<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
<TABLE>
<S> <C>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NUMBER 1-8472
------------------------
HEXCEL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-1109521
(State of (I.R.S. Employer Identification
Incorporation) No.)
281 TRESSER BOULEVARD
STAMFORD, CONNECTICUT 06901
(Address of principal executive offices and zip code)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 969-0666
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------- -----------------------------------------
<S> <C>
Common Stock New York Stock Exchange
Pacific Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7% Convertible Subordinated Debentures Due 2011
7% Convertible Subordinated Notes Due 2003
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value as of March 24, 1999 of voting stock held by
nonaffiliates of the registrant: $128,715,209
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a U.S. Bankruptcy Court. Yes __X No ____
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT MARCH 24,
CLASS 1999
- ----------------- ----------------------------
<S> <C>
Common Stock 36,409,635
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS (TO THE EXTENT SPECIFIED
HEREIN)--PART III.
- --------------------------------------------------------------------------------
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<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF BUSINESS
Hexcel Corporation, founded in 1946, was incorporated in California in 1948,
and reincorporated in Delaware in 1983. Hexcel Corporation, together with its
subsidiaries (herein referred to as "Hexcel" or the "Company"), is a leading
producer of advanced structural materials. The Company develops, manufactures
and markets lightweight, high-performance reinforcement products, composite
materials and engineered products for use in the commercial aerospace, space and
defense, electronics, general industrial and recreation markets. The Company's
products are used in a wide variety of end products, such as commercial and
military aircraft, space launch vehicles and satellites, printed circuit boards
("PCBs"), computers, cellular telephones, televisions, high-speed trains and
ferries, cars and trucks, windmill blades, reinforcements for bridges and other
structures, window blinds, skis and snowboards, golf clubs, fishing poles,
tennis rackets and bicycles.
The Company serves international markets through manufacturing and marketing
facilities located in the United States and Europe, as well as sales offices in
Asia, Australia and South America. The Company is also a member of four joint
ventures that manufacture and market reinforcement products and composite
materials in Europe, Asia and the United States.
Through a series of strategic acquisitions over the past three years, the
Company has expanded and diversified its product lines, manufacturing
capabilities and technology portfolio. The Company believes that it is the most
vertically integrated company in the advanced structural materials industry.
This vertical integration enhances the Company's control over the cost, quality
and delivery of its products, and enables the Company to offer a variety of
solutions to its customers' structural materials needs.
RECENT ACQUISITION HISTORY
On September 15, 1998, the Company acquired the industrial fabrics business
of Clark-Schwebel and its subsidiaries (the "Acquired Clark-Schwebel Business")
for a cash purchase price of approximately $473 million (including $19 million
paid on December 23, 1998). This business is engaged in the manufacture and sale
of high-quality fiberglass fabrics used to make PCBs for electronics equipment
such as computers, cellular telephones, televisions and automobiles. The
business also produces high performance specialty products for use in
insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials. The Company also entered into a $50
million lease of property, plant and equipment used in that business pursuant to
a long-term lease which includes purchase options.
The acquisition of the Acquired Clark-Schwebel Business established the
Company as a leading global materials supplier to the electronics industry,
which the Company believes has attractive long-term growth potential, and
further diversified the Company's business beyond the historically cyclical
commercial aerospace market.
The Acquired Clark-Schwebel Business was the Company's most recent in a
series of strategic acquisitions. On February 29, 1996, the Company purchased
the composites business of Ciba-Geigy Limited (the "Acquired Ciba Business") for
an aggregate value of approximately $209 million. This acquisition combined two
of the world's leading and most technically advanced structural materials
companies, broadening the Company's range of products and markets, enhancing the
Company's research, development and technological capabilities and balancing the
Company's geographical scope. The Acquired Ciba Business' composite product
lines were highly complementary to the Company's fabrics, prepregs and honeycomb
businesses; furthermore, the Acquired Ciba Business provided the Company with
manufacturing capabilities in finished and semi-finished structures and
interiors for original equipment manufacturers' ("OEMs") airframes. The
Company's overall customer profiles were similar, but the
1
<PAGE>
Acquired Ciba Business had a stronger presence in Europe, particularly with
members of the Airbus consortium (Aerospatiale, British Aerospace, CASA and
DASA) ("Airbus"). With equally strong market positions in Europe and the United
States, the Company benefits from future aircraft orders placed with either the
Boeing Company ("Boeing") or Airbus. As a result of this acquisition and the
spinoff of Ciba Specialty Chemical Holding Inc. (a Swiss Corporation formerly an
affiliate of Ciba-Geigy Limited) ("Ciba") from Ciba-Geigy Limited, Ciba has a
significant relationship with the Company and now beneficially owns 49.6% of the
Company's outstanding common stock.
On June 27, 1996, the Company acquired Hercules Inc.'s carbon fibers and
prepreg business (the "Acquired Hercules Business") for a cash purchase price of
approximately $139 million. This acquisition combined two leading prepreg
manufacturers and enabled the Company to produce a large portion of a
significant raw material, polyacrylonitrile ("PAN") based carbon fiber. With
this acquisition, the Company became the fourth largest carbon fiber producer in
the world. The Company is also today the largest consumer of PAN-based carbon
fiber in the world, utilizing approximately 20% of worldwide carbon fiber
production. This has created a hedge against carbon fiber price fluctuations for
the Company because the Company can both buy and sell this crucial raw material.
In addition, the Acquired Hercules Business further enhanced the Company's
technological and integrated manufacturing capabilities and provided the Company
with new prepreg products and customer qualifications both in the United States
and Europe, thus strengthening existing customer relationships.
On September 30, 1997, the Company acquired from Fiberite, Inc. ("Fiberite")
its satellite business consisting of intangible assets and inventory, and
certain non-exclusive worldwide rights to other prepreg technologies for $37.0
million in cash. The Fiberite acquisition expanded the Company's existing role
as a supplier of carbon fiber, prepreg and honeycomb to rocket and space
satellite programs, positioned the Company to capitalize on the expected growth
in commercial satellite activities and expanded the Company's offering of
prepregs for commercial and military applications.
