<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
_______________________
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
---- ----
Commission File Number 1-8472
_______________________
HEXCEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 94-1109521
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
Two Stamford Plaza
281 Tresser Boulevard
Stamford, Connecticut 06901-3238
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
Registrant's telephone number, including area code: (203) 969-0666
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a US Bankruptcy Court. Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 11, 1999
----- ------------------------------
COMMON STOCK 36,497,509
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<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION
<S> <C>
ITEM 1. Condensed Consolidated Financial Statements
- Condensed Consolidated Balance Sheets --
June 30, 1999 and December 31, 1998 2
- Condensed Consolidated Statements of
Operations -- The Quarter and Year-to-Date Periods
Ended June 30, 1999 and 1998 3
- Condensed Consolidated Statements of
Cash Flows -- The Year-to-Date Periods
Ended June 30, 1999 and 1998 4
- Notes to Condensed Consolidated
Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 27
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 28
ITEM 6. Exhibits and Reports on Form 8-K 28
SIGNATURE 29
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------------------------------
UNAUDITED
------------------------------------
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,692 $ 7,504
Accounts receivable 191,522 188,368
Inventories 200,978 213,199
Prepaid expenses and other assets 5,848 10,111
Deferred tax asset 21,995 19,844
- -----------------------------------------------------------------------------------------------------------------
Total current assets 426,035 439,026
Property, plant and equipment 618,035 628,533
Less accumulated depreciation (207,917) (195,960)
- -----------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 410,118 432,573
Goodwill and other purchased intangibles, net of accumulated
amortization of $18,228 in 1999 and $11,742 in 1998 417,786 425,405
Investment in affiliated companies and other assets 115,824 107,157
- -----------------------------------------------------------------------------------------------------------------
Total assets $ 1,369,763 $ 1,404,161
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- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 29,530 $ 26,867
Accounts payable 85,777 81,869
Accrued liabilities 102,872 110,708
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Total current liabilities 218,179 219,444
Long-term notes payable and capital lease obligations 784,779 802,376
Indebtedness to a related party 23,919 35,675
Other non-current liabilities 42,698 44,267
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Total liabilities 1,069,575 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 37,321 in 1999 and 37,176 in 1998 373 372
Additional paid-in capital 272,575 271,469
Retained earnings 44,378 34,898
Accumulated other comprehensive income (loss) (6,485) 6,313
- -----------------------------------------------------------------------------------------------------------------
310,841 313,052
Less - treasury stock, at cost, 847 shares in 1999 and 1998 (10,653) (10,653)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 300,188 302,399
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Total liabilities and stockholders' equity $ 1,369,763 $ 1,404,161
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</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
-----------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 292,654 $ 273,537 $ 608,824 $ 530,278
Cost of sales 226,395 202,316 471,794 392,961
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Gross margin 66,259 71,221 137,030 137,317
Selling, general and administrative expenses 33,737 27,182 68,075 54,359
Research and technology expenses 6,292 5,883 12,747 11,066
Business acquisition and consolidation expenses 1,369 --- 4,178 ---
- --------------------------------------------------------------------------------------------------------------------
Operating income 24,861 38,156 52,030 71,892
Interest expense 18,421 6,744 37,527 13,711
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Income before income taxes 6,440 31,412 14,503 58,181
Provision for income taxes 2,261 11,434 5,100 21,133
Equity in earnings of affiliated companies 101 --- 85 ---
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Net income $ 4,280 $ 19,978 $ 9,488 $ 37,048
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Net income per share:
Basic $ 0.12 $ 0.54 $ 0.26 $ 1.00
Diluted 0.12 0.46 0.26 0.86
Weighted average shares:
Basic 36,452 36,885 36,410 36,867
Diluted 36,602 46,478 36,511 46,419
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- --------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<CAPTION>
HEXCEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------
UNAUDITED
-------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
(IN THOUSANDS) 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,488 $ 37,048
Reconciliation to net cash provided (used) by operations:
Depreciation and amortization 31,480 19,848
Deferred income taxes (1,928) 7,276
Accrued business acquisition and consolidation expenses 4,178 ---
Business acquisition and consolidation payments (6,636) (3,147)
Equity in earnings of affiliated companies (85) ---
Working capital changes and other 11,596 (38,207)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 48,093 22,818
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (17,958) (27,391)
Advances to affiliated companies --- (750)
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Net cash used by investing activities (17,958) (28,141)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of the credit facilities, net (247,328) (1,304)
Proceeds from long-term debt and capital lease obligations, net 224,782 2,439
Debt issuance costs (9,515) (1,164)
Activity under stock plans 746 2,372
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Net cash provided (used) by financing activities (31,315) 2,343
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Effect of exchange rate changes on cash and cash equivalents (632) 916
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Net decrease in cash and cash equivalents (1,812) (2,064)
Cash and cash equivalents at beginning of year 7,504 9,033
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Cash and cash equivalents at end of period $ 5,692 $ 6,969
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- BASIS OF ACCOUNTING
The accompanying condensed consolidated financial statements have been
prepared from the unaudited records of Hexcel Corporation and subsidiaries
("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 June 30, 1999, and the
results of operations for the quarter and year-to-date periods ended June 30,
1999 and 1998, and the cash flows for the year-to-date periods ended June 30,
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 period amounts in the condensed
consolidated financial statements and notes 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 a fixed-price option to increase this equity interest to
84.0%. The fixed-price option expires on December 31, 1999. Hexcel's
acquisition of the CS-Interglas equity interest and related option 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.
5
<PAGE>
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving
primarily the European and Asian electronics and telecommunications industries.
CS Tech-Fab manufactures non-woven materials for roofing, construction and other
specialty applications. 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 year-to-date period ended June 30, 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>
- --------------------------------------------------------------------------------
6/30/98
- --------------------------------------------------------------------------------
<S> <C>
Pro forma net sales $ 641,942
Pro forma net income 38,309
Pro forma diluted net income per share $ 0.89
- --------------------------------------------------------------------------------
</TABLE>
NOTE 3 -- INVENTORIES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
6/30/99 12/31/98
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 86,587 $ 90,881
Work in progress 76,288 77,769
Finished goods 38,103 44,549
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Total inventories $ 200,978 $ 213,199
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</TABLE>
NOTE 4 -- INVESTMENT IN CS-INTERGLAS
The Company has a fixed-price option to increase the equity position in
its CS-Interglas investment from 43.6% to 84%, which expires on December 31,
1999. In the Company's opinion, this fixed-price option is significantly
higher than its current fair market value. As a result, the Company intends
to allow the option to expire unexercised.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("SFAS 121"), the Company is evaluating its investment in
CS-Interglas. A number of factors are leading to this evaluation, including a
decline in the investment's market value, changes in the business climate in
which the investment operates in and the Company's decision to allow the
option to expire unexercised. Once the Company's business plans have been
developed, the Company will assess the applicable fair value of its
investment in CS-Interglas.
6
<PAGE>
NOTE 5 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED
PARTY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
6/30/99 12/31/98
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Senior credit facility $ 372,126 $ 618,214
European credit and overdraft facilities 10,586 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 763,180 775,151
Capital lease obligations 51,129 54,092
Senior subordinated note payable to a related party,
net of unamortized discount of $1,055 and $1,801
as of June 30, 1999 and December 31, 1998, respectively 23,919 35,675
- ---------------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 838,228 $ 864,918
- ---------------------------------------------------------------------------------------------------------
Notes payable and current maturities of long-term liabilities $ 29,530 $ 26,867
Long-term notes payable and capital lease obligations,
less current maturities 784,779 802,376
Indebtedness to a related party 23,919 35,675
- ---------------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 838,228 $ 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. In January 1999, simultaneously with the closing of the Company's
$240,000 senior subordinated notes offering (see below), the Company amended the
Senior Credit Facility to, among other things, reduce the available borrowing
capacity from $910,000 to $671,500, modify certain financial covenants and to
permit the offering. Approximately $544,000 of the Senior Credit Facility
expires in September 2004, with the balance expiring in 2005.
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. The
upper limit of these ranges have been increased to 2.75% and 1.75%
respectively as part of the August 13, 1999 amendment to the Senior Credit
Facility with the applicable rate continuing to be determined by the
Company's ratio of total debt to earnings before business acquisition and
consolidation expenses, other income, interest, taxes, depreciation and
amortization, and equity in earnings of affiliated companies. 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.
SENIOR SUBORDINATED NOTES DUE 2009
On January 21, 1999, the Company issued $240,000 of senior subordinated
notes due 2009 (the "Senior Subordinated Notes"). 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 $230,500 from this offering were
used to repay amounts owed under the Senior Credit Facility. The Senior
Subordinated
7
<PAGE>
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 increasing rate senior subordinated note payable to a related party,
is payable to Ciba Specialty Chemicals Inc., and is a general unsecured
obligation of Hexcel (the "Ciba Note"). Ciba Specialty Chemicals Inc. and its
affiliate, Ciba Specialty Chemicals Corporation, collectively hold
approximately 49.4% of the Company's common stock. From February 28, 1996
through February 28, 1999, the Ciba Note bore interest at a rate of 7.5% per
annum. On February 28, 1999, the interest rate on the Ciba Note increased to
10.5% per annum, and will continue to increase by an additional 0.5% per year
thereafter until it matures in 2003. On February 17, 1999, the Company
redeemed $12,500 of the Ciba Note, with such repayment financed with
borrowings under the Company's Senior Credit Facility.
