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As Filed Pursuant to Rule 424(b)(4)
Reg. No. 333-71601
PROSPECTUS
Offer to Exchange All 9 3/4% Senior Subordinated Notes Due 2009
for 9 3/4% Senior Subordinated Notes Due 2009, Which Have Been Registered
Under the Securities Act of 1933, of
Hexcel Corporation
The exchange offer will expire at 5:00 P.M.,
New York City time, on July 19, 1999, unless extended.
------------------
Terms of the exchange offer:
- We will exchange all original notes that are validly tendered and not
withdrawn prior to the expiration of the exchange offer.
- You may withdraw tenders of original notes at any time prior to the
expiration of the exchange offer.
- We believe that the exchange of original notes will not be a taxable event
for U.S. federal income tax purposes, but you should see "Material United
States Federal Income Tax Considerations" on page 124 for more
information.
- We will not receive any proceeds from the exchange offer.
- The terms of the exchange notes are substantially identical to the
original notes, except that the exchange notes are registered under the
Securities Act and the transfer restrictions and registration rights
applicable to the original notes do not apply to the exchange notes.
---------------------
See "Risk Factors" beginning on page 10 for a discussion of risks that
should be considered by holders before tendering their original notes.
-------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
-------------------
The date of this prospectus is June 18, 1999.
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PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. This
prospectus includes specific terms of the notes we are offering, as well as
information regarding our business and detailed financial data. We encourage you
to read this prospectus in its entirety. The terms "Hexcel," "we," "our" or "us"
as used in this prospectus refer to Hexcel Corporation, the issuer of your notes
and the notes to be issued in the exchange offer, and its subsidiaries as a
combined entity, except where it is made clear that the term means only the
parent company. Unless otherwise indicated, the market and market share data
contained in this prospectus are derived from publicly available industry
sources, which we have not independently verified. You should pay special
attention to the "Risk Factors" section beginning on page 10 of this prospectus.
For a description of industry-related terms, see "Glossary of Terms."
SUMMARY OF THE EXCHANGE OFFER
On January 21, 1999, we completed the private offering of $240 million
aggregate principal amount of 9 3/4% Senior Subordinated Notes Due 2009. As part
of that offering, we entered into a registration rights agreement with the
initial purchasers of these original notes in which we agreed, among other
things, to deliver this prospectus to you and to complete an exchange offer for
the original notes. Set forth below is a summary of that exchange offer.
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Securities Offered.............. We are offering up to $240,000,000 aggregate principal
amount of new 9 3/4% Senior Subordinated Notes Due 2009,
which have been registered under the Securities Act. The
form and terms of these exchange notes are identical in
all material respects to those of the original notes. The
exchange notes, however, will not contain transfer
restrictions and registration rights applicable to the
original notes.
The Exchange Offer.............. We are offering to exchange new $1,000 principal amount of
our 9 3/4% Senior Subordinated Notes Due 2009, which have
been registered under the Securities Act, for $1,000
principal amount of our outstanding 9 3/4% Senior
Subordinated Notes Due 2009.
In order to be exchanged, an original note must be
properly tendered and accepted. All original notes that
are validly tendered and not withdrawn will be exchanged.
As of the date of this prospectus, there are $240.0
million principal of original notes outstanding. We will
issue exchange notes promptly after the expiration of the
exchange offer.
Resales......................... Based on interpretations by the staff of the SEC, as set
forth in a series of no-action letters issued to third
parties, we believe that the exchange notes issued in the
exchange offer may be offered for resale, resold or
otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the
Securities Act provided that:
- you are acquiring the exchange notes in the ordinary
course of your business;
- you are not participating, do not intend to participate
and have no arrangement or understanding with any person
to participate, in a distribution of the exchange notes;
and
- you are not an "affiliate" of ours.
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If you are an affiliate of ours, are engaged in or intend
to engage in or have any arrangement or understanding with
any person to participate in the distribution of the
exchange notes:
(1) you cannot rely on the applicable interpretations of
the staff of the SEC and
(2) you must comply with the registration requirements of
the Securities Act in connection with any resale
transaction.
Each broker or dealer that receives exchange notes for its
own account in exchange for original notes that were
acquired as a result of market-making or other trading
activities must acknowledge that it will deliver this
prospectus in connection with any offer to resell, resale,
or other transfer of the exchange notes issued in the
exchange offer.
Expiration Date................. 5:00 p.m., New York City time, on July 19, 1999, unless we
extend the expiration date.
Accrued Interest on the Exchange
Notes and Original Notes...... The exchange notes will bear interest from January 21,
1999. If your original notes are accepted for exchange,
then you will receive interest on the exchange notes and
not on the original notes.
Conditions to the Exchange
Offer......................... The exchange offer is subject to customary conditions. We
may assert or waive these conditions in our sole
discretion. If we materially change the terms of the
exchange offer, we will resolicit tenders of the original
notes. Please read the section "The Exchange
Offer--Conditions to the Exchange Offer" of this
prospectus for more information regarding conditions to
the exchange offer.
Procedures for Tendering
Original Notes................ If you wish to tender your original notes, you must
complete, sign and date the letter of transmittal, or a
facsimile of it, according to its instructions and
transmit the letter of transmittal, together with your
original notes and any other required documentation to The
Bank of New York. The Bank of New York, who is the
exchange agent, must receive this documentation at the
address set forth in the letter of transmittal by 5:00
p.m. New York City time, on the expiration date. By
executing the letter of transmittal, you will represent to
us that you are acquiring the exchange notes in the
ordinary course of your business, that you are not
participating, do not intend to participate and have no
arrangement or understanding with any person to
participate, in the distribution of exchange notes, and
that you are not an "affiliate" of ours. See "The Exchange
Offer--Procedures for Tendering."
Special Procedures for
Beneficial Holders............ If you are the beneficial holder of original notes that
are registered in the name of your broker, dealer,
commercial bank, trust company or other nominee, and you
wish to tender in the exchange offer, you should promptly
contact the person in whose
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name your original notes are registered and instruct that
person to tender on your behalf. See "The Exchange
Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures.................... If you wish to tender your original notes and you cannot
deliver your notes, the letter of transmittal or any other
required documents to the exchange agent before the
expiration date, you may tender your original notes
according to the guaranteed delivery procedures set forth
in "The Exchange Offer-- Guaranteed Delivery Procedures."
Withdrawal Rights............... Tenders may be withdrawn at any time before 5:00 p.m., New
York City time, on the expiration date.
Acceptance of Original Notes and
Delivery of Exchange
Notes......................... Subject to the conditions set forth in the section "The
Exchange Offer--Conditions to the Exchange Offer" of this
prospectus, we will accept for exchange any and all
original notes which are properly tendered in the exchange
offer before 5:00 p.m., New York City time, on the
expiration date. The exchange notes will be delivered
promptly after the expiration date. See "The Exchange
Offer--Terms of the Exchange Offer."
Material U.S. Federal Income Tax
Considerations................ We believe that your exchange of original notes for
exchange notes pursuant to the exchange offer will not
result in any gain or loss to you for U.S. federal income
tax purposes. See "Material United States Federal Income
Tax Considerations" in this prospectus.
Exchange Agent.................. The Bank of New York is serving as exchange agent in
connection with the exchange offer. The address and
telephone number of the exchange agent are set forth in
"The Exchange Offer--Exchange Agent" in this prospectus.
Use of Proceeds................. We will not receive any proceeds from the issuance of
exchange notes pursuant to the exchange offer. We will pay
all expenses incident to the exchange offer.
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SUMMARY OF TERMS OF THE EXCHANGE NOTES
The form and terms of the exchange notes and the original notes are
identical in all material respects, except that transfer restrictions and
registration rights applicable to the original notes do not apply to the
exchange notes. The exchange notes will evidence the same debt as the original
notes and will be governed by the same indenture. Where we refer to "notes" in
this document, we are referring to both original notes and exchange notes.
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Aggregate Amount................ $240.0 million principal amount of 9 3/4% Senior
Subordinated Notes Due 2009.
Maturity........................ January 15, 2009.
Interest rate................... 9 3/4% per year.
Interest payment dates.......... January 15 and July 15 of each year, commencing July 15,
1999.
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Ranking......................... The notes will be unsecured senior subordinated
obligations and will rank junior to our existing and
future senior indebtedness. The notes will rank equally
with our existing and future senior subordinated
indebtedness and will rank senior to our subordinated
indebtedness. The notes effectively will rank junior to
all liabilities of our subsidiaries. The terms "Senior
Indebtedness" and "Subordinated Indebtedness" are defined
in the "Description of the Notes--Ranking" and
"Description of the Notes--Definitions of Terms Used in
the Indenture" sections of this prospectus.
As of March 31, 1999 we had outstanding $455.2 million of
senior indebtedness and we had outstanding $23.8 million
of senior subordinated indebtedness other than the notes.
The indenture permits us to incur significant additional
indebtedness. See "Description of the Notes--Ranking" in
this prospectus.
The notes will rank senior to our existing convertible
subordinated debentures and convertible subordinated
notes. An aggregate principal amount of $140.1 million of
this junior debt remains outstanding.
Optional Redemption............. We cannot redeem the notes until January 15, 2004, except
as described immediately below. Thereafter, we can redeem
some or all of the notes at the redemption prices listed
in the "Description of the Notes--Optional Redemption"
section of this prospectus, plus accrued interest.
Optional Redemption after Public
Equity Offerings.............. At any time, and from time to time, before January 15,
2002, we can choose to redeem up to 35% of the original
principal amount of the notes, including the original
principal amount of any additional notes issued under the
indenture, with money that we raise in public equity
offerings, as long as:
- we pay to holders of the notes a redemption price of
109 3/4% of the face amount of the notes we redeem, plus
accrued interest;
- we redeem the notes within 120 days of completing such
equity offering; and
- at least 65% of the original aggregate principal amount
of the notes, including the original principal amount of
any additional notes issued under the indenture, remains
outstanding afterwards.
Change of Control Offer......... If a change in control of Hexcel occurs, we must give
holders of the notes the opportunity to sell to us their
notes at a purchase price of 101% of their face amount,
plus accrued interest. The term "Change of Control" is
defined in the "Description of the Notes--Change of
Control" section of this prospectus.
Our ability to repurchase the notes following the
occurrence of a change of control may be limited by our
then existing financial
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resources. We cannot assure you that sufficient funds will
be available when necessary to make any required
repurchases. See "Risk Factor--We may be unable to
purchase your notes upon a change of control."
Covenants....................... The indenture governing the notes will contain covenants
that limit our ability and that of our subsidiaries to:
- incur additional indebtedness;
- pay dividends or distributions on, or redeem or
repurchase, our capital stock;
- make investments;
- issue or sell capital stock of subsidiaries;
- engage in transactions with affiliates;
- create liens on our assets to service specified debt;
- transfer or sell assets;
- guarantee indebtedness;
- restrict dividend or other payments to us;
- consolidate, merge or transfer all or substantially all
of our assets and the assets of our subsidiaries; and
- engage in unrelated businesses.
These covenants are subject to important exceptions and
qualifications, which are described in the "Description of
the Notes--Covenants" section of this prospectus.
Use of Proceeds................. We will not receive any proceeds from the exchange offer.
See "Use of Proceeds." We have agreed to bear the expenses
of the exchange offer. No underwriter is being used in
connection with the exchange offer. For a description of
the use of proceeds of the offering of original notes, see
"--The Company--Recent Developments--Offering of Original
Notes."
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THE COMPANY
GENERAL
We are the world's leading producer of advanced structural materials. We
develop, manufacture and market lightweight, high-performance reinforcement
products, composite materials and engineered products for use in commercial
aerospace, space and defense, electronics, recreation and general industrial
applications. Our materials are used in a wide variety of end products, such as
commercial and military aircraft, space launch vehicles and satellites, printed
circuit boards, computers, cellular telephones, televisions, high-speed trains
and ferries, cars and trucks, windmill blades, reinforcements for bridges and
other structures, window blinds, skis and snowboards, golf clubs, fishing poles,
tennis rackets and bicycles.
Our business is organized around three strategic business segments,
presented in order of manufacturing integration from raw materials to finished
products.
- REINFORCEMENT PRODUCTS: this segment manufactures carbon fibers and carbon
fiber fabrics, fiberglass fabrics which form the substrate for printed
circuit boards, woven industrial fabrics, woven fabrics for ballistics
protection and carbon, aramid and glass reinforcement materials, all of
which comprise the foundation of many composite materials, parts and
structures;
- COMPOSITE MATERIALS: this segment produces honeycomb and prepregs, as well
as structural adhesives and specially machined honeycomb details and
composite panels, which are incorporated into aerospace platforms; and
- ENGINEERED PRODUCTS: this segment engineers and produces composite parts
and structures, including finished components for commercial and military
aircraft and parts used in automotive, civil engineering and rail
applications.
Through a series of strategic acquisitions over the past three years, we
have expanded and diversified our product lines, manufacturing capabilities and
technology portfolio. With 24 manufacturing facilities located in seven
countries around the world and with joint ventures in Asia, Europe and the
United States, we are well positioned to take advantage of opportunities for
growth worldwide.
For the year ended December 31, 1998, we generated pro forma net sales of
approximately $1.235 billion and pro forma Adjusted EBITDA of $208 million. For
the three months ended March 31, 1999, we generated net sales of approximately
$316 million and Adjusted EBITDA of $46 million. See the introductory discussion
to the "Summary Consolidated Financial Data and Other Data" table at page 8 of
this prospectus for a definition of the terms "EBITDA" and "Adjusted EBITDA."
COMPETITIVE STRENGTHS
We believe that our competitive position is attributable to a number of key
strengths, including the following:
- Market leader for advanced structural materials.
- Most vertically integrated manufacturer of advanced structural materials.
- Market and geographic diversity.
- Broad range of product qualifications in the aerospace industry.
- Leader in growing multilayer printed circuit board market.
- Leader in advanced structural materials technology.
6
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RECENT DEVELOPMENTS
BUSINESS CONSOLIDATION PROGRAM
We are intensifying our business consolidation efforts to achieve more rapid
cost reductions throughout our organization. Our efforts will include
implementing an aggressive value chain management program. In addition, we have
initiated a reorganization of our business operations to focus on improving
operating effectiveness and to integrate the Clark-Schwebel business into our
existing fabrics operations. We have consolidated our U.S., European, and Asian
composite materials business into a single global business unit. As a result of
these and other actions, we recorded $12.7 million of business acquisition and
consolidation costs in the year ended December 31, 1998.
During the quarter ended March 31, 1999, we continued the consolidation and
integration of our global reinforcement fabrics operations. On March 16, 1999,
we announced our plan to close the Cleveland, Georgia manufacturing facility. As
a result, we recorded business acquisition and consolidated expenses of $2.8
million, primarily reflecting the costs of closing this facility, of which $1.8
million are non-cash charges. A further charge related to this plant closure of
slightly above $1 million is anticipated during the second or third quarter of
1999.
AMENDMENT TO SENIOR CREDIT FACILITY
In connection with the acquisition of the industrial fabrics business of
Clark-Schwebel on September 15, 1998, we amended our senior credit facility to:
- fund the Clark-Schwebel acquisition;
- refinance our then existing revolving credit facility; and
- provide for our ongoing working capital and other financing requirements.
Simultaneously with the closing of the offering of the original notes, we
amended our senior credit facility to, among other things, modify financial
covenants and to permit that offering. As of December 31, 1998, amounts
outstanding under our senior credit facility include an aggregate of $88.1
million under the revolving credit facility commitments and $311.6 million in
aggregate term loans, after giving pro forma effect to:
(1) the offering of the original notes and the application of the net proceeds
from that offering; and
(2) the redemption of $12.5 million aggregate principal amount of senior
subordinated notes payable to Ciba Specialty Chemicals Inc. from borrowings
under our senior credit facility.
On February 17, 1999, we redeemed $12.5 million of the $37.5 million
aggregate principal amount of senior subordinated notes payable to Ciba
Specialty Chemicals Inc. The interest rate on the outstanding principal amount
of these notes increased from 7.5% per annum to 10.5% per annum on February 28,
1999 and will increase by an additional 0.5% per annum on each February 28
thereafter through maturity in 2003. These notes were issued in connection with
the acquisition of the composites business of Ciba Geigy Limited.
OFFERING OF ORIGINAL NOTES
On January 21, 1999, we issued and sold the original notes. We used the net
proceeds of that offering, which were approximately $231 million, to reduce
borrowings under our senior credit facility.
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SUMMARY CONSOLIDATED FINANCIAL DATA AND OTHER DATA
The following table presents summary financial and other data with respect
to Hexcel and has been derived from
- the audited consolidated financial statements of Hexcel as of and for the
four years ended December 31, 1998, and the unaudited condensed
consolidated financial statements as of and for the quarters ended March
31, 1998 and 1999, and
- the unaudited pro forma financial statements included elsewhere in this
prospectus which give effect to the Clark-Schwebel acquisition, the
offering of the original notes and the application of the net proceeds
from that offering and the redemption of $12.5 million aggregate principal
amount of senior subordinated notes payable to Ciba with borrowings under
the senior credit facility. The information set forth below should be read
together with the other information contained under the captions
"Capitalization," "Pro Forma Financial Information," "Selected
Consolidated 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 to the
consolidated financial statements, included elsewhere in this prospectus.
As used in the following table and throughout this prospectus, "EBITDA"
means income from continuing operations before interest, taxes, depreciation and
amortization and equity in earnings of joint ventures and "Adjusted EBITDA"
means EBITDA before business acquisition and consolidation expenses, other
expense (income) and bankruptcy reorganization expenses. Hexcel believes that
EBITDA and Adjusted EBITDA provide useful information regarding Hexcel's ability
to service its indebtedness, but should not be considered in isolation or as a
substitute for operating income or cash flows from operations as an indicator of
Hexcel's performance or as a measure of Hexcel's liquidity. Adjusted EBITDA may
not be comparable to similarly titled financial measures of other companies.
Pro forma cash flow data for all periods presented were prepared assuming
that the following transactions occurred on January 1 of each respective period
presented:
- the Clark-Schwebel acquisition, excluding cash flows associated with the
purchase price, and the related financing, of the acquisition,
- the offering of the original notes and the application of the net proceeds
from that offering, and
- the redemption of $12.5 million aggregate principal amount of senior
subordinated notes payable to Ciba with borrowings under the senior credit
facility.
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 that portion of rent expense
deemed to be interest. For the year ended December 31, 1996, earnings were
insufficient to cover fixed charges by approximately $15.8 million.
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<CAPTION>
FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
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HISTORICAL PRO FORMA PRO FORMA HISTORICAL
------------------------------------------ ----------- ----------- ----------------------
1995 1996 1997 1998(A) 1997 1998 1998 1999(A)(B)
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(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 350.2 $ 695.3 $ 936.9 $ 1,089.0 $ 1,177.1 $ 1,234.8 $ 256.7 $ 316.2
Gross margin....................... 67.1 141.3 222.6 271.3 276.9 305.3 66.1 70.8
Gross margin percentage............ 19.2% 20.3% 23.8% 24.9% 23.5% 24.7% 25.7% 22.4%
Business acquisition and
consolidation expenses........... $ -- $ 42.4 $ 25.3 $ 12.7 $ 25.3 $ 12.7 $ -- $ 2.8
Operating income................... 17.8 2.8 76.4 117.0 107.3 134.5 33.7 27.1
Other expense (income)............. (0.8) (3.0) -- -- -- -- -- --
Bankruptcy reorganization
expenses......................... 3.4 -- -- -- -- -- -- --
Income (loss) from continuing
operations....................... 3.2 (19.1) 73.6 50.4 71.6 44.7 17.1 5.2
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PRO FORMA PRO FORMA
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1998 1999
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STATEMENT OF OPERATIONS DATA:
Net sales.......................... $ 317.2 $ 316.2
Gross margin....................... 81.0 70.8
Gross margin percentage............ 25.5% 22.4%
Business acquisition and
consolidation expenses........... $ -- $ 2.8
Operating income................... 42.4 27.1
Other expense (income)............. -- --
Bankruptcy reorganization
expenses......................... -- --
Income (loss) from continuing
operations....................... 17.0 5.3
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FOR THE THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31,
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HISTORICAL PRO FORMA PRO FORMA HISTORICAL
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1995 1996 1997 1998(A) 1997 1998 1998 1999(A)(B)
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(DOLLARS IN MILLIONS)
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OTHER DATA:
EBITDA............................. $ 26.8 $ 32.5 $ 112.3 $ 164.5 $ 163.0 $ 195.7 $ 43.7 $ 42.8
Adjusted EBITDA.................... 29.4 71.9 137.6 177.2 188.3 208.4 43.7 45.6
Cash flows from:
Operating activities............. (2.5) 26.5 26.0 93.8 43.5 110.2 (5.1) 17.3
Investing activities............. 15.7 (206.4) (82.9) (539.2) (92.4) (72.5) (12.3) (9.4)
Financing activities............. (9.6) 181.7 57.2 440.7 45.3 (42.5) 11.0 (12.4)
Depreciation and amortization...... 11.6 26.7 35.9 47.5 55.6 61.2 10.0 15.7
Capital expenditures............... 12.1 43.6 57.4 66.5 65.7 70.1 11.5 9.4
Ratio of earnings to fixed
charges.......................... 1.7x -- 2.9x 2.9x 1.6x 1.9x 4.6x 1.4x
RECONCILIATION OF NET INCOME TO
EBITDA AND ADJUSTED EBITDA:
Net income (loss) from continuing
operations....................... $ 3.2 $ (19.1) $ 73.6 $ 50.4 $ 71.6 $ 44.7 $ 17.1 $ 5.2
Provision (benefit) for income
taxes............................ 3.3 3.4 (22.9) 28.4 (27.9) 22.7 9.6 2.8
Interest expense................... 8.7 21.5 25.7 38.7 70.5 72.1 7.0 19.1
Depreciation and amortization...... 11.6 26.7 35.9 47.5 55.6 61.2 10.0 15.7
Equity in earnings of joint
ventures......................... -- -- -- (0.5) (6.8) (5.0) -- --
--------- --------- --------- --------- ----------- ----------- --------- -----------
EBITDA............................. 26.8 32.5 112.3 164.5 163.0 195.7 43.7 42.8
Business acquisition and
consolidation expenses........... -- 42.4 25.3 12.7 25.3 12.7 -- 2.8
Bankruptcy reorganization
expenses......................... 3.4 -- -- -- -- -- -- --
Other expense (income)............. (0.8) (3.0) -- -- -- -- -- --
--------- --------- --------- --------- ----------- ----------- --------- -----------
Adjusted EBITDA.................... $ 29.4 $ 71.9 $ 137.6 $ 177.2 $ 188.3 $ 208.4 $ 43.7 $ 45.6
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BALANCE SHEET DATA (AT PERIOD END):
Working capital.................... $ 61.6 $ 128.1 $ 200.7 $ 219.6 $ 219.6 $ 227.7 $ 219.6
Total assets....................... 230.6 701.7 811.6 1,404.2 1,413.2 821.9 1,397.0
Total debt......................... 90.1 311.0 353.4 864.9 874.6 363.4 859.1
Shareholders' equity............... 48.4 179.3 249.9 302.4 301.8 266.8 301.1
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PRO FORMA PRO FORMA
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1998 1999
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OTHER DATA:
EBITDA............................. $ 57.5 $ 42.8
Adjusted EBITDA.................... 57.5 45.6
Cash flows from:
Operating activities............. 13.9 17.3
Investing activities............. (13.2) (9.4)
Financing activities............. 11.0 (12.4)
Depreciation and amortization...... 15.1 15.7
Capital expenditures............... 12.5 9.4
Ratio of earnings to fixed
charges.......................... 2.4x 1.4x
RECONCILIATION OF NET INCOME TO
EBITDA AND ADJUSTED EBITDA:
Net income (loss) from continuing
operations....................... $ 17.0 $ 5.3
Provision (benefit) for income
taxes............................ 8.7 2.9
Interest expense................... 18.3 18.9
Depreciation and amortization...... 15.1 15.7
Equity in earnings of joint
ventures......................... (1.6) --
----------- -----------
EBITDA............................. 57.5 42.8
Business acquisition and
consolidation expenses........... -- 2.8
Bankruptcy reorganization
expenses......................... -- --
Other expense (income)............. -- --
----------- -----------
Adjusted EBITDA.................... $ 57.5 $ 45.6
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BALANCE SHEET DATA (AT PERIOD END):
Working capital.................... $ 219.6
Total assets....................... 1,396.9
Total debt......................... 859.1
Shareholders' equity............... 301.1
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(a) Amounts include the operating results of the Clark-Schwebel business since
the acquisition date, September 15, 1998.
(b) Amounts include the effect of the offering of the original notes on January
21, 1999, and the application of the net proceeds from that offering and the
redemption of $12.5 million aggregate principal amount of senior
subordinated notes payable to Ciba on February 29, 1999 with borrowings
under the senior credit facility.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE DECIDING TO
TENDER YOUR ORIGINAL NOTES IN THE EXCHANGE OFFER, AS WELL AS THE MORE DETAILED
DESCRIPTIONS CROSS-REFERENCED TO THE BODY OF THE PROSPECTUS AND THE OTHER
MATTERS DESCRIBED IN THIS PROSPECTUS.
WE HAVE SUBSTANTIAL INDEBTEDNESS THAT COULD LIMIT OUR ABILITY TO MAKE PAYMENTS
ON THE NOTES AND REDUCE THE EFFECTIVENESS OF OUR OPERATIONS
We have substantial indebtedness and debt service requirements. We cannot
assure you that we will generate sufficient cash flow from operations, or that
we will be able to obtain sufficient funding, to satisfy our debt service
obligations, including the payment of principal and interest on the notes. As of
March 31, 1999, we had $859.1 million of outstanding indebtedness. Our total
debt, as a percentage of total capitalization, was 74%. This substantial level
of indebtedness will have important consequences, including:
- limiting our ability to borrow additional amounts for working capital,
capital expenditures, debt service requirements, execution of our growth
strategy, and research and development costs;
- limiting our ability to use operating cash flow in other areas of our
business;
- increasing our vulnerability to general adverse economic and industry
conditions; and
- limiting our ability to capitalize on business opportunities and to react
to competitive pressures and adverse changes in government regulation.
Our ability to pay interest on the notes and to meet our other debt service
obligations depends upon, among other things, our future operating performance
and ability to refinance indebtedness when necessary. Each of these factors is
to a large extent dependent upon economic conditions and financial, business and
competitive factors beyond our control.
WE MAY NOT BE ABLE TO FINANCE FUTURE OPERATIONS AND CAPITAL NEEDS BECAUSE OF
RESTRICTIONS IN OUR DEBT AGREEMENTS
The operating and financial restrictions and covenants in our existing debt
agreements, and in any future financing agreements, may impair our ability to
finance future operations or capital needs. In addition, the senior credit
facility requires that we maintain compliance with specified financial ratios. A
breach of any of these restrictions or covenants could cause a default under the
notes and our other debt. A significant portion of our indebtedness may then
become immediately due and payable. We may not have, or be able to obtain,
sufficient funds to make these accelerated payments, including payments on the
notes.
WE MAY NOT BE ABLE TO PAY PRINCIPAL AND INTEREST ON YOUR NOTES AFTER PAYMENT OF
OUR SENIOR INDEBTEDNESS
We may not be able to make payments on the notes after payment of amounts
due on our senior indebtedness. Your notes will be subordinate to the prior
payment in full of all senior indebtedness. As of March 31, 1999, we had
approximately $455.2 million of senior indebtedness outstanding. Moreover, the
indenture permits us to incur significant additional indebtedness, which may
include senior indebtedness. After giving effect to loan covenants under our
senior credit facility, the maximum amount of additional debt that we could
borrow as of March 31, 1999 was $74.3 million, including $36.0 million of senior
indebtedness. Because of the subordination provisions of the notes, in the event
of our bankruptcy, our assets would be available to pay obligations under the
notes only after all payments had been made on our senior indebtedness. We
cannot assure you that sufficient assets will remain after these payments have
been made to make any payments on the notes. In addition, the
10
<PAGE>
occurence of specified events of default under our senior indebtedness would
prohibit us from making any payments on the notes, including payments of
interest when due.
YOUR NOTES WILL BE SUBORDINATED TO THE LIABILITIES OF OUR SUBSIDIARIES--PRIOR
PAYMENTS OF THESE LIABILITIES MAY PREVENT US FROM BEING ABLE TO MAKE PAYMENTS
ON THE NOTES
As of March 31, 1999, our subsidiaries had approximately $224 million of
liabilities. Because your notes are structurally subordinated to our
subsidiaries' liabilities, we must pay these liabilities prior to making
payments on your notes. We cannot assure you that adequate assets will remain
after these payments. Moreover, these prior payments will generally include the
payment of all liabilities of our subsidiaries, even if the particular
liabilities do not constitute senior indebtedness. Thus, for example, your claim
on our assets in satisfaction of your rights as a note holder will generally be
subordinate to the claims of trade creditors of, or creditors holding guarantees
issued by, our subsidiaries.
YOUR NOTES ARE NOT SECURED BY ANY OF OUR ASSETS. IF OUR BANK LENDERS FORECLOSE
ON OUR ASSETS, THE PROCEEDS FROM OUR REMAINING ASSETS MAY BE INSUFFICIENT TO
MAKE PAYMENTS ON THE NOTES
Our bank lenders have a security interest in our assets. Your claims as a
note holder are unsecured. Therefore, our secured lenders will have a claim on
our assets prior to any claim you have as a note holder. Accordingly, we cannot
assure you that the liquidation value of our remaining assets after a
foreclosure by our secured lenders would be adequate to make any payments on
your notes.
DECREASED DEMAND IN THE COMMERCIAL AEROSPACE INDUSTRY COULD SIGNIFICANTLY IMPAIR
OUR SALES, PROFIT MARGINS AND FINANCIAL CONDITION
Decreased demand in the commercial aerospace industry could result in
reduced net sales for our commercial aerospace products and could reduce our
profit margins. Approximately 57% of our pro forma net sales for the year ended
December 31, 1998 was derived from sales to the commercial aerospace industry,
which includes 44% of these sales to Boeing, Airbus and related subcontractors.
We recently experienced a decline in backlog for some of our commercial
aerospace products. This decline is attributable to commercial aerospace build
rates, which are expected to peak in 1999, and the continuing trend towards
shorter lead times and better supply-chain management by the industry overall.
Because we supply our products ahead of the delivery of a commercial aircraft,
we expect that we will start to see the impact of the lower anticipated
deliveries of Boeing aircraft in 2000 by the second half of 1999.
In addition, our customers have emphasized the need for improved yield in
the use of our products and cost and inventory reduction throughout the
commercial aerospace supply chain. In response to these pressures, we reduced
the price of some commercial aerospace products in 1999. We are also aware that
one customer is planning, in the third quarter of 1999, to substitute one of our
premium products for a lower cost, lower priced alternative product, which we
also expect to provide. We expect the negative impact of such substitution to be
approximately $9 million in operating income.
A SIGNIFICANT DECLINE IN BUSINESS WITH BOEING OR AIRBUS COULD MATERIALLY IMPAIR
OUR BUSINESS, OPERATING RESULTS, PROSPECTS AND FINANCIAL CONDITION
Approximately 34% and 10% of our pro forma sales for the year ended December
31, 1998 were to Boeing and their related subcontractors, and Airbus and their
related subcontractors, respectively. Accordingly, the loss of, or significant
reduction in purchases by, either of these customers could materially impair our
operating results and weaken our financial condition.
Moreover, because the Asian markets are important markets for airlines and
large commercial aircraft manufacturers, the ongoing Asian economic crisis
creates a distinct risk of cancellations or deferrals of deliveries of aircraft
from Boeing and Airbus. This could result in a corresponding
11
<PAGE>
reduction in production and sales activity throughout the commercial aerospace
supply chain. Boeing has developed a large backlog of aircraft sales to
customers in Asia and estimates that the current crisis in the Asian financial
markets will result in about 150 fewer airplane deliveries for all manufacturers
during the next five years. In addition, Boeing has recently announced that in
light of these recent economic conditions in Asia, it plans to reduce its
production schedules over the next several years.
THE EXCESS INVENTORY OF CARBON FIBER ACCUMULATED BY OUR CUSTOMERS MAY RESULT IN
REDUCED CARBON FIBER PRODUCTION, SALES AND PROFIT MARGINS
The excess inventory of carbon fiber accumulated by our customers could
significantly reduce our production, sales and pricing of carbon fiber in a
number of applications in 1999 as compared to 1998. We believe that, in response
to a significant shortage of carbon fiber supply in 1997, a number of our
customers, particularly those in the space and defense market, purchased and/or
ordered more carbon fiber than they needed for production during the year ended
December 31, 1998. Consequently, customers are reducing their inventories of
carbon fibers and anticipating lower purchasing needs during 1999.
INTENSE COMPETITION FROM ELECTRONIC FIBERGLASS MANUFACTURERS MAY CONTINUE TO
IMPOSE SIGNIFICANT PRICING PRESSURES
Intense competition from electronic fiberglass manufacturers located in Asia
and Eastern Europe has imposed, and may continue to impose, significant pressure
on the profit margins relating to some of our electronic fiberglass products. On
a pro forma basis, electronics net sales decreased 19% during the first quarter
of 1999 from the first quarter of 1998. The reduction in sales primarily
reflects the impact of price reductions combined with lower unit sales volume in
the United States. During the first quarter of 1999, this intense competition
continued to place pressure on the prices and margins for some of our electronic
fiberglass products.
REDUCTIONS IN SPACE AND DEFENSE SPENDING COULD RESULT IN A DECLINE IN OUR NET
SALES
We cannot assure you that the U.S. defense budgets and the related demand
for defense-related equipment will not decline or that sales of defense-related
equipment to foreign governments will continue at expected levels. Approximately
10% of our pro forma net sales for the year ended December 31, 1998 was derived
from the space and defense industry. The space and defense industry is largely
dependent upon government defense budgets, particularly the U.S. defense budget.
We cannot assure you that new military aircraft programs will enter full scale
production as expected, or that any of the aircraft will use significant amounts
of our advanced structural materials. See "Business-- Markets and Customers."
A DECREASE IN SUPPLY OR INCREASE IN COST OF OUR RAW MATERIALS COULD RESULT IN A
MATERIAL DECLINE IN OUR PROFITABILITY
Because we purchase large volumes of raw materials, such as resins, carbon
fiber, fiber glass and aramids, any decrease in the supply or increase in the
cost of our raw materials could significantly reduce our profit margins. We
cannot assure you that we will experience no decrease in the supply or increase
in price of our raw materials. Our profitability depends largely on the price
and continuity of supply of these raw materials, which are supplied by a limited
number of sources. In addition, qualification of raw materials limits the extent
to which we are able to substitute alternative materials in some of our
products. Our ability to pass on these costs to our customers is, to a large
extent, dependent on market conditions, including the extent to which our
customers would switch to alternative materials not produced by us in the event
of an increase in the prices of our products.
12
<PAGE>
OUR CONSOLIDATION PLANS MAY NOT RESULT IN COST SAVINGS
We cannot assure you that our current consolidation plans will prove
successful. One of our principal strategies is to improve financial results
through the consolidation of our operations. The complexity, cost and time of
consolidating manufacturing operations is greatly increased because of the
qualification requirements of the aerospace and other industries. Accordingly,
we may encounter delays or unanticipated problems in our efforts to consolidate
our operations and these efforts may not result in the cost savings that we
currently anticipate.
THE INTERESTS OF OUR SIGNIFICANT SHAREHOLDER MAY BE DIFFERENT THAN YOUR
INTERESTS
Ciba will have the ability to influence our affairs so long as it maintains
ownership of specified percentages of our outstanding common stock, and the
interests of Ciba may not in all cases be the same as your interests. Ciba
currently owns 49.6% of our outstanding common stock. See "Certain Relationships
and Related Transactions--The Governance Agreement." Under the governance
agreement between Hexcel and Ciba, Ciba is entitled to designate a specific
number of members of our board of directors and a specific number of committee
members on each committee of the board of directors. In addition, the governance
agreement provides that our board of directors will not authorize various types
of significant transactions without the approval of a specific number of the
Ciba designees.
WE COULD HAVE BUSINESS INTERRUPTIONS AND BE HURT BECAUSE OF YEAR 2000 PROBLEMS
Our inability to remedy our own Year 2000 problems or the failure of third
parties to do so may cause business interruptions or shutdown, financial loss,
regulatory actions, reputational harm and/or legal liability. We cannot assure
you that our Year 2000 program or the programs of third parties who do business
with us will be effective, that our estimate about the timing and cost of
completing our program will be accurate, or that all remediation will be
complete by the Year 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Readiness Disclosure."
We are dependent on business systems, including our information technology
systems and non-information technology devices with embedded microprocessors, in
operating our business. We also depend on the proper functioning of business
systems of third parties, including our vendors and customers. The failure of
any of these systems to appropriately interpret the upcoming calendar year 2000
could have a material adverse effect on our financial condition, results of
operations, cash flow and business prospects. We are currently identifying our
own applications that are not Year 2000 compliant and taking steps to determine
whether third parties are doing the same. In addition, we are implementing a
worldwide plan to prepare our computer systems to be Year 2000 compliant. We
have nearly completed our inventory phase and, based on this analysis, our
estimated future costs to prepare our business systems to become Year 2000
compliant are approximately $5 million.
WE MAY BE UNABLE TO PURCHASE YOUR NOTES UPON A CHANGE OF CONTROL
We may not be able to purchase your notes if there is a change in control of
Hexcel. Upon a change of control event, each holder of notes may require us to
purchase all or a portion of its notes. Our ability to purchase your notes upon
a change of control event will be limited by the terms of our debt agreements.
Upon a change of control event, we may be required immediately to repay the
outstanding principal, any accrued interest on and any other amounts owed by us
under our senior credit facility. We cannot assure you that we would be able to
repay amounts outstanding under our senior credit facility or obtain necessary
consents under the facility to purchase your notes.
In addition, upon the happening of a change of control event, we will be
required to offer to purchase all of the convertible subordinated notes. Any
requirement to offer to purchase your notes or
13
<PAGE>
the convertible subordinated notes may result in us having to refinance our
outstanding indebtedness, which we may not be able to do. The term "change of
control" is defined in the "Description of the Notes--Change of Control" section
of this prospectus.
YOU MAY FIND IT DIFFICULT TO SELL YOUR NOTES
You may find it difficult to sell your notes because an active trading
market for the notes may not develop. The exchange notes are being offered to
the holders of the original notes. The original notes were issued on January 21,
1999 to a small number of institutional investors and overseas investors and are
eligible for trading in the Private Offering, Resale and Trading through
Automated Linkages (PORTAL) Market, the National Association of Securities
Dealers' screenbased, automated market for trading of securities eligible for
resale under Rule 144A. After the exchange offer, the trading market for the
remaining untendered original notes could be adversely affected.
There is no existing trading market for the exchange notes. We do not intend
to apply for listing or quotation of the exchange notes on any exchange.
Therefore, we do not know the extent to which investor interest will lead to the
development of a trading market or how liquid that market might be. Although the
initial purchasers of the original notes have informed us that they currently
intend to make a market in the exchange notes, they are not obligated to do so,
and any market-making may be discontinued at any time without notice. As a
result, the market price of the exchange notes could be adversely affected.
In addition, the market for non-investment grade debt, such as the exchange
notes, has been subject to disruptions that have caused substantial volatility
in the prices of these securities. These disruptions may have an adverse effect
on holders of the exchange notes.
FORWARD-LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to analyses and other information which are based
on forecasts of future results and estimates of amounts not yet determinable.
These statements also relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases including references to assumptions. These statements are contained in
sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
other sections of this prospectus and in the documents incorporated by reference
in this prospectus.
These forward-looking statements include, but are not limited to, estimates
of, or expectations regarding, as the case may be:
- commercial aerospace production and delivery rates, including those of
Boeing and Airbus;
- growth in the production of military aircraft and launch vehicle programs
in 2000 and beyond;
- the recovery of the electronics market;
- the impact of pricing pressures from Hexcel's customers;
- the ability of Hexcel to pass along pricing reductions to its suppliers;
- future sales based on current backlog;
14
<PAGE>
- sales growth, sales mix, gross margins, manufacturing productivity,
capital expenditures and effective tax rates;
- Hexcel's financial condition and liquidity, as well as future free cash
flows and earnings;
- the total cost of our business consolidation program and estimates of the
amount of cash expenditures to complete the program;
- the costs and benefits of accelerating and expanding our Lean Enterprise
and business consolidation programs and implementing a supply chain
management program; and
- the impact of the Year 2000 issue, the estimated costs associated with
becoming Year 2000 compliant and the estimated target date for substantial
completion of remediation.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. These factors include, but are not limited to, the following:
- the integration of the acquired Clark-Schwebel business without disruption
to manufacturing, marketing and distribution activities;
- changes in general economic and business conditions;
- changes in current pricing levels;
- changes in political, social and economic conditions and local
regulations, particularly in Asia and Europe;
- foreign currency fluctuations;
- changes in aerospace delivery rates;
- reductions in sales to any significant customers, particularly Boeing or
Airbus; changes in sales mix; changes in government defense procurement
budgets;
- changes in military aerospace programs technology;
- industry capacity;
- competition;
- disruptions of established supply channels;
- manufacturing capacity constraints;
- the availability, terms and deployment of capital; and
- the ability of Hexcel to accurately estimate the cost of systems
preparation and successfully implement for Year 2000 compliance.
Additional information regarding these factors is contained in our annual
report on Form 10-K (SEC File No. 1-8472) for the year ended December 31, 1998,
and subsequent quarterly reports on Form 10-Q.
Our risks are more specifically described in "Risk Factors" and in our
annual report on Form 10-K and quarterly reports on Form 10-Q, which are
incorporated by reference in this prospectus. If one or more of these risks or
uncertainties materialize, or if underlying assumptions prove incorrect, our
actual results may vary materially from those expected, estimated or projected.
We do not undertake to update our forward-looking statements or risk factors
to reflect future events or circumstances.
15
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. In consideration
for issuing the exchange notes, we will receive in exchange original notes of
like principal amount, the terms of which are identical in all material respects
to the exchange notes. The original notes surrendered in exchange for exchange
notes will be retired and canceled and cannot be reissued. Accordingly, issuance
of the exchange notes will not result in any increase in our indebtedness. We
have agreed to bear the expenses of the exchange offer. No underwriter is being
used in connection with the exchange offer.
For a description of the use of proceeds of the offering of original notes,
see "Prospectus Summary--The Company--Recent Developments--Offering of Original
Notes."
16
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of Hexcel as of
March 31, 1999.
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1999
-----------
(DOLLARS IN
THOUSANDS)
<S> <C>
Senior debt:
Senior Credit Facility...................................................... $ 394,489
European Credit and overdraft facilities.................................... 7,843
Capital lease obligations (a)............................................... 52,450
Other....................................................................... 408
-----------
Total Senior Debt (b)..................................................... 455,190
Other debt:
Senior Subordinated Notes payable to Ciba, net of discount (c).............. 23,849
9 3/4% Senior Subordinated Notes Due 2009................................... 240,000
7% Convertible Subordinated Notes Due 2003.................................. 114,435
7% Convertible Subordinated Debentures Due 2011............................. 25,625
-----------
Total other debt.......................................................... 403,909
-----------
Total debt (b)........................................................ 859,099
Shareholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized, 36,417,000
shares issued and outstanding (d)......................................... 364
Additional paid-in capital (d).............................................. 261,347
Retained earnings........................................................... 40,103
Accumulated other comprehensive income (loss)............................... (692)
-----------
Total shareholders' equity................................................ 301,122
-----------
Total capitalization.................................................. $1,160,221
-----------
-----------
</TABLE>
- ------------------------------
(a) Includes a $50 million capital lease for property, plant and equipment
entered into in connection with the Clark-Schwebel acquisition. The lease
expires in September 2006 and includes various purchase options.
(b) Includes $22.4 million of debt due within one year.
(c) Represents the Ciba notes (face amount of $25.0 million), net of unamortized
discount of $1.1 million as of March 31, 1999.
(d) Net of 847,020 shares of treasury stock acquired by Hexcel at an aggregate
cost of $10.7 million.
17
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined statements of operations for the
fiscal years ended December 31, 1997 and 1998, and the quarters ended March 31,
1998 and 1999, as well as the unaudited pro forma condensed consolidated balance
sheets as of December 31, 1998 and March 31, 1999, were prepared to illustrate
the estimated effects of (1) the offering of the original notes and the
application of the net proceeds from that offering and (2) the redemption of
$12.5 million aggregate principal amount of Ciba notes with borrowings under the
senior credit facility, collectively referred to as the Pro Forma Transaction,
and the acquisition of the Clark-Schwebel business. The pro forma financial
information presented assumes that the Pro Forma Transaction and the acquisition
of the Clark-Schwebel business occurred as of the beginning of the periods
presented.
The unaudited pro forma financial information presented below is derived
from the audited financial statements of Hexcel as of December 31, 1998 and for
the years ended December 31, 1997 and 1998, the audited financial statements of
Clark-Schwebel as of and for the 53 weeks ended January 3, 1998 and the
unaudited financial statements of Hexcel as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999, and Clark-Schwebel for the three months
ended April 4, 1998.
The Clark-Schwebel acquisition has been accounted for using the purchase
method of accounting. The purchase method of accounting allocates the aggregate
purchase price to the assets acquired and liabilities assumed based upon their
respective fair values, and such allocations are subject to change up to one
year from the date of acquisition. We are unable to predict whether any
adjustments as a result of the foregoing will have a material effect on the pro
forma financial statements.
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 consolidated financial statements of Hexcel
and the notes to the consolidated financial statements appearing elsewhere in
this prospectus. The unaudited pro forma financial information does not purport
to be indicative of the results of operations or financial condition that would
have been reported had the events assumed occurred on the dates indicated, nor
does it purport to be indicative of results of operations, or financial
condition that may be achieved in the future.
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, other than those incurred during the quarter ended March
31, 1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Business Acquisition and Consolidation Activities."
18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------
CLARK- ADJUSTMENTS PRO FORMA
HEXCEL SCHWEBEL (NOTE 1) COMBINED
-------- -------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales............................... $936,855 $240,204 $ -- $ 1,177,059
Cost of sales........................... 714,223 184,901 1,000(a) 900,124
-------- -------- ----------- ------------
Gross margin........................ 222,632 55,303 (1,000) 276,935
Selling, general and administrative
expenses.............................. 102,449 13,771 7,451(b) 123,671
Research and technology expenses........ 18,383 2,216 -- 20,599
Business acquisition and consolidation
expenses.............................. 25,343 -- -- 25,343
-------- -------- ----------- ------------
Operating income.................... 76,457 39,316 (8,451) 107,322
Interest expense........................ 25,705 15,176 29,574(c) 70,455
Other income, net....................... -- 35 -- 35
-------- -------- ----------- ------------
Income before income taxes.......... 50,752 24,175 (38,025) 36,902
Provision (benefit) for income taxes.... (22,878) 9,657 (14,712)(d) (27,933)
Equity in earnings of joint ventures,
net................................... -- 3,997 2,755(e) 6,752
-------- -------- ----------- ------------
Net income.......................... $ 73,630 $ 18,515 $(20,558) $ 71,587
-------- -------- ----------- ------------
-------- -------- ----------- ------------
Net income per share:
Basic............................... $ 2.00 $ 1.95
Diluted............................. 1.74 1.69
Weighted average shares.................
Basic............................... 36,748 36,748
Diluted............................. 45,997 45,997
OTHER FINANCIAL DATA:
EBITDA (Note 3)..................... $112,254 $ 48,736 $ 2,000 $ 162,990
Adjusted EBITDA (Note 3)............ 137,597 48,701 2,000 188,298
Cash flows from (Note 4):...........
Operating activities.............. 25,974 21,644 (4,101) 43,517
Investing activities.............. (82,869) (9,508) -- (92,377)
Financing activities.............. 57,244 (16,053) 4,101 45,292
Depreciation and amortization....... 35,797 9,385 10,451 55,633
Capital expenditures................ 57,369 8,330 -- 65,699
Ratio of earnings to fixed
charges........................... 2.9x 2.9x -- 1.6x
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information.
19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------
CLARK- ADJUSTMENTS PRO FORMA
HEXCEL SCHWEBEL (NOTE 1) COMBINED
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................... $1,089,044 $145,728 $ -- $1,234,772
Cost of sales........................... 817,785 110,980 700(a) 929,465
-------- -------- ----------- -----------
Gross margin........................ 271,259 34,748 (700) 305,307
Selling, general and administrative
expenses.............................. 117,885 9,291 5,726(b) 132,902
Research and technology expenses........ 23,624 1,544 -- 25,168
Business acquisition and consolidation
expenses.............................. 12,711 -- -- 12,711
-------- -------- ----------- -----------
Operating income.................... 117,039 23,913 (6,426) 134,526
Interest expense........................ 38,675 17,606 15,838(c) 72,119
Other expense, net...................... -- 13 -- 13
-------- -------- ----------- -----------
Income before income taxes.......... 78,364 6,294 (22,264) 62,394
Provision (benefit) for income taxes.... 28,442 2,600 (8,376)(d) 22,666
Equity in earnings of joint ventures,
net................................... 517 2,818 1,630(e) 4,965
-------- -------- ----------- -----------
Net income.......................... $ 50,439 $ 6,512 $(12,258) $ 44,693
-------- -------- ----------- -----------
-------- -------- ----------- -----------
Net income per share:
Basic............................... $ 1.38 $ 1.22
Diluted............................. 1.24 1.12
Weighted average shares.................
Basic............................... 36,675 36,675
Diluted............................. 45,671 45,671
OTHER FINANCIAL DATA:
EBITDA (Note 3)..................... $164,493 $ 30,240 $ 976 $ 195,709
Adjusted EBITDA (Note 3)............ 177,204 30,253 976 208,433
Cash flows from (Note 4):...........
Operating activities.............. 93,780 19,524 (3,070) 110,234
Investing activities.............. (539,151) (6,159) 472,770 (72,540)
Financing activities.............. 440,665 1,709 (484,921) (42,547)
Depreciation and amortization....... 47,454 6,340 7,402 61,196
Capital expenditures................ 66,530 3,541 -- 70,071
Ratio of earnings to fixed
charges........................... 2.9x 1.5x -- 1.9x
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information.
20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
COMBINED STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------
CLARK- ADJUSTMENTS PRO FORMA
HEXCEL SCHWEBEL (NOTE 1) COMBINED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales........................................................ $ 256,741 $ 60,418 $ -- $ 317,159
Cost of sales.................................................... 190,645 45,215 250(a) 236,110
---------- --------- ----------- -----------
Gross margin................................................. 66,096 15,203 (250) 81,049
Selling, general and administrative expenses..................... 27,177 3,863 1,863(b) 32,903
Research and technology expenses................................. 5,183 560 -- 5,743
---------- --------- ----------- -----------
Operating income............................................. 33,736 10,780 (2,113) 42,403
Interest expense................................................. 6,967 4,508 6,825(c) 18,300
Other expense, net............................................... -- 2 -- 2
---------- --------- ----------- -----------
Income before income taxes................................... 26,769 6,270 (8,938) 24,101
Provision (benefit) for income taxes............................. 9,699 2,550 (3,523)(d) 8,726
Equity in earnings of joint ventures, net........................ -- 1,071 518(e) 1,589
---------- --------- ----------- -----------
Net income................................................... $ 17,070 $ 4,791 $ (4,897) $ 16,964
---------- --------- ----------- -----------
---------- --------- ----------- -----------
Net income per share:
Basic........................................................ $ 0.46 $ 0.46
Diluted...................................................... 0.40 0.40
Weighted average shares:
Basic........................................................ 36,845 36,845
Diluted...................................................... 46,346 46,346
OTHER FINANCIAL DATA:
EBITDA (Note 3).............................................. 43,744 13,272 500 57,516
Adjusted EBITDA (Note 3)..................................... 43,744 13,274 500 57,518
Cash flows from (Note 4):....................................
Operating activities....................................... (5,101) 18,960 13,859
Investing activities....................................... (12,296) (904) -- (13,200)
Financing activities....................................... 10,984 -- -- 10,984
Depreciation and amortization................................ 10,008 2,494 2,613 15,115
Capital expenditures......................................... 11,546 929 -- 12,475
Ratio of earnings to fixed charges........................... 4.6x 2.6x -- 2.4x
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information.
21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
COMBINED STATEMENT OF OPERATIONS
QUARTER ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
---------- ADJUSTMENTS PRO FORMA
HEXCEL (NOTE 1) COMBINED
---------- ------------- -----------
<S> <C> <C> <C>
Net sales................................................................... $ 316,170 $ -- $ 316,170
Cost of sales............................................................... 245,399 -- 245,399
---------- ------ -----------
Gross margin............................................................ 70,771 -- 70,771
Selling, general and administrative expenses................................ 34,338 -- 34,338
Research and technology expenses............................................ 6,455 -- 6,455
Business acquisition and consolidation expenses............................. 2,809 -- 2,809
---------- ------ -----------
Operating income........................................................ 27,169 -- 27,169
Interest expense............................................................ 19,106 (180)(c) 18,926
---------- ------ -----------
Income before income taxes.............................................. 8,063 180 8,243
Provision (benefit) for income taxes........................................ 2,839 63(d) 2,902
Equity in (earnings) losses of joint ventures, net.......................... 16 -- 16
---------- ------ -----------
Net income.............................................................. $ 5,208 $ 117 $ 5,325
---------- ------ -----------
---------- ------ -----------
Net income per share:
Basic................................................................... $ 0.14 $ 0.14
Diluted................................................................. 0.14 0.14
Weighted average shares:
Basic................................................................... 36,365 36,365
Diluted................................................................. 36,460 36,460
OTHER FINANCIAL DATA:
EBITDA (Note 3)......................................................... 42,829 -- 42,829
Adjusted EBITDA (Note 3)................................................ 45,638 -- 45,638
Cash flows from (Note 4)................................................
Operating activities.................................................. 17,341 17,341
Investing activities.................................................. (9,429) -- (9,429)
Financing activities.................................................. (12,414) (12,414)
Depreciation and amortization........................................... 15,660 -- 15,660
Capital expenditures.................................................... 9,429 -- 9,429
Ratio of earnings to fixed charges...................................... 1.4x -- 1.4x
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information.
22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND MARCH 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AS OF MARCH 31, 1999
------------------------------------ ------------------------------------
HISTORICAL HISTORICAL
--------- ADJUSTMENTS PRO FORMA --------- ADJUSTMENTS PRO FORMA
HEXCEL (NOTE 2) CONSOLIDATED HEXCEL (NOTE 2) COMBINED
--------- ----------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 7,504 $ -- $ 7,504 $ 2,458 $ -- $ 2,458
Accounts receivable............. 188,368 -- 188,368 199,884 -- 199,884
Inventories..................... 213,199 -- 213,199 204,748 -- 204,748
Prepaid expenses and other
assets........................ 29,955 -- 29,955 28,718 -- 28,718
--------- ----------- ------------ --------- ----------- ------------
Total current assets.......... 439,026 -- 439,026 435,808 -- 435,808
Net property, plant and
equipment....................... 432,573 -- 432,573 421,193 -- 421,193
Goodwill and other purchased
intangibles..................... 425,405 -- 425,405 421,422 -- 421,422
Investment in affiliated companies
and other assets................ 107,157 9,000(a) 116,157 118,564 (61) (e) 118,503
--------- ----------- ------------ --------- ----------- ------------
Total assets.................. $1,404,161 $ 9,000 $1,413,161 $1,396,987 $ (61) $1,396,926
--------- ----------- ------------ --------- ----------- ------------
--------- ----------- ------------ --------- ----------- ------------
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Notes payable and current
maturities of long-term
liabilities................... $ 26,867 $ -- $ 26,867 $ 22,381 $ -- $ 22,381
Accounts payable................ 81,869 -- 81,869 82,703 -- 82,703
Accrued liabilities............. 110,708 -- 110,708 111,094 -- 111,094
--------- ----------- ------------ --------- ----------- ------------
Total current liabilities..... 219,444 -- 219,444 216,178 -- 216,178
Long-term notes payable and
capital lease obligations....... 802,376 21,500(b) 823,876 812,869 -- 812,869
Indebtedness to related parties... 35,675 (11,862)(c) 23,813 23,849 -- 23,849
Other non-current liabilities..... 44,267 -- 44,267 42,969 -- 42,969
--------- ----------- ------------ --------- ----------- ------------
Total liabilities............. 1,101,762 9,638 1,111,400 1,095,865 -- 1,095,865
Total shareholders' equity.... 302,399 (638)(d) 301,761 301,122 (61) (e) 301,061
--------- ----------- ------------ --------- ----------- ------------
Total liabilities and
shareholders' equity........ $1,404,161 $ 9,000 $1,413,161 $1,396,987 $ (61) $1,396,926
--------- ----------- ------------ --------- ----------- ------------
--------- ----------- ------------ --------- ----------- ------------
</TABLE>
See accompanying notes to Unaudited Pro Forma Financial Information.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
NOTE 1 -- ADJUSTMENTS TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE QUARTER
DECEMBER 31, ENDED MARCH 31,
-------------------- --------------------
1997 1998 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS OF
DOLLARS)
(a) Adjustment to reflect the increase in depreciation costs resulting
from the adjustment to fair value of acquired property, plant and
equipment, and from the recognition at fair value of property,
plant and equipment to be leased pursuant to a long-term lease
with purchase options............................................ 1,000 700 250 --
--------- --------- --------- ---------
--------- --------- --------- ---------
(b) Adjustment to reflect the following:
Elimination of management fees and other expenses paid by the
Clark-Schwebel business to the selling shareholders.............. (2,000) (976) (500) --
Amortization of the excess of purchase price over the net assets
acquired (using a 34-year weighted average amortization period,
based on asset lives ranging from 10 to 40 years)................ 9,451 6,702 2,363 --
--------- --------- --------- ---------
Net adjustment..................................................... 7,451 5,726 1,863 --
--------- --------- --------- ---------
--------- --------- --------- ---------
(c) Adjustment to reflect the following:
Elimination of interest expense on debt obligations of the
Clark-Schwebel business which were not assumed by Hexcel......... (15,176) (17,607) (4,508) --
Net increase in interest expense attributable to borrowings under
the senior credit facility and the notes to finance the
acquisition of the Clark-Schwebel business and to refinance
Hexcel's previous bank debt. Interest on outstanding borrowings
under the senior credit facility is computed at variable rates
based on the London interbank rate or, at the option of Hexcel,
the base rate of the administrative agent for the lenders. For
purposes of estimating pro forma adjustments, a weighted average
interest rate of approximately 7.2% has been used. Interest on
the outstanding balance of the notes has been calculated using
the actual interest rate of 9.75%................................ 41,150 30,745 10,433 334
Estimated interest expense under a long-term lease for $50,000 of
property, plant and equipment.................................... 3,600 2,700 900 --
Adjustment to reflect the write-off of a portion of the unamortized
discount in connection with the reduction of the indebtedness to
related parties.................................................. -- -- -- (575)
Amortization of transaction costs incurred in connection with the
sale of the notes................................................ -- -- -- 61
--------- --------- --------- ---------
Net adjustment..................................................... 29,574 15,838 6,825 (180)
--------- --------- --------- ---------
--------- --------- --------- ---------
(d) Adjustment to reflect an approximate average income tax rate of
36.5% on the Clark-Schwebel business and on related transaction
costs in 1998 and an average income tax rate of 35.2% in 1999.... (14,712) (8,376) (3,523) 63
--------- --------- --------- ---------
--------- --------- --------- ---------
(e) Adjustment to reflect Hexcel's ability to utilize certain tax
attributes to reduce aggregate tax expense on the equity in
earnings of the Clark-Schwebel business joint ventures........... 2,755 1,630 518 --
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
24
<PAGE>
NOTE 2 -- ADJUSTMENTS TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE
SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS OF DOLLARS)
(a) Capitalization of estimated transaction costs incurred in connection with
the sale of the notes.................................................... 9,000 --
----------------- ------
(b) Net reduction in outstanding indebtedness under the senior credit facility
with proceeds from the sale of the notes................................. (218,500) --
Gross aggregate proceeds from the sale of the notes........................ 240,000 --
----------------- ------
Net adjustment............................................................. 21,500 --
----------------- ------
----------------- ------
(c) Net reduction in outstanding indebtedness to related parties with proceeds
from the sale of the notes............................................... (11,862) --
----------------- ------
----------------- ------
(d) Net reduction in shareholders' equity resulting from the write-off of a
portion of the unamortized discount on indebtedness to related parties,
in connection with the reduction of this obligation...................... (638) --
----------------- ------
----------------- ------
(e) Amortization of transaction costs incurred in connection with the sale of
the notes................................................................ -- 61
----------------- ------
----------------- ------
</TABLE>
NOTE 3 -- EBITDA AND ADJUSTED EBITDA
"EBITDA" is defined as income from continuing operations before interest,
taxes, depreciation and amortization and equity in (earnings) losses of joint
ventures. "Adjusted EBITDA" is defined as EBITDA before business acquisition and
consolidation expenses and other (income) expense, net. Hexcel believes that
EBITDA and adjusted EBITDA provide useful information regarding Hexcel'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 Hexcel's operating performance or as a measure of Hexcel's
liquidity. Adjusted EBITDA may not be comparable to other similarly titled
financial measures of other companies.
A reconciliation of net income to EBITDA and adjusted EBITDA is as follows:
<TABLE>
<CAPTION>
HISTORICAL
---------------------
<S> <C> <C> <C> <C>
CLARK- PRO FORMA
HEXCEL SCHWEBEL ADJUSTMENTS COMBINED
---------- --------- ----------- -----------
FOR THE YEAR ENDED DECEMBER 31, 1997:
Net income..................................................... $ 73,630 $ 18,515 $ (20,558) $ 71,587
Provision (benefit) for income taxes........................... (22,878) 9,657 (14,712) (27,933)
Interest expense............................................... 25,705 15,176 29,574 70,455
Depreciation and amortization.................................. 35,797 9,385 10,451 55,633
Equity in earnings of joint ventures........................... -- (3,997) (2,755) (6,752)
---------- --------- ----------- -----------
EBITDA......................................................... 112,254 48,736 2,000 162,990
Business acquisition and consolidation expenses................ 25,343 -- -- 25,343
Other income................................................... -- (35) -- (35)
---------- --------- ----------- -----------
Adjusted EBITDA................................................ $ 137,597 $ 48,701 $ 2,000 $ 188,298
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
---------------------
CLARK- PRO FORMA
HEXCEL SCHWEBEL ADJUSTMENTS COMBINED
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998:
Net income..................................................... $ 50,439 $ 6,512 $ (12,258) $ 44,693
Provision (benefit) for income taxes........................... 28,442 2,600 (8,376) 22,666
Interest expense............................................... 38,675 17,606 15,838 72,119
Depreciation and amortization.................................. 47,454 6,340 7,402 61,196
Equity in earnings of joint ventures........................... (517) (2,818) (1,630) (4,965)
---------- --------- ----------- -----------
EBITDA......................................................... 164,493 30,240 976 195,709
Business acquisition and consolidation expenses................ 12,711 -- -- 12,711
Other expense.................................................. -- 13 -- 13
---------- --------- ----------- -----------
Adjusted EBITDA................................................ $ 177,204 $ 30,253 $ 976 $ 208,433
---------- --------- ----------- -----------
---------- --------- ----------- -----------
FOR THE QUARTER ENDED MARCH 31, 1998:
Net income..................................................... 17,070 4,791 (4,897) 16,964
Provision (benefit) for income taxes........................... 9,699 2,550 (3,523) 8,726
Interest expense............................................... 6,967 4,508 6,825 18,300
Depreciation and amortization.................................. 10,008 2,494 2,613 15,115
Equity in earnings of joint ventures........................... -- (1,071) (518) (1,589)
---------- --------- ----------- -----------
EBITDA......................................................... 43,744 13,272 500 57,516
Other expense.................................................. -- 2 -- 2
---------- --------- ----------- -----------
Adjusted EBITDA................................................ 43,744 13,274 500 57,518
---------- --------- ----------- -----------
---------- --------- ----------- -----------
FOR THE QUARTER ENDED MARCH 31, 1999:
Net income..................................................... 5,208 -- 117 5,325
Provision (benefit) for income taxes........................... 2,839 -- 63 2,902
Interest expense............................................... 19,106 -- (180) 18,926
Depreciation and amortization.................................. 15,660 -- -- 15,660
Equity in (earnings) losses of joint ventures.................. 16 -- -- 16
---------- --------- ----------- -----------
EBITDA......................................................... 42,829 -- -- 42,829
Business acquisition and consolidation expenses................ 2,809 -- -- 2,809
---------- --------- ----------- -----------
Adjusted EBITDA................................................ 45,638 -- -- 45,638
---------- --------- ----------- -----------
---------- --------- ----------- -----------
</TABLE>
NOTE 4 -- PRO FORMA CASH FLOW DATA
Pro forma cash flow data for all periods presented were prepared to
illustrate the estimated effects of (1) the offering of the original notes and
the application of the net proceeds from that offering and (2) the redemption of
$12.5 million aggregate principal amount of Ciba notes with borrowings under the
senior credit facility, collectively referred to as the Pro Forma Transaction.