Further discussion of the Company's business acquisitions is contained under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and in Notes 1, 2 and 3 to the accompanying consolidated
financial statements included in this Annual Report on Form 10-K.
2
<PAGE>
BUSINESS SEGMENTS AND OVERVIEW
Hexcel is a vertically integrated manufacturer of a variety of products
within a single business industry: Advanced Structural Materials. Hexcel's
advanced structural materials business is organized around three strategic
operating business segments: reinforcement products, composite materials and
engineered products. The following table identifies, by each of these segments,
the Company's principal products and examples of the primary end-uses:
<TABLE>
<CAPTION>
BUSINESS SEGMENTS PRODUCTS PRIMARY END-USE
- ----------------------- --------------------------- --------------------------------------------------------
<S> <C> <C>
Reinforcement Products Carbon Fibers - Raw materials for industrial fabrics and prepregs; and
- Filament winding for various space, defense and
industrial applications.
Industrial Fabrics - Printed circuit boards;
- Raw materials for prepregs and honeycomb;
- Various marine applications;
- Window blinds;
- Insulation;
- Metal and fume filtration systems;
- Soft body armor; and
- Civil engineering and construction applications.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Composite Materials Prepregs - Raw materials for composite structures and interiors;
- Semi-finished aircraft components;
- Munitions and defense systems; and
- Skis, snowboards, golf club shafts, fishing rods and
tennis rackets.
Structural Adhesives - Bonding of structural materials and components,
including composite panels.
Honeycomb, Honeycomb - Raw materials for composite structures and interiors;
Parts & Composite Panels and
- Semi-finished aircraft components used in:
Helicopter blades;
Aircraft surfaces (flaps, wing tips, elevators and
fairings);
High-speed ferries, truck and train components;
Automotive components; and
Space shuttle doors.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Engineered Products Composite Structures - Aircraft structures and finished aircraft components,
including:
Wing-to-body and flap track fairings;
Radomes;
Engine cowls and inlet ducts;
Wing panels; and
Truck floor panels.
Interiors - OEM and retrofit aircraft interiors, including:
Overhead stowage compartments;
Lavatories; and
Sidewalls and ceilings.
</TABLE>
REINFORCEMENT PRODUCTS
The Reinforcement Products business segment manufactures and markets carbon
fibers and industrial fabrics.
CARBON FIBERS: Carbon fibers are manufactured for sale to third party
customers and for use by Hexcel in manufacturing certain industrial fabrics and
composite materials. Carbon fibers are woven into carbon fabrics, used as
reinforcement in conjunction with a resin matrix to produce prepregs, and used
in filament winding and advanced fiber placement to produce various other
composite materials. Key product applications include structural components for
commercial and military aircraft and space launch vehicles,
3
<PAGE>
as well as certain general industrial and recreational applications such as golf
club shafts and tennis racquets.
INDUSTRIAL FABRICS: Industrial fabrics are made from a variety of fibers,
including several types of fiberglass as well as carbon, aramid, quartz, ceramic
and other specialty reinforcements. These fabrics are sold to third-party
customers for use in a wide range of products, including PCBs, window coverings
and other architectural products, soft body armor, and a variety of structural
materials and components used in aerospace, marine and rail applications. These
fabrics are also used internally by the Company to manufacture prepregs and
other composite materials.
Hexcel's net sales and pro forma net sales of reinforcement products to
third party customers, after giving effect to the acquisitions of the Acquired
Clark-Schwebel, Ciba and Hercules Businesses as if those transactions had
occurred at the beginning of 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales........................................................ $ 224.8 $ 170.1 $ 155.2
Pro forma net sales.............................................. 370.5 410.3 402.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company expanded its reinforcement products business with the
acquisitions of the Acquired Clark-Schwebel Business in 1998 and the Acquired
Ciba and Hercules Businesses in 1996. The decrease in pro forma net sales in
1998 was the result of worldwide inventory adjustments in the electronics
industry. Approximately 37%, 42% and 27% of the Company's production of
reinforcement products was used internally to manufacture composite materials in
1998, 1997 and 1996, respectively. The percentage of production of reinforcement
products for internal use decreased in 1998, due to the acquisition of the
Acquired Clark-Schwebel Business and increased in 1997 from 1996 levels due to
the increase in commercial aerospace composites materials sales.
<TABLE>
<S> <C>
REINFORCEMENT PRODUCTS
KEY CUSTOMERS MANUFACTURING FACILITIES
AlliedSignal Anderson, SC
Alliant Techsystems Cleveland, GA
Cytec Fiberite Decatur, AL
IBM Decines, France
Isola Les Avenieres, France
Nelco Salt Lake City, UT
Piad Seguin, TX
Polyclad Statesville, NC
Second Chance Washington, GA
</TABLE>
As part of the Company's business consolidation program, the Company
recently announced the closure of its Cleveland, Georgia facility. Production
equipment from this facility will be relocated to the Company's Andersen, South
Carolina, facility, with the closure expected to be completed by July 1, 1999.
COMPOSITE MATERIALS
The Composite Materials business segment, which was recently reorganized on
a global basis, has worldwide responsibility for manufacturing and marketing
prepregs, structural adhesives, honeycomb, specially machined honeycomb parts
and composite panels.
4
<PAGE>
PREPREGS AND STRUCTURAL ADHESIVES: Prepregs are manufactured for sale to
third party customers and for use by Hexcel in manufacturing other composite
materials and structures, including finished components for aircraft structures
and interiors. Prepregs are manufactured by combining high performance
reinforcement fabrics or unidirectional fibers with a resin matrix to form a
composite material with exceptional structural properties not present in either
of the constituent materials. Industrial fabrics used in the manufacture of
prepregs include S-2-Registered Trademark- and E-type fiberglass, carbon,
aramid, quartz, ceramic, Thorstrand-Registered Trademark-, polyethylene and
other specialty reinforcements. Resin matrices include bismaleimide, cyanates,
epoxy, phenolic, polyester, polyimide and other specialty resins.