NOTE 6 -- BUSINESS ACQUISITION AND CONSOLIDATION EXPENSES
Over the past few years, the Company has announced two major business
consolidation programs. In December 1998 and March 1999, the Company
announced a business acquisition and consolidation ("BA&C") program related
to the integration of the Acquired Clark-Schwebel Business and the
combination of its U.S., European and Pacific Rim composite materials
businesses into a single, global business unit (the "1998/1999 program").
Prior to this program, in May 1996, the Company announced a BA&C program
primarily related to the integration of the acquired composites businesses
from Ciba-Geigy Limited and Ciba-Geigy Corporation (the "Acquired Ciba
Business"). This program was later revised in December 1996, to include the
acquired carbon fibers and prepreg business from Hercules Incorporated as
well as other consolidation activities identified during the on-going
integration of the Acquired Ciba Business (collectively, the "1996 program").
These programs were designed to integrate the acquired businesses, streamline
operations, reduce operating costs, and position the Company for profitable
growth. More detailed discussions on each of these programs are set forth
below.
Total accrued BA&C expenses at December 31, 1998 and June 30, 1999, and
activity during the six months ended June 30, 1999 for each of these
programs, were 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
BA&C expenses 4,178 - 4,178
Cash expenditures (4,134) (2,502) (6,636)
Non-cash usage, including asset write-downs (2,053) 19 (2,034)
- ---------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1999 $ 2,993 $ 717 $ 3,710
- ---------------------------------------------------------------------------------------------------
</TABLE>
Business consolidation activities were financed with operating cash
flows and borrowings under the Company's credit facility. The Company expects
that substantially all remaining cash expenditures for the 1998/1999 and 1996
programs will be completed by the end of 1999, with such expenditures being
funded through operating cash flows.
8
<PAGE>
1998/1999 PROGRAM
In December 1998, the Company announced consolidation actions within its
reinforcement fabrics and composite materials businesses. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of the Acquired Clark-Schwebel Business, and the combination
of its U.S., European and Pacific Rim composite materials businesses into a
single, global business unit. The objectives of these actions were intended
to eliminate redundancies, improve manufacturing planning, and enhance
customer service. The Company substantially completed these actions in the
first quarter of 1999, which 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 facility, which, at that time, employed
approximately 100 manufacturing personnel. This facility produces fabrics for
the electronics market and, a significant portion of its production equipment
will be relocated to the Company's Anderson, South Carolina facility. The
planned closure of this facility, which is expected to be completed in the
third quarter of 1999, 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 Acquired Clark-Schwebel Business.
During the first half of 1999, the Company recorded $4,178 of BA&C
expenses for the 1998/1999 program, primarily reflecting the costs of closing
its Cleveland, Georgia facility as well as the elimination of certain
additional administrative positions relating to the consolidation of the
composite materials business unit. Included in the BA&C expense was a $1,815
non-cash write-down of equipment that will be disposed of at the Cleveland
facility. The Company expects to record an additional charge of approximately
$1,200 during the third quarter of 1999 relating to the relocation of certain
equipment from the Cleveland facility to the Company's Anderson, South
Carolina facility.
Accrued BA&C expenses at December 31, 1998 and June 30, 1999, and
activity during the six months ended June 30, 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
BA&C expenses 2,131 2,047 4,178
Cash expenditures (2,556) (1,578) (4,134)
Non-cash usage, including asset write-downs --- (2,053) (2,053)
- --------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1999 $ 2,595 $ 398 $ 2,993
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, accrued BA&C 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. Cash expenditures
during the six months ended June 30, 1999 for this program principally
related to severance payments made to those employees terminated in December
1998. As of June 30, 1999, the remaining accrued expenses for the 1998/1999
program primarily reflected severance and relocation costs for employees in
the Company's Cleveland facility and for those administrative employees
terminated in the second quarter of 1999. The 1998/1999 program is expected
to be substantially completed by the end of 1999.
9
<PAGE>
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. The business consolidation program was also
intended to eliminate excess manufacturing capacity and redundant
administrative functions. The Company 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. 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 Acquired Ciba
Business, the consolidation of the Company's manufacturing operations in
Europe, the consolidation of the Company's U.S. special process manufacturing
activities, and the integration of sales, marketing and administrative
resources. With the exception of certain nominal cash expenditures, the
program was completed in the second quarter of 1999 with the disposal of the
Company's operations in Brindisi, Italy (the "Italian Operations").
In the fourth quarter of 1998, the Company recorded $5,600 of BA&C
expenses relating to an asset impairment for its Italian Operations, which
was part of the Acquired Ciba Business. The purchase price originally
allocated to the Italian Operations was a net liability of approximately
$2,100. Since the acquisition, the Italian Operations had immaterial
revenues, incurred operating losses, and was not strategically important to
the Company. Consequently, the Company periodically evaluated the
recoverability of its carrying value pursuant to SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." The Company again evaluated the recoverability of the carrying
value of its Italian Operations in the fourth quarter of 1998, in light of
its continuing operating losses and certain offers received from interested
buyers. In assessing whether an impairment had occurred, the Company
considered the offers received, as well as the future undiscounted cash flows
related to its Italian Operations. The estimate of fair value used in
determining the impairment charge was based on the offers received from the
interested buyers. In June 1999, the Company sold its Italian Operations for
immaterial proceeds, resulting in a loss on disposal that approximated
amounts accrued. The amounts accrued approximated the Italian Operations'
debt plus certain employee retirement costs, which the Company agreed to
maintain. The Company had accounted for its Italian Operations under its
Engineered Products business segment.
Accrued BA&C expenses at December 31, 1998 and June 30, 1999, and
activity during the six months ended June 30, 1999 for the 1996 BA&C 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
Cash expenditures (2,315) (187) (2,502)
Non-cash usage 19 --- 19
- -----------------------------------------------------------------------------------
BALANCE AS OF JUNE 30, 1999 $ 552 $ 165 $ 717
- -----------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, accrued BA&C expenses for the 1996 program
related to employee retirement costs associated with terminations, a foreign
government grant received by the Company that is required to be repaid due to
lower employee levels as a result of the consolidation program, and
environmental costs related to a closed facility. Cash expenditures for the
six months ended
10
<PAGE>
June 30, 1999, primarily represented the employee retirement costs that were
disbursed in connection with the disposal of the Company's Italian
Operations. As of June 30, 1999, remaining accrued BA&C expenses for the 1996
program consisted of the foreign government grant that is to be repaid over a
five year period and accrued environmental costs.
NOTE 7 -- NET INCOME PER SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic net income per share:
Net income $ 4,280 $ 19,978 $ 9,488 $ 37,048
Weighted average common shares outstanding 36,452 36,885 36,410 36,867
- --------------------------------------------------------------------------------------------------------------------
Basic net income per share $ 0.12 $ 0.54 $ 0.26 $ 1.00
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Diluted net income per share:
Net income $ 4,280 $ 19,978 $ 9,488 $ 37,048
Effect of dilutive securities -
Convertible Subordinated Notes, due 2003 --- 1,272 --- 2,544
Convertible Subordinated Debentures, due 2011 --- 278 --- 556
- --------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 4,280 $ 21,528 $ 9,488 $ 40,148
- --------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 36,452 36,885 36,410 36,867
Effect of dilutive securities -
Stock options 150 1,520 101 1,479
Convertible Subordinated Notes, due 2003 --- 7,239 --- 7,239
Convertible Subordinated Debentures, due 2011 --- 834 --- 834
- --------------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares
outstanding 36,602 46,478 36,511 46,419
- --------------------------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.12 $ 0.46 $ 0.26 $ 0.86
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The Convertible Subordinated Notes, due 2003, and the Convertible
Subordinated Debentures, due 2011, were excluded from the 1999 computations
of diluted net income per share, as they were antidilutive. For the quarter
and year-to-date periods ended June 30, 1999, approximately 4,000 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 $8.95 to
$30.38, with the weighted average price being approximately $13.26. For the
quarter and year-to-date periods ended June 30, 1998, substantially all of
the Company's outstanding stock options were included in the calculation of
diluted net income per share.