In addition, the pro forma data for all periods include either the actual or the
estimated effects of the acquisition of Clark-Schwebel business. The pro forma
data for both the Pro Forma Transaction and the acquisition of the
Clark-Schwebel business, excluding cash flows associated with the purchase
price, and the related financing, of the acquisition, were assumed to have
occurred on January 1 of each respective period presented.
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected historical financial information of Hexcel set forth below has
been derived from the audited consolidated financial statements of Hexcel as of
and for the five years ended December 31, 1998, and the unaudited condensed
consolidated financial statements as of and for the quarters ended March 31,
1998 and 1999. The following selected financial information is qualified in its
entirety by, and should be read in conjunction with, Hexcel's consolidated
financial statements and the related notes to the consolidated financial
statements, included elsewhere in this prospectus.
Business acquisition and consolidation expenses include amounts previously
reported as "Restructuring expenses."
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 that portion of rent expense
deemed to be interest. For the years ended December 31, 1994 and 1996, earnings
were insufficient to cover fixed charges by approximately $24.5 million and
$15.8 million, respectively.
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------
1994 1995 1996 1997 1998(A) 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
STATEMENT OF OPERATIONS DATA:
Net sales...................................................... $ 313.8 $ 350.2 $ 695.3 $ 936.9 $ 1,089.0 $ 256.7
Cost of sales.................................................. 265.4 283.1 554.0 714.3 817.7 190.6
--------- --------- --------- --------- --------- ---------
Gross margin................................................... 48.4 67.1 141.3 222.6 271.3 66.1
Selling, general & administrative expenses..................... 37.5 41.7 79.4 102.5 117.9 27.2
Research and technology expenses............................... 8.2 7.6 16.7 18.4 23.7 5.2
Business acquisition and consolidation expenses................ -- -- 42.4 25.3 12.7 --
--------- --------- --------- --------- --------- ---------
Operating income............................................... 2.7 17.8 2.8 76.4 117.0 33.7
Interest expense............................................... 11.8 8.7 21.5 25.7 38.7 7.0
Other expense (income)......................................... (4.9) (0.8) (3.0) -- -- --
Bankruptcy reorganization expenses............................. 20.2 3.4 -- -- -- --
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations before income taxes... (24.4) 6.5 (15.7) 50.7 78.3 26.7
Provision (benefit) for income taxes........................... 3.6 3.3 3.4 (22.9) 28.4 9.6
Equity in earnings of affiliated companies..................... -- -- -- -- (0.5) --
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations....................... $ (28.0) $ 3.2 $ (19.1) $ 73.6 $ 50.4 $ 17.1
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA......................................................... $ 1.6 $ 26.8 $ 32.5 $ 112.3 $ 164.5 $ 43.7
Adjusted EBITDA................................................ 16.9 29.4 71.9 137.6 177.2 43.7
Cash flows from:
Operating activities......................................... (1.1) (2.5) 26.5 26.0 93.8 (5.1)
Investing activities......................................... 0.3 15.7 (206.4) (82.9) (539.2) (12.3)
Financing activities......................................... (9.6) (9.6) 181.7 57.2 (440.7) 11.0
Depreciation and amortization.................................. 14.2 11.6 26.7 35.9 47.5 10.0
Capital expenditures........................................... 8.4 12.1 43.6 57.4 66.5 11.5
Ratio of earnings to fixed charges............................. -- 1.7x -- 2.9x 2.9x 4.6x
<CAPTION>
1999(A)
---------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................................................... $ 316.2
Cost of sales.................................................. 245.4
---------
Gross margin................................................... 70.8
Selling, general & administrative expenses..................... 34.4
Research and technology expenses............................... 6.5
Business acquisition and consolidation expenses................ 2.8
---------
Operating income............................................... 27.1
Interest expense............................................... 19.1
Other expense (income)......................................... --
Bankruptcy reorganization expenses............................. --
---------
Income (loss) from continuing operations before income taxes... 8.0
Provision (benefit) for income taxes........................... 2.8
Equity in earnings of affiliated companies..................... --
---------
Income (loss) from continuing operations....................... $ 5.2
---------
---------
OTHER DATA:
EBITDA......................................................... $ 42.8
Adjusted EBITDA................................................ 45.6
Cash flows from:
Operating activities......................................... 17.3
Investing activities......................................... (9.4)
Financing activities......................................... (12.4)
Depreciation and amortization.................................. 15.7
Capital expenditures........................................... 9.4
Ratio of earnings to fixed charges............................. 1.4x
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
ENDED
FOR THE YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- ---------
1994 1995 1996 1997 1998(A) 1998
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
RECONCILIATION OF NET INCOME TO EBITDA AND ADJUSTED EBITDA:
Net income (loss) from continuing operations..... $ (28.0) $ 3.2 $ (19.1) $ 73.6 $ 50.4 $ 17.1 $ 5.2
Provision (benefit) for income taxes............. 3.6 3.3 3.4 (22.9) 28.4 9.6 2.8
Interest expense................................. 11.8 8.7 21.5 25.7 38.7 7.0 19.1
Depreciation and amortization.................... 14.2 11.6 26.7 35.9 47.5 10.0 15.7
Equity in earnings of joint ventures............. -- -- -- -- (0.5) -- --
--------- --------- --------- --------- --------- --------- ---------
EBITDA........................................... 1.6 26.8 32.5 112.3 164.5 43.7 42.8
Business acquisition and consolidation
expenses....................................... -- -- 42.4 25.3 12.7 -- 2.8
Bankruptcy reorganization expenses............... 20.2 3.4 -- -- -- -- --
Other expense (income)........................... (4.9) (0.8) (3.0) -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Adjusted EBITDA.................................. $ 16.9 $ 29.4 $ 71.9 $ 137.6 $ 177.2 $ 43.7 $ 45.6
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................................. $ (23.0) $ 61.6 $ 128.1 $ 200.7 $ 219.6 $ 227.7 $ 219.6
Total assets..................................... 243.5 230.6 701.7 811.6 1,404.2 821.9 1,397.0
Total debt....................................... 109.5 90.1 311.0 353.4 864.9 363.4 859.1
Shareholders' equity (deficit)................... (5.9) 48.4 179.3 249.9 302.4 266.8 301.1
<CAPTION>
1999(A)
---------
<S> <C>
RECONCILIATION OF NET INCOME TO EBITDA AND ADJUSTED EBITDA:
</TABLE>
- ------------------------
(a) Amounts include the operating results of the Clark-Schwebel business since
the acquisition date, September 15, 1998.
28
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER
Upon the terms and conditions set forth in this prospectus and in the
accompanying letter of transmittal, which together constitute the exchange
offer, we will accept for exchange original notes which are properly tendered on
or before the expiration date and not withdrawn as permitted below. As used in
this prospectus, the term "expiration date" means 5:00 p.m., New York City time,
on July 19, 1999. However, if we, in our sole discretion, have extended the
period of time for which the exchange offer is open, the term "expiration date"
means the latest time and date to which we extend the exchange offer.
As of the date of this prospectus, $240 million aggregate principal amount
of the original notes is outstanding. This prospectus, together with the letter
of transmittal, is first being sent on or about June 18, 1999, to all holders of
original notes known to us. Our obligation to accept original notes for exchange
pursuant to the exchange offer is subject to the conditions set forth below
under "--Conditions to the Exchange Offer."
We reserve the right to extend the period of time during which the exchange
offer is open. We would then delay acceptance for exchange of any original notes
by giving oral or written notice of an extension to the holders of original
notes as described below. During any extension period, all original notes
previously tendered will remain subject to the exchange offer and may be
accepted for exchange by us. Any original notes not accepted for exchange will
be returned to the tendering holder after the expiration or termination of the
exchange offer.
Original notes tendered in the exchange offer must be in denominations of
principal amount of $1,000 and any integral multiple of $1,000.
We reserve the right to amend or terminate the exchange offer, and not to
accept for exchange any original notes not previously accepted for exchange,
upon the occurrence of any of the conditions of the exchange offer specified
below under "--Conditions to the Exchange Offer." We will give oral or written
notice of any extension, amendment, non-acceptance or termination to the holders
of the original notes as promptly as practicable. If we materially change the
terms of the exchange offer, we will resolicit tenders of the original notes. We
will notify you of any extension by means of a press release or other public
announcement no later than 9:00 a.m., New York City time on that date.
Our acceptance of the tender of original notes by a tendering holder will
form a binding agreement upon the terms and subject to the conditions provided
in this prospectus and in the accompanying letter of transmittal.
PROCEDURES FOR TENDERING
Except as described below, a tendering holder must transmit a properly
completed and duly executed letter of transmittal, including all other documents
required by the letter of transmittal, to The Bank of New York, the exchange
agent, on or before the expiration date. In addition, the exchange agent must
receive, on or before the expiration date:
- certificates for the original notes; or
- a timely confirmation of book-entry transfer of the original notes into
the exchange agent's account at The Depository Trust Company, the
book-entry transfer facility, in accordance with the procedures for
book-entry described below.
The method of delivery of original notes, letters of transmittal and all
other required documents is at your election and risk. If the delivery is by
mail, we recommend that you use registered mail,
29
<PAGE>
properly insured, with return receipt requested. In all cases, you should allow
sufficient time to assure timely delivery. You should not send letters of
transmittal or original notes to us.
If you are a beneficial owner whose original notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee, and
wish to tender, you should promptly instruct the registered holder to tender on
your behalf. Any registered holder that is a participant in The Depository Trust
Company's book-entry transfer facility system may make book-entry delivery of
the original notes by causing The Depository Trust Company to transfer the
original notes into the exchange agent's account. The Depository Trust Company
will be referred to as "DTC" in this prospectus.
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed unless the original notes surrendered for exchange are tendered:
- by a registered holder of the original notes who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the letter of transmittal, or
- for the account of an "eligible institution."
If signatures on a letter of transmittal or a notice of withdrawal are
required to be guaranteed, the guarantees must be by an "eligible institution."
An "eligible institution" is a financial institution-- including most banks,
savings and loan associations and brokerage houses--that is a participant in the
Securities Transfer Agents Medallion Program, the New York Stock Exchange
Medallion Signature Program or the Stock Exchanges Medallion Program.
We will determine in our sole discretion all questions as to the validity,
form and eligibility of original notes tendered for exchange. This discretion
extends to the determination of all questions concerning the timing of receipts
and acceptance of tenders. These determinations will be final and binding.
We reserve the right to reject any particular original note not properly
tendered or any which acceptance might, in our judgment or our counsel's
judgment, be unlawful. We also reserve the right to waive any defects or
irregularities or conditions of the exchange offer as to any particular original
note either before or after the expiration date, including the right to waive
the ineligibility of any tendering holder. Our interpretation of the terms and
conditions of the exchange offer as to any particular original note either
before or after the expiration date, including the letter of transmittal and the
instructions to the letter of transmittal, shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of original notes must be cured within a reasonable period of time. Neither we,
the exchange agent nor any other person will be under any duty to give
notification of any defect or irregularity in any tender of original notes. Nor
will we, the exchange agent or any other person incur any liability for failing
to give notification of any defect or irregularity.
If the letter of transmittal is signed by a person other than the registered
holder of original notes, the letter of transmittal must be accompanied by a
written instrument of transfer or exchange in satisfactory form duly executed by
the registered holder with the signature guaranteed by an eligible institution.
The original notes must be endorsed or accompanied by appropriate powers of
attorney. In either case, the original notes must be signed exactly as the name
of any registered holder appears on the original notes.
If the letter of transmittal or any original notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by us,
proper evidence satisfactory to us of their authority to so act must be
submitted.
30
<PAGE>
By tendering, each holder will represent to us that, among other things,
- the exchange notes are being acquired in the ordinary course of business
of the person receiving the exchange notes, whether or not that person is
the holder and
- neither the holder nor the other person has any arrangement or
understanding with any person to participate in the distribution of the
exchange notes.
In the case of a holder that is not a broker-dealer, that holder, by
tendering, will also represent to us that the holder is not engaged in and does
not intend to engage in a distribution of the exchange notes.
If any holder or other person is an "affiliate" of ours, as defined under
Rule 405 of the Securities Act, or is engaged in, or intends to engage in, or
has an arrangement or understanding with any person to participate in, a
distribution of the exchange notes that holder or other person can not rely on
the applicable interpretations of the staff of the SEC and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction.
Each broker-dealer that receives exchange notes for its own account in
exchange for original notes, where the original notes were acquired by it as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus that meets the requirements of the Securities
Act in connection with any resale of the exchange notes. The letter of
transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. See "Plan of Distribution."
ACCEPTANCE OF ORIGINAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept, promptly after the expiration date, all original notes properly
tendered. We will issue the exchange notes promptly after acceptance of the
original notes. See "-- Conditions to the Exchange Offer" below. For purposes of
the exchange offer, we will be deemed to have accepted properly tendered
original notes for exchange when, as and if we have given oral or written notice
to the exchange agent, with prompt written confirmation of any oral notice.
For each original note accepted for exchange, the holder of the original
note will receive an exchange note having a principal amount equal to that of
the surrendered original note. The exchange notes will bear interest from the
most recent date to which interest has been paid on the original notes or, if no
interest has been paid on the original notes, from January 21, 1999.
Accordingly, registered holders of exchange notes on the relevant record date
for the first interest payment date following the completion of the exchange
offer will receive interest accruing from the most recent date to which interest
has been paid or, if no interest has been paid, from January 21, 1999. Original
notes accepted for exchange will cease to accrue interest from and after the
date of completion of the exchange offer. Holders of original notes whose
original notes are accepted for exchange will not receive any payment for
accrued interest on the original notes otherwise payable on any interest payment
date the record date for which occurs on or after completion of the exchange
offer and will be deemed to have waived their rights to receive the accrued
interest on the original notes.
In all cases, issuance of exchange notes for original notes will be made
only after timely receipt by the exchange agent of:
- certificates for the original notes, or a timely book-entry confirmation
of the original notes, into the exchange agent's account at the book-entry
transfer facility,
- a properly completed and duly executed letter of transmittal and
- all other required documents.
31
<PAGE>
Unaccepted or non-exchanged original notes will be returned without expense
to the tendering holder of the original notes. In the case of original notes
tendered by book-entry transfer pursuant to the book-entry procedures described
below, the non-exchanged original notes will be credited to an account
maintained with the book-entry transfer facility, as promptly as practicable
after the expiration or termination of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account for the
original notes at the book-entry transfer facility for purposes of the exchange
offer within two business days after the date of this prospectus. Any financial
institution that is a participant in the book-entry transfer facility's systems
may make book-entry delivery of original notes by causing the book-entry
transfer facility to transfer the original notes into the exchange agent's
account at the facility. However, although delivery of the original notes may be
made through the book-entry transfer facility, the letter of transmittal or a
facsimile of the letter of transmittal, with any required signature guarantees
and any other required documents, must, in any case, be transmitted to, and
received by, the exchange agent on or before the expiration date, unless the
holder has strictly complied with the guaranteed delivery procedures described
below.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of original notes desires to tender the original
notes, and the original notes are not immediately available, or time will not
permit the holder's original notes or other required documents to reach the
exchange agent before the expiration date, or the procedure for book-entry
transfer described above cannot be completed on a timely basis, a tender may
nonetheless be made if:
- the tender is made through an eligible institution;
- prior to the expiration date, the exchange agent received from an eligible
institution a properly completed and duly executed letter of transmittal,
or a facsimile of the letter of transmittal, and notice of guaranteed
delivery, substantially in the form provided by us, by facsimile
transmission, mail or hand delivery,
(a) setting forth the name and address of the holder of original notes
and the amount of original notes tendered,
(b) stating that the tender is being made, and
(c) guaranteeing that within three NYSE trading days after the expiration
date, the certificates for all physically tendered original notes, in
proper form for transfer, or a book-entry confirmation, as the case
may be, and any other documents required by the letter of transmittal
will be deposited by the eligible institution with the exchange
agent; and
- the certificates for all physically tendered original notes, in proper
form for transfer, or a book-entry confirmation, as the case may be, and
all other documents required by the letter of transmittal, are received by
the exchange agent within three NYSE trading days after the expiration
date.
WITHDRAWAL RIGHTS
Tenders of original notes may be withdrawn at any time before 5:00 p.m., New
York City time, on the expiration date.
For a withdrawal to be effective, the exchange agent must receive a written
notice of withdrawal at the address or, in the case of eligible institutions, at
the facsimile number, set forth below under
32
<PAGE>
"--Exchange Agent" before 5:00 p.m., New York City time, on the expiration date.
Any notice of withdrawal must:
- specify the name of the person, referred to as the depositor, having
tendered the original notes to be withdrawn;
- identify the notes to be withdrawn, including the certificate number or
numbers and principal amount of the original notes;
- contain a statement that the holder is withdrawing his election to have
the original notes exchanged;
- be signed by the holder in the same manner as the original signature on
the letter of transmittal by which the original notes were tendered,
including any required signature guarantees, or be accompanied by
documents of transfer to have the trustee with respect to the original
notes register the transfer of the original notes in the name of the
person withdrawing the tender; and
- specify the name in which the original notes are registered, if different
from that of the depositor.
If original notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at the book-entry transfer facility to be
credited with the withdrawn original notes. We will determine all questions as
to the validity, form and eligibility, including time of receipt, of notices of
withdrawal. Any original notes so withdrawn will be deemed not to have been
validly tendered for exchange. No exchange notes will be issued unless the
original notes so withdrawn are validly retendered. Any original notes that have
been tendered for exchange, but which are not exchanged for any reason, will be
returned to the tendering holder without cost to the holder. In the case of
original notes tendered by book-entry transfer, the original notes will be
credited to an account maintained with the book-entry transfer facility for the
original notes. Properly withdrawn original notes may be retendered by following
the procedures described under "--Procedures for Tendering" above at any time on
or before 5:00 p.m., New York City time, on the expiration date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the exchange offer, we shall not be
required to accept for exchange, or to issue exchange notes in exchange for, any
original notes, and may terminate or amend the exchange offer, if at any time
before the acceptance of the original notes for exchange or the exchange of the
exchange notes for the original notes, any of the following events shall occur:
- there shall be threatened, instituted or pending any action or proceeding
before, or any injunction, order or decree shall have been issued by, any
court or governmental agency or other governmental regulatory or
administrative agency or commission:
(1) seeking to restrain or prohibit the making or completion of the
exchange offer or any other transaction contemplated by the exchange
offer, or assessing or seeking any damages as a result of such
transaction or
(2) resulting in a material delay in our ability to accept for exchange
or exchange some or all of the original notes pursuant to the
exchange offer; or any statute, rule, regulation, order or injunction
shall be sought, proposed, introduced, enacted, promulgated or deemed
applicable to the exchange offer or any of the transactions
contemplated by the exchange offer by any governmental authority,
domestic or foreign, or
(3) any action shall have been taken, proposed or threatened, by any
governmental authority, domestic or foreign, that in our sole
judgment might directly or indirectly result in any of
33
<PAGE>
the consequences referred to in clauses (1) or (2) above or, in our
sole judgment, might result in the holders of exchange notes having
obligations with respect to resales and transfers of exchange notes
which are greater than those described in the interpretation of the
SEC referred to above, or would otherwise make it inadvisable to
proceed with the exchange offer; or
- there shall have occurred:
(1) any general suspension of or general limitation on prices for, or
trading in, securities on any national securities exchange or in the
over-the-counter market;
(2) any limitation by a governmental authority which may adversely affect
our ability to complete the transactions contemplated by the exchange
offer;
(3) a declaration of a banking moratorium or any suspension of payments
in respect of banks in the United States or any limitation by any
governmental agency or authority which adversely affects the
extension of credit; or
(4) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United
States, or, in the case of any of the foregoing existing at the time
of the commencement of the exchange offer, a material acceleration or
worsening of such calamities; or
- any change, or any development involving a prospective change, shall have
occurred or be threatened in our business, financial condition, operations
or prospects and those of our subsidiaries taken as a whole that is or may
be adverse to us, or we shall have become aware of facts that have or may
have an adverse impact on the value of the original notes or the exchange
notes; which in our sole judgment in any case makes it inadvisable to
proceed with the exchange offer and/or with such acceptance for exchange
or with such exchange.
These conditions to the exchange offer are to our sole benefit and may be
asserted by us regardless of the circumstances giving rise to any of these
conditions, or may be waived by us in whole or in part in our sole discretion.
Our failure at any time to exercise any of the foregoing rights will not be
deemed a waiver of any right.
In addition, we will not accept for exchange any original notes tendered,
and no exchange notes will be issued in exchange for any original notes, if at
such time any stop order is threatened or in effect relating to the registration
statement of which this prospectus constitutes a part or the qualification of
the indenture under the Trust Indenture Act of 1939.
EXCHANGE AGENT
We have appointed The Bank of New York as the exchange agent for the
exchange offer. You should direct all executed letters of transmittal to the
exchange agent at the address set forth below. You should direct questions and
requests for assistance, requests for additional copies of this
34
<PAGE>
prospectus or of the letter of transmittal and requests for notices of
guaranteed delivery to the exchange agent addressed as follows:
DELIVERY TO: The Bank of New York, EXCHANGE AGENT
<TABLE>
<S> <C>
BY HAND OR OVERNIGHT DELIVERY: BY REGISTERED OR CERTIFIED MAIL:
The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street, 7E
Corporate Trust Services Window New York, NY 10286
Ground Level Attention: Noriko Miyavahi,
New York, NY 10286 Reorganization Section
Attention: Noriko Miyavahi,
Reorganization Section
</TABLE>
FOR INFORMATION CALL:
(212) 815-6333
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
(212) 571-3080
CONFIRM BY TELEPHONE:
(212) 815-6333
IF YOU DELIVER THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMIT INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE, THEN YOUR DELIVERY OR TRANSMISSION WILL NOT CONSTITUTE A VALID DELIVERY
OF THE LETTER OF TRANSMITTAL.
FEES AND EXPENSES
We will not make any payment to brokers, dealers, or others soliciting
acceptances of the exchange offer. The estimated cash expenses to be incurred in
connection with the exchange offer will be paid by us. We estimate these
expenses in the aggregate to be approximately $500,000.
ACCOUNTING TREATMENT
We will not recognize any gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize the expense of the exchange
offer over the term of the exchange notes under generally accepted accounting
principles.
TRANSFER TAXES
Holders who tender their original notes for exchange will not be obligated
to pay any related transfer taxes, except that holders who instruct us to
register exchange notes in the name of, or request that original notes not
tendered or not accepted in the exchange offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer taxes.
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE ORIGINAL NOTES
Holders of original notes who do not exchange their original notes for
exchange notes pursuant to the exchange offer will continue to be subject to the
provisions in the indenture regarding transfer and exchange of the original
notes and the restrictions on transfer of the original notes as set forth in the
legend on the notes as a consequence of the issuance of the original notes
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and
35
<PAGE>
applicable state securities laws. In general, the original notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. As discussed in "Exchange Offer; Registration
Rights," we do not currently anticipate that we will register original notes
under the Securities Act.
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to third parties, we believe that exchange notes issued pursuant
to the exchange offer in exchange for original notes may be offered for resale,
resold or otherwise transferred by holders of the original notes, other than any
holder which is an "affiliate" of ours within the meaning of Rule 405 under the
Securities Act, without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the exchange notes are acquired
in the ordinary course of the holders' business and the holders have no
arrangement or understanding with any person to participate in the distribution
of the exchange notes. However, the SEC has not considered the exchange offer in
the context of a no-action letter. We cannot assure you that the staff of the
SEC would make a similar determination with respect to the exchange offer as in
the other circumstances. Each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of exchange notes and has no arrangement or understanding to
participate in a distribution of exchange notes. If any holder is an affiliate
of ours, is engaged in or intends to engage in or has any arrangement or
understanding with any person to participate in the distribution of the exchange
notes to be acquired in the exchange offer, that holder:
(1) could not rely on the applicable interpretations of the staff of the
SEC, and
(2) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives exchange notes for its own account in
exchange for original notes must acknowledge that the original notes were
acquired by the broker-dealer as a result of market-making activities or other
trading activities and that it will deliver a prospectus in connection with any
resale of the exchange notes. See "Plan of Distribution." In addition, to comply
with state securities laws, the exchange notes may not be offered or sold in any
state unless they have been registered or qualified for sale in such state or an
exemption from registration or qualification, with which there has been
compliance, is available. The offer and sale of the exchange notes to "qualified
institutional buyers," as defined under Rule 144A of the Securities Act, is
generally exempt from registration or qualification under the state securities
laws. We currently do not intend to register or qualify the sale of exchange
notes in any state where an exemption from registration or qualification is
required and not available.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS RELATE TO THE AUDITED RESULTS OF
OPERATIONS OF HEXCEL FOR THE THREE YEARS ENDED DECEMBER 31, 1998 AND THE
UNAUDITED RESULTS OF OPERATIONS FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998.
THE DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE SELECTED
CONSOLIDATED FINANCIAL INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS OF
HEXCEL AND THE NOTES TO THE FINANCIAL STATEMENTS APPEARING ELSEWHERE AND OTHER
FINANCIAL INFORMATION INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
<TABLE>
<CAPTION>
BUSINESS OVERVIEW
<S> <C> <C> <C> <C> <C>
QUARTER ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1998 1997 1996
- ------------------------------------------------- --------- --------- --------- --------- ---------
Net sales........................................ $ 316.2 $ 256.7 $ 1,089.0 $ 936.9 $ 695.3
Gross margin %................................... 22.4% 25.7% 24.9% 23.8% 20.3%
Adjusted EBITDA (a).............................. $ 45.6 $ 43.7 $ 177.2 $ 137.6 $ 71.9
Adjusted operating income % (b).................. 9.5% 13.1% 11.9% 10.9% 6.5%
Business acquisition and consolidation
expenses....................................... $ 2.8 -- $ 12.7 $ 25.3 $ 42.4
Net income (loss)................................ $ 5.2 $ 17.1 $ 50.4 $ 73.6 $ (19.1)
Adjusted net income (c).......................... $ 7.0 $ 17.1 $ 59.2 $ 47.6 $ 13.8
Diluted earnings (loss) per share................ $ 0.14 $ 0.40 $ 1.24 $ 1.74 $ (0.58)
Adjusted diluted earnings per share (c).......... $ 0.19 $ 0.40 $ 1.43 $ 1.17 $ 0.48
</TABLE>
- ------------------------
(a) Earnings before business acquisition and consolidation expenses, other
(income) expense, interest, taxes, depreciation, amortization and equity in
(earnings) losses of affiliated companies. See also "--Financial Condition
and Liquidity" for a reconciliation of net income to EBITDA and Adjusted
EBITDA.
(b) Excludes business acquisition and consolidation expenses and other income.
(c) Excludes business acquisition and consolidation expenses and assumes a U.S.
effective tax provision of 36% for 1997 and 1996.
Net income for the first quarter of 1999 was $5.2 million, or $0.14 per
diluted share, compared with $17.1 million, or $0.40 per diluted share, for the
first quarter of 1998. Excluding business acquisition and consolidation expenses
of $2.8 million ($1.8 million after tax) incurred in the first quarter of 1999,
diluted earnings per share were $0.19.
During the first quarter of 1999, demand in most of the markets that Hexcel
serves was in line with our expectations, with net sales from commercial
aerospace holding steady and lower demand for carbon fiber products. However,
pricing in the global market for electronic fiberglass materials remained under
intense competitive pressure from Asian producers who used the western markets
to reduce their significant excess production capacity. Our gross margins
reflected the impact of higher unit carbon fiber product costs due to lower
production, the pricing reductions in the electronics market, and supply chain
pricing pressures in the commercial aerospace market. We remain committed to
improving performance by continuing to reduce material costs from suppliers,
decrease our own operating costs and increase productivity through our lean
enterprise, supply-chain and business consolidation initiatives.
37
<PAGE>
BUSINESS ACQUISITIONS
Over the last three years, Hexcel has substantially expanded its size,
through both internal growth as well as through acquisitions. During 1998, 1997
and 1996, Hexcel acquired:
- the industrial fabrics business of Clark-Schwebel, Inc. and its
subsidiaries' on September 15, 1998, including interests in three joint
ventures, one of which was acquired in December 1998;
- the worldwide composites division of Ciba, including most of Ciba's
composite materials, parts and structures businesses, on February 29,
1996. Hexcel subsequently acquired Ciba's Austrian composites business on
May 30, 1996, and various remaining assets of Ciba's worldwide composites
division at various dates through February 28, 1997;
- the composite products division of Hercules Incorporated including
Hercules' carbon fibers and prepreg businesses, on June 27, 1996; and
- the satellite business and rights to technologies from Fiberite, Inc., on
September 30, 1997.
All of the above acquisitions were accounted for under the purchase method
of accounting. Accordingly, the consolidated balance sheets, statements of
operations, stockholders' equity, and cash flows include the financial position,
results of operations and cash flows of the businesses acquired as of such dates
and for such periods that these businesses were owned by Hexcel.
ACQUIRED CLARK-SCHWEBEL BUSINESS
On September 15, 1998, Hexcel acquired Clark-Schwebel. Clark-Schwebel is
engaged in the manufacture and sale of high-quality fiberglass fabrics, which
are used to make printed circuit boards for electronic equipment such as
computers, cellular telephones, televisions and automobiles. Clark-Schwebel also
produces high performance specialty products for use in insulation, filtration,
wall and facade claddings, soft body armor and reinforcements for composite
materials. Clark-Schwebel currently operates four manufacturing facilities in
the southeastern U.S. and has approximately 1,300 full time employees.
As part of this acquisition, Hexcel also acquired Clark-Schwebel's equity
ownership interests in the following three joint ventures, which are
incorporated using the equity method of accounting:
- a 43.6% share in CS-Interglas AG, headquartered in Germany, together with
fixed-price options to increase this equity interest to 84.0%. Hexcel's
acquisition of the CS-Interglas equity interest and related options was
completed on December 23, 1998;
- a 43.3% share in Asahi-Schwebel Co., Ltd., headquartered in Japan, which
in turn has its own joint venture with AlliedSignal Inc. in Taiwan; and
- a 50.0% share in Clark-Schwebel Tech-Fab Company, headquartered in the
United States.
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian electronics and telecommunications industries. CS Tech-Fab
manufactures non-woven materials for roofing, construction and other specialty
applications. The fixed-price options to increase the equity interest in
CS-Interglas are, in our opinion, significantly higher than their current fair
market value. Accordingly, we do not currently anticipate exercising the
options, at the stated price, before their expiration on December 31, 1999. The
unconsolidated revenues in 1998 for these joint ventures were in excess of $300
million.
The acquisition of Clark-Schwebel was completed pursuant to an asset
purchase agreement dated July 25, 1998, by and among Hexcel, Stamford CS
Acquisition Corp., and Clark-Schwebel. Under the asset purchase agreement,
Hexcel acquired the net assets of the acquired business, other than specified
excluded assets and liabilities, in exchange for approximately $472.8 million in
cash, including the
38
<PAGE>
$19.0 million paid on December 23, 1998. Hexcel also agreed to lease $50.0
million of property, plant and equipment used in the acquired business from an
affiliate of Clark-Schwebel, pursuant to a long-term lease with purchase
options. See "--Financial Condition and Liquidity--Financial Resources" for a
discussion on acquisition financing.
ACQUIRED CIBA BUSINESS
Hexcel acquired most of Ciba's composite materials, parts and structures
businesses on February 29, 1996, Ciba's Austrian composites business on May 30,
1996, and various remaining assets of Ciba's worldwide composites division at
various dates through February 28, 1997. The Ciba composites business is engaged
in the manufacture and marketing of reinforcement fabrics and lightweight,
high-performance composite materials, parts and structures for commercial
aerospace, space and defense, general industrial and recreation markets.
The acquisition of the Ciba composites business was consummated pursuant to
a strategic alliance agreement dated as of September 29, 1995, among Ciba and
Hexcel. Under the strategic alliance agreement, Hexcel acquired the assets
including the capital shares of several non-U.S. subsidiaries, and assumed the
liabilities of the Ciba composites business, other than specified excluded
assets and liabilities, in exchange for: (a) 18,022 newly issued shares of
Hexcel common stock; (b) $25.0 million in cash; (c) senior subordinated notes in
an aggregate principal amount of $37.5 million, with a fair value of $34.5
million; and (d) senior demand notes in an aggregate principal amount equal to
the cash on hand at the non-U.S. subsidiaries included in the Ciba composites
business. The total aggregate purchase price for the net assets acquired was
approximately $209 million.
ACQUIRED HERCULES BUSINESS
Hexcel acquired the assets of the composite products division of Hercules on
June 27, 1996. This business, which manufactures carbon fibers and prepregs for
commercial aerospace, space and defense, general industrial and recreation
markets, was purchased for $139.4 million in cash.
ACQUIRED FIBERITE ASSETS
On September 30, 1997, Hexcel acquired from Fiberite its satellite business
consisting of intangible assets and inventory, and non-exclusive worldwide
rights to other prepreg technologies, for $37.0 million in cash. The acquisition
was substantially downsized from the original agreement whereby Hexcel had,
subject to specific terms and conditions, committed to purchase selected assets
and businesses of Fiberite for approximately $300 million. As a result of the
downsized transaction, Hexcel wrote-off $5.0 million of acquisition and
financing costs to business acquisition and consolidation expenses in 1997. In
addition, Hexcel expensed $8.0 million of acquired in-process research and
technology purchased from Fiberite which is included in the 1997 business
acquisition and consolidation expenses. Substantially all of the $37.0 million
purchase price, less the $8.0 million write-off of the acquired in-process
research and technology, was allocated to intangible assets.
Further discussion and analysis of Hexcel's business acquisitions is
contained in Notes 1, 2 and 3 to the accompanying consolidated financial
statements.
RESULTS OF OPERATIONS
FIRST QUARTER 1999 COMPARED TO FIRST QUARTER 1998
NET SALES: Net sales for the first quarter of 1999 were $316.2 million,
compared with $256.7 million for the first quarter of 1998 and $317.2 million
for the first quarter of 1998 on a pro forma basis, after giving effect to the
acquisition of the Clark-Schwebel business as if the transaction had occurred at
the beginning of 1998. Strong sales of composite products to the commercial
aerospace
39
<PAGE>
and space and defense markets were offset by reduced sales of carbon fiber and
sales to the electronics market. On a constant currency basis, first quarter
1999 net sales would not have been materially different than reported.
The following table summarizes net sales to third-party customers by product
group and market segment for the quarter ended March 31, 1999 and pro forma net
sales for the quarter ended March 31, 1998:
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- ----------------------------------------------------- ----------- ----------- ------------- ----------- ----------- ---------
FIRST QUARTER 1999 NET SALES
Reinforcement products............................... $ 11.7 $ 5.5 $ 42.3 $ 21.5 $ 4.8 $ 85.8
Composite materials.................................. 122.4 27.5 -- 18.3 9.0 177.2
Engineered products.................................. 48.9 3.3 -- 1.0 -- 53.2
----------- ----- ----- ----- ----- ---------
Total................................................ $ 183.0 $ 36.3 $ 42.3 $ 40.8 $ 13.8 $ 316.2
58% 11% 13% 13% 5% 100%
----------- ----- ----- ----- ----- ---------
PRO FORMA FIRST QUARTER 1998 NET SALES
Reinforcement products............................... $ 11.2 $ 7.2 $ 52.2 $ 26.8 $ 6.0 $ 103.4
Composite materials.................................. 118.8 21.4 -- 13.3 10.6 164.1
Engineered products.................................. 46.1 2.8 -- 0.8 -- 49.7
----------- ----- ----- ----- ----- ---------
Total................................................ $ 176.1 $ 31.4 $ 52.2 $ 40.9 $ 16.6 $ 317.2
56% 10% 16% 13% 5% 100%
----------- ----- ----- ----- ----- ---------
</TABLE>
Commercial aerospace net sales increased 4% to $183.0 million for the first
quarter of 1999, from $176.1 million on a pro forma basis for the first quarter
of 1998. The growth in sales was largely attributable to increased sales of
composite materials and reflects the increase in commercial aircraft build rates
by our two largest customers, Boeing and Airbus. The increase also reflects an
improvement in the engineered products segment's shipments of retrofit interiors
to airline customers.
Approximately 44% of Hexcel's pro forma full year 1998 net sales were to
Boeing, Airbus and related subcontractors. Based on published projections,
combined deliveries for Boeing and Airbus were 577 and 788 in 1997 and 1998,
respectively, and are expected to peak at 913 in 1999, before declining to
approximately 800 in 2000. We sell material for every model of commercial
aircraft sold by Boeing and Airbus, with sales per aircraft ranging from $0.1
million to over $1.0 million. Depending on the product, orders placed with
Hexcel are received anywhere between one and eighteen months prior to delivery
of the aircraft to the customer. As we supply our products ahead of the delivery
of a commercial aircraft, we will start to see the impact of reduced Boeing
production rates by summer 1999.
During 1998, our commercial aerospace customers started emphasizing the need
for material yield improvement and cost and inventory reduction throughout the
industry's supply chain. In response to these pressures, we reduced the price of
several products in 1999. Further, we are aware that in the third quarter of
1999, one customer is planning to substitute one of Hexcel's premium products
for a lower cost, lower priced alternative product, which we will also provide.
We expect the negative impact of such substitution to be approximately $9
million in operating income. Meanwhile, our sales of products used to retrofit
aircraft interiors continue to grow, with a strong initial reception for our kit
product that extends the size of overhead stowage bins in narrow aisle aircraft.
Space and defense net sales for the first quarter of 1999 increased 16% to
$36.3 million, from $31.4 million on a pro forma basis for the first quarter of
1998, primarily reflecting an increase in sales of composite materials to select
military and space programs.
40
<PAGE>
In the last quarter of 1998, we experienced cancellations of several carbon
fiber orders. We believe that, in response to a significant shortage of carbon
fiber supply in 1997, a number of our customers, particularly those in the space
and defense market, purchased and/or ordered more carbon fiber than they needed
during 1997 and 1998. Now that carbon fiber supplies are more certain, customers
are reducing their inventories and are therefore anticipating lower purchasing
needs for 1999. These factors resulted in surplus inventories throughout the
supply chain, including Hexcel, at December 31, 1998 and a significant reduction
in the anticipated carbon fiber production for 1999 as compared to 1998. The
increase in worldwide carbon fiber capacity limits both our ability to sell our
short-term excess capacity to other markets and prices at which such surplus
capacity can be sold.
Electronics net sales decreased 19% to $42.3 million for the first quarter
of 1999, from $52.2 million on a pro forma basis for the first quarter of 1998.
The reduction in sales primarily reflects the impact of price reductions
combined with lower unit sales volume in the United States. During the quarter,
intense competition from manufacturers located in Asia continued to place
pressure on the prices of our electronic fiberglass products. We have been
successful in partially offsetting these price reductions by obtaining lower raw
material prices. In addition we continue to seek opportunities to reduce the
cost of our products and during the quarter announced the closure of our
Cleveland, Georgia plant as a targeted cost reduction action.
General industrial net sales for the first quarter of 1999 were comparable
to pro forma first quarter 1998. Recreation net sales decreased 17% in the first
quarter of 1999 compared to first quarter 1998 net sales on a pro forma basis,
reflecting reduced customer demand for products in this market, including one
customer who is changing the design of many of its athletic shoes to alternative
materials.
BACKLOG: The backlog of commercial aerospace and space and defense orders
scheduled for delivery in the next 12 months was as follows:
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------------
COMMERCIAL SPACE AND
(IN MILLIONS) AEROSPACE DEFENSE TOTAL
- ------------------------------------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
AS OF MARCH 31, 1999
Reinforcement products......................................................... $ 12.7 $ 15.3 $ 28.0
Composite materials............................................................ 194.0 42.1 236.1
Engineered products............................................................ 145.5 10.9 156.4
----------- ----- ---------
Total.......................................................................... $ 352.2 $ 68.3 $ 420.5
----------- ----- ---------
AS OF DECEMBER 31, 1998
Reinforcement products......................................................... $ 5.9 $ 6.5 $ 12.4
Composite materials............................................................ 226.9 40.1 267.0
Engineered products............................................................ 165.1 7.6 172.7
----------- ----- ---------
Total.......................................................................... $ 397.9 $ 54.2 $ 452.1
----------- ----- ---------
AS OF MARCH 31, 1998
Reinforcement products......................................................... $ 10.4 $ 20.0 $ 30.4
Composite materials............................................................ 237.3 57.2 294.5
Engineered products............................................................ 158.6 9.9 168.5
----------- ----- ---------
Total.......................................................................... $ 406.3 $ 87.1 $ 493.4
----------- ----- ---------
</TABLE>
The decrease in our backlog is attributable to commercial aerospace build
rates, which are expected to peak in 1999 and the continuing trend towards
shorter lead times and better supply-chain management by the industry overall.
Because we supply our products ahead of the delivery of a commercial aircraft,
we will start to see the impact of the lower anticipated deliveries of Boeing
aircraft
41
<PAGE>
in 2000 by the second half of 1999. Backlog for our other markets is not a
material trend indicator and accordingly, such amounts are not presented.
GROSS MARGIN: Gross margin for the first quarter of 1999 was $70.8 million,
or 22.4% of net sales, compared with $66.1 million, or 25.7% of net sales, for
the first quarter of 1998. The decrease is attributable to a number of factors,
including a reduction in pricing, and to a lesser extent, sales volume, in the
global electronics market due to the competitive conditions, lower production
and sales of carbon fiber products, and supply chain pressures in the commercial
aerospace market. These factors were partially offset by lower material costs.
We are pursuing efforts to reduce our cost structure and increase our
productivity through our Lean Enterprise program, which was extended to all U.S.
locations in the latter part of 1998 and which will be extended to our European
facilities in 1999. The expected improvements in cost and productivity will be
offset by customer demand for reductions in the costs of the products that they
purchase from us.
OPERATING INCOME: Operating income was $27.2 million in the first quarter
of 1999, or 8.6% of net sales, compared with $33.7 million in the first quarter
of 1998, or 13.1% of net sales. Excluding business acquisition and consolidation
expenses, operating income was $30.0 million, or 9.5% of net sales. The
aggregate decrease in operating income, excluding business acquisition and
consolidation expenses, reflects the decrease in gross margins and increased
selling, general and administrative ("SG&A") and research and technology ("R&T")
expenses over the first quarter 1998. SG&A expenses were $34.3 million, or 10.9%
of net sales for the first quarter of 1999 compared with $27.2 million, or 10.6%
of net sales for the first quarter of 1998. The aggregate dollar increase in
SG&A was primarily attributable to the acquired Clark-Schwebel business and
costs associated with the implementation of our Lean Enterprise and supply-chain
initiatives. R&T expenses were $6.5 million, or 2.1% of net sales for the first
quarter of 1999 compared with $5.2 million, or 2.0% of net sales for the first
quarter of 1998.
EQUITY IN LOSSES OF AFFILIATED COMPANIES: As part of the acquired
Clark-Schwebel business, we acquired interests in three joint ventures.
Competitive conditions in the electronics market, resulting from the Asian
economic situation, impacted the performance of two of these joint ventures
during the first quarter of 1999. As a result, we recognized a nominal amount of
equity in losses of affiliated companies in the first quarter of 1999.
NET INCOME: Net income for the first quarter of 1999 was $5.2 million, or
$0.14 per diluted share, compared with net income for the first quarter of 1998
of $17.1 million, or $0.40 per diluted share. Excluding business acquisition and
consolidation expenses of $2.8 million, first quarter 1999 net income would have
been $0.19 per diluted share. Pro forma first quarter 1998 diluted net income
per share, after giving effect to the acquisition of the acquired Clark-Schwebel
business as if the transaction had occurred at the beginning of 1998, was $0.43
per diluted share.
1998 COMPARED TO 1997
NET SALES: Net sales for 1998 were $1,089.0 million, compared with net sales
for 1997 of $936.9 million. The results for 1998 include the results of the
Clark-Schwebel business from the date of acquisition, September 15, 1998,
through December 31, 1998. Excluding the results of the Clark-Schwebel business,
1998 sales were approximately $1,030.6 million, a 10% increase over 1997. The
sales growth was primarily due to strong sales of composite products to the
commercial aerospace market, primarily in Europe, as well as to the space and
defense markets. On a constant currency basis, 1998 sales would not have been
materially different than reported.
42
<PAGE>
Net sales for 1998 and 1997 by product group and market segment, after
giving effect to the acquisition of the Clark-Schwebel business as if the
transaction had occurred at the beginning of the year, were as follows:
<TABLE>
<CAPTION>
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- ----------------------------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998 Pro Forma Net Sales
Reinforcement products....... $ 46.1 $ 26.4 $ 179.3 $ 101.2 $ 17.6 $ 370.6
Composite materials.......... 467.9 89.6 -- 57.4 38.6 653.5
Engineered products.......... 195.0 11.2 -- 4.5 -- 210.7
----------- ----------- ----------- ----------- ----- ---------
Total........................ $ 709.0 $ 127.2 $ 179.3 $ 163.1 $ 56.2 $ 1,234.8
57% 10% 15% 13% 5% 100%
----------- ----------- ----------- ----------- ----- ---------
1997 Pro Forma Net Sales
Reinforcement products....... $ 50.5 $ 13.9 $ 203.8 $ 130.1 $ 13.0 $ 411.3
Composite materials.......... 395.6 64.2 -- 63.9 53.4 577.1
Engineered products.......... 177.1 10.2 -- 1.4 -- 188.7
----------- ----------- ----------- ----------- ----- ---------
Total........................ $ 623.2 $ 88.3 $ 203.8 $ 195.4 $ 66.4 $ 1,177.1
53% 7% 17% 17% 6% 100%
</TABLE>
The 14% growth in pro forma net sales to the commercial aerospace market
from 1997 to 1998 was largely attributable to increased sales of composite
materials and reflects the increase in commercial aircraft build rates by our
two largest customers, Boeing and Airbus. The increase also reflects an
improvement in the engineered products segment's shipments of retrofit interiors
to airline customers.
Approximately 35% and 36% of Hexcel's 1998 and 1997 net sales, respectively,
were identifiable as sales to Boeing and related subcontractors. Of the 35% of
sales attributable to Boeing and its subcontractors, 32% and 3% related to
commercial aerospace and space and defense market applications, respectively.
Approximately 11% and 10% of Hexcel's 1998 and 1997 net sales, respectively,
were identifiable as sales to Airbus and related subcontractors. Reported
commercial aircraft deliveries by Boeing and Airbus improved significantly in
1998, from a combined 557 aircraft in 1997 to 788 aircraft in 1998, including
559 and 229 deliveries from Boeing and Airbus, respectively. Depending on the
product, orders placed with Hexcel are received anywhere between one and
eighteen months prior to delivery of the aircraft to the customer.
Taking all of the above factors into account, Hexcel currently anticipates
that its net sales to the commercial aircraft market will show a moderate
reduction in 1999 compared to 1998 pro forma net sales, with the greater impact
being seen in the second half of the year.
Space and defense pro forma net sales increased 44% from 1997 to 1998,
reflecting an increase in sales of reinforcement products and composite
materials to select military and space programs, as well as Hexcel's acquisition
of Fiberite's satellite business on September 30, 1997. Hexcel currently
anticipates that its net sales to space and defense applications will grow in
1999 over 1998 pro forma net sales, but not as rapidly as was seen in 1998.
In the last quarter of 1998, Hexcel experienced cancellations of several
carbon fiber orders. Hexcel believes that, in response to a significant shortage
of carbon fiber supply in 1997, a number of Hexcel's customers, particularly
those in the space and defense market, purchased and/or ordered more carbon
fiber than they needed during 1997 and 1998. Now that carbon fiber supplies are
more certain, customers are reducing their inventories and are therefore
anticipating lower purchasing needs for 1999. These factors resulted in surplus
inventories throughout the supply chain, including Hexcel, at December 31, 1998
and a significant reduction in the anticipated carbon fiber production for 1999
as
43
<PAGE>
compared to 1998. The increase in worldwide carbon fiber capacity limits both
Hexcel's ability to sell its short-term excess capacity to other markets and
prices at which such surplus capacity can be sold.
Despite these short-term impacts, Hexcel still anticipates growth in carbon
fiber sales in 2000 and beyond as new military aircraft and launch vehicle
programs, in both the U.S. and Europe, enter full-scale production. The military
market uses a higher percentage of advanced structural materials and higher
value products than the commercial market. Hexcel is currently qualified to
supply materials to a broad range of military aircraft and helicopters scheduled
to enter full-scale production at the start of the next decade. These programs
include V-22 (Osprey) tilt-roter, F-22 (Raptor), F/A-18E/F (Hornet), C-17
transport, European Fighter Aircraft (Typhoon), RAH-66 (Comanche) and NH90
helicopter.
Pro forma electronics net sales decreased 12% from 1997 to 1998. In the
second and third quarters of 1998, the electronics industry, including Hexcel,
experienced a worldwide reduction in sales volume, primarily resulting from
inventory adjustments across the supply chain. Towards the end of the third
quarter and into the fourth quarter of 1998, Hexcel experienced increased order
volume for woven fiberglass products used in electronic printed circuit board
applications, suggesting an end to the inventory correction. However, intense
competition from manufacturers located in Asia continues to place pressure on
volumes and prices for these products. In light of market uncertainties, we can
not predict when these conditions in the electronic market for woven fiberglass
products may recover. We therefore continue to pursue opportunities to reduce
the cost of our products and enhance our ability to compete effectively. We have
been successful in partially offsetting these price reductions by obtaining
lower raw material prices. Nevertheless, we anticipate that our electronic net
sales in 1999 will be less than 1998 pro forma net sales.
Pro forma general industrial net sales for advanced structural materials
decreased 16% from 1997 to 1998, primarily reflecting a reduction in the level
of soft body armor sales to various government agencies. Nevertheless, we
anticipate that net sales to select emerging markets for our products in the
general industrial market will continue to grow in 1999 compared to 1998 pro
forma net sales, with growth opportunities coming from ground transportation,
architectural and civil engineering, wind energy and soft body armor
applications. This growth is currently anticipated to offset the reduction in
net sales in the commercial aerospace market.
Pro forma recreation net sales decreased 15% from 1997 to 1998, reflecting
reduced customer demand for products in this market, including one particular
customer who is changing the design of many of its athletic shoes to alternative
materials. We currently anticipate that our 1999 recreation market revenues will
be at the same level as 1998.
Backlog for aerospace materials was $452.1 million as of December 31, 1998,
a 5% decrease over backlog as of December 31, 1997. The decrease in backlog
reflects a number of factors, including a continuing trend toward shorter lead
times and better supply-chain management by the industry overall. In light of
changing conditions in the aerospace industry, twelve month backlog information
may no longer be a meaningful trend indicator. We continue to closely watch the
economic situation in Asia, along with overall aircraft orders and production
trends, to monitor future sales.
Backlog for the non-aerospace markets was $41.0 million as of December 31,
1998, compared to $43.5 million as of December 31, 1997. The decrease in backlog
is primarily attributable to a decrease in orders from customers in the
recreation market. Customers in the electronics, general industrial and
recreation markets generally operate with little advance purchasing and thus,
backlog is subject to fluctuation. The Clark-Schwebel business also operates
with nominal backlog. Our backlog in the non-aerospace markets for the next
twelve months is therefore not necessarily a meaningful indicator of future
sales.
44
<PAGE>
GROSS MARGIN: Gross margin for 1998 was $271.3 million, or 24.9% of net
sales, compared with $222.6 million, or 23.8% of net sales, for 1997. Excluding
the Clark-Schwebel business, 1998 gross margin was also 24.9%. The improvement
in 1998 gross margin relative to 1997 is the result of higher sales volume and
the benefit from Hexcel's 1996 consolidation and restructuring program. While
gross margin for 1998 increased over 1997, on a quarterly trend basis, Hexcel's
gross margin percentage has leveled off as Hexcel's 1996 business consolidation
program has approached completion and commercial aerospace growth has flattened.
Hexcel is, however, pursuing efforts to reduce its cost structure and increase
its productivity through its Lean Enterprise program, which was extended to all
U.S. locations in the latter part of 1998 and which will be extended to its
European facilities in 1999. The expected improvements in cost and productivity
will be offset by customer demand for reductions in the costs of the products
that they purchase from Hexcel.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$117.9 million in 1998, or 10.8% of net sales. This compared to $102.4 million,
or 10.9% of net sales for 1997. The aggregate dollar increase in SG&A was
primarily attributable to the increased sales volume in commercial aerospace and
the Clark-Schwebel business.
RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses were $23.6 million
in 1998, or 2.2% of net sales. This compared to $18.4 million, or 2.0% of net
sales for 1997. The aggregate dollar increase in R&T was attributable to
additional expenditures in 1998 resulting from an increased commitment to R&T
activities and, to a lesser extent, the Clark-Schwebel business.
OPERATING INCOME: Operating income increased from $76.5 million, or 8.2% of
net sales, in 1997 to $117.0 million, or 10.8% of net sales, in 1998. The
aggregate increase in operating income reflects the higher sales volume,
improved gross margins, a $12.6 million decrease in business acquisition and
consolidation expenses and $7.6 million from the Clark-Schwebel business.
Excluding business acquisition and consolidation expenses, operating income as a
percentage of sales increased from 10.9% in 1997 to 11.9% in 1998.
INTEREST EXPENSE: Interest expense was $38.7 million, or 3.6% of net sales,
for 1998 compared to $25.7 million, or 2.7% of net sales, for 1997. The increase
in interest expense was primarily due to the additional financing required for
the Clark-Schwebel business as well as working capital needs, and a $1.6 million
write-off of capitalized loan fees relating to Hexcel's previous credit
facilities.
PROVISION FOR INCOME TAXES: The effective income tax rate for 1998 was 36%.
For the year ended December 31, 1997, the benefit for income taxes was $22.9
million, which included a $39.0 million reversal of a U.S. tax valuation
allowance.
Prior to September 30, 1997, Hexcel had fully provided valuation allowances
against its U.S. net deferred tax assets as there were uncertainties regarding
Hexcel's ability to generate sufficient future taxable income to realize these
net deferred tax assets. On September 30, 1997, Hexcel reversed its U.S. tax
valuation allowance as it was more likely than not that these tax assets would
be realized. As a result, excluding the $39.0 million U.S. valuation allowance
reversal, no provision for U.S. federal income taxes had been recorded for the
first nine months of 1997 due to the utilization of net operating loss
carryforwards. Hexcel continues to reserve the balance of the net deferred tax
assets of its Belgium operations.
NET INCOME: Net income for 1998 was $50.4 million or $1.24 per diluted
share compared with $73.6 million or $1.74 per diluted share for 1997. As part
of the Clark-Schwebel business, net income for 1998 includes $0.5 million of
equity in earnings from affiliated companies. Net income, after giving effect to
the acquisition of the Clark-Schwebel business as if the transaction had
occurred at the beginning of the year, was $49.5 million. Excluding business
acquisition and consolidation expenses of $12.7 million and $25.3 million in
1998 and 1997, respectively, and assuming a U.S. effective income tax
45
<PAGE>
rate of 36% in 1997, net income would have been $1.43 and $1.17 per diluted
share in 1998 and 1997, respectively.
As of December 31, 1998 and 1997, there were 36.3 million and 36.9 million
shares of Hexcel common stock outstanding, respectively. See Note 13 to the
accompanying consolidated financial statements for the calculation, including
the number of shares used, of diluted net income per share.
1997 COMPARED TO 1996
NET SALES: Net sales for 1997 were $936.9 million, compared with net sales
for 1996 of $695.3 million. On a pro forma basis, including full year results of
the Ciba and Hercules businesses, 1996 sales were approximately $798.5 million.
The 17% increase from pro forma 1996 sales was largely attributable to improved
sales of composite materials to commercial aerospace customers and sales of
engineered products to Boeing. This increase was partially offset by the
translation effect of the strengthening U.S. dollar. On a constant currency
basis, 1997 sales would have been approximately $38.0 million higher, reflecting
a 22% increase over 1996 pro forma sales.
Approximately 46% of Hexcel's 1997 sales were to Boeing, Airbus, and related
subcontractors, as compared to 32% in 1996. The increase is primarily due to the
growth of the commercial aerospace market and to a much lesser extent Boeing's
acquisition of McDonnell Douglas Corporation, which was completed on August 1,
1997. Reported commercial aircraft deliveries by Boeing and Airbus improved
significantly in 1997, from a combined 397 aircraft in 1996 to 557 aircraft in
1997, including 375 from Boeing and 182 deliveries by Airbus. As previously
discussed, depending on the product, orders placed with Hexcel are received
anywhere between one and eighteen months prior to delivery of the aircraft to
the customer. Hexcel sells material for every model of commercial aircraft sold
by Boeing and Airbus, with sales per aircraft ranging from $0.2 million to over
$1.0 million per aircraft on the Boeing 777.
Net sales to third-party customers by product group and market segment for
1997 and on a pro forma basis for 1996, which includes full year results of the
Ciba and Hercules businesses, are presented below. These net sales and pro forma
net sales, excluding the effects of the Clark-Schwebel business were:
<TABLE>
<CAPTION>
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- ----------------------------- ----------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997 Net Sales
Reinforcement products....... $ 24.7 $ 13.9 $ 48.3 $ 71.2 $ 13.0 $ 171.1
Composite materials.......... 395.6 64.2 -- 63.9 53.4 577.1
Engineered products.......... 177.1 10.2 -- 1.4 -- 188.7
----------- ----- ----- ----------- ----- ---------
Total........................ $ 597.4 $ 88.3 $ 48.3 $ 136.5 $ 66.4 $ 936.9
64% 9% 5% 15% 7% 100%
----------- ----- ----- ----------- ----- ---------
1996 Pro Forma Net Sales
Reinforcement products....... $ 17.4 $ 20.2 $ 47.2 $ 69.6 $ 27.4 $ 181.8
Composite materials.......... 317.1 60.8 -- 60.8 63.3 502.0
Engineered products.......... 102.5 10.4 -- 1.8 -- 114.7
----------- ----- ----- ----------- ----- ---------
Total........................ $ 437.0 $ 91.4 $ 47.2 $ 132.2 $ 90.7 $ 798.5
55% 11% 6% 17% 11% 100%
</TABLE>
46
<PAGE>
The 37% growth in net sales to the commercial aerospace market from 1996 to
1997 was largely attributable to increased sales of composite materials and
engineered products. The improvement in sales of composite materials reflects
the commercial aircraft build rate increase noted above. The improvement for
engineered products primarily reflects the production of structural and interior
components outsourced to Hexcel by Boeing throughout 1997, as well as strong
shipments of retrofit interiors to airline customers.
Space and defense net sales decreased 3% from 1996 to 1997, reflecting a
decrease in sales of reinforcement products, which were partially offset by
improved sales of composite materials to select military programs.
Electronics net sales in 1996 were comparable to 1997. The 3% increase in
general industrial net sales was largely due to improved sales of composite
materials for various transportation applications. Recreation net sales
decreased 27% from 1996 to 1997, reflecting the shift in emphasis of production
to the commercial aerospace market as a result of the increased demand. Hexcel
anticipated sales to the electronics, general industrial and recreation markets
to grow modestly throughout 1998.
GROSS MARGIN: Gross margin for 1997 was $222.6 million, or 23.8% of net
sales, compared with $141.3 million, or 20.3% of net sales, for 1996. The
improvement in 1997 gross margin relative to 1996 was the result of higher sales
volume, expansion of Hexcel's fibers capacity and continued advances in
manufacturing productivity resulting from Hexcel's consolidation and
restructuring activities. Product price changes were not a significant factor in
the 1997 gross margin improvement.
The integration of the Ciba and Hercules businesses into Hexcel, including
the consolidation and rationalization of manufacturing facilities and processes,
is a primary objective of the business consolidation program. While Hexcel began
to realize the productivity improvements in 1997 as a result of the program,
these improvements will not be fully realized until 1999.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$102.4 million in 1997, or 10.9% of net sales. This compares to $79.4 million,
or 11.4% of net sales for 1996. The aggregate dollar increase in SG&A was
primarily attributable to the Ciba and Hercules businesses.
RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses were $18.4 million
in 1997, or 2.0% of net sales. This compared to $16.7 million, or 2.4% of net
sales for 1996. The aggregate dollar increase in R&T was attributable to the
additional activity from the acquired Ciba and Hercules businesses.
OPERATING INCOME: Operating income increased from $2.8 million, or 0.4% of
net sales, in 1996 to $76.5 million, or 8.2% of net sales, in 1997. The
aggregate increase in operating income reflects the higher sales volume,
improved gross margins and a $17.0 million decrease in business acquisition and
consolidation expenses. Excluding business acquisition and consolidation
expenses, operating income as a percentage of sales increased from 6.5% in 1996
to 10.9% in 1997.
INTEREST EXPENSE: Interest expense was $25.7 million, or 2.7% of net sales,
for 1997 compared to $21.5 million, or 3.1% of net sales, for 1996. The increase
in interest expense primarily represents the cost of financing the acquisitions
of the Ciba and Hercules businesses. The 1996 amount also includes a $3.4
million write-off of capitalized debt issuance costs.
PROVISION FOR INCOME TAXES: As previously discussed, in 1997 Hexcel
reversed $39.0 million of its U.S. valuation allowance reserves in accordance
with SFAS 109. Prior to 1997, Hexcel had fully provided valuation allowance
reserves against its net deferred tax assets in the U.S. and Belgium where there
were uncertainties in generating sufficient future taxable income.
NET INCOME (LOSS): Net income for 1997 was $73.6 million or $1.74 per
diluted share compared with a net loss of $19.2 million or $0.58 per diluted
share for 1996. Excluding the $25.3 million in
47
<PAGE>
business acquisition and consolidation expenses and assuming a U.S. effective
income tax rate of 36%, 1997 adjusted net income would have been $1.17 per
diluted share. Pro forma net income for 1996 would have been $0.48 per diluted
share on a comparable basis.
There were 36.7 million weighted average shares outstanding in 1997 compared
to 33.4 million during 1996. The increase in the number of weighted average
shares in 1997 was primarily attributable to the full year impact of the
delivery of 18.0 million newly issued shares of Hexcel common stock to Ciba on
February 29, 1996 in connection with the purchase of the Ciba business. As of
December 31, 1997, there were 36.9 million shares of Hexcel common stock issued
and outstanding. See Note 13 to the accompanying consolidated financial
statements for the calculation, including the number of shares used, of diluted
net income per share.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL RESOURCES
In connection with the acquisition of Clark-Schwebel business on September
15, 1998, Hexcel obtained a new global credit facility to: (a) fund the purchase
of the Clark-Schwebel business; (b) refinance Hexcel's existing revolving credit
facility; and (c) provide for ongoing working capital and other financing
requirements. The senior credit facility, prior to the issuance in January 1999
of $240.0 million principal amount of original notes, provided for up to $910.0
million of borrowing capacity. Simultaneously with the closing of this offering,
Hexcel amended the senior credit facility to, among other things, reduce the
available borrowing capacity to $672.0 million, modify financial covenants and
to permit the offering. Available committed borrowing capacity under the senior
credit facility at December 31, 1998 was $281.0 million, of which $115.5 million
could have been drawn after recognition of loan covenants that form part of the
credit agreement. Approximately $544 million of the senior credit facility
expires in September 2004, with the balance expiring in 2005.
On January 21, 1999, Hexcel issued $240.0 million of senior subordinated
notes due 2009. The senior subordinated notes are general unsecured obligations
of Hexcel that bear interest at a rate of 9.75% per annum. Net proceeds of
approximately $231 million from this offering were used to repay amounts owed
under the senior credit facility. The senior subordinated notes are redeemable
beginning in January of 2004, in whole or in part, at the option of Hexcel. The
redemption prices range from 104.9% to 100.0% of the outstanding principal
amount, depending on the period in which redemption occurs. On February 17,
1999, Hexcel also redeemed $12.5 million of its increasing rate senior
subordinated notes payable to Ciba. The repayment was financed with borrowings
under Hexcel's senior credit facility. Hexcel anticipates making further
redemptions as it generates free cash flow.