Hexcel designs and markets a comprehensive range of
Redux-Registered Trademark- film adhesives. These structural adhesives, which
bond a wide range of composite, metallic and honeycomb surfaces, are used in a
variety of product applications.
HONEYCOMB, HONEYCOMB PARTS AND COMPOSITE PANELS: Honeycomb is a unique,
lightweight, cellular structure generally composed of hexagonal nested cells.
The product is similar in appearance to a cross-sectional slice of a beehive.
The hexagonal cell design gives honeycomb a high strength-to-weight ratio and a
uniform resistance to crushing. These basic characteristics are combined with
the physical properties of the material from which the honeycomb is made to meet
various engineering requirements.
Hexcel produces honeycomb from a number of metallic and non-metallic
materials. Most metallic honeycomb is made from aluminum and is available in a
selection of alloys, cell sizes and dimensions. Non-metallic honeycomb materials
include fiberglass, carbon, thermoplastics, non-flammable aramid papers and
several other specialty materials.
Hexcel sells honeycomb core material in standard block and sheet form and in
laminated panel form. In the construction of composite panels, sheets of
aluminum, stainless steel, prepreg or other laminates are bonded with adhesives
to each side of a slice of honeycomb core, creating a "sandwich" structure.
Hexcel also possesses advanced processing capabilities which enable the Company
to design and manufacture complex fabricated honeycomb parts and bonded
assemblies to meet customer specifications. Such parts and assemblies are used
as semi-finished components in the manufacture of composite structures.
The largest market for honeycomb products is the aerospace market. The
Company also sells honeycomb for non-aerospace applications including high-speed
trains and mass transit vehicles, automotive parts, energy absorption products,
marine vessel compartments, portable shelters, business machine cabinets and
other general industrial uses. In addition, the Company produces honeycomb for
its Engineered Products business segment for use in manufacturing finished parts
for airframe OEMs.
Hexcel's net sales and pro forma net sales of composite materials to third
party customers, after giving effect to the acquisitions of the Acquired
Clark-Schwebel, Ciba and Hercules Businesses as if those transactions had
occurred at the beginning of 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales........................................................ $ 653.6 $ 585.4 $ 438.2
Pro forma net sales.............................................. 653.6 585.4 502.0
--------- --------- ---------
</TABLE>
The Company expanded its composite materials business in connection with the
acquisitions of the Acquired Ciba and Hercules Businesses in 1996. These
products have benefited from the increases in commercial aerospace build rates
as further discussed under the captions "Markets and Customers" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
5
<PAGE>
Approximately 3% of the Company's production of composite materials are used
internally to manufacture composite structures and interiors.
<TABLE>
<S> <C>
COMPOSITE MATERIALS
KEY CUSTOMERS MANUFACTURING FACILITIES
United States: United States:
Boeing Burlington, WA
CFAN Casa Grande, AZ
Embraer Gilbert, AZ
Hawker de Havilland Lancaster, OH
Lockheed Martin Livermore, CA
Northrop Grumman Pottsville, PA
Rohr Salt Lake City, UT
United Technologies Europe:
Europe: Dagneux, France
Aerospatiale Duxford, England
Alenia Linz, Austria
British Aerospace Parla, Spain
CASA Swindon, England
DASA Welkenraedt, Belgium
</TABLE>
The Company also operates sales offices in Sydney, Australia; Singapore;
Taipei, Taiwan; Shanghai, China and Sao Paulo, Brazil.
ENGINEERED PRODUCTS
Hexcel entered the composite structures and interiors businesses in
connection with the purchase of the Acquired Ciba Business. The Engineered
Products business segment has worldwide responsibility for manufacturing and
marketing composite structures and interiors, primarily for use in the aerospace
industry.
COMPOSITE STRUCTURES: Composite structures and structural parts, are
manufactured from a variety of composite materials (prepregs, honeycomb and
structural adhesives) using such manufacturing processes as resin transfer
molding, autoclave processing, multi-axis numerically controlled machining,
press laminating, heat forming and other composite manufacturing techniques.
Composite structures include such items as wing-to-body and flap track fairings,
radomes, engine cowls, inlet ducts, wing panels and other aircraft components.
Composite structural components are also used in heavy trucks such as the cab
floor of the Kenworth T2000 truck, and certain other industrial products.
AIRCRAFT INTERIORS: The interiors operations of the Engineered Products
business segment design and produce innovative, lightweight, high-strength
composite interior systems for aircraft. Aircraft interior products, which
include overhead stowage bins, lavatories, sidewalls and ceilings, are sold to
Boeing and other airframe manufacturers for production on certain aircraft and
to airlines for replacement of existing interior components. With increasing
airline traffic and the trend of increased use of rolling carry-on luggage,
airlines are increasingly requesting larger overhead stowage bins. The Company
has developed a patented bin extension kit to increase the size of certain
single-aisle aircraft overhead stowage bins which increases their capacity to
accommodate these larger bags. This product is being marketed to the world's
airlines.
6
<PAGE>
Hexcel's net sales and pro forma net sales of engineered products to third
party customers, after giving effect to the acquisition of the Acquired Ciba
Business as if the transaction had occurred at the beginning of 1996, were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales........................................................ $ 210.6 $ 181.4 $ 101.9
Pro forma net sales.............................................. 210.6 181.4 114.7
--------- --------- ---------
</TABLE>
The improvement in engineered products net sales primarily reflects the
production of structural and interior components outsourced to Hexcel by Boeing
starting in the second half of 1996 and expanding sales of retrofit interior
products.