NOTE 8 -- COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
1999 1998 1999 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 4,280 $ 19,978 $ 9,488 $ 37,048
Currency translation adjustment (5,793) 1,257 (12,798) (316)
---------------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ (1,513) $ 21,235 $ (3,310) $ 36,732
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
NOTE 9 -- 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
quarter and year-to-date periods ended June 30, 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
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers $ 83,180 $ 156,242 $ 53,232 $ 292,654
Intersegment sales 30,972 1,834 --- 32,806
- --------------------------------------------------------------------------------------------------------------------
Total sales 114,152 158,076 53,232 325,460
Adjusted EBIT 11,241 19,758 3,664 34,663
Depreciation and amortization 8,857 5,027 1,036 14,920
Capital expenditures 3,194 3,808 1,431 8,433
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA QUARTER ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 97,511 $ 170,622 $ 56,650 $ 324,783
Intersegment sales 35,079 3,219 31 38,329
- --------------------------------------------------------------------------------------------------------------------
Total sales 132,590 173,841 56,681 363,112
Adjusted EBIT 22,048 23,149 5,462 50,659
Depreciation and amortization 8,810 4,307 936 14,053
Capital expenditures 5,813 8,823 2,008 16,644
- --------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 46,265 $ 170,622 $ 56,650 $ 273,537
Intersegment sales 35,079 3,219 31 38,329
- --------------------------------------------------------------------------------------------------------------------
Total sales 81,344 173,841 56,681 311,866
Adjusted EBIT 15,839 23,149 5,462 44,450
Depreciation and amortization 3,785 4,307 936 9,028
Capital expenditures 4,019 8,823 2,008 14,850
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers $ 168,987 $ 333,442 $ 106,395 $ 608,824
Intersegment sales 66,700 4,610 --- 71,310
- --------------------------------------------------------------------------------------------------------------------
Total sales 235,687 338,052 106,395 680,134
Adjusted EBIT 21,514 46,155 6,260 73,929
Depreciation and amortization 17,759 10,064 2,041 29,864
Capital expenditures 7,383 7,300 3,097 17,780
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA YEAR-TO-DATE ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 200,873 $ 334,755 $ 106,314 $ 641,942
Intersegment sales 70,197 6,165 50 76,412
- --------------------------------------------------------------------------------------------------------------------
Total sales 271,070 340,920 106,364 718,354
Adjusted EBIT 44,392 49,224 8,372 101,988
Depreciation and amortization 18,232 8,556 1,710 28,498
Capital expenditures 10,585 15,297 2,908 28,790
- --------------------------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 89,209 $ 334,755 $ 106,314 $ 530,278
Intersegment sales 70,197 6,165 50 76,412
- --------------------------------------------------------------------------------------------------------------------
Total sales 159,406 340,920 106,364 606,690
Adjusted EBIT 29,518 49,224 8,372 87,114
Depreciation and amortization 8,100 8,556 1,710 18,366
Capital expenditures 7,862 15,297 2,908 26,067
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of the totals reported for the operating segments to
consolidated income before income taxes, are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
---------------------------------------------------------------------------------
PRO FORMA PRO FORMA
1999 1998 1998 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Adjusted EBIT for
reportable segments $ 34,663 $ 50,659 $ 44,450 $ 73,929 $ 101,988 $ 87,114
Less:
BA&C expenses 1,369 --- --- 4,178 --- ---
Corporate, other expenses and
eliminations 8,433 6,294 6,294 17,721 15,222 15,222
Interest expense 18,421 16,059 6,744 37,527 32,490 13,711
- --------------------------------------------------------------------------------------------------------------------
Consolidated income before
income taxes $ 6,440 $ 28,306 $ 31,412 $ 14,503 $ 54,276 $ 58,181
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 10 - SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
1999 1998
------------------------------------------------------
<S> <C> <C>
Cash paid for:
Interest $ 20,731 $ 12,136
Income taxes $ 10,087 $ 14,576
------------------------------------------------------
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS OVERVIEW
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30,
------------------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 (a) 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 292.7 $ 324.8 $ 273.5
Gross margin % 22.6% 25.5% 26.0%
Adjusted operating income % (b) 9.0% 13.7% 13.9%
Adjusted EBITDA (c) $ 42.0 $ 59.2 $ 48.0
Business acquisition and consolidation expenses $ 1.4 $ --- $ ---
Net income $ 4.3 $ 20.1 $ 20.0
Adjusted net income (b) $ 5.2 $ 20.1 $ 20.0
-------------------------------------------------------------------------------------------------
Diluted net income per share $ 0.12 $ 0.47 $ 0.46
Adjusted diluted net income per share (b) $ 0.14 $ 0.47 $ 0.46
-------------------------------------------------------------------------------------------------
</TABLE>
(a) Pro forma results gives effect to the September 1998 acquisition of Clark
Schwebel, as if the transaction had occurred at the beginning of 1998.
(b) Excludes business acquisition and consolidation expenses and related income
taxes, as applicable.
(c) Excludes business acquisition and consolidation expenses, interest, taxes,
depreciation, amortization, and equity in earnings of affiliated companies.
Net income for the second quarter of 1999 was $4.3 million, or $0.12 per
diluted share, compared with $20.0 million, or $0.46 per diluted share, for the
second quarter of 1998. Excluding business acquisition and consolidation
expenses of $1.4 million incurred in the second quarter of 1999, "Adjusted"
diluted net income per share was $0.14. For the quarter ended June 30, 1999,
Hexcel generated free cash flow (change in debt net of cash) of $24 million.
Hexcel used such free cash flow to repay amounts outstanding under its
various amortizing indebtedness.
During the second quarter of 1999, demand in a number of the markets Hexcel
serves was lower than anticipated. The Company's sales and gross margins for the
second quarter reflect reduced sales volume to the commercial aerospace market
as a result of the supply chain impacts of The Boeing Company's ("Boeing")
planned reduction in deliveries in 2000, lower prices in the global electronics
market because of intensified competition from Asia, and lower production and
sales of carbon fiber products. These market conditions were partially offset by
various cost savings initiatives. In light of these conditions, the Company
expects that Adjusted diluted earnings per share for the year will be in the
range of $0.60 to $0.70. Hexcel remains committed to improving performance by
continuing to reduce costs and increase productivity through its business
consolidation, global procurement and Lean Enterprise initiatives.
BUSINESS ACQUISITION
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from Clark-Schwebel, Inc. and its subsidiaries
(the "Acquired Clark-Schwebel Business"). 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,
14
<PAGE>
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.
As part of this acquisition, Hexcel also acquired Clark-Schwebel's equity
ownership interests in three joint ventures, CS-Interglas AG ("CS-Interglas")
headquartered in Germany, Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"),
headquartered in Japan, and Clark-Schwebel Tech-Fab Company ("CS Tech-Fab")
headquartered in the United States. CS-Interglas and Asahi-Schwebel are
fiberglass fabric producers serving primarily the European and Asian electronics
and telecommunications industries. CS Tech-Fab manufactures non-woven materials
for roofing, construction and other specialty applications. The unconsolidated
revenues in 1998 for these joint ventures were in excess of $300 million.
Hexcel acquired the net assets of the acquired business, other than certain
excluded assets and liabilities, in exchange for approximately $472.8 million in
cash. 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.
Further discussions of the acquisition and its related financing are
contained in Notes 2 and 5 to the accompanying condensed consolidated financial
statements.
RESULTS OF OPERATIONS
NET SALES: Net sales for the second quarter of 1999 were $292.7 million,
compared with $273.5 million for the second quarter of 1998 and $324.8
million for the second quarter of 1998 on a pro forma basis, after giving
effect to the acquisition of the Acquired Clark-Schwebel Business as if the
transaction had occurred at the beginning of 1998. The decrease in sales
compared to 1998 pro forma results primarily reflects reduced composite
materials sales to the commercial aerospace market and reduced sales of
reinforcement products, particularly in the general industrial and
recreational markets. The reduction in sales of reinforcement products to
electronic applications is the net impact of increased volume and lower
average pricing. On a constant currency basis, second 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 June 30, 1999 and pro
forma net sales for the quarter ended June 30, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
------------------------------------------------------------------------------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER 1999
Reinforcement products $ 13.4 $ 5.5 $ 42.2 $ 20.9 $ 1.2 $ 83.2
Composite materials 101.8 24.4 --- 17.7 12.3 156.2
Engineered products 48.6 3.4 --- 1.3 --- 53.3
- --------------------------------------------------------------------------------------------------------------------
Total $ 163.8 $ 33.3 $ 42.2 $ 39.9 $ 13.5 $ 292.7
56% 11% 14% 14% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA SECOND QUARTER 1998
Reinforcement products $ 13.0 $ 7.4 $ 45.4 $ 27.6 $ 4.2 $ 97.6
Composite materials 122.9 22.9 --- 12.6 12.2 170.6
Engineered products 53.3 2.3 --- 1.0 --- 56.6
- --------------------------------------------------------------------------------------------------------------------
Total $ 189.2 $ 32.6 $ 45.4 $ 41.2 $ 16.4 $ 324.8
58% 10% 14% 13% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial aerospace net sales decreased 13% to $163.8 million for the
second quarter of 1999, from $189.2 million on a pro forma basis for the second
quarter of 1998. The decline in sales was largely a result of the efforts by
Boeing and its subcontractors to adjust inventories and procurement in
15
<PAGE>
anticipation of lower aircraft production in 2000. Partially offsetting this
decrease, were sales to Airbus Industrie ("Airbus") and regional aircraft
producers. In addition, the Company's sales of products used to retrofit
aircraft interiors continue to grow, with a strong reception for its kit product
that extends the size of overhead stowage bins in narrow aisle aircraft.