In connection with the purchase of the Hercules composites business in 1996,
Hexcel obtained a revolving credit facility. The revolving credit facility was
obtained to: (a) refinance outstanding indebtedness under a senior secured
credit facility; (b) finance the purchase of the Hercules business; and (c)
provide for the ongoing working capital and other financing requirements,
including business consolidation activities, on a worldwide basis. The revolving
credit facility was amended in March 1998. In September 1998, the senior credit
facility replaced the amended revolving credit facility. The amended revolving
credit facility, prior to its replacement, had provided up to $355.0 million of
borrowing capacity and would have expired in March 2003.
Hexcel expects that its financial resources, including the senior credit
facility, will be sufficient to fund Hexcel's worldwide operations for the
foreseeable future. However, if demand in the commercial aerospace and carbon
fiber markets continues to deteriorate, and the pricing pressure exerted by the
commercial aerospace supply chain and the electronic fiberglass market continues
to intensify, Hexcel may not achieve expected EBITDA in future periods. In that
case, Hexcel may need to secure an amendment or waiver of financial tests under
the senior credit facility. In addition, the operating and financial
restrictions and covenants in our existing debt agreements may impair our
ability to finance
48
<PAGE>
future operations or capital needs. Accordingly, one of Hexcel's primary goals
over the next few years is generating operating cash flow to reduce debt and
operating leverage. Further discussion of Hexcel's financial resources is
contained in Note 7 to the accompanying consolidated financial statements.
CAPITAL LEASE OBLIGATION
Hexcel entered into a $50.0 million capital lease for property, plant and
equipment used in the Clark-Schwebel business. The lease expires in September
2006 and includes various purchase options.
STOCK BUYBACK PLANS
In 1998, Hexcel's board of directors approved plans to repurchase up to
$20.0 million of Hexcel's common stock. During the year ended December 31, 1998,
Hexcel repurchased 0.8 million shares of its common stock at an average cost of
$12.32 per share, for a total of $10.0 million. Hexcel's board of directors may
approve additional stock buybacks from time to time subject to market conditions
and the terms of the Hexcel's credit agreements and indentures. The purchases
may be made in the open market at prevailing prices or in privately negotiated
transactions. Hexcel does not currently anticipate repurchasing additional
common stock in 1999.
OTHER CAPITAL COMMITMENTS
Mandatory redemption of Hexcel's 7% convertible subordinated debentures, due
2011, is scheduled to begin in 2002 through annual sinking fund requirements of
$1.1 million in 2002 and $1.8 million in each year thereafter.
Hexcel has total estimated financial commitments to its proposed joint
ventures in China and Malaysia of approximately $31 million. These commitments
are expected to be made in increments through 2001.
CAPITAL EXPENDITURES
Capital expenditures totaled $9.4 million for the first three months of 1999
compared to $11.5 million for the first three months of 1998 and $12.5 million
for the first three months of 1998 on a pro forma basis. The decrease reflects
reduced spending due to changing market conditions, the expected benefits from
our Lean Enterprise program and a commitment to reduce debt.
Capital expenditures were $66.5 million in 1998 compared with $57.4 million
in 1997 and $43.6 million in 1996. Pro forma 1998 capital expenditures were
approximately $70 million. The increase in 1998 expenditures over prior years
reflects the impact of Hexcel's various acquisitions on capital requirements,
including the impact of various business consolidation activities. The increase
also reflects expenditures on manufacturing equipment necessary to improve
manufacturing processes and to expand production capacity for select product
lines. As a result of Hexcel's consolidation activities and the global capacity
review that will be performed in 1999, Hexcel expects that capital spending will
decrease in 1999 to approximately $45 to $50 million.
ADJUSTED EBITDA, CASH FLOWS AND RATIO OF EARNINGS TO FIXED CHARGES
FIRST QUARTER, 1999: Earnings before business acquisition and consolidation
expenses, other income, interest, taxes, depreciation and amortization, and
equity in (earning) losses of affiliated companies ("Adjusted EBITDA") was $45.6
million. Net cash provided by operating activities was $17.3 million, as $5.2
million of net income and $15.7 million of non-cash depreciation and
amortization more than offset cash used by all other operating activities.
49
<PAGE>
Net cash used for investing activities was $9.4 million, reflecting our
capital expenditures for the quarter. Net cash used for financing activities was
$12.4 million, primarily reflecting $9.0 million of debt issuance costs
pertaining to the issuance of the senior subordinated notes.
Adjusted EBITDA and pro forma Adjusted EBITDA have been presented to provide
a measure of Hexcel's operating performance that is commonly used by investors
and financial analysts to analyze and compare companies. Adjusted EBITDA may not
be comparable to similarly titled financial measures of other companies.
Adjusted EBITDA and pro forma Adjusted EBITDA do not represent alternative
measures of Hexcel's cash flows or operating income, and should not be
considered in isolation or as substitutes for measures of performance presented
in accordance with generally accepted accounting principles.
Reconciliations of net income to EBITDA and Adjusted EBITDA for the quarters
ended March 31, 1999 and 1998, including pro forma first quarter 1998, after
giving effect to the acquisition of the Clark-Schwebel business as if it
occurred at the beginning of 1998, are as follows:
<TABLE>
<CAPTION>
FIRST PRO FORMA FIRST
QUARTER FIRST QUARTER QUARTER
(IN MILLIONS) 1999 1998 1998
- -------------------------------------------------------------------------------- ----------- --------------- -----------
<S> <C> <C> <C>
Net income...................................................................... $ 5.2 $ 18.2 $ 17.1
Provision for income taxes...................................................... 2.8 9.4 9.6
Interest expense................................................................ 19.1 16.4 7.0
Depreciation and amortization expense........................................... 15.7 15.1 10.0
Equity in earnings of affiliated companies...................................... -- (1.6) --
----- ----- -----
EBITDA.......................................................................... 42.8 57.5 43.7
Business acquisition and consolidation expenses................................. 2.8 -- --
----- ----- -----
Adjusted EBITDA................................................................. $ 45.6 $ 57.5 $ 43.7
----- ----- -----
</TABLE>
The ratio of earnings to fixed charges for the quarters ended March 31, 1999
and 1998, and pro forma first quarter 1998, were 1.4x, 4.6x and 2.6x,
respectively. The decrease in the ratio in the first quarter of 1999 reflects
Hexcel's lower operating income and higher interest costs. The calculation of
earnings to fixed charges assumes that one-third of Hexcel's rental expense is
attributable to interest expense.
1998: In 1998, Adjusted EBITDA was $177.2 million. Pro forma Adjusted
EBITDA, giving effect to the acquisition of the Clark- Schwebel business as if
the transaction had occurred at the beginning of the year, was approximately
$208 million. Net cash provided by operating activities was $93.8 million, as
$50.4 million of net income and $54.3 million of non-cash depreciation,
amortization and deferred income taxes, was partially offset by increased
working capital of $14.5 million which resulted from the increase in sales
volume.
Net cash used for investing activities was $539.2 million, reflecting $472.8
million of net cash paid for the Clark-Schwebel business, and $66.5 million of
capital expenditures. Net cash provided by financing activities was $440.7
million, primarily reflecting $459.7 million of net funds borrowed under the
senior and revolving credit facilities, including the financing of the
Clark-Schwebel business, offset in part by the repurchase of $10.0 million of
treasury stock and $10.3 million of debt issuance costs related to the senior
and amended revolving credit facilities.
1997: Adjusted EBITDA for 1997 was $137.6 million and pro forma Adjusted
EBITDA was $188.3 million. Net cash provided from operations was $29.2 million,
including $33.6 million of business acquisition and consolidation payments and a
$46.7 million increase in working capital as a result of the increase in sales
volume.
50
<PAGE>
Net cash used for investing activities was $82.9 million, including $57.4
for capital expenditures and $37.0 million for the Fiberite transaction,
partially offset by $13.5 million of proceeds from the sale of the Anaheim
facility and Hexcel's 50% interest in the Knytex joint venture to Owens Corning.
These investing activities were funded by cash from operations and $57.2 million
of borrowings primarily under the revolving credit facility.
1996: Adjusted EBITDA was $71.9 million. Adjusted EBITDA, giving effect to
the acquisitions of the Ciba and Hercules businesses as if those transactions
had occurred at the beginning of the year, was approximately $86 million.
Net cash provided by operating activities was $33.8 million. Net cash used
for investing activities was $206.4 million, including $164.4 million used in
connection with the acquisitions of the Ciba and Hercules businesses and $43.6
million for capital expenditures. Net cash provided by financing activities,
including borrowings under the revolving credit facility and proceeds from the
issuance of $114.5 million in convertible subordinated notes, was $174.4
million. Non-cash financing of the purchase of the Ciba business included the
issuance of debt securities valued at $37.2 million and the issuance of 18.0
million shares of Hexcel common stock valued at $144.2 million.
Adjusted EBITDA and pro forma Adjusted EBITDA have been presented to provide
a measure of Hexcel's operating performance that is commonly used by investors
and financial analysts to analyze and compare companies. Adjusted EBITDA may not
be comparable to similarly titled financial measures of other companies.
Adjusted EBITDA and pro forma Adjusted EBITDA do not represent alternative
measures of Hexcel's cash flows or operating income, and should not be
considered in isolation or as substitutes for measures of performance presented
in accordance with generally accepted accounting principles. A reconciliation of
net income to EBITDA and Adjusted EBITDA for 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(IN MILLIONS) 1998 1997 1996
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Net income (loss).................................................................... $ 50.4 $ 73.6 $ (19.1)
Provision (benefit) for income taxes................................................. 28.4 (22.9) 3.4
Interest expense..................................................................... 38.7 25.7 21.5
Depreciation and amortization expense................................................ 47.5 35.9 26.7
Equity in earnings of affiliated companies........................................... (0.5) -- --
--------- --------- ---------
EBITDA............................................................................... 164.5 112.3 32.5
Business acquisition and consolidation expenses...................................... 12.7 25.3 42.4
Other income......................................................................... -- -- (3.0)
--------- --------- ---------
Adjusted EBITDA...................................................................... $ 177.2 $ 137.6 $ 71.9
</TABLE>
The ratio of earnings to fixed charges for 1998 and 1997 was 2.9. In 1996,
the deficiency of earnings to fixed charges was $15.8 million. The calculation
of earnings to fixed charges assumes that one-third of Hexcel's rental expense,
representing a reasonable approximation of such rentals, is attributable to
interest expense.
BUSINESS ACQUISITION AND CONSOLIDATION ACTIVITIES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
In the fourth quarter of 1998, Hexcel announced a business acquisition and
consolidation ("BA&C") program related to the integration of the Clark-Schwebel
business and the combination of its U.S., European and Pacific Rim composite
materials businesses into a single, global business unit (the "1998 program").
Prior to this program, in May 1996, Hexcel announced a BA&C program primarily
related to the integration of the Ciba business. This program was later revised
in December 1996, to include the Hercules business as well as other
consolidation activities identified
51
<PAGE>
during the integration of the Ciba business (collectively, the "1996 program").
These programs were designed to integrate the acquired businesses, streamline
operations, reduce operating costs, and position Hexcel for profitable growth.
The table below sets forth components of Hexcel's BA&C expenses for the
years ended December 31, 1998, 1997 and 1996. These expenses exclude Fiberite
and other BA&C expenses of $13.0 million and $0.7 million incurred in 1997 and
1998, respectively, which are discussed separately below.
<TABLE>
<CAPTION>
1996 PROGRAM
1998 ------------------------------------------
PROGRAM 1998 1997 1996 TOTAL
(IN THOUSANDS) EXPENSE EXPENSE EXPENSE EXPENSE EXPENSE
- ------------------------------------------------------------ ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
EMPLOYEE RELATED EXPENSES
Severance................................................. $ 2,656 $ -- $ -- $ 14,304 $ 14,304
Relocation................................................ 619 -- (25) 1,181 1,156
Foreign government grant to be repaid..................... -- -- -- 1,800 1,800
Reversal of previously recorded expenses.................. -- (6,500) -- -- (6,500)
----------- --------- --------- --------- ---------
Total employee related expenses............................. 3,275 (6,500) (25) 17,285 14,035
----------- --------- --------- --------- ---------
FACILITY RELATED EXPENSES
Relocation................................................ 411 6,500 5,258 691 12,449
Requalifications.......................................... 772 175 2,393 341 2,909
Asset write-downs......................................... -- 625 -- 9,456 10,081
Lease terminations and other.............................. 1,142 -- -- -- --
----------- --------- --------- --------- ---------
Total facility related expenses............................. 2,325 7,300 7,651 10,488 25,439
----------- --------- --------- --------- ---------
OTHER
Write-down of investment in wholly-owned subsidiary....... -- 5,600 -- -- 5,600
Discontinued product lines................................ -- -- -- 2,647 2,647
Compensation expense...................................... -- -- -- 5,332 5,332
Functional integration.................................... -- -- -- 4,638 4,638
Other..................................................... -- -- 4,744 1,935 6,679
----------- --------- --------- --------- ---------
Total other expenses...................................... -- 5,600 4,744 14,597 24,941
----------- --------- --------- --------- ---------
Total BA&C expenses relating to the 1998 and 1996
programs.................................................. $ 5,600 $ 6,400 $ 12,370 $ 42,370 $ 61,140
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
</TABLE>
1998 PROGRAM: In December 1998, Hexcel announced consolidation actions
within its reinforcement fabrics and composite materials businesses. These
actions included the integration of Hexcel's existing fabrics business with the
U.S. operations of the Clark-Schwebel business, and the combination of its U.S.,
European and Pacific Rim composite materials businesses into a single, global
business unit. These actions are intended to eliminate redundancies, improve
manufacturing planning, and enhance customer service, and resulted in the
elimination of approximately 100 operating, sales, marketing and administrative
positions. The cost of these actions resulted in the recognition of $5.6 million
of BA&C expenses. Beginning in 1999, Hexcel anticipates annual cash savings from
these business consolidation activities to approximate $10 million.
In addition to these initiatives, Hexcel expects to complete a global
capacity review of its worldwide facilities requirements during 1999. On March
16, 1999, Hexcel announced the closing of its Cleveland, Georgia facility, which
currently employs 100 manufacturing personnel and produces fabrics for the
electronics market. A significant portion of the production equipment from the
facility will be relocated to Hexcel's Anderson, South Carolina facility, with
the closure expected to be completed by
52
<PAGE>
August 1999. Anticipated cash savings from this business consolidation activity
will help offset competitive pricing pressures in the electronics market. In
addition to this facility closure, the global capacity review may result in the
closing or right-sizing of additional facilities and, consequently, additional
consolidation charges may be recognized in 1999.
1996 PROGRAM: In 1996, Hexcel announced plans to consolidate its operations
over a period of three years. The objective of the program was to integrate
acquired assets and operations into Hexcel, and to reorganize its manufacturing
and research activities around strategic centers dedicated to select product
technologies. The business consolidation program was also intended to eliminate
excess manufacturing capacity and redundant administrative functions. Hexcel
expected that this consolidation program would take approximately three years to
complete, in part because of the aerospace industry requirements to "qualify"
specific equipment and manufacturing facilities for the manufacture of certain
products. These qualification requirements increase the complexity, cost and
time of moving equipment and consolidating manufacturing activities. Specific
actions of the consolidation program included the elimination of approximately
245 manufacturing, marketing and administrative positions, the closure of the
Anaheim, California facility acquired in connection with the purchase of the
Ciba business, the consolidation of Hexcel's manufacturing operations in Europe,
the consolidation of Hexcel's U.S. special process manufacturing activities, and
the integration of sales, marketing and administrative resources.
As of December 31, 1998, the primary remaining activities of this
consolidation program relate to Hexcel's European operations and certain
customer qualifications of equipment transferred within the U.S. Hexcel expects
that activities related to this consolidation program will be completed in
mid-1999. Total expenses for the 1996 program were $61.1 million, or $6.4
million more than Hexcel's original estimate. The additional expense was
primarily the result of a non-cash write-down of the carrying value of Hexcel's
wholly-owned Italian subsidiary, as more fully discussed below, which was
recorded in the fourth quarter of 1998. Hexcel does not anticipate any
additional expenses in relation to the 1996 program. As of December 31, 1998,
remaining cash expenditures to complete this program approximate amounts
accrued. Thus, when the program is complete, Hexcel expects that cash
expenditures (for expenses and capital, net of proceeds from asset sales)
necessary to complete the program will approximate the initial estimate of $51
million.
In connection with the Ciba business, Hexcel acquired operations in
Brindisi, Italy (the "Italian Operations"). The purchase price allocated to the
Italian Operations was a net liability of $2.1 million. Since the acquisition,
the Italian Operations has had immaterial revenues, incurred operating losses,
and has not been strategically important to Hexcel. Consequently, Hexcel has
periodically evaluated the recoverability of its carrying value pursuant to
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
During the fourth quarter of 1998, Hexcel again evaluated the recoverability of
the carrying value of its Italian Operations in light of its continuing
operating losses and certain offers received from interested buyers. In
assessing whether an impairment had occurred, Hexcel considered the offers
received, as well as the future undiscounted cash flows related to its Italian
Operations. As a result, Hexcel recorded a charge of $5.6 million in the fourth
quarter of 1998 for an asset impairment related to its Italian Operations, which
was included in BA&C expenses. The estimate of fair value used in determining
the impairment charge was based on the offers received from the interested
buyers. While none of the offers have been accepted to date, Hexcel expects to
dispose of its Italian Operations by mid-1999. Hexcel accounts for its Italian
Operations under its Engineered products business segment.
In 1998, Hexcel reversed $6.5 million of accrued BA&C expenses relating to
employee severance to BA&C expense. From 1996 through 1998, while Hexcel was
implementing its 1996 consolidation program, Hexcel experienced significant
increased business volume in its commercial aerospace market, which enabled
Hexcel to reassign employees who would have otherwise been terminated. As a
result, the actual number of employees terminated were 100 less than the
original program and Hexcel no
53
<PAGE>
longer required the full amount of its BA&C employee severance accrual. Also in
1998, Hexcel incurred additional facility and equipment relocation expenses of
$6.7 million relating to its 1996 program, which were primarily the result of
actual costs for equipment moves exceeding previous estimates.
In 1996, Hexcel incurred a non-cash BA&C expense of $6.7 million relating to
a write-down on its Welkenraedt, Belgium manufacturing facilities and their
related equipment and other assets. The write-down was the result of the
elimination of excess manufacturing capacity and was determined based on the
difference between the net realizable value of the assets and their respective
carrying values.
Hexcel initially estimated that the 1996 business consolidation program
would result in annual cost reductions of $32 million per year, beginning in
1999. Due to the nature of the program (i.e., because the consolidation of
existing and acquired businesses occurred while at the same time Hexcel was
experiencing an increase in its commercial aerospace market), the exact amount
of annual savings attributable to the program is difficult to isolate. However,
Hexcel believes that the cost savings achieved equals or exceeds the target of
$32 million per year. The program was a key contributor to Hexcel's improvement
in operating margins in 1997 and 1998.
FIBERITE AND OTHER BA&C EXPENSES: As a result of the downsized Fiberite
transaction, Hexcel wrote-off $5.0 million of acquisition and financing costs in
1997. Hexcel also expensed $8.0 million of in-process research and technology
purchased from Fiberite to BA&C expenses in 1997. In 1998, Hexcel wrote-off $0.7
million of costs related to a proposed acquisition that was not consummated.
ACCRUED BA&C EXPENSES: Accrued BA&C expenses at December 31, 1998, 1997 and
1996 and activity during the three years then ended for each program as well as
costs related to the Fiberite transaction and other expenses, were as follows:
<TABLE>
<CAPTION>
1996 PROGRAM 1998 PROGRAM
--------------------------------- ---------------------- FIBERITE &
EMPLOYEE FACILITY EMPLOYEE FACILITY OTHER
(IN THOUSANDS) RELATED RELATED OTHER RELATED RELATED EXPENSES TOTAL
- ---------------------------------------------- ----------- --------- --------- ----------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF 01-01-1996
BA&C expenses............................... $ 17,285 $ 10,488 $ 14,597 $ -- $ -- $ -- $ 42,370
Liabilities assumed or incurred in business
acquisitions.............................. 7,104 2,497 -- -- -- -- 9,601
Cash payments............................... (5,306) (1,109) (5,164) -- -- -- (11,579)
Non-cash usage.............................. -- (6,678) (8,357) -- -- -- (15,035)
----------- --------- --------- ----------- --------- ---------- ----------
BALANCE AS OF 12-31-1996...................... 19,083 5,198 1,076 -- -- -- 25,357
BA&C expenses............................... (25) 7,651 4,744 -- -- 12,973 25,343
Cash payments............................... (6,644) (8,771) (5,207) -- -- (12,973) (33,595)
Non-cash usage.............................. (2,759) (2,068) (105) -- -- -- (4,932)
----------- --------- --------- ----------- --------- ---------- ----------
BALANCE AS OF 12-31-1997...................... 9,655 2,010 508 -- -- -- 12,173
BA&C expenses............................... (6,500) 7,300 5,600 3,275 2,325 711 12,711
Cash payments............................... (854) (6,010) (508) (225) (343) (711) (8,651)
Non-cash usage.............................. 517 (2,948) (5,600) -- -- -- (8,031)
----------- --------- --------- ----------- --------- ---------- ----------
BALANCE AS OF 12-31-1998...................... $ 2,848 $ 352 $ -- $ 3,020 $ 1,982 $ -- $ 8,202
----------- --------- --------- ----------- --------- ---------- ----------
----------- --------- --------- ----------- --------- ---------- ----------
</TABLE>
In 1996, Hexcel incurred $9.6 million of BA&C costs that pertained to the
Ciba and Hercules businesses. Costs of terminating and relocating employees as
well as relocating equipment which were originally part of the Ciba and Hercules
businesses, were reflected as adjustments to the net assets acquired.
54
<PAGE>
Non-cash usage consists of asset write-downs and currency translation
effects. Business consolidation activities were financed with operating cash
flows and borrowings under Hexcel's credit facilities. In addition, during 1997,
Hexcel received $8.5 million of net proceeds from the sale of its Anaheim,
California facility. Hexcel expects that substantially all remaining cash
expenditures for the 1998 and 1996 programs will be completed by the end of
1999, with such expenditures being funded through operating cash flows.
As of December 31, 1998, the remaining accrued BA&C expenses for the 1998
program primarily consisted of severance for employees terminated in December
1998, costs for early termination for certain leases, and equipment relocation
costs incurred, but not yet paid. Hexcel's policy is to pay severance over a
period of time rather than in a lump-sum amount. The 1998 program is expected to
be substantially completed by the end of 1999. As of December 31, 1997, accrued
BA&C expenses for the 1996 program primarily related to accrued employee
severance costs, a foreign government grant received by Hexcel that is required
to be repaid due to lower employee levels as a result of the consolidation
program, a non-cash reserve of $1.4 million for asset write-downs, and accrued
environmental costs related to a closed facility. As of December 31, 1998,
accrued BA&C expenses for the 1996 program related to the foreign government
grant, employee severance costs and environmental costs related to a closed
facility.
FOR THE QUARTER ENDED MARCH 31, 1999
Total accrued BA&C expenses at December 31, 1998 and March 31, 1999, and
activity during the quarter ended March 31, 1999 for each of our BA&C programs
was as follows:
<TABLE>
<CAPTION>
1998/1999 1996
(IN THOUSANDS) PROGRAM PROGRAM TOTAL
- ---------------------------------------------------------------------------------- ----------- ----------- ---------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998................................................... $ 5,002 $ 3,200 $ 8,202
BA&C expenses..................................................................... 2,809 -- 2,809
Cash expenditures................................................................. (2,242) -- (2,242)
Non-cash usage, including asset write-downs and currency translation effects...... (1,927) (100) (2,027)
----------- ----------- ---------
BALANCE AS OF MARCH 31, 1999...................................................... $ 3,642 $ 3,100 $ 6,742
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
1998/1999 PROGRAM: As of March 31, 1999, Hexcel had substantially completed
those business consolidation actions announced in the fourth quarter of 1998
("the 1998/1999 program"), and to date, those actions have resulted in the
elimination of approximately 100 operating, sales, marketing and administrative
positions. Estimated savings from those actions, which Hexcel has already begun
to realize, are expected to approximate $10 million per year.
As previously discussed, on March 16, 1999, Hexcel expanded its actions
relating to the integration of the Clark-Schwebel business with the announcement
of the closure of our Cleveland, Georgia manufacturing facility by August 1999.
The planned closure of this facility is the result of current competitive
conditions in the global market for electronic fiberglass materials and was not
expected at the time of the acquisition of the Clark-Schwebel business.
55
<PAGE>
Accrued BA&C expenses at December 31, 1998 and March 31, 1999, and activity
during the quarter ended March 31, 1999 for the 1998/1999 program, were as
follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
1998/1999 PROGRAM RELOCATION RELOCATION TOTAL
- ------------------------------------------------------------------------------ ----------- ----------- ---------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998............................................... $ 3,020 $ 1,982 $ 5,002
BA&C expenses................................................................. 994 1,815 2,809
Cash expenditures............................................................. (1,497) (745) (2,242)
Non-cash usage, including asset write-downs and currency translation
effects..................................................................... -- (1,927) (1,927)
----------- ----------- ---------
BALANCE AS OF MARCH 31, 1999.................................................. $ 2,517 $ 1,125 $ 3,642
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
During the first quarter of 1999, Hexcel recorded additional BA&C expenses
of $2.8 million, primarily reflecting the costs of closing the Cleveland,
Georgia facility, of which $1.8 million represented a non-cash write-down on
equipment that will be disposed of. Hexcel expects to record an additional
charge of slightly above $1 million during the second and third quarters of 1999
relating to the relocation of certain equipment from the Cleveland, Georgia
facility to Hexcel's Anderson, South Carolina facility. Cash expenditures during
the quarter ended March 31, 1999 for the 1998/1999 program principally related
to severance payments made to those employees terminated in December 1998.
As of March 31, 1999, remaining accrued expenses for the 1998/1999 program
primarily reflected severance and relocation costs for employees in Hexcel's
Cleveland, Georgia facility and for employees terminated in December 1998, as
well as costs relating to the early termination of certain leases. Remaining
cash expenditures for the 1998/1999 program are expected to be funded through
operating cash flows. The 1998/1999 program is expected to be substantially
completed by the end of 1999. Anticipated cash savings from this business
consolidation activity are expected to help offset competitive pricing pressures
in Hexcel's electronics market. In addition to the Cleveland, Georgia facility
closure, Hexcel is continuing to conduct a global capacity review. This review
may result in the closing or right-sizing of additional facilities and, as a
result, additional consolidation charges may be recognized in 1999.
1996 PROGRAM: Accrued BA&C expenses at December 31, 1998 and March 31,
1999, and activity during the quarter ended March 31, 1999 for the 1996 BA&C
program, were as follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
1996 PROGRAM RELOCATION RELOCATION TOTAL
- ------------------------------------------------------------------------------- ------------- ----------- ---------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998................................................ $ 2,848 $ 352 $ 3,200
Non-cash usage, including asset write-downs and currency translation effects... (100) -- (100)
------ ----- ---------
BALANCE AS OF MARCH 31, 1999................................................... $ 2,748 $ 352 $ 3,100
------ ----- ---------
------ ----- ---------
</TABLE>
As of March 31, 1999, accrued BA&C expenses for the 1996 program related to
a $0.6 million foreign government grant received by Hexcel that is required to
be repaid over a five year period due to lower employee levels as a result of
the consolidation program, $2.1 million in employee retirement costs associated
with terminations and $0.4 million of environmental costs related to a closed
facility. The employee retirement costs are expected to be disbursed by
mid-1999. The program is near completion, and Hexcel expects that all activities
related to this consolidation program will be finished by mid-1999. Hexcel does
not anticipate any additional expenses in relation to the 1996 program.
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<PAGE>
MARKET RISKS
Hexcel's financial position, results of operations and cash flows are
subject to market risks, which primarily include fluctuations in interest rates
and exchange rate variability.
INTEREST RATE RISKS
Hexcel's long-term debt bears interest at both fixed and variable rates. As
a result, Hexcel's results of operations are affected by interest rate changes
on its variable rate debt. In order to mitigate a portion of this risk, in 1998
Hexcel entered into an interest rate cap agreement which covers a notional
amount of $50.0 million of Hexcel's variable rate debt under the senior credit
facility. In addition, on January 21, 1999, Hexcel issued $240.0 million of
9 3/4% Senior Subordinated Notes, due 2009. Net proceeds of approximately $231
million from this offering were used to redeem variable rate amounts owed under
the senior credit facility. On February 17, 1999, Hexcel repaid $12.5 million of
its senior subordinated notes payable to Ciba, which was fixed but increasing,
rate debt. The repayment was financed with borrowings under Hexcel's senior
credit facility.
The table below presents the impact on Hexcel's net income and pro forma net
income, as if the acquisition of the Clark-Schwebel business had occurred at the
beginning of the year and, after adjusting interest expense for the above
refinancings, of a 10% favorable and a 10% unfavorable change in Hexcel's
variable rate debt:
<TABLE>
<CAPTION>
AS 10% FAVORABLE 10% UNFAVORABLE
(IN MILLIONS) REPORTED CHANGE CHANGE
- ---------------------------------------------------------------------- ----------- --------------- -----------------
<S> <C> <C> <C>
Net income............................................................ $ 50.4 $ 52.0 $ 48.9
Pro forma net income.................................................. 49.5 52.4 46.5
</TABLE>
FOREIGN CURRENCY RISKS
Hexcel is subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers using non-local or
"non-functional" currencies. In general, Hexcel maintains a "naturally hedged"
position where it balances customer receipts and supplier payments with similar
currencies. Net exposures are hedged by purchasing foreign currency forward
contracts. Consistent with the nature of the economic hedge of such foreign
exchange contracts, any unrealized gain or loss would be offset by corresponding
decreases or increases, respectively, of the underlying transaction being
hedged. As of December 31, 1998, Hexcel had limited net exposure in relation to
its non-functional currencies as well as a limited amount of outstanding foreign
exchange contracts. Accordingly, the impact of a 10% appreciation and a 10%
depreciation of the U.S. dollar against Hexcel's net non-functional currencies
and foreign exchange contracts would not represent a material potential gain or
loss in fair value, earnings or cash flows. In addition, Hexcel is generally not
exposed to Asian currencies as transactions with customers in Pacific Rim
countries are predominately denominated in U.S. dollars, British pounds or
French francs.
The primary currencies for which Hexcel has foreign currency translation
exchange rate exposure are the U.S. dollar versus the British pound, French
franc, German mark, Belgium franc, Austrian schilling and Spanish peseta. With
the introduction of the Euro, Hexcel's primary exposures are now between the
U.S. dollar, British pound and the Euro. Hexcel does not participate in hedging
activities to offset translation effects of changes in foreign exchange rates on
Hexcel's consolidated financial position, results of operations and cash flows.
The impact of a 10% appreciation or 10% depreciation of the U.S. dollar against
Hexcel's net underlying foreign currency translation exposures could be
significant.
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OTHER RISKS
As of December 31, 1998, the aggregate fair values of Hexcel's convertible
subordinated notes, due 2003, and the convertible subordinated debentures, due
2011, were $96.1 million and $19.0 million, respectively. These debt securities
are convertible into Hexcel common stock at a conversion price of $15.81 and
$30.72 per share, respectively. Fair values were estimated on the basis of
quoted market prices, although trading in these debt securities is limited and
may not reflect fair value. Due to the conversion feature in these debt
securities, fair values are subject to fluctuations based on the value of
Hexcel's stock and Hexcel's credit rating, as well as changes in interest rates
for debt securities with similar terms. Assuming all other factors remain
constant, the fair values of Hexcel's convertible subordinated notes, due 2003,
and the convertible subordinated debentures, due 2011, would be approximately
$99.6 million and $19.2 million, respectively, assuming a 10% favorable change
in the market price of Hexcel's common stock, and $92.7 million and $18.7
million, respectively, assuming a 10% unfavorable change in market price.
YEAR 2000 READINESS DISCLOSURE
Hexcel, like most other companies, is continuing to address whether its
information technology systems and non-information technology devices with
embedded microprocessors will recognize and process dates starting with the year
2000 and beyond. The Year 2000 issue can arise at any point in Hexcel's supply,
manufacturing, processing and distribution chains. Hexcel does not, however,
manufacture or sell products that contain microprocessors or software.
In early 1998, Hexcel established a central Year 2000 project office to
coordinate and monitor progress towards achieving corporate-wide Year 2000
compliance. A discussion of Hexcel's business systems and devices, suppliers and
vendors as they pertain to Hexcel's Year 2000 issues, as of April 30, 1999, is
detailed as follows:
BUSINESS SYSTEMS & DEVICES
In order to address the Year 2000 issue as it relates to Hexcel's business
systems and devices, Hexcel has developed, and is in the process of
implementing, a six phase plan. Hexcel is also using external consulting
services, where appropriate, as part of its efforts to address its Year 2000
issue. In implementing this plan, Hexcel has been, and continues to be
substantially on schedule. The components of this plan and their related status,
as of April 30, 1999, are detailed below and apply to both Hexcel's business
systems and its devices:
(1) INVENTORY: This phase, which was completed in December 1998, consisted of
compiling a detailed listing of Hexcel's business systems and devices likely
to be impacted by the Year 2000 issue.
(2) RISK ASSESSMENT AND ASSIGNING PRIORITIES: This phase consisted of assessing
the likelihood that a business system or device is not Year 2000 compliant
as well as assigning a priority of importance to the particular business
system or device as it relates to Hexcel's business operations. This phase
was completed in December 1998.
(3) ASSESSING COMPLIANCE: This phase consists of assessing Year 2000 compliance
on Hexcel's business systems or devices which have been identified as
essential to Hexcel's business operations. In assessing compliance, Hexcel
performs a variety of tasks, including obtaining Year 2000 compliance
statements and information from Hexcel's vendors and service providers. This
phase was completed in March 1999. However, Hexcel is dependent upon its
suppliers and service providers to continue to inform Hexcel as to any
updates or changes to the information supplied to Hexcel.
(4) REPAIRING OR REPLACING: This phase consists of repairing and replacing
non-Year 2000 compliant Business Systems and Devices which are essential to
Hexcel's operations. This phase is approximately 80% complete, with
substantial completion estimated by June 30, 1999.
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<PAGE>
(5) TESTING: This phase consists of testing the repair or replacement of those
business systems and devices which are essential to Hexcel's business
operations. Hexcel also intends to test the integration of the various
Business Systems and Devices within its manufacturing processes. This phase
is approximately 65% complete, with substantial completion estimated by June
30, 1999. The results of this phase may change the estimated timing of
completion of phase four.
(6) DEVELOPING CONTINGENCY PLANS: This phase consists of developing alternative
plans in the event that a business interruption occurs from a Year 2000
issue. Hexcel is in the early stages of this phase. Hexcel has targeted
September 30, 1999 as the date of substantially completing its contingency
plans. However, Hexcel believes that this phase will be on-going through to
the year 2000.
SUPPLIERS & CUSTOMERS
Hexcel is also gathering information from its significant suppliers and
customers concerning their Year 2000 issues as a means of assessing risks and
developing alternatives. Hexcel has sent out surveys to all of its significant
suppliers and customers to determine what steps, if any, those companies are
taking to remediate their respective Year 2000 issues. Hexcel is, however,
dependent upon its suppliers and customers with respect to the completeness and
accuracy of such responses.
As of April 30, 1999, Hexcel has received responses from approximately 70%
of its significant suppliers and one-third of its customers. The responses from
Hexcel's suppliers generally indicate that these parties are taking actions to
ensure that their ability to supply products or services to Hexcel will not be
impaired. To the extent that supplier responses to Year 2000 readiness are
unsatisfactory, Hexcel will attempt to reduce risks of interruptions, with such
options including changes in suppliers to those who have demonstrated Year 2000
readiness, and accumulation of inventory. The responses from Hexcel's customers
also generally indicate that these parties are taking actions to ensure their
ability to purchase products from Hexcel will not be impaired. Hexcel will
continue to monitor the status of all of its significant suppliers' and
customers' Year 2000 readiness through to the year 2000, in order to determine
whether additional or alternative measures are necessary.
Total estimated costs to address Hexcel's Year 2000 issues, including
preparing Hexcel's business systems and devices to become Year 2000 compliant,
is approximately $5 million, of which approximately $1.5 million has been
incurred through April 30, 1999. The total estimated costs includes
approximately $2 million of capital expenditures to be used for the purchase of
capital equipment to replace equipment which is currently not Year 2000
compliant. The estimate also includes the cost of internal resources fully
dedicated to this project. However, the estimate does not include any costs
associated with the implementation of contingency plans, which have not yet been
developed. Hexcel has not used any external resources to independently verify
these cost estimates. Due to resource constraints caused by the Year 2000 issue,
Hexcel is deferring other information technology projects. These deferrals,
however, are not expected to have a material adverse effect on Hexcel's results
of operations or financial condition.
We are progressing with the development of our Year 2000 contingency plans.
We expect these plans to be substantially completed by September 30, 1999. We
are currently unable to assess the most reasonably likely worst case scenario.
However, if necessary remediation actions are not completed in a timely manner,
or if Hexcel's suppliers and customers do not successfully address their Year
2000 issues, Hexcel estimates that a disruption in operations could occur. Such
a disruption could result in, for example, delays in the receipt of raw
materials and distribution of finished goods, or errors in customer orders.
These consequences could have a material impact on the operations, liquidity and
financial condition of Hexcel. Hexcel presently believes that by implementing
its plans, including modifications to existing business systems and devices and
conversion to new or upgraded software and other systems, the Year 2000 issue
will not pose significant operational problems for Hexcel.
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<PAGE>
BUSINESS
GENERAL
We are the world's leading producer of advanced structural materials. We
develop, manufacture and market lightweight, high-performance reinforcement
products, composite materials and engineered products for use in commercial
aerospace, space and defense, electronics, recreation and general industrial
applications. Our materials are used in a wide variety of end products, such as
commercial and military aircraft, space launch vehicles and satellites, printed
circuit boards, computers, cellular telephones, televisions, high-speed trains
and ferries, cars and trucks, windmill blades, reinforcements for bridges and
other structures, window blinds, skis and snowboards, golf clubs, fishing poles,
tennis rackets and bicycles.
Our business is organized around three strategic business segments,
presented in order of manufacturing integration from raw materials to finished
products.
- REINFORCEMENT PRODUCTS: this segment manufactures carbon fibers and carbon
fiber fabrics, fiberglass fabrics which form the substrate for printed
circuit boards, woven industrial fabrics, woven fabrics for ballistics
protection and carbon, aramid and glass reinforcement materials, all of
which comprise the foundation of many composite materials, parts and
structures;
- COMPOSITE MATERIALS: this segment produces honeycomb and prepregs, as well
as structural adhesives and specially machined honeycomb details and
composite panels, which are incorporated into aerospace platforms; and
- ENGINEERED PRODUCTS: this segment engineers and produces composite parts
and structures, including finished components for commercial and military
aircraft and parts used in automotive, civil engineering and rail
applications.
Through a series of strategic acquisitions over the past three years, we
have expanded and diversified our product lines, manufacturing capabilities and
technology portfolio. With 24 manufacturing facilities located in seven
countries around the world and with joint ventures in Asia, Europe and the
United States, we are well positioned to take advantage of opportunities for
growth worldwide. We believe that we have achieved a degree of vertical
integration unmatched by any competitor. This vertical integration enhances our
control over the cost, quality and delivery of our products, and enables us to
offer a variety of solutions to our customers' structural materials needs. For
the year ended December 31, 1998, our company generated pro forma net sales of
approximately $1.235 billion and pro forma adjusted EBITDA of $208 million.
COMPETITIVE STRENGTHS
We believe that our competitive position is attributable to a number of key
strengths, including the following:
- MARKET LEADER. We believe that our company is the largest integrated
producer of advanced structural materials in the world. We are the largest
supplier of advanced structural materials to both the commercial and
military aerospace industries. We are the global leader in weaving carbon
fibers, glass and aramid fibers, with an especially strong position as the
leading worldwide supplier of fiberglass fabrics used in the manufacture
of printed circuit boards.
- VERTICAL INTEGRATION. We believe that our acquisitions since 1996 have
built Hexcel into the most vertically integrated manufacturer of advanced
structural materials in the world. Vertical integration enhances our
ability to control the cost, quality and delivery of our products. For the
year ended December 31, 1998, we consumed internally approximately 43% and
39% of our carbon fiber and fabric production, respectively, and sold the
balance of these products to our customers.
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- MARKET AND GEOGRAPHIC DIVERSITY. Approximately 57% of our pro forma net
sales for the year ended December 31, 1998 was derived from the commercial
aerospace industry; 10% from the space and defense industry; 15% from the
electronics industry; 13% from general industrial markets; and 5% from
recreation products. During the same period, we sold approximately 67%,
and 33% of our products to customers located in the United States and
Europe and the Pacific Rim, respectively. We believe that this market and
geographic diversity provides us with growth platforms in a number of
global markets that follow different business cycles.
- BROAD RANGE OF PRODUCT QUALIFICATIONS IN THE AEROSPACE INDUSTRY. We
believe that our company has the broadest range of product qualifications
of any advanced materials manufacturer in the aerospace industry and has
qualified products for use in virtually all western commercial and
military aircraft programs. Advanced structural materials must be
qualified before they may be utilized in aerospace and military
applications. We believe that our extensive range of qualifications
positions us to remain a leading supplier of advanced structural materials
to the aerospace industry.
- LEADER IN GROWING MULTILAYER PRINTED CIRCUIT BOARD MARKET. We are the
leading weaver of the fine, lightweight fiberglass fabrics used in the
fabrication of multilayer printed circuit boards. Multilayer printed
circuit boards are the fastest growing segment of the printed circuit
board industry and our fabrics are one of its enabling technologies. The
worldwide printed circuit boards market is estimated at over $30 billion.
Multilayer printed circuit boards comprise approximately two-thirds of the
total market. As the leading manufacturer of lightweight fabrics for
multilayer printed circuit boards, we are well positioned to capture a
significant portion of this market growth.
- MANUFACTURING AND TECHNICAL EXPERTISE. We have been a leader in advanced
structural materials technology for over 50 years and a leader in
fiberglass fabrics technology for nearly 40 years. Our technically
oriented sales force works with new and existing customers to identify and
engineer solutions to meet our customers' needs by identifying areas where
advanced structural materials may beneficially replace traditional
materials.
BUSINESS STRATEGY
Key elements of our strategy include the following:
- MAINTAIN LEADERSHIP POSITION IN COMMERCIAL AEROSPACE INDUSTRY. Commercial
aerospace remains the largest market for advanced structural materials. We
are the leading supplier to this industry, with strong positions at both
Boeing and Airbus. We believe that demand for commercial aircraft, and
therefore advanced structural materials, will remain at historically high
levels for the next several years as a result of the following trends that
have been identified in industry reports:
- continued growth in air travel over the next ten years;
- the existing broad design and qualification baseline for advanced
structural materials in modern commercial aircraft;
- the acceleration of new aircraft deliveries as a result of government
noise regulations;
- European aviation deregulation;
- continuing airline profitability and balance sheet strength; and
- expected increases in aircraft fleet size during the next decade.
Industry analysts believe combined Boeing and Airbus production will
decline from 1999 peak levels but remain at a historically high level for
the next few years, although relative market shares may shift. We believe
that we are well positioned to capitalize on these trends by
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continuing to produce a wide variety of advanced structural materials for
use in the manufacture of virtually every commercial aircraft in the
western world, whether the aircraft is produced by Boeing, Airbus or
regional manufacturers.
- REDUCE PRODUCTION COSTS AND IMPROVE MANUFACTURING EFFICIENCIES. We will
pursue specific initiatives to reduce production costs and capital
expenditures and improve manufacturing efficiencies, including
implementation of our Lean Enterprise program and value chain management
initiatives on a global basis. The goals of our current programs are to
reduce unit product costs, lower production cycle times, increase
throughputs, lower inventories and improve product quality and customer
satisfaction.
- CAPITALIZE ON GROWING MILITARY AEROSPACE MARKETS. We intend to capitalize
on the expected growth of the military market, which uses a higher
percentage of advanced structural materials and higher value products than
the commercial market. We are already qualified to supply materials to a
broad range of military aircraft and helicopters scheduled to enter full
scale production at the start of the next decade. Some of these programs
are currently in the developmental stage, but in many cases government
funding for production has been approved. These programs include the V-22
Osprey tilt-rotor, F-22 (Raptor), F/A-18E/F (Hornet), C-17 transport,
European Fighter Aircraft (Typhoon), RAH-66 (Comanche) and NH90
helicopter.
- EXPLOIT OPPORTUNITIES FROM THE COMMERCIALIZATION OF SPACE. We expect the
rapid growth in the commercial use of satellites for voice, data and image
communications as well as mapping and weather monitoring to generate
increasing production of satellites, rockets and launch vehicles. Advanced
structural materials should benefit from the growth in space-related
markets because they are well suited to meet severe environmental
conditions during launch and in space. Advanced structural materials also
maximize launch payloads and reduce launch costs. Our products are already
qualified for use in programs such as the Delta II, III and IV, Sea Launch
and Ariane rockets.
- GLOBALIZE AND INTEGRATE GLASS FABRICS OPERATIONS. As a result of our
acquisition of Clark-Schwebel and its equity interests in CS-Interglas and
Asahi-Schwebel, we are now the largest supplier of glass fabrics to
producers of printed circuit boards and reinforcements for structural
composites worldwide. We intend to integrate the acquired Clark-Schwebel
operations into our own operations to create a global organization that
can exploit best manufacturing practices and technology, leverage
procurement of raw materials and optimize the utilization of our
manufacturing capacity.
- EXPAND APPLICATIONS FOR ADVANCED STRUCTURAL MATERIALS. We intend to expand
the applications of our advanced structural materials both within existing
markets and into promising new segments. To date, advanced structural
materials have found their greatest use in aerospace and recreation
applications, where their performance properties have shown the most
demonstrable value. We believe that these materials have significant
potential applications in surface transportation, civil engineering and
wind energy applications. Where appropriate, we will leverage our
development of new applications through alliances with companies that have
strong positions in these markets.
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CORE BUSINESSES
Hexcel operates in three business segments, each of which focuses on
particular products and markets.
<TABLE>
<CAPTION>
BUSINESS SEGMENTS PRODUCTS PRIMARY END-USE
<S> <C> <C>
REINFORCEMENT Carbon Fibers - Raw materials for industrial fabrics
PRODUCTS and prepregs; and
- Filament winding for various space,
defense and industrial applications.
Industrial Fabrics - Printed circuit boards;
- Raw materials for prepregs and
honeycomb;
- Various marine applications;
- Window blinds;
- Insulation;
- Metal and fume filtration systems;
- Soft body armor; and
- Civil engineering and construction
applications.
COMPOSITE MATERIALS Prepregs - Raw materials for composite structures
& interiors;
- Semi-finished aircraft components;
- Munitions and defense systems; and
- Skis, snowboards, golf club shafts,
fishing rods and tennis rackets.
Structural Adhesives - Bonding of structural materials and
components, including composite panels.
Honeycomb, Honeycomb - Raw materials for composite structures
Parts & Composite & interiors; and
Panels - Semi-finished aircraft components used
in:
Helicopter blades;
Aircraft surfaces (flaps, wing tips,
elevators and fairings);
High-speed ferries, truck and train
components;
Automotive carburetor components; and
Space shuttle doors.
ENGINEERED PRODUCTS Composite Structures - Aircraft structures and finished
aircraft components, including:
Wing-to-body and flap track fairings;
Radomes;
Engine cowls and inlet ducts;
Wing panels; and
Truck floor panels.
Interiors - OEM and retrofit aircraft interiors,
including:
Overhead stowage compartments;
Lavatories; and
Sidewalls and ceilings.
</TABLE>
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REINFORCEMENT PRODUCTS
The Reinforcement Products business segment manufactures and markets carbon
fibers and industrial fabrics.
CARBON FIBERS. Carbon fibers are manufactured for sale to third-party
customers and for use by Hexcel in manufacturing industrial fabrics and
composite materials. Carbon fibers are woven into carbon fabrics, used as
reinforcement in conjunction with a resin matrix to produce prepregs, and used
in filament winding and advanced fiber placement to produce various other
composite materials. Key product applications include structural components for
commercial and military aircraft and space launch vehicles, as well as general
industrial and recreational products such as golf club shafts and tennis
racquets. On a pro forma basis, for the year ended December 31, 1998, we sold
approximately 57% of the carbon fiber that we produced to third-party customers
and used the remainder internally.
INDUSTRIAL FABRICS. Industrial fabrics are made from a variety of fibers,
including several types of fiberglass as well as carbon, aramid, quartz, ceramic
and other specialty reinforcements. On a pro forma basis, for the year ended
December 31, 1998, we sold approximately 74% of the industrial fabrics that we
produced to third-party customers for use in a wide range of products, including
printed circuit boards, window coverings and other architectural products, soft
body armor, and a variety of structural materials and components used in
aerospace, marine and rail applications. The remainder was used internally to
manufacture prepregs and other composite materials.
<TABLE>
<CAPTION>
REINFORCEMENT PRODUCTS
KEY CUSTOMERS MANUFACTURING FACILITIES
<S> <C>
AlliedSignal Anderson, SC
Alliant Techsystems Cleveland, GA
Cytec Fiberite Decatur, AL
IBM Decines, France
Isola Les Avenieres, France
Nelco Salt Lake City, UT
Piad Seguin, TX
Polyclad Statesville, NC
Second Chance Washington, GA
</TABLE>
As part of our business consolidation program, we recently announced the
closure of our Cleveland, Georgia facility. Production equipment from this
facility will be relocated to our Anderson, South Carolina facility, with the
closure expected to be completed by July 1, 1999.
COMPOSITE MATERIALS
The Composite Materials business segment, which was recently reorganized on
a global basis, has worldwide responsibility for manufacturing and marketing
prepregs, structural adhesives, honeycomb, specially machined honeycomb parts
and composite panels.
PREPREGS AND STRUCTURAL ADHESIVES. We are a worldwide leader in the
production of prepregs and have led the development of applications for prepregs
for nearly thirty years.
Prepregs are manufactured by combining high performance industrial fabrics
or unidirectional fibers with a resin matrix to form a composite material with
exceptional structural properties not present in either of their constituent
materials. Industrial fabrics used in the manufacture of prepregs include
S-2-Registered Trademark- fiberglass, carbon, aramid, quartz, ceramic,
Thorstrand-Registered Trademark-, polyethylene and other specialty
reinforcements. Resin matrices include BMI, cyanates, epoxy, phenolic,
polyester, polyimide and other
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specialty resins. Prepregs are used to manufacture other products, including
finished components for aircraft structures and interiors.
Hexcel designs and markets a comprehensive range of
Redux-Registered Trademark- and other film adhesives. These structural
adhesives, which bond a wide range of composite, metallic, and honeycomb
surfaces, are used in a variety of product applications.
HONEYCOMB, HONEYCOMB PARTS AND COMPOSITE PANELS. Honeycomb is a unique,
lightweight, cellular structure composed of hexagonal nested cells. The product
is similar in appearance to a cross-sectional slice of a beehive. The hexagonal
cell design gives honeycomb a high strength-to-weight ratio and a uniform
resistance to crushing. These basic characteristics are combined with the
physical properties of the material from which the honeycomb is made to meet
various engineering requirements.
Hexcel produces honeycomb from a number of metallic and non-metallic
materials. Most metallic honeycomb is made from aluminum and is available in a
selection of alloys, cell sizes and dimensions. Non-metallic honeycomb materials
include fiberglass, carbon, thermoplastics, non-flammable aramid papers and
several other specialty materials.
Hexcel sells honeycomb core material in standard block and sheet form and in
laminated panel form. In the construction of composite panels, sheets of
aluminum, stainless steel, prepreg or other laminates are bonded with adhesives
to each side of a slice of honeycomb core, creating a "sandwich" structure.
Hexcel also possesses advanced processing capabilities which enable us to design
and manufacture complex fabricated honeycomb parts and bonded assemblies to meet
customer specifications. Such parts and assemblies are used as semi-finished
components in the manufacture of composite structures.
The largest market for honeycomb products is the aerospace market. We also
sell honeycomb for non-aerospace applications including high-speed trains and
mass transit vehicles, automotive parts, energy absorption products, marine
vessel compartments, portable shelters, business machine cabinets and other
general industrial uses.
In addition, we produce honeycomb for the Engineered Products business
segment for use in manufacturing finished parts for airframe OEMs.
<TABLE>
<CAPTION>
COMPOSITE MATERIALS
KEY CUSTOMERS MANUFACTURING FACILITIES
<S> <C>
United States United States
Boeing Burlington, WA
CFAN Casa Grande, AZ
Hawker de Havilland Gilbert, AZ
Lockheed Martin Lancaster, OH
Northrop Grumman Livermore, CA
Rohr Pottsville, PA
United Technologies Salt Lake City, UT
Europe Europe
Aerospatiale Dagneux, France
Alenia Duxford, England
British Aerospace Linz, Austria
CASA Parla, Spain
DASA Swindon, England
Welkenraedt, Belgium
</TABLE>
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<PAGE>
ENGINEERED PRODUCTS
The Engineered Products business unit has worldwide responsibility for
designing, manufacturing and marketing lightweight, high-strength composite
structures and interiors primarily for use in the aerospace industry.
COMPOSITE STRUCTURES. Composite structures, and structural parts, are
manufactured from a variety of composite materials using such manufacturing
processes as resin transfer molding, autoclave processing, press laminating,
heat forming, resin transfer molding and other manufacturing techniques.
Composite structures include such items as wing-to-body and flap track fairings,
radomes, engine cowls, inlet ducts, wing panels and other aircraft components.
More recently, we have begun to produce composite structural components used in
heavy trucks, such as the cab floor of the Kenworth T2000 truck, and other
industrial products.
AIRCRAFT INTERIORS. Hexcel designs and produces innovative, lightweight,
high-strength composite interior systems for aircraft. Aircraft interior
products include overhead stowage bins, lavatories, sidewalls and ceilings. We
sell these products to Boeing and other airframe manufacturers for use in the
production of aircraft, and to airlines for replacement of existing interior
components.
<TABLE>
<CAPTION>
ENGINEERED PRODUCTS
KEY CUSTOMERS MANUFACTURING FACILITIES
<S> <C>
Alenia Bellingham, WA
Boeing Brindisi, Italy
Cathay Pacific Kent, WA
Continental Airlines
Kenworth
Mitsubishi
Northrop Grumman
Qantas
United Airlines
</TABLE>
JOINT VENTURES
In January 1998, we reached an agreement in principle with Boeing and
Aviation Industries of China to form a joint venture, BHA Aero Composite Parts
Co., Ltd., to manufacture composite parts for secondary structures and interior
applications on commercial aircraft. This joint venture will be located in
Tianjin, China. In February 1998, we signed an agreement with Boeing, Sime Darby
Berhad and Malaysia Helicopter Services, now known as Naluri Berhad, to form
another joint venture, Asian Composite Manufacturing Sdn. Bhd., to manufacture
composite parts for secondary structures on commercial aircraft. This joint
venture will be located in Alor Setar, Malaysia.
Products manufactured by both joint ventures will be shipped to our
company's Kent, Washington facility for final assembly, inspection and shipment
to Boeing as well as other customers worldwide. It is anticipated that the first
parts will be delivered to customers in 2001. Our total estimated financial
commitment to both of these joint ventures will be approximately $31 million,
which is expected to be made in increments through 2001. However, implementation
of these projects, and the related investments remain subject to significant
conditions, including foreign governmental approvals.
We have also formed a global alliance with Sika Finanz AG to develop and
market composite systems for the construction industry. Initial applications
will focus on the strengthening and repair of existing structures using
composite materials. Under the terms of the alliance, Sika will generally take
leadership for the marketing and sale of alliance products under the Sika
Carbodur-Registered Trademark- trade name, and
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Hexcel will take leadership for the development and manufacture of advanced
structural materials for the alliance. Sika is a worldwide leader in
construction chemicals and structural adhesives. Sika has extensive experience
and expertise in the repair, protection and strengthening of structures in the
construction industry and the use of elastic bonding technology in the
transportation industry.
In addition, we have a 45% equity interest in a joint venture in Japan with
Dainippon Ink and Chemicals. This joint venture, which owns and operates a
manufacturing facility in Komatsu, Japan, was formed in 1990 and produces and
sells prepregs, honeycomb, decorative laminates and bulk molding compounds using
technology licensed from Hexcel and DIC.
As part of the Clark-Schwebel acquisition, we also acquired significant
equity ownership interests in three joint ventures:
- a 43.3% share in Asahi-Schwebel Co., Ltd., headquartered in Japan, which
in turn has its own joint venture with AlliedSignal in Taiwan;
- a 43.6% share in CS-Interglas AG, together with fixed-price options to
increase this equity interest to approximately 84%; and
- a 50.0% share in Clark-Schwebel Tech-Fab Company, headquartered in the
U.S.
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian electronics industry. CS Tech-Fab manufactures non-woven
materials for roofing, construction and other specialty applications.
LEAN ENTERPRISE AND VALUE CHAIN MANAGEMENT PROGRAMS
The Lean Enterprise and value chain management programs are designed to
create a common way of managing our company. These programs impose a singular
focus on creating value for our customers and eliminating waste throughout the
value chain. This new management approach targets value creation, and challenges
all our employees to continually reduce cost, improve our operating efficiency
and maximize the quality of our products. Success of these programs will depend
on training our employees to eliminate waste and non-value activity while
improving business processes to deliver superior product faster and more
efficiently than our competitors.
The goals of the program are reduced scrap, faster manufacturing cycle
times, shorter equipment set-up and clean-down times, lower manufacturing
rejects and warranty claims, faster processing of customer orders and
deliveries, simplified manufacturing procedures and improved manufacturing
processes. All of these actions, if successful, are expected to result in higher
throughput and greater capacity on existing manufacturing equipment, thereby
reducing both capital expenditures and facility requirements. Improved
efficiency and quality are expected to result in lower unit labor requirements
and thereby lower product costs and lower inventory requirements.
The potential for improvement encompasses our entire vertically integrated
supply chain, including our manufacturing plants, support functions, product
development activities and customers and suppliers. The Lean Enterprise program
is also systematically linked with key initiatives to improve the quality and
effectiveness of our global procurement activities. The results of these
multi-year initiatives will be measured by the satisfaction of our customers and
the progressive improvement in our operating performance.
PRODUCTION SUPPLY CHAIN
Due to our vertically integrated operations, we produce several materials
used in our manufacture of industrial fabrics, composite materials and
engineered products, as well as the PAN used as a precursor material in our
manufacture of carbon fibers. As depicted below, at each level of the production
supply chain we sell a significant portion of our products to outside customers.
This exposes
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each product line to market forces and stimulates productivity and innovation so
that product lines remain cost competitive and at the leading edge of
technology. Currently, we consume internally approximately 43% and 39% of our
carbon fiber and fabric production, respectively.
[LOGO]
Our production activities are generally based on a combination of
"make-to-order" and "make-to-forecast" production requirements. We coordinate
closely with key suppliers in an effort to avoid raw material shortages and
excess inventories.
RESEARCH AND TECHNOLOGY
Hexcel's research and technology activities support all of our core
businesses worldwide. Through R&T, we maintain expertise in chemical formulation
and curatives, fabric forming and textile architectures, advanced composites
structures, process engineering, analysis and testing of composite materials,
computational design and prediction, and other scientific disciplines related to
our worldwide business base. Additionally, our R&T departments perform 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.
Our products rely primarily on our expertise in materials science, textiles,
process engineering and polymer chemistry. Consistent with market demand, we
have been placing more emphasis on cost
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effective product design and agile manufacturing in recent years. Towards this
end, we have entered into formal and informal partnerships, as well as licensing
and teaming arrangements, with several customers, suppliers, external agencies
and laboratories. We believe that we possess unique capabilities to design,
develop and manufacture composite materials and structures.
We own and maintain in excess of 100 patents worldwide, have licensed many
key technologies and have granted technology licenses and patent rights to
several third parties in connection with joint ventures and joint development
programs. We spent $23.6 million for research and technology for the year ended
December 31, 1998.
MARKETS AND CUSTOMERS
Our materials are sold for a broad range of end-uses. The following tables
summarize net sales and pro forma net sales, after giving effect to the
Clark-Schwebel acquisition, to third-party customers by market and by geography
for the year ended December 31, 1998.
<TABLE>
<CAPTION>
PRO FORMA YEAR
YEAR ENDED DECEMBER ENDED DECEMBER 31,
31, 1998 1998
------------------- -------------------
<S> <C> <C>
NET SALES BY MARKET
Commercial aerospace.................................................... 63% 57%
Space and defense....................................................... 12 10
Electronics............................................................. 8 15
General industrial...................................................... 12 13
Recreation.............................................................. 5 5
----- -----
Total............................................................... 100% 100%
----- -----
----- -----
NET SALES BY GEOGRAPHY
United States........................................................... 54% 59%
U.S. exports............................................................ 9 8
International........................................................... 37 33
----- -----
Total............................................................... 100% 100%
----- -----
----- -----
</TABLE>
Virtually all of the net sales of the Clark-Schwebel business, excluding its
non-consolidated joint ventures, are to customers located in the United States.
Approximately 65% of net sales of the Clark-Schwebel business are to electronics
markets, approximately 14% to commercial aerospace markets and 21% to general
industrial markets.
COMMERCIAL AEROSPACE. Historically, the commercial aerospace industry has
led the development of applications for advanced structural materials and
components 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. Accordingly, the demand for advanced structural material products is
closely correlated to the demand for commercial aircraft.
Commercial aircraft demand fluctuates in relation to two principal factors.
First, the number of revenue passenger miles flown by the world's airlines
affects the size of the airline fleets and generally follows the level of
overall economic activity. A recent document, published by Boeing, projects that
revenue passenger miles will increase an average of 4.9% per year over the next
decade, providing a source of long-term demand for new commercial aircraft.
However, recent economic events in Asia, Latin America and other parts of the
world may result in difficulties in achieving this projected growth rate,
especially in the near term.
The second demand factor, which is less sensitive to the general economy, is
the replacement and retrofit rates for existing aircraft. These rates are
determined in part by the regulatory requirements
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established by various civil aviation authorities, and by public concern
regarding aircraft age, safety and noise. These rates may also be affected by
the desire of the various airlines for higher payloads and more fuel efficient
aircraft, which in turn is influenced by the price of fuel.
Reflecting the demand factors noted above, the number of commercial aircraft
delivered by Boeing, including McDonnell Douglas, and Airbus declined by 48%
from 1992 to 1995. At the lowest point during this period, Boeing and Airbus
reported combined deliveries of 380 aircraft. Beginning in 1996, however,
aircraft deliveries by Boeing and Airbus began to rise, growing to a combined
total of 397 in 1996, 557 in 1997, and 788 in 1998. Based on published
projections, including a press release issued by Boeing on January 26, 1999,
combined deliveries are expected to peak at 913 in 1999, before declining to 797
in 2000. Set forth below are historical and projected deliveries as published by
Boeing and Airbus:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Boeing/McDonnell Douglas...................... 527 605 573 409 311 256
Airbus........................................ 95 163 157 138 127 124
--- --- --- --- --- ---
Total..................................... 622 768 730 547 438 380
--- --- --- --- --- ---
--- --- --- --- --- ---
<CAPTION>
PROJECTED
------------
1996 1997 1998 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Boeing/McDonnell Douglas...................... 271 375 559 620 480
Airbus........................................ 126 182 229 293 317
--- --- --- --- ---
Total..................................... 397 557 788 913 797
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
Approximately 44% of Hexcel's net sales on a pro forma basis for the year
ended December 31, 1998 were to Boeing, Airbus and related subcontractors,
compared with reported 46% in 1998 and 1997 and 32% in 1996, as reported. This
percentage is expected to decline in 1999, as a result of the projected trends
in commercial aircraft deliveries as well as the procurement and manufacturing
trends noted above. In addition, the acquisition of the Clark-Schwebel business
will increase the proportion of Hexcel's sales to the electronics market in
1999.
SPACE AND DEFENSE. The space and defense markets have historically been
innovators in and sources of significant demand for advanced structural
materials. For example, advanced structural materials made a major contribution
to the development of "stealth" aircraft technologies. However, aggregate demand
by space and defense customers is primarily a function of military aircraft
procurement by the U.S. and various European governments. Consequently, the
space and defense market for advanced structural materials declined
significantly during the early part of this decade, as a result of substantial
decreases in military aircraft procurement that began in the late 1980s.
Presently, there are a number of potentially significant military aircraft
programs in various stages of development or initial production that utilize
advanced structural materials. Hexcel has a number of carbon fiber and composite
material products qualified for use on several of these programs, including the
competing development versions of the Joint Strike Fighter (JSF), the F-22
(Raptor) and F/A-18 E/ F (Hornet) aircraft, the European Fighter Aircraft
(Typhoon), the C-17 cargo and V-22 (Osprey)tilt-rotor aircraft, RAH-66
(Comanche) and NH90 helicopter.