<TABLE>
<S> <C>
ENGINEERED PRODUCTS
KEY CUSTOMERS MANUFACTURING FACILITIES
Alenia Bellingham, WA
Boeing Brindisi, Italy
Cathy Pacific Kent, WA
Continental Airlines
Kenworth
Mitsubishi
Northrop Grumman
Qantas
United Airlines
</TABLE>
Further discussion of Hexcel's business operations and operating segments
are contained under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 16, to the
accompanying consolidated financial statements included in this Annual Report on
Form 10-K.
JOINT VENTURES AND ALLIANCE ACTIVITIES
In January 1998, the Company reached an agreement in principle with Boeing
and Aviation Industries of China to form a joint venture, BHA Aero Composite
Parts Co., Ltd., to manufacture composite parts for secondary structures and
interior applications on commercial aircraft. This joint venture will be located
in Tianjin, China. In February 1998, the Company signed an agreement with
Boeing, Sime Darby Berhad and Malaysia Helicopter Services (now known as Naluri
Berhad) to form another joint venture, Asian Composite Manufacturing Sdn. Bhd.,
to manufacture composite parts for secondary structures on commercial aircraft.
This joint venture will be located in Alor Setar, Malaysia. Products
manufactured by both joint ventures will be shipped to the Company's Kent,
Washington facility for final assembly, inspection and shipment to Boeing as
well as other customers worldwide. It is anticipated that the first parts will
be delivered to customers in 2001. The Company's total estimated financial
commitment to both of these joint ventures will be approximately $31 million,
which is expected to be made in increments through 2001. However, implementation
of these projects and their related investments, remain subject to certain
significant conditions, including foreign government approvals.
As part of the Acquired Clark-Schwebel Business, the Company also acquired
significant equity ownership interests in three joint ventures: a 43.3% share in
Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in
turn has its own joint venture with AlliedSignal in Taiwan; a 43.6% share in
CS-Interglas AG ("CS-Interglas"), together with fixed-price options to increase
this equity interest to approximately 84%; and a 50.0% share in Clark-Schwebel
Tech-Fab Company ("CS Tech-Fab"),
7
<PAGE>
headquartered in the U.S. CS-Interglas and Asahi-Schwebel are fiberglass fabric
producers serving the European and Asian electronics industry. CS Tech-Fab
manufactures non-woven materials for roofing, construction and other specialty
applications.
In addition, Hexcel has a 45% equity interest in a joint venture in Japan
with Dainippon Ink and Chemicals ("DIC"). This joint venture, which owns and
operates a manufacturing facility in Komatsu, Japan, was formed in 1990 and
produces and sells prepregs, honeycomb, decorative laminates and bulk molding
compounds using technology licensed from Hexcel and DIC.
Hexcel has also formed a global alliance with Sika Finanz AG ("Sika") to
develop and market composite systems for the construction industry. Initial
applications will focus on the strengthening and repair of existing structures
using composite materials. Under the terms of the alliance, Sika will generally
take leadership for the marketing and sale of alliance products under the Sika
Carbodur-Registered Trademark- trade name, and Hexcel will take leadership for
the development and manufacture of advanced structural materials for the
alliance. Sika is a worldwide leader in construction chemicals and structural
adhesives. Sika has extensive experience and expertise in the repair, protection
and strengthening of structures in the construction industry and the use of
elastic bonding technology in the transportation industry.
BUSINESS CONSOLIDATION
Between 1996 and 1998, the Company announced various business consolidation
plans. The goals of these consolidation plans were to integrate the Company's
acquired businesses and to respond to changing market conditions and the need
for continuous improvement. The Company also expects to complete a global
capacity review of its worldwide facilities requirements during 1999. As a
result of such review, on March 16, 1999, the Company announced the closing of
its Cleveland, Georgia facility, which currently employs 100 people and produces
fabrics for the electronics market. The ongoing global capacity review may
result in the closing or right-sizing of additional facilities and, as a result,
additional consolidation charges may be recognized in 1999.
For the years ended December 31, 1998, 1997 and 1996, the Company recorded
business acquisition and consolidation expenses of $12.7 million, $25.3 million
and $42.4 million, respectively, in relation to these plans as well as other
costs relating to acquisitions that were either downsized or not consummated.
Further discussion of the Company's business consolidation plans is contained
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and in Note 3 to the accompanying consolidated
financial statements included in this Annual Report on Form 10-K.
LEAN ENTERPRISE AND VALUE CHAIN MANAGEMENT PROGRAMS
The Company is in the process of implementing Lean Enterprise and value
chain management programs which are designed to create a common way of managing
the Company, with a singular focus on creating value for the Company's customers
and eliminating waste throughout the value chain. This new management approach
targets value creation, and challenges employees to continually reduce cost,
improve operating efficiency and maximize the quality of the Company's products.
Success of the program will depend on training employees to eliminate waste and
non-value activity while improving business processes to deliver superior
product faster and more efficiently than Hexcel's competitors.
The goals of the program are reduced scrap, faster manufacturing cycle
times, shorter equipment set-up and clean-down times, lower manufacturing
rejects and warranty claims, faster processing of customer orders and
deliveries, simplified manufacturing procedures and improved manufacturing
processes. All of these actions, if successful, are expected to result in higher
throughput and greater capacity on existing manufacturing equipment, thereby
reducing both capital expenditures and facility requirements. Improved
efficiency and quality are expected to result in lower unit labor requirements
and thereby lower product costs and lower inventory requirements.
8
<PAGE>
The potential for improvement encompasses the Company's entire vertically
integrated supply chain, including its manufacturing plants, support functions,
product development activities and customers and suppliers. The Lean Enterprise
program is also systematically linked with key initiatives to improve the
quality and effectiveness of global procurement activities. The results of these
multi-year initiatives will be measured by the satisfaction of customers and the
progressive improvement in the Company's operating performance.