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 906 in 1999, before declining to
approximately 800 in 2000. The Company sells 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, with the average being approximately
six months. As the Company supplies its products ahead of the delivery of a
commercial aircraft, it started to see the impact of future reduced Boeing
production rates on the procurement of the Company's products in the second
quarter of 1999, and expects that it will continue to see this impact in the
second half of 1999.
During 1998, the Company's commercial aerospace customers started
emphasizing the need for material yield improvement as well as cost and
inventory reduction throughout the industry's supply chain. In response to these
pressures, the Company reduced the price of certain products in 1999. Further,
the Company is aware that by the fourth quarter of 1999, one customer will have
substituted one of Hexcel's premium products for a lower cost, lower priced
alternative product, which will also be provided by Hexcel. Although these
changes impact the Company's profit margins, they have been mitigated, in part,
by the Company's various cost reduction and efficiency improvement programs.
Space and defense net sales for the second quarter of 1999 were $33.3
million, or comparable to pro forma second quarter 1998 net sales of $32.6
million. The Company expects to benefit from a number of new U.S. and European
military aircraft programs which continue to move towards full scale production
starting as early as late 2000.
The Company believes that, in response to a significant shortage of
carbon fiber supply in 1997, a number of the Company'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
purchasing less carbon fiber in 1999. Further the Company's sales of carbon
fiber to commercial aerospace applications are reflecting the trends in that
market. While the Company is seeking to find opportunities to sell its
short-term excess capacity in other markets, the increase in worldwide carbon
fiber capacity limits the prices at which such surplus capacity can be sold.
Electronics net sales decreased 7% to $42.2 million for the second
quarter of 1999, from $45.4 million on a pro forma basis for the second
quarter of 1998. The reduction in electronics net sales primarily reflects
the impact of price reductions, net of volume increases, for the Company's
electronic fiberglass products. Global pricing across the PCB laminate supply
chain has been reduced over the last twelve months due to intense competition
from Asian manufacturers seeking to sell their excess capacity in Western
markets. Nevertheless, the prices for electronic fiberglass products have
been relatively stable during the second quarter of 1999, after the last
round of price reductions that were made in the first quarter of 1999. The
Company has been successful in partially offsetting these price reductions by
obtaining lower raw material prices. In addition, the Company continues to
seek opportunities to reduce the cost of its products, and during the first
quarter of 1999 announced the closure of its Cleveland, Georgia plant as a
targeted cost reduction action.
General industrial net sales of $39.9 million for the second quarter of
1999 were comparable to pro forma second quarter 1998 net sales of $41.2
million. Recreation net sales decreased 18% in the second
16
<PAGE>
quarter of 1999 to $13.5 million compared to pro forma second quarter 1998 net
sales of $16.4 million, reflecting reduced customer demand for certain products
in this market, including, one particular customer who has changed 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 JUNE 30, 1999
Reinforcement products $ 8.7 $ 5.9 $ 14.6
Composite materials 157.0 35.7 192.7
Engineered products 141.4 10.4 151.8
-----------------------------------------------------------------------------------------
Total $ 307.1 $ 52.0 $ 359.1
-----------------------------------------------------------------------------------------
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 JUNE 30, 1998
Reinforcement products $ 10.0 $ 15.5 $ 25.5
Composite materials 215.0 48.1 263.1
Engineered products 159.1 9.2 168.3
-----------------------------------------------------------------------------------------
Total $ 384.1 $ 72.8 $ 456.9
-----------------------------------------------------------------------------------------
</TABLE>
The decrease in the Company's commercial aerospace backlog is
attributable to 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 the Company supplies its products
ahead of the delivery of a commercial aircraft, it has started to experience
the impact of the lower anticipated deliveries of Boeing aircraft in 2000.
The decrease in the Company's space and defense backlog compared to June 30,
1998 is also believed to be primarily attributable to the continuing trend
towards shorter lead times and better supply-chain management by the industry
overall. Backlog for the Company's other markets is not a material trend
indicator and accordingly, such amounts are not presented.
GROSS MARGIN: Gross margin for the second quarter of 1999 was $66.3
million, or 22.6% of net sales, compared with $71.2 million, or 26.0% of net
sales, for the second quarter of 1998 and $82.9 million, or 25.5% of net sales,
for pro forma second quarter 1998. The decrease compared to 1998 pro forma gross
margin reflects reduced sales volume and selected lower pricing in the
commercial aerospace market as a result of the supply chain impacts of Boeing's
planned reduction in deliveries in 2000, lower prices in the global electronics
market because of intensified competition from Asia, and lower production, sales
and weaker sales mix of carbon fiber products. These impacts have been partially
offset by various cost savings initiatives. The Company is pursuing efforts to
further reduce costs and increase productivity through its business
consolidation, global procurement and Lean Enterprise initiatives. By mid-1999,
the Company's Lean Enterprise program had been extended to a large portion of
the Company's U.S. and European locations, and will continue to be extended to
all of its locations by the end of 1999. The improvements in cost and
productivity are expected to be offset by the impact of lower commercial
aerospace demand in the U.S. and customer requirements for reductions in the
costs of the products that they purchase from the Company.
OPERATING INCOME: Operating income was $24.9 million in the second quarter
of 1999, or 8.5% of net sales, compared with $38.2 million in the second quarter
of 1998, or 13.9% of net sales. Excluding
17
<PAGE>
business acquisition and consolidation expenses, 1999 second quarter operating
income was $26.2 million, or 9.0% of net sales. The aggregate decrease in
operating income, excluding business acquisition and consolidation ("BA&C")
expenses, reflects the decrease in sales and gross margins, and increased
selling, general and administrative ("SG&A") and research and technology ("R&T")
expenses over the second quarter 1998. SG&A expenses were $33.7 million, or
11.5% of net sales for the second quarter of 1999 compared with $27.2 million,
or 9.9% of net sales for the second quarter of 1998. The aggregate dollar
increase in SG&A was primarily attributable to the Acquired Clark-Schwebel
Business, including $2.3 million of goodwill amortization, and costs associated
with the implementation of the Company's Lean Enterprise and supply-chain
initiatives. R&T expenses for the second quarter of 1999 were $6.3 million, or
2.2% of net sales, which were comparable to second quarter 1998 expenses of $5.9
million, or 2.2% of net sales.
INTEREST EXPENSE: Interest expense was $18.4 million, or 6.3% of net sales,
in the second quarter of 1999, compared to $6.7 million, or 2.5% of net sales,
in the second quarter of 1998. The increase primarily reflects the additional
financing required for the Acquired Clark-Schwebel Business.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: As part of the Acquired
Clark-Schwebel Business, the Company acquired interests in three joint
ventures. Competitive conditions in the electronics market, arising from the
Asian economic recession last year, continued to impact the performance of two
of these joint ventures during the second quarter of 1999. As a result, the
Company recognized a nominal amount of equity in earnings of affiliated
companies in the second quarter of 1999.
NET INCOME AND NET INCOME PER SHARE: Net income for the second quarter of
1999 was $4.3 million compared with $20.0 million for the second quarter of
1998. Pro forma second quarter 1998 net income, after giving effect to the
acquisition of the Acquired Clark-Schwebel Business as if the transaction had
occurred at the beginning of 1998, was $20.1 million.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
FOR THE QUARTER ENDED JUNE 30,
-----------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE AMOUNT) 1999 1998 1998
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diluted net income per share $ 0.12 $ 0.47 $ 0.46
Adjusted diluted net income per share, excluding BA&C expenses $ 0.14 $ 0.47 $ 0.46
Diluted net income per share, excluding goodwill amortization $ 0.17 $ 0.51 $ 0.47
Diluted weighted average shares outstanding 36.6 46.5 46.5
-----------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the number of weighted average shares is primarily
attributable to the exclusion of 8.1 million of potential common shares relating
to the Convertible Subordinated Notes, due 2003, and the Convertible
Subordinated Debentures, due 2011, which were antidilutive in the 1999 period.
Refer to Note 7 to the accompanying condensed consolidated financial statements
for the calculation and the number of shares used for diluted net income per
share.