ELECTRONICS. The acquisition of the Clark-Schwebel business provides Hexcel
with a global platform to supply the electronics industry, which we believe has
attractive long-term growth potential. The Clark-Schwebel business is the
largest producer of fine, lightweight fiberglass fabrics used in the fabrication
of multilayer printed circuit boards, with an estimated 50% market share in the
United States. In addition to its U.S. businesses, it has significant ownership
positions in three joint ventures: CS-Interglas, Asahi-Schwebel and CS Tech-Fab.
CS-Interglas and Asahi-Schwebel are leading fiberglass fabric manufacturers in
Europe, Japan and Southeast Asia with estimated electronics fiberglass fabric
market shares of 36%, 38% and 13%, respectively. Fiberglass fabrics are a
critical component used in the production of printed circuit boards, which are
integral to most advanced electronics products, including computers,
telecommunications equipment, advanced cable television equipment, network
servers, televisions, automotive equipment and home appliances.
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We believe that we are strategically positioned to capitalize on the
expected growth in worldwide demand for electronics fiberglass fabrics resulting
from:
- the development of more complex and sophisticated electronics equipment in
established markets, such as wireless communications and personal
computers;
- the proliferation of computer usage through networking, server and
multi-media systems;
- the increase in global demand for telecommunication infrastructure and
mobile telecommunications services; and
- new applications for electronic systems in automobiles, home appliances
and medical equipment.
The worldwide printed circuit board market is estimated at over $30 billion,
with multilayer printed circuit boards comprising approximately two-thirds of
the total market. As the leading manufacturer of lightweight fabrics for
multilayer printed circuit boards, we are well positioned to capture a
significant portion of this market growth.
GENERAL INDUSTRIAL AND RECREATION MARKETS. We have focused our
participation in general industrial and recreation markets in areas where the
application of advanced structural material technology offers significant
benefits to the end-user. As a result, we have chosen select opportunities where
high performance is the key product criterion. Accordingly, future opportunities
and growth depend primarily upon the success of the individual programs and
industries in which we have elected to participate. Within general industrial
markets, key applications include surface transportation, wind energy and civil
engineering. Within the recreation market, key product applications in which we
are involved include skis, snowboards, golf club shafts, fishing rods, tennis
rackets and bicycles. Our participation in these markets is a valuable
complement to our commercial and military aerospace businesses. We are committed
to pursuing the utilization of advanced structural material technology in
general industrial and recreation products.
COMPETITION
In the production and sale of advanced structural materials, Hexcel competes
with numerous United States and international companies on a worldwide basis.
The broad markets for our products are highly competitive and we have focused on
both specific markets and specialty products within markets to obtain market
share. In addition to competing directly with companies offering similar
products, our 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. See "Risk Factors--Intense competition from electronic
fiberglass manufacturers may continue to impose significant pricing pressures."
ENVIRONMENTAL MATTERS
We are subject to numerous federal, state, local 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 (Superfund), the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act, and analogous state laws and regulations.
Regulatory standards under these environmental laws and regulations have tended
to become increasingly stringent over time.
We have incurred substantial compliance costs, including capital costs, in
complying with such requirements in the United States and in foreign
jurisdictions. We are currently a party to, or otherwise involved in, legal
proceedings in connection with a number of Superfund sites. Because Superfund
provides for joint and several liability, we could be responsible for all
remediation costs at such sites,
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even if we are one of many potentially responsible parties. We believe, however,
based on our experience with such matters, the amount and the nature of our
waste, and the number of other financially viable potentially responsible
parties, that our liability in connection with such matters will not be
material.
In addition, we are currently investigating and remediating on-site areas of
contamination at several of our current and former facilities. We cannot assure
you that we have identified all off-site liability matters and all on-site
remediation matters involving our current or former facilities for which we may
be responsible or that the cost of such known or unknown remediation matters
will be immaterial. We have established financial reserves in cases where the
amount of environmentally-related expenditures can be reasonably estimated. As
assessments and cleanups proceed, and as additional information becomes
available, we will review and adjust, if necessary, these reserve amounts.
LEGAL MATTERS
We are aware of a grand jury investigation being conducted by the Antitrust
Division of the United States Department of Justice with respect to the carbon
fiber and carbon fiber prepreg industries. The Department of Justice appears to
be reviewing the pricing practices of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. Hexcel, along with other manufacturers of these
products, has received a grand jury subpoena requiring production of documents
to the Department of Justice. We are not in a position to predict the direction
or outcome of the investigation and we are cooperating with the Department of
Justice.
Net sales of carbon fiber in 1998 and 1997 were approximately $43 million.
Net sales of prepregs for 1998 and 1997 were approximately $280 million and $238
million, respectively.
EMPLOYEES
As of December 31, 1998, Hexcel employed 6,875 full-time employees, compared
with 5,597 and 5,013 as of December 31, 1997 and 1996, respectively. As a result
of the acquisition of the Clark-Schwebel business, we added approximately 1,300
employees to our workforce.
PROPERTIES
Hexcel owns manufacturing facilities and leases sales offices located
throughout the United States and in other countries as noted below. Our
corporate offices are located in leased facilities in Stamford, Connecticut and
Pleasanton, California. Our central R&T administration and composite materials
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. The following table does not include manufacturing facilities
owned by entities in which we have a joint venture interest.
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<PAGE>
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY LOCATION SQUARE FOOTAGE PRINCIPAL PRODUCTS
- ---------------------------------------- -------------- -------------------------------------------------------
<S> <C> <C>
UNITED STATES:
Anderson, South Carolina.............. 432,000 Reinforcement fabrics
Bellingham, Washington................ 188,000 Interiors
Burlington, Washington................ 73,000 Honeycomb Parts
Casa Grande, Arizona.................. 307,000 Honeycomb and Honeycomb Parts
Cleveland, Georgia*................... 93,000 Heavyweight electronic fabric
Decatur, Alabama...................... 159,000 PAN Precursor used to produce Carbon Fibers
Gilbert, Arizona...................... 30,000 Prepregs
Kent, Washington...................... 883,000 Composite Structures; Interiors
Lancaster, Ohio....................... 49,000 Prepregs
Livermore, California................. 141,000 Prepregs
Pottsville, Pennsylvania.............. 134,000 Honeycomb Parts
Salt Lake City, Utah.................. 371,000 Carbon Fibers; Prepregs
Seguin, Texas......................... 204,000 Reinforcement fabrics
Statesville, North Carolina........... 553,000 Lightweight electronic fabrics; reinforcement fabrics
Washington, Georgia................... 160,000 Midweight electronic fabrics
INTERNATIONAL:
Brindisi, Italy....................... 110,000 Engineered Products
Dagneux, France....................... 130,000 Prepregs
Decines, France....................... 90,000 Reinforcement fabrics
Duxford, United Kingdom............... 440,000 Prepregs; Honeycomb and Honeycomb Parts
Les Avenieres, France................. 476,000 Reinforcement fabrics; Prepregs
Linz, Austria......................... 163,000 Prepregs
Parla, Spain.......................... 43,000 Prepregs
Swindon, United Kingdom............... 20,000 Honeycomb Parts
Welkenraedt, Belgium.................. 223,000 Honeycomb and Honeycomb Parts
</TABLE>
* We intend to close our Cleveland, GA facility by August, 1999.
Hexcel leases the facilities located in Anderson, South Carolina;
Washington, Georgia; Statesville, North Carolina; Gilbert, Arizona; and Swindon,
U.K.; and the land on which the Burlington, Washington facility is located.
Hexcel also leases portions of the facilities located in Casa Grande, Arizona;
Bellingham and Kent, Washington; Linz, Austria; and Les Avenieres, France.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of Hexcel consists of 10 directors: four directors
designated by Ciba (John M.D. Cheesmond, John J. McGraw, Martin Riediker,
Stanley Sherman, the Chairman of the Board and Chief Executive Officer of Hexcel
(John J. Lee), the President and Chief Operating Officer of Hexcel (Harold E.
Kinne) and four additional independent directors (Marshall S. Geller, Martin L.
Solomon, George S. Springer and Franklin S. Wimer).
The following tables set forth information regarding the directors and
executive officers of Hexcel as of March 15, 1998. No family relationship exists
between any of our directors and/or executive officers.
DIRECTORS
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITION(S) WITH HEXCEL
- ------------------------------- --- ----------- ----------------------------------------------------------------
<S> <C> <C> <C>
John J. Lee.................... 62 1993 Chairman of the Board; Chief Executive Officer; Director
Harold E. Kinne................ 59 1998 President and Chief Operating Officer; Director
John M.D. Cheesmond............ 49 1996 Director
Marshall S. Geller............. 59 1994 Director
John J. McGraw................. 58 1999 Director
Martin Riediker................ 47 1999 Director
Stanley Sherman................ 60 1996 Director
Martin L. Solomon.............. 62 1996 Director
George S. Springer............. 65 1993 Director
Franklin S. Wimer.............. 63 1995 Director
</TABLE>
JOHN J. LEE, age 62, has served as Chairman of the Board of Directors of
Hexcel 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 from July 1993 to December 1993 and a director since
May 1993. He also serves as Chairman of the Nominating Committee and is a member
of the Finance Committee of Hexcel. Mr. Lee is a director of Hvide Marine
Incorporated, a marine support and transportation services company. He has
served as Chairman of the Board, President and Chief Executive Officer of Lee
Development Corporation, a merchant banking company, since 1987. He is also a
trustee of Yale University. Mr. Lee was a director of Aviva Petroleum
Corporation, an oil and gas exploration company, from 1993 to 1998. Mr. Lee was
a director of XTRA Corporation, a transportation equipment leasing company, from
1990 to 1996 and Chairman of the Board and Chief Executive Officer of Seminole
Corporation, a manufacturer and distributor of fertilizer, from 1989 to 1993.
Mr. Lee served as an advisor to the Clipper Group, a private investment
partnership, from 1993 to 1998. Mr. Lee also served as a director of Tosco
Corporation, a national refiner and marketer of petroleum products, from 1988 to
1993 and as President and Chief Operating Officer of Tosco Corporation from 1990
through 1993.
HAROLD E. KINNE, age 59, has served as President and Chief Operating Officer
of Hexcel since July 1998. Prior to joining Hexcel, he was President of the
Additives Division, corporate vice president, a member of the corporate
management committee and a director of Ciba Specialty Chemicals Corporation from
1996 to June 1998. Mr. Kinne also held the same positions in Ciba-Geigy
Corporation from 1988 through 1996. Prior to that, Mr. Kinne served as Vice
President, Pigments, for the Plastics & Additives Division of Ciba-Geigy
Corporation from 1986 to 1988. Mr. Kinne has held various other technical and
managerial positions with Ciba-Geigy Corporation from 1965 to 1986.
JOHN M.D. CHEESMOND, age 49, has been a director of Hexcel since February
1996. Mr. Cheesmond also serves as Chairman of the Executive Compensation
Committee, is a member of the Finance Committee of Hexcel and is Executive Vice
President of Ciba Specialty Chemicals Inc.
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<PAGE>
(Switzerland). Mr. Cheesmond was Senior Vice President and Head of Regional
Finance and Control of Ciba Geigy Limited from 1994 to 1996. From 1991 to 1993,
Mr. Cheesmond served as Group Vice President, Planning, Information and Control
at Ciba Vision Corporation.
MARSHALL S. GELLER, age 59, served as Co-Chairman of the Board of Directors
of Hexcel from February 1995 to February 1996 and has been a director of Hexcel
since August 1994. Mr. Geller also serves as a member of the Audit, Executive
Compensation and Nominating Committees of Hexcel. 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 1995. Mr. Geller
was Senior Managing Director of Golenberg & Geller, Inc., a merchant banking
firm, from 1991 to 1995; Vice Chairman of Gruntal & Company, an investment
banking firm, from 1988 to 1990; and a Senior Managing Director of Bear, Stearns
& Co., Inc., an investment banking firm, from 1967 to 1988. Mr. Geller is
currently a director of Ballantyne of Omaha, Inc., Players International, Inc.,
Value Vision International, Inc., iMall, Inc., Cabletel Communications Corp.,
Stroud's, Inc. and various privately-held corporations and charitable
organizations.
JOHN J. McGRAW, age 58, has been a director of Hexcel since February 1999.
Mr. McGraw has been Vice President, General Counsel, Secretary and a member of
the Board of Directors of Ciba Specialty Chemicals Corporation since 1996. Mr.
McGraw served as Vice President, General Counsel and Secretary of Ciba-Geigy
Corporation from 1986 to 1996, and was a member of the Board of Directors and of
the Finance Committee of Ciba-Geigy Corporation from 1989 to 1996. Mr. McGraw
also serves on the Board of Directors of the Westchester Legal Aid Society.
MARTIN RIEDIKER, age 47, has been a director of Hexcel since February 1999.
Mr. Riediker has been Global President of Ciba's Consumer Care Division and a
member of Ciba's Executive Committee since 1996 and as such is also responsible
for Ciba's Performance Polymers Division. Mr. Riediker was appointed Head of
Ciba Geigy Limited's Ciba Chemicals Division in 1995. From 1994 to 1995 he
served as head of Ciba-Geigy Corporation's US Polymers Division and as a
Management Committee member of Ciba-Geigy Corporation in the United States.
STANLEY SHERMAN, age 60, has been a director of Hexcel since February 1996.
Mr. Sherman also serves as a member of the Executive Compensation and Finance
Committees of Hexcel. Mr. Sherman is President and Chief Executive Officer of
Ciba Specialty Chemicals Corporation (North America)and Chairman of the Board of
Ciba Specialty Chemicals (Canada). Mr. Sherman served as a director and Vice
President and Chief Financial Officer of Ciba-Geigy Corporation from 1991 to
1996, and was a member of the Finance Committee and the Corporate Management
Committee of Ciba-Geigy Corporation's Board of Directors. From 1986 to 1991, Mr.
Sherman served as Vice President-Corporate Planning of Ciba-Geigy Corporation.
Mr. Sherman also serves on the Board of Directors of the Chemicals Manufacturers
Association and of the Westchester Educational Coalition.
MARTIN L. SOLOMON, age 62, has been a director of Hexcel since May 1996. Mr.
Solomon serves as Chairman of the Finance Committee and is a member of the Audit
and Executive Compensation Committees of Hexcel. Mr. Solomon has been Chairman
and Chief Executive Officer of American County Holdings, Inc., an insurance
holding company, since 1997 and a self-employed investor since 1990. Mr. Solomon
was 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, from 1985 to 1996,
Managing Partner of Value Equity Associates I, L.R., an investment partnership,
from 1988 to 1990, and an investment analyst and portfolio manager of Steinhardt
Partners, an investment partnership, from 1985 to 1987. Mr. Solomon has been a
director of XTRA Corporation since 1990. Mr. Solomon is also a director of
various privately-held corporations and civic organizations.
GEORGE S. SPRINGER, age 65, has been a director of Hexcel since January
1993. Mr. Springer also serves as Chairman of the Technology Committee of
Hexcel. Mr. Springer is the Paul Pigott Professor and Chairman of the Department
of Aeronautics and Astronautics, and by courtesy,
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Professor of Mechanical Engineering and Professor of Civil Engineering, at
Stanford University. Mr. Springer joined Stanford University's faculty in 1983.
FRANKLIN S. WIMER, age 63, was a director of Hexcel from February 1995 to
February 1996 and was reelected in May 1996. Mr. Wimer also serves as Chairman
of the Audit Committee and is a member of the Technology Committee of Hexcel.
Mr. Wimer is President and Principal of UniRock Management Corporation, a
private merchant banking firm based in Denver, Colorado. Mr. Wimer has been with
UniRock since 1987. UniRock acted as strategic planning consultant to Hexcel
from December 1993 through April 1996. Mr. Wimer is currently Chairman of the
Board of Vista Restaurants, Inc., Chairman of the Board of Colorado Gaming &
Entertainment Co. and is a director of the Denver Paralegal Institute and
Foresight Products, Inc.
EXECUTIVE OFFICERS
Set forth below is information concerning the executive officers of Hexcel
and all persons chosen to become executive officers of Hexcel as of March 15,
1999. For additional information concerning Messrs. Lee and Kinne, see
"--Directors and Executive Officers--Directors."
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE SINCE POSITION(S) WITH HEXCEL
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
John J. Lee.................. 62 1993 Chairman of the Board; Chief Executive Officer; Director
Harold E. Kinne.............. 59 1998 President; Chief Operating Officer; Director
Stephen C. Forsyth........... 43 1994 Executive Vice President; Chief Financial Officer
Ira J. Krakower.............. 58 1996 Senior Vice President; General Counsel; Secretary
Lynn L. Brown................ 49 1999 Vice President of Human Resources
Wayne C. Pensky.............. 43 1993 Vice President; Corporate Controller; Chief Accounting Officer
Robert A. Petrisko........... 44 1993 Vice President of Research and Technology
Gary L. Sandercock........... 58 1989 Vice President of Manufacturing
Joseph H. Shaulson........... 33 1996 Vice President of Planning and Integration
David M. Wong................ 54 1996 Vice President of Corporate Affairs
Bruce D. Herman.............. 43 1996 Treasurer
William Hunt................. 55 1996 President of the Global Materials Business Unit
William D. Bennison.......... 54 1998 President of the Global Fabrics Business Unit
Justin P.S. Taylor........... 45 1996 President of the Structures and Interiors Business Unit
James N. Burns............... 58 1996 President of the Fibers Business Unit
</TABLE>
STEPHEN C. FORSYTH, age 43, has served as Executive Vice President of Hexcel
since June 1998, Chief Financial Officer since November 1996 and Senior Vice
President of Finance and Administration between February 1996 and June 1998. Mr.
Forsyth served as Vice President of International Operations of Hexcel from
October 1994 to February 1996 and General Manager of Hexcel's Resins Business
and Export Marketing from 1989 to 1994, and held other general management
positions with Hexcel from 1980 to 1989. Mr. Forsyth joined Hexcel in 1980.
IRA J. KRAKOWER, age 58, has served as Senior Vice President, General
Counsel and Secretary of Hexcel since September 1996. Prior to joining Hexcel,
Mr. Krakower served as Vice President and General Counsel to Uniroyal Chemical
Corporation from 1986 to August 1996 and served on the Board of Directors of and
as Secretary of Uniroyal Chemical Company, Inc. from 1989 to 1996.
LYNN L. BROWN, age 49, has served as Vice President of Human Resources since
March 1999, prior to joining Hexcel, Ms. Brown served as Vice President of Human
Resources at MKE-Quantum Components, LLC from 1998 to February 1999, as Vice
President of Organizational Development and International Human Resources at
Burger King Corporation from 1996 to 1998, and as Director of Human Resources at
several business units of AlliedSignal, Inc. from 1993 to 1996.
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WAYNE C. PENSKY, age 43, has served as Vice President of Hexcel since
December 1998 and as Corporate Controller and Chief Accounting Officer of Hexcel
since July 1993. Prior to joining Hexcel in 1993, Mr. Pensky was a partner at
Arthur Andersen & Co., an accounting firm, where he was employed from 1979 to
1993.
ROBERT A. PETRISKO, age 44, has served as Vice President of Research and
Technology of Hexcel since September 1993. Mr. Petrisko served at Hexcel's
Chandler facility as Manager of the Signature Technology Group from 1989 to
April 1993 and as Director of Aerospace Technology from April 1993 to September
1993. Mr. Petrisko joined Hexcel in 1989 after serving as a Research Specialist
with Dow Corning Corporation from 1985 to 1989.
GARY L. SANDERCOCK, age 58, has served as Vice President of Manufacturing of
Hexcel since October 1996. From February 1996 to October 1996, he served as
President of Hexcel's Special Process business unit. Mr. Sandercock served as
Vice President of Manufacturing of Hexcel from April 1993 to February 1996, Vice
President of the Reinforcement Fabrics business unit of Hexcel from 1989 to 1993
and General Manager of the Trevarno Division of Hexcel from 1985 to 1989, and
held other manufacturing and general management positions from 1967 to 1985. Mr.
Sandercock joined Hexcel in 1967.
JOSEPH H. SHAULSON, age 33, has served as Vice President of Planning and
Integration of Hexcel since November 1998. Mr. Shaulson served as Vice President
of Corporate Development of Hexcel from April 1996 to October 1998. In addition,
Mr. Shaulson served as Acting General Counsel and Acting Secretary of Hexcel
from April 1996 to September 1996. Prior to joining Hexcel, Mr. Shaulson was an
associate in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, where he
was employed from 1991 to 1996.
DAVID M. WONG, age 54, 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.
BRUCE D. HERMAN, age 43, has served as Treasurer of Hexcel since April 1996.
Prior to joining Hexcel, Mr. Herman served as Vice President of Finance in the
Transportation and Industrial Financing Division of USL Capital Corp. (formerly
U.S. Leasing Inc.) from 1993 to 1996. Mr. Herman, served as Vice President of
Finance in the Equipment Financing Group of USL from 1991 to 1993.
WILLIAM HUNT, age 55, has served as President of Hexcel's Global Materials
business unit since November 1998 and as President of the former Hexcel
EuroMaterials business unit since February 1996. Mr. Hunt served as President of
the EuroMaterials unit of the Ciba Composites Business from 1991 to February
1996 and as Managing Director of Ciba-Geigy Plastics from 1990 to 1991. Prior to
joining Ciba-Geigy Plastics in 1990, Mr. Hunt held various other technical and
managerial positions, including the position of Managing Director of Illford
Limited (Photographic) Co.
WILLIAM D. BENNISON, age 54, has served as President of Hexcel's Global
Fabrics business unit since November 1998. Mr. Bennison also serves as President
of CS Tech-Fab and as a director of CS-Interglas and Asahi-Schwebel. Prior to
joining Hexcel, Mr. Bennison was President of Clark-Schwebel, Inc. from 1991 to
September 1998.
JAMES N. BURNS, age 58, has served as President of Hexcel's Fibers business
unit since July 1996. Prior to his employment with Hexcel, Mr. Burns served in a
number of management positions with the Composite Products Division of Hercules
Incorporated, including Business Director from March 1995 to June 1996, Business
Unit Director of Advanced Composite Materials from June 1992 to March 1995 and
Vice President of Marketing from June 1986 to June 1992.
JUSTIN TAYLOR, age 45, has served as President of Hexcel's Structures and
Interiors business unit since April 1996. From July 1995 to April 1996, Mr.
Taylor served as a member of Ciba Geigy Limited's strategic planning unit. From
1993 to July 1995, Mr. Taylor held various management positions in the Heath
Tecna Division of Ciba-Geigy Corporation.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of February 28, 1999
reflecting ownership by any person, including any "group" as that term is used
in Section 13(d)(3) of the Securities Exchange Act of 1934, known to Hexcel to
be the beneficial owner of more than five percent of the issued and outstanding
shares of Hexcel's common stock.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENT OF
NAME AND ADDRESS COMMON STOCK CLASS
- --------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Ciba Specialty Chemicals Holding Inc. (a)........................................ 18,028,414 49.6%
Klybeckstrasse 141
CH 4002
Basle, Switzerland
Franklin Resources, Inc. (b)..................................................... 3,627,773 10.0%
Franklin Mutual Advisors, Inc.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
</TABLE>
- ------------------------
(a) Based on information contained in a Statement on Schedule 13D filed with the
SEC on March 18, 1997 on behalf of Ciba and its wholly owned affiliates,
Ciba Specialty Chemicals Corporation and Ciba Specialty Chemicals Inc. Ciba
Specialty Chemicals, Inc. has sole voting and investment power with respect
to 9,204,503 shares and Ciba Specialty Chemicals Corporation has sole voting
and investment power with respect to 8,817,245 shares of Hexcel's common
stock. Ciba directors Messrs. McGraw and Riediker each hold 10,000 options
to purchase Hexcel's common stock, 3,333 of which for each are vested. Based
on information provided to Hexcel, such options are held for the benefit of
Ciba and are included in the shares owned by Ciba above. The shares of
Hexcel's common stock beneficially owned by Ciba are subject to the terms of
the governance agreement. See "Certain Relationships and Related
Transactions."
(b) Based on information contained in a Statement on Schedule 13G filed with the
SEC on January 29, 1999 on behalf of Franklin Resources, Inc., Franklin
Mutual Advisors, Inc., Rupert H. Johnson, Jr. and Charles B. Johnson, which
parties have sole voting and investment power with respect to all the shares
of Hexcel's common stock held by it.
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<PAGE>
DESCRIPTION OF MATERIAL INDEBTEDNESS
The following description summarizes the material provisions of Hexcel's
material indebtedness. Hexcel's material indebtedness consists of the senior
credit facility, the convertible debentures indenture, the convertible notes
indenture and the Ciba notes indenture. You may request copies of these
agreements at our address set forth under "Available Information."
In this description, the word "Hexcel" refers only to Hexcel Corporation and
not to any of its subsidiaries.
SENIOR CREDIT FACILITY
In connection with the acquisition of the Clark-Schwebel business on
September 15, 1998, Hexcel and several of its foreign subsidiaries entered into
a senior credit facility with several financial institutions as lenders, Credit
Suisse First Boston, as the administrative agent, and Citibank, N.A., as
documentation agent, to: (a) fund the purchase of the Clark-Schwebel business;
(b) refinance our then existing revolving credit facility; and (c) provide for
ongoing working capital and other financing requirements. Simultaneously with
the consummation of the offering of the original notes, the senior credit
facility was amended to, among other things, modify financial covenants and
permit the offering.
After giving pro forma effect to the offering of the original notes and the
application of the proceeds thereof, the senior credit facility provides for up
to $671.5 million of aggregate borrowing capacity, consisting of:
- a secured $152.5 million tranche A term loan;
- a secured $159.0 million tranche B term loan;
- a secured domestic revolving line of credit in an aggregate amount of
$250.0 million in borrowings available to Hexcel;
- a secured European revolving line of credit in an aggregate amount of
$100.0 million in borrowings available to Hexcel and the foreign
subsidiaries; and
- a secured European overdraft facility in an aggregate amount of $10.0
million in borrowings available to the foreign subsidiaries.
The domestic revolving line of credit is available to Hexcel for revolving loans
subject to utilization by Hexcel of a letter of credit sub-facility and a swing
line sub-facility. The european revolving line of credit is available to Hexcel
and the foreign subsidiaries for revolving loans subject to utilization by
Hexcel and the foreign subsidiaries of a European letter of credit sub-facility.
The european overdraft facility is available to all of our foreign subsidiaries.
As of March 31, 1999, there was approximately $394.1 million of aggregate
loans outstanding under the senior credit facility. This amount consisted of
$152.5 million of the tranche A term loan, $159.0 million of the tranche B term
loan, $46.0 million of the domestic revolving line of credit and $36.6 million
of the european revolving line of credit.
The tranche A term loan is subject to specified amortization payments
required to be made in quarterly installments commencing in December 1999 until
final payment is made in September 2004. The tranche B term loan is subject to
specified amortization payments required to be made in quarterly installments
commencing in December 1999 until final payment is made in September 2005. The
domestic revolving line of credit, the european revolving line of credit and the
european overdraft facility are available until September 14, 2004 unless
terminated earlier under specified circumstances. Additionally, the loans under
the senior credit facility and the aggregate available commitments under the
senior credit facility will be reduced in connection with asset and capital
stock sales and dispositions, receipt of insurance proceeds, and incurrences of
indebtedness.
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<PAGE>
Borrowings by us under the tranche A term loan, tranche B term loan and
domestic revolving line of credit portions of the senior credit facility and
borrowings in U.S. dollars by us under the european revolving line of credit
portion of the senior credit facility bear interest at a rate equal to, at our
option, either (1) the base rate, which is based on the prime rate most recently
announced by the agent or the Federal Funds rate plus one-half of 1%, or (2) the
applicable London interbank rate, in each case plus an applicable margin of
Hexcel and its subsidiaries; provided that borrowings of swing line loans under
the domestic Revolving Line of Credit portion of the senior credit facility bear
interest at a rate equal to the base rate plus an applicable margin determined
by reference to the ratio of Indebtedness to EBITDA of Hexcel and its
subsidiaries. All other borrowings under the european revolving line of credit
and the european overdraft facility portions of the senior credit facility bear
interest at a rate equal to the applicable London interbank rate plus an
applicable margin determined by reference to the ratio of Indebtedness to EBITDA
of Hexcel and its subsidiaries.
Our obligations and those of the foreign subsidiaries under the senior
credit facility are unconditionally guaranteed, jointly and severally, by all of
our material U.S. subsidiaries and the obligations of the foreign subsidiaries
under the senior credit facility are unconditionally guaranteed by Hexcel. Our
obligations, those of the foreign subsidiaries and the guarantors under the
senior credit facility are secured primarily by a first priority pledge of the
stock of all of our material U.S. subsidiaries, and a first priority pledge of
at least 65% of the capital stock of our non-U.S. subsidiaries owned directly by
us or any of our material U.S. subsidiaries.
The senior credit facility contains, among other things, covenants
restricting our ability and that of our subsidiaries to dispose of assets,
merge, pay dividends, repurchase or redeem capital stock and indebtedness,
including the notes, incur indebtedness and guarantees, create liens, enter into
agreements with negative pledge clauses, make investments or acquisitions, enter
into sale and leaseback transactions, enter into transactions with affiliates,
change its fiscal year, change its business or make fundamental changes, and
otherwise restrict corporate activities. The senior credit facility also
contains a number of financial covenants.
In addition, the senior credit facility is subject to (1) a facility fee
determined by reference to the ratio of Indebtedness to EBITDA of Hexcel and its
subsidiaries, payable in arrears on a quarterly basis, times the daily average
of the domestic revolving line of credit, european revolving line credit and
european overdraft facility commitments and the additional amount that is
available to be borrowed under the tranche A term loan, and (2) letter of credit
fees with respect to each letter of credit outstanding under the senior credit
facility margin based on the applicable margin in effect for London interbank
rate loans under the senior credit facility.
The senior credit facility was filed with the SEC as an exhibit to Hexcel's
quarterly report on Form 10-Q for the period ended September 30, 1998.
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
On August 1, 1986, Hexcel issued $35.0 million aggregate principal amount of
7% Convertible Subordinated Debentures Due 2011, of which $25.6 million
aggregate principal amount remains outstanding. The convertible debentures are
convertible into common stock of Hexcel prior to maturity, unless previously
redeemed, at a conversion price of $30.72 per share. Mandatory redemption of the
convertible debentures is scheduled to begin in 2002 through annual sinking fund
requirements of $1.1 million in 2002 and $1.75 million in each year thereafter.
The convertible debentures are subordinated to all present and future senior
indebtedness of Hexcel. The convertible debentures indenture contains covenants
that, among other things, limit consolidations, mergers and transfers of all or
substantially all assets.
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<PAGE>
7% CONVERTIBLE SUBORDINATED NOTES DUE 2003
On July 18, 1996, Hexcel issued $114.5 million aggregate principal amount of
7% Convertible Subordinated Notes Due 2003, of which $114.4 million remains
outstanding. The convertible notes are convertible into common stock of Hexcel
at any time on or before August 1, 2003, unless previously redeemed, at a
conversion price of $15.81 per share. The convertible notes are redeemable, in
whole or in part, at our option at any time on or after August 9, 1999, at
various redemption prices set forth in the convertible notes indenture, plus
accrued interest. Upon a change of control, each holder of convertible notes
will have the right to require us to repurchase any or all outstanding
convertible notes held by the holder at 100% of their principal amount plus
accrued interest. The convertible notes are subordinated to all present and
future senior indebtedness of Hexcel. The convertible notes indenture contains
covenants that, among other things, limit consolidations, mergers and transfers
of all or substantially all assets.
SENIOR SUBORDINATED NOTES PAYABLE TO CIBA
In connection with the Ciba acquisition, we issued $37.5 million of
aggregate principal amount of senior subordinated notes payable to Ciba. The
Ciba notes rank PARI PASSU with the notes and currently bear interest at a rate
of 7.5% per annum. The interest rate on the Ciba notes increased to 10.5% per
annum on February 28, 1999 and will increase by an additional 0.5% per year on
each February 17 thereafter through maturity in 2003. The Ciba notes are
redeemable, in whole or in part, at our option. On February 28, 1999, we
redeemed $12.5 million aggregate principal amount of the Ciba notes with
borrowings under the senior credit facility. Hexcel has various financial and
other relationships with Ciba, the holder of the Ciba notes. See "Certain
Relationships and Related Transactions."
81
<PAGE>
DESCRIPTION OF THE NOTES
The form and terms of the exchange notes and the original notes are
identical in all material respects, except that transfer restrictions and
registration rights applicable to the original notes do not apply to the
exchange notes.
The original notes are, and the exchange notes will be, issued under an
indenture, between Hexcel and The Bank of New York, as trustee. References to
the notes include the exchange notes unless the context otherwise requires. The
terms of the notes include those stated in the indenture and those made part of
the indenture by reference to the Trust Indenture Act of 1939. This description
of the notes contains definitions of terms, including those defined under the
caption "--Definition of Terms Used in the Indenture," that are necessary to
understand this section of the prospectus. In this section "Hexcel" refers only
to Hexcel Corporation and not to any of its subsidiaries.
The following description is only a summary of the material provisions of
the indenture. We urge you to read the indenture because it, and not this
description, defines your rights as holders of the notes. We have filed a copy
of the indenture as an exhibit to the registration statement which includes this
prospectus. You may request a copy of the indenture at our address set forth
under "Available Information."
BRIEF DESCRIPTION OF THE NOTES
These notes:
- are unsecured senior subordinated obligations of Hexcel;
- are subordinated in right of payment to all existing and future Senior
Indebtedness of Hexcel; and
- are senior in right of payment to any future Subordinated Obligations of
Hexcel.
PRINCIPAL, MATURITY AND INTEREST
The original notes are, and the exchange notes will be, issued initially in
a maximum aggregate principal amount of $240.0 million. The original notes are,
and the exchange notes will be, issued in denominations of $1,000 and any
integral multiple of $1,000. The notes will mature on January 15, 2009. Subject
to our compliance with the covenant described under the caption "--Covenants--
Limitation on Indebtedness," we are permitted to issue additional notes under
the indenture in an unlimited principal amount. The indenture defines notes so
issued as "additional notes."
Interest on the notes will accrue at the rate of 9 3/4% per annum. Interest
will be payable semiannually in arrears on January 15 and July 15, commencing on
July 15, 1999. Hexcel will make each interest payment to the holders of record
of the notes on the immediately preceding January 1 and July 1.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest on each exchange note will accrue from the last interest payment date
on which interest was paid on the original note surrendered for exchange. If no
interest has been paid on the original note, interest will be paid from the date
of its original issuance. Holders whose original notes are accepted in the
exchange offer will waive their right to receive accrued interest on the
original notes. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Additional interest may accrue on the notes in specified circumstances
according to the registration rights agreement.
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<PAGE>
OPTIONAL REDEMPTION
Except as set forth below, we will not be entitled to redeem the notes at
our option before January 15, 2004.
On and after January 15, 2004, we will be entitled at our option to redeem
all or a portion of these notes upon not less than 30 nor more than 60 days'
notice. We will be entitled to redeem the notes at the redemption prices set
forth below, if redeemed during the 12-month period beginning on January 15 in
the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE
OF
PRINCIPAL
YEAR AMOUNT
- ------------------------------------------------------------------------------------- -----------
<S> <C>
2004................................................................................. 104.875%
2005................................................................................. 103.900
2006................................................................................. 102.925
2007................................................................................. 101.950
2008................................................................................. 100.975
2009 and thereafter.................................................................. 100.000%
</TABLE>
In addition, before January 15, 2002, we may at our option redeem up to 35%
of the original aggregate principal amount of notes, including the original
principal amount of any additional notes, with the cash proceeds from one or
more public equity offerings; PROVIDED that:
- at least 65% of the original aggregate principal amount of notes other
than notes held by Hexcel or its affiliates, remains outstanding
immediately after the redemption, and
- the redemption occurs within 120 days after the date of the related public
equity offering.
If we exercise this option, we will pay a redemption price of 109.75% of the
principal amount of the notes, plus accrued and unpaid interest to the
redemption date.
SELECTION AND NOTICE OF REDEMPTION
If we redeem less than all the notes at any time, the trustee will select
notes on a PRO RATA basis, by lot or by another method as the trustee will deem
to be fair and appropriate.
We will redeem notes of $1,000 or less in whole and not in part. We will
cause notices of redemption to be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address.
We will issue a new note in principal amount equal to the unredeemed portion
of the original note in the name of the holder of the note upon cancellation of
the original note. Notes called for redemption become due on the date fixed for
redemption. On and after the redemption date, interest ceases to accrue on notes
or portions of them called for redemption.
RANKING
SENIOR INDEBTEDNESS VERSUS NOTES
The payment of the principal of, premium and interest on the notes will be
subordinate in right of payment to the prior payment in full of all Senior
Indebtedness, including Hexcel's obligations under the Credit Agreement.
As of March 31, 1999, Hexcel's Senior Indebtedness was $455.2 million. The
indenture limits the amount of additional Indebtedness that Hexcel may incur.
However, under specified circumstances the amount of the Indebtedness could be
substantial. In any case, the Indebtedness may be Senior Indebtedness. As of
March 31, 1999, the amount of additional Indebtedness that Hexcel could incur
under the indenture was estimated at $793.0 million, including $275.1 million of
committed borrowing capacity under the senior credit facility. After giving
effect to loan covenants under the senior credit facility, the maximum amount of
additional debt that Hexcel could borrow as of March 31, 1999 was $74.3 million,
including $36.0 million of senior debt.
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<PAGE>
LIABILITIES OF SUBSIDIARIES VERSUS NOTES
A portion of Hexcel's operations are conducted through its subsidiaries.
Claims of creditors of these subsidiaries generally will have priority with
respect to the assets and earnings of the subsidiaries over the claims of
creditors of Hexcel, including holders of the notes. Accordingly, the notes will
be effectively subordinated to creditors and preferred stockholders, if any, of
subsidiaries of Hexcel.
At March 31, 1999, the total liabilities of our subsidiaries were
approximately $224 million, including trade payables. Although the indenture
limits the incurrence of Indebtedness and preferred stock of some of our
subsidiaries, this limitation is subject to a number of significant
qualifications. Moreover, the indenture does not limit the incurrence by our
subsidiaries of liabilities that are not considered Indebtedness under the
indenture. See "--Covenants--Limitation on Indebtedness."
OTHER SENIOR SUBORDINATED INDEBTEDNESS VERSUS NOTES
Under the indenture, only Senior Indebtedness of Hexcel will rank senior to
the notes. The notes will in all respects rank PARI PASSU with all other Senior
Subordinated Indebtedness of Hexcel. As of March 31, 1999, Hexcel's outstanding
Senior Subordinated Indebtedness was $23.8 million, net of unamortized discount
of $1.1 million.
We have agreed in the indenture that we will not Incur any Indebtedness that
is contractually subordinate or junior in right of payment to our Senior
Indebtedness, unless the Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated Indebtedness.
The indenture does not treat unsecured Indebtedness as subordinated or junior to
Secured Indebtedness merely because it is unsecured.
PAYMENT OF NOTES
We are not permitted to pay principal of, premium or interest on the notes
or make any deposit pursuant to the provisions described under "--Defeasance"
below. We may not repurchase, redeem or otherwise retire any notes if:
(1) any Designated Senior Indebtedness is not paid when due; or
(2) any other default on Designated Senior Indebtedness occurs and the
maturity is accelerated;
unless, in either case, the default has been cured or waived and any
acceleration has been rescinded or the Designated Senior Indebtedness has been
paid in full. Regardless of these provisions, we are permitted to pay the notes
if we and the trustee receive written notice approving the payment from the
representative of any Designated Senior Indebtedness.
During the continuance of any default, other than a default described in
clause (1) or (2) above, in connection with any Designated Senior Indebtedness,
we are not permitted to pay the notes for a "Payment Blockage Period." The
payment blockage period commences upon the receipt by the trustee of a "Blockage
Notice" of the default from the holders of the Designated Senior Indebtedness
and ends 179 days later. The Payment Blockage Period will end earlier if it is
terminated:
- by written notice to the trustee and us from the person who gave the
Blockage Notice;
- because the default giving rise to the Blockage Notice is cured, waived or
otherwise no longer continuing; or
- because the Designated Senior Indebtedness has been discharged or repaid
in full.
Unless the holders of the Designated Senior Indebtedness have accelerated
the maturity of the Designated Senior Indebtedness, we are permitted to resume
paying the notes after the end of the Payment Blockage Period. The notes will
not be subject to more than one Payment Blockage Period in any consecutive
360-day period.
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<PAGE>
Upon any payment or distribution of the assets of Hexcel upon a liquidation,
dissolution or reorganization of Hexcel or its property:
- the holders of Senior Indebtedness will be entitled to receive payment in
full of the Senior Indebtedness before the holders of the notes are
entitled to receive any payment;
- until the Senior Indebtedness is paid in full, any payment or distribution
to which holders of the notes would be entitled but for the subordination
provisions of the indenture will be made to holders of the Senior
Indebtedness as their interests may appear, except that holders of notes
may receive capital stock and subordinated debt obligations; and
- if a distribution is made to holders of the notes that should not have
been made to them, the holders of the notes are required to hold it in
trust for the holders of Senior Indebtedness and pay it over to them.
If payment of the notes is accelerated because of an Event of Default,
Hexcel or the trustee shall promptly notify the holders of Designated Senior
Indebtedness of the acceleration.
In the event of a liquidation or insolvency proceeding, creditors of ours
who are holders of Senior Indebtedness may recover more than the holders of the
notes. Creditors of ours who are not holders of Senior Indebtedness may recover
less than holders of Senior Indebtedness and may recover more than the holders
of the notes.
The terms of the subordination provisions described above will not apply to
payments from money held in trust by the trustee for the payment of principal of
and interest on the notes. See "--Defeasance."
CHANGE OF CONTROL
Upon the occurrence of a "Change of Control," each holder may require us to
purchase its notes at a purchase price equal to 101% of the principal amount of
the notes plus accrued and unpaid interest. The following are "Change of
Control" events:
(1) any "person" other than one or more Permitted Holders, becomes the
beneficial owner of more than 40% of the total voting power of Hexcel;
PROVIDED, HOWEVER, that the Permitted Holders beneficially own in the
aggregate a lesser percentage of the total voting power of Hexcel than
the other person and do not have the right or ability to elect or
designate for election a majority of the board of directors;
(2) during any period of two consecutive years, individuals who at the
beginning of that period constituted the board of directors, together
with any new directors whose election by the board of directors or whose
nomination for election by the stockholders of Hexcel was approved under
the governance agreement or by a vote of 66 2/3% of the directors of
Hexcel then still in office cease for any reason to constitute a majority
of the board of directors then in office; or
(3) the merger of Hexcel with another person other than a Permitted Holder,
or the merger of another person other than a Permitted Holder, with
Hexcel, or the sale of all or substantially all the assets of Hexcel to
another person other than a person controlled by the Permitted Holders.
A Change of Control shall not be deemed to occur if the event described in
(1) above occurs as a result of a transfer of voting stock by the Permitted
Holders unless and until the publicly announced rating of the notes shall,
within 90 days, be less than the rating of the notes on the date which is 90
days before the date of the occurrence of that event. If, however, the notes
have an investment grade rating by both rating agencies, a Change of Control
shall be deemed not to occur following that event unless and until the publicly
announced rating of the notes shall be less than investment grade rating within
90 days after the date of the occurrence of that event. In each case the 90-day
period shall be
85
<PAGE>
extended so long as the rating of the notes is under publicly announced
consideration for possible downgrade by either rating agency.
Within 30 days after any Change of Control, we will mail a notice to each
holder of notes, a "Change of Control Offer," stating:
(1) that a Change of Control has occurred and that the holder has the right
to require us to purchase its notes at a purchase price in cash equal to
101% of the principal amount of the notes plus accrued and unpaid
interest to the date of purchase;
(2) the circumstances and relevant facts regarding the Change of Control,
including a statement of PRO FORMA historical income, cash flow and
capitalization after giving effect to the Change of Control;
(3) the purchase date, which shall be no earlier than 30 days nor later than
60 days from the date the notice is mailed; and
(4) the instructions determined by us, consistent with the covenant
described under this caption, that a holder must follow in order to have
its notes purchased.
We will not be required to make a Change of Control Offer following a Change
of Control if a third party makes the Change of Control Offer in compliance with
the requirements set forth in the indenture and purchases all notes validly
tendered and not withdrawn under the Change of Control Offer.
We will comply with the requirements of the securities laws in connection
with the purchase of notes as a result of a Change of Control. To the extent
that the provisions of any securities laws conflict with the provisions of the
covenant described under this caption, we will comply with the applicable
securities laws and will not be deemed to have breached our obligations under
the change of control covenant.
The Change of Control purchase feature of the notes may make more difficult
or discourage a sale or takeover of Hexcel and, thus, the removal of incumbent
management. The Change of Control purchase feature is a result of negotiations
between Hexcel and the initial purchasers of the original notes. It is not the
result of our knowledge of any specific effort to accumulate common stock of
Hexcel or to obtain control of Hexcel or part of a plan by management to adopt a
series of anti-takeover provisions. We have no present intention to engage in a
transaction involving a Change of Control, although it is possible that we could
decide to do so in the future.
Subject to the limitations discussed below, we could enter into transactions
that would not constitute a Change of Control under the indenture, but that
could increase the amount of Indebtedness outstanding at that time or otherwise
affect our capital structure or credit ratings. Restrictions on our ability to
incur additional Indebtedness are contained in the covenant described under the
caption "-- Covenants--Limitation on Indebtedness." These restrictions can only
be waived with the consent of the holders of a majority in principal amount of
the notes then outstanding. Except for the limitations contained in this
covenant, however, the indenture will not contain any covenants or provisions
that may afford holders of the notes protection in the event of a highly
leveraged transaction.
The Credit Agreement will prohibit us from purchasing any notes and will
also provide that the occurrence of specified Change of Control events would
constitute a default under the Credit Agreement. In the event a Change of
Control occurs when we are prohibited from purchasing notes, we may seek the
consent of our lenders to the purchase of notes or attempt to refinance the
borrowings that contain the prohibition. If we do not obtain the consent or
repay the borrowings, we will remain prohibited from purchasing the notes. In
that case, our failure to purchase tendered notes would constitute an Event of
Default under the indenture which would, in turn, constitute a default under the
Credit Agreement. In these circumstances, the subordination provisions in the
indenture would likely restrict payment to the holders of notes.
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<PAGE>
Future Indebtedness that we may incur may contain prohibitions on the
occurrence of events that would constitute a Change of Control or require us to
repurchase the Indebtedness upon a Change of Control. Moreover, the exercise by
the holders of notes of their right to require us to purchase the notes could
cause a default under the Indebtedness, even if the Change of Control itself
does not. Finally, our ability to pay cash to the holders of notes following the
occurrence of a Change of Control may be limited by our then existing financial
resources. We cannot assure you that sufficient funds will be available when
necessary to make any required repurchases.
Our obligation to purchase the notes as a result of a Change of Control may
be waived or modified with the written consent of the holders of a majority in
principal amount of the notes.
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COVENANTS
LIMITATION ON INDEBTEDNESS
(a) Hexcel will not, and will not permit any Restricted Subsidiary to,
Incur, directly or indirectly, any Indebtedness; PROVIDED, HOWEVER, that Hexcel
and its Restricted Subsidiaries may Incur Indebtedness if, on the date of the
Incurrence and after giving effect to the Incurrence on a PRO FORMA basis, the
Consolidated Coverage Ratio exceeds (x) if on or before January 15, 2002, 2.0 to
1.0 and (y) if thereafter, 2.25 to 1.0.
(b) Notwithstanding paragraph (a) above, Hexcel and the Restricted
Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred by Hexcel or any Restricted Subsidiary under
the Credit Agreement; PROVIDED, HOWEVER, that, after giving effect to
the Incurrence, the aggregate principal amount of the Indebtedness
then outstanding does not exceed
(A) the greater of
(x) $680.0 million LESS the sum of all term loan principal
amortization payments scheduled to be made, whether or not in
fact made, through the date of the Incurrence under the
Credit Agreement as in effect on the issue date (the "Maximum
Committed Credit Agreement Amount") and
(y) the sum of 50% of the book value of the consolidated
inventory of Hexcel and its Restricted Subsidiaries and 80%
of the consolidated accounts receivable of Hexcel and its
Restricted Subsidiaries (the "Consolidated Working Capital
Amount") LESS the principal amount of any Indebtedness
Incurred under clause (2) below and then outstanding, LESS
(B) the sum of all principal payments on Indebtedness made under
paragraph (a)(3)(A) of the covenant described under the caption
"--Limitation on Asset Dispositions";
(2) Indebtedness Incurred by foreign subsidiaries to finance the working
capital requirements of foreign subsidiaries; PROVIDED, HOWEVER, that
the aggregate principal amount of the Indebtedness, when added
together with the amount of Indebtedness Incurred by all foreign
subsidiaries under this clause (2) and then outstanding, does not
exceed the lesser of
(A) the sum of 50% of the book value of the consolidated inventories
of all foreign subsidiaries and 80% of the consolidated accounts
receivable of all foreign subsidiaries and
(B) the amount by which the greater of
(x) the Consolidated Working Capital Amount and
(y) the Maximum Committed Credit Agreement Amount exceeds the
principal amount of Indebtedness Incurred under clause (1)
above and then outstanding;
(3) Indebtedness owed to and held by Hexcel or any Wholly Owned
Subsidiary; PROVIDED, HOWEVER, that
(A) any subsequent issuance or transfer of any capital stock which
results in any Wholly Owned Subsidiary ceasing to be a Wholly
Owned Subsidiary or any subsequent transfer of the
Indebtedness--other than to Hexcel or a Wholly Owned Subsidiary--
shall be deemed, in each case, to constitute the Incurrence of
the Indebtedness and
(B) if Hexcel is the obligor on the Indebtedness, the payment of the
Indebtedness is expressly subordinate to the prior payment in
full in cash of all obligations with respect to the notes;
(4) the notes, other than additional notes, and the exchange notes;
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(5) Indebtedness, other than the Indebtedness described in clauses (1),
(2), (3) or (4) above, outstanding on the issue date;
(6) Refinancing Indebtedness in respect of Indebtedness Incurred under
paragraph (a) above or under clause (4), (5) or this clause (6);
(7) hedging obligations directly related to Indebtedness permitted to be
Incurred by Hexcel and Restricted Subsidiaries under the indenture
or, in the case of a currency exchange protection agreement,
reasonably related to the ordinary course of business of Hexcel and
its Restricted Subsidiaries;
(8) Indebtedness, including Capitalized Lease Obligations and purchase
money Indebtedness, Incurred by Hexcel or its Restricted Subsidiaries
to finance the acquisition of tangible assets or other capital
expenditures, and Indebtedness Incurred by Hexcel or its Restricted
Subsidiaries to refinance the Capitalized Lease Obligations and
purchase money Indebtedness, in an aggregate outstanding principal
amount which, when added together with the amount of Indebtedness
Incurred under this clause (8) and then outstanding, does not exceed
$20 million;
(9) Indebtedness in respect of performance, surety or appeal bonds
provided in the ordinary course of Hexcel and its Restricted
Subsidiaries; or
(10) Indebtedness in an aggregate principal amount which, together with
all other Indebtedness of Hexcel and Restricted Subsidiaries
outstanding on the date of the Incurrence, other than Indebtedness
permitted by clauses (1) through (9) above or paragraph (a), does not
exceed $25.0 million.
(c) Notwithstanding the above provisions, Hexcel will not Incur any
Indebtedness under paragraph (b) above, if the proceeds of the Indebtedness are
used, directly or indirectly, to refinance any Subordinated Obligations, unless
the Indebtedness will be subordinated to the notes to at least the same extent
as the Subordinated Obligations.
(d) For purposes of determining compliance with this covenant:
(1) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described above, Hexcel, in its
sole discretion, will classify the item of Indebtedness and only be
required to include the amount and type of the Indebtedness in one of
the above clauses and
(2) an item of Indebtedness may be divided and classified under more than
one of the types of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, Hexcel will not Incur:
(1) any Indebtedness if that Indebtedness is contractually subordinate or
junior in right of payment in any respect to any Senior Indebtedness,
unless the Indebtedness is Senior Subordinated Indebtedness or is
expressly subordinated in right of payment to Senior Subordinated
Indebtedness or
(2) any Secured Indebtedness that is not Senior Indebtedness, unless
contemporaneously therewith effective provision is made to secure the
notes equally and ratably with the Secured Indebtedness for so long
as the Secured Indebtedness is secured by a lien.
(f) In determining amounts of Indebtedness outstanding under the Limitation
on Indebtedness covenant and to avoid duplication, the following shall not be
deemed to be a separate Incurrence of Indebtedness: indebtedness of a person
resulting from the grant by that person of security interests, the issuance by
that person of guarantees, or from the assumption of obligations with respect to
letters of credit supporting, Indebtedness Incurred by the person under the
indenture or Indebtedness which the person is otherwise permitted to Incur under
the indenture.
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(g) Indebtedness of any person which is outstanding at the time the person
becomes a Restricted Subsidiary, including upon designation of any subsidiary or
other person as a Restricted Subsidiary, or is merged with or into or
consolidated with Hexcel or a Restricted Subsidiary shall be deemed to have been
Incurred at the time the person becomes a Restricted Subsidiary or merged with
or into or consolidated with Hexcel or a Restricted Subsidiary, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
(a) Hexcel will not, and will not permit any Restricted Subsidiary, directly
or indirectly, to make a Restricted Payment if at the time Hexcel or any
Restricted Subsidiary makes a Restricted Payment:
(1) a Default shall have occurred and be continuing, or would result from
the Restricted Payment;
(2) Hexcel is not able to Incur an additional $1.00 of Indebtedness under
paragraph (a) of the covenant described under the caption "--Limitation
on Indebtedness"; or
(3) the aggregate amount of the Restricted Payment and all other Restricted
Payments made since the issue date would exceed the sum of, without
duplication:
(A) 50% of the Consolidated Net Income accrued during the period, which
will be treated as one accounting period, from the beginning of the
fiscal quarter in which the issue date occurs to the end of the most
recent fiscal quarter ending at least 45 days before the date of the
Restricted Payment, or, in case the Consolidated Net Income is a
deficit, LESS 100% of that deficit; PLUS
(B) 100% of the aggregate Net Cash Proceeds received by Hexcel from the
issuance or sale of its capital stock--other than capital stock
within the meaning of "Disqualified Stock" as defined in the
indenture--subsequent to the issue date and on or before the date of
the Restricted Payment, other than an issuance or sale to a
subsidiary of Hexcel or an issuance or sale to an employee stock
ownership plan or to a trust established by Hexcel or any of its
subsidiaries for the benefit of their employees; PLUS
(C) the amount by which the Indebtedness of Hexcel is reduced on Hexcel's
balance sheet upon the conversion or exchange--other than by a
subsidiary of Hexcel--subsequent to the issue date and on or before
the date of the Restricted Payment of any Indebtedness of Hexcel
convertible or exchangeable for capital stock--other than
disqualified stock-- of Hexcel, less the amount of any cash, or the
fair value of any other property, distributed by Hexcel upon the
conversion or exchange; PLUS
(D) an amount equal to the sum of (x) the net reduction in Investments in
Unrestricted Subsidiaries resulting from dividends, repayments of
loans or advances or other transfers of assets, in each case to
Hexcel or any Restricted Subsidiary from Unrestricted Subsidiaries,
and (y) the portion, proportionate to Hexcel's equity interest in the
subsidiary, of the fair market value of the net assets of an
Unrestricted Subsidiary at the time the Unrestricted Subsidiary is
designated a Restricted Subsidiary; PROVIDED, HOWEVER, that this sum
shall not exceed, in the case of any Unrestricted Subsidiary, the
amount of Investments previously made and treated as a Restricted
Payment by Hexcel or any Restricted Subsidiary in the Unrestricted
Subsidiary.
(b) The preceding provisions will not prohibit:
(1) any acquisition of any capital stock of Hexcel made by exchange for,
or out of the proceeds of the substantially concurrent sale of,
capital stock of Hexcel--other than disqualified stock and other than
capital stock issued or sold to a subsidiary of Hexcel-- or options,
warrants or other rights to purchase the capital stock; PROVIDED,
HOWEVER, that
(A) the purchase or redemption shall be excluded in the calculation
of the amount of Restricted Payments and
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(B) the Net Cash Proceeds from the sale shall be excluded from clause
(3)(B) of paragraph (a) above;
(2) any purchase, repurchase, redemption, defeasance or acquisition or
retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
capital stock of Hexcel--other than disqualified stock and other than
capital stock issued or sold to a subsidiary of Hexcel--or options,
warrants or other rights to purchase the capital stock; PROVIDED,
HOWEVER, that
(A) the purchase, repurchase, redemption, defeasance or acquisition
or retirement for value shall be excluded in the calculation of
the amount of Restricted Payments and
(B) the Net Cash Proceeds from the sale shall be excluded from clause
(3)(B) of paragraph (a) above;
(3) any purchase, repurchase, redemption, defeasance or acquisition or
retirement for value of Subordinated Obligations made by exchange
for, or out of the proceeds of the substantially concurrent sale of,
Indebtedness of Hexcel which is permitted to be Incurred under the
covenant described under the caption "--Limitation on Indebtedness";
PROVIDED, HOWEVER, that the Indebtedness
(A) shall have a stated maturity later than the stated maturity of
the notes and
(B) shall have an Average Life greater than the remaining Average
Life of the notes; PROVIDED FURTHER, HOWEVER, that the purchase,
repurchase, redemption, defeasance or other acquisition or
retirement for value shall be excluded in the calculation of the
amount of Restricted Payments;
(4) any purchase or redemption of Subordinated Obligations from Net
Available Cash after application according to clauses (A), (B) and
(C) of paragraph (a)(3) of the covenant described under the caption
"--Limitation on Asset Dispositions"; PROVIDED, HOWEVER, that the
purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments;
(5) dividends paid within 60 days after the date of declaration thereof
if at the date of declaration the dividend would have complied with
this covenant; PROVIDED, HOWEVER, that at the time of payment of the
dividend, no other Default shall have occurred and be continuing, or
result therefrom; PROVIDED FURTHER, HOWEVER, that the declaration,
but not the payment, of such dividend shall be included in the
calculation of the amount of Restricted Payments;
(6) so long as no Default shall have occurred and be continuing, or
result therefrom, Investments in Joint Ventures or other persons
engaged in a related business in an aggregate amount which, when
added together with the amount of all other Investments made
according to this clause (6) which at the time have not been repaid
through dividends, repayments of loans or advances or other transfers
of assets, does not exceed $60.0 million; PROVIDED, HOWEVER, that the
amount of the Investments shall be excluded in the calculation of
Restricted Payments;
(7) so long as no Default shall have occurred and be continuing, or
result therefrom, payments with respect to employee or director stock
options, stock incentive plans or restricted stock plans of Hexcel,
including any redemption, repurchase, acquisition, cancelation or
other retirement for value of shares of capital stock of Hexcel,
restricted stock, options on any of these shares or similar
securities held by directors, officers or employees or former
directors, officers or employees or by any Plan upon death,
disability, retirement or termination of employment of any of these
persons under the terms of the Plan or agreement under which the
shares or related rights were issued or
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acquired; PROVIDED, HOWEVER, that the amount of any of these payments
shall be included in the calculation of Restricted Payments;
(8) so long as no Default shall have occurred and be continuing, or
result therefrom, any purchase or defeasance of Subordinated
Obligations upon a Change of Control to the extent required by the
indenture or other agreement or instrument under which the
Subordinated Obligations were issued, but only if Hexcel has first
complied with all its obligations under the provisions described
under the caption "--Change of Control"; PROVIDED, HOWEVER, that the
amount of the purchase or defeasance shall be excluded in the
calculation of Restricted Payments; or
(9) so long as no Default shall have occurred and be continuing, or
result therefrom, Restricted Payments in an aggregate amount which,
when added together with the amount of all other Restricted Payments
made under, this clause (9) which at that time have not been repaid
through dividends, repayments of loans or advances or other transfers
of assets, does not exceed $40.0 million; PROVIDED, HOWEVER, that the
amount of the Restricted Payments shall be included in the
calculation of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES
Hexcel will not, and will not permit any Restricted Subsidiary to, create or
otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to:
(a) pay dividends or make any other distributions on its capital stock to
Hexcel or a Restricted Subsidiary or pay any Indebtedness owed to Hexcel,
(b) make any loans or advances to Hexcel or any Restricted Subsidiary, or
(c) transfer any of its property or assets to Hexcel or any Restricted
Subsidiary (collectively "Payment Restrictions"), except:
(1) any Payment Restriction imposed under the Credit Agreement, the
indenture, Refinancing Indebtedness in respect of the notes and any
agreement in effect at or entered into on the issue date;
(2) any Payment Restriction with respect to a Restricted Subsidiary under
an agreement relating to any Indebtedness Incurred by the Restricted
Subsidiary on or prior to the date on which the Restricted Subsidiary
was acquired by Hexcel --other than Indebtedness Incurred as
consideration in, or to provide all or any portion of the funds or
credit support utilized to complete, the transaction or series of
related transactions as a result of which the Restricted Subsidiary
became a Restricted Subsidiary of, or was acquired by, Hexcel--and
outstanding on that date;
(3) any Payment Restriction under an agreement effecting a refinancing of
Indebtedness Incurred under an agreement referred to in clause (1) or
(2) of this covenant or this clause (3) or contained in any amendment
to an agreement referred to in clause (1) or (2) of this covenant or
this clause (3); PROVIDED, HOWEVER, that the Payment Restrictions
with respect to the Restricted Subsidiary contained in the
refinancing agreement or amendment are no less favorable to the
holders of the notes than those with respect to the Restricted
Subsidiary contained in the predecessor agreements;
(4) in the case of clause (c) above, any encumbrance or restriction
consisting of customary non-assignment provisions in leases or other
contracts governing leasehold interests to the extent these
provisions restrict the transfer of the lease or the property leased
under the leases and contracts;
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(5) any restriction with respect to a Restricted Subsidiary imposed under
an agreement entered into for the sale or disposition of all or
substantially all the capital stock or assets of the Restricted
Subsidiary pending the closing of the sale or disposition; and
(6) any encumbrance or restriction contained in the governing documents
of any Joint Venture Subsidiary.
LIMITATION ON ASSET DISPOSITIONS
(a) Hexcel will not, and will not permit any Restricted Subsidiary to, make
any Asset Disposition unless:
(1) Hexcel or a Restricted Subsidiary receives consideration at least
equal to the fair market value, of the shares and assets subject to
the Asset Disposition;
(2) at least 75% of the consideration for the Asset Disposition received
by Hexcel or the Restricted Subsidiary is in the form of cash; and
(3) an amount equal to 100% of the Net Available Cash from the Asset
Disposition is applied by Hexcel or the Restricted Subsidiary, as the
case may be:
(A) FIRST, to the extent Hexcel or the Restricted Subsidiary elects,
to prepay, repay or purchase Senior Indebtedness or
Indebtedness--other than any disqualified stock--of a Restricted
Subsidiary, in each case other than Indebtedness owed to Hexcel
or an affiliate of Hexcel, within one year from the later of the
Asset Disposition or the receipt of the Net Available Cash;
(B) SECOND, to the extent Hexcel or the Restricted Subsidiary elects,
to acquire additional assets within one year from the later of
the Asset Disposition or the receipt of the Net Available Cash;
(C) THIRD, to make an offer to the holders of the notes, and to
holders of other Senior Subordinated Indebtedness designated by
Hexcel, to purchase notes, and the other Senior Subordinated
Indebtedness, according to the indenture; and
(D) FOURTH, to the extent of the balance of the Net Available Cash
after application according to clauses (A), (B) and (C), for any
purpose not prohibited by the terms of the indenture.
Notwithstanding the above provisions of this paragraph, Hexcel and the
Restricted Subsidiaries will not be required to apply any Net Available Cash
according to the foregoing paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied according to
the foregoing paragraph exceeds $15.0 million. Pending application of Net
Available Cash under this covenant, the Net Available Cash will be invested in
Temporary Cash Investments.