RAW MATERIALS AND PRODUCTION ACTIVITIES
Due to the vertically integrated nature of Hexcel's operations, the Company
produces several materials used in the manufacture of certain industrial
fabrics, composite materials and engineered products, as well as the PAN used as
a precursor material in the manufacture of carbon fibers. The Company consumed
internally approximately 43% and 39% of its carbon fiber and fabric production,
respectively, in 1998. However, the Company purchases most of the raw materials
used in production. Several key materials are available from relatively few
sources, and in many cases the cost of product qualification makes it
impractical to develop multiple sources of supply. The unavailability of these
materials, which the Company does not currently anticipate, could have a
material adverse effect on operations.
Hexcel's production activities are generally based on a combination of
"make-to-order" and "make-to-forecast" production requirements. The Company
coordinates closely with key suppliers in an effort to avoid raw material
shortages and excess inventories.
RESEARCH AND TECHNOLOGY; PATENTS AND KNOW-HOW
Hexcel's Research and Technology ("R&T") function supports all of the
Company's core businesses worldwide. Through R&T activities, the Company
maintains expertise in chemical formulation and curatives, fabric forming and
textile architectures, advanced composites structures, process engineering,
analysis and testing of composite materials, computational design and
prediction, and other scientific disciplines related to the Company's worldwide
business base. Additionally Hexcel's R&T function performs a limited amount of
contract research and development in the U.S. and Europe for strategically
important customers in the areas of ceramics, higher temperature polymers,
advanced textiles and composite structures manufacturing.
Hexcel's products rely primarily on the Company's expertise in materials
science, textiles, process engineering and polymer chemistry. Consistent with
market demand, the Company has been placing more emphasis on cost effective
product design and lean manufacturing in recent years. Towards this end, the
Company has entered into formal and informal alliances, as well as licensing and
teaming arrangements, with several customers, suppliers, external agencies and
laboratories. Management believes that the Company possesses unique capabilities
to design, develop and manufacture composite materials and structures. In
addition to the rights to certain technologies obtained as part of the Fiberite
transaction, the Company owns and maintains in excess of 100 patents worldwide,
has licensed many key technologies, and has granted technology licenses and
patent rights to several third parties in connection with joint ventures and
joint development programs. It is the Company's policy to actively enforce its
proprietary rights. The Company believes that the patents and know-how rights
currently owned or licensed by the Company are adequate for the conduct of its
business.
Hexcel spent $23.6 million for research and technology in 1998, $18.4
million in 1997 and $16.7 million in 1996. These expenditures were expensed as
incurred.
9
<PAGE>
MARKETS AND CUSTOMERS
Hexcel's products are sold for a broad range of end uses. The following
tables summarize net sales to third-party customers by market and by geography
for the three years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET SALES BY MARKET
Commercial aerospace................................................ 63% 64% 56%
Space and defense................................................... 12 9 11
Electronics 8 5 6
General industrial.................................................. 12 15 17
Recreation.......................................................... 5 7 10
--------- --------- ---------
Total............................................................. 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
NET SALES BY GEOGRAPHY
United States....................................................... 54% 56% 49%
U.S. exports........................................................ 9 8 8
International....................................................... 37 36 43
--------- --------- ---------
Total............................................................. 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
</TABLE>
SIGNIFICANT CUSTOMERS
To the extent that the end application of net sales can be identified,
Boeing and related subcontractors accounted for approximately 35% of 1998 net
sales, and Airbus and related subcontractors accounted for approximately 11% of
1998 net sales. The loss of all or a significant portion of the business with
Boeing or Airbus, which Hexcel does not currently anticipate, could have a
material adverse effect on sales and earnings.
COMMERCIAL AEROSPACE
Historically the commercial aerospace industry has led the development of
applications for advanced structural materials and components because it has the
strongest need for the performance properties of these materials and is well
positioned to maximize the economic benefits from their use. Accordingly, the
demand for advanced structural material products is closely correlated to the
demand for commercial aircraft.
Commercial aerospace activity fluctuates in relation to two principal
factors. First, the number of revenue passenger miles flown by the airlines
affects the size of the airline fleets and generally follows the level of
overall economic activity. A recent document, published by Boeing, projects that
revenue passenger miles will increase an average of 4.9% per year over the next
decade, providing a source of long-term demand for new commercial aircraft.
However, recent economic events in Asia, Latin America and other parts of the
world may result in difficulties in achieving this projected growth rate,
especially in the near term. The second factor, which is less sensitive to the
general economy, is the replacement and retrofit rates for existing aircraft.
These rates, resulting mainly from obsolescence, are determined in part by the
regulatory requirements established by various civil aviation authorities as
well as public concern regarding aircraft age, safety and noise. These rates may
also be affected by the desire of the various airlines for higher payloads and
more fuel efficient aircraft, which in turn is influenced by the price of fuel.
Reflecting the demand factors noted above, the number of commercial aircraft
delivered by Boeing, including McDonnell Douglas, and Airbus declined by 48%
from 1992 to 1995. At the lowest point during this period, Boeing and Airbus
reported combined deliveries of 380 aircraft. Beginning in 1996, however,
aircraft deliveries by Boeing and Airbus began to rise, growing to a combined
total of 397 in 1996, 557 in
10
<PAGE>
1997, and 788 in 1998. Based on published projections, including a press release
issued by Boeing on January 26, 1999, combined deliveries are expected to peak
at 913 in 1999, before declining to 797 in 2000. Set forth below are historical
and projected deliveries as published by Boeing and Airbus:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Boeing/McDonnell Douglas............. 527 605 573 409 311 256 271
Airbus............................... 95 163 157 138 127 124 126
--- --- --- --- --- --- ---
Total................................ 622 768 730 547 438 380 397
--- --- --- --- --- --- ---
--- --- --- --- --- --- ---
<CAPTION>
PROJECTED
-------------
1997 1998 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Boeing/McDonnell Douglas............. 375 559 620 480
Airbus............................... 182 229 293 317
--- --- --- ---
Total................................ 557 788 913 797
--- --- --- ---
--- --- --- ---
</TABLE>
Approximately 35%, 36% and 22% of Hexcel's 1998, 1997 and 1996 net sales,
respectively, were identifiable as sales to Boeing and related subcontractors.