18
<PAGE>
YEAR-TO-DATE RESULTS
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
------------------------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 608.9 $ 642.0 $ 530.3
Gross margin % 22.5% 25.5% 25.9%
Adjusted operating income % 9.2% 13.5% 13.6%
Adjusted EBITDA $ 87.6 $ 116.7 $ 91.8
Business acquisition & consolidation expenses $ 4.2 $ --- $ ---
Net income $ 9.5 $ 38.3 $ 37.0
Adjusted net income $ 12.2 $ 38.3 $ 37.0
-----------------------------------------------------------------------------------------------
Diluted net income per share $ 0.26 $ 0.89 $ 0.86
Adjusted diluted net income per share $ 0.33 $ 0.89 $ 0.86
-----------------------------------------------------------------------------------------------
</TABLE>
NET SALES AND GROSS MARGIN: Net sales for the first half of 1999 were
$608.9 million, compared with $530.3 million for the first half of 1998 and pro
forma first half 1998 net sales of $642.0 million. Gross margin for the first
half of 1999 was $137.1 million, or 22.5% of sales, versus gross margin of
$137.3 million, or 25.9% of sales, for the same period in 1998 and $163.9
million, or 25.5% of net sales, for pro forma first half of 1998. The decrease
in net sales and gross margin compared to pro forma 1998 results primarily
reflect the factors previously discussed. On a constant currency basis, 1999
year-to-date 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 year-to-date period ended June 30, 1999
and pro forma net sales for the year-to-date period ended June 30, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED
------------------------------------------------------------------------------------
COMMERCIAL SPACE & GENERAL
(IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FIRST HALF 1999
Reinforcement products $ 25.1 $ 11.0 $ 84.5 $ 42.4 $ 6.0 $ 169.0
Composite materials 224.2 51.9 --- 36.0 21.3 333.4
Engineered products 97.5 6.7 --- 2.3 --- 106.5
- --------------------------------------------------------------------------------------------------------------------
Total $ 346.8 $ 69.6 $ 84.5 $ 80.7 $ 27.3 $ 608.9
57% 11% 14% 13% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
PRO FORMA FIRST HALF 1998
Reinforcement products $ 24.2 $ 14.6 $ 97.6 $ 54.4 $ 10.2 $ 201.0
Composite materials 241.7 44.3 --- 25.9 22.8 334.7
Engineered products 99.4 5.1 --- 1.8 --- 106.3
- --------------------------------------------------------------------------------------------------------------------
Total $ 365.3 $ 64.0 $ 97.6 $ 82.1 $ 33.0 $ 642.0
57% 10% 15% 13% 5% 100%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
OPERATING INCOME: Operating income for the first six months of 1999 was
$52.0 million, compared with $71.9 million for the same period in 1998.
Excluding business acquisition and consolidation expenses of $4.2 million
incurred in the first half of 1999, the aggregate decrease in operating
income is the result of lower sales and gross margins, primarily in the
commercial aerospace and electronics markets, and lower carbon fiber
production and sales, as well as increases in SG&A and R&T expenses. SG&A
expenses were $68.1 million, or 11.2% of sales, for the first half of 1999,
compared to $54.4 million, or 10.3% of sales, for the same period in 1998.
The increase in SG&A expenses was primarily attributable to the Acquired
Clark-Schwebel Business, including $4.6 million of goodwill amortization, and
costs associated with the implementation of the Company's Lean Enterprise and
supply-chain
19
<PAGE>
initiatives. R&T expenses were $12.8 million, or 2.1% of sales, for the first
half of 1999, compared to $11.1 million, or 2.1% of sales, for the comparable
1998 period.
INTEREST EXPENSE: Interest expense for the first half of 1999 was $37.5
million, or 6.2% of net sales, compared to $13.7 million, or 2.6% of net sales,
in the first half of 1998. The increase primarily reflects the additional
financing required for the Acquired Clark-Schwebel Business.
EQUITY IN EARNINGS OF AFFILIATED COMPANIES: As previously discussed,
competitive conditions in the electronics market have impacted the
performance of the Company's joint ventures, resulting in a nominal amount of
equity in earnings of affiliated companies in the year-to-date period ended
June 30, 1999.
NET INCOME AND NET INCOME PER SHARE: Net income for the first half of 1999
was $9.5 million versus $37.0 million for the comparable 1998 period. Pro forma
1998 year-to-date net income, after giving effect to the acquisition of the
Acquired Clark-Schwebel Business as if the transaction had occurred at the
beginning of 1998, was $38.3 million.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
YEAR-TO-DATE ENDED JUNE 30,
-----------------------------------
Pro Forma
(IN MILLIONS, EXCEPT PER SHARE AMOUNT) 1999 1998 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Diluted net income per share $ 0.26 $ 0.89 $ 0.86
Adjusted diluted net income per share, excluding BA&C expenses $ 0.33 $ 0.89 $ 0.86
Diluted net income per share, excluding goodwill amortization $ 0.36 $ 0.97 $ 0.88
Diluted weighted average shares outstanding 36.5 46.4 46.4
-----------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the number of diluted weighted average shares is primarily
attributable to the exclusion of 8.1 million of potential common shares relating
to the Convertible Subordinated Notes, due 2003, and the Convertible
Subordinated Debentures, due 2011, which were antidilutive in the 1999 period.
Refer to Note 7 to the accompanying condensed consolidated financial statements
for the calculation and the number of shares used for diluted net income per
share.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL RESOURCES
Debt, net of cash, as of June 30, 1999 was $832.5 million compared to
$857.5 million as of December 31, 1998. The Company generated free cash flow of
$25.0 million during the six months ended June 30, 1999. The generation of free
cash flow was used to repay the Company's debt and transaction costs associated
with the senior subordinated notes offering (see below).
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. The Senior Credit Facility provides up
to $671.5 million of borrowing capacity, of which, approximately $544 million
of the facility expires in September 2004, with the balance expiring in 2005.
In January 1999, simultaneously with the closing of the Company's $240.0
million offering of 9 3/4% senior subordinated notes offering, the Company
amended the Senior Credit Facility to, among other things, reduce the
available borrowing capacity from $910.0 million to $671.5 million, modify
certain financial covenants and permit the offering. On August 13, 1999, the
Company further amended its Senior Credit Facility, modifying certain
financial covenants and the applicable interest rates payable, increasing the
interest expense to the Company for borrowings under the facility by about
1/4%.
20
<PAGE>
On January 21, 1999, the Company issued $240.0 million of Senior
Subordinated Notes due 2009 (the `Senior Subordinated Notes"). The Senior
Subordinated Notes are general unsecured obligations of Hexcel that bear
interest at a rate of 9 3/4% per annum. Net proceeds of approximately $230.5
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
redeemed $12.5 million of its increasing rate senior subordinated notes payable
to its affiliate, Ciba Specialty Chemicals Inc. Such redemption was financed
with borrowings under the Company's Senior Credit Facility.
On June 18, 1999, the Company commenced its offer to exchange all of its
outstanding Senior Subordinated Notes which were sold under Rule 144A of the
Securities Act of 1933 for a like principal amount of new senior subordinated
notes which were registered under the Securities Act of 1933. This exchange
offer was completed on July 19, 1999 with all original Senior Subordinated
Notes outstanding being exchanged for the new notes. The form and terms of
the new notes are identical in all material respects to the original notes.
The Company expects that its financial resources, including the Senior
Credit Facility, will be sufficient to fund the Company's worldwide
operations for the foreseeable future. Further discussion of the Company's
financial resources is contained in Note 5 to the accompanying condensed
consolidated financial statements.
CAPITAL EXPENDITURES
Capital expenditures totaled $18.0 million for the first half of 1999
compared to $27.4 million for the first half of 1998 and $30.1 million for the
first half of 1998 on a pro forma basis. The Company anticipates that its 1999
capital expenditures will approximate $40 to $45 million, compared to pro forma
full year 1998 capital expenditures of approximately $70 million. The decrease
reflects reduced spending due to changing market conditions, the expected
benefits from the Company's Lean Enterprise program, and a commitment by Hexcel
to reduce its debt.
OTHER CAPITAL COMMITMENTS
Hexcel has total estimated financial commitments to its joint ventures
in China and Malaysia of approximately $31 million. These commitments are
expected to be made in increments through 2001, including an estimated $5
million in the second half of 1999. Investments in these joint ventures to
date have been nominal.
ADJUSTED EBITDA, CASH FLOWS AND RATIO OF EARNINGS TO FIXED CHARGES
FIRST HALF, 1999: Earnings before business acquisition and consolidation
expenses, other income, interest, taxes, depreciation and amortization, and
equity in earnings of affiliated companies ("Adjusted EBITDA") was $87.6
million. Net cash provided by operating activities was $48.1 million, as $9.5
million of net income, $31.5 million of non-cash depreciation and amortization,
and $11.5 million of working capital changes more than offset cash used by all
other operating activities.
21
<PAGE>
Net cash used for investing activities was $18.0 million, reflecting the
Company's capital expenditures for the first six months of 1999. Net cash used
for financing activities was $31.3 million, primarily reflecting a net debt
repayment of $22.5 million, and $9.5 million of debt issuance costs pertaining
to the issuance of the Senior Subordinated Notes.
FIRST HALF, 1998: Adjusted EBITDA was $91.8 million. Pro forma Adjusted
EBITDA, after giving effect to the acquisition of the Acquired Clark-Schwebel
Business as if the transaction had occurred at the beginning of 1998, was $116.7
million. Net cash provided by operating activities was $22.8 million, as
increased working capital of $38.2 million and restructuring payments of $3.1
million partially offset $37.0 million of net income and $27.1 million of
non-cash depreciation and amortization and deferred income taxes. The increase
in working capital reflected higher levels of accounts receivable and inventory
due to higher sales volume, as well as reductions in accrued liabilities from
peak year-end levels, primarily due to the payments made in 1998 for capital
projects and employee incentive and benefit programs incurred during 1997.