For the purposes of the covenant described under this caption, the following
shall be deemed to be cash:
(x) the assumption of Indebtedness of Hexcel or any Restricted
Subsidiary and the release of Hexcel or the Restricted Subsidiary from all
liability with respect to the Indebtedness in connection with the Asset
Disposition, PROVIDED, HOWEVER, that the amount of the Indebtedness shall
not be deemed to be cash for the purpose of the term "Net Available Cash";
and
(y) securities received by Hexcel or any Restricted Subsidiary from the
transferee that are promptly converted by Hexcel or the Restricted
Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
notes and other Senior Subordinated Indebtedness, we will purchase notes
tendered at a purchase price of 100% of their principal amount, without premium,
plus accrued but unpaid interest--according to the procedures, set forth in the
indenture. If the aggregate purchase price of notes and any other Senior
Subordinated Indebtedness tendered is less than the Net Available Cash, we will
be entitled to apply the remaining
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Net Available Cash according to clause (a)(3)(D) above. We will not be required
to make the offer to purchase notes and other Senior Subordinated Indebtedness
if the Net Available Cash available for the offer, after application of Net
Available Cash according to clauses (A) and (B) of paragraph (a) above, is less
than $10.0 million. The lesser amount shall be carried forward to determine
whether the offer is required for any subsequent Asset Disposition.
(c) Hexcel will comply with the requirements of the securities laws in
connection with the purchase of the notes under this covenant. To the extent
that the provisions of any securities laws conflict with provisions of this
covenant, Hexcel will comply with the applicable securities laws and shall not
be deemed to have breached its obligations under this covenant.
LIMITATION ON AFFILIATE TRANSACTIONS
(a) Hexcel will not, and will not permit any Restricted Subsidiary to, enter
into or permit to exist any "Affiliate Transaction", including the purchase,
sale, lease or exchange of any property, employee compensation arrangements or
the rendering of any service, with any affiliate of Hexcel unless:
(1) the Affiliate Transaction is made in good faith and on terms which
are fair and reasonable to Hexcel or the Restricted Subsidiary, as
the case may be;
(2) if the Affiliate Transaction involves an amount in excess of $5.0
million, the terms of the Affiliate Transaction are set forth in
writing and a majority of the non-employee directors of Hexcel
disinterested with respect to the Affiliate Transaction have
determined in good faith that the terms are fair and reasonable; and
(3) if the Affiliate Transaction involves an amount in excess of $10.0
million, the board of directors shall also have received a written
opinion from an investment banking firm to the effect that the
Affiliate Transaction is fair, from a financial standpoint, to Hexcel
and its Restricted Subsidiaries.
(b) The provisions of paragraph (a), above, shall not prohibit:
(1) any Permitted Investment and any Restricted Payment permitted to be
paid under the covenant described under the caption "--Limitation on
Restricted Payments";
(2) any issuance of securities, or other payments, awards or grants in
cash, securities or otherwise under, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the
board of directors;
(3) the payment of reasonable fees to directors of Hexcel and its
Restricted Subsidiaries;
(4) transactions between Hexcel or a Restricted Subsidiary and one or
more Restricted Subsidiaries; PROVIDED, HOWEVER, that no affiliate of
Hexcel, other than another Restricted Subsidiary, owns, directly or
indirectly, any capital stock in any of the Restricted Subsidiaries;
(5) transactions in the ordinary course of business, including loans,
expense advances and reimbursements, between Hexcel or any of its
Restricted Subsidiaries, on the one hand, and any employee of Hexcel
or any of its Restricted Subsidiaries, on the other hand;
(6) transactions with affiliates entered into in the ordinary course of
business of Hexcel or its Restricted Subsidiaries, on terms which
are, in the opinion of Hexcel's management or the board of directors,
fair and reasonable to Hexcel or its Restricted Subsidiaries;
(7) the granting and performance of registration rights for shares of
capital stock of Hexcel under a written registration rights agreement
approved by a majority of directors of Hexcel that are disinterested
with respect to the transactions;
(8) transactions with affiliates solely in their capacity as holders of
Indebtedness or capital stock of Hexcel or any of its subsidiaries,
so long as Indebtedness or capital stock of the same class is also
held by persons that are not affiliates of Hexcel and these
affiliates are treated no more favorably than holders of the
Indebtedness or the capital stock generally, and the redemption of
the outstanding principal amount of the Ciba notes, together with
accrued interest;
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(9) transactions according to the governance agreement, and any amendments
to the governance agreement that are not adverse to the interests of the
holders of the notes and which are approved by a majority of the
directors of Hexcel disinterested with respect to the amendment; and
(10) any transaction between Hexcel or any Restricted Subsidiaries and any
of the Existing Joint Ventures under agreements in effect on the issue
date.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
Hexcel will not sell any shares of capital stock of a Restricted Subsidiary,
and shall not permit any Restricted Subsidiary to issue or sell shares of its
capital stock--in each case, other than preferred stock within the meaning of
"Qualified Preferred Stock" as defined in the indenture--except:
(1) to Hexcel or a Wholly Owned Subsidiary;
(2) directors' qualifying shares;
(3) if, immediately after giving effect to the issuance or sale, neither
Hexcel nor any of its subsidiaries own any capital stock of the
Restricted Subsidiary; or
(4) if, immediately after giving effect to the issuance or sale, the
Restricted Subsidiary would no longer constitute a Restricted Subsidiary
and any Investment in the person remaining after giving effect to the
issuance or sale would have been permitted to be made under the indenture
if made on the date of the issuance or sale.
Notwithstanding the provisions above, the issuance or sale of shares of
capital stock of any Restricted Subsidiary of Hexcel will not violate the
indenture if the shares are issued or sold in connection with
- the formation or capitalization of a Restricted Subsidiary which, at the
time of the issuance or sale or immediately after the issuance or sale, is
a Joint Venture Subsidiary or
- a single transaction or a series of substantially contemporaneous
transactions by which the Restricted Subsidiary becomes a Restricted
Subsidiary of Hexcel by reason of the acquisition of securities or assets
from another person.
MERGER AND CONSOLIDATION
Hexcel will not consolidate with or merge with or into, or convey, transfer
or lease, in one transaction or a series of transactions, all or substantially
all its assets to, any other person, unless:
(1) the successor company shall be a person organized and existing under the
laws of the United States of America, any U.S. State or the District of
Columbia, and the successor company, if other than Hexcel, shall
expressly assume, by a supplemental indenture all the obligations of
Hexcel under the notes and the indenture;
(2) immediately after giving effect to the transaction, and treating any
Indebtedness which becomes an obligation of the successor company or any
Restricted Subsidiary as a result of the transaction as having been
Incurred by the successor company or the Restricted Subsidiary at the
time of the transaction, no Default shall have occurred and be
continuing;
(3) immediately after giving effect to the transaction, the successor
company would be able to Incur an additional $1.00 of Indebtedness under
paragraph (a) of the covenant described under the caption "--Limitation
on Indebtedness";
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(4) immediately after giving effect to the transaction, the successor
company shall have Consolidated Net Worth in an amount that is not less
than the Consolidated Net Worth of Hexcel before the transaction; and
(5) Hexcel shall have delivered to the trustee an officers' certificate and
an opinion of counsel, each stating that the consolidation, merger or
transfer and the supplemental indenture, if any, comply with the
indenture.
Nothing contained in the preceeding paragraphs shall prohibit any wholly
owned subsidiary from merging with or into, or transferring all or part of its
assets to, Hexcel.
The successor company will succeed to, and be substituted for Hexcel under
the indenture, but the predecessor company in the case of a conveyance, transfer
or lease shall not be released from the obligation to pay the principal of and
interest on the notes.
LIMITATION ON BUSINESS ACTIVITIES
Hexcel will not, and will not permit any Restricted Subsidiary to, engage in
any business other than in businesses conducted by Hexcel and its Restricted
Subsidiaries on the issue date and businesses which are reasonably related,
ancillary or complementary thereto.
SEC REPORTS
Hexcel will file with the SEC and provide the trustee and the holders of the
notes with the annual reports and the applicable information, documents and
other reports as are specified in the Exchange Act.
In addition Hexcel will file a copy of all of the information and reports
referred to above with the SEC for public availability within the time periods
specified in the SEC's rules and regulations. Hexcel will make this information
available to securities analysts and prospective investors upon request.
DEFAULTS
Each of the following is an Event of Default:
(1) a default for 30 days in the payment when due of interest on the notes,
whether or not prohibited by the subordination provisions of the
indenture;
(2) a default in payment when due of the principal of any note at its stated
maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, whether or not prohibited by the subordination
provisions of the indenture;
(3) the failure by Hexcel to comply with its obligations described under the
caption "--Covenants--Merger and Consolidation" above;
(4) the failure by Hexcel to comply for 30 days after notice with any of its
obligations in the covenants described above under the caption "--Change
of Control," other than a failure to purchase notes, or under the
captions "--Covenants--Limitation on Indebtedness,"
"--Limitation on Restricted Payments," "--Limitation on Restrictions on
Distributions from Restricted Subsidiaries," "--Limitation on Asset
Dispositions," other than a failure to purchase notes, "--Limitation on
Affiliate Transactions," "--Limitation on the Sale or Issuance of Capital
Stock of Restricted Subsidiaries," "--Limitation on Business Activities"
or "--SEC Reports";
(5) the failure by Hexcel to comply for 60 days after notice with any of the
other agreements contained in the indenture;
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(6) Indebtedness of Hexcel or any significant subsidiary is not paid within
any applicable grace period after final maturity or is accelerated by the
holders of the Indebtedness because of a default and the total amount of
Indebtedness unpaid or accelerated exceeds $10.0 million;
(7) events of bankruptcy, insolvency or reorganization of Hexcel or a
significant subsidiary; or
(8) any judgment or decree for the payment of money in excess of $10.0
million is entered against Hexcel or a significant subsidiary, remains
outstanding for a period of 60 days following the judgment and is not
discharged, waived or stayed within 10 days after notice.
However, a default under clauses (4), (5) or (8) will not constitute an
Event of Default until the trustee or the holders of 25% in principal amount of
the outstanding notes notify Hexcel of the default and Hexcel does not cure the
default within the time specified after receipt of the notice.
If an Event of Default occurs and is continuing, the trustee or the holders
of at least 25% in principal amount of the outstanding notes may declare the
principal of and accrued but unpaid interest on all the notes to be due and
payable. Upon this declaration, the principal and interest shall be due and
payable immediately. If an Event of Default relating to events of bankruptcy,
insolvency or reorganization of Hexcel occurs and is continuing, the principal
of and interest on all the notes will become and be immediately due and payable.
Under some circumstances, the holders of a majority in principal amount of the
outstanding notes may rescind any acceleration with respect to the notes and its
consequences.
In case an Event of Default occurs and is continuing, the trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders of the notes unless the
holders have offered to the trustee reasonable indemnity or security against any
loss, liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder of a note may pursue
any remedy with respect to the indenture or the notes unless:
(1) the holder has previously given the trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding notes
have requested the trustee to pursue the remedy;
(3) the holders have offered the trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the trustee has not complied with the request within 60 days; and
(5) the holders of a majority in principal amount of the outstanding notes
have not given the trustee a direction inconsistent with the request
within the 60-day period.
The holders of a majority in principal amount of the outstanding notes are
given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or of exercising any trust or
power conferred on the trustee. The trustee, however, may refuse to follow any
direction that conflicts with law or the indenture or that the trustee
determines is unduly prejudicial to the rights of any other holder of a note or
that would involve the trustee in personal liability.
The indenture provides that if a Default occurs and is continuing and is
known to the trustee, the trustee must mail to each holder of the notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any note, the trustee may withhold
notice if a committee of its trust officers determines that withholding notice
is not adverse to the holders of the notes. In addition, Hexcel is required to
deliver to the trustee, after the end of each fiscal year, a certificate
indicating whether the signers of the certificate know of any Default that
occurred during the previous year. Hexcel also is required to deliver to the
trustee, within 30 days after
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its occurrence, written notice of any event which would constitute a Default,
its status and what action Hexcel is taking or proposes to take in respect to
the event.
AMENDMENTS AND WAIVERS
Subject to exceptions, the indenture may be amended with the consent of the
holders of a majority in principal amount of the notes then outstanding. This
may include consents obtained in connection with a tender offer or exchange for
the notes. Any past default or compliance with any provisions may also be waived
with the consent of the holders of a majority in principal amount of the notes
then outstanding. However, without the consent of holders of 80% or more in
principal amount of the notes then outstanding, Hexcel may not, with respect to
any notes held by a non-consenting holder, make any change to the subordination
provisions of the indenture that would adversely affect holders of the notes.
In addition, without the consent of each holder affected, an amendment or
waiver may not:
(1) reduce the principal amount of notes whose holders must consent to an
amendment;
(2) reduce the rate of or extend the time for payment of interest on any
note;
(3) reduce the principal of or extend the stated maturity of any note;
(4) reduce the amount payable upon the redemption of any note or change the
time at which any note may be redeemed as described under "--Optional
Redemption";
(5) make any note payable in money other than that stated in the notes;
(6) impair the right of any holder of the notes to receive payment of
principal of and interest on the holder's notes on or after the due dates
for payment or to institute suit for the enforcement of any payment on or
with respect to the holder's notes; or
(7) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
Hexcel and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes, PROVIDED, THAT the uncertificated notes are issued in
registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated notes are described in Section
163(f)(2)(B) of the Code;
(3) to provide for the assumption by a successor corporation of the
obligations of Hexcel under the indenture;
(4) to add guarantees with respect to the notes or to secure the notes;
(5) to add to the covenants of Hexcel for the benefit of the holders of the
notes or to surrender any right or power conferred upon Hexcel;
(6) to make any change that does not adversely affect the rights under the
indenture of any holder; or
(7) to comply with requirements of the SEC in order to effect or maintain
the qualification of the indenture under the Trust Indenture Act.
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No amendment may be made to the subordination provisions of the indenture
that adversely affects the rights of any holder of Senior Indebtedness then
outstanding unless the holders of the Senior Indebtedness consent to the change.
The consent of the holders of the notes is not necessary under the indenture
to approve the particular form of any proposed amendment. It is sufficient if
the consent approves the substance of the proposed amendment.
After an amendment under the indenture becomes effective, Hexcel is required
to mail to holders of the notes a notice briefly describing the amendment.
However, the failure to give notice to all holders of the notes, or any defect
in the notice, will not impair or affect the validity of the amendment.
DEFEASANCE
Hexcel at any time may terminate all its obligations under the notes and the
indenture, except for specified obligations, including those respecting the
defeasance trust and obligations to register the transfer or exchange of the
notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a
registrar and paying agent in respect of the notes. This type of termination is
referred to as legal defeasance.
In addition, Hexcel at any time may terminate its obligations described
under the caption "-- Change of Control" and under the covenants described under
the caption "--Covenants", other than the covenant described under the caption
"Merger and Consolidation", the operation of the cross acceleration provision,
the bankruptcy provisions with respect to significant subsidiaries and the
judgment default provision described under the caption "--Defaults" above and
the limitations contained in clauses (3) and (4) of the covenant described under
the caption "--Covenants--Merger and Consolidation" above. This type of
termination is referred to as covenant defeasance.
Hexcel may exercise its legal defeasance option regardless of its prior
exercise of its covenant defeasance option. If Hexcel exercises its legal
defeasance option, payment of the notes may not be accelerated because of an
Event of Default with respect to the payment of the notes. If Hexcel exercises
its covenant defeasance option, payment of the notes may not be accelerated
because of an Event of Default specified in clause (4), (6), (7), with respect
only to significant subsidiaries, or (8) under the caption "--Defaults" above or
because of the failure of Hexcel to comply with clause (3) or (4) of the
covenant described under the caption "--Covenants--Merger and Consolidation"
above.
In order to exercise either legal defeasance or covenant defeasance, Hexcel
must irrevocably deposit in a defeasance trust money or U.S. government
obligations for the payment of principal and interest on the notes to redemption
or maturity. Hexcel must also comply with other conditions, including delivery
to the trustee of an opinion of counsel to the effect that holders of the notes
will not recognize income, gain or loss for federal income tax purposes as a
result of the deposit and defeasance and will be subject to federal income tax
on the same amount and in the same manner and at the same times as would have
been the case if the deposit and defeasance had not occurred. In the case of
legal defeasance only, this opinion of counsel must be based on a ruling of the
IRS or other change in applicable federal income tax law.
CONCERNING THE TRUSTEE
The Bank of New York is to be the trustee under the indenture and has been
appointed by Hexcel as registrar and paying agent for the notes.
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The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place for exercising any
remedy available to the trustee, subject to various exceptions. The indenture
provides that in case an Event of Default shall occur and be continuing, the
trustee will be required to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to these 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 the holder shall have offered to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.
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.
DEFINITIONS OF TERMS USED IN THE INDENTURE
The following defined terms are used in the indenture and are included in
this prospectus because they are necessary to understand the description of the
notes contained in this prospectus.
"ADDITIONAL ASSETS" means any:
(1) property or assets (other than Indebtedness and capital stock) to be
used by Hexcel, a Restricted Subsidiary or a Joint Venture;
(2) capital stock of a person that becomes a Restricted Subsidiary as a
result of the acquisition of such capital stock by Hexcel or another
Restricted Subsidiary; or
(3) capital stock constituting a minority interest in any person that at
such time is a Restricted Subsidiary or a Joint Venture;
PROVIDED, HOWEVER, that any Restricted Subsidiary described in clauses (2) and
(3) is primarily engaged in related business.
"AFFILIATE" of any specified person means:
(1) any other person, directly or indirectly, controlling or controlled by
or under direct or indirect common control with such specified person; or
(2) any other person who is a director or officer (A) of such specified
person, (B) of any subsidiary of such specified person or (C) of any
person described in clause (1).
For the purposes of this definition, "control" when used with respect to any
person means the power to direct the management and policies of such person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise, and the terms "controlling" and "controlled" have
meanings correlative to the foregoing. For purposes of the covenants described
under the captions "--Covenants--Limitation on Affiliate Transactions" and
"--Covenants--Limitation on Asset Dispositions" only, "affiliate" shall also
mean any beneficial owner of capital stock representing 10% or more of the total
voting power of the voting stock (on a fully diluted basis) of Hexcel or of
rights or warrants to purchase such capital stock (whether or not currently
exercisable) and any person who would be an affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"ASSET DISPOSITION" means any direct or indirect sale, lease, transfer,
conveyance or other disposition (or series of related sales, leases, transfers,
conveyances or dispositions) of shares of capital stock of a Restricted
Subsidiary (other than directors' qualifying shares), property or other assets
(each referred to for the purposes of this definition as a "disposition") by
Hexcel or any Restricted Subsidiary (including any disposition by means of a
merger, consolidation or similar transaction)involving an amount in excess of
$3.0 million other than
(1) a disposition by a Restricted Subsidiary to Hexcel, by Hexcel or a
Restricted Subsidiary to a Restricted Subsidiary or between Restricted
Subsidiaries;
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(2) a disposition of property or assets at fair market value in the ordinary
course of business and consistent with past practices of Hexcel or any of
its Restricted Subsidiaries, as applicable (including sales of products
to customers, disposition of excess inventory and dispositions of used or
replaced equipment);
(3) the disposition or grant of licenses to third parties in respect of
intellectual property;
(4) a sale or disposition of assets for the purpose of forming any Joint
Venture, in exchange for an interest in such Joint Venture;
(5) the sale of Specified Properties;
(6) a disposition by Hexcel or any subsidiary of assets within 24 months
after such assets were directly or indirectly acquired as part of an
acquisition of other properties or assets (including capital stock) (the
"Primary Acquisition"), if the assets being disposed of are "non-core"
assets (as determined in good faith by a majority of the board of
directors) or are required to be disposed of pursuant to any law, rule or
regulation or any order of or settlement with any court or governmental
authority, and the proceeds therefrom are used within 18 months after the
date of sale to repay any Indebtedness Incurred in connection with the
Primary Acquisition of such assets; and
(7) for purposes of the covenant described under the caption
"--Covenants--Limitation on Asset Dispositions" only, a disposition that
constitutes a Restricted Payment permitted by the covenant described
under the caption "--Covenants--Limitation on Restricted Payments;" or
(8) an Asset Disposition that also constitutes a Change of Control;
PROVIDED, HOWEVER, that Hexcel complies with all its obligations
described under the caption "--Change of Control."
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (x) the sum of the products of
the numbers of years from the date of determination to the date of each
successive scheduled principal payment of such Indebtedness or scheduled
redemption multiplied by the amount of such payment by (y) the sum of all such
payments.
"BANK INDEBTEDNESS" means any and all Indebtedness and other amounts payable
under or in respect of the Credit Agreement including principal, premium (if
any), interest (including interest accruing at the contract rate specified in
the Credit Agreement (including any rate applicable upon default) on or after
the filing of any petition in bankruptcy, or the commencement of any similar
state, federal or foreign reorganization or liquidation proceeding, relating to
Hexcel and interest that would accrue but for the commencement of such
proceeding whether or not a claim for post-filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees and
all other amounts payable thereunder or in respect thereof.
"BOARD OF DIRECTORS" means the board of directors of Hexcel or any committee
thereof duly authorized to act on behalf of the board.
"CAPITALIZED LEASE OBLIGATION" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP. The amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP. The stated maturity thereof shall be the date of the last
payment of rent or any other amount due under such lease prior to the first date
upon which such lease may be terminated by the lessee without payment of a
penalty.
"CONSOLIDATED COVERAGE RATIO" as of any date of determination means the
ratio of (x) the aggregate amount of EBITDA for the most recent four consecutive
fiscal quarters ending at least 45 days prior to the date of such determination
to (y) Consolidated Interest Expense for such four fiscal quarters; PROVIDED,
HOWEVER, that:
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(1) if Hexcel or any Restricted Subsidiary has Incurred any Indebtedness
since the beginning of such period that remains outstanding on such date
of determination or if the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio is an Incurrence of
Indebtedness, or both, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving effect on a PRO FORMA basis to
(a) such Indebtedness as if such Indebtedness had been Incurred on the
first day of such period and (b) the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds
of such new Indebtedness as if such discharge had occurred on the first
day of such period;
(2) if Hexcel or any Restricted Subsidiary has repaid, repurchased, defeased
or otherwise discharged any Indebtedness since the beginning of such
period or if any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged (in each case other than Indebtedness Incurred under
any revolving credit facility unless such Indebtedness has been
permanently repaid and has not been replaced) on the date of the
transaction giving rise to the need to calculate the Consolidated
Coverage Ratio, EBITDA and Consolidated Interest Expense for such period
shall be calculated on a PRO FORMA basis as if such discharge had
occurred on the first day of such period and as if Hexcel or such
Restricted Subsidiary has not earned the interest income actually earned
during such period in respect of cash or Temporary Cash Investments used
to repay, repurchase, defease or otherwise discharge such Indebtedness;
(3) if since the beginning of such period Hexcel or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for such
period shall be reduced by an amount equal to the EBITDA (if positive)
directly attributable to the assets which are the subject of such Asset
Disposition for such period or increased by an amount equal to the EBITDA
(if negative) directly attributable thereto for such period and
Consolidated Interest Expense for such period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable
to any Indebtedness of Hexcel or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to Hexcel and
its continuing Restricted Subsidiaries in connection with such Asset
Disposition for such period (or, if the capital stock of any Restricted
Subsidiary is sold, the Consolidated Interest Expense for such period
directly attributable to the Indebtedness of such Restricted Subsidiary
to the extent Hexcel and its continuing Restricted Subsidiaries are no
longer liable for such Indebtedness after such sale);
(4) if since the beginning of such period Hexcel or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any Person which becomes a Restricted
Subsidiary) or an acquisition of assets, including any acquisition of
assets occurring in connection with a transaction causing a calculation
to be made hereunder, EBITDA and Consolidated Interest Expense for such
period shall be calculated after giving PRO FORMA effect thereto
(including the Incurrence of any Indebtedness) as if such Investment or
acquisition occurred on the first day of such period; and
(5) if since the beginning of such period any person (that subsequently
became a Restricted Subsidiary or was merged with or into Hexcel or any
Restricted Subsidiary since the beginning of such period) shall have made
any Asset Disposition, any Investment or acquisition of assets requiring
an adjustment pursuant to clause (3) or (4) above if made by Hexcel or a
Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving PRO
FORMA effect thereto as if such Asset Disposition, Investment or
acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever PRO FORMA effect is to be given to an
acquisition of assets, the amount of income or earnings relating thereto and the
amount of Consolidated Interest Expense associated with any Indebtedness
Incurred in connection therewith, the PRO FORMA calculations shall be determined
in good faith by a responsible financial or accounting officer of Hexcel. If any
Indebtedness bears a floating rate of interest and is being given PRO FORMA
effect, the interest expense on such
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Indebtedness shall be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period (taking into
account any interest rate protection agreement applicable to such Indebtedness
if such interest rate protection agreement has a remaining term as at the date
of determination in excess of 12 months).
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the sum of, without
duplication:
(a) total interest expense of Hexcel and its consolidated Restricted
Subsidiaries for such period, including, to the extent not otherwise included in
such interest expense, and to the extent Incurred by Hexcel or its Restricted
Subsidiaries in such period, without duplication,
(1) interest expense attributable to capital leases;
(2) amortization of debt discount and debt issuance cost;
(3) amortization of capitalized interest;
(4) non-cash interest expense;
(5) accrued interest;
(6) amortization of commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing;
(7) interest actually paid by Hexcel or any such Restricted Subsidiary under
any guarantee of Indebtedness of any other person;
(8) net payments, if any, made pursuant to interest rate protection
agreements (including amortization of fees);
(b) preferred stock dividends paid during such period in respect of all
preferred stock of Restricted Subsidiaries of Hexcel held by persons other than
Hexcel; and
(c) cash contributions made during such period to any employee stock
ownership plan or other trust for the benefit of employees to the extent such
contributions are used by such plan or trust to pay interest or fees to any
person (other than Hexcel) in connection with Indebtedness Incurred by such plan
or trust to purchase capital stock of Hexcel.
"CONSOLIDATED NET INCOME" means, for any period, the net income (loss) of
Hexcel and its consolidated subsidiaries; PROVIDED, HOWEVER, that there shall
not be included in such Consolidated Net Income:
(1) any net income (loss) of any person if such person is not a Restricted
Subsidiary, except that
(A) Hexcel's equity in the net income of any such person for such period
shall be included in such Consolidated Net Income up to the aggregate
amount of cash that could have been distributed by such person during
such period to Hexcel or a Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Restricted Subsidiary, to the limitations contained
in clause (3) below); and
(B) Hexcel's equity in a net loss of any such person for such period
shall be included in determining such Consolidated Net Income;
(2) any net income (loss) of any person acquired by Hexcel or a subsidiary
in a pooling of interests transaction for any period prior to the date of
such acquisition;
(3) any net income (loss) of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to Hexcel, except that
(A) Hexcel's equity in the net income of any such Restricted Subsidiary
for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash that
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could have been distributed by such Restricted Subsidiary during such
period to Hexcel or another Restricted Subsidiary as a dividend or
other distribution (subject, in the case of a dividend to another
Restricted Subsidiary, to the limitation contained in this clause);
and
(B) Hexcel's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net
Income;
(4) any gain (but not loss) realized upon the sale or other disposition of
any assets of Hexcel, its consolidated subsidiaries or any other person
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any capital stock of any person;
(5) any extraordinary gain or loss;
(6) cumulative effect of a change in accounting principles; and
(7) any non-cash business consolidation and acquisition charges recognized
with respect to the Clark-Schwebel acquisition (except to the extent such
non-cash charges represent an accrual of or a reserve for cash
expenditures in any future period).
Notwithstanding the foregoing, for the purposes of the covenant described under
the caption "--Covenants--Limitation on Restricted Payments" only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to Hexcel
or a Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(D) thereof.
"CONSOLIDATED NET WORTH" means the total of the amounts shown on the balance
sheet of Hexcel and its consolidated subsidiaries, determined on a consolidated
basis in accordance with GAAP, as of the end of the most recent fiscal quarter
of Hexcel ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as the sum of:
(1) the par or stated value of all outstanding capital stock of Hexcel; PLUS
(2) paid-in capital or capital surplus relating to such capital stock; PLUS
(3) any retained earnings or earned surplus; LESS
(4) any accumulated deficit; LESS
(5) any amounts attributable to disqualified stock.
"CREDIT AGREEMENT" means:
(1) one or more credit agreements, loan agreements or similar agreements
providing for working capital advances, term loans, letter of credit
facilities or similar advances, loan or facilities to Hexcel, any
Restricted Subsidiary, domestic or foreign, or any or all of such
persons, including the Second Amended and Restated Credit Agreement in
effect on the issue date, among Hexcel and specified subsidiaries of
Hexcel, as borrowers, the lenders party thereto and Credit Suisse First
Boston as administrative agent for the lenders, Citibank, N.A., as
documentation agent for the lenders, as the same may be amended,
modified, restated or supplemented from time to time, or any other
indebtedness referred to in clause (b)(1) of the covenant described under
the caption "--Covenants--Limitation on Indebtedness"; and
(2) any one or more agreements governing advances, loans or facilities
provided to refund, refinance, replace or renew (including subsequent or
successive refundings, financings, replacements and renewals)
Indebtedness under the agreement or agreements referred to in the
foregoing clause (1), as the same may be amended, modified, restated or
supplemented from time to time.
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"DEFAULT" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"DESIGNATED SENIOR INDEBTEDNESS" means:
(1) the Bank Indebtedness; and
(2) any other Senior Indebtedness (other than hedging obligations) which, at
the date of determination, has an aggregate principal amount outstanding
of, or under which, at the date of determination, the holders of which
are committed to lend up to, at least $25.0 million and is specifically
designated by Hexcel in the instrument evidencing or governing the Senior
Indebtedness as "Designated Senior Indebtedness" for purposes of the
indenture in an Officers' Certificate received by the Trustee.
"EBITDA" for any period means the sum of Consolidated Net Income plus,
without duplication, the following to the extent deducted in calculating such
Consolidated Net Income:
(1) all income tax expense of Hexcel and its consolidated Restricted
Subsidiaries for such period;
(2) Consolidated Interest Expense for such period;
(3) depreciation expense and amortization expense of Hexcel and its
consolidated Restricted Subsidiaries for such period (excluding
amortization expense attributable to a prepaid cash item that was paid in
a prior period);
(4) all other non-cash items of Hexcel and its consolidated Restricted
Subsidiaries for such period (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash expenditures
in any future period) reducing Consolidated Net Income LESS all non-cash
items increasing Consolidated Net Income for such period; and
(5) business consolidation and acquisition charges recognized for such
period to the extent recognized during or prior to the fiscal year ended
December 31, 2000; PROVIDED, HOWEVER, that the aggregate amount of the
charges described in this clause (5) through the end of such fiscal year
shall not exceed $25.0 million.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization of, a Restricted Subsidiary
shall be added to Consolidated Net Income to compute EBITDA only to the extent
(and in the same proportion) that the net income of such Restricted Subsidiary
was included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to
Hexcel by such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Restricted Subsidiary or its stockholders.
"EXISTING JOINT VENTURES" means: (1) Asahi-Schwebel, (2) Asahi-Schwebel
(Taiwan), (3) Asahi-Schwebel Interglas (Philippines), (4) CS Tech-Fab, (5) CS
Interglas, (6) Asian Composite Manufacturing, (7) BHA Aero Composite Parts, and
(8) DIC. The indenture also defines each of the terms set forth in (1)-(8)
hereof.
"FOREIGN SUBSIDIARY" means a subsidiary that is incorporated in a
jurisdiction other than, and the majority of the assets of which are located
outside of, the United States, a State thereof and the District of Columbia.
"GAAP" means generally accepted accounting principles.
"GOVERNANCE AGREEMENT" means the Governance Agreement dated as of February
29, 1996, between Ciba Specialty Chemicals Holding Inc. and Hexcel.
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"GUARANTEE" means any obligation, contingent or otherwise, of any person
directly or indirectly guaranteeing any Indebtedness of any other person and any
obligation, direct or indirect, contingent or otherwise, of such person:
(1) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to
purchase assets, goods, securities or services, to take-or-pay or to
maintain financial statement conditions or otherwise); or
(2) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "guarantee" shall not include:
(1) endorsements for collection or deposit in the ordinary course of
business; or
(2) obligations, warranties and indemnities, not with respect to
Indebtedness of any person, that have been or are undertaken or made in
the ordinary course of business or in connection with any Asset
Disposition permitted by the covenant described under the caption
"--Covenants-- Limitation on Asset Dispositions" and not for the benefit
of or in favor of an affiliate of Hexcel or any of its subsidiaries.
The term "guarantee" used as a verb has a corresponding meaning.
"INCUR" means issue, assume, guarantee, incur or otherwise become liable
for; PROVIDED, HOWEVER, that any Indebtedness or capital stock of a person
existing at the time such person becomes a Restricted Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary;
PROVIDED, FURTHER, that any amendment, modification or waiver of any provision
of any document pursuant to which Indebtedness was previously Incurred shall not
be deemed to be an Incurrence of Indebtedness as long as such amendment,
modification or waiver does not:
(1) increase the principal or premium thereof or interest rate thereon;
(2) change to an earlier date the stated maturity thereof or the date of any
scheduled or required principal payment thereon or the time or
circumstances under which such Indebtedness may or shall be redeemed; or
(3) if such Indebtedness is contractually subordinated in right of payment
to the notes, modify or affect, in any manner adverse to the holders,
such subordination.
The term "Incurrence" when used as a noun shall have a correlative meaning. The
accretion of principal of a non-interest bearing or other discount security
shall not be deemed the Incurrence of Indebtedness.
"INDEBTEDNESS" means, with respect to any person on any date of
determination (without duplication):
(1) the principal of and premium (if any such premium is then due and owing)
in respect of
(A) indebtedness of such person for money borrowed; and
(B) indebtedness evidenced by notes, debentures, bonds or other similar
instruments for the payment of which such person is responsible or
liable;
(2) all Capitalized Lease Obligations of such person;
(3) all obligations of such person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such
person and all obligations of such person under any title
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retention agreement (but excluding trade accounts payable arising in the
ordinary course of business);
(4) all obligations of such person for the reimbursement of any obligor on
any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in (1) through (3) above)
entered into in the ordinary course of business of such person to the
extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the tenth business
day following receipt by such person of a demand for reimbursement
following payment on the letter of credit);
(5) the amount of all obligations of such person with respect to the
redemption, repayment or other repurchase of any disqualified stock of
such person, or with respect to any subsidiary of such person, the
liquidation preference with respect to any preferred stock (but
excluding, in each case, any accrued dividends);
(6) all obligations of the type referred to in clauses (1) through (5) of
other persons and all dividends of other persons for the payment of
which, in either case, such person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
guarantee;
(7) all obligations of the type referred to in clauses (1) through (6) of
other persons secured by any lien on any property or asset of such person
(whether or not such obligation is assumed by such person), the amount of
such obligation being deemed to be the lesser of the value of such
property or assets or the amount of the obligation so secured; and
(8) to the extent not otherwise included in this definition, hedging
obligations of such person.
For purposes of this definition, the obligation of such person with respect to
the redemption, repayment or repurchase price of any disqualified stock that
does not have a fixed redemption, repayment or repurchase price shall be
calculated in accordance with the terms of such stock as if such stock were
redeemed, repaid or repurchased on any date on which Indebtedness shall be
required to be determined pursuant to the indenture; PROVIDED, HOWEVER, that if
such stock is not then permitted to be redeemed, repaid or repurchased, the
redemption, repayment or repurchase price shall be the book value of such stock
as reflected in the most recent financial statements of such person. The amount
of Indebtedness of any person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and, with respect
to contingent obligations, the amount of liability required by GAAP to be
accrued or reflected on the most recently published balance sheet of such
person; PROVIDED, HOWEVER, that:
(1) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at such time as determined in conformity with GAAP; and
(2) Indebtedness shall not include any liability for federal, state, local
or other taxes.
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"INVESTMENT" by any person in any other person means any direct or indirect
advance, loan (other than advances to customers or suppliers in the ordinary
course of business that are recorded as accounts receivable on the balance sheet
of such former person) or other extension of credit (including by way of
guarantee or similar arrangement) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
capital stock, Indebtedness or other similar instruments issued by such latter
person that are or would be classified as investments on a balance sheet of such
former person prepared in accordance with GAAP. In determining the amount of any
Investment in respect of any property or assets other than cash, such property
or asset shall be valued at its fair market value at the time of such Investment
(unless otherwise specified in this definition), as determined in good faith by
the board of directors. For purposes of the definition of "Unrestricted
Subsidiary", the definition of "Restricted Payment" and the covenant described
under the caption "--Covenants--Limitation on Restricted Payments,"
(1) "Investment" shall include the portion (proportionate to Hexcel's equity
interest in such subsidiary) of the fair market value of the net assets
of any subsidiary of Hexcel at the time that such subsidiary is
designated an Unrestricted Subsidiary; PROVIDED, HOWEVER, that upon a
redesignation of such subsidiary as a Restricted Subsidiary, Hexcel shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) Hexcel's
"Investment" in such subsidiary at the time of such redesignation less
(y) the portion (proportionate to Hexcel's equity interest in such
subsidiary) of the fair market value of the net assets of such subsidiary
at the time of such redesignation; and
(2) any property transferred to or from an Unrestricted Subsidiary shall be
valued at its fair market value at the time of such transfer, in each
case as determined in good faith by the board of directors.
"INVESTMENT GRADE RATING" means a rating of BBB- or higher by Standard &
Poor's Ratings Group, Inc. and Baa3 or higher by Moody's Investors Service, Inc.
or the equivalent of such ratings by Standard & Poor's Ratings Group, Inc. or
Moody's Investors Service, Inc. or by any other Rating Agency selected as
provided in the definition of Rating Agency.
"ISSUE DATE" means the date on which the notes are originally issued.
"JOINT VENTURE" means the Existing Joint Ventures, and any other joint
venture, partnership or other similar arrangement whether in corporate,
partnership or other legal form which is formed by Hexcel or any Restricted
Subsidiary and one or more persons which own, operate or service a Related
Business.
"JOINT VENTURE SUBSIDIARY" means a Restricted Subsidiary formed by Hexcel or
any Restricted Subsidiary and one or more persons which own, operate or service
a Related Business.
"LENDERS" has the meaning specified in the Credit Agreement.
"NET AVAILABLE CASH" from an Asset Disposition means the aggregate amount of
cash received in respect of an Asset Disposition (including any cash payments
received by way of deferred payment of principal pursuant to a note or
installment receivable or otherwise, but only as and when received, but
excluding any other consideration received in the form of assumption by the
acquiring person of Indebtedness or other obligations relating to such
properties or assets or received in any other noncash form) therefrom, in each
case net of:
(1) all legal, accounting, title and recording tax expenses, commissions and
other fees and expenses incurred, and all federal, state, provincial,
foreign and local taxes required to be paid or accrued as a liability
under GAAP as a consequence of such Asset Disposition;
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(2) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any
lien upon such assets, or which must by its terms, or in order to obtain
a necessary consent to such Asset Disposition, or by applicable law, be
repaid out of the proceeds from such Asset Disposition;
(3) all distributions and other payments required to be made to minority
interest holders in Restricted Subsidiaries or Joint Ventures as a result
of such Asset Disposition;
(4) any amount of cash required to be placed in escrow by one or more
parties to a transaction relating to contingent liabilities associated
with an Asset Disposition until such cash is released to Hexcel or a
Restricted Subsidiary; and
(5) the deduction of appropriate amounts to be provided by the seller as a
reserve, in accordance with GAAP, against any liabilities associated with
the assets disposed of in such Asset Disposition, including pension and
other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification
obligations associated with such Asset Dispositions, all as determined in
conformity with GAAP, retained by Hexcel or any Restricted Subsidiary
after such Asset Disposition.
"NET CASH PROCEEDS," with respect to any issuance or sale of capital stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, printing costs, underwriters' or placement agents' fees,
discounts or commissions and brokerage stock exchange listing fees, consultant
and other fees actually incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof.
"PERMITTED HOLDERS" means:
(1) Ciba Specialty Chemicals Holding Inc. and its affiliates;
(2) any person succeeding to the business of Ciba Specialty Chemicals
Holding Inc., including pursuant to any merger or combination of one or
more businesses that includes the business of Ciba Specialty Chemicals
Holding Inc.; and
(3) any affiliate of any person described in clause (2).
"PERMITTED INVESTMENT" means an Investment
(1) in Hexcel or a Restricted Subsidiary or a person which will, upon the
making of such Investment, become a Restricted Subsidiary; PROVIDED,
HOWEVER, that the primary business of such Restricted Subsidiary is a
related business;
(2) in another person, if as a result of such Investment such other person
is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, Hexcel or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such person's primary business is a related
business;
(3) in Temporary Cash Investments;
(4) in receivables owing to Hexcel or any Restricted Subsidiary if created
or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; PROVIDED,
HOWEVER, that such trade terms may include such concessionary trade terms
as Hexcel or any such Restricted Subsidiary deems reasonable under the
circumstances;
(5) in loans or advances to officers, directors or employees of Hexcel or
any of its subsidiaries for travel, transportation, entertainment, and
moving and other relocation expenses and other business expenses that are
expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course
of business;
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(6) in loans or advances to employees made in the ordinary course of
business consistent with past practices of Hexcel or such subsidiary, as
the case may be;
(7) in stock, obligations or securities received
(A) in settlement of debts created in the ordinary course of business and
owing to Hexcel or any subsidiary;
(B) in satisfaction of judgments; or
(C) as consideration in connection with an Asset Disposition permitted
pursuant to the covenant described under the caption
"--Covenants--Limitation on Asset Dispositions;" and
(8) deemed to have been made as a result of the acquisition of a person that
at the time of such acquisition held instruments constituting Investments
that were not acquired in contemplation of the acquisition of such
person.
"PLANS" means any employee benefit plan, retirement plan, deferred
compensation plan, restricted stock plan, health, life, disability or other
insurance plan or program, employee stock purchase plan, employee stock
ownership plan, pension plan, stock option plan or similar plan or arrangement
of Hexcel or any subsidiary, or any successor thereof and "Plan" shall have a
correlative meaning.
"PUBLIC EQUITY OFFERING" means an underwritten primary public offering of
common stock of Hexcel pursuant to an effective registration statement under the
Securities Act.
"PUBLIC MARKET" means any time after (x) a public equity offering has been
consummated and (y) at least 15% of the total issued and outstanding common
stock of Hexcel has been distributed by means of an effective registration
statement under the Securities Act or sales pursuant to Rule 144 under the
Securities Act.
"RATING AGENCY" means Standard & Poor's Ratings Group, Inc. and Moody's
Investors Service, Inc. or if Standard & Poor's Ratings Group, Inc. or Moody's
Investors Service, Inc. or both shall not make a rating on the notes publicly
available, a nationally recognized statistical rating agency or agencies, as the
case may be, selected by Hexcel (as certified by a resolution of the board of
directors) which shall be substituted for Standard & Poor's Ratings Group, Inc.
or Moody's Investors Service, Inc. or both, as the case may be.
"REFINANCING INDEBTEDNESS" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," and "refinanced" shall have a
correlative meaning) any Indebtedness or Incurred in compliance with the
indenture (including Indebtedness of Hexcel that refinances Indebtedness of any
Restricted Subsidiary and Indebtedness of any Restricted Subsidiary that
refinances Indebtedness of another Restricted Subsidiary) including Indebtedness
that refinances Refinancing Indebtedness; PROVIDED, HOWEVER, that:
(1) the Refinancing Indebtedness has stated maturity no earlier than any
stated maturity of the Indebtedness being refinanced;
(2) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced; and
(3) such Refinancing Indebtedness is Incurred in an aggregate principal
amount (or if issued with original issue discount, an aggregate issue
price) that is equal to or less than the sum of (x) either the aggregate
principal amount (or if issued with original issue discount, the
aggregate accreted value) of the Indebtedness being refinanced
(including, with respect to both the Refinancing Indebtedness and the
Indebtedness being refinanced, amounts then
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outstanding and amounts available thereunder) or, if the Indebtedness
being refinanced is the Capitalized Lease Obligation entered into on or
about September 15, 1998, the aggregate purchase price of the property
subject thereto, PLUS (y) unpaid interest, prepayment penalties,
redemption premiums, defeasance costs, fees, expenses and other amounts
owing with respect thereto, plus reasonable financing fees and other
reasonable out-of-pocket expenses incurred in connection therewith;
PROVIDED FURTHER, HOWEVER, that Refinancing Indebtedness shall not include
Indebtedness of a subsidiary that refinances Indebtedness of Hexcel.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement
dated January 21, 1999, between Hexcel and Credit Suisse First Boston
Corporation and Salomon Smith Barney Inc.
"RELATED BUSINESS" means any business conducted by Hexcel and its Restricted
Subsidiaries on the issue date and any business related, ancillary or
complementary to the business of Hexcel and its Restricted Subsidiaries on the
issue date.
"RESTRICTED PAYMENT" with respect to any person means:
(1) the declaration or payment of any dividends or any other distributions
of any sort in respect of its capital stock (including any payment in
connection with any merger or consolidation involving such person) or
similar payment to the direct or indirect holders of its capital stock
(other than dividends or distributions payable solely in its capital
stock (other than disqualified stock) and dividends or distributions
payable solely to Hexcel or a Restricted Subsidiary, and other PRO RATA
dividends or other distributions made by a subsidiary that is not a
Wholly Owned Subsidiary to minority stockholders (or owners of an
equivalent interest in the case of a subsidiary that is an entity other
than a corporation));
(2) the purchase, redemption or other acquisition or retirement for value of
any capital stock of Hexcel held by any person or of any capital stock of
the Restricted Subsidiary held by any affiliate of Hexcel (other than a
Restricted Subsidiary), including the exercise of any option to exchange
any capital stock (other than into capital stock of Hexcel that is not
disqualified stock);
(3) the purchase, repurchase, redemption, defeasance or other acquisition or
retirement for value, prior to scheduled maturity, scheduled repayment or
scheduled sinking fund payment of any Subordinated Obligations (other
than the purchase, repurchase, or other acquisition of Subordinated
Obligations purchased in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity, in each case due
within one year of the date of acquisition); or
(4) the making of any Investment (other than a Permitted Investment) in any
person.
"RESTRICTED SUBSIDIARY" means any subsidiary of Hexcel that is not an
Unrestricted Subsidiary.
"SECURED INDEBTEDNESS" means any Indebtedness of Hexcel secured by a lien.
"SENIOR INDEBTEDNESS" means:
(1) all Bank Indebtedness; and
(2) all other Indebtedness of Hexcel, including interest (including interest
accruing at the contract rate specified in the Credit Agreement or the
documentation governing such other Indebtedness, as applicable (including
any rate applicable upon default) on or after the filing of any petition
in bankruptcy, or the commencement of any similar state, federal or
foreign reorganization or liquidation proceeding, relating to Hexcel,
whether or not allowed as a claim against Hexcel in any such proceeding)
and fees thereon, whether outstanding on the issue
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date or thereafter issued or Incurred, unless in the instrument creating
or evidencing the same or pursuant to which the same is outstanding it is
provided that such obligations are not superior in right of payment to
the notes;
PROVIDED, HOWEVER, that Senior Indebtedness shall not include:
(1) any liability for federal, state, local or other taxes owed or owing by
Hexcel;
(2) any accounts payable or other liabilities to trade creditors arising in
the ordinary course of business (including guarantees thereof or
instruments evidencing such liabilities);
(3) any Indebtedness, guarantee or obligation of Hexcel which is subordinate
or junior in any respect to any other Indebtedness, guarantee or
obligation of Hexcel, including any Senior Subordinated Indebtedness and
any Subordinated Obligations; and
(4) any obligations with respect to any capital stock.
"SENIOR SUBORDINATED INDEBTEDNESS" means the notes and any other
Indebtedness of Hexcel that specifically provides that such Indebtedness is to
rank PARI PASSU with the notes in right of payment and is not subordinated by
its terms in right of payment to any Indebtedness or other obligation of Hexcel
which is not Senior Indebtedness.
"SIGNIFICANT SUBSIDIARY" means a Restricted Subsidiary that is a
"significant subsidiary" as defined in Rule 1-02 of Regulation S-X promulgated
under the Securities Act and the Exchange Act.
"SPECIFIED PROPERTIES" shall mean Hexcel's manufacturing plants located in
Lancaster, Ohio, Welkenraedt, Belgium, Brindisi, Italy and Lodi, New Jersey, and
certain real property adjacent to the Company's manufacturing plant in
Livermore, California.
"SUBORDINATED OBLIGATION" means any Indebtedness of Hexcel (whether
outstanding on the issue date or thereafter incurred) that is contractually
subordinated or junior in right of payment to the notes pursuant to a written
agreement, including the convertible notes and the convertible debentures.
"SUBSIDIARY" of any person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of voting stock is at the time owned or controlled, directly or
indirectly, by:
(1) such person,
(2) such person and one or more subsidiaries of such person or
(3) one or more subsidiaries of such person.
Unless the context requires otherwise, "subsidiary" shall refer to a subsidiary
of Hexcel.
"TEMPORARY CASH INVESTMENTS" means any of the following:
(1) investments in U.S. government obligations;
(2) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the
laws of the United States of America, any State thereof or any foreign
country recognized by the United States of America having capital,
surplus and undivided profits aggregating in excess of $50.0 million (or
the U.S. dollar equivalent thereof) and whose long-term debt is rated
"A-" or higher (or such equivalent rating) by at least one "nationally
recognized statistical rating organization" (as defined in Rule 436 under
the Securities Act);
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(3) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (1) above entered
into with a bank meeting the qualifications described in clause (2)
above;
(4) investments in commercial paper, maturing not more than 90 days after
the date of acquisition, issued by a corporation (other than an affiliate
of Hexcel) organized and in existence under the laws of the United States
of America or any foreign country recognized by the with a rating at the
time as of which any investment therein is made of "P-1" (or higher)
according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Group; and
(5) investments in securities with maturities of six months or less from the
date of acquisition issued or fully guaranteed by any state, commonwealth
or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poors Ratings Group or "A" by Moody's Investors Service, Inc.
"UNRESTRICTED SUBSIDIARY" means:
(1) any subsidiary of Hexcel that at the time of determination shall be
designated an Unrestricted Subsidiary by the board of directors in the
manner provided below; and
(2) any subsidiary of an Unrestricted Subsidiary.
The board of directors may designate any subsidiary of Hexcel (including any
newly acquired or newly formed subsidiary) to be an Unrestricted Subsidiary
unless such subsidiary or any of its Subsidiaries owns any capital stock or
Indebtedness of, or holds any lien on any property of, Hexcel or any other
subsidiary of Hexcel that is not a subsidiary of the subsidiary to be so
designated; PROVIDED, HOWEVER, that either (A) the subsidiary to be so
designated has total assets of $1,000 or less or (B) if such subsidiary has
assets greater than $1,000, such designation would be permitted under the
covenant described under the caption "--Covenants--Limitation on Restricted
Payments."
The board of directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; PROVIDED, HOWEVER, that immediately after giving effect
to such designation (x) Hexcel could Incur $1.00 of additional Indebtedness
under paragraph (a) of the covenant described under the caption
"--Covenants--Limitation on Indebtedness" and (y) no Default shall have occurred
and be continuing. Any such designation by the board of directors shall be
evidenced to the trustee by promptly filing with the trustee a copy of the
resolution of the board of directors giving effect to such designation and an
officers' certificate certifying that such designation complied with the
foregoing provisions.
"WHOLLY OWNED SUBSIDIARY" means a Restricted Subsidiary all the capital
stock of which (other than Qualified Preferred Stock and directors' qualifying
shares) is owned by Hexcel or another Wholly Owned Subsidiary.
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BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the exchange notes will be issued in fully
registered form. Except as described below, the exchange notes initially will be
represented by one or more global notes, in definitive, fully registered form
without interest coupons. The global notes will be deposited with the trustee as
custodian for DTC and registered in the name of Cede & Co. or another nominee as
DTC may designate.
DTC has advised us as follows:
- DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a
"clearing agency" registered pursuant to the provision of Section 17A of
the Exchange Act.
- DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and other organizations.
Indirect access to the DTC system is available to others, including banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
- Upon the issuance of the global notes, DTC or its custodian will credit,
on its internal system, the respective principal amounts of the exchange
notes represented by the global notes to the accounts of persons who have
accounts with DTC. Ownership of beneficial interests in the global notes
will be limited to persons who have accounts with DTC or persons who hold
interests through the persons who have accounts with DTC. Persons who have
accounts with DTC are referred to as "participants." Ownership of
beneficial interests in the global notes will be shown on, and the
transfer of that ownership will be effected only through, records
maintained by DTC or its nominee, with respect to interests of
participants, and the records of participants, with respect to interests
of persons other than participants.
So long as DTC or its nominee is the registered owner or holder of the
global notes, DTC or the nominee, as the case may be, will be considered the
sole record owner or holder of the exchange notes represented by the global
notes for all purposes under the indenture and the exchange notes. No beneficial
owners of an interest in the global notes will be able to transfer that interest
except according to DTC's applicable procedures, in addition to those provided
for under the indenture. Owners of beneficial interests in the global notes will
not:
- be entitled to have the exchange notes represented by the global notes
registered in their names,
- receive or be entitled to receive physical delivery of certificated notes
in definitive form, and
- be considered to be the owners or holders of any exchange notes under the
global notes.
Accordingly, each person owning a beneficial interest in the global notes must
rely on the procedures of DTC and, if a person is not a participant, on the
procedures of the participant through which that person owns its interests, to
exercise any right of a holder of exchange notes under the global notes. We
understand that under existing industry practice, in the event an owner of a
beneficial interest in the global notes desires to take any action that DTC, as
the holder of the global notes, is entitled to take, DTC would authorize the
participants to take that action, and that the participants would authorize
beneficial owners owning through the participants to take that action or would
otherwise act upon the instructions of beneficial owners owning through them.
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Payments of the principal of, premium, if any, and interest on the exchange
notes represented by the global notes will be made to DTC or its nominee, as the
case may be, as the registered owner of the global notes. Neither we, the
trustee, nor any paying agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the global notes or for maintaining, supervising or
reviewing any records relating to the beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
of, premium, if any, or interest on the global notes will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
ownership interests in the principal amount of the global notes, as shown on the
records of DTC or its nominee. We also expect that payments by participants to
owners of beneficial interests in the global notes held through these
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for these customers. These payments will be the
responsibility of these participants.
Transfer between participants in DTC will be effected in the ordinary way in
accordance with DTC rules. If a holder requires physical delivery of notes in
certificated form for any reason, including to sell notes to persons in states
which require the delivery of the notes or to pledge the notes, a holder must
transfer its interest in the global notes in accordance with the normal
procedures of DTC and the procedures set forth in the indenture.
Unless and until they are exchanged in whole or in part for certificated
exchange notes in definitive form, the global notes may not be transferred
except as a whole by DTC to a nominee of DTC or by a nominee of DTC to DTC or
another nominee of DTC.
Beneficial owners of exchange notes registered in the name of DTC or its
nominee will be entitled to be issued, upon request, exchange notes in
definitive certificated form.
DTC has advised us that DTC will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below, only at the direction of one or more participants to whose account the
DTC interests in the global notes are credited. Further, DTC will take any
action permitted to be taken by a holder of notes only in respect of that
portion of the aggregate principal amount of notes as to which the participant
or participants has or have given that direction.
Although DTC has agreed to these procedures in order to facilitate transfers
of interests in the global notes among participants of DTC, it is under no
obligation to perform these procedures, and may discontinue them at any time.
Neither we nor the trustee will have any responsibility for the performance by
DTC or its participants or indirect participants of their respective obligations
under the rules and procedures governing their operations.
Subject to specified conditions, any person having a beneficial interest in
the global notes may, upon request to the trustee, exchange the beneficial
interest for exchange notes in the form of certificated notes. Upon any issuance
of certified notes, the trustee is required to register the certificated notes
in the name of, and cause the same to be delivered to, the person or persons, or
the nominee of these persons. In addition, if DTC is at any time unwilling or
unable to continue as a depositary for the global notes, and a successor
depositary is not appointed by us within 90 days, we will issue certificated
notes in exchange for the global notes.
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EXCHANGE OFFER; REGISTRATION RIGHTS
As part of the sale of the original notes to Credit Suisse First Boston
Corporation and Salomon Smith Barney Inc. pursuant to the purchase agreement,
dated January 15, 1999, among Hexcel and the initial purchasers, the holders of
the original notes became entitled to the benefits of the registration rights
agreement, dated as of January 21, 1999 by and among Hexcel and the initial
purchasers.
Under the registration rights agreement, we have agreed to use our best
efforts:
- to file a registration statement with the SEC in connection with a
registered offer to exchange the original notes for new 9 3/4% Senior
Subordinated Notes due 2009, having terms substantially identical in all
material respects to the original notes, except that the exchange notes
will not contain transfer restrictions, within 90 days after January 21,
1999, the date the original notes were issued;
- to cause the registration statement to become effective within 180 days
after the issuance of the original notes;
- to offer the exchange notes in exchange for surrender of the original
notes, as soon as practicable after the effectiveness of the registration
statement; and
- to keep the exchange offer open for not less than 30 days--or longer if
required by applicable law--after the date notice of the exchange offer is
mailed to the holders of the original notes.
The exchange offer being made by this prospectus, if consummated within the
required time periods, will satisfy our obligations under the registration
rights agreement. We understand that there are approximately 30 beneficial
owners of original notes. This prospectus, together with the letter of
transmittal, is being sent to all the beneficial holders known to us. For each
original note validly tendered to us in the exchange offer and not withdrawn by
the holder of the original note, the holder will receive an exchange note having
a principal amount equal to that of the tendered original note. Interest on each
exchange note will accrue from the last interest payment date on which interest
was paid on the tendered original note in exchange for an exchange note or, if
no interest has been paid on the original note, from the date of the original
issue of the original note.
Based on an interpretation of the Securities Act by the staff of the SEC set
forth in several no-action letters to third parties, and subject to the
immediately following sentence, we believe that the exchange notes issued in the
exchange offer may be offered for resale, resold and otherwise transferred by
holders of the exchange notes without further compliance with the registration
and prospectus delivery provisions of the Securities Act. However, any purchaser
of original notes who is an "affiliate" of ours or who intends to participate in
the exchange offer for the purpose of distributing the exchange notes:
(1) will not be able to rely on the interpretation by the staff of the SEC
set forth in the above referenced no-action letters,
(2) will not be able to tender original notes in the exchange offer, and
(3) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or transfer of the notes,
unless the sale or transfer is made under an exemption from these requirements.
Each holder of the original notes who wishes to exchange original notes for
exchange notes in the exchange offer will be required to make representations,
including that:
- it is neither our affiliate nor a broker-dealer tendering notes acquired
directly from us for its own account;
- any exchange notes to be received by it were acquired in the ordinary
course of its business; and
- at the time of commencement of the exchange offer, it has no arrangement
with any person to participate in the distribution, within the meaning of
the Securities Act, of the exchange notes.
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In addition, in connection with any resales of exchange notes, any
participating broker-dealer who acquired the exchange notes for its own account
as a result of market-making activities or other trading activities must deliver
a prospectus meeting the requirements of the Securities Act. The SEC has taken
the position that participating broker-dealers may fulfill their prospectus
delivery requirements, except for the resale of an unsold allotment from the
original sale of the original notes, with the prospectus contained in the
registration statement. Under the registration rights agreement, we are required
to allow participating broker-dealers and other persons, if any, subject to
similar prospectus delivery requirements to use the prospectus contained in the
registration statement for the resale of exchange notes.
In the event that applicable interpretations of the staff of the SEC do not
permit us to effect the exchange offer, or if for any other reason we do not
consummate the exchange offer within 180 days of the date of the registration
rights agreement, or if an initial purchaser notifies us within 10 business days
following consummation of the exchange offer that notes held by it are not
eligible for exchange in the exchange offer, or if any holder notifies us that
it:
(1) is prohibited by law or SEC policy from participating in the exchange
offer;
(2) may not resell the exchange notes acquired in the exchange offer to the
public without delivering a prospectus and this prospectus is not appropriate or
available for the resales by the holder; or
(3) is a broker-dealer and holds notes that are part of an unsold allotment
from the original sale of the notes, then, we have agreed:
- to file a shelf registration statement as promptly as practicable,
covering resales of the original notes or the exchange notes, as the case
may be;
- to use our best efforts to cause the shelf registration statement to be
declared effective under the Securities Act; and
- to keep the shelf registration statement effective until the earliest of
(A) the time when the notes covered by the shelf registration statement
can be sold pursuant to Rule 144 without any limitations under clauses
(c), (e), (f) and (h) of Rule 144, (B) two years from the effective date
and (C) the date on which all notes registered under the shelf
registration statement are disposed of in accordance with the shelf
registration statement.
We have agreed to pay additional cash interest on the notes if:
(1) by April 21, 1999--90 days after the issuance of the original
notes--neither the registration statement nor the shelf registration statement
is filed with the SEC;
(2) by July 20, 1999--180 days after the issue date--the exchange offer is
not consummated and, if applicable, the shelf registration statement is not
declared effective; or
(3) after either the registration statement or the shelf registration
statement is declared effective, the registration statement thereafter ceases to
be effective or usable, subject to noted exceptions. The rate of the additional
interest will be 0.50% per annum following the occurrence of a registration
default, until all registration defaults have been cured, subject to noted
exceptions.
Interest on each exchange note will accrue from January 21, 1999 or from the
most recent interest payment date to which interest was paid on the original
note surrendered in exchange for the exchange note or on the exchange note, as
the case may be. The exchange notes will bear interest at 9 3/4% per annum,
except that, if any interest accrues on the exchange notes in respect of any
period prior to their issuance, interest will accrue at the rate or rates borne
by the notes from time to time during that period. If we effect the exchange
offer, we will be entitled to close the exchange offer 30 days after the
commencement of the offer, provided that we have accepted all notes validly
tendered in accordance with the terms of the exchange offer.
The summary in this prospectus of these provisions of the registration
rights agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
registration rights agreement, which is filed as an exhibit to the registration
statement to which this prospectus forms a part.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 29, 1996, Hexcel completed transactions with Ciba Geigy Limited,
as a result of which Hexcel acquired the Ciba composites business in accordance
with the terms and conditions of the strategic alliance agreement, the
governance agreement, a registration rights agreement, a distribution agreement
and other agreements.
On December 20, 1996, Ciba Geigy and Sandoz Limited combined to form
Novartis Inc., a Swiss corporation. Before the business combination, Ciba Geigy
formed a new subsidiary, Ciba. On March 13, 1997, all of Ciba Geigy's interest
in Hexcel was transferred to Ciba, including all of its direct or indirect
interest in Hexcel's common stock, the Ciba senior subordinated debt and all of
its rights and obligations under the agreements.
THE STRATEGIC ALLIANCE AGREEMENT
Under the strategic alliance agreement, Hexcel acquired the assets,
including the capital stock of a number of non-U.S. subsidiaries, and assumed
the liabilities of the Ciba composites business. Some assets and liabilities
were excluded. In exchange, Ciba received:
- 18.0 million newly issued shares of Hexcel's common stock, representing
beneficial ownership of approximately 49.6% of Hexcel's outstanding common
stock,
- $25.0 million in cash,
- senior subordinated notes in an aggregate principal amount of $37.5
million, and
- senior demand notes in an aggregate principal amount of $5.3 million.
The aggregate purchase price for the net assets acquired from Ciba in 1996 was
$208.7 million.
THE GOVERNANCE AGREEMENT
Under the governance agreement, Hexcel's board of directors was
reconstituted. In addition, as of the closing of the Ciba acquisition, key
employees of the Ciba composites business became executive officers of Hexcel.
CORPORATE GOVERNANCE
Hexcel has agreed to cause any slate of nominees for election to the board
of directors to consist of specified numbers of Ciba nominees and independent
nominees. The precise number of Ciba nominees and independent nominees to be
included in any slate of nominees varies based on Ciba's percentage ownership of
Hexcel. The governance agreement further provides that (1) while Ciba
beneficially owns 40% or more of the voting securities of Hexcel, each committee
of the board of directors will consist of an equal number of Ciba directors and
independent directors and (2) at all other times, each committee will be
comprised so that Ciba's representation is at least proportionate to its
representation on the board of directors. If the committee is comprised of three
members or less, at least one Ciba director will serve.
New directors chosen to fill vacancies on the board of directors will be
selected as follows:
- if the new director is to be a Ciba director, then Ciba will designate the
new director;
- if the former director was the chairman or president, the replacement
chairman or president will be the replacement director; and
- if the new director is to be an independent director, other than the
chairman or the president, the remaining independent directors, including
the chairman and the president if he or she is an independent director,
will designate the new director.
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If the percentage of the total voting power of Hexcel beneficially owned by
Ciba decreases to a point at which the number of Ciba directors would decrease,
Ciba will cause a sufficient number of Ciba directors to resign from the board
of directors. Any vacancies created by these resignations would be filled by
independent directors.
APPROVALS
When Ciba beneficially owns 40% or more of the voting securities of Hexcel,
neither the board of directors nor any committee of the board will take any
action, including the approval, authorization or ratification of any action or
inaction by officers, agents or employees of Hexcel, without the affirmative
vote of at least one Ciba director and one independent director.