Of the 35% of sales attributable to Boeing and its subcontractors, 32% and 3%
related to commerical areospace and space and defense market applications,
respectively. Approximately 11%, 10% and 10% of Hexcel's 1998, 1997 and 1996 net
sales, respectively, were identifiable as sales to Airbus, and related
subcontractors. These percentages are expected to decline in 1999, as a result
of the projected trends in commercial aircraft deliveries as well as to certain
procurement and manufacturing trends. In addition, the acquisition of the
Acquired Clark-Schwebel Business will increase the proportion of Hexcel's sales
to the electronics market in 1999. On a pro forma basis, Hexcel's net sales for
the year ended December 31, 1998 to Boeing, Airbus and related subcontractors
were approximately 34% of its total net sales.
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. The Company sells material for every model of commercial aircraft sold
by Boeing and Airbus, with sales per aircraft ranging from $0.2 million to over
$1.0 million. Based on published projections, combined deliveries for Boeing and
Airbus are expected to peak at 913 in 1999, before declining to approximately
800 in 2000. As the Company supplies its products ahead of the delivery of a
commercial aircraft, it will start to see the impact of reduced Boeing
production rates by summer 1999. The Company's sales to regional and general
aviation aircraft manufacturers remain robust.
SPACE AND DEFENSE
The space and defense markets have historically been innovators in and
sources of significant demand for advanced structural materials. For example,
advanced structural materials made a major contribution to the development of
"stealth" aircraft technologies. However, aggregate demand by space and defense
customers is primarily a function of military aircraft procurement by the U.S.
and certain European governments. Consequently, the space and defense market for
composite materials and structures declined significantly during the early part
of this decade, as a result of substantial decreases in military aircraft
procurement that began in the late 1980's. Presently, there are a number of
potentially significant military aircraft programs in various stages of
development or initial production that utilize advanced structural materials.
Hexcel has a number of carbon fiber and composite material products qualified
for use on several of these programs, including the competing development
versions of the Joint Strike Fighter (JSF), the F-22 (Raptor) and F/A-18 E/F
(Hornet) aircraft, the European Fighter Aircraft (Typhoon), the C-17 cargo and
V-22 (Osprey) tilt-rotor aircraft, RAH-66 (Comanche) and NH90 helicopter.
Contracts to supply materials for military and some commercial projects
contain provisions for termination at the convenience of the U.S. government or
the buyer. In the case of such a termination, Hexcel is entitled to recover
reasonable incurred cost plus a provision for profit on the incurred cost. In
addition, the Company is subject to U.S. government cost accounting standards,
which are applicable to companies with more than $25 million of government
contract or subcontract awards each year.
11
<PAGE>
ELECTRONICS
The acquisition of the Acquired Clark-Schwebel Business provides Hexcel with
a global platform to supply the electronics industry, which the Company believes
has attractive long-term growth potential. The Acquired Clark-Schwebel Business
is the largest producer of fine, lightweight fiberglass fabrics used in the
fabrication of multilayer PCBs, with an estimated 50% market share in the U.S.
In addition to its U.S. businesses, it has significant ownership positions in
three joint ventures: CS-Interglas, Asahi-Schwebel and CS Tech-Fab. CS-Interglas
and Asahi-Schwebel are leading fiberglass fabric manufacturers in Europe, Japan
and Southeast Asia with estimated electronics fiberglass fabric market shares of
36%, 38% and 13%, respectively. Hexcel's existing operations in Europe also
partcipate in the eclecronics fiberglas fabric market. Fiberglass fabrics are a
critical component used in the production of PCBs, which are integral to most
advanced electronics products, including computers, telecommunications
equipment, advanced cable television equipment, network servers, televisions,
automotive equipment and home appliances.
GENERAL INDUSTRIAL AND RECREATION MARKETS
Hexcel has focused its participation in general industrial and recreation
markets in areas where the application of advanced structural material
technology offers significant benefits to the end user. As a result, the Company
has chosen to focus on select opportunities where high performance is the key
product criterion. Accordingly, future opportunities and growth depend primarily
upon the success of the individual programs and industries in which the Company
has elected to participate. Within general industrial markets, key applications
include surface transportation (automobiles, trucks, mass transit and high-speed
rail and marine applications), wind energy and civil engineering. Within the
recreation market, key product applications in which the Company is involved
include skis, snowboards, golf club shafts, fishing rods, tennis rackets and
bicycles. Hexcel's participation in these markets is a valuable complement to
its commercial and military aerospace businesses, and the Company is committed
to pursuing the utilization of advanced structural material technology in its
general industrial and recreation markets.
HEXCEL VENTURES
In 1997, the Company created Hexcel Ventures, which is an internal
organization responsible for certain entrepreneurial activities outside of the
Company's commercial aerospace and space and defense markets. This organization
focuses on leveraging Hexcel's vertically integrated capabilities and geographic
reach to bring cost effective advanced materials solutions to new customers and
applications. In particular, Hexcel Ventures seeks to stimulate internally and
externally driven growth and diversification through targeted projects in areas
such as automotive, civil engineering/construction and composite part making for
industrial applications.
Further discussion of Hexcel's markets and customers, including certain
risks, uncertainties and other factors with respect to "forward-looking
statements" about those markets and customers, is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SALES AND MARKETING
A staff of salaried market managers, product managers and salespeople sell
and market Hexcel products directly to customers worldwide. The Company also
uses independent distributors and manufacturer representatives for certain
products, markets and regions.