Net cash used for investing activities was $28.1 million, primarily
reflecting $27.4 million of capital expenditures. Net cash provided by financing
activities totaled $2.3 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 the Company'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 as well as the
ratio of earnings to fixed charges, for the applicable periods, are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
QUARTER ENDED JUNE 30, YEAR-TO-DATE ENDED JUNE 30,
------------------------------------------------------------------------
PRO FORMA PRO FORMA
(IN MILLIONS) 1999 1998 1998 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 4.3 $ 20.1 $ 20.0 $ 9.5 $ 38.3 $ 37.0
Provision for income taxes 2.2 10.3 11.4 5.0 19.7 21.2
Interest expense 18.4 16.1 6.7 37.5 32.5 13.7
Depreciation and amortization expense 15.8 14.8 9.9 31.5 29.9 19.9
Equity in earnings of affiliated companies (0.1) (2.1) --- (0.1) (3.7) ---
- ---------------------------------------------------------------------------------------------------------------------
EBITDA 40.6 59.2 48.0 83.4 116.7 91.8
Business acquisition and consolidation
expenses 1.4 --- --- 4.2 --- ---
- ---------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA $ 42.0 $ 59.2 $ 48.0 $ 87.6 $ 116.7 $ 91.8
- ---------------------------------------------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.3x 5.4x 2.9x 1.4x 5.1x 2.8x
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The decrease in the earnings to fixed charges ratios reflect the Company's
lower operating income and higher interest costs. The calculation of earnings to
fixed charges assumes that one-third of the Company's rental expense is
attributable to interest expense.
22
<PAGE>
INVESTMENT IN CS-INTERGLAS AG
The Company has a fixed-price option to increase the equity position in
its CS-Interglas investment from 43.6% to 84%, which expires on December 31,
1999. In the Company's opinion, this fixed-price option is significantly
higher than its current fair market value. As a result, the Company intends
to allow the option to expire unexercised.
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", the Company is evaluating its investment in CS-Interglas.
A number of factors are leading to this evaluation, including, a decline in
the investment's market value, changes in the business climate in which the
investment operates in and the Company's decision to allow the option to
expire unexercised. Once the Company's business plans have been developed,
the Company will assess the applicable fair value of its investment in
CS-Interglas.
BUSINESS ACQUISITION AND CONSOLIDATION ACTIVITIES
Over the past few years, the Company has announced and undertaken two major
business consolidation programs. 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. In 1996, Hexcel
announced plans to integrate and consolidate its acquired composites and carbon
fibers and prepreg businesses into Hexcel, including reorganizing the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies. The Company's consolidation activities with respect
to these programs are expected to be substantially complete by the end of 1999.
During the first half of 1999, the Company recorded $4.2 million of BA&C
expenses, primarily reflecting the costs of closing its Cleveland, Georgia
facility as well as the elimination of certain additional administrative
positions relating to the consolidation of the composite materials business
unit. Included in the 1999 BA&C expense, was a $1.8 million non-cash write-down
of equipment that will be disposed of from the Cleveland facility. The Company
expects to record an additional charge of approximately $1.2 million during the
third quarter of 1999 relating to the relocation of certain equipment from the
Cleveland facility to the Company's Anderson, South Carolina facility. In
addition to the Cleveland, Georgia facility closure, the Company is continuing
to conduct a global capacity review, as well as a review of its administrative
activities. These reviews may result in the closing or right-sizing of
additional facilities or further reductions in administrative personnel and, as
a result, additional consolidation charges may be recognized in 1999.
For the six months ended June 30, 1999, the Company disbursed $6.6 million
for its BA&C activities, with such expenditures being financed with operating
cash flows. These expenditures primarily related to severance payments and the
disposal of the Company's Italian Operations. In June 1999, the Company sold its
Italian Operations, which was originally part of the 1996 acquired composites
business, for immaterial proceeds, resulting in a loss on disposal that
approximated amounts accrued. The amounts accrued approximated the Italian
operations' debt plus certain employee retirement costs, which the Company
agreed to either maintain or pay out.
As of June 30, 1999, the Company had accrued BA&C expenses of approximately
$3.7 million, which is expected to be disbursed in the second half of 1999.
23
<PAGE>
Estimated savings from the Company's recent BA&C activities include
approximately $10 million per year for those actions announced in December 1998
and approximately $5 million per year relating to the closure of the Company's
Cleveland facility and the disposal of its Italian operations. The Company has
already begun to realize those savings from the December 1998 actions.
Further discussions of the Company's BA&C activities are contained in Note
6 to the accompanying condensed financial Statements
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 (collectively "Business Systems and Devices") will
recognize and process dates starting with the year 2000 and beyond (the "Year
2000"). The Year 2000 issue can arise at any point in the Company'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. With certain exceptions, the Company is near completion of its
repairing, replacing and testing phases for its Year 2000 issues that have been
identified as "critical" to the Company's operations, and is proceeding, as
targeted, to substantially complete its contingency plans by the third quarter
of 1999. A discussion of the Company's critical Business Systems and Devices,
suppliers and vendors as they pertain to the Company's Year 2000 issues, as of
June 30, 1999, is detailed as follows:
BUSINESS SYSTEMS & DEVICES
In order to address the Year 2000 issue as it relates to the Company's
Business Systems and Devices, Hexcel developed, and is in the process of
implementing, a six phase plan. The Company is also using external consulting
services, where appropriate, as part of its efforts to address its Year 2000
issue. The components of this plan and their related status, as of June 30,
1999, are detailed below and apply to both the Company's Business Systems and
its Devices:
(1) INVENTORY: This phase, which was completed in December 1998, consisted
of compiling a detailed listing of the Company'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 the Company's
business operations. This phase was completed in December 1998.
(3) ASSESSING COMPLIANCE: This phase consisted of assessing Year 2000
compliance on the Company's Business Systems or Devices which have
been identified as essential to the Company's business operations. In
assessing compliance, the Company performed a variety of tasks
including, obtaining Year 2000 compliance statements and information
from the Company's vendors and service providers. This phase was
completed in March 1999. However, the Company 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.
24
<PAGE>
(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 90%
complete, which approximates the Company's original estimate of having
this phase substantially completed by June 30, 1999. Remaining items
to repair or replace primarily consist of wide area network upgrades,
telecommunications, and quality assurance and time and attendance
systems, for certain of the Company's facilities. These items are
anticipated to be repaired or replaced in the second half of 1999.
(5) TESTING: This phase consists of testing the repair or replacement of
those Business Systems and Devices, which are essential to the
Company's business operations. Hexcel also intends to test the
integration of the various Business Systems and Devices within the
Company's manufacturing processes. This phase is approximately 85%
complete, and is dependent upon the 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.
The Company has targeted September 30, 1999 as the date for
substantial completion of its contingency plans, however, the Company
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. The Company 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 June 30, 1999, the Company has received responses from over 80% of
its significant suppliers and 50% of its significant customers. The responses
from the Hexcel's suppliers generally indicate that these parties are taking
actions to ensure that their ability to supply products or services to the
Company will not be impaired. To the extent that supplier responses to Year 2000
readiness are unsatisfactory, the Company 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 the Hexcel's customers also generally indicate that these parties
are taking actions to ensure their ability to purchase products from the Company
will not be impaired. The Company 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 the Company's Business Systems and Devices to become Year 2000
compliant, is approximately $4.6 million, or $0.9 million less than the
Company's original estimate of $5.5 million. The decrease in the total estimated
costs is due to the development of less costly alternatives and the difficulties
in the original estimation process. The total estimated costs includes
approximately $2.5 million of capital expenditures to be used for the purchase
of certain capital equipment to replace equipment which is currently not Year
2000 compliant. As of June 30, 1999, approximately $2.5 million has been
incurred. The remaining estimated balance of $2.1 million represents costs to
repair or replace those items identified in phase four as well as internal costs
to manage the Company's central Year 2000 project office. The estimate does not
include any costs associated with the implementation of the Company's
contingency plans, which are in the process of being developed, however, the
Company does not anticipate these costs to be material. Hexcel
25
<PAGE>
has not used any external resources to independently verify these cost
estimates. Due to resource constraints caused by the Year 2000 issue, the
Company is deferring other information technology projects. These deferrals,
however, are not expected to have a material adverse effect on the Company's
results of operations or financial condition.