In addition, when Ciba beneficially owns at least 33% of the voting
securities of Hexcel, the board of directors will not authorize, approve or
ratify any of the following actions without the approval of a majority of the
Ciba directors:
- any merger, acquisition or other business combination involving Hexcel or
any subsidiary if the value of the consideration paid or received by
Hexcel in the individual transaction or the aggregate consideration paid
or received by Hexcel in all the transactions approved by the board of
directors during the prior 12 months exceeds the greater of $75 million or
11% of Hexcel's total consolidated assets;
- any sale, transfer, lease or other disposition or series of related
dispositions of assets of Hexcel or any of its subsidiaries, if the value
of the assets so disposed exceeds the greater of $75 million or 11% of
Hexcel's total consolidated assets;
- any issuance by Hexcel or any significant subsidiary of Hexcel of equity
securities, other than under customary stock option or incentive
compensation plans and other than transactions solely among Hexcel and its
subsidiaries, or any other bonds, debentures, notes or securities
convertible into, exchangeable for or exercisable for equity securities if
the aggregate net proceeds to Hexcel of the issuance or of the issuance
when added to the aggregate net proceeds to Hexcel of all the issuances
approved by the board of directors during the prior 12 months exceeds the
greater of $75 million or 11% of Hexcel's total consolidated assets; and
- any new capital expenditure program or any capital expenditure that is not
part of a capital expenditure program previously approved by the board of
directors, if the amount of the program or expenditure or of the program
or expenditure when added to the aggregate amount of capital expenditures
not approved by the board of directors during the prior 12 months exceeds
the greater of $50 million or 7% of Hexcel's total consolidated assets.
Under the terms of the governance agreement, Ciba has agreed that, until the
percentage of the total voting power of Hexcel beneficially owned by Ciba falls
below either (1) 15% if there is on file with the SEC any statement showing that
a person other than Ciba beneficially owns 10% or more of the total voting power
of Hexcel or (2) 10% in all other cases, in any election of directors or any
meeting of stockholders of Hexcel called expressly for the removal of directors,
Ciba will be present for purposes of establishing a quorum and will vote all of
its voting securities of Hexcel in favor of any nominee or director selected and
against the removal of any director designated. In any other matter submitted to
a vote of the stockholders of Hexcel, Ciba will be present for purposes of
establishing a quorum and will vote all of its voting securities of Hexcel
either as recommended by the board of directors or in proportion to the votes
cast with respect to the voting securities of Hexcel not beneficially owned by
Ciba. However, Ciba will be free to vote in its sole discretion on the following
matters submitted to stockholders if the matters were not submitted to
stockholders at the request of Ciba:
- any amendment to Hexcel's Certificate of Incorporation;
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- any merger, consolidation, acquisition or other business combination
involving Hexcel or any of its subsidiaries;
- any sale, lease, transfer or other disposition of the business operations
or assets of Hexcel;
- any recapitalization, restructuring or similar transaction or series of
transactions involving Hexcel or any significant subsidiary of Hexcel;
- any dissolution or complete or partial liquidation or similar arrangement
of Hexcel or any significant subsidiary of Hexcel, subject to exceptions;
- issuances of equity securities or securities convertible into or
exchangeable or exercisable for equity securities; and
- entering into any material joint venture, collaboration or partnership by
Hexcel or any of its subsidiaries.
STANDSTILL
Ciba has agreed, subject to specified exceptions, that it will not:
- purchase or otherwise acquire any beneficial ownership of voting
securities of Hexcel;
- enter into, solicit or support any merger or business combination
involving Hexcel or purchase, acquire, or solicit or support the purchase
or acquisition of any portion of the business or assets of Hexcel, except
in the ordinary course of business or in nonmaterial amounts;
- initiate or propose any security holder proposal without the approval of
the board of directors or make, or in any way participate in, any
solicitation of proxies, as these terms are used in Section 14 of the
Exchange Act, to vote or seek to advise or influence any person or entity
with respect to the voting of any voting securities of Hexcel or request
or take any action to obtain any list of security holders for such
purposes with respect to any matter other than those with respect to which
Ciba may vote in their sole discretion under the governance agreement;
- form or otherwise participate in a group formed for the purpose of
acquiring, holding, voting, disposing of or taking any action with respect
to Hexcel's voting securities that would be required under Section 13(d)
of the Exchange Act to file a statement on Schedule 13D with the SEC;
- deposit any voting securities of Hexcel in a voting trust or enter into
any voting agreement other than the governance agreement;
- seek representation on the board of directors, remove a director or seek a
change in the size or composition of the board of directors;
- make any request to amend or waive the provisions of the governance
agreement referred to in this paragraph that would require public
disclosure;
- disclose any intent, purpose, plan, arrangement or proposal inconsistent
with the actions listed above, or take any action that would require
public disclosure of any such intent, purpose, plan, arrangement or
proposal;
- take any action challenging the validity or enforceability of the actions
listed above; or
- assist, advise, encourage or negotiate with respect to or seek to do any
of the actions listed above.
The governance agreement permits Ciba to purchase or otherwise acquire
beneficial ownership of Hexcel's voting securities in open market purchases so
long as after giving effect to the purchases the
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percentage of the total voting power of Hexcel beneficially owned by Ciba does
not exceed the greater of:
- 57.5% and
- the highest percentage of the total voting power of Hexcel beneficially
owned by Ciba immediately following any action by Hexcel that increases
the percentage of the total voting power of Hexcel beneficially owned by
Ciba due to a reduction in the amount of voting securities of Hexcel
outstanding as a result of that action.
BUYOUT TRANSACTIONS
After February 28, 2001, Ciba may propose, participate in or support
completion of a tender offer, merger or sale of substantially all of Hexcel's
assets or similar transaction, including a transaction with Ciba, if each
stockholder other than Ciba is entitled to receive upon completion of the
transaction consideration that is:
- approved by (1) a majority of the independent directors acting solely in
the interests of the other holders after the receipt of an opinion of an
independent nationally recognized investment banking firm or (2) a
majority of the other holders by means of a stockholder vote solicited
pursuant to a proxy statement containing the information required under
the Exchange Act and
- fair from a financial point of view to the other holders in the opinion of
an independent nationally recognized investment banking firm, including a
firm retained by Ciba.
ISSUANCE OF ADDITIONAL SECURITIES
For so long as Ciba is entitled to designate one or more nominees for
election to the board of directors, if Hexcel issues any additional voting
securities for cash, Ciba will have the option to purchase, for the same
consideration, an amount of voting securities that would allow Ciba to
beneficially own the same percentage of the total voting power of Hexcel after
the issuance as Ciba beneficially owned immediately prior to the issuance.
However, Ciba will not have this option if Hexcel issues voting securities in
connection with employee or director stock option or incentive compensation
plans.
THIRD PARTY OFFERS
If Hexcel becomes the subject of a bona fide offer to enter into a buyout
transaction by a person other than Ciba or any other person acting on behalf of
Ciba that is approved by two-thirds of Hexcel's independent directors, Ciba will
either (1) offer to acquire the voting securities of Hexcel held by the other
holders on terms at least as favorable to the other holders as those
contemplated by the third party offer or (2) support the third party offer, or
an alternative third party offer providing greater value to the other holders,
by voting all its voting securities of Hexcel in favor of the third party offer
or, if applicable, tendering or selling all its voting securities of Hexcel to
the person making the third party offer. In the event that Hexcel becomes the
subject of a third party offer, Ciba may not support or vote in favor of the
third party offer or tender or sell its voting securities of Hexcel to the
person making the third party offer unless the offer is approved by (1) a
majority of the independent directors acting solely in the interests of the
other holders or (2) a majority in interest of the other holders in a
stockholder vote.
TRANSFER RESTRICTIONS
Except in connection with a third party offer that has been approved by the
independent directors or the other holders, Ciba is not permitted to sell,
transfer or otherwise dispose of any voting securities of Hexcel except:
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- transfers solely among Ciba and its wholly owned subsidiaries,
- in accordance with the volume and manner-of-sale limitations of Rule 144
under the Securities Act, and otherwise subject to compliance with the
Securities Act, or
- in a registered public offering or a non-registered offering subject to an
applicable exemption from the registration requirements of the Securities
Act.
In the case of clauses (2) and (3), Ciba must act in a manner calculated to
achieve a broad distribution.
In addition Ciba will not permit any subsidiary of Ciba that is not wholly
owned to become a Ciba entity, or dispose of any of the capital stock of any
Ciba entity except to another direct or indirect wholly owned subsidiary of
Ciba. This provision does not, however, prohibit Ciba from effecting a pro rata
distribution to Ciba's stockholders or a sale in a manner calculated to achieve
a broad distribution of up to 20%, in each case, of the equity securities of a
Ciba entity if:
- the distribution or sale has a bona fide business purpose, other than the
sale or distribution of the voting securities,
- the voting securities of Hexcel beneficially owned by the Ciba entity do
not constitute a material portion of the total assets of the Ciba entity,
and
- in the case of a pro rata distribution to Ciba's stockholders, the Ciba
entity agrees in writing to be bound by the terms and provisions of the
governance agreement.
TERMINATION; EXTENSION
On February 28, 2006, or at the end of any subsequent renewal period, if the
percentage of the total voting power of Hexcel beneficially owned by Ciba is
greater than 10% but less than 100%, Ciba will have the option to:
- extend the governance agreement for an additional two year period, in
which case so long as Ciba beneficially owns voting securities of Hexcel
representing 25% or more of the total voting power of Hexcel, on one
occasion during such two-year period Ciba may require Hexcel to solicit in
good faith a buyout transaction in which Ciba and the other holders
receive the same consideration per voting security of Hexcel, or
- undertake to sell a sufficient number of voting securities of Hexcel so
that the percentage of total voting power of Hexcel beneficially owned by
Ciba falls below 10% during the subsequent 18 months pursuant to one or
more registered or non-registered offerings calculated to achieve a broad
distribution.
If Ciba exercises its option to require Hexcel to solicit a buyout transaction
as described above, Ciba may vote in favor of or sell its voting securities in
response to any third party offer made as a result of solicitation so long as
the third party offer offers the same consideration to the other holders. Unless
Hexcel has accepted another third party offer providing at least equivalent
value to all Hexcel stockholders, Hexcel will not take any action to interfere
with Ciba's right to vote in favor of or tender into the third party offer.
However, Hexcel will remain free to pursue alternative third party offers that
provide for at least equivalent currently realizable value to all Hexcel
stockholders, as the previously proposed third party offer.
The governance agreement will automatically terminate at any time that Ciba
beneficially owns either 100% or less than 10% of the total voting power of
Hexcel.
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THE DISTRIBUTION AGREEMENT
Under the strategic alliance agreement, Hexcel and Ciba Geigy entered into
the distribution agreement, which was assigned to Ciba according to the Hexcel
consent letter. Under these agreements, Hexcel primarily acquired inventory and
fixed assets of these distributors for an aggregate purchase price of
approximately $2.5 million, which amount was paid by the issuance to Ciba of a
senior subordinated note.
THE REGISTRATION RIGHTS AGREEMENT
In connection with the acquisition, Hexcel and Ciba Geigy entered into a
registration rights agreement, which was assigned to Ciba according to the
Hexcel consent letter. The Ciba rights agreement provides that Hexcel will
prepare and, not later than 60 days after a request from Ciba, file with the SEC
a shelf registration statement covering the shares of Hexcel common stock
beneficially owned by Ciba. Ciba's shares of Hexcel common stock will generally
become eligible for sale under the Ciba registration rights agreement in four
equal annual installments commencing on March 1, 1998. Ciba also has the right,
subject to restrictions, to include its shares of Hexcel common stock eligible
for sale under the Ciba registration rights agreement in equity offerings of
Hexcel. The agreement also contains provisions relating to blackout periods
during which Ciba would not be permitted to sell shares of Hexcel common stock
otherwise eligible for sale under the agreement.
THE SUPPLY AND MANUFACTURING AGREEMENTS
Hexcel and CGL have entered into various agreements and purchase orders,
some of which were entered into in connection with the Ciba acquisition. Under
these agreements, Hexcel and Ciba have purchased products from each other. Sales
to Hexcel under these agreements were approximately $37.7 million on a worldwide
basis in 1998. Hexcel sold no products to Ciba in 1998.
We believe that the terms of the supply and manufacturing agreements between
Hexcel and Ciba are as fair to Hexcel as terms that may have been obtained from
unaffiliated third parties.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material United States federal
income tax consequences associated with the exchange of the original notes for
the exchange notes in the exchange offer and the ownership and disposition of
the exchange notes. This summary applies only to a holder of an exchange note
who acquired an original note at the initial offering from an initial purchaser
for the original offering price and who acquires the exchange note in the
exchange offer. This discussion is based on provisions of the Internal Revenue
Code, Treasury regulations, and administrative and judicial interpretations of
the Code and the regulations, all as currently in effect and all of which are
subject to change, possibly with retroactive effect. This discussion does not
address the tax consequences to subsequent purchasers of the exchange notes and
is limited to investors who hold the exchange notes as capital assets. The tax
treatment of the holders of the notes may vary depending upon their particular
situations. In addition, holders, including insurance companies, tax exempt
organizations, financial institutions and broker-dealers, may be subject to
special rules not discussed below. EACH HOLDER SHOULD CONSULT ITS TAX ADVISOR
REGARDING THE PARTICULAR TAX CONSEQUENCES TO THE HOLDER OF THE EXCHANGE OF THE
ORIGINAL NOTES FOR THE EXCHANGE NOTES IN THE EXCHANGE OFFER AND THE OWNERSHIP
DISPOSITION OF THE EXCHANGE NOTES, AS WELL AS ANY TAX CONSEQUENCES THAT MAY
ARISE UNDER THE LAWS OF ANY RELEVANT FOREIGN, STATE, LOCAL OR OTHER TAXING
JURISDICTION.
UNITED STATES TAXATION OF UNITED STATES HOLDERS
The term United States holder means a holder of an exchange note that is,
for United States federal income tax purposes:
- a citizen or resident of the United States,
- a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision of the United States,
- an estate the income of which is subject to United States federal income
taxation regardless of its source and
- a trust if a United States court is able to exercise primary supervision
over the administration of that trust and one or more United States
persons have the authority to control all substantial decisions of the
trust. The term non-U.S. holder means a holder of an exchange note that is
not a United States holder.
EXCHANGE OFFER
The exchange of an original note for an exchange note in the exchange offer
will not constitute a significant modification of the original note for United
States federal income tax purposes. Therefore, the exchange note received will
be treated as a continuation of the original note in the hands of the holder. As
a result, there will be no United States federal income tax consequences to a
United States holder who exchanges an original note for an exchange note in the
exchange offer and that holder will have the same adjusted tax basis and holding
period in the exchange note as it had in the original note immediately before
the exchange.
STATED INTEREST
Stated interest payable on an exchange note generally will be included in
the gross income of a United States holder as ordinary interest income at the
time accrued or received, according to the United States holder's method of
accounting for United States federal income tax purposes.
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DISPOSITION OF THE EXCHANGE NOTES
Upon the sale, exchange, retirement at maturity or other taxable disposition
of an exchange note, a United States holder generally will recognize capital
gain or loss equal to the difference between the amount realized by the holder,
except to the extent that amount is attributable to accrued interest, which will
be treated as ordinary interest income, and the holder's adjusted tax basis in
the exchange note. The capital gain or loss will be long-term capital gain or
loss if the United States holder's holding period for the exchange note exceeds
one year at the time of the disposition.
UNITED STATES TAXATION OF NON-U.S. HOLDERS
STATED INTEREST
In general, payments of interest received by a non-U.S. holder will not be
subject to United States federal withholding tax, provided that:
- (1) the non-U.S. holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of Hexcel
entitled to vote, (2) the non-U.S. holder is not a controlled foreign
corporation that is related to Hexcel actually or constructively through
stock ownership, and (3) the beneficial owner of the exchange note, under
penalty of perjury, either directly or through a financial institution
which holds the exchange note on behalf of the non-U.S. holder and holds
customers' securities in the ordinary course of its trade or business,
provides Hexcel or its agent with the beneficial owner's name and address
and certifies, under penalty of perjury, that it is not a United States
holder;
- the interest received on the exchange note is effectively connected with
the conduct by the non-U.S. holder of a trade or business within the
United States and the non-U.S. holder complies with various reporting
requirements; or
- the non-U.S. holder is entitled to the benefits of an income tax treaty
under which the interest is exempt from United States withholding tax and
the non-U.S. holder complies with various reporting requirements. Payments
of interest not exempt from United States federal withholding tax as
described above will be subject to withholding tax at the rate of 30%
(subject to reduction under an applicable income tax treaty).
GAIN ON DISPOSITION
A non-U.S. holder generally will not be subject to U.S. federal income tax
with respect to gain recognized on a sale, redemption or other disposition of an
exchange note unless:
- the gain is effectively connected with the conduct of a trade or business
within the United States by the non-U.S. holder or
- in the case of a non-U.S. holder who is a nonresident alien individual,
the holder is present in the United States for 183 or more days in the
taxable year and other requirements are met. In addition, an exchange of
an original note for an exchange note in the exchange offer will not
constitute a taxable exchange of the original note for non-U.S. holders.
See "--United States Taxation of United States Holders--Exchange Offer"
above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Non-corporate United States holders may be subject to backup withholding at
a rate of 31% on payments of principal, premium, if any, and interest on, and
the proceeds of the disposition of, the notes. In general, backup withholding
will be imposed if the United States holder:
125
<PAGE>
- fails to furnish its taxpayer identification number, which, for an
individual, would be the holder's Social Security number,
- furnishes an incorrect taxpayer identification number,
- is notified by the IRS that the holder has failed to report payments of
interest or dividends or
- under specified circumstances, fails to certify, under penalty of perjury,
that the holder has furnished a correct taxpayer identification number and
has been notified by the IRS that the holder is subject to backup
withholding tax for failure to report interest or dividend payments. In
addition, these payments of principal premium and interest to United
States holders will generally be subject to information reporting. United
States holders should consult their tax advisors regarding their
qualification for exemption from backup withholding and the procedure for
obtaining this exemption, if applicable.
Backup withholding generally will not apply to payments made to a non-U.S.
holder of an exchange note who provides the certification described under
"--United States Taxation of Non-U.S. Holders--Stated Interest" or otherwise
establishes an exemption from backup withholding. Payments by a United States
office of a broker of the proceeds of a disposition of the exchange notes
generally will be subject to backup withholding at a rate of 31% unless the
non-United States holder certifies it is a non-U.S. holder under penalties of
perjury or otherwise establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the holder's U.S.
federal income tax liability, provided that the required information is
furnished to the IRS.
NEW TREASURY REGULATIONS
New final Treasury regulations governing information reporting and the
certification procedures regarding withholding and backup withholding on amounts
paid to non-U.S. holders after December 31, 1999 generally would not alter the
treatment of non-U.S. holders described above. The new Treasury regulations
would alter the procedures for claiming the benefits of an income tax treaty and
may change the certification procedures relating to the receipt by
intermediaries of payments on behalf of a non-U.S. holder of an exchange note.
Holders should consult their tax advisors concerning the effect, if any, of
these new Treasury regulations on an investment in the exchange notes.
126
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of the exchange notes. This prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for original notes where the
original notes were acquired as a result of market-making activities or other
trading activities. Hexcel has agreed that, for a period of 180 days after the
expiration date of the exchange offer, it will make this prospectus, available
to any broker-dealer for use in connection with any resale. In addition, until
July 20, 1999, all dealers effecting transactions in the exchange notes may be
required to deliver a prospectus.
Hexcel will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
in the exchange offer may be sold from time to time in one or more transactions
in the over-the-counter market, in negotiated transactions, through the writing
of options on the exchange notes or a combination of these methods of resale.
These resales may be made at market prices prevailing at the time of resale, at
prices related to these prevailing market prices or negotiated prices. Any
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
broker-dealer or the purchasers of any of the exchange notes. Any broker-dealer
that resells exchange notes that were received by it for its own account in the
exchange offer and any broker or dealer that participates in a distribution of
the exchange notes may be deemed to be an underwriter within the meaning of the
Securities Act, and any profit on the resale of exchange notes and any
commission or concessions received by those persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
underwriter within the meaning of the Securities Act.
For a period of 180 days after the expiration date of the exchange offer,
Hexcel will promptly send additional copies of this prospectus and any amendment
or supplement to this prospectus to any broker-dealer that requests these
documents in the letter of transmittal. Hexcel has agreed to pay all expenses
incident to the exchange offer, including the expenses of one counsel for the
holders of the notes, other than commissions or concessions of any brokers or
dealers. Hexcel will indemnify the holders of the notes, including any
broker-dealers, against various liabilities, including liabilities under the
Securities Act.
127
<PAGE>
LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York will pass upon
the validity and enforceability of the exchange notes.
EXPERTS
The consolidated financial statements of Hexcel Corporation as of December
31, 1998 and 1997 and for each of the two years in the period ended December 31,
1998 included in this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The consolidated financial statements of Hexcel Corporation for the year
ended December 31, 1996 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
in this prospectus, and are included in reliance upon the report of said firm
given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Clark-Schwebel Holdings, Inc. as of
and for the years ended December 28, 1996 and January 3, 1998, included in this
prospectus, were audited by Arthur Andersen LLP, independent accountants, as
stated in their report appearing in this prospectus, and are included in
reliance upon the reports of said firm given upon their authority as experts in
accounting and auditing. The consolidated financial statements of Clark-Schwebel
Holdings, Inc. for the year ended December 30, 1995, included in this
prospectus, were audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing in this prospectus, and are included in
reliance upon the report of said firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-4 under the
Securities Act of 1933, covering the notes to be issued in the exchange offer
(File No. 333-71601). This prospectus does not contain all of the information
included in the registration statement. If we have filed any contract, agreement
or other document as an exhibit to the registration statement, you should read
the exhibit for a more complete understanding of the document or matter
involved.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the registration statement,
including the attached exhibits, and any reports, statements or other
information filed by us at the SEC's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. Our
filings with the SEC are also available to the public from commercial document
retrieval services and at the SEC's Web site at "http://www.sec.gov."
This prospectus incorporates by reference the following documents (File No.
1-8472) filed by Hexcel with the SEC:
- Annual Report on Form 10-K for the fiscal year ended December 31, 1997;
- Annual Report on Form 10-K for the fiscal year ended December 31, 1998;
- Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31,
1998, June 30, 1998, September 30, 1998 and March 31, 1999; and
- Current Reports on Form 8-K dated July 30, 1998, August 11, 1998,
September 24, 1998, October 9, 1998, October 22, 1998, November 12, 1998,
December 29, 1998, January 4, 1999 and January 25, 1999, March 17, 1999,
March 29, 1999 and April 30, 1999.
128
<PAGE>
In addition, all reports and other documents we subsequently file under
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act will be deemed to be
incorporated by reference into this prospectus and to be part of this prospectus
from the date we subsequently file the reports and documents.
Any statements contained in a document incorporated or deemed to be
incorporated by reference into this prospectus are deemed to be modified or
superseded for purposes of this prospectus to the extent modified or superseded
by another statement contained in any subsequently filed document also
incorporated by reference in this prospectus. Any statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute part of this prospectus.
You may also access copies of these filings at our website at
"http://www.Hexcel.com." In addition, you may request a copy of any of these
filings, at no cost, by writing or telephoning us at the following address or
phone number:
Hexcel Corporation
Two Stamford Plaza
281 Tresser Blvd.
Stamford, Connecticut 06901
(203) 969-0666
Attention: Investor Relations
129
<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. Woven Aramid fabrics are used in both ballistic and
composite materials applications.
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.
KOREX-REGISTERED TRADEMARK---DuPont's registered trademark for honeycomb
made from high temperature resistant Kevlar-Registered Trademark- aramid papers.
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.
PCBS--Printed circuit boards (also known as printed wiring boards) contain
high pressure laminates derived from fiberglass fabric on which are mounted and
interconnected semiconductors, passive electronic devices and other electronic
components.
130
<PAGE>
PAN (POLYACRYLONITRILE)--A material used as a base or precursor material in
the manufacture of certain carbon fibers.
POLYETHYLENE--A common plastic made by polymerizing ethylene which is used
widely in packaging and consumer products.
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.
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.
REDUX-REGISTERED TRADEMARK---A registered trademark exclusively licensed by
Hexcel for one of Hexcel's lines of adhesives and primers.
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.
S-2-REGISTERED TRADEMARK- FIBERGLASS--A type of high modulus glass fiber.
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.
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.
THORSTRAND-REGISTERED TRADEMARK---A family of electrically conductive
fabrics woven by Hexcel from metallized yarns.
131
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF HEXCEL CORPORATION
Report of Independent Accountants.......................................................................... F-2
Independent Auditors' Report............................................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. F-4
Consolidated Statements of Operations for the three years ended December 31, 1998........................ F-5
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1998.............. F-6
Consolidated Statements of Cash Flows for the three years ended December 31, 1998........................ F-7
Notes to the Consolidated Financial Statements........................................................... F-8
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HEXCEL CORPORATION
Condensed Consolidated Balance Sheets--March 31, 1999 (unaudited) and December 31, 1998.................... F-39
Condensed Consolidated Statements of Operations (unaudited)--The Three-Months Ended March 31, 1999 and
1998..................................................................................................... F-40
Condensed Consolidated Statements of Cash Flows (unaudited)--The Three-Months Ended March 31, 1999 and
1998..................................................................................................... F-41
Notes to Condensed Consolidated Financial Statements....................................................... F-42
CONSOLIDATED FINANCIAL STATEMENTS OF CLARK-SCHWEBEL HOLDINGS, INC.
Report of Independent Public Accountants................................................................... F-51
Independent Auditors' Report............................................................................... F-52
Consolidated Balance Sheets as of December 28, 1996, and January 3, 1998................................... F-53
Consolidated Statements of Income for the year ended December 30, 1995, the two periods in the year ended
December 28, 1996 and the year ended January 3, 1998..................................................... F-54
Consolidated Statements of Cash Flows for the year ended December 30, 1995, the two periods in the year
ended December 28, 1996 and the year ended January 3, 1998............................................... F-55
Notes to Consolidated Financial Statements................................................................. F-56
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF CLARK-SCHWEBEL HOLDINGS, INC.
Consolidated Balance Sheets as of January 3, 1998 and July 4, 1998 (unaudited)............................. F-72
Consolidated Statements of Income for the Six months ended June 28, 1997 (unaudited) and July 4, 1998
(unaudited).............................................................................................. F-73
Consolidated Statements of Stockholders' Equity and Comprehensive Income as of January 3, 1998 and July 4,
1998 (unaudited)......................................................................................... F-74
Consolidated Statements of Cash Flows for the Six Months ended June 28, 1997 (unaudited) and July 4, 1998
(unaudited).............................................................................................. F-75
Notes to Condensed and Consolidated Financial Statements................................................... F-76
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Hexcel Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Hexcel
Corporation and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The financial
statements of Hexcel Corporation for the year ended December 31, 1996 were
audited by other independent accountants whose report dated February 28, 1997
expressed an unqualified opinion on those statements.
/S/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 21, 1999, except as to
Ciba Senior Subordinated Notes Payable and
Aggregate Maturities of Notes Payable and
Indebtedness to Related Parties in Note 7,
which are as of February 17, 1999
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Hexcel Corporation:
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Hexcel Corporation and subsidiaries for the year ended
December 31, 1996. These financial statements are the responsibility of Hexcel's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Hexcel
Corporation and subsidiaries for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Oakland, California
February 28, 1997
F-3
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 7,504 $ 9,033
Accounts receivable................................................................ 188,368 181,192
Inventories........................................................................ 213,199 165,321
Prepaid expenses and other assets.................................................. 10,111 6,665
Deferred tax asset................................................................. 19,844 24,839
------------ ------------
Total current assets............................................................... 439,026 387,050
------------ ------------
Property, plant and equipment........................................................ 628,533 488,916
Less accumulated depreciation........................................................ (195,960) (157,439)
------------ ------------
Net property, plant and equipment.................................................. 432,573 331,477
Goodwill and other purchased intangibles, net of accumulated amortization of $11,742
in 1998 and $4,657 in 1997......................................................... 425,405 67,184
Investment in affiliated companies and other assets.................................. 107,157 25,875
------------ ------------
Total assets....................................................................... $1,404,161 $ 811,586
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations.................. $ 26,867 $ 13,858
Accounts payable................................................................... 81,869 70,011
Accrued compensation and benefits.................................................. 42,172 37,306
Other accrued liabilities.......................................................... 68,536 65,181
------------ ------------
Total current liabilities.......................................................... 219,444 186,356
------------ ------------
Long-term notes payable and capital lease obligations 802,376 304,546
Indebtedness to related parties...................................................... 35,675 34,967
Other non-current liabilities 44,267 35,816
------------ ------------
Total liabilities.................................................................. 1,101,762 561,685
------------ ------------
Commitments and contingent liabilities (see notes)
Stockholders' equity:
Preferred stock, no par value, 20,000 stock authorized, no stock issued or
outstanding in 1998 and 1997..................................................... -- --
Common stock, $0.01 par value, 100,000 stock authorized, stock issued and
outstanding of 37,176 in 1998 and 36,891 in 1997................................. 372 369
Additional paid-in capital 271,469 266,830
Retained earnings (accumulated deficit)............................................ 34,898 (15,541)
Accumulated other comprehensive income (loss)...................................... 6,313 (1,104)
------------ ------------
313,052 250,554
Less--treasury stock, at cost, 847 stock in 1998, 35 stock in 1997 (10,653) (653)
------------ ------------
Total stockholders' equity......................................................... 302,399 249,901
------------ ------------
Total liabilities and stockholders' equity......................................... $1,404,161 $ 811,586
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net sales.................................................................. $ 1,089,044 $ 936,855 $ 695,251
Cost of sales.............................................................. 817,785 714,223 553,942
------------ ---------- ----------
Gross margin............................................................. 271,259 222,632 141,309
Selling, general and administrative expenses............................... 117,885 102,449 79,408
Research and technology expenses........................................... 23,624 18,383 16,742
Business acquisition and consolidation expenses............................ 12,711 25,343 42,370
------------ ---------- ----------
Operating income......................................................... 117,039 76,457 2,789
Interest expense........................................................... 38,675 25,705 21,537
Other income, net.......................................................... -- -- (2,994)
------------ ---------- ----------
Income (loss) before income taxes........................................ 78,364 50,752 (15,754)
Provision (benefit) for income taxes....................................... 28,442 (22,878) 3,436
Equity in earnings of affiliated companies................................. 517 -- --
------------ ---------- ----------
Net income (loss).......................................................... $ 50,439 $ 73,630 $ (19,190)
------------ ---------- ----------
------------ ---------- ----------
Net income (loss) per share:
Basic.................................................................... $ 1.38 $ 2.00 $ (0.58)
Diluted.................................................................. $ 1.24 $ 1.74 $ (0.58)
Weighted average shares:
Basic.................................................................... 36,675 36,748 33,351
Diluted.................................................................. 45,671 45,997 33,351
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER TOTAL COMPREHENSIVE
PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS' INCOME
PAR CAPITAL DEFICIT) INCOME (LOSS) SHARES EQUITY (LOSS)
--------- ----------- ------------ --------------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE, JANUARY 1, 1996....... $ 181 $ 111,259 $ (69,981) $ 6,915 $ -- $ 48,374
Net loss..................... (19,190) (19,190) $ (19,190)
Pension obligation
adjustment................. 535 535 535
Currency translation
adjustment................. 1,092 1,092 1,092
--------------
Comprehensive loss........... (17,563)
--------------
Issuance of stock to Ciba,
net of issuance costs of
$2,993..................... 180 141,001 141,181
Activity under stock plans... 4 7,689 7,693
Other issuance of stock...... 1 199 200
Treasury stock purchased..... (556) (556)
--------- ----------- ------------ ------ --------- ------------
BALANCE, DECEMBER 31, 1996..... 366 260,148 (89,171) 8,542 (556) 179,329
Net income................... 73,630 73,630 73,630
Currency translation
adjustment................. (9,646) (9,646) (9,646)
--------------
Comprehensive income......... 63,984
--------------
Activity under stock plans... 3 6,632 6,635
Conversion of Subordinated
Notes...................... 50 50
Treasury stock purchased..... (97) (97)
--------- ----------- ------------ ------ --------- ------------
BALANCE, DECEMBER 31, 1997..... 369 266,830 (15,541) (1,104) (653) 249,901
Net income................... 50,439 50,439 50,439
Currency translation
adjustment................. 7,417 7,417 7,417
--------------
Comprehensive income......... $ 57,856
--------------
--------------
Activity under stock plans... 3 4,624 4,627
Conversion of Subordinated
Notes...................... 15 15
Treasury stock purchased..... (10,000) (10,000)
--------- ----------- ------------ ------ --------- ------------
BALANCE, DECEMBER 31, 1998..... $ 372 $ 271,469 $ 34,898 $ 6,313 $ (10,653) $ 302,399
--------- ----------- ------------ ------ --------- ------------
--------- ----------- ------------ ------ --------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................................................. $ 50,439 $ 73,630 $ (19,190)
Reconciliation to net cash provided by operating activities:
Depreciation................................................................. 37,442 33,214 24,656
Amortization................................................................. 10,012 2,583 2,074
Deferred income taxes........................................................ 6,850 (33,203) (520)
Accrued business acquisition and consolidation expenses...................... 12,711 25,343 42,370
Business acquisition and consolidation payments.............................. (8,651) (33,595) (11,579)
Write-off of purchased in-process technologies -- 8,000 --
Equity in earnings of affiliated companies................................... (517) -- --
Other income................................................................. -- -- (1,560)
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable............................... 18,214 (37,557) (14,695)
Increase in inventories.................................................. (9,316) (23,797) (5,072)
Decrease (increase) in prepaid expenses and other assets................. (2,858) 1,667 (1,430)
Increase (decrease) in accounts payable and accrued liabilities.......... (17,067) 23,567 15,549
Changes in other non-current assets and long-term liabilities (3,479) (10,606) 3,225
---------- --------- ----------
Net cash provided by operating activities.................................... 93,780 29,246 33,828
---------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures......................................................... (66,530) (57,369) (43,569)
Cash paid for business acquisitions.......................................... (472,770) (37,000) (164,400)
Dividends received from affiliated companies................................. 1,399 -- --
Proceeds from sale of other assets........................................... -- 13,500 1,560
Advances to affiliated companies............................................. (1,250) (2,000) --
---------- --------- ----------
Net cash used by investing activities.................................... (539,151) (82,869) (206,409)
---------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 276 3,199 286,974
Repayments of long-term debt (1,805) (9,679) (124,288)
Proceeds from the Senior and Revolving Credit Facilities..................... 726,044 84,686 15,319
Repayments of the Senior and Revolving Credit Facilities..................... (266,339) (27,500) --
Debt issuance costs.......................................................... (10,264) -- (6,792)
Purchase of treasury stock................................................... (10,000) (97) (556)
Activity under stock plans................................................... 2,753 3,363 3,729
---------- --------- ----------
Net cash provided by financing activities...................................... 440,665 53,972 174,386
---------- --------- ----------
Effect of exchange rate changes on cash and cash equivalents................... 3,177 709 2,341
---------- --------- ----------
Net increase (decrease) in cash and cash equivalents........................... (1,529) 1,058 4,146
Cash and cash equivalents at beginning of year................................. 9,033 7,975 3,829
---------- --------- ----------
Cash and cash equivalents at end of year....................................... $ 7,504 $ 9,033 $ 7,975
---------- --------- ----------
---------- --------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
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 accompanying consolidated financial statements include the accounts of
Hexcel Corporation and subsidiaries ("Hexcel" or the "Company"), after
elimination of intercompany transactions and accounts. Hexcel is a leading
international producer of advanced structural materials. The Company develops,
manufactures and markets lightweight, high-performance reinforcement products,
composite materials and engineered products for use in the commercial aerospace,
space and defense, electronics, general industrial and recreation 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 member of four joint
ventures that manufacture and market reinforcement products and composite
materials in Europe, Asia and the United States.
As discussed in Note 2, Hexcel acquired:
- certain assets and assumed certain operating liabilities from Clark-
Schwebel, Inc. and its subsidiaries' ("C-S") industrial fabrics business
(the "Acquired Clark-Schwebel Business") on September 15, 1998, including
interests in three joint ventures, one of which was acquired on December
23, 1998;
- the worldwide composites division of Ciba-Geigy Limited ("CGL"), a Swiss
corporation, and Ciba-Geigy Corporation, a New York corporation ("CGC" and
together with CGL, "Ciba"), including most of Ciba's composite materials,
parts and structures businesses, on February 29, 1996. The Company
subsequently acquired Ciba's Austrian composites business on May 30, 1996,
and various remaining assets of Ciba's worldwide composites division at
various dates through February 28, 1997 (the "Acquired Ciba Business");
- the composite products division of Hercules Incorporated ("Hercules"),
including Hercules' carbon fibers and prepreg businesses (the "Acquired
Hercules Business"), on June 27, 1996; and
- the satellite business and rights to certain technologies from Fiberite,
Inc. ("Fiberite"), on September 30, 1997.
All of the above acquisitions were accounted for under the purchase method
of accounting. Accordingly, the accompanying consolidated balance sheets,
statements of operations, stockholders' equity, and cash flows include the
financial position, results of operations and cash flows of the businesses
acquired as of such dates and for such periods that these businesses were owned
by Hexcel.
ESTIMATES AND ASSUMPTIONS
The accompanying consolidated financial statements and related notes reflect
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 accompanying consolidated
financial statements and related notes are reasonable in light of known facts
and circumstances, actual results could differ materially from the estimates
used.
F-8
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Hexcel invests excess cash in investments with original maturities of less
than three months. The investments consist primarily of Eurodollar time deposits
and are stated at cost, which approximates fair value. The Company considers
such investments to be cash equivalents for purposes of the statements of cash
flows.
ACCOUNTS RECEIVABLE
Accounts receivable are net of reserves for doubtful accounts of $6,785 and
$6,641 as of December 31, 1998 and 1997, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out and average cost methods.
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. Property, plant and equipment are depreciated over estimated useful
lives, using accelerated and straight-line methods. The estimated useful lives
range from 10 to 40 years for buildings and improvements and from 3 to 20 years
for machinery and equipment.
GOODWILL AND OTHER PURCHASED INTANGIBLES
Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of net assets of businesses acquired, and other purchased
intangibles, are amortized on a straight-line basis over estimated economic
lives which are as follows:
<TABLE>
<S> <C>
Goodwill from the Acquired Clark-Schwebel Business.............. 40 years
Goodwill from the Acquired Ciba Business........................ 20 years
10-15
Other purchased intangibles..................................... years
</TABLE>
The Company periodically reviews the recoverability of all long-term assets,
including the related amortization period, whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. The Company determines whether there has been an impairment by
comparing the anticipated undiscounted future net cash flows to the related
asset's carrying value. If an asset is considered impaired, the asset is written
down to fair value which is either determined based on discounted cash flows or
appraised values, depending on the nature of the asset.
INVESTMENT IN AFFILIATED COMPANIES
Investment in affiliated companies consists of equity interests in joint
ventures, which are accounted for using the equity method of accounting.
F-9
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEBT FINANCING COSTS
Debt financing costs are deferred and amortized over the life of the related
debt, which ranges from 7 to 8 years.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense is not recognized when options are
granted at the fair market value at the date of grant. The Company also provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".
CURRENCY TRANSLATION
The assets and liabilities of non-U.S. 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 "stockholders' equity". Realized gains and losses
from currency exchange transactions are recorded in "selling, general and
administrative expenses" in the accompanying consolidated statements of
operations and were not material to the Company's consolidated results of
operations in 1998, 1997 or 1996.
REVENUE RECOGNITION
Product sales are recognized on the date of shipment.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs an interest rate cap agreement and foreign currency
forward contracts in the management of its interest rate and currency exposures.
The Company designates its interest rate cap agreement against a specific debt
instrument and recognizes interest differentials as adjustments to interest
expense as the differentials occur. Realized and unrealized gains and losses
arising from foreign currency forward contracts are recognized in income as
offsets to gains and losses resulting from the underlying hedged transaction.
The Company does not hold financial instruments for trading purposes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's sales to two customers and their related subcontractors accounted
for approximately 46% of the Company's 1998 and 1997 net sales (see Note 16).
The Company performs on-going credit evaluations of its customers' financial
condition but generally does not require collateral or other security to support
customer receivables. The Company establishes an allowance for doubtful accounts
based on factors surrounding the credit risk of specific customers, historical
trends and other financial information.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS 133 requires companies to record
derivatives on the balance sheet as assets and liabilities,
F-10
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS 133 is not expected to have
a material impact on Hexcel's consolidated financial statements. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. Hexcel will adopt this
accounting standard as required by January 1, 2000.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 1998
presentation.
NOTE 2--BUSINESS ACQUISITIONS
ACQUIRED CLARK-SCHWEBEL BUSINESS
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from C-S. The Acquired Clark-Schwebel Business is
engaged in the manufacture and sale of high-quality fiberglass fabrics, which
are used to make printed circuit boards ("PCBs") for electronic equipment such
as computers, cellular telephones, televisions and automobiles. The Acquired
Clark-Schwebel Business also produces high performance specialty products for
use in insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials. The Acquired Clark-Schwebel Business
currently operates four manufacturing facilities in the southeastern U.S. and
has approximately 1,300 full time employees. As part of this acquisition, Hexcel
also acquired C-S's equity ownership interests in the following three joint
ventures:
- a 43.6% share in CS-Interglas AG ("CS-Interglas"), headquartered in
Germany, together with fixed-price options to increase this equity
interest to 84.0%. Hexcel's acquisition of the CS-Interglas equity
interest and related options was completed on December 23, 1998;
- a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"),
headquartered in Japan, which in turn has its own joint venture with
AlliedSignal Inc. in Taiwan; and
- a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"),
headquartered in the United States.
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian electronics and telecommunications industries. CS Tech-Fab
manufactures non-woven materials for roofing, construction and other specialty
applications. The fixed-price options to increase the equity interest in
CS-Interglas are significantly higher than their fair market value and expire on
December 31, 1999. The unconsolidated net sales in 1998 for these joint ventures
were in excess of $300,000.
The acquisition of the Acquired Clark-Schwebel Business was completed
pursuant to an Asset Purchase Agreement dated July 25, 1998, as amended, by and
among Hexcel, Stamford CS Acquisition Corp., and C-S (the "Asset Purchase
Agreement"). Under the Asset Purchase Agreement, Hexcel acquired the net assets
of the acquired business, other than certain excluded assets and liabilities, in
F-11
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--BUSINESS ACQUISITIONS (CONTINUED)
exchange for approximately $473,000 in cash, including the $19,000 paid on
December 23, 1998. The assets acquired and the liabilities assumed or incurred
were:
<TABLE>
<S> <C>
Estimated fair value of assets acquired:
Cash............................................................ $ 5,049
Accounts receivable............................................. 20,249
Inventories..................................................... 35,508
Net property, plant and equipment............................... 70,000
Investment in joint ventures, intangibles and other assets...... 68,389
Goodwill........................................................ 365,286
---------
Total assets acquired............................................. 564,481
---------
Estimated fair value of liabilities assumed or incurred:
Accounts payable and accrued liabilities........................ 32,523
Capital lease obligations....................................... 50,000
Other non-current liabilities 4,139
---------
Total liabilities assumed or incurred............................. 86,662
---------
Estimated fair value of net assets acquired....................... $ 477,819
---------
Less- cash acquired (5,049)
---------
Net cash paid..................................................... $ 472,770
---------
---------
</TABLE>
The allocations of purchase price to the assets acquired and liabilities
assumed or incurred in connection with the Acquired Clark-Schwebel Business are
based on current estimates of fair values, and are subject to change until
September 15, 1999. As part of the acquisition, Hexcel entered into a $50,000
lease for property, plant and equipment used in the acquired business from an
affiliate of C-S, pursuant to a long-term lease which includes purchase options.
Refer to Note 7 for acquisition financing.
ACQUIRED CIBA BUSINESS & ACQUIRED HERCULES BUSINESS
Hexcel acquired most of Ciba's composite materials, parts and structures
businesses on February 29, 1996, Ciba's Austrian composites business on May 30,
1996, and various remaining assets of Ciba's worldwide composites division at
various dates through February 28, 1997. The Acquired Ciba Business is engaged
in the manufacture and marketing of reinforcement fabrics and lightweight,
high-performance composite materials, parts and structures for commercial
aerospace, space and defense, general industrial and recreation markets. Product
lines include reinforcement fabrics, pre-impregnated fabrics ("prepregs"),
structural adhesives, honeycomb core, sandwich panels and fabricated components,
as well as composite structures and interiors primarily for the commercial and
military aerospace markets.
The acquisition of the Acquired Ciba Business was consummated pursuant to a
Strategic Alliance Agreement dated as of September 29, 1995, among Ciba and
Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic
Alliance Agreement, the Company acquired the assets (including the capital
shares of certain non-U.S. subsidiaries) and assumed the liabilities of the
F-12
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--BUSINESS ACQUISITIONS (CONTINUED)
Acquired Ciba Business, other than certain excluded assets and liabilities, in
exchange for: (a) 18,022 newly issued shares of Hexcel common stock; (b) $25,000
in cash; (c) senior subordinated notes in an aggregate principal amount of
$37,476 (the "Ciba Senior Subordinated Notes"), with a fair value of $34,450;
and (d) senior demand notes in an aggregate principal amount equal to the cash
on hand at certain of the non-U.S. subsidiaries included in the Acquired Ciba
Business (the "Senior Demand Notes"). The total aggregate purchase price for the
net assets acquired was approximately $209,000.
Hexcel acquired the assets of the composite products division of Hercules on
June 27, 1996. The Acquired Hercules Business, which manufactures carbon fibers
and prepregs for commercial aerospace, space and defense, general industrial and
recreation markets, was purchased for $139,400 in cash.
The assets acquired and the liabilities assumed or incurred were:
<TABLE>
<CAPTION>
ACQUIRED ACQUIRED
CIBA HERCULES
BUSINESS BUSINESS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Estimated fair values of assets acquired:
Accounts receivable........................................................ $ 53,861 $ 16,819 $ 70,680
Inventories................................................................ 65,596 22,289 87,885
Property, plant and equipment.............................................. 119,446 110,611 230,057
Goodwill and other purchased intangibles................................... 39,851 -- 39,851
Prepaid pension asset...................................................... 8,688 -- 8,688
Other assets............................................................... 3,069 642 3,711
---------- ---------- ----------
Total assets acquired........................................................ 290,511 150,361 440,872
---------- ---------- ----------
Estimated fair values of liabilities assumed or incurred:
Accounts payable and accrued liabilities................................... 62,582 7,688 70,270
Notes payable and capital lease obligations................................ 4,743 2,774 7,517
Deferred liabilities....................................................... 14,233 499 14,732
---------- ---------- ----------
Total liabilities assumed or incurred........................................ 81,558 10,961 92,519
---------- ---------- ----------
Estimated fair values of net assets acquired................................. $ 208,953 $ 139,400 $ 348,353
---------- ---------- ----------
---------- ---------- ----------
Purchase price:
Cash....................................................................... $ 25,000 $ 139,400 $ 164,400
Senior Subordinated Notes issued to Ciba, at aggregate fair value.......... 34,450 -- 34,450
Senior Demand Notes issued to Ciba......................................... 5,329 -- 5,329
Hexcel common stock issued to Ciba, valued at $8 per stock................. 144,174 -- 144,174
---------- ---------- ----------
Aggregate purchase price..................................................... $ 208,953 $ 139,400 $ 348,353
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
ACQUIRED FIBERITE ASSETS
On September 30, 1997, the Company acquired from Fiberite its satellite
business consisting of intangible assets and inventory, and certain
non-exclusive worldwide rights to other prepreg technologies, for $37,000 in
cash. The acquisition was substantially downsized from the original agreement
whereby the Company had, subject to certain terms and conditions, committed to
purchase selected assets and businesses of Fiberite for approximately $300,000.
As a result of the downsized
F-13
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2--BUSINESS ACQUISITIONS (CONTINUED)
transaction, the Company wrote-off $4,973 of acquisition and financing costs to
business acquisition and consolidation expenses in 1997. In addition, the
Company expensed $8,000 of acquired in-process research and technology purchased
from Fiberite which is also included in the 1997 business acquisition and
consolidation expenses.
The acquisition of the satellite business and certain technologies from
Fiberite on September 30, 1997 was accounted for using the purchase method.
Under this method, substantially all of the $37,000 purchase price, less the
$8,000 write-off of the acquired in-process research and technology, was
allocated to intangible assets. Transaction costs in relation to the downsized
transaction were not material.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma net sales, net income and diluted net income per share of
Hexcel for the years ended December 31, 1998 and 1997, giving effect to the
Acquired Clark-Schwebel Business, as if it had occurred at the beginning of the
periods presented were:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Pro forma net sales............................................... $ 1,234,772 $ 1,177,059
Pro forma net income.............................................. 49,494 76,336
Pro forma diluted net income per share............................ $1.22 $1.79
</TABLE>
Pro forma adjustments giving effect to the Fiberite transaction as if it
occurred at the beginning of 1997 would not have had a material effect to the
Company's consolidated financial statements.
NOTE 3--BUSINESS CONSOLIDATION
In December 1998, Hexcel announced consolidation actions within its
reinforcement fabrics and composite materials businesses. These actions included
the integration of Hexcel's existing fabrics business with the U.S. operations
of the Acquired Clark-Schwebel Business, and the combination of the Company's
U.S., European and Pacific Rim composite materials businesses into a single,
global business unit. These actions are intended to eliminate redundancies,
improve manufacturing planning, and enhance customer service, and resulted in
the elimination of approximately 100 operating, sales, marketing and
administrative positions. As of December 31, 1998, the cost of these actions,
together with a $6,400 non-cash charge for writing down certain assets held for
disposition and another $711 incurred for costs related to a proposed
acquisition that was not consummated, resulted in the recognition of $12,711 in
business acquisition and consolidation expenses.
In 1996, Hexcel announced plans to consolidate the Company's operations over
a period of three years. The objective of the program was to integrate acquired
assets and operations into Hexcel, and to reorganize the Company's manufacturing
and research activities around strategic centers dedicated to select product
technologies. The business consolidation program was also intended to eliminate
excess manufacturing capacity and redundant administrative functions. Specific
actions of the consolidation program included the elimination of 245
manufacturing, marketing and administrative positions, the closure of the
Anaheim, California facility acquired in connection with the purchase of the
Acquired Ciba Business, the reorganization of the Company's manufacturing
operations in Europe, the consolidation of the Company's U.S. special process
manufacturing activities, and the integration of
F-14
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3--BUSINESS CONSOLIDATION (CONTINUED)
sales, marketing and administrative resources. Management expected that this
consolidation program would take approximately three years to complete, in part
because of the aerospace industry requirements to "qualify" specific equipment
and manufacturing facilities for the manufacture of certain products. These
qualification requirements increase the complexity, cost and time of moving
equipment and rationalizing manufacturing activities.
As of December 31, 1998, the primary remaining activities of this
consolidation program relate to the Company's European operations and certain
customer qualifications of equipment transferred within the U.S. The Company
expects that activities related to this consolidation program will be completed
in 1999. Total expenses for this program, which remains unchanged since December
31, 1997, were $54,700, excluding $12,973 of expenses relating to the Fiberite
transaction, which were not included in the original program.
Total accrued business acquisition and consolidation expenses at December
31, 1998, 1997 and 1996 and activity during the three years then ended were as
follows:
<TABLE>
<CAPTION>
EMPLOYEE FIBERITE &
SEVERANCE FACILITY OTHER
AND & EQUIPMENT TRANSACTION
RELOCATION RELOCATION OTHER COSTS TOTAL
----------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1996........................ -- -- -- -- --
Business acquisition and consolidation expenses...... $ 17,285 $ 10,488 $ 14,597 $ -- $ 42,370
Liabilities assumed or incurred in business
acquisitions....................................... 7,104 2,497 -- -- 9,601
Cash expenditures.................................... (5,306) (1,109) (5,164) -- (11,579)
Non-cash usage -- (6,678) (8,357) -- (15,035)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1996 19,083 5,198 1,076 -- 25,357
Business acquisition and consolidation expenses...... (25) 7,651 4,744 12,973 25,343
Cash expenditures.................................... (6,644) (8,771) (5,207) (12,973) (33,595)
Non-cash usage (2,759) (2,068) (105) -- (4,932)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1997...................... 9,655 2,010 508 -- 12,173
Business acquisition and consolidation expenses...... (3,225) 9,625 5,600 711 12,711
Cash expenditures.................................... (1,079) (6,353) (508) (711) (8,651)
Non-cash usage 517 (2,948) (5,600) -- (8,031)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1998...................... $ 5,868 $ 2,334 $ -- $ -- $ 8,202
----------- ----------- --------- ----------- ----------
----------- ----------- --------- ----------- ----------
</TABLE>
Non-cash items consist of asset write-downs and currency translation
effects. Accrued business consolidation costs of $8,202 and $12,173 as of
December 31, 1998 and 1997, respectively, were included in "other accrued
liabilities" in the accompanying consolidated balance sheets. Business
consolidation activities were financed with operating cash flows and borrowings
under the Senior and Revolving Credit Facilities. In addition, in 1997, the
Company received $8,500 of net proceeds, which approximated book value, from the
sale of its Anaheim, California facility.
F-15
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4--INVENTORIES
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 90,881 $ 90,429
Work in progress...................................................... 77,769 47,953
Finished goods........................................................ 44,549 26,939
---------- ----------
Inventories........................................................... $ 213,199 $ 165,321
---------- ----------
---------- ----------
</TABLE>
NOTE 5--PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land.................................................................. $ 22,178 $ 17,773
Buildings............................................................. 167,176 136,108
Equipment............................................................. 439,179 335,035
---------- ----------
Property, plant and equipment......................................... 628,533 488,916
Less accumulated depreciation......................................... (195,960) (157,439)
---------- ----------
Net property, plant and equipment..................................... $ 432,573 $ 331,477
---------- ----------
---------- ----------
</TABLE>
NOTE 6--INVESTMENT IN AFFILIATED COMPANIES AND OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Investment in affiliated companies..................................... $ 70,291 $ --
Deferred tax asset..................................................... 10,503 9,901
Deferred debt financing costs, net of accumulated amortization of
$1,773 and $2,487 as of December 31, 1998 and 1997, respectively..... 11,452 4,030
Prepaid pension asset.................................................. 9,503 8,619
Other assets........................................................... 5,408 3,325
---------- ---------
Investment in affiliated companies and other assets.................... $ 107,157 $ 25,875
---------- ---------
</TABLE>
INVESTMENT IN AFFILIATED COMPANIES
As part of the Acquired Clark-Schwebel Business, the Company acquired equity
ownership interests in three joint ventures: a 43.3% share in Asahi-Schwebel,
headquartered in Japan, which in turn has its own joint venture with
AlliedSignal Inc. in Taiwan; a 43.6% share in CS-Interglas, together with
fixed-price options to increase this equity interest to approximately 84%; and a
50.0% share in CS Tech-Fab, headquartered in the U.S. (see Note 2).
As of December 31, 1998 and 1997, Hexcel owned a 45% equity interest in
DIC-Hexcel Limited ("DHL"), a joint venture with Dainippon Ink and Chemicals,
Inc. ("DIC"). This joint venture, which owns and operates a manufacturing
facility in Komatsu, Japan, was formed in 1990 and produces and sells prepregs,
honeycomb, decorative laminates and bulk molding compounds using technology
licensed from Hexcel and DIC. In December of 1996, Hexcel and DIC reached an
agreement to continue the
F-16
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6--INVESTMENT IN AFFILIATED COMPANIES AND OTHER ASSETS (CONTINUED)
DHL joint venture and expand its operations. The Company and DIC agreed to fund
the joint venture's operations through 1998 by each contributing an additional
$3,250 in cash, payable in installments through 1998. Of this amount, $1,250 and
$2,000 was paid in 1998 and 1997, respectively. In addition, the Company and DIC
agreed to contribute certain additional technology and product manufacturing
rights to DHL. Under the terms of the agreements, Hexcel remains contingently
liable to pay DIC up to $4,500 with respect to DHL's bank debt, but the
possibility that such repayment will be required has diminished as a result of
the improvement in DHL's business prospects. As of December 31, 1998, the
Company's investment in DIC is zero.
In addition to the above joint ventures, in 1998, the Company reached an
agreement in principle with The Boeing Company ("Boeing") and Aviation
Industries of China to form a joint venture, BHA Aero Composite Parts Co., Ltd.,
to manufacture composite parts for secondary structures and interior
applications for commercial aircraft. This joint venture will be located in
Tianjin, China. Also in 1998, the Company signed an agreement with Boeing, Sime
Darby Berhad and Malaysia Helicopter Services (now known as Naluri Berhad) to
form another joint venture, Asian Composite Manufacturing Sdn. Bhd., to
manufacture composite parts for secondary structures for commercial aircraft.
This joint venture will be located in Alor Setar, Malaysia. Products
manufactured by both joint ventures will be shipped to the Company's Kent,
Washington facility for final assembly, inspection and shipment to Boeing as
well as other customers worldwide. It is anticipated that the first parts will
be delivered to customers in 2001. The Company's total estimated financial
commitment to both of these joint ventures will be approximately $31,000, which
is expected to be made in increments through 2001. However, completion of these
projects and related investments remain subject to certain significant
conditions, including foreign government approvals.
NOTE 7--NOTES PAYABLE
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Senior Credit Facility.................................................................... $ 618,214 $ --
Revolving Credit Facility................................................................. -- 158,267
European Credit and Overdraft Facilities.................................................. 16,330 13,909
Convertible Subordinated Notes, due 2003.................................................. 114,435 114,450
Convertible Subordinated Debentures, due 2011............................................. 25,625 25,625
Various notes payable..................................................................... 547 680
---------- ----------
Total notes payable....................................................................... 775,151 312,931
Capital lease obligations (see Note 8) 54,092 5,473
Senior Subordinated Notes Payable to a related party, net of unamortized discount of
$1,801 and $2,233 as of December 31, 1998 and 1997, respectively 35,675 34,967
---------- ----------
Total notes payable, capital lease obligations and indebtedness to related parties........ $ 864,918 $ 353,371
---------- ----------
---------- ----------
Notes payable and current maturities of capital lease obligations......................... $ 26,867 $ 13,858
Long-term notes payable and capital lease obligations, less current maturities 802,376 304,546
Indebtedness to related parties........................................................... 35,675 34,967
---------- ----------
Total notes payable, capital lease obligations and indebtedness to related parties........ $ 864,918 $ 353,371
---------- ----------
---------- ----------
</TABLE>
F-17
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--NOTES PAYABLE (CONTINUED)
SENIOR CREDIT FACILITY
In connection with the acquisition of the Acquired Clark-Schwebel Business
(see Note 2) on September 15, 1998, Hexcel obtained the Senior Credit Facility
to: (a) fund the purchase of the Acquired Clark Schwebel Business; (b) refinance
the Company's existing revolving credit facility; and (c) provide for ongoing
working capital and other financing requirements of the Company. The Senior
Credit Facility, prior to the issuance in January 1999 of $240,000 of 9.75%
Senior Subordinated Notes, due 2009 (see below), provided up to $910,000 of
borrowing capacity, with available borrowings of $281,000 at December 31, 1998,
subject to certain loan covenants. After the issuance of the 9.75% Senior
Subordinated Notes, due 2009, the borrowing capacity under the Senior Credit
Facility was reduced to $672,000, subject to certain loan covenants.
Depending on certain predetermined ratios and other conditions, interest on
outstanding borrowings under the Senior Credit Facility is computed at an annual
rate ranging from approximately 0.75% to 2.25% in excess of the applicable
London interbank rate, or at the option of Hexcel, at 0 to 1.25% in excess of
the base rate of the administrative agent for the lenders. In addition, the
Senior Credit Facility is subject to a commitment fee ranging from 0.23% to
0.50% per annum of the total facility. As of December 31, 1998, the Company had
an interest rate cap agreement outstanding which covers a notional amount of
$50,000 of the variable rate Senior Credit Facility providing a maximum fixed
rate of 5.5%. The cost of the interest rate cap is being amortized to interest
expense over the term of the contract and the unamortized amount approximated
fair value at December 31, 1998.
The Senior Credit Facility is secured by a pledge of shares of certain of
Hexcel's subsidiaries. In addition, the Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, and is generally
prohibited from paying dividends or redeeming capital stock. Approximately
$544,000 of the Senior Credit Facility, after the issuance of the Senior
Subordinated Notes, expires by September 2004, with the balance expiring in
2005.
As a result of obtaining the Senior Credit Facility and the Amended
Revolving Credit Facility (see below), the Company wrote off approximately
$1,600 of capitalized debt financing costs in 1998. This amount is included in
"interest expense" in the accompanying consolidated statement of operations for
1998.
REVOLVING CREDIT FACILITY
In connection with the purchase of the Acquired Hercules Business in 1996,
Hexcel obtained a revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility was obtained to: (a) refinance outstanding
indebtedness under a senior secured credit facility; (b) finance the purchase of
the Acquired Hercules Business; and (c) provide for the ongoing working capital
and other financing requirements of the Company, including business
consolidation activities, on a worldwide basis. The Revolving Credit Facility
was amended in March 1998 (the "Amended Revolving Credit Facility") and in
September 1998, the Senior Credit Facility replaced the Amended Revolving Credit
Facility. The Amended Revolving Credit Facility, prior to its replacement, had
provided up to $355,000 of borrowing capacity and would have expired in March
2003.
Interest on outstanding borrowings on the Amended Revolving Credit Facility
depended upon certain predetermined ratios and other conditions and was computed
at an annual rate ranging from approximately 0.3% to 1.1% in excess of the
applicable London interbank rate or, at the option of
F-18
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--NOTES PAYABLE (CONTINUED)
Hexcel, at the base rate of the administrative agent for the lenders. In
addition, the Amended Revolving Credit Facility was subject to a commitment fee
ranging from approximately 0.2% to 0.4% per annum of the total facility.
Interest on outstanding borrowings under the Revolving Credit Facility was
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. The Revolving Credit Facility was also subject to a commitment
fee of approximately 0.2% per annum on the unused portion of the facility.
EUROPEAN CREDIT AND OVERDRAFT FACILITIES
In addition to the Senior Credit Facility, certain of Hexcel's European
subsidiaries have access to limited credit and overdraft facilities provided by
various local lenders. These credit and overdraft facilities, which are only
available to finance certain activities by specific subsidiaries, are primarily
uncommitted facilities that are terminable at the discretion of the lenders. The
credit and overdraft facilities in use by the Company's European subsidiaries as
of December 31, 1998 and 1997, other than the Senior or Revolving Credit
Facilities, bear interest at rates between 3.0% and 6.4% per annum.
CONVERTIBLE SUBORDINATED NOTES, DUE 2003
In July of 1996, Hexcel completed an offering of $114,500 in convertible
subordinated notes, due 2003 (the "Convertible Subordinated Notes"). The
Convertible Subordinated Notes carry an annual interest rate of 7% and are
convertible into Hexcel common stock at a conversion price of $15.81 per share,
subject to adjustment under certain conditions. Net proceeds of $111,351 from
this offering were used to repay amounts owed under the Company's Revolving
Credit Facility.
The Convertible Subordinated Notes are redeemable beginning in August of
1999, in whole or in part, at the option of Hexcel. The redemption prices range
from 103.5% to 100.0% of the outstanding principal amount, depending on the
period in which redemption occurs. As of December 31, 1998, $65 of the
Convertible Subordinated Notes had been converted resulting in the issuance of 4
shares of common stock.
CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011
The 7% convertible subordinated debentures, due 2011, are redeemable by
Hexcel prior to maturity. Mandatory redemption is scheduled to begin in 2002
through annual sinking fund requirements. The debentures are convertible prior
to maturity into common shares of the Company at $30.72 per share.
CIBA SENIOR SUBORDINATED NOTES PAYABLE
In connection with the purchase of the Acquired Ciba Business, Hexcel issued
to Ciba, the Ciba Senior Subordinated Notes in an aggregate principal amount of
$37,476. Hexcel also consented to an assignment by Ciba of Ciba's rights and
obligations under the Strategic Alliance Agreement to Ciba Speciality Chemical
Holdings Inc. and Ciba Specialty Chemicals Corporation (collectively "CSC"). In
connection with the assignment of these rights and obligations, the Ciba Senior
Subordinated Notes that were previously payable to Ciba are now payable to CSC.
F-19
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--NOTES PAYABLE (CONTINUED)
The Ciba Senior Subordinated Notes are general unsecured obligations of
Hexcel that 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 purchase of the Acquired Ciba Business
(February 28, 1999), and by an additional 0.5% per year thereafter until the
Ciba Senior Subordinated Notes mature in the year 2003.