12
<PAGE>
BACKLOG
The following table summarizes the backlog of orders by product group as of
December 31, 1998 and 1997 (IN MILLIONS):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998 AEROSPACE(a) NON-AEROSPACE(b) TOTAL
- ---------------------------------------------------- ------------- ------------------- ---------
<S> <C> <C> <C>
Reinforcement products.............................. $ 12.4 $ 14.1 $ 26.5
Composite materials................................. 267.0 26.5 293.5
Engineered products................................. 172.7 0.4 173.1
------ ----- ---------
Total............................................. $ 452.1 $ 41.0 $ 493.1
------ ----- ---------
------ ----- ---------
<CAPTION>
AS OF DECEMBER 31, 1997 AEROSPACE(a) NON-AEROSPACE(b) TOTAL
- ---------------------------------------------------- ------------- ------------------- ---------
<S> <C> <C> <C>
Reinforcement products.............................. $ 33.3 $ 24.4 $ 57.7
Composite materials................................. 273.2 19.1 292.3
Engineered products................................. 170.0 -- 170.0
------ ----- ---------
Total............................................. $ 476.5 $ 43.5 $ 520.0
------ ----- ---------
------ ----- ---------
</TABLE>
(a) Includes commercial aerospace and space and defense markets.
(b) Includes electronics, general industrial and recreation markets.
The backlog of orders for aerospace materials to be filled within 12 months
was $452.1 million as of December 31, 1998, as compared to $476.5 million as of
December 31, 1997 and $347.5 million as of December 31, 1996. The decrease in
backlog reflects a number of factors, including a continuing trend toward
shorter lead times and better supply-chain management by the industry overall.
Orders for aerospace materials generally lag behind the award of orders for
new aircraft by a considerable period. Thus, the level of new aircraft
procurement normally will not have an impact on aerospace orders received by
Hexcel for about one to three years, depending on the nature of the product, the
manufacturer, and delivery schedules. Aerospace orders are generally received by
the Company between one and eighteen months prior to scheduled delivery of the
aircraft to the customer. However, in the light of changing conditions in the
aerospace industry discussed above, twelve month backlog information may no
longer be a meaningful trend indicator. The Company continues to closely watch
the economic situation in Asia, along with overall aircraft orders and
production trends, to monitor future sales.
Backlog for non-aerospace was $41.0 million at December 31, 1998 compared
with $43.5 million at December 31, 1997. The decrease in backlog is primarily
attributable to a decrease in orders from customers in the recreation market.
Customers in the electronics, general industrial and recreation markets
generally operate with little advance purchasing and thus, backlog is subject to
certain fluctuations. The Acquired Clark-Schwebel Business also operates with
nominal backlog. The Company's backlog in the non-aerospace markets for the next
twelve months is therefore not necessarily a meaningful indicator of future
sales.
COMPETITION
In the production and sale of advanced structural materials, Hexcel competes
with numerous U.S. and international companies on a worldwide basis. The broad
markets for the Company's products are highly competitive and the Company has
focused on both specific markets and specialty products within markets to obtain
market share. In addition to competing directly with companies offering similar
products, the Company competes with substitute structural materials such as
structural foam, wood, metal, and concrete.
13
<PAGE>
Depending upon the material and markets, relevant competitive factors include
price, delivery, service, quality and product performance.
ENVIRONMENTAL MATTERS
To date, environmental control regulations have not had a significant
adverse effect on overall operations. A discussion of environmental matters is
contained under the caption, "Legal Proceedings," and in Note 14 to the
accompanying consolidated financial statements included in this Annual Report on
Form 10-K.
EMPLOYEES
As of December 31, 1998, Hexcel employed 6,875 full-time employees, compared
with 5,597 and 5,013 as of December 31, 1997 and 1996, respectively. The
increase from the end of 1997 to the end of 1998 is primarily attributable to
the Acquired Clark-Schwebel Business, which added approximately 1,300 employees
to Hexcel's workforce. The increase from the end of 1996 to the end of 1997 is
primarily attributable to the growth in the Company's sales.
ITEM 2. PROPERTIES.
Hexcel owns and leases manufacturing facilities and sales offices located
throughout the United States and in other countries as noted below. The
corporate offices and principal corporate support activities for the Company are
located in leased facilities in Stamford, Connecticut and Pleasanton,
California. The Company's corporate research and technology administration and
certain composite materials laboratories are located in Dublin, California.
The following table lists the manufacturing facilities of Hexcel by
geographic location, approximate square footage, and principal products
manufactured. The following table does not include manufacturing facilities
owned by entities in which the Company has a joint venture interest.
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY LOCATION SQUARE FOOTAGE PRINCIPAL PRODUCTS
- ----------------------------------------- -------------- ------------------------------------------------------
<S> <C> <C>
United States:
Anderson, South Carolina............... 432,000 Reinforcement fabrics
Bellingham, Washington................. 188,000 Interiors
Burlington, Washington................. 73,000 Honeycomb Parts
Casa Grande, Arizona................... 307,000 Honeycomb and Honeycomb Parts
Cleveland, Georgia *................... 93,000 Heavyweight electronic fabric
Decatur, Alabama....................... 159,000 PAN Precursor (used to produce Carbon Fibers)
Gilbert, Arizona....................... 30,000 Prepregs
Kent, Washington....................... 883,000 Composite Structures; Interiors
Lancaster, Ohio........................ 49,000 Prepregs
Livermore, California.................. 141,000 Prepregs
Pottsville, Pennsylvania............... 134,000 Honeycomb Parts
Salt Lake City, Utah................... 371,000 Carbon Fibers; Prepregs
Seguin, Texas.......................... 204,000 Reinforcement fabrics
Statesville, North Carolina............ 553,000 Lightweight electronic fabrics; reinforcement fabrics
Washington, Georgia.................... 160,000 Midweight electronic fabrics
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY LOCATION SQUARE FOOTAGE PRINCIPAL PRODUCTS
- ----------------------------------------- -------------- ------------------------------------------------------
<S> <C> <C>
International:
Brindisi, Italy........................ 110,000 Engineered Products
Dagneux, France........................ 130,000 Prepregs
Decines, France........................ 90,000 Reinforcement fabrics
Duxford, United Kingdom................ 440,000 Prepregs; Honeycomb and Honeycomb Parts
Les Avenieres, France.................. 476,000 Reinforcement fabrics; Prepregs
Linz, Austria.......................... 163,000 Prepregs
Parla, Spain........................... 43,000 Prepregs
Swindon, United Kingdom................ 20,000 Honeycomb Parts
Welkenraedt, Belgium................... 223,000 Honeycomb and Honeycomb Parts
</TABLE>
* On March 16, 1999, the Company announced its intention to close its
Cleveland, GA. facility by July, 1999.