Hexcel is progressing with the development of its Year 2000 contingency
plans. These plans are expected to be substantially completed by September 30,
1999. The Company is currently unable to assess the most reasonably likely worst
case scenarios. 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, the Company 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. The Company 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 the Company.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement No. 137 (SFAS 137), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133--an
amendment of FASB Statement No. 133." This Statement requires companies to
record derivatives on the balance sheet as assets and liabilities, 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 137 is not expected to have a
material impact on Hexcel's consolidated financial statements. This Statement is
effective for fiscal years beginning after June 15, 2000. Hexcel will adopt this
accounting standard as required by January 1, 2001.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," that are not of historical
fact, constitute "forward-looking statements". Such forward-looking
statements include, but are not limited to: (a) estimates of commercial
aerospace production and delivery rates, including those of Boeing and
Airbus; (b) expectations regarding the growth in the production of military
aircraft and launch vehicle programs; (c) estimates of the change in net
sales in total and by market compared to pro forma 1998 net sales; (d)
expectations regarding the impact of pricing pressures from Hexcel's
customers; (e) expectations regarding the ability of Hexcel to pass along
price reductions to its customers; (f) expectations regarding future sales
based on current backlog; (g) expectations regarding sales growth, sales mix,
gross margins, manufacturing productivity and capital expenditures; (h)
expectations regarding Hexcel's full year 1999 diluted net income per share;
(i) expectations regarding Hexcel's financial condition and liquidity, as
well as future free cash flows and Adjusted EBITDA; (j) estimated additional
business acquisition and consolidation expenses to be incurred in 1999; (k)
expectations regarding the expenditures, benefits and savings of Hexcel's
Lean Enterprise, business consolidation and procurement programs, including
the closure of the Company's Cleveland, GA facility; (l) expectations
regarding full year 1999 capital expenditures and contributions to Hexcel's
joint ventures in China and Malaysia; (m) expectations regarding the fair
value of the CS-Interglas option and the investment in CS-Interglas; and;
(n) the impact of the Year 2000
26
<PAGE>
issue, the estimated costs associated with becoming Year 2000 compliant and the
estimated target date for substantial completion of remediation.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such 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 required actions for Year 2000 compliance. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results to be materially different.
Additional information regarding these factors is contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A discussion of market risk exposures is included in Part II, Item 7A, of
Hexcel's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
There has been no material change to this information during the six months
ended June 30, 1999.
PART II. OTHER INFORMATION
HEXCEL CORPORATION AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 20, 1999
(the "Meeting") in Stamford, Connecticut. Stockholders holding 35,119,685 shares
of Hexcel common stock were present at the Meeting, either in person or by
proxy, constituting a quorum. The following matter was submitted to the
Company's stockholders for a vote at the Meeting, with the results of the vote
indicated:
(1) Each of the ten nominees to the Board of Directors was elected by the
stockholders to serve as directors until the next annual meeting of
stockholders and until their successors are duly elected and qualified:
27
<PAGE>
DIRECTOR FOR WITHHELD
John M. D. Cheesmond 34,944,501 175,184
Marshall S. Geller 34,944,501 175,184
Harold E. Kinne 34,944,501 175,184
John J. Lee 34,944,314 175,371
John J. McGraw 34,944,501 175,184
Martin Riediker 34,944,501 175,184
Stanley Sherman 34,944,501 175,184
Martin L. Solomon 34,944,501 175,184
George S. Springer 34,944,501 175,184
Franklin S. Wimer 34,944,501 175,184
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
10.1 Hexcel Corporation Incentive Stock Plan, as amended and
restated on January 30, 1997, and further amended on
December 10, 1997 and March 25, 1999 (incorporated herein by
reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-8 filed on July 26, 1999).
10.2 Hexcel Corporation Management Stock Purchase Plan, as
amended on March 25, 1999 (incorporated herein by reference
to Exhibit 4.3 of the Company's Registration Statement on
Form S-8 filed on July 26, 1999).
10.3 Second Amendment dated August 13, 1999 to the Second Amended
and Restated Credit Agreement by and among Hexcel
Corporation and the Foreign Borrowers from time to time
parties thereto, the banks and other financial institutions
from time to time parties thereto, Citibank, N.A., as
Documentation Agent, and Credit Suisse First Boston, as
Administrative Agent.
22.1 The Company's Proxy Statement dated April 12, 1999,
containing the full text of the proposals referred to in
Item 4, which was previously filed electronically, is hereby
incorporated by reference.
27. Financial Data Schedule.
(B) REPORTS ON FORM 8-K:
Current Report on Form 8-K dated June 25, 1999, relating to the
commencement by the Company of its offer to exchange any and all of
its outstanding 9 3/4% Senior Subordinated Notes due 2009 which were
sold under Rule 144A.
Current Report on Form 8-K dated July 6, 1999, relating to the
Company's estimated second quarter earnings.
Current Report on Form 8-K dated July 21, 1999, relating to the
Company's second quarter 1999 financial results, and the completion of
the Company's exchange offer for all of its outstanding 9 3/4% Senior
Subordinated Notes due 2009.
28
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, and in the capacity indicated.
HEXCEL CORPORATION
(Registrant)
August 16, 1999 /s/ Wayne C. Pensky
- ---------------------------- -------------------------------------------
(Date) Wayne C. Pensky,
Vice President; Corporate Controller; and
Chief Accounting Officer
29
<PAGE>
EXHIBIT 10.3
SECOND AMENDMENT
SECOND AMENDMENT, dated as of August 13, 1999 (this
"AMENDMENT"), to the Second Amended and Restated Credit Agreement, dated as of
September 15, 1998 (as amended, supplemented or otherwise modified from time to
time, the "CREDIT AGREEMENT"), among Hexcel Corporation (the "COMPANY") and the
Foreign Borrowers from time to time party thereto (together with the Company,
the "BORROWERS"), the banks and other financial institutions from time to time
parties thereto (the "LENDERS"), Citibank, N.A., as Documentation Agent, and
Credit Suisse First Boston, as Administrative Agent (the "ADMINISTRATIVE
AGENT").
W I T N E S S E T H:
WHEREAS, pursuant to the Credit Agreement, the Lenders have
agreed to make, and have made, certain loans and other extensions of credit to
the Borrowers; and
WHEREAS, the Borrowers have requested, and, upon this
Amendment becoming effective, the Lenders shall have agreed, that certain
provisions of the Credit Agreement be amended in the manner provided for in this
Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in consideration of the
premises and mutual agreements contained herein, the parties hereto hereby agree
as follows:
1. DEFINED TERMS. Unless otherwise defined herein, capitalized
terms which are defined in the Credit Agreement are used herein as defined
therein.
2. AMENDMENT TO SUBSECTION 1.1. Subsection 1.1 of the Credit
Agreement is hereby amended by deleting therefrom in its entirety the table of
Leverage Ratios and Applicable Margins contained in the definition of the term
"Applicable Margin" contained therein and by substituting therefor the
following:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Applicable Margin
----------------------------------------------------------------
Tranche A Loans
Revolving Credit Loans
Swing Line Loans
European Revolving Loans Tranche B Loans
----------------------------------------------------------------
Eurocurrency Eurocurrency ABR Loans
Leverage Ratio Loans ABR Loans Loans
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Greater than or equal to 5.0 to 1.0 225 b.p. 125 b.p. 275 b.p. 175 b.p.
- --------------------------------------------------------------------------------------------------------------
Greater than or equal to 4.5 to 1.0, 200 b.p. 100 b.p. 250 b.p. 150 b.p.
but less than 5.0 to 1.0
- --------------------------------------------------------------------------------------------------------------
Greater than or equal to 4.0 to 1.0, 175 b.p. 75 b.p. 225 b.p. 125 b.p.
but less than 4.5 to 1.0
- --------------------------------------------------------------------------------------------------------------
Greater than or equal to 3.5 to 1.0, 150 b.p. 50 b.p. 225 b.p. 125 b.p.
but less than 4.0 to 1.0
- --------------------------------------------------------------------------------------------------------------
<PAGE>
Greater than or equal to 3.0 to 1.0, 125 b.p. 25 b.p. 200 b.p. 100 b.p.
but less than 3.5 to 1.0
- --------------------------------------------------------------------------------------------------------------
Greater than or equal to 2.5 to 1.0, 87.5 b.p. 0 b.p. 175 b.p. 75 b.p.
but less than 3.0 to 1.0
- --------------------------------------------------------------------------------------------------------------
Less than 2.5 to 1.0 75 b.p. 0 b.p. 175 b.p. 75 b.p.