At the date of issue, the aggregate fair value of the Ciba Senior
Subordinated Notes was $3,026 less than the aggregate principal amount. The
original discount of $3,026 reflects the absence of certain call protection
provisions from the terms of the Ciba Senior Subordinated Notes and the
difference between the stated interest rate on the Ciba Senior Subordinated
Notes and the estimated market rate for debt obligations of comparable quality
and maturity. This discount, which is amortized over the life of the Ciba Senior
Subordinated Notes, had an unamortized balance of $1,801 and $2,233 as of
December 31, 1998 and 1997, respectively.
On February 17, 1999, the Company repaid $12,500 of its Ciba Senior
Subordinated Notes payable. The repayment was financed with borrowings under the
Company's Senior Credit Facility. As a result of the repayment, the Company will
write-off approximately $600 of the unamortized discount in 1999.
As discussed in Note 9, Hexcel has various financial and other relationships
with CSC. Accordingly, the Company's net indebtedness to CSC under the Ciba
Senior Subordinated Notes has been classified as "indebtedness to related
parties" in the accompanying consolidated balance sheets.
9.75% SENIOR SUBORDINATED NOTES, DUE 2009
On January 21, 1999, the Company issued $240,000 of 9.75% Senior
Subordinated Notes, due 2009. Net proceeds of approximately $231,000 from this
offering were used to repay amounts owed under the Senior Credit Facility.
Simultaneously with the closing of this offering, the Company amended the Senior
Credit Facility to, among other things, reduce the available borrowing capacity
to $672,000, modify certain financial covenants and to permit the offering.
AGGREGATE MATURITIES OF NOTES PAYABLE AND INDEBTEDNESS TO RELATED PARTIES
As discussed above, on January 21, 1999, the Company issued $240,000 of
9.75% Senior Subordinated Notes, due 2009, for net proceeds of $231,000, and
amended its Senior Credit Facility. In addition, on February 17, 1999, the
Company repaid $12,500 of the Ciba Senior Subordinated Notes payable to CSC with
borrowings under the Senior Credit Facility. The table below reflects aggregate
maturities of notes payable and indebtedness to related parties, including the
amended due dates and maturities from the above events (see Note 8 for
maturities of capital lease obligations):
<TABLE>
<CAPTION>
PAYABLE DURING YEARS ENDING DECEMBER 31:
- ----------------------------------------------------------------------------------
<S> <C>
1999.............................................................................. $ 21,983
2000.............................................................................. 17,490
2001.............................................................................. 20,154
2002.............................................................................. 35,726
2003.............................................................................. 176,000
2004 and thereafter............................................................... 548,473
----------
Total notes payable and indebtedness to related parties........................... $ 819,826
----------
----------
</TABLE>
F-20
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7--NOTES PAYABLE (CONTINUED)
ESTIMATED FAIR VALUES OF NOTES PAYABLE
The Senior Credit Facility, and substantially all of the various European
credit facilities and other notes payable outstanding as of December 31, 1998
and 1997, are variable-rate debt obligations. Accordingly, the estimated fair
values of each of these debt obligations approximates their respective book
values.
The aggregate fair values of the Convertible Subordinated Notes, due 2003,
and the Convertible Subordinated Debentures, due 2011, are estimated on the
basis of quoted market prices, although trading in these debt securities is
limited and may not reflect fair value. The aggregate fair value of the
Convertible Subordinated Notes, due 2003, was approximately $96,100 and $196,000
as of December 31, 1998 and 1997, respectively. The aggregate fair value of the
Convertible Subordinated Debentures, due 2011, was approximately $19,000 and
$25,500 as of December 31, 1998 and 1997, respectively.
NOTE 8--LEASING ARRANGEMENTS
Assets, accumulated depreciation and related liability balances under
capital leasing arrangements as of December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Property, plant and equipment........................................... $ 67,191 $ 10,197
Less accumulated depreciation........................................... (6,593) (3,593)
--------- ---------
Net property, plant and equipment....................................... $ 60,598 $ 6,604
--------- ---------
--------- ---------
Capital lease obligations............................................... $ 54,092 $ 5,473
Less current maturities................................................. (4,884) (347)
--------- ---------
Long-term capital lease obligations, net $ 49,208 $ 5,126
--------- ---------
--------- ---------
</TABLE>
As discussed in Note 2, Hexcel entered into a $50,000 capital lease for
property, plant and equipment used in the Acquired Clark-Schwebel Business. The
lease expires in September 2006 and includes various purchase options.
Certain sales and administrative offices, data processing equipment, and
manufacturing facilities are leased under operating leases. Rental expense under
operating leases was $4,656 in 1998, $4,559 in 1997 and $4,623 in 1996.
F-21
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8--LEASING ARRANGEMENTS (CONTINUED)
Future minimum lease payments as of December 31, 1998, were:
<TABLE>
<CAPTION>
TYPE OF LEASE
----------------------
<S> <C> <C>
PAYABLE DURING YEARS ENDING DECEMBER CAPITAL OPERATING
- ------------------------------------------------------------------------ --------- -----------
1999.................................................................... $ 9,038 $ 4,377
2000.................................................................... 8,804 3,135
2001.................................................................... 8,513 1,691
2002.................................................................... 8,513 1,100
2003.................................................................... 8,022 474
2004 and thereafter..................................................... 29,158 2,380
--------- -----------
Total minimum lease payments.......................................... $ 72,048 $ 13,157
--------- -----------
--------- -----------
</TABLE>
Total minimum capital lease payments include $17,956 of imputed interest.
NOTE 9--RELATED PARTIES
In connection with the purchase of the Acquired Ciba Business, Hexcel
delivered 18,022 newly issued shares of Hexcel common stock to Ciba,
representing 49.9% of the Hexcel common stock issued and outstanding at that
date. In addition, the Company and Ciba entered into the Strategic Alliance
Agreement which currently provides for, among other things, the designation by
Ciba of four of the Company's ten directors, and the approval of a majority of
these four designated directors for the taking of certain significant actions by
the Company. On February 21, 1997, the Company consented to an assignment by
Ciba of Ciba's rights and obligations under the Strategic Alliance Agreement to
CSC. In connection with the assignment of these rights and obligations, all of
the Hexcel common stock previously held by Ciba is now held by CSC.
As discussed in Notes 2 and 7, Hexcel delivered Ciba Senior Subordinated
Notes in an aggregate principal amount of $37,476 to Ciba in connection with the
purchase of the Acquired Ciba Business. In connection with the assignment of
Ciba's rights and obligations under the Strategic Alliance Agreement, the Senior
Subordinated Notes that were previously payable to Ciba are payable to CSC.
During 1996, the Company also delivered Senior Demand Notes to Ciba in an
aggregate principle amount of $5,329. The Senior Demand Notes were presented for
payment and paid in full prior to December 31, 1996. Aggregate interest expense
on the Ciba Senior Subordinated Notes in 1998, 1997 and 1996, was $2,811, $2,762
and $2,715, respectively.
Hexcel purchases certain raw materials from various CSC subsidiaries. The
Company's aggregate purchases from CSC subsidiaries for 1998, 1997 and 1996 were
$37,717, $34,255 and $15,116, respectively. Aggregate payables to various CSC
subsidiaries included in "accounts payable" and "accrued liabilities" as of
December 31, 1998 and 1997, were $3,314 and $1,196, respectively. In addition,
the Company sold certain finished products to the affiliates of CSC ("Ciba
Distributors") pursuant to a distribution agreement, which expired February 28,
1997. For the year ended December 31, 1998, there were no sales to Ciba
Distributors. For the years ended December 31, 1997 and 1996, aggregate sales to
Ciba Distributors were $5,620 and $32,408, respectively. As of December 31, 1998
and 1997, aggregate receivables from Ciba Distributors were not material to the
accompanying consolidated balance sheets.
F-22
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
RETIREMENT PLANS
Hexcel maintains defined benefit retirement plans covering most U.S. and
certain European employees as well as retirement savings plans covering eligible
U.S. employees. The defined benefit retirement plans are based on years of
service and employee compensation under either a career average or final pay
benefits' method. Hexcel's funding policy is to contribute the minimum amount
required by applicable regulations. In addition, the Company participates in a
union sponsored multi-employer pension plan covering certain U.S. employees with
union affiliations.
As part of the Acquired Ciba Business, the Company acquired a net pension
asset from a defined benefit retirement plan covering employees of a United
Kingdom subsidiary. Pursuant to the terms of the Strategic Alliance Agreement,
these employees continued to participate in a defined benefit retirement plan
sponsored by Ciba up to January 1, 1997, at which time, the accumulated benefit
obligation and net pension asset was valued and transferred to a newly created
plan sponsored by the Company.
Under the retirement savings plans, eligible U.S. employees may contribute
up to 16% of their compensation to an individual retirement savings account.
Hexcel makes matching contributions equal to 50% of employee contributions, not
to exceed 3% of employee compensation. In addition, the Company makes profit
sharing contributions when the Company meets or exceeds certain annual
performance targets. The net expense for these retirement savings plans was
approximately $5,798 for 1998, $5,957 for 1997 and $5,396 for 1996.
OTHER POSTRETIREMENT BENEFIT PLANS
Hexcel provides certain postretirement health care and life insurance
benefits to eligible retirees. Substantially all U.S. employees hired on or
before December 31, 1995, are eligible for benefits, as well as senior
executives and certain U.S. employees hired in connection with the Acquired Ciba
Business and the Acquired Hercules Business. The Company also maintains a
postretirement medical plan for its employees hired in connection with the
Acquired Clark- Schwebel Business.
Benefits are available to eligible employees who retire on or after age 58
after rendering at least 15 years of service to Hexcel, including years of
service rendered to the Acquired Ciba Business or the Acquired Hercules Business
prior to the dates of acquisition. 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.
As part of the Acquired Clark-Schwebel Business, the Company assumed a
defined benefit postretirement medical plan, which covers substantially all
salaried and nonsalaried employees. The plan provides medical coverage to age 65
for employees who retire at age 62 or later, have at least 25 years of service
and participated in the plan prior to retirement.
F-23
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
The net periodic cost of Hexcel's defined benefit retirement and U.S.
postretirement plans for the years ended December 31, 1998, 1997 and 1996, were:
<TABLE>
<CAPTION>
U.S. PLANS EUROPEAN PLANS
------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997 1996
--------- --------- --------- --------- --------- ---------
RETIREMENT PLANS
Service cost--benefits earned during the year......... $ 3,314 $ 2,310 $ 2,365 $ 2,063 $ 1,933 $ 150
Interest cost on projected benefit obligation......... 1,180 817 646 2,301 2,168 132
Expected return on plan assets........................ (805) (739) (477) (4,365) (6,799) (109)
Net amortization and deferral......................... 567 265 273 898 4,002 --
--------- --------- --------- --------- --------- ---------
Net periodic pension cost............................. $ 4,256 $ 2,653 $ 2,807 $ 897 $ 1,304 $ 173
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
POSTRETIREMENT PLANS
Service cost--benefits earned during the year........................................... $ 127 $ 91 $ 80
Interest cost on projected benefit obligation........................................... 691 752 701
Net amortization and deferral........................................................... (318) (213) (222)
--------- --------- ---------
Net periodic postretirement benefit cost................................................ $ 500 $ 630 $ 559
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
The benefit obligation, fair value of plan assets, funded status and amounts
recognized in the consolidated financial statements, for Hexcel's retirement
plans and U.S. postretirement plans, as of and for the years ended December 31,
1998 and 1997 were:
<TABLE>
<CAPTION>
RETIREMENT PLANS
-------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. PLANS EUROPEAN PLANS POSTRETIREMENT PLANS
--------------------- -------------------- ----------------------
<CAPTION>
1998 1997 1998 1997 1998 1997
---------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation--beginning of year............... $ 14,910 $ 11,071 $ 32,627 $ 27,479 $ 10,836 $ 10,294
Service cost........................................ 3,314 2,310 2,063 1,933 127 91
Interest cost....................................... 1,180 817 2,301 2,168 691 752
Introduction of a new plan.......................... 1,200 -- -- -- -- --
Plan participants' contributions.................... -- -- 511 459 41 53
Plan from the Acquired Clark- Schwebel Business..... -- -- -- -- 4,139 --
Actuarial loss (gain)............................... 1,781 1,253 9,080 750 (1,927) 235
Benefits paid....................................... (840) (541) (188) (162) (526) (589)
Other............................................... -- -- 705 -- -- --
---------- --------- --------- --------- ---------- ----------
Benefit obligation--end of year....................... 21,545 14,910 47,099 32,627 13,381 10,836
---------- --------- --------- --------- ---------- ----------
Change in plan assets:
Fair value of plan assets- beginning of year........ 8,343 5,974 44,557 36,282 -- --
Actual return on plan assets........................ 1,517 739 4,941 6,798 -- --
Employer contributions.............................. 2,525 2,171 1,172 1,180 416 536
Plan participants' contributions.................... -- -- 511 459 41 53
Benefits paid....................................... (840) (541) (188) (162) (457) (589)
Other............................................... -- -- 705 -- -- --
---------- --------- --------- --------- ---------- ----------
Fair value of plan assets- end ofyear................. 11,545 8,343 51,698 44,557 -- --
---------- --------- --------- --------- ---------- ----------
Funded status:
Benefit obligation in excess of plan assets......... (10,000) (6,567) 4,598 11,930 (13,420) (10,836)
Unrecognized actuarial loss (gain).................. 2,369 1,436 4,905 (3,311) (549) (556)
Unrecognized net liability.......................... 126 169 -- -- -- --
Unrecognized prior service cost..................... 816 4 -- -- (4,743) (3,210)
---------- --------- --------- --------- ---------- ----------
Prepaid (accrued) benefit cost........................ $ (6,689) $ (4,958) $ 9,503 $ 8,619 $ (18,712) $ (14,602)
---------- --------- --------- --------- ---------- ----------
---------- --------- --------- --------- ---------- ----------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $21,545, $18,858 and $11,545, respectively, as of
December 31, 1998 and $14,910, $13,037 and $8,343, respectively, as of December
31, 1997. In 1998, the Company updated certain assumptions with respect to its
European plans, resulting in an actuarial loss. Amortization of this loss and
other prior service costs, is calculated on a straight-line basis over the
expected future years of service of the plans' active participants. Assets for
the defined benefit pension plans generally consist of publicly traded
securities, bonds and cash investments.
As of December 31, 1998 and 1997, the prepaid benefit cost was included in
"investment in affiliated companies and other assets" in the accompanying
consolidated balance sheets. For the same
F-25
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10--RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
periods, the accrued benefit cost was included in "accrued compensation and
benefits" and "other non-current liabilities" in the accompanying consolidated
balance sheets.
Assumptions used to estimate the actuarial present value of benefit
obligations as of December 31, 1998, 1997 and 1996, were:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
U.S. defined benefit retirement plans:
Discount rates........................... 7.0% 7.0% 7.5%
Rate of increase in compensation......... 4.5% 4.5% 4.5%
Expected long-term rate of return on plan
assets 9.0% 9.0% 9.0%
European defined benefit retirement plans:
Discount rates........................... 5.5%--5.8% 6.5%--7.0% 6.5%--7.5%
Rates of increase in compensation........ 1.5%--4.0% 2.0%--5.0% 2.0%--4.5%
Expected long-term rates of return on
plan assets 6.5%--7.0% 6.5%--7.5% 6.5%--9.0%
Postretirement benefit plans:
Discount rates........................... 6.8%--7.0% 7.0% 7.5%
</TABLE>
For measurement purposes, the annual rate of increase in the per capita cost
of covered health care benefits were assumed at 7.5% to 10.2% for medical, and
5.0% for dental and vision for 1999. These rates were assumed to decrease
gradually to 5.5% to 8.4%, and remain at 5.0%, respectively, by the year 2002.
The table below presents the impact of a one-percentage point increase and a
one-percentage point decrease in the assumed health care cost trend on the total
of service and interest cost components and on the postretirement benefit
obligation.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
One-percentage point increase:
Effect on total service and interest cost components....................... $ 67 $ 47
Effect on postretirement benefit obligation................................ 778 608
One-percentage point decrease:
Effect on total service and interest cost components....................... (55) (43)
Effect on postretirement benefit obligation................................ (662) (527)
</TABLE>
F-26
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11--INCOME TAXES
PROVISION FOR INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for income
taxes for the years ended December 31, 1998, 1997 and 1996, were:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S...................................................... $ 30,590 $ 24,197 $ (11,956)
International............................................ 47,774 26,555 (3,798)
--------- ---------- ----------
Total income (loss) before income taxes.............. $ 78,364 $ 50,752 $ (15,754)
--------- ---------- ----------
--------- ---------- ----------
Provision (benefit) for income taxes:
Current:
U.S...................................................... $ 6,352 $ 798 $ (1,600)
International............................................ 15,240 9,527 5,556
--------- ---------- ----------
Current provision for income taxes......................... 21,592 10,325 3,956
--------- ---------- ----------
Deferred:
U.S...................................................... 4,662 (33,935) --
International............................................ 2,188 732 (520)
--------- ---------- ----------
Deferred provision (benefit) for income taxes.............. 6,850 (33,203) (520)
--------- ---------- ----------
Total provision (benefit) for income taxes........... $ 28,442 $ (22,878) $ 3,436
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
A reconciliation of the provision (benefit) to the U.S. federal statutory
income tax rate of 35%, 35% and 34% for the years ended December 31, 1998, 1997
and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Provision (benefit) at U.S. federal statutory rate.......... $ 27,732 $ 17,763 $ (5,356)
U.S. state taxes, less federal tax benefit.................. 807 519 21
Impact of different international tax rates, adjustments to
income tax accruals and other............................. 1,103 18,773 (9,656)
Valuation allowance......................................... (1,200) (59,933) 18,427
--------- ---------- ---------
Total provision (benefit) for income taxes............ $ 28,442 $ (22,878) $ 3,436
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
In accordance with SFAS No. 109, "Accounting for Income Taxes", in 1996 the
Company had fully provided valuation allowance reserves against its net deferred
tax assets primarily in the U.S. and Belgium where there were uncertainties
concerning the Company's ability to generate sufficient future taxable income to
realize these assets. In 1997, the Company reversed $59,900 of its valuation
allowance reserve as follows: $17,000 due to current year profitable U.S.
operations, $39,000 due to the Company's assessment that the realization of the
remaining U.S. net deferred tax assets is more likely than not, and $3,900 in
Belgium due to a gain on sale of certain tangible and intangible assets to other
Hexcel subsidiaries. The Company continues to reserve the balance of the net
deferred tax asset related to its Belgium operations.
F-27
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11--INCOME TAXES (CONTINUED)
The Company has made no U.S. income tax provision for approximately $76,000
of undistributed earnings of international subsidiaries as of December 31, 1998.
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.
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, 1998 and 1997, were:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Net operating loss carryforwards........................................ $ 19,200 $ 21,000
Reserves and other, net................................................. 24,150 31,580
Accrued business acquisition and consolidation expenses................. 3,000 4,380
Accelerated depreciation and amortization............................... (14,130) (16,690)
Valuation allowance..................................................... (7,300) (8,500)
--------- ---------
Net deferred tax asset.................................................. $ 24,920 $ 31,770
--------- ---------
--------- ---------
</TABLE>
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1998, Hexcel had net operating loss ("NOL") carryforwards
for U.S. federal and Belgium income tax purposes of approximately $45,000 and
$4,500, respectively. The U.S. NOL carryforwards, which are available to offset
future taxable income, expire at various dates through the year 2012. As a
result of the ownership change, which occurred in connection with the purchase
of the Acquired Ciba Business, the Company has a limitation on the utilization
of U.S. NOL carryforwards of approximately $12,000 per year.
NOTE 12--STOCKHOLDERS' EQUITY
COMMON STOCK OUTSTANDING
<TABLE>
<CAPTION>
(NUMBER OF SHARES-IN THOUSANDS) 1998 1997 1996
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Common stock:
Balance, beginning of year....................................... 36,891 36,592 18,091
Issuance of stock to Ciba........................................ -- -- 18,022
Activity under stock plans and other............................. 284 296 479
Conversion of Subordinated Notes................................. 1 3 --
--------- --------- ---------
Balance, end of year............................................. 37,176 36,891 36,592
--------- --------- ---------
Treasury stock:
Balance, beginning of year....................................... 35 31 --
Repurchased...................................................... 812 4 31
--------- --------- ---------
Balance, end of year............................................. 847 35 31
--------- --------- ---------
Common stock outstanding......................................... 36,329 36,856 36,561
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-28
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
In 1998, the Company's Board of Directors approved plans to repurchase up to
$20,000 of the Company's common stock. During the year ended December 31, 1998,
the Company repurchased 812 shares of its common stock at an average cost of
$12.32 per share, for a total of $10,000. The Board of Directors may also
approve additional stock buybacks from time to time subject to market conditions
and the terms of the Company's credit agreements and indentures.
STOCK-BASED INCENTIVE PLANS
The Company has various stock option and management incentive plans for
eligible employees, officers, directors and consultants. These plans provide for
awards in the form of stock options, stock appreciation rights, restricted
stock, restricted stock units, and other stock-based awards. Options to purchase
common stock are generally granted at the fair market value on the date of
grant. Substantially all of these options have a ten-year term and generally
vest over a 3-year period. In 1998 and 1997, Hexcel's stockholders approved
various amendments to the Company's stock-based incentive plans, which increased
the aggregate number of stock issuable under these plans by 4,500 to 7,350.
As of December 31, 1998, 1997 and 1996, the Company had outstanding a total
of 518,353 and 286, of performance accelerated restricted stock units ("PARS"),
respectively. PARS are convertible to an equal number of shares of Hexcel common
stock and generally vest in increments through 2005, subject to certain terms of
employment and other circumstances which may accelerate the vesting period. As
of December 31, 1998, 1997 and 1996, 301, 286, and 0 PARS were vested,
respectively. Approximately $1,660, $3,272 and $529 of compensation expense was
recognized in 1998, 1997 and 1996, respectively, with respect to the PARS and
certain other stock-based incentive plans.
In addition to the above, during 1996, the Company recognized $3,635 of
compensation expense under the intrinsic value method resulting from stock
options which vested in connection with the purchase of the Acquired Ciba
Business. This compensation expense was based on the difference between the
exercise price of the stock options granted and the market price of Hexcel
common stock on the date that the Company's stockholders approved the Incentive
Stock Plan under which these 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.
F-29
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
Stock option data for the three years ended December 31, 1998, 1997 and
1996, were:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
----------- -----------
<S> <C> <C>
Options outstanding at January 1, 1996 1,014 $ 7.27
Options granted........................................................ 1,577 $ 12.69
Options exercised...................................................... (447) $ 9.40
Options expired or canceled............................................ (85) $ 11.45
----------- -----------
Options outstanding at December 31, 1996 2,059 $ 10.36
Options granted........................................................ 3,094 $ 18.24
Options exercised...................................................... (289) $ 9.64
Options expired or canceled............................................ (25) $ 15.51
----------- -----------
Options outstanding at December 31, 1997 4,839 $ 15.39
Options granted........................................................ 3,253 $ 12.23
Options exercised...................................................... (237) $ 8.53
Options expired or canceled............................................ (2,740) $ 18.52
----------- -----------
Options outstanding at December 31, 1998 5,115 $ 12.05
----------- -----------
----------- -----------
</TABLE>
The number of options exercisable as of December 31, 1998, 1997 and 1996
were 1,505, 1,193 and 841, respectively, at a weighted average exercise price of
$11.54, $9.80 and $8.64, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
EXERCISE OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
- -------------- ------------- ----------------- ----------- ------------- -----------
$ 4.18- 4.75 173 5.9 $ 4.58 120 $ 4.75
$ 4.76-10.00 907 8.8 $ 8.10 252 $ 6.41
$10.01-15.00 3,322 8.9 $ 12.17 900 $ 12.46
$15.01-20.00 550 7.9 $ 16.58 226 $ 16.62
$20.01-24.00 141 9.0 $ 23.98 -- --
$24.01-30.00 20 9.3 $ 26.95 7 $ 26.95
$30.01-32.06 2 8.2 $ 30.49 -- $ 30.68
--
----- ----------- ----- -----------
$ 4.18-32.06 5,115 8.7 $ 12.05 1,505 $ 11.54
--
--
----- ----------- ----- -----------
----- ----------- ----- -----------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
In July 1997, the Company established an ESPP to provide eligible employees
an additional opportunity to share in the ownership of Hexcel. The maximum
number of common stock reserved for issuance under the ESPP is 200. Under the
ESPP, eligible employees may contribute up to 10% of their base earnings toward
the quarterly purchase of the Company's common stock at a purchase price equal
F-30
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
to 85% of the fair market value of the common stock on the purchase date. During
1998, approximately 36 common stock were issued under the ESPP.
PRO FORMA DISCLOSURES
The Company has elected to continue to follow APB Opinion No. 25 for
accounting for its stock-based incentive plans. Had compensation expense for the
Company's stock option plans been determined as prescribed by SFAS 123, pro
forma net income (loss) and related per share amounts, would have been as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $ 50,439 $ 73,630 $ (19,190)
Pro forma................................................. 48,172 67,355 (19,233)
Basic net income (loss) per share:
As reported............................................... $ 1.38 $ 2.00 $ (0.58)
Pro forma................................................. 1.31 1.83 (0.58)
Diluted net income (loss) per share:
As reported............................................... $ 1.24 $ 1.74 $ (0.58)
Pro forma................................................. 1.19 1.60 (0.58)
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 was $12.23, $18.24 and $12.75, respectively. The following ranges of
assumptions were used in the Black-Scholes pricing models for options granted in
1998, 1997 and 1996: risk-free interest of 4.6% to 6.3%, estimated volatility of
40% to 51%, dividend yield of 0.0%, and an expected life of 1 to 10 years.
F-31
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13--NET INCOME (LOSS) PER SHARE
Computations of basic and diluted net income (loss) per share for the years
ended December 31, 1998, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Basic net income (loss) per share:
Net income (loss)........................................... $ 50,439 $ 73,630 $ (19,190)
--------- --------- ----------
Weighted average common shares outstanding.................. 36,675 36,748 33,351
--------- --------- ----------
Basic net income (loss) per share........................... $ 1.38 $ 2.00 $ (0.58)
--------- --------- ----------
--------- --------- ----------
Diluted net income (loss) per share:
Net income (loss)........................................... $ 50,439 $ 73,630 $ (19,190)
Effect of dilutive securities--
Senior Subordinated Notes, due 2003......................... 5,087 5,087 --
Senior Subordinated Debentures, due 2011.................... 1,139 1,139 --
--------- --------- ----------
Adjusted net income (loss).................................. $ 56,665 $ 79,856 $ (19,190)
--------- --------- ----------
--------- --------- ----------
Weighted average common shares outstanding.................. 36,675 36,748 33,351
Effect of dilutive securities--
Stock options............................................... 924 1,176 --
Senior Subordinated Notes, due 2003......................... 7,238 7,239 --
Senior Subordinated Debentures, due 2011.................... 834 834 --
--------- --------- ----------
Diluted weighted average common shares outstanding.......... 45,671 45,997 33,351
--------- --------- ----------
Diluted net income (loss) per share......................... $ 1.24 $ 1.74 $ (0.58)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The Convertible Subordinated Notes, due 2003, which were issued in 1996, and
the Convertible Subordinated Debentures, due 2011, were excluded from the 1996
computation of diluted net loss per share as they were antidilutive.
Substantially all of the Company's stock options were included in the
calculation of the diluted earnings per share for the years ended December 31,
1998 and 1997.
NOTE 14--CONTINGENCIES
Hexcel is involved in litigation, investigations and claims arising out of
the conduct of its business, including those relating to commercial
transactions, and environmental, health and safety matters. The Company
estimates and accrues 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
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 the
Company'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, results of operations or cash
flows of the Company.
F-32
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14--CONTINGENCIES (CONTINUED)
LEGAL AND ENVIRONMENTAL CLAIMS AND PROCEEDINGS
Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess which are
included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. The
Company believes that it has limited or no liability for cleanup costs at these
sites and intends to vigorously defend itself in these matters.
Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act,
Hexcel signed an administrative consent order to pay for the environmental
remediation of a manufacturing facility it owns and formerly operated in Lodi,
New Jersey. The Company's estimate of the remaining cost to satisfy this consent
order is accrued in the accompanying consolidated balance sheets. The ultimate
cost of remediating the Lodi site will depend on developing circumstances.
In connection with the purchase of the Acquired Ciba Business, Hexcel
assumed various liabilities including a liability with respect to certain
environmental remediation activities at an acquired facility in Kent,
Washington. The Company was a party to a cost sharing agreement regarding the
operation of certain environmental remediation systems necessary to satisfy a
post-closure care permit issued to a previous owner of the Kent site by the U.S.
Environmental Protection Agency. Under the terms of the cost sharing agreement,
the Company was obligated to reimburse the previous owner for a portion of the
cost of the required remediation activities. The Company has determined that the
cost sharing agreement terminated on December 22, 1998, however, the other party
disputes this determination. The Company's estimate of other costs associated
with the cleanup of the Kent site are accrued in the accompanying consolidated
balance sheets.
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 Composites S.A., and installed in rail cars in France and
Spain. Two customers alleged that Hexcel Composites S.A. was responsible for the
problem. In 1998, the Company negotiated a settlement to be paid in 1999 with
one customer and the Company expects to settle with the remaining customer in
1999. The Company's estimated liability for this matter is accrued in the
accompanying consolidated balance sheets.
F-33
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information, including non-cash financing and
investing activities, for the years ended December 31, 1998, 1997 and 1996,
consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash paid for:
Interest................................................... $ 28,774 $ 22,300 $ 14,061
Taxes...................................................... 26,359 3,929 8,911
Non-cash items:
Debt issued in connection with the Acquired Ciba
Business................................................. -- -- 37,231
Common stock issued in connection with the Acquired Ciba
Business................................................. -- -- 144,174
Common stock issued under incentive plans.................. 1,874 3,272 529
Conversion of Senior Subordinated Notes.................... 15 50 --
Compensation expense in connection with the issuance of
common stock (see Note 12) -- -- 3,635
Capital lease obligation in connection with the Acquired
Clark-Schwebel Business.................................. 50,000 -- --
</TABLE>
NOTE 16--SEGMENT INFORMATION
The financial results for Hexcel's operating segments have been prepared
using a management approach, which is consistent with the basis and manner in
which Hexcel management internally segregates financial information for the
purposes of assisting in making internal operating decisions. Hexcel's operating
segments and related products, are as follows:
REINFORCEMENT PRODUCTS: This segment manufactures and sells carbon fibers
and carbon, glass and aramid fiber fabrics. These reinforcement products
comprise the foundation of most composite materials, parts and structures. The
segment weaves electronic fiberglass fabrics that are a substrate for PCBs. All
of the Company's electronic sales come from reinforcement fabric sales. This
segment also sells products for general industrial and recreation applications
such as decorative blinds and soft body armor. In addition, this segment sells
to the Company's Composite Materials segment and other third party customers in
the commercial aerospace and space and defense markets. Sales from the Acquired
Clark-Schwebel Business are included in this segment.
COMPOSITE MATERIALS: This segment manufactures and sells composite
materials, including prepregs, honeycomb, structural adhesives, sandwich panels
and specially machined honeycomb parts, primarily to the commercial aerospace
and space and defense markets, as well as to the general industrial and
recreational markets. This segment also sells to the Company's Engineered
Products segment.
ENGINEERED PRODUCTS: This segment manufactures and sells a range of
lightweight, high strength composite structures and interiors, primarily to the
commercial aerospace and space and defense markets.
Hexcel evaluates performance based on adjusted income before business
acquisition and consolidation ("BA&C") expenses, interest and taxes ("Adjusted
EBIT"), and generally accounts for
F-34
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16--SEGMENT INFORMATION (CONTINUED)
intersegment sales based on arm's length prices. Corporate and other expenses
are not allocated to the operating segments. The following table presents
financial information on the Company's operating segments as of December 31,
1998, 1997 and 1996, and for the years then ended:
<TABLE>
<CAPTION>
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
1998
Net sales to external customers........ $ 224,815 $ 653,484 $ 210,745 $ 1,089,044
Intersegment sales..................... 130,288 11,807 50 142,145
------------- ---------- ----------- ------------
Total sales...................... 355,103 665,291 210,795 1,231,189
Adjusted EBIT.......................... 57,433 87,126 16,009 160,568
Depreciation and amortization.......... 23,558 17,106 3,669 44,333
Equity in earnings of affiliated
companies............................ 517 -- -- 517
BA&C expenses.......................... 1,645 3,171 5,500 10,316
Segment assets......................... 788,445 423,183 133,715 1,345,343
Investment in non-consolidated
affiliates 70,291 -- -- 70,291
Capital expenditures................... 21,137 33,168 9,324 63,629
BA&C payments.......................... 598 7,141 -- 7,739
1997
Net sales to external customers........ 171,072 577,118 188,665 936,855
Intersegment sales..................... 124,736 16,710 -- 141,446
------------- ---------- ----------- ------------
Total sales...................... 295,808 593,828 188,665 1,078,301
Adjusted EBIT.......................... 40,399 84,151 14,702 139,252
Depreciation and amortization.......... 13,791 16,594 2,958 33,343
BA&C expenses.......................... 1,707 9,579 -- 11,286
Segment assets......................... 221,335 413,043 128,678 763,056
Capital expenditures................... 23,360 22,617 8,399 54,376
BA&C payments.......................... 2,849 16,796 -- 19,645
1996
Net sales to external customers........ 155,231 438,220 101,800 695,251
Intersegment sales..................... 57,168 7,609 23 64,800
------------- ---------- ----------- ------------
Total sales...................... 212,399 445,829 101,823 760,051
Adjusted EBIT.......................... 25,806 44,604 2,889 73,299
Depreciation and amortization.......... 8,877 13,022 2,455 24,354
BA&C expenses.......................... 1,699 27,998 -- 29,697
Segment assets......................... 227,415 350,218 118,383 696,016
Capital expenditures................... 21,569 15,056 3,883 40,508
BA&C payments.......................... 1,555 6,456 -- 8,011
</TABLE>
F-35
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16--SEGMENT INFORMATION (CONTINUED)
RECONCILIATION OF REPORTABLE SEGMENTS TO CONSOLIDATED TOTALS
Reconciliations of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES:
Total Adjusted EBIT for reportable segments............ $ 160,568 $ 139,252 $ 73,299
Less:
Total BA&C expenses for reportable segments............ 10,316 11,286 29,697
Corporate BA&C expenses 2,395....... 14,057 12,673
------------ ---------- ----------
Total consolidated BA&C expenses....................... 12,711 25,343 42,370
Corporate & other expenses 30,918 33,338 25,125
Interest expense....................................... 38,675 25,705 21,537
Other income........................................... -- -- (2,994)
Eliminations........................................... (100) 4,114 3,015
------------ ---------- ----------
Consolidated income (loss) before income taxes......... 78,364 50,752 (15,754)
------------ ---------- ----------
------------ ---------- ----------
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization for reportable
segments............................................. 44,333 33,343 24,354
Corporate depreciation and amortization................ 3,121 2,454 2,376
------------ ---------- ----------
Total consolidated depreciation and amortization....... 47,454 35,797 26,730
------------ ---------- ----------
------------ ---------- ----------
ASSETS:
Total assets for reportable segments................... 1,345,343 763,056 696,016
Corporate assets....................................... 96,376 86,381 44,670
Eliminations........................................... (37,558) (37,851) (38,950)
------------ ---------- ----------
Total consolidated assets.............................. 1,404,161 811,586 701,736
------------ ---------- ----------
------------ ---------- ----------
CAPITAL EXPENDITURES:
Total capital expenditures for reportable segments..... 63,629 54,376 40,508
Corporate expenditures................................. 2,901 2,993 3,061
------------ ---------- ----------
Total consolidated capital expenditures................ 66,530 57,369 43,569
------------ ---------- ----------
------------ ---------- ----------
BA&C PAYMENTS:
Total BA&C payments for reportable segments............ 7,739 19,645 8,011
Corporate BA&C payments................................ 912 13,950 3,568
------------ ---------- ----------
Total consolidated BA&C payments....................... $ 8,651 $ 33,595 $ 11,579
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-36
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16--SEGMENT INFORMATION (CONTINUED)
GEOGRAPHIC DATA
Sales and long-lived assets, by geographic area, consisted of the following
for the three years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net Sales to External Customers:
United States............................................ $ 687,566 $ 598,555 $ 394,524
International
France................................................... 178,878 165,738 151,638
United Kingdom........................................... 65,999 49,395 48,172
Other.................................................... 156,601 123,167 100,917
---------- ---------- ----------
Total international...................................... 401,478 338,300 300,727
---------- ---------- ----------
Total consolidated net sales............................. 1,089,044 936,855 695,251
---------- ---------- ----------
---------- ---------- ----------
Long-Lived Assets:
United States............................................ 831,382 304,191 266,191
International
France................................................... 42,155 37,313 42,661
United Kingdom........................................... 46,428 43,123 41,444
Other.................................................... 31,689 30,008 34,509
---------- ---------- ----------
Total international...................................... 120,272 110,444 118,614
---------- ---------- ----------
Total consolidated long-lived assets $ 951,654 $ 414,635 $ 384,805
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Net sales are attributed to geographic areas based on the location in which
the sale originated. U.S. net sales include U.S. exports to non-affiliates of
$99,976, $70,875 and $53,333, for the years ended December 31, 1998, 1997 and
1996, respectively. Long-lived assets primarily consist of property, plant and
equipment, intangibles, investments in affiliated companies and other assets,
less long-term deferred tax assets.
SIGNIFICANT CUSTOMERS
To the extent that the end application of net sales can be identified, the
Boeing Company and their subcontractors accounted for approximately 35%, 36% and
22% of 1998, 1997 and 1996 net sales, respectively. Similarly, the Airbus
Industrie consortium and their subcontractors accounted for approximately 11%,
10% and 10%, of 1998, 1997 and 1996 net sales, respectively.
F-37
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 17--QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1998 and 1997,
were:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998
Net sales.................................... $ 256,741 $ 273,537 $ 255,303 $ 303,463
Gross margin................................. 66,096 71,221 61,847 72,095
Business acquisition and consolidation
expenses................................... -- -- (711) (12,000)
Operating income............................. 33,736 38,156 27,563 17,584
Net income................................... 17,070 19,978 11,498 1,893
Net income per share:
Basic........................................ $ 0.46 $ 0.54 $ 0.31 $ 0.05
Diluted...................................... 0.40 0.46 0.29 0.05
Dividends per share.......................... -- -- -- --
Market price:
High......................................... $ 28.13 $ 31.38 $ 24.38 $ 14.19
Low.......................................... 21.25 22.63 9.69 7.06
1997
Net sales.................................... $ 214,009 $ 241,629 $ 226,611 $ 254,606
Gross margin................................. 46,889 57,818 54,967 62,958
Business acquisition and consolidation
expenses................................... (2,899) (2,818) (15,433) (4,193)
Operating income............................. 16,384 24,516 9,331 26,226
Net income................................... 8,226 15,135 37,948 12,321
Net income per share:
Basic........................................ $ 0.22 $ 0.41 $ 1.03 $ 0.33
Diluted...................................... 0.22 0.38 0.87 0.30
Dividends per share.......................... -- -- -- --
Market price:
High......................................... $ 21.38 $ 20.00 $ 30.25 $ 31.75
Low.......................................... 16.00 16.38 18.75 22.25
</TABLE>
Results for the quarters ended September 30, 1998 and December 31, 1998,
include the results of the Acquired Clark-Schwebel Business, which was acquired
on September 15, 1998. The Acquired Clark-Schwebel Business had net sales and
operating income of $7,000 and $400, and $51,400 and $7,200, for the quarters
ended September 30, 1998 and December 31, 1998, respectively. For the nine
months ended September 30, 1997, except for the $39,000 reversal of the U.S. tax
valuation allowance reserve on September , 1997, there was no net federal tax
provision recorded on the Company's U.S. income.
F-38
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 2,458 $ 7,504
Accounts receivable................................................................ 199,884 188,368
Inventories........................................................................ 204,748 213,199
Prepaid expenses and other assets.................................................. 7,469 10,111
Deferred tax asset................................................................. 21,249 19,844
------------ ------------
Total current assets............................................................... 435,808 439,026
Property, plant and equipment........................................................ 623,245 628,533
Less accumulated depreciation........................................................ (202,052) (195,960)
------------ ------------
Net property, plant and equipment.................................................. 421,193 432,573
Goodwill and other purchased intangibles, net of accumulated amortization of $14,963
in 1999 and $11,742 in 1998........................................................ 421,422 425,405
Investment in affiliated companies and other assets.................................. 118,564 107,157
------------ ------------
Total assets......................................................................... $ 1,396,987 $1,404,161
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations.................. $ 22,381 $ 26,867
Accounts payable................................................................... 82,703 81,869
Accrued liabilities................................................................ 111,094 110,708
------------ ------------
Total current liabilities.......................................................... 216,178 219,444
Long-term notes payable and capital lease obligations................................ 812,869 802,376
Indebtedness to a related party...................................................... 23,849 35,675
Other non-current liabilities........................................................ 42,969 44,267
------------ ------------
Total liabilities.................................................................... 1,095,865 1,101,762
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 20,000 shares authorized, no shares issued or
outstanding in 1999 and 1998....................................................... -- --
Common stock, $0.01 par value, 100,000 shares authorized, shares issued and
outstanding of 37,264 in 1999 and 37,176 in 1998................................... 373 372
Additional paid-in capital........................................................... 271,991 271,469
Retained earnings.................................................................... 40,103 34,898
Accumulated other comprehensive income (loss)........................................ (692) 6,313
------------ ------------
311,775 313,052
Less--treasury stock, at cost, 847 shares in 1999 and 1998........................... (10,653) (10,653)
------------ ------------
Total stockholders' equity........................................................... 301,122 302,399
------------ ------------
Total liabilities and stockholders' equity........................................... $ 1,396,987 $1,404,161
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-39
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
31,
----------------------
<S> <C> <C>
1999 1998
---------- ----------
<CAPTION>
UNAUDITED
<S> <C> <C>
Net sales.............................................................................. $ 316,170 $ 256,741
Cost of sales.......................................................................... 245,399 190,645
---------- ----------
Gross margin......................................................................... 70,771 66,096
Selling, general and administrative expenses........................................... 34,338 27,177
Research and technology expenses....................................................... 6,455 5,183
Business acquisition and consolidation expenses........................................ 2,809 --
---------- ----------
Operating income..................................................................... 27,169 33,736
Interest expense....................................................................... 19,106 6,967
---------- ----------
Income before income taxes............................................................. 8,063 26,769
Provision for income taxes............................................................. 2,839 9,699
Equity in losses of affiliated companies............................................... 16 --
---------- ----------
Net income............................................................................. $ 5,208 $ 17,070
---------- ----------
---------- ----------
Net income per share:
Basic................................................................................ $ 0.14 $ 0.46
Diluted.............................................................................. 0.14 0.40
Weighted average shares:
Basic................................................................................ 36,365 36,845
Diluted.............................................................................. 36,460 46,346
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-40
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
---------------------
1999 1998
---------- ---------
<S> <C> <C>
UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................... $ 5,208 $ 17,070
Reconciliation to net cash provided (used) by operations:
Depreciation and amortization.......................................................... 15,660 10,008
Deferred income taxes.................................................................. (1,189) (3,720)
Accrued business acquisition and consolidation expenses................................ 2,809 --
Business acquisition and consolidation payments........................................ (2,242) (1,783)
Equity in losses of affiliated companies............................................... 16 --
Working capital changes and other...................................................... (2,921) (26,676)
---------- ---------
Net cash provided (used) by operating activities......................................... 17,341 (5,101)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................................................... (9,429) (11,546)
Advances to affiliated companies......................................................... -- (750)
---------- ---------
Net cash used by investing activities.................................................... (9,429) (12,296)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (repayments of) the senior and revolving credit facilities, net............ (229,392) 10,114
Proceeds from (repayments of) long-term debt and capital lease obligations, net.......... 225,719 (505)
Debt issuance costs...................................................................... (8,990) --
Activity under stock plans............................................................... 249 1,375
---------- ---------
Net cash provided (used) by financing activities......................................... (12,414) 10,984
---------- ---------
Effect of exchange rate changes on cash and cash equivalents............................... (544) 553
---------- ---------
Net decrease in cash and cash equivalents.................................................. (5,046) (5,860)
Cash and cash equivalents at beginning of year............................................. 7,504 9,033
---------- ---------
Cash and cash equivalents at end of period................................................. $ 2,458 $ 3,173
---------- ---------
---------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
F-41
<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, 1999, and the
results of operations and cash flows for the quarters ended March 31, 1999 and
1998. The condensed consolidated balance sheet of the Company as of December 31,
1998 was derived from the audited 1998 consolidated balance sheet. Certain
information and footnote disclosures normally included in financial statements
have been omitted pursuant to rules and regulations of the Securities and
Exchange Commission. Certain prior quarter amounts in the condensed consolidated
financial statements have been reclassified to conform to the 1999 presentation.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's 1998 Annual Report on Form 10-K.
As discussed in Note 2, Hexcel acquired from Clark-Schwebel, Inc. and its
subsidiaries ("C-S") certain assets and assumed certain operating liabilities of
its industrial fabrics business (the "Acquired Clark-Schwebel Business") on
September 15, 1998. Accordingly, the condensed consolidated balance sheets,
statements of operations and cash flows include the financial position, results
of operations and cash flows of the Acquired Clark-Schwebel Business as of such
date and for such periods that the business was owned by the Company.
NOTE 2--BUSINESS ACQUISITION
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from C-S. The Acquired Clark-Schwebel Business is
engaged in the manufacture and sale of high-quality fiberglass fabrics, which
are used to make printed circuit boards for electronic equipment such as
computers, cellular telephones, televisions and automobiles. The Acquired
Clark-Schwebel Business also produces high performance specialty products for
use in insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials. At the date of acquisition, the Acquired
Clark-Schwebel Business operated four manufacturing facilities in the
southeastern U.S. and had approximately 1,300 full time employees.
As part of this acquisition, Hexcel also acquired C-S's equity ownership
interests in the following three joint ventures:
- a 43.6% share in CS-Interglas AG ("CS-Interglas") headquartered in
Germany, together with fixed-price options to increase this equity
interest to 84.0%. Hexcel's acquisition of the CS-Interglas equity
interest and related options was completed on December 23, 1998;
- a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"),
headquartered in Japan, which in turn has its own joint venture with
AlliedSignal Inc. in Taiwan; and
- a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab")
headquartered in the United States.
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian electronics and telecommunications industries. CS Tech-Fab
manufactures non-woven materials for roofing, construction and other specialty
applications. The fixed-price options to increase the equity
F-42
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 2--BUSINESS ACQUISITION (CONTINUED)
interest in CS-Interglas are, in the Company's opinion, significantly higher
than their current fair market value and expire on December 31, 1999. The
unconsolidated net sales in 1998 for these joint ventures were in excess of
$300,000.
The acquisition of the Acquired Clark-Schwebel Business was accounted for
under the purchase method of accounting and was completed pursuant to an Asset
Purchase Agreement dated July 25, 1998, as amended, by and among Hexcel,
Stamford CS Acquisition Corp., and C-S (the "Asset Purchase Agreement"). Under
the Asset Purchase Agreement, Hexcel acquired the net assets of the acquired
business, other than certain excluded assets and liabilities, in exchange for
approximately $473,000 in cash. As part of the acquisition, Hexcel entered into
a $50,000 lease for property, plant and equipment used in the acquired business
from an affiliate of C-S, pursuant to a long-term lease with purchase options.
PRO FORMA FINANCIAL INFORMATION
The pro forma net sales, net income and diluted net income per share of
Hexcel for the quarter ended March 31, 1998, after giving effect to the
acquisition of the Acquired Clark-Schwebel Business as if it had occurred on
January 1, 1998, were:
<TABLE>
<CAPTION>
3/31/98
----------
<S> <C>
Pro forma net sales................................................................................... $ 317,159
Pro forma net income.................................................................................. 18,151
Pro forma diluted net income per share................................................................ $ 0.43
</TABLE>
NOTE 3--INVENTORIES
<TABLE>
<CAPTION>
3/31/99 12/31/98
---------- ----------
<S> <C> <C>
Raw materials............................................................................. $ 88,988 $ 90,881
Work in progress.......................................................................... 74,439 77,769
Finished goods............................................................................ 41,321 44,549
---------- ----------
Total inventories......................................................................... $ 204,748 $ 213,199
---------- ----------
---------- ----------
</TABLE>
F-43
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED
PARTY
<TABLE>
<CAPTION>
3/31/99 12/31/98
---------- ----------
<S> <C> <C>
Senior credit facility.................................................................... $ 394,489 $ 618,214
European credit and overdraft facilities.................................................. 7,843 16,330
Convertible subordinated notes, due 2003.................................................. 114,435 114,435
Convertible subordinated debentures, due 2011............................................. 25,625 25,625
Senior subordinated notes, due 2009....................................................... 240,000 --
Various notes payable..................................................................... 408 547
---------- ----------
Total notes payable....................................................................... 782,800 775,151
Capital lease obligations................................................................. 52,450 54,092
Senior subordinated note payable to related party, net of unamortized discount of $1,128
and $1,801 as of March 31, 1999 and December 31, 1998, respectively..................... 23,849 35,675
---------- ----------
Total notes payable, capital lease obligations and indebtedness to a related party........ $ 859,099 $ 864,918
---------- ----------
---------- ----------
Notes payable and current maturities of long-term liabilities............................. $ 22,381 $ 26,867
Long-term notes payable and capital lease obligations, less current maturities............ 812,869 802,376
Indebtedness to related parties........................................................... 23,849 35,675
---------- ----------
Total notes payable, capital lease obligations and indebtedness to a related party........ $ 859,099 $ 864,918
---------- ----------
---------- ----------
</TABLE>
SENIOR CREDIT FACILITY
In connection with the acquisition of the Acquired Clark-Schwebel Business
on September 15, 1998, Hexcel obtained a new global credit facility (the "Senior
Credit Facility") to: (a) fund the purchase of the Acquired Clark-Schwebel
Business; (b) refinance the Company's existing revolving credit facility; and
(c) provide for ongoing working capital and other financing requirements of the
Company. Simultaneously with the January 1999 closing of the $240,000 principal
amount of 9.75% senior subordinated notes due 2009 (the "Senior Subordinated
Notes") offering, the Company amended the Senior Credit Facility to, among other
things, reduce the available borrowing capacity from $910,000 to $672,000,
modify certain financial covenants and to permit the offering.
Depending on certain predetermined ratios and other conditions, interest on
outstanding borrowings under the Senior Credit Facility is computed at an annual
rate ranging from approximately 0.75% to 2.25% in excess of the applicable
London interbank rate, or at the option of Hexcel, at 0 to 1.25% in excess of
the base rate of the administrative agent for the lenders. In addition, the
Senior Credit Facility is subject to a commitment fee ranging from 0.23% to
0.50% per annum of the total facility. The Senior Credit Facility is secured by
a pledge of shares of certain of Hexcel's subsidiaries. The Company is subject
to various financial covenants and restrictions under the Senior Credit
Facility, and is generally prohibited from paying dividends or redeeming capital
stock. Approximately $544,000 of the Senior Credit Facility expires in September
2004, with the balance expiring in 2005.
F-44
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 4--NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED
PARTY (CONTINUED)
SENIOR SUBORDINATED NOTES DUE 2009
On January 21, 1999, the Company issued $240,000 of Senior Subordinated
Notes due 2009. The Senior Subordinated Notes are general unsecured obligations
of Hexcel that bear interest at a rate of 9.75% per annum. Net proceeds of
approximately $231,000 from this offering were used to repay amounts owed under
the Senior Credit Facility. The Senior Subordinated Notes are redeemable
beginning in January of 2004, in whole or in part, at the option of Hexcel. The
redemption prices range from 104.9% to 100.0% of the outstanding principal
amount, depending on the period in which redemption occurs.
SENIOR SUBORDINATED NOTE PAYABLE TO A RELATED PARTY
The senior subordinated note payable to a related party, is payable to Ciba
Specialty Chemicals Inc., and is a general unsecured obligation of Hexcel. Ciba
Specialty Chemicals Inc. and its affiliate, Ciba Specialty Chemicals
Corporation, collectively hold approximately 49.6% of the Company's common
stock. From February 28, 1996 through February 28, 1999, the senior subordinated
note payable to a related party bore interest at a rate of 7.5% per annum. On
February 28, 1999, the interest rate increased to 10.5% per annum, and will
continue to increase by an additional 0.5% per year thereafter until they mature
in 2003. On February 17, 1999, the Company redeemed $12,500 of the note payable,
with such repayment financed with borrowings under the Company's Senior Credit
Facility.
NOTE 5--BUSINESS ACQUISITION AND CONSOLIDATION EXPENSES
Over the past few years, the Company has announced two major business
consolidation programs. The first one was announced in May 1996 and later
revised in December 1996 (the "1996 program"), and primarily related to the
integration of the acquired composite business of Ciba-Geigy Ltd. and the
acquired carbon fibers and prepreg business of Hercules Inc. In December 1998
and March 1999, the Company announced a second program related to the
integration of the Acquired Clark-Schwebel Business and the combination of the
Company's U.S., European and Pacific Rim composite materials businesses into a
single, global business unit (the "1998/1999 program"). More detailed
discussions on each of these programs are set forth below. Total accrued
business acquisition and consolidation expenses at December 31, 1998 and March
31, 1999, and activity during the quarter ended March 31, 1999 for each of these
programs was as follows:
<TABLE>
<CAPTION>
1998/1999 1996
PROGRAM PROGRAM TOTAL
----------- ----------- ---------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998.................................................. $ 5,002 $ 3,200 $ 8,202
Business acquisition and consolidation expenses.................................. 2,809 -- 2,809
Cash expenditures................................................................ (2,242) -- (2,242)
Non-cash usage, including asset write-downs and currency translation effects..... (1,927) (100) (2,027)
----------- ----------- ---------
BALANCE AS OF MARCH 31, 1999..................................................... $ 3,642 $ 3,100 $ 6,742
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
F-45
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS ACQUISITION AND CONSOLIDATION EXPENSES (CONTINUED)
1998/1999 PROGRAM
In December 1998, Hexcel announced business consolidation actions within its
reinforcement products and composite materials businesses. These actions
included the integration of Hexcel's existing fabrics business with the U.S.
operations of the Acquired Clark-Schwebel Business, and the combination of the
Company's U.S., European and Pacific Rim composite materials businesses into a
single, global business unit. The objectives of these actions were to eliminate
redundancies, improve manufacturing planning, and enhance customer service. As
of March 31, 1999, the Company had substantially completed these business
consolidation actions and to date, these actions have resulted in the
elimination of approximately 100 operating, sales, marketing and administrative
positions.
On March 16, 1999, the Company expanded its actions relating to the
integration of the Acquired Clark-Schwebel Business with the announcement of the
closure of its Cleveland, Georgia manufacturing facility by August 1999. This
facility, which was part of the Acquired Clark-Schwebel Business, employs
approximately 100 people and produces fabrics used to make laminate for printed
circuit boards. Certain production equipment from the Cleveland, Georgia
facility will be moved to the Company's Anderson, South Carolina facility.
Closure of this facility resulted from current competitive conditions in the
global market for electronic fiberglass materials and was not expected at the
time of the acquisition of the Acquired Clark-Schwebel Business.
Accrued business acquisition and consolidation expenses at December 31, 1998
and March 31, 1999, and activity during the quarter ended March 31, 1999 for the
1998/1999 program, were as follows:
<TABLE>
<CAPTION>
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
1998/1999 PROGRAM RELOCATION RELOCATION TOTAL
- ------------------------------------------------------------------------------ ------------- ----------- ---------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998............................................... $ 3,020 $ 1,982 $ 5,002
Business acquisition and consolidation expenses............................... 994 1,815 2,809
Cash expenditures............................................................. (1,497) (745) (2,242)
Non-cash usage, including asset write-downs and currency translation
effects..................................................................... -- (1,927) (1,927)
------ ----------- ---------
BALANCE AS OF MARCH 31, 1999.................................................. $ 2,517 $ 1,125 $ 3,642
------ ----------- ---------
------ ----------- ---------
</TABLE>
As of December 31, 1998, accrued business consolidation and acquisition
expenses for the 1998/1999 program primarily consisted of severance for
employees terminated in December 1998, costs for early termination for certain
leases, and equipment relocation costs incurred, but not yet paid. The Company's
policy is to pay severance over a period of time rather than in a lump-sum
amount. During the first quarter of 1999, the Company recorded additional
business acquisition and consolidation expenses of $2,809, primarily reflecting
the costs of closing the Cleveland, Georgia facility, of which $1,800
represented a non-cash write-down on equipment that will be disposed of. Cash
expenditures during the quarter ended March 31, 1999 for the 1998/1999 program
principally related to severance payments made to those employees terminated in
December 1998.
As of March 31, 1999, remaining accrued expenses for the 1998/1999 program
primarily reflected severance and relocation costs for employees in the
Company's Cleveland, Georgia facility and for employees terminated in December
1998, as well as costs relating to the early termination of certain
F-46
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 5--BUSINESS ACQUISITION AND CONSOLIDATION EXPENSES (CONTINUED)
leases. Remaining cash expenditures for the 1998/1999 program are expected to be
funded through operating cash flows. The 1998/1999 program is expected to be
substantially completed by the end of 1999.
1996 PROGRAM
In 1996, Hexcel announced plans to consolidate the Company's operations over
a period of three years. The objective of the program was to integrate acquired
assets and operations into Hexcel, and to reorganize the Company's manufacturing
and research activities around strategic centers dedicated to select product
technologies. Management expected that this consolidation program would take
approximately three years to complete, in part because of the aerospace industry
requirements to "qualify" specific equipment and manufacturing facilities for
the manufacture of certain products. These qualification requirements increase
the complexity, cost and time of moving equipment and consolidating
manufacturing activities. The program is near completion, and the Company
expects that all activities related to this consolidation program will be
finished by mid-1999.
Accrued business acquisition and consolidation expenses at December 31, 1998
and March 31, 1999, and activity during the quarter ended March 31, 1999 for
this business acquisition and consolidation program, were as follows:
<TABLE>
<CAPTION>
EMPLOYEE FACILITY &
SEVERANCE & EQUIPMENT
1996 PROGRAM RELOCATION RELOCATION TOTAL
- ------------------------------------------------------------------------------ ------------- ------------- ---------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1998............................................... $ 2,848 $ 352 $ 3,200
Non-cash usage, including asset write-downs and currency translation
effects..................................................................... (100) -- (100)
------ ----- ---------
BALANCE AS OF MARCH 31, 1999.................................................. $ 2,748 $ 352 $ 3,100
------ ----- ---------
------ ----- ---------
</TABLE>
As of December 31, 1998 and March 31, 1999, accrued business acquisition and
consolidation expenses for the 1996 program related to a $600 foreign government
grant received by the Company that is required to be repaid over a five year
period due to lower employee levels as a result of the consolidation program,
$2,148 in employee retirement costs associated with terminations and $352 of
environmental costs related to a closed facility.
F-47
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 6--NET INCOME PER SHARE
Computations of basic and diluted net income per share for the quarters
ended March 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Basic net income per share:
Net income.................................................................................. $ 5,208 $ 17,070
--------- ---------
Weighted average common shares outstanding.................................................. 36,365 36,845
--------- ---------
Basic net income per share.................................................................. $ 0.14 $ 0.46
--------- ---------
--------- ---------
Diluted net income per share:
Net income.................................................................................. $ 5,208 $ 17,070
Effect of dilutive securities -
Senior Subordinated Notes, due 2003....................................................... -- 1,264
Senior Subordinated Debentures, due 2011.................................................. -- 283
--------- ---------
Adjusted net income......................................................................... $ 5,208 $ 18,617
--------- ---------
--------- ---------
Weighted average common shares outstanding.................................................. 36,365 36,845
Effect of dilutive securities -
Stock options............................................................................. 95 1,428
Senior Subordinated Notes, due 2003....................................................... -- 7,239
Senior Subordinated Debentures, due 2011.................................................. -- 834
--------- ---------
Diluted weighted average common shares outstanding.......................................... 36,460 46,346
--------- ---------
Diluted net income per share................................................................ $ 0.14 $ 0.40
--------- ---------
--------- ---------
</TABLE>
The Convertible Subordinated Notes, due 2003, and the Convertible
Subordinated Debentures, due 2011, were excluded from the 1999 computation of
diluted net income per share, as they were antidilutive. For the quarter ended
March 31, 1999, approximately 4,800 stock options, or substantially all of the
Company's outstanding stock options, were excluded from the calculation of
diluted net income per share. The exercise price for these stock options ranged
from approximately $8.25 to $30.68, with the weighted average price being
approximately $12.55. For the quarter ended March 31, 1998, substantially all of
the Company's outstanding stock options were included in the calculation of
diluted net income per share.
NOTE 7--COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
------------------------
<S> <C> <C>
1999 1998
----------- -----------
Net income.......................................................... $ 5,208 $ 17,070
Currency translation adjustment..................................... (7,005) (1,573)
----------- -----------
Total comprehensive income (loss)................................... $ (1,797) $ 15,497
----------- -----------
----------- -----------
</TABLE>
F-48
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--SEGMENT INFORMATION
Hexcel evaluates the performance of its operating segments based on adjusted
income before business acquisition and consolidation expenses, interest, taxes
and equity in earnings of affiliated companies ("Adjusted EBIT"), and generally
accounts for intersegment sales based on arm's length prices. Corporate and
certain other expenses are not allocated to the operating segments.