- --------------------------------------------------------------------------------------------------------------
</TABLE>
2. AMENDMENT TO SUBSECTION 14.1. Subsection 14.1 of the Credit
Agreement hereby is amended by:
(a) deleting the table of "Period[s]" and "Ratio[s]" set forth in clause
(a) thereof and by substituting therefor the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Period Ratio
- --------------------------------------------------------------------
<S> <C>
Closing Date - December 31, 1999 2.00 to 1.0
January 1, 2000 - December 31, 2000 2.25 to 1.0
January 1, 2001 - thereafter 2.50 to 1.0
- --------------------------------------------------------------------
</TABLE>
(b) deleting the table of "Period[s]" and "Ratio[s]" set forth in clause
(b) thereof and by substituting therefor the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Period Ratio
- --------------------------------------------------------------------
<S> <C>
Closing Date - September 30, 2000 5.25 to 1.0
October 1, 2000 - March 31, 2001 5.00 to 1.0
April 1, 2001 - June 30, 2001 4.75 to 1.0
July 1, 2001 - thereafter 4.50 to 1.0
- --------------------------------------------------------------------
</TABLE>
(c) deleting from clause (c) thereof the ratio "1.25 to 1.0" and by
substituting therefor the ratio "1.20 to 1.0"; and
(d) deleting the table of "Period[s]" and "Ratio[s]" set forth in clause
(d) thereof and by substituting therefor the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
Period Ratio
- --------------------------------------------------------------------
<S> <C>
Closing Date - September 30, 2000 2.75 to 1.0
October 1, 2000 - June 30, 2001 2.50 to 1.0
July 1, 2001- thereafter 2.25 to 1.0
- --------------------------------------------------------------------
</TABLE>
3. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. This Amendment
shall become effective (as of the date first set forth above) on the date upon
which the Administrative Agent shall have received (the date of such receipt,
the "Effective Date"):
(a) counterparts hereof, duly executed and delivered by each Borrower, the
Documentation Agent, the Administrative Agent and the Majority Lenders;
and
<PAGE>
(b) for the account of each Lender (other than the Swing Line Lender, each
Local Lender and each Issuing Lender) who shall have duly executed and
delivered this Amendment on or prior to August 13, 1999 (or such later
date as the Company and the Administrative Agent shall agree), an
amendment fee in the amount equal to 12.5 bps on (i) in the case of any
Tranche A Lender or Tranche B Lender, the aggregate outstanding
principal amount of Tranche A Loans or Tranche B Loans (as the case may
be) owing to such Lender on the Effective Date, (ii) in the case of
each Revolving Credit Lender, the Revolving Credit Commitment of such
Revolving Credit Lender which is in effect on the Effective Date, (iii)
in the case of each European Lender, the European Loan Commitment of
such European Lender which is in effect on the Effective Date and (iv)
in the case of the European Overdraft Lender, the European Overdraft
Commitment which is in effect on the Effective Date.
4. REPRESENTATIONS AND WARRANTIES. The Company, as of the date
hereof and after giving effect to the amendments contained herein, hereby
confirms, reaffirms and restates the representations and warranties made by it
and each Foreign Borrower in Section 11 of the Credit Agreement (including,
without limitation, subsection 11.22) and otherwise in the Credit Documents to
which it is a party; provided that each reference to the Credit Agreement
therein shall be deemed to be a reference to the Credit Agreement after giving
effect to this Amendment.
5. LIMITED EFFECT. The execution, delivery and effectiveness
of this Amendment shall not, except as expressly provided herein, operate as a
waiver of any right, power or remedy of any Lender or the Administrative Agent
under any of the Credit Documents, nor constitute a waiver or amendment of any
provisions of any of the Credit Documents. Except as expressly modified herein,
all of the provisions and covenants of the Credit Agreement and the other Credit
Documents are and shall continue to remain in full force and effect in
accordance with the terms thereof and are hereby in all respects ratified and
confirmed.
6. COUNTERPARTS. This Amendment may be executed by one or more
of the parties hereto in any number of separate counterparts (which may include
counterparts delivered by facsimile transmission) and all of said counterparts
taken together shall be deemed to constitute one and the same instrument. Any
executed counterpart delivered by facsimile transmission shall be effective as
for all purposes hereof.
7. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered by their respective proper and duly
authorized officers as of the day and year first above written.
HEXCEL CORPORATION AERIES FINANCE LTD.
HEXCEL (U.K.) LIMITED
HEXCEL COMPOSITES LIMITED
HEXCEL S.A. (France) By:_______________________________
HEXCEL FABRICS S.A. Title:
HEXCEL COMPOSITES S.A. (Belgium)
HEXCEL COMPOSITES S.A. (France)
HEXCEL COMPOSITES GMBH (Austria)
HEXCEL COMPOSITES S.A. (Spain)
HEXCEL COMPOSITES GMBH (Germany) AMARA - 2 FINANCE LTD.
By:_______________________________ By:_______________________________
Title: Title:
CREDIT SUISSE FIRST BOSTON, as ARCHIMEDES FUNDING II, Ltd.
Administrative Agent and Arranger By: ING CAPITAL ADVISORS, INC., as
Collateral Manager
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
CITIBANK, N.A., as Documentation BALANCED HIGH-YIELD FUND I LTD.
Agent and as a Lender By: BHF BANK AKTIENGESELLSHAFT, acting
through its New York Branch,
as attorney-in-fact
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
CREDIT SUISSE FIRST BOSTON, THE BANK OF NEW YORK
as a Lender
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
<PAGE>
BANQUE NATIONALE DE PARIS CREDIT AGRICOLE INDOSUEZ
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________ By:_______________________________
Title: Title:
BANQUE WORMS CAPITAL CORP. CREDIT LYONNAIS NEW YORK BRANCH
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
BATTERSON PARK CBO 1 CYPRESSTREE SENIOR FLOATING RATE FUND
By: GENERAL RE - NEW ENGLAND ASSET By: CYPRESSTREE INVESTMENT
MANAGEMENT, INC., MANAGEMENT COMPANY, INC.,
as Collateral Manager as Portfolio Manager
By:_______________________________ By:_______________________________
Title: Title:
CAPTIVA FINANCE LTD. CYPRESSTREE INVESTMENT FUND, LLC
By: CYPRESSTREE INVESTMENT
MANAGEMENT COMPANY, INC.,
its Managing Member
By:_______________________________ By:_______________________________
Title: Title:
THE CHASE MANHATTAN BANK CYPRESSTREE INVESTMENT
PARTNERS I, LTD.
By: CYPRESSTREE INVESTMENT
MANAGEMENT COMPANY, INC.,
as Portfolio Manager
By:_______________________________ By:_______________________________
Title: Title:
CHAIO TUNG BANK
By:_______________________________
Title:
<PAGE>
CYPRESSTREE INSTITUTIONAL FUND, LLC THE INDUSTRIAL BANK OF JAPAN, LIMITED,
By: CYPRESSTREE INVESTMENT NEW YORK BRANCH
MANAGEMENT COMPANY, INC.,
its Managing Member
By:_______________________________ By:_______________________________
Title: Title:
DEUTSCHE BANK AG NEW YORK KEYBANK NATIONAL ASSOCIATION
BRANCH AND/OR CAYMAN ISLANDS BRANCH
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
ERSTE BANK DER OESTERREICHISCHEN KZH CYPRESSTREE-1 LLC
SPARKASSEN AG
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
THE FIRST NATIONAL BANK OF CHICAGO KZH ING-2 LLC
By:_______________________________ By:_______________________________
Title: Title:
FIRST UNION NATIONAL BANK KZH ING-3 LLC
By:_______________________________ By:_______________________________
Title: Title:
GENERAL ELECTRIC CAPITAL CORPORATION KZH SHOSHONE LLC
By:_______________________________ By:_______________________________
Title: Title:
KZH III LLC
By:_______________________________
<PAGE>
MERITA BANK Plc UNION BANK OF CALIFORNIA N.A.
By:_______________________________ By:_______________________________
Title: Title:
By:_______________________________
Title:
METROPOLITAN LIFE INSURANCE COMPANY VAN KAMPEN SENIOR FLOATING RATE FUND
By:_______________________________ By:_______________________________
Title: Title:
MORGAN GUARANTY TRUST COMPANY OF WACHOVIA BANK
NEW YORK
By:_______________________________ By:_______________________________
Title: Title:
OXFORD STRATEGIC INCOME FUND NORTH AMERICAN SENIOR FLOATING RATE FUND
By: EATON VANCE MANAGEMENT,
as Investment Advisor
By:_______________________________ By:_______________________________
Title: Title:
SENIOR DEBT PORTFOLIO DLJ CAPITAL FUNDING, INC.
By: BOSTON MANAGEMENT
AND RESEARCH,
as Investment Manager
By:_______________________________ By:_______________________________
Title: Title:
SOCIETE GENERALE KZH WATERSIDE LLC
By:_______________________________ By:_______________________________
Title: Title:
<PAGE>
CAPTIVA II FINANCE LLC
By:_______________________________
Title:
CERES FINANCE LTD.
By:_______________________________
Title:
STRATA FUNDING, LTD.
By:_______________________________
Title:
GALAXY CLO 1999-1, LTD.
By:_______________________________
Title:
STANFIELD CLO, LTD.
By: STANFIELD CAPITAL PARTNERS, LLC,
as its Collateral Manager
By:_______________________________
Title:
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,692
<SECURITIES> 0
<RECEIVABLES> 199,686
<ALLOWANCES> 8,164
<INVENTORY> 200,978
<CURRENT-ASSETS> 426,035
<PP&E> 618,035
<DEPRECIATION> 207,917
<TOTAL-ASSETS> 1,369,763
<CURRENT-LIABILITIES> 218,179
<BONDS> 784,779
0
0
<COMMON> 373
<OTHER-SE> 299,815
<TOTAL-LIABILITY-AND-EQUITY> 1,369,763
<SALES> 608,824
<TOTAL-REVENUES> 608,824
<CGS> 471,794
<TOTAL-COSTS> 85,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,527
<INCOME-PRETAX> 14,503
<INCOME-TAX> 5,100
<INCOME-CONTINUING> 9,488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,488
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.26
</TABLE>