Financial information on the Company's operating segments for the quarters
ended March 31, 1999 and 1998, including pro forma financial information, after
giving effect to the acquisition of the Acquired Clark-Schwebel Business as if
it occurred on January 1, 1998, is as follows:
<TABLE>
<CAPTION>
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
------------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
FIRST QUARTER 1999
Net sales to external customers.............................. $ 85,807 $ 177,200 $ 53,163 $ 316,170
Intersegment sales........................................... 35,728 2,776 -- 38,504
------------- ---------- ----------- ----------
Total sales.............................................. 121,535 179,976 53,163 354,674
Adjusted EBIT................................................ 10,273 26,397 2,596 39,266
Depreciation and amortization................................ 8,902 5,037 1,005 14,944
Capital expenditures......................................... 4,189 3,492 1,666 9,347
PRO FORMA FIRST QUARTER 1998
Net sales to external customers.............................. 103,362 164,133 49,664 317,159
Intersegment sales........................................... 35,118 2,946 19 38,083
------------- ---------- ----------- ----------
Total sales.............................................. 138,480 167,079 49,683 355,242
Adjusted EBIT................................................ 22,344 26,075 2,910 51,329
Depreciation and amortization................................ 9,422 4,249 774 14,445
Capital expenditures......................................... 4,772 6,474 900 12,146
FIRST QUARTER 1998
Net sales to external customers.............................. 42,944 164,133 49,664 256,741
Intersegment sales........................................... 35,118 2,946 19 38,083
------------- ---------- ----------- ----------
Total sales.............................................. 78,062 167,079 49,683 294,824
Adjusted EBIT................................................ 13,679 26,075 2,910 42,664
Depreciation and amortization................................ 4,315 4,249 774 9,338
Capital expenditures......................................... 3,843 6,474 900 11,217
</TABLE>
F-49
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 8--SEGMENT INFORMATION (CONTINUED)
Reconciliations of the totals reported for the operating segments to
consolidated income before income taxes, are as follows:
<TABLE>
<CAPTION>
PRO FORMA
FIRST FIRST FIRST
QUARTER QUARTER QUARTER
1999 1998 1998
--------- ------------ ---------
<S> <C> <C> <C>
Total Adjusted EBIT for reportable segments.................................. $ 39,266 $ 51,329 $ 42,664
Less:
Business acquisition and consolidation expenses.............................. 2,809 -- --
Corporate, other expenses and eliminations................................... 9,288 8,928 8,928
Interest expense............................................................. 19,106 16,431 6,967
--------- ------------ ---------
Consolidated income before income taxes...................................... $ 8,063 $ 25,970 $ 26,769
--------- ------------ ---------
--------- ------------ ---------
</TABLE>
F-50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Clark-Schwebel Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of
Clark-Schwebel Holdings, Inc. (a Delaware corporation) and subsidiaries as of
December 28, 1996, and January 3, 1998, and the related consolidated statements
of income and cash flows for each of the two periods in the year ending December
28, 1996, and the fiscal year ending January 3, 1998. 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 disclosure 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 financial position of Clark-Schwebel Holdings,
Inc. and subsidiaries as of December 28, 1996, and January 3, 1998, and the
results of their operations and their cash flows for each of the two periods in
the year ended December 28, 1996, and the fiscal year ending January 3, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Columbia, South Carolina
February 12, 1998 (except with respect to the matters discussed
in Note 17 as to which the date is September 15, 1998)
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying statements of income and cash flows of Fort
Mill A Inc. (the "Predecessor") (a wholly owned subsidiary of Springs
Industries, Inc.) for the fiscal year ended December 30, 1995. These financial
statements are the responsibility of the Predecessor's management, our
responsibility is to express an opinion on the financial statements based on our
audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of Fort Mill A Inc. for the
fiscal year ended December 30, 1995 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 9, 1996
(February 24, 1996 as to Note 2)
F-52
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND JANUARY 3, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
--------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 4,064 $ 147
Accounts receivable, net......................................................... 25,794 28,527
Inventories, net................................................................. 33,625 34,897
Other............................................................................ 592 235
--------------- ------------
Total current assets........................................................... 64,075 63,806
--------------- ------------
PROPERTY, PLANT AND EQUIPMENT...................................................... 67,936 72,133
Accumulated depreciation......................................................... (5,841) (12,540)
--------------- ------------
Property, plant and equipment, net............................................. 62,095 59,593
--------------- ------------
EQUITY INVESTMENTS................................................................. 63,426 65,411
GOODWILL........................................................................... 44,333 43,205
OTHER ASSETS....................................................................... 6,808 5,702
--------------- ------------
TOTAL ASSETS....................................................................... $ 240,737 $ 237,717
--------------- ------------
--------------- ------------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 21,448 $ 19,806
Accrued liabilities.............................................................. 15,330 16,706
Deferred tax liabilities--current................................................ 2,056 2,370
Current maturities of long-term debt............................................. 51 --
--------------- ------------
Total current liabilities...................................................... 38,885 38,882
LONG-TERM DEBT..................................................................... 123,440 155,994
DEFERRED TAX LIABILITIES........................................................... 21,458 20,575
LONG-TERM BENEFIT PLANS AND OTHER.................................................. 7,121 4,139
COMMITMENTS AND CONTINGENCIES
--------------- ------------
TOTAL LIABILITIES.................................................................. 190,904 219,590
--------------- ------------
EQUITY:
Preferred stock (par value per share--$.01)--12.5% participating, 10,000 shares
authorized, 1,000 and 0 shares issued and outstanding, respectively.............. 35,000 --
Common stock (par value per share--$.01)--100,000 shares authorized, 9,000 shares
issued and outstanding, less management loans of $822 and $0, respectively....... 9,178 9,000
Retained earnings................................................................ 7,005 13,664
Cumulative translation adjustment................................................ (1,350) (4,537)
--------------- ------------
Total equity................................................................... 49,833 18,127
--------------- ------------
TOTAL LIABILITIES AND EQUITY....................................................... $ 240,737 $ 237,717
--------------- ------------
--------------- ------------
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, APRIL 18-- 29,
1995-- DECEMBER 1996--
APRIL 17, 28, JANUARY 3,
1995 1996 1996 1998
--------- ----------- ----------- -----------
(PREDECESSOR BASIS) (SUCCESSOR BASIS)
<S> <C> <C> <C> <C>
Net sales................................... $ 231,306 $ 68,911 $ 152,003 $ 240,204
Cost of goods sold.......................... 191,978 54,958 118,605 184,901
--------- ----------- ----------- -----------
Gross profit................................ 39,328 13,953 33,398 55,303
Selling, general and adminstrative
expenses.................................. 17,750 4,812 10,418 15,987
--------- ----------- ----------- -----------
Operating income.......................... 21,578 9,141 22,980 39,316
Other income (expense):
Interest expense.......................... (401) (148) (10,061) (15,176)
Other, net................................ 12 (5) 50 35
--------- ----------- ----------- -----------
Income before income taxes.................. 21,189 8,988 12,969 24,175
Provision for income tax.................... (8,444) (3,595) (5,460) (9,657)
Income from equity investees, net........... 2,553 1,174 2,633 3,997
--------- ----------- ----------- -----------
Income from continuing operations........... 15,298 6,567 10,142 18,515
Discontinued operations:
Income from discontinued operations,
net..................................... 111 -- -- --
--------- ----------- ----------- -----------
Net income.................................. $ 15,409 $ 6,567 10,142 18,515
--------- -----------
--------- -----------
Accrued dividends on preferred stock........ (3,137) (2,856)
----------- -----------
Net income applicable to common shares.... $ 7,005 $ 15,659
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-54
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996 AND JANUARY 3, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER DECEMBER
31, APRIL 18-- 29,
1995-- DECEMBER 1996--
APRIL 17, 28, JANUARY 3,
1995 1996 1996 1998
--------- ----------- ----------- -----------
(PREDECESSOR BASIS) (SUCCESSOR BASIS)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................. $ 15,409 $ 6,567 $ 10,142 $ 18,515
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization of goodwill
and unearned revenue................... 11,128 3,526 6,683 9,385
Amortization of deferred financing
cost................................... -- 0 601 1,106
Deferred tax provision................... 176 1,404 (1,128) (1,369)
Income from equity investments, net...... (2,553) (1,174) (2,633) (3,997)
Income from discontinued operations,
net.................................... (111) -- -- --
Loss on sale of equipment................ -- -- -- 42
Changes in assets and liabilities, net of
the effects of the purchase of the
company:
Accounts receivable.................... (8,244) 1,832 3,811 (2,733)
Inventories............................ (2,931) (2,883) 3,323 (1,272)
Prepaid expenses and other............. 1,465 (187) 1,399 890
Accounts payable....................... 3,181 (697) 14,011 (1,642)
Accrued liabilities.................... 367 (289) 5,076 2,377
Other.................................... 124 (131) (455) 342
--------- ----------- ----------- -----------
Net cash provided by operating
activities........................... 18,011 7,968 40,830 21,644
--------- ----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment and other assets.... (8,429) (1,603) (2,035) (11,019)
Proceeds from sale of assets............... 42 -- -- 1,511
Payment for purchase of company............ -- -- (192,895) --
--------- ----------- ----------- -----------
Net cash used in investing
activities........................... (8,387) (1,603) (194,930) (9,508)
--------- ----------- ----------- -----------
FINANCING ACTIVITIES:
Investment by Springs...................... (8,982) (10,955) -- --
Transfer of assets retained by Springs..... -- 4,461 -- --
Proceeds from issuance of stock............ -- -- 45,000 --
Payment of acquisition fees, net........... -- -- (10,128) --
Loans to management investors.............. -- -- (822) --
Proceeds from long-term borrowings......... -- -- 160,000 45,994
Principal payments under long-term debt and
capital lease obligations................ (87) (29) (36,616) (13,491)
Redemption of preferred stock, net......... -- -- -- (50,172)
Dividends received from ASCO............... -- -- 304 1,616
--------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities................. (9,069) (6,523) 157,738 (16,053)
--------- ----------- ----------- -----------
NET CHANGE IN CASH........................... 555 (158) 3,638 (3,917)
CASH, BEGINNING OF PERIOD / YEAR............. 29 584 426 4,064
--------- ----------- ----------- -----------
CASH, END OF PERIOD / YEAR................... $ 584 $ 426 $ 4,064 $ 147
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
CASH PAID FOR INTEREST....................... $ 401 $ 120 $ 7,081 $ 12,263
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
CASH PAID FOR TAXES.......................... $ -- $ -- $ 7,546 $ 10,488
--------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-55
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the assets,
liabilities and results of operations of Clark-Schwebel Holdings, Inc. the
successor company ("Company"), following the change in ownership (See Note 2),
for the following periods: as of and for the period ended January 3, 1998, and
as of December 28, 1996 and for the period from April 18, 1996 to December 28,
1996. The Company's primary asset is the capital stock of Clark-Schwebel, Inc.
its operating company. The statements also include the assets, liabilities, and
results of operations as of and for the period ended December 30, 1995, and for
the period from December 31, 1995 to April 17, 1996 of Fort Mill A Inc., the
predecessor company ("Predecessor Company"), prior to the change in ownership.
The statements of the Predecessor Company include certain liabilities and
expenses that historically were accounted for only at the Springs Industries,
Inc. ("Springs")--parent company level. The financial statements of the
Predecessor Company and Successor Company are not comparable in certain respects
due to differences between the costs bases of certain assets and liabilities and
the impact of interest expense on the Successor Company (see Note 2).
SUMMARIZED FINANCIAL INFORMATION--The following table provides summarized
financial information for Clark-Schwebel, Inc., the operating company, on a
stand alone basis. Clark-Schwebel, Inc. is a wholly owned subsidiary of
Clark-Schwebel Holdings, Inc. and its separate financial statements are not
included or filed separately because management has determined that they would
not be material to investors. The 1996 balance sheet information is as of
December 28, 1996 and the 1996 income statement information is for the period
from April 18, 1996 through December 28, 1996. The 1997 balance sheet
information is as of January 3, 1998 and the 1997 income statement information
is for the period from December 29, 1996 to January 3, 1998.
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current assets........................................................ $ 64,038 $ 63,806
Noncurrent assets..................................................... 176,662 173,911
---------- ----------
Total assets.................................................... $ 240,700 $ 237,717
---------- ----------
---------- ----------
Current liabilities................................................... $ 38,885 $ 36,706
Noncurrent liabilities................................................ 148,878 135,097
Equity................................................................ 52,937 65,914
---------- ----------
Total liabilities and equity.................................... $ 240,700 $ 237,717
---------- ----------
---------- ----------
Net sales............................................................. $ 152,003 $ 240,204
Gross profit.......................................................... 33,398 55,303
Income from continuing operations..................................... 10,135 19,816
Net income............................................................ $ 10,135 $ 19,816
---------- ----------
---------- ----------
Dividends to Clark-Schwebel Holdings, Inc............................. $ -- $ 5,000
---------- ----------
---------- ----------
</TABLE>
All assets of Clark-Schwebel, Inc. represent restricted net assets with the
exception of the foreign equity investments and distributions received from the
foreign equity investments. Except in limited circumstances, Clark-Schwebel,
Inc. is prohibited from transferring restricted net assets to Clark-Schwebel
Holdings, Inc. in the form of cash dividends, loans, or advances without the
consent of a third party lender. The amount of unrestricted net assets at
January 3, 1998 is $62,257, which
F-56
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION (CONTINUED)
represents the book value of the foreign equity investments ($61,254) and
distributions received in the form of cash from the foreign equity investments
($1,003).
OPERATIONS--The Company consists primarily of the operations, assets, and
liabilities of manufacturing facilities located in Anderson, SC, Statesville,
NC, Cleveland, GA, and Washington, GA, which produce woven fiber glass and
aramid fabrics. The Company's products are used in electronic circuit boards,
coated and laminated composites, aircraft construction and protective apparel
such as anti-ballistic vests and helmets.
2. PURCHASE TRANSACTION
On February 24, 1996, the Company, Springs and affiliates of Vestar Equity
Partners, L.P. (Vestar), entered into an Agreement and Plan of Merger
(Agreement) whereby affiliates of Vestar would acquire the Company. Pursuant to
the Agreement, on April 17, 1996 (Closing Date), Vestar/CS Holding Company, LLC
(Vestar/CS) purchased all of the issued and outstanding capital stock of Fort
Mill A Inc. from Springs for approximately $192,895. The sources of cash for
this purchase included $110,000 of senior notes, an equity contribution of
$45,000 and bank debt. On the day following the Closing Date, Vestar/CS had an
82% common equity interest and management investors had an 18% common equity
interest in the Company.
Under the Agreement, Springs agreed to (i) assume responsibility for
repayment of the Industrial Revenue Bonds payable in 2010 and related accrued
interest, (ii) pay $959 in certain accrued employee benefits, (iii) provide
indemnification for certain environmental, tax and other matters (including the
environmental matter described in Note 14 for which $175 was accrued at December
30, 1995), (iv) retain the accounts receivable from one customer (which totaled
$2,782 as of December 30, 1995)and related $1,400 reserve, and (v) retain the
$99 accrued obligation related to the Company's Long-Term Disability Plan. At
the Closing Date, all payable and receivable accounts between the Company and
Springs were canceled.
The acquisition was accounted for as a purchase business combination. The
adjustment to net assets represents the step-up to fair value of the net assets
acquired as follows:
<TABLE>
<S> <C>
Purchase price.................................................... $ 192,895
Nonfinancing portion of fees and expenses......................... 2,780
---------
Total purchase price........................................ 195,675
Less fair value of net assets acquired............................ (150,547)
---------
Excess of purchase price over fair value of net assets acquired... $ 45,128
---------
---------
</TABLE>
F-57
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. PURCHASE TRANSACTION (CONTINUED)
The fair values of Clark-Schwebel, Inc.'s assets and liabilities at the date
of acquisition are presented below:
<TABLE>
<S> <C>
Current assets.................................................... $ 68,410
Property, plant and equipment..................................... 66,391
Equity investments................................................ 62,314
Current liabilities............................................... (20,282)
Other liabilities................................................. (26,286)
---------
Net assets acquired............................................... $ 150,547
---------
---------
</TABLE>
Following the acquisition, the purchase cost (including the fees and
expenses related thereto) was allocated to the tangible and intangible assets
and liabilities of the Company based upon their respective fair values. This
resulted in a step-up in the basis of inventory of $5,274 and property, plant
and equipment of $15,000. The excess of the purchase price over the fair value
of net assets acquired of $45,128 was recorded as goodwill, and is being
amortized on a straight-line basis over a period of 40 years.
Additional agreements include Transition Agreements for specified periods in
which Springs would be compensated for certain services provided to the Company,
and a Management Agreement that specifies services to be provided to the Company
by Vestar.
In accordance with agreements related to the change of ownership
transaction, certain assets totaling $4,461 were transferred to Springs in the
first quarter of 1996. This balance has been separately disclosed on the face of
the accompanying 1996 statements of cash flows.
3. PREFERRED STOCK REDEMPTION AND ISSUANCE OF SENIOR DEBENTURES
On July 14, 1997, the Company amended the terms of its outstanding
participating preferred stock (the "Preferred Stock") by amending and restating
its certificate of incorporation (the "Certificate") to allow the Company to
redeem such Preferred Stock. On August 14, 1997 the Company issued $46,000 in
12.5% Senior Debentures due 2007 (the "Senior Debentures")and paid $5,000 in
cash in exchange for and redemption of the Preferred Stock. The $51,000
redemption price was established as follows:
<TABLE>
<S> <C>
Book value of Preferred Stock...................................... $ 35,000
Accrued Preferred Stock dividends.................................. 6,000
Common equity component of Preferred Stock......................... 10,000
---------
Total........................................................ $ 51,000
---------
---------
</TABLE>
Vestar/CS-Holding paid $1,000 for the common equity component of the
Preferred Stock at the time of the Acquisition. The common equity component was
purchased for $10,000 on the redemption date.
Vestar/CS-Holding sold the Preferred Stock on July 14, 1997 and
simultaneously purchased 10% of the outstanding Common Stock of the Company from
the management investors on a pro rata basis.
F-58
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. PREFERRED STOCK REDEMPTION AND ISSUANCE OF SENIOR DEBENTURES (CONTINUED)
Upon the consummation of that transaction, all of the Company's outstanding
loans to management were repaid in full.
The overall net impact of the Preferred Stock redemption and issuance of
Senior Debentures was a reduction of equity by $44,200, an increase in debt by
$46,000, a reduction of "long-term benefit plans and other" liabilities by
$6,000, and a decrease in cash by $4,200.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Following is a summary of the significant accounting policies used in the
preparation of the financial statements of the Company.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All material intercompany amounts
and transactions have been eliminated.
FISCAL YEAR--The Company's operations are based on a fifty-two or
fifty-three week fiscal year ending on the Saturday closest to December 31. The
fiscal years ended December 30, 1995, December 28, 1996 and January 3, 1998 are
referred to herein as 1995, 1996 and 1997, respectively. The 1995 and 1996
fiscal years each consisted of 52 weeks, while the 1997 fiscal year consisted of
53 weeks. Due to the purchase transaction on April 17, 1996, the 52 week fiscal
year in 1996 is comprised of the operations of the Predecessor Company and the
Successor Company.
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 and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These estimates include the allowance for doubtful accounts
receivable and the liabilities for certain long-term benefit plans. Actual
results could differ from such estimates.
REVENUE RECOGNITION--Revenue from product sales is recognized at the time
ownership of the goods transfers to the customer and the earnings process is
complete. This generally occurs when the goods are shipped.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash on hand
and in the bank as well as short term investments held for the purpose of
general liquidity. Such investments normally mature within three months from the
date of acquisition.
ACCOUNTS RECEIVABLE--The Company establishes an allowance for doubtful
accounts based upon factors including the credit risk of specific customers,
historical trends and other information. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral. The reserve for doubtful accounts was $853 at December 28, 1996 and
$1,100 at January 3, 1998. The provision for uncollectible amounts was $1,842,
($84), $160 and $189 for fiscal 1995, 1996 (Predecessor), 1996 (Successor) and
1997 (Successor), respectively. Net write-offs (recoveries) were $349, ($6),
($38) and ($58), respectively, for the same periods.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO)method for substantially all
inventories.
F-59
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT--Property, plant, and equipment is recorded
at cost and depreciation is computed on a straight-line basis over the estimated
useful lives of the related assets. Estimated useful lives are as follows:
<TABLE>
<S> <C>
10 to 20
Land improvements............................................ years
20 to 40
Buildings and improvements................................... years
Machinery and equipment...................................... 3 to 11 years
</TABLE>
EQUITY INVESTMENTS--The company owns equity interests in CS-Interglas AG
(headquartered in Germany), Asahi-Schwebel Co., Ltd. (headquartered in Japan)
and Clark Schwebel Tech-Fab Company (located in Anderson, SC), which are
accounted for using the equity method of accounting.
FOREIGN CURRENCY--The foreign equity investments are translated at year-end
exchange rates. Equity income and losses are translated at the average rate
during the year. Cumulative translation adjustments are reflected as a separate
component of stockholders' equity.
POSTRETIREMENT BENEFITS--Postretirement benefits are accounted for pursuant
to Statement of Financial Accounting Standards ("SFAS")No. 106, EMPLOYERS
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106
requires that the projected future cost of providing postretirement benefits,
such as health care and life insurance, be recognized as an expense as employees
render service rather than when claims are incurred.
INCOME TAXES--Income taxes are accounted for pursuant to SFAS 109,
ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, deferred income tax assets and
liabilities represent the future income tax effect of temporary differences
between the book and tax bases of assets and liabilities assuming they will be
realized and settled at the amounts reported in the financial statements. The
provision for income taxes included in the accompanying financial statements is
computed in a manner consistent with SFAS No. 109.
CERTAIN COMPENSATION PLANS--Certain key employees of the Company were
granted stock options and certain types of deferred compensation related to
Springs common stock under Springs' executive plans. Compensation expense
allocated from Springs for these grants for 1995, 1996 (Predecessor), 1996
Successor) and 1997 (Successor) was approximately $145, $418, $0 and $0,
respectively.
NEW ACCOUNTING STANDARD--During 1997, the FASB issued SFAS No. 130,
"Comprehensive Income", that is not effective until 1998. SFAS No. 130 applies
to the Company and will be adopted in the first quarter of 1998. Comprehensive
income is defined as essentially all changes in shareholders' equity exclusive
of transactions with owners, such as translation adjustments on investments in
foreign subsidiaries. Comprehensive income includes net income (loss) plus
changes in certain assets and liabilities that are reported directly in equity,
referred to as "Other Comprehensive Income." The adoption of SFAS No. 130 is not
expected to have a material impact on the consolidated financial statements of
the Company.
F-60
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Senior Notes, payable in 2006, interest at 10.5%...................... $ 110,000 $ 110,000
Senior Debentures, payable in 2007, interest at 12.5%................. -- 45,994
Term Loan payable in quarterly installments; paid in July 1997........ 13,440 --
Revolving Credit Agreement, due 2002, interest at
variable rates...................................................... -- --
Capitalized lease obligation payable in equal monthly
Installments of $7, through June 1997............................... 51 --
---------- ----------
Total........................................................... 123,491 155,994
Less current maturities............................................... (51) --
---------- ----------
Long-term debt........................................................ $ 123,440 $ 155,994
---------- ----------
---------- ----------
</TABLE>
The Senior Notes accrue interest at a fixed rate of 10.5% per annum, with
interest payable semiannually in arrears on April 15 and October 15. The Senior
Notes are not redeemable at the option of the Company prior to April 15, 2001,
except in the event of a public equity offering of the Company, at which time a
portion of the Senior Notes would be redeemable. Management estimates that the
fair value of the Senior Notes is $120,450 at January 3, 1998, based on the
estimated market trading price for the Senior Notes as of January 3, 1998.
The Senior Debentures accrue interest at a fixed rate of 12.5% per annum
with interest payable semiannually in arrears on January 15 and July 15 to the
extent permitted by the Credit Agreement and the indenture governing the Senior
Notes. If the Company is unable to pay interest in cash due to the prohibitions
contained in the Credit Agreement or such indenture, interest on the Senior
Debentures would be payable in additional Senior Debentures. Under the terms of
the indenture, Clark-Schwebel, Inc., the operating company, must maintain a
minimum fixed charge coverage ratio in order to pay dividends. At January 3,
1998, the indenture allowed the operating company to pay $8,700 in dividends to
the Company. The Senior Debentures will not be redeemable at the Company's
option prior to July 15, 2002, except in the event of a public equity offering
of the Company, or a change of control or subsidiary change of control after
January 15, 1998. Management estimates that the fair value of the Senior
Debentures is $49,214 at January 3, 1998, based on the estimated market trading
price for the Senior Debentures as of January 3, 1998.
On July 14, 1997, the Company prepaid all of its outstanding indebtedness
under the Term Loan and amended the Credit Agreement to provide, among other
things, that the Company may, subject to certain conditions, pay up to $5,000 in
cash and issue Senior Debentures in a redemption of the Preferred Stock, and
make semi-annual interest payments in cash on the Senior Debentures. The
Revolving Credit Facility under the Credit Agreement was also amended to
increase the aggregate amount of commitments thereunder to $65,000.
The Company pays a quarterly commitment fee equal to 0.25% on the unused
portion of the Revolving Credit Facility which was $65,000 at January 3, 1998.
F-61
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. LONG-TERM DEBT (CONTINUED)
The Revolving Credit Facility, the Senior Notes, and the Senior Debentures
contain certain restrictive covenants which provide limitations on the Company
with respect to restricted payments, indebtedness, liens, investments,
dividends, distributions, transactions with affiliates, debt repayments, capital
expenditures, mergers, and consolidations. The bank facility covenants also
require maintenance of certain financial ratios. At January 3, 1998, the Company
was in compliance with such covenants. With the exception of the Senior
Debentures, which are obligations of Clark-Schwebel Holdings, Inc., all other
debt is incurred at the Clark-Schwebel, Inc., operating company level.
Substantially all of the assets of Clark-Schwebel, Inc., the operating company,
are subject to liens in favor of the Revolving Credit Facility lenders.
No principal payments are required on any long-term debt in the next five
years due to the payment of the term loan in July 1997.
6. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Finished goods.......................................................... $ 10,256 $ 12,301
Raw material and supplies............................................... 9,254 8,854
In process.............................................................. 15,215 15,317
--------- ---------
Total at standard cost (which approximates average cost)................ 34,725 36,472
Less LIFO reserve....................................................... (1,100) (1,575)
--------- ---------
Inventories, net........................................................ $ 33,625 $ 34,897
--------- ---------
--------- ---------
</TABLE>
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Land..................................................................... $ 1,875 $ 1,875
Buildings and improvements............................................... 19,381 20,714
Machinery and equipment.................................................. 43,113 47,061
Construction in progress................................................. 3,567 2,483
--------- ---------
Total.................................................................... 67,936 72,133
Less accumulated depreciation............................................ (5,841) (12,540)
--------- ---------
Property, plant and equipment, net....................................... $ 62,095 $ 59,593
--------- ---------
--------- ---------
</TABLE>
F-62
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
8. OTHER CURRENT LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Accrued retirement and incentive........................................ $ 3,841 $ 4,711
Employee benefit accruals............................................... 3,017 2,935
Accrued payroll......................................................... 2,759 2,235
Accrued interest........................................................ 2,477 4,576
Other accrued liabilities............................................... 2,235 2,249
Unearned revenue........................................................ 1,001 0
--------- ---------
Total accrued liabilities............................................... $ 15,330 $ 16,706
--------- ---------
--------- ---------
</TABLE>
9. STOCKHOLDERS' EQUITY
Changes in stockholders' equity on a successor basis for the periods of
April 18, 1996 through December 28, 1996, and December 29, 1996 through January
3, 1998, respectively, consisted of the following (in thousands, except share
amounts):
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CUMULATIVE
-------------------- -------------------- RETAINED TRANSLATION
SHARES AMOUNT SHARES AMOUNT EARNINGS ADJUSTMENT
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Preferred stock issued on April 17, 1996................ 1,000 $ 35,000
Common stock issued on April 17, 1996................... 9,000 $ 10,000
Management loans (see Note 16).......................... (822)
Net income.............................................. $ 10,142
Accrued preferred stock dividend........................ (3,137)
Cumulative translation adjustment....................... ($ 1,350)
--------- --------- --------- --------- --------- -----------
Balance at December 28, 1996............................ 1,000 $ 35,000 9,000 $ 9,178 $ 7,005 ($ 1,350)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
Repayment of management loans
(See Notes 3 and 16).................................. 822
Net income.............................................. 18,515
Accrued preferred stock dividend........................ (2,856)
Redemption of preferred stock (see Note 3).............. (1,000) (35,000) (1,000) (9,000)
Cummulative translation adjustment...................... (3,187)
--------- --------- --------- --------- --------- -----------
Balance at January 3, 1998.............................. -- $ -- 9,000 $ 9,000 $ 13,664 ($ 4,537)
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
</TABLE>
10. EMPLOYEE BENEFIT PLANS
EMPLOYEES PROFIT SHARING/RETIREMENT PLANS
Substantially all associates of the Company are covered by defined
contribution plans. In 1995 and 1996 (Predecessor Company) the plan was provided
by Springs. The 1996 Successor Company plan operates substantially the same as
the Springs plan. The Company makes contributions to a defined contribution
Profit Sharing Plan annually based upon the profitability of the Company. The
F-63
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
contribution is allocated to participant accounts based upon participant
compensation. The amount of the Company contribution is subject to approval by
the Board of Directors.
In addition, associates are allowed to contribute a percentage of their
compensation to a defined contribution plan and the Company will match a portion
of their contribution. This plan, available to substantially all associates,
contains a matched savings provision that permits pre-tax employee
contributions. Participants can contribute from 1% to 12% of their compensation
and receive a 50% matching employer contribution on up to 4% of the
participant's contribution.
Defined contribution plan expense for 1995, 1996 (Predecessor), and 1996
(Successor) and 1997 (Successor) was $1,810, $964, $1,655 and $3,116,
respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company participates in a defined benefit postretirement medical plan
which covers substantially all salaried and nonsalaried employees. In 1995 and
1996 (Predecessor Company) the plan was provided by Springs. The benefit cost
and benefit obligation for these periods was allocated by Springs to the
Predecessor Company. The 1996 Successor Company and 1997 plan operated
identically to the Springs plan, but was a separate plan on a stand alone
company basis. The plan provides medical coverage to age 65 for employees who
retire at age 62 or later, have at least 25 years of service and participated in
the plan prior to retirement. The plan is funded on a "pay-as-you-go" basis and
is contributory, with retiree contributions adjusted periodically.
Postretirement benefit cost consisted of the following components:
<TABLE>
<CAPTION>
1995 1996 1996 1997
--------- --------- --------- ---------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C>
Service cost.................................... $ 138 $ 41 $ 71 $ 127
Interest cost................................... 278 83 229 283
--------- --------- --------- ---------
$ 416 $ 124 $ 300 $ 410
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Management believes that the 1995 and 1996 (Predecessor) allocated amounts
are reasonable and approximate the amounts that would have resulted from a SFAS
106 calculation of postretirement benefit cost on a separate company basis. The
1996 Successor and 1997 amounts were determined on a stand alone company basis.
The Company has assumed responsibility for the accrued benefits attributable
to employees of the Company. Pursuant to the Agreement, the Company established
employee benefit plans which are substantially similar to Springs' employee
benefit plans.
F-64
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
10. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the status of the Company's obligation under
SFAS No. 106 at the end of 1996 and 1997:
<TABLE>
<CAPTION>
Accumulated postretirement benefit obligation ("APBO") 1996 1997
--------- ---------
<S> <C> <C>
Retirees.................................................... $ 1,473 $ 1,416
Fully eligible active plan participants..................... 393 261
Other active participants................................... 2,145 2,583
--------- ---------
Accumulated postretirement benefit obligation............... $ 4,011 $ 4,260
Unrecognized gain/(loss).................................... (27) (121)
--------- ---------
Total recorded obligation................................... $ 3,984 $ 4,139
--------- ---------
--------- ---------
</TABLE>
The 1996 and 1997 balance sheets include a liability of $3,984 and $4,139,
respectively, which is classified in "Long-Term Benefit Plans and Other."
For measurement purposes, a 10.8% annual rate of increase in the per capita
cost of covered health care benefits was assumed. This 10.8% rate is assumed to
decrease gradually to 6.3% in the year 2006 and remain at that level thereafter.
If the health care cost trend rate was increased by one percent, the APBO would
increase by 12.6% and postretirement benefit cost would increase by
approximately 14.6%. The discount rate used in determining the APBO at January
3, 1998 was 7.25%.
11. INCOME TAXES
The following tables present the components of the provision for income
taxes, a reconciliation of the statutory U.S. income tax rate to the effective
income tax rate, and the principal items of deferred income tax assets and
liabilities at the end of 1995, 1996 (Predecessor), 1996 (Successor), and 1997
(Successor).
Components of the total income tax provision were as follows:
<TABLE>
<CAPTION>
1995 1996 1996 1997
--------- --------- --------- ---------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C>
Current federal......................... $ 8,622 $ 3,739 $ 6,011 $ 9,906
Current state........................... 1,297 563 1,096 1,955
--------- --------- --------- ---------
Total current........................... 9,919 4,302 7,107 11,861
--------- --------- --------- ---------
Deferred federal........................ 129 56 (18) 543
Deferred state.......................... 47 20 (3) 107
--------- --------- --------- ---------
Total deferred.......................... 176 76 (21) 650
--------- --------- --------- ---------
Total provision......................... $ 10,095 $ 4,378 $ 7,086 $ 12,511
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
F-65
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
11. INCOME TAXES (CONTINUED)
The total provision is included in the statements of income as follows:
<TABLE>
<CAPTION>
1995 1996 1996 1997
--------- --------- --------- ---------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C>
Provision on income before income
taxes................................. $ 8,444 $ 3,595 $ 5,460 $ 9,657
Income from equity investees............ 1,582 783 1,626 2,854
Income of discontinued operations....... 69 0 0 0
--------- --------- --------- ---------
Total provision......................... $ 10,095 $ 4,378 $ 7,086 $ 12,511
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The difference between the federal statutory tax rate and the effective tax
rate on income before income taxes was as follows:
<TABLE>
<CAPTION>
1995 1996 1996 1997
--------- --------- --------- ---------
(PREDECESSOR) (SUCCESSOR)
<S> <C> <C> <C> <C>
Provision at federal statutory tax rate....... 35.0% 35.0% 35.0% 35.0%
State income tax, net of federal tax effect... 3.4 3.4 4.2 4.2
Amortization of acquisition price not
deductible for tax purposes................. 0.7 0.7 2.1 1.6
Other......................................... 0.8 0.9 (0.2) (0.5)
--- --- --- ---
Effective tax rate............................ 39.9% 40.0% 41.1% 40.3%
--- --- --- ---
--- --- --- ---
</TABLE>
Temporary differences and the related balances of deferred tax assets and
liabilities were as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Employee benefit accruals............................................... $ 3,356 $ 2,865
Equity investments...................................................... 2,376 3,519
Other items............................................................. 419 1,176
--------- ---------
Total deferred tax assets............................................... 6,151 7,561
--------- ---------
Property................................................................ 11,920 11,114
Equity investments...................................................... 12,551 13,339
Inventories............................................................. 4,362 4,786
Other items............................................................. 832 1,267
--------- ---------
Total deferred tax liabilities.......................................... 29,665 30,506
--------- ---------
Net deferred tax liabilities............................................ $ 23,514 $ 22,945
--------- ---------
--------- ---------
</TABLE>
12. EQUITY INVESTMENTS
CS-INTERGLAS AG ("INTERGLAS")--In March 1993, the Company contributed two
European subsidiaries and $8.8 million to Interglas, a company which
manufactures fiber glass, aramid and carbon fabrics, in exchange for a 24.9%
common stock interest and convertible notes with a face value of
F-66
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. EQUITY INVESTMENTS (CONTINUED)
20 million Deutsche marks (the "Convertible Notes"). No gain or loss was
recognized as a result of this exchange. The Company's common stock investment
in Interglas had a carrying value of $14,282 and $13,107 at December 28, 1996
and January 3,1998, respectively.
The Convertible Notes, which had a carrying value of $13,037 and $11,344 at
December 28, 1996 and January 3, 1998, respectively, are convertible into common
stock of Interglas. At the Company's option, conversion would result in the
Company owning a total of 42% of the outstanding common stock of Interglas as of
January 3, 1998. Interest on the Convertible Notes, which is included in income
from equity investees, is at 8% through December 31, 1996 and 5% thereafter.
Interest income in 1995, 1996 and 1997 was recognized on an accrual basis. If
Convertible Notes are not converted, the principal balance plus outstanding
interest becomes due on June 30, 2007.
ASAHI-SCHWEBEL CO. LTD. ("ASCO")--On October 1, 1997, the Company purchased
an additional 4.3% common equity interest in ASCO, which increased the Company's
ownership percentage from 39.0% to 43.3%. ASCO, a company which manufactures
fiber glass fabric, operates a facility in Japan and, in 1996, acquired a
majority interest in a fiber glass manufacturer located in Taiwan. The Company's
investment in ASCO had a carrying value of $32,586 and $36,803 at December 28,
1996 and January 3, 1998, respectively. The carrying value at January 3, 1998
exceeds 43.3% of ASCO's total equity by approximately $1.7 million, which is
being amortized on a straight-line basis through 2008.
CLARK-SCHWEBEL TECH-FAB COMPANY ("TECH-FAB")--The Company owns a 50%
partnership interest in Tech-Fab, a joint venture which manufactures nonwoven
fabrics using fiber glass and other synthetic materials. The Company's
investment in Tech-Fab had a carrying value of $3,521 and $4,156 at December 28,
1996 and January 3, 1998, respectively.
COMBINED SUMMARIZED FINANCIAL INFORMATION--The following table provides
combined summarized balance sheet information for these investees as of December
28, 1996 and January 3, 1998:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Current assets........................................................ $ 165,715 $ 178,573
Noncurrent assets..................................................... 125,597 118,694
---------- ----------
Total assets.......................................................... $ 291,312 $ 297,267
---------- ----------
---------- ----------
Current liabilities................................................... $ 54,303 $ 64,879
Noncurrent liabilities................................................ 89,279 77,036
Minority interest..................................................... 9,715 11,712
Redeemable equity instrument.......................................... 21,341 19,853
Equity................................................................ 116,675 123,787
---------- ----------
Total liabilities and equity.......................................... $ 291,312 $ 297,267
---------- ----------
---------- ----------
</TABLE>
F-67
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
12. EQUITY INVESTMENTS (CONTINUED)
The following table provides combined summarized income statement
information for these investees for the years ended December 30, 1995, December
28,1996, and January 3, 1998:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................................ $ 328,145 $ 317,918 $ 328,122
Operating income......................................... 20,761 35,163 36,739
Net income............................................... 13,207 16,643 17,783
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
13. MAJOR CUSTOMERS, CERTAIN CONCENTRATIONS, AND FAIR VALUE OF FINANCIAL
INSTRUMENTS
Sales to two customers exceeded 10% of net sales during fiscal 1995, 1996,
and 1997. Sales to the two customers represented as a percentage of net sales
29.1% and 13.2% in 1995, 29.9% and 13.5% in 1996 (Predecessor), 29.1% and 14.1%
in 1996 (Successor), and 28.7% and 15.9% in 1997 (Successor), respectively.
Accounts receivable due from these two customers as a percent of total accounts
receivable was 38.0% and 19.8% at December 28, 1996 and 27.1% and 25.2% at
January 3, 1998. Although the Company's exposure to credit risk could be
affected by conditions or occurrences within these customers' industry, no
indication of such adverse circumstances existed at January 3, 1998.
The Company currently buys substantially all of its fiber glass yarn, an
important component of its products, from two suppliers and substantially all of
its aramid yarn from one supplier. There are a limited number of manufacturers
of fiber glass yarn and aramid yarn.
The Company's financial instruments include cash, short term investments,
accounts receivable, Convertible Notes, accounts payable and long-term debt.
Management estimates that the carrying value of such instruments approximates
fair value, with the exception of the Senior Notes and Senior Debentures (see
Note 5).
14. COMMITMENTS AND CONTINGENCIES
The Company leases certain machinery and equipment under noncancelable
operating leases. Rent expense attributed to such leases was $384, $177, $314,
and $563 in 1995, 1996 (Predecessor), 1996 (Successor), and 1997 (Successor),
respectively.
Future minimum payments under the non-cancelable operating leases as of
January 3, 1998 were as follows:
<TABLE>
<S> <C>
1998................................................ $ 497
1999................................................ 360
2000................................................ 316
2001................................................ 258
2002................................................ 258
---------
$ 1,689
---------
---------
</TABLE>
F-68
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
14. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Prior to the Closing Date of the Acquisition, the Company was involved in
administrative proceedings under environmental laws and regulations, including
proceedings under the Comprehensive Environmental Response, Compensation and
Liability Act. On the closing date, Springs assumed all liabilities related to
the costs associated with these environmental matters. There was no material
provision for environmental matters in 1995, 1996 or 1997.
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not materially affect the Company's financial
position or results of operations.
15. DISCONTINUED OPERATIONS
In January 1996, the Company sold its equity investment in a company engaged
in a separate line of business for an amount which approximated book value. The
proceeds received were distributed to Springs. The equity earnings from this
investment are included in Discontinued Operations in the Company's financial
statements.
16. RELATED PARTY TRANSACTIONS
In connection with the Acquisition, certain members of management (the
"Management Investors") made equity contributions to the Company pursuant to a
Management Subscription Agreement which provided the terms under which the
Management Investors could purchase shares in the Company. The Management
Subscription Agreement set forth the share price, vesting provisions,
disposition of shares upon termination of employment, and certain other rights
of the Management Investors with respect to the shares.
The Management Investors purchased $1,800, or 18%, of the common equity in
the Company. Approximately $800 of the purchase price was financed by the
Company through a promissory note (the "Note") which carried an interest rate of
6.51% annually. As described in Note 3, the notes were paid in full during 1997
in connection with the Preferred Stock Redemption.
The Management Investors have entered into a Securityholders Agreement with
the Company and Vestar/CS Holding which contains certain agreements among such
parties with respect to the capital stock and corporate governance of the
Company. The Securityholders Agreement gives Vestar/CS Holding the right to
appoint all members to the Board of Directors of the Company. Additionally, the
Securityholders Agreement restricts the ability of Management Investors to
transfer their equity interest except upon (A) the exercise of their tag along
rights, which allows Management Investors to sell their equity interest when
Vestar/CS Holding sells its equity interest in the Company; (B) a sale of the
Company; (C) the exercise of certain put and call options under the Management
Subscription Agreement; (D) a public sale of the Company's common stock.
The Management Investors have entered into a Voting Trust Agreement with the
Company and Vestar/CS Holding which requires Management Investors to vote all of
their common stock as directed by Vestar/CS Holding for the approval of any of
the following: amendment to the Company's Certificate of Incorporation, merger,
share exchange, combination or consolidation of the Company with any other
person, the sale, lease or exchange of all or substantially all of the property
and assets of the Company, or the reorganization, recapitalization, liquidation,
or dissolution of the Company.
F-69
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
16. RELATED PARTY TRANSACTIONS (CONTINUED)
Pursuant to a Management Advisory Agreement (the "Management Agreement"),
Vestar Capital Partners will receive an annual fee and reimbursement of
out-of-pocket expenses for management and financial consulting services provided
to the Company. Such services include advising the Company on the establishment
of effective banking, legal and other business relationships, and assisting
management in developing and implementing strategies for improving the
operational, marketing and financial performance of the Company. The management
advisory fees to be paid per annum will equal the greater of (i) 1.0% of the
consolidated earnings of the Company before interest, taxes, depreciation and
amortization or (ii) $350. Expenses pursuant to the Management Agreement were
approximately $485 in 1997 and $258 for the period from April 18, 1996 to
December 28, 1996 (Successor Company).
Upon consummation of the Acquisition, the Company paid to Vestar Capital
Partners an investment banking fee of approximately $1,500 plus out-of-pocket
expenses for its services in structuring the transaction and providing financial
advice in connection therewith. Additionally, a member of the Company's Board of
Directors received a fee of approximately $600 for his consulting services in
connection with the Acquisition.
17. SUBSEQUENT EVENTS
HEXCEL CORPORATION ACQUIRES ASSETS OF CLARK-SCHWEBEL
On September 15, 1998, Hexcel Corporation ("Hexcel") acquired certainassets
and operating liabilities of Clark-Schwebel, Inc. In the first transaction,
Vestar Capital Partners and Management Investors sold the stock of the
Clark-Schwebel Holdings, Inc. ("Holdings") to Stamford C-S Acquisition Corp.
("Stamford") for an enterprise value of approximately $488,000, less debt and
transaction expenses. Stamford then immediately sold certain assets and
operating liabilities of Clark-Schwebel, Inc. and its subsidiaries (the
"Company") to Hexcel for $453,600. Stamford will retain $50,000 of property,
plant and equipment to be leased to Hexcel under a long-term capital lease.
CLARK-SCHWEBEL AND PARENT COMPANY LAUNCH CASH TENDER OFFERS AND CONSENT
SOLICITATIONS FOR NOTES AND DEBENTURES
As part of the sale described above, the Company and Holdings launched cash
tender offers and consent solicitations for their notes and debentures.
Pursuant to the tender offers, the Company and Holdings, respectively, have
repurchased:
1. All $110,000 of the 10 1/2% Senior Notes of the Company due 2006. The
purchase price offered for each $1 principal amount tendered is based on a
fixed spread of 50 basis points over the yield of the 6 1/4% U.S. Treasury
Notes due March 31, 2001, plus accrued unpaid interest on the notes, minus
the consent payment described below.
2. All $45,994 of the 12 1/2% Senior Debentures of Holdings due 2007.
The purchase price offered for each $1 principal amount tendered is $1.06750
plus accrued unpaid interest on the debentures, minus the consent payment
described below.
Concurrent with the tender offers, the issuers obtained consents to
eliminate or modify substantially all of the convenants in the indentures
governing the notes and the debentures. Holders who tender their notes and
debentures were required to consent to the proposed amendments.
F-70
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
17. SUBSEQUENT EVENTS (CONTINUED)
The Company offered to make consent payments of $.025 per $1 principal
amount to the holders of the notes and debentures who tender their securities
and deliver their consents at or prior to 5:00 p.m. New York City time on the
consent date.
The Company and Holdings purchased the tendered notes and debentures with
borrowings under proceeds from stock sale.
F-71
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1998 AND JULY 4, 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 3, JULY 4,
1998 1998
------------ -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 147 $ 14,175
Accounts receivable, net......................................................... 28,527 22,153
Inventories, net................................................................. 34,897 35,799
Other............................................................................ 235 615
------------ -----------
Total current assets......................................................... 63,806 72,742
------------ -----------
PROPERTY, PLANT AND EQUIPMENT.......................................................... 72,133 74,565
Accumulated depreciation........................................................... (12,540) (16,623)
------------ -----------
Property, plant and equipment, net............................................... 59,593 57,942
------------ -----------
EQUITY INVESTMENTS..................................................................... 65,411 65,341
GOODWILL............................................................................... 43,205 42,641
OTHER ASSETS........................................................................... 5,702 5,327
------------ -----------
TOTAL ASSETS........................................................................... $ 237,717 $ 243,993
------------ -----------
------------ -----------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 19,806 $ 22 994
Accrued liabilities.............................................................. 16,706 15,261
Deferred tax liabilities--current................................................ 2,370 2,370
------------ -----------
Total current liabilities.................................................... 38,882 40,625
------------ -----------
LONG-TERM DEBT......................................................................... 155,994 155,994
DEFERRED TAX LIABILITIES............................................................... 20,575 19,578
LONG-TERM BENEFIT PLANS AND OTHER...................................................... 4,139 4,139
COMMITMENTS AND CONTINGENCIES
------------ -----------
TOTAL LIABILITIES...................................................................... 219,590 220,336
------------ -----------
EQUITY:
Common stock (par value per share--$.01)--100,000 shares authorized, 9,000 shares
issued and outstanding........................................................... 9,000 9,000
Retained earnings................................................................ 13,664 22,310
Cumulative translation adjustment................................................ (4,537) (7,653)
------------ -----------
Total equity................................................................. 18,127 23,657
------------ -----------
TOTAL LIABILITIES AND EQUITY........................................................... $ 237,717 $ 243,993
------------ -----------
------------ -----------
</TABLE>
See notes to condensed and consolidated financial statements.
F-72
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED--DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------
JUNE 28, JULY 4,
1997 1998
--------- ---------
<S> <C> <C>
Net sales............................................................... $ 123,299 $ 111,664
Cost of goods sold...................................................... 95,851 84,546
--------- ---------
Gross profit............................................................ 27,448 27,118
Selling, general and administrative expenses............................ 7,727 8,016
--------- ---------
Operating income.................................................... 19,721 19,102
Other income (expense):
Interest expense.................................................... (6,427) (8,885)
Other, net.......................................................... (3) (2)
--------- ---------
Income before income taxes.............................................. 13,291 10,215
Provision for income tax................................................ (5,475) (4,090)
Income from equity investees, net....................................... 1,582 2,521
--------- ---------
Net income.............................................................. 9,398 8,646
Accrued dividends on preferred stock.................................... (2,416) 0
--------- ---------
Net income applicable to common shares.............................. $ 6,982 $ 8,646
--------- ---------
--------- ---------
</TABLE>
See notes to condensed and consolidated financial statements.
F-73
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CUMULATIVE
-------------------- -------------------- RETAINED TRANSLATION COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL INCOME
--------- --------- --------- --------- --------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 28, 1996..... 1,000 $ 35,000 9,000 $ 9,178 $ 7,005 $ (1,350) $ 49,833 $ 8,792
Repayment of management loans.... 822 822
Net income....................... 18,515 18,515 18,515
Accrued preferred stock
dividend....................... (2,856) (2,856)
Redemption of preferred stock.... (1,000) (35,000) (1,000) (9,000) (45,000)
Cumulative translation
adjustment..................... (3,187) (3,187) (3,187)
--------- --------- --------- --------- --------- ----------- ---------- -------
Balance at January 3, 1998....... 0 $ 0 9,000 $ 9,000 $ 13,664 $ (4,537) $ 18,127 $ 24,120
--------- --------- --------- --------- --------- ----------- ---------- -------
--------- --------- --------- --------- --------- ----------- ---------- -------
Net income (Unaudited)........... 4,791 4,791 4,791
Cumulative translation adjustment
(Unaudited).................... (2,175) (2,175) (2,175)
--------- --------- --------- --------- --------- ----------- ---------- -------
Balance at April 4, 1998
(Unaudited).................... 0 $ 0 9,000 $ 9,000 $ 18,455 $ (6,712) $ 20,743 $ 26,736
--------- --------- --------- --------- --------- ----------- ---------- -------
--------- --------- --------- --------- --------- ----------- ---------- -------
Net Income (Unaudited)........... 3,855 3,855 3,855
Cumulative translation adjustment
(Unaudited).................... (941) (941) (941)
--------- --------- --------- --------- --------- ----------- ---------- -------
Balance at July 4, 1998
(Unaudited).................... 0 $ 0 9,000 $ 9,000 $ 22,310 $ (7,653) $ 23,657 $ 29,650
--------- --------- --------- --------- --------- ----------- ---------- -------
--------- --------- --------- --------- --------- ----------- ---------- -------
</TABLE>
See notes to condensed and consolidated financial statements.
F-74
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED--DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------------
JUNE 28, JULY 4,
1997 1998
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................... $ 9,398 $ 8,646
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of goodwill and unearned revenue..... 4,562 4,906
Amortization of deferred financing cost............................ 417 404
Deferred tax provision............................................. (595) (676)
Income from equity investments, net................................ (1,540) (2,521)
Loss on sale of equipment.......................................... 11 7
Changes in assets and liabilities, net of the effects of the
purchase of the company:
Accounts receivable.............................................. (557) 6,374
Inventories...................................................... (4,130) (902)
Prepaid expenses and other....................................... 98 (320)
Accounts payable................................................. 7,525 3,188
Accrued liabilities.............................................. (570) (1,445)
Other.............................................................. (6) (1)
----------- ---------
Net cash provided by operating activities...................... 14,613 17,660
----------- ---------
INVESTING ACTIVITIES:
Purchases of equipment............................................... (3,541) (2,723)
Proceeds from sale of equipment...................................... 1,494 25
Additional investment in CS-Interglas................................ 0 (2,643)
----------- ---------
Net cash used in investing activities.......................... (2,047) (5,341)
----------- ---------
FINANCING ACTIVITIES:
Principal payments under long-term debt and capital lease
obligations.......................................................... (2,301) 0
Proceeds from repayment of loans to management Investor.............. 23 0
Dividends received from ASCO......................................... 0 1,709
----------- ---------
Net cash (used in) provided by financing activities............ (2,278) 1,709
----------- ---------
NET CHANGE IN CASH....................................................... 10,288 14,028
CASH, BEGINNING OF PERIOD................................................ 4,064 147
----------- ---------
CASH, END OF PERIOD...................................................... $ 14,352 $ 14,175
----------- ---------
----------- ---------
CASH PAID FOR INTEREST................................................... $ 6,030 $ 8,269
----------- ---------
----------- ---------
CASH PAID FOR TAXES...................................................... $ 6,372 $ 4,914
----------- ---------
----------- ---------
</TABLE>
Noncash Transaction: The company accrued dividends on preferred stock of $2,416
for the period of December 29, 1996--June 28, 1997.
See notes to condensed and consolidated financial statements.
F-75
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the assets,
liabilities and results of operations as of July 4, 1998 and for the period from
January 4, 1998 to July 4, 1998 of Clark-Schwebel Holdings, Inc. The Company's
primary asset is all of the capital stock of Clark-Schwebel, Inc., its operating
company. The statements also include the assets and liabilities of the Company
as of January 3, 1998, and the Company's results of operations for the period
from December 29, 1996 to June 28, 1997.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X of the Securities and Exchange Commission (SEC).
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
All significant intercompany balances and transactions have been eliminated. The
balance sheet at January 3, 1998 has been derived from the audited financial
statements at that date. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Results of operations for interim periods are
not necessarily indicative of results for the entire year. For further
information, refer to the Company's consolidated financial statements and
footnotes for the year ended January 3, 1998 included in the Company's Form 10-K
for the year then ended.
SUMMARIZED FINANCIAL INFORMATION--The following table provides summarized
financial information for Clark-Schwebel, Inc., the operating company, on a
stand-alone basis. Clark-Schwebel, Inc. is a wholly owned subsidiary of
Clark-Schwebel Holdings, Inc. and its separate financial statements are not
included or filed separately because management has determined that they would
not be material to investors. The balance sheet information is as of July 4,
1998 and the income statement information is for the six months ended July 4,
1998.
<TABLE>
<S> <C>
Current assets.................................................................... $ 72,742
Noncurrent assets................................................................. 171,251
---------
Total assets...................................................................... $ 243,993
---------
---------
Current liabilities............................................................... $ 37,986
Noncurrent liabilities............................................................ 135,189
Equity............................................................................ 70,818
---------
Total liabilities and equity...................................................... $ 243,993
---------
---------
Net sales......................................................................... $ 111,664
Gross profit...................................................................... 27,118
Income from continuing operations................................................. 10,431
Net income........................................................................ $ 10,431
---------
---------
Dividends paid to Clark-Schwebel Holdings, Inc.................................... $ 2,411
---------
---------
</TABLE>
All assets of Clark-Schwebel, Inc. represent restricted net assets with the
exception of the foreign equity investments and distributions received from the
foreign equity investments. Except in limited circumstances, Clark-Schwebel,
Inc. is prohibited from transferring restricted net assets to Clark-Schwebel
Holdings, Inc. in the form of cash dividends, loans, or advances without the
consent of the
F-76
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION (CONTINUED)
lenders under the Credit Agreement. The amount of unrestricted net assets at
July 4, 1998 was $61,295, which represents the book value of the foreign equity
investments ($61,225) and distributions received in the form of cash from the
foreign equity investments, net of restricted payments to increase equity
ownership in foreign equity investments ($70).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Following is a summary of the significant accounting policies used in the
preparation of the financial statements of the Company.
BASIS OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its operating company and wholly-owned subsidiary,
Clark-Schwebel, Inc. All material intercompany amounts and transactions have
been eliminated.
FISCAL YEAR--The Company's operations are based on a fifty-two or
fifty-three week fiscal year ending on the Saturday closest to December 31.
Accordingly, the interim periods will also be reported on the Saturday closest
to the calendar quarter end. The fiscal year ended January 2, 1999 is referred
to herein as 1998. The fiscal year ended January 3, 1998 is referred to herein
as 1997. The 1998 fiscal year consists of 52 weeks, while the 1997 fiscal year
consisted of 53 weeks.
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 and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. These estimates include the allowance for doubtful accounts
receivable and the liabilities for certain long-term benefit plans. Actual
results could differ from such estimates.
REVENUE RECOGNITION--Revenue from product sales is recognized at the time
ownership of the goods transfers to the customer and the earnings process is
complete. This generally occurs when the goods are shipped.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash on hand
and in the bank as well as short term investments held for the purpose of
general liquidity. Such investments normally mature within three months from the
date of acquisition.
ACCOUNTS RECEIVABLE--The Company establishes an allowance for doubtful
accounts based upon factors including the credit risk of specific customers,
historical trends and other information. The Company performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral.
INVENTORIES--Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO)method for substantially all
inventories.
F-77
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT--Property, plant, and equipment is recorded
at cost and depreciation is computed on a straight-line basis over the estimated
useful lives of the related assets. Estimated useful lives are as follows:
<TABLE>
<S> <C>
10 to 20
Land improvements............................................ years
20 to 40
Buildings and improvements................................... years
Machinery and equipment...................................... 3 to 11 years
</TABLE>
EQUITY INVESTMENTS--The company owns equity interests in CS-Interglas AG
(headquartered in Germany), Asahi-Schwebel Co., Ltd. (headquartered in Japan)
and Clark Schwebel Tech-Fab Company (located in Anderson, SC), which are
accounted for using the equity method of accounting.
FOREIGN CURRENCY--The foreign equity investments are translated at year-end
exchange rates. Equity income and losses are translated at the average rate
during the year. Cumulative translation adjustments are reflected as a separate
component of stockholders' equity.
POSTRETIREMENT BENEFITS--Postretirement benefits are accounted for pursuant
to Statement of Financial Accounting Standards ("SFAS")No. 106, EMPLOYERS
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106
requires that the projected future cost of providing postretirement benefits,
such as health care and life insurance, be recognized as an expense as employees
render service rather than when claims are incurred.
INCOME TAXES--Income taxes are accounted for pursuant to SFAS 109,
ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, deferred income tax assets and
liabilities represent the future income tax effect of temporary differences
between the book and tax bases of assets and liabilities assuming they will be
realized and settled at the amounts reported in the financial statements. The
provision for income taxes included in the accompanying financial statements is
computed in a manner consistent with SFAS No. 109.
GOODWILL--Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired in the Acquisition of the Company from Springs
Industries in April 1996. Goodwill recorded from the Acquisition was $45,128,
and is being amortized on a straight-line basis over a period of 40 years.
F-78
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, JULY 4,
1998 1998
---------- ----------
<S> <C> <C>
Senior Notes, payable in 2006, interest at 10.5%...................... $ 110,000 $ 110,000
Senior Debentures, payable in 2007, interest at 12.5%................. 45,994 45,994
Revolving Credit Agreement, due 2002, interest at
variable rates...................................................... 0 0
---------- ----------
Total................................................................. 155,994 155,994
Less current maturities............................................... 0 0
---------- ----------
Long-term debt........................................................ $ 155,994 $ 155,994
---------- ----------
---------- ----------
</TABLE>
The Senior Notes accrue interest at a fixed rate of 10.5% per annum, with
interest payable semiannually in arrears on April 15 and October 15. The Senior
Notes are not redeemable at the option of the Company prior to April 15, 2001,
except in the event of a public equity offering of the Company, at which time a
portion of the Senior Notes would be redeemable.
The Senior Debentures accrue interest at a fixed rate of 12.5% per annum
with interest payable semiannually in arrears on January 15 and July 15 to the
extent permitted by the Credit Agreement and the indenture governing the Senior
Notes. If the Company is unable to pay interest in cash due to the prohibitions
contained in the Credit Agreement or such indenture, interest on the Senior
Debentures would be payable in additional Senior Debentures. The Senior
Debentures will not be redeemable at the Company's option prior to July 15,
2002, except in the event of a public equity offering of the Company, or a
change of control or subsidiary change of control after January 15, 1998. See
Note 6.
The Company has a $65,000 Revolving Credit Facility under the Credit
Agreement. The Company pays a quarterly commitment fee equal to 0.25% on the
unused portion of the Revolving Credit Facility, which was $65,000 at July 4,
1998.
The Revolving Credit Facility, the Senior Notes, and the Senior Debentures
contain certain restrictive covenants which provide limitations on the Company
with respect to restricted payments, indebtedness, liens, investments,
dividends, distributions, transactions with affiliates, debt repayments, capital
expenditures, mergers, and consolidations. The bank facility covenants also
require maintenance of certain financial ratios. At July 4, 1998, the Company
was in compliance with such covenants. With the exception of the Senior
Debentures, which are obligations of Clark-Schwebel Holdings, Inc., all other
long-term debt is owed at the Clark-Schwebel, Inc., operating company level, and
guaranteed by Clark-Schwebel Holdings, Inc.
No principal payments are required on any long-term debt in the next five
years.
F-79
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
4. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JANUARY 3, JULY 4,
1998 1998
----------- ---------
<S> <C> <C>
Finished goods......................................................... $ 12,301 $ 11,511
Raw material and supplies.............................................. 8,854 10,384
In process............................................................. 15,317 15,853
----------- ---------
Total at standard cost (which approximates average cost)............... 36,472 37,748
Less LIFO reserve...................................................... (1,575) (1,949)
----------- ---------
Inventories, net....................................................... $ 34,897 $ 35,799
----------- ---------
----------- ---------
</TABLE>
F-80
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
5. CONVERSION OF CS-INTERGLAS AG ("INTERGLAS") NOTE RECEIVABLE AND OPTION TO
PURCHASE A CONTROLLING INTEREST IN INTERGLAS
On March 31, 1998, the Company notified CS-Interglas of its intent to
convert its 20 million Deutsche mark convertible notes (the "Convertible Notes")
into CS-Interglas common stock. Effective June 30, 1998, the conversion
increased the Company's ownership of the outstanding common stock of Interglas
from 24.9% to 41.9%. The conversion was approved by the German Merger Control
Authorities. Interglas manufactures fiber glass, aramid and carbon fabrics in
Europe, with plants in Germany, Belgium, England and France. CS-Interglas sales
for the fiscal year ended June 30, 1997 were $154,000.
On March 31, 1998, the Company also entered into an agreement (the
"Interglas Purchase Agreement") with the Deschler-Group, the Company's joint
venture partner in Interglas who, following the Company's Convertible Notes
conversion described above, owns 41.9% of the outstanding common stock of
Interglas. Under the Interglas Purchase Agreement, the Company purchased 1.7% of
Interglas' common stock from the Deschler-Group for 4.75 million Deutsche marks
(approximately $2,600) on June 30, 1998. This purchase increased the Company's
ownership in Interglas from 41.9% to 43.6%. The Company's purchase of additional
shares in CS-Interglas was approved by the German Merger Control Authorities.
Additionally, pursuant to the Interglas Purchase Agreement, the Company obtained
two options from the Deschler-Group to purchase additional shares of Interglas
held by the Deschler-Group. The first option allows the Company to purchase an
additional 6.4% of Interglas' common stock from the Deschler-Group on or before
January 10, 1999, which, if exercised, will give the Company control of
Interglas. The second option allows the Company to purchase the remaining shares
of Interglas held by the Deschler-Group at any time through December 31, 1999.
6. SUBSEQUENT EVENTS
HEXCEL CORPORATION ACQUIRES ASSETS OF CLARK-SCHWEBEL
On September 15, 1998, Hexcel Corporation ("Hexcel") acquired certain assets
and operating liabilities of Clark-Schwebel, Inc. In the first transaction,
Vestar Capital Partners and Management Investors sold the stock of the
Clark-Schwebel Holdings, Inc. ("Holdings") to Stamford C-S Acquisition Corp.
("Stamford") for an enterprise value of approximately $488,000, less debt and
transaction expenses. Stamford then immediately sold certain assets and
operating liabilities of Clark-Schwebel, Inc. and its subsidiaries (the
"Company") to Hexcel for $453,600. Stamford will retain $50,000 of property,
plant and equipment to be leased to Hexcel under a long-term capital lease.
CLARK-SCHWEBEL AND PARENT COMPANY LAUNCH CASH TENDER OFFERS AND CONSENT
SOLICITATIONS FOR NOTES AND DEBENTURES
As part of the sale described above, the Company and Holdings launched cash
tender offers and consent solicitations for their notes and debentures.
Pursuant to the tender offers, the Company and Holdings, respectively, have
repurchased:
1. all $110,000 of the 10 1/2% Senior Notes of the Company due 2006. The
purchase price offered for each $1 principal amount tendered is based on a
fixed spread of 50 basis points over the yield of the 6 1/4% U.S. Treasury
Notes due March 31, 2001, plus accrued unpaid interest on the notes, minus
the consent payment described below.
F-81
<PAGE>
CLARK-SCHWEBEL HOLDINGS, INC.
NOTES TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
6. SUBSEQUENT EVENTS (CONTINUED)
2. all $45,994 of the 12 1/2% Senior Debentures of Holdings due 2007.
The purchase price offered for each $1 principal amount tendered is $1.0675
plus accrued unpaid interest on the debentures, minus the consent payment
described below.
Concurrent with the tender offers, the issuers obtained consents to
eliminate or modify substantially all of the convenants in the indentures
governing the notes and the debentures. Holders who tender their notes and
debentures were required to consent to the proposed amendments.
The Company offered to make consent payments of $.025 per $1 principal
amount to the holders of the notes and debentures who tender their securities
and deliver their consents at or prior to 5:00 p.m. New York City time on the
consent date.
The Company and Holdings purchased the tendered notes and debentures with
borrowings under proceeds from stock sale.
F-82
<PAGE>
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- --------------------------------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT
RELY ON UNAUTHORIZED INFORMATION. THIS PROSPECTUS DOES NOT OFFER TO SELL OR BUY
ANY SHARES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS
PROSPECTUS IS CURRENT AS OF JUNE 18, 1999. HOWEVER, YOU SHOULD REALIZE THAT OUR
AFFAIRS MAY HAVE CHANGED SINCE THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 10
Forward-Looking Statements................................................ 14
Use of Proceeds........................................................... 16
Capitalization............................................................ 17
Pro Forma Financial Information........................................... 18
Selected Consolidated Financial Information............................... 27
The Exchange Offer........................................................ 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 37
Business.................................................................. 60
Management................................................................ 74
Security Ownership of Certain Beneficial Owners........................... 78
Description of Material Indebtedness...................................... 79
Description of the Notes.................................................. 82
Book-Entry; Delivery and Form............................................. 114
Exchange Offer; Registration Rights....................................... 116
Certain Relationships and Related Transactions............................ 118
Material United States Federal Income Tax Considerations.................. 124
Plan of Distribution...................................................... 127
Legal Matters............................................................. 128
Experts................................................................... 128
Available Information..................................................... 128
Glossary of Terms......................................................... 130
Index to Financial Statements............................................. F-1
</TABLE>
$240,000,000
[LOGO]
9 3/4% SENIOR SUBORDINATED
NOTES DUE 2009
---------------------------
PROSPECTUS
---------------------------
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- --------------------------------------------------------------------------------
<PAGE>
JUNE 18, 1999