Hexcel leases the facilities located in Anderson, South Carolina;
Washington, Georgia; Statesville, North Carolina; Gilbert, Arizona; and Swindon,
U.K., and the land on which the Burlington, Washington facility is located. The
Company also leases portions of the facilities located in Casa Grande, Arizona;
Bellingham and Kent, Washington; Linz, Austria; and Les Avenieres, France.
ITEM 3. LEGAL PROCEEDINGS.
Hexcel is involved in litigation, investigations and claims arising out of
the conduct of its business, including those relating to commercial
transactions, and environmental, health and safety matters. The Company
estimates and accrues its liabilities resulting from such matters based on a
variety of factors, including outstanding legal claims and proposed settlements,
assessments by internal and external counsel of pending or threatened
litigation, and assessments by environmental engineers and consultants of
potential environmental liabilities and remediation costs. Such estimates
exclude counterclaims against other third parties. Such estimates are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
Although it is impossible to determine the level of future expenditures for
legal, environmental and related matters with any degree of certainty, it is the
Company's opinion, based on available information, that it is unlikely that
these matters, individually or in the aggregate, will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
LEGAL AND ENVIRONMENTAL CLAIMS AND PROCEEDINGS
The Company is subject to numerous federal, state, local and foreign laws
and regulations that impose strict requirements for the control and abatement of
air, water and soil pollutants and the manufacturing, storage, handling and
disposal of hazardous substances and waste. These laws and regulations include
the Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA" or "Superfund"), the Clean Air Act, the Clean Water Act and the
Resource Conservation and Recovery Act, and analogous state laws and
regulations. Regulatory standards under these environmental laws and regulations
have tended to become increasingly stringent over time.
Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess which are
included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. Because
CERCLA provides for joint and several liability, the Company could be
responsible for all remediation costs at such sites, even if it is one of many
potentially responsible parties ("PRPs"). The Company believes, however, based
on its experience with such matters, the amount and the nature of its waste, and
the number of other financially viable PRPs, that the Company's liability in
connection with such matters will not be material.
15
<PAGE>
Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act,
Hexcel signed an administrative consent order to pay for the environmental
remediation of a manufacturing facility it owns and formerly operated in Lodi,
New Jersey. The Company's estimate of the remaining cost to satisfy this consent
order is accrued in the accompanying consolidated balance sheets. The ultimate
cost of remediating the Lodi site will depend on developing circumstances.
In connection with the purchase of the Acquired Ciba Business, Hexcel
assumed various liabilities including a liability with respect to certain
environmental remediation activities at an acquired facility in Kent,
Washington. The Company was a party to a cost sharing agreement regarding the
operation of certain environmental remediation systems necessary to satisfy a
post-closure care permit issued to a previous owner of the Kent site by the U.S.
Environmental Protection Agency. Under the terms of the cost sharing agreement,
the Company was obligated to reimburse the previous owner for a portion of the
cost of the required remediation activities. The Company has determined that the
cost sharing agreement terminated on December 22, 1998; however, the other party
disputes this determination. The Company's estimate of other costs associated
with the cleanup of the Kent site are accrued in the accompanying consolidated
balance sheets.
The Company is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. The Company is not in a position to
predict the direction or outcome of the investigation and is cooperating with
the Department of Justice.
PRODUCT CLAIM
In 1993, Hexcel became aware of an aluminum honeycomb sandwich panel
delamination problem with panels produced by its wholly-owned Belgium
subsidiary, Hexcel Composites S.A., and installed in rail cars in France and
Spain. Two customers alleged that Hexcel Composites S.A. was responsible for the
problem. In 1998, the Company negotiated a settlement to be paid in 1999 with
one customer and the Company expects to settle with the remaining customer in
1999. The Company's estimated liability for this matter is accrued in the
accompanying consolidated balance sheets.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Hexcel common stock is traded on the New York and Pacific Stock Exchanges.
The range of high and low sales prices of Hexcel common stock on the New York
Stock Exchange Composite Tape is contained in Note 17 to the accompanying
consolidated financial statements included in this Annual Report on Form 10-K
and is incorporated herein by reference.
Hexcel did not declare or pay any dividends in 1998, 1997 or 1996. The
payment of dividends is generally prohibited under the terms of certain of the
Company's credit agreements.
On March 24, 1999, there were 1778 holders of record of Hexcel common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is contained on page 33 of this Form 10-K
under the caption "Selected Financial Data" and is incorporated herein by
reference.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by Item 7 is contained on pages 34 to 51 of this
Form 10-K under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSION DISCLOSURES ABOUT MARKET RISK.
The information required by Item 7A is contained under the heading "Market
Risks" on page 47 of this Form 10-K and is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is contained on pages 52 to 86 of this
Form 10-K under "Consolidated Financial Statements and Supplementary Data" and
is incorporated herein by reference. The reports of the independent public
accountants for the years ended December 31, 1998, 1997 and 1996 are contained
on pages 54 and 55 of this Form 10-K under the captions "Report of Independent
Accountants" and "Independent Auditors' Report" and are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 10, 1997, the Company changed independent auditors. There were no
disagreements or other reportable events related to this change.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Listed below are the directors of Hexcel as of March 24, 1999, the
positions with the Company held by them and a brief description of each
director's prior business experience.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITION(S) WITH HEXCEL
- ---------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
John J. Lee................. 62 1993 Chairman of the Board; Chief Executive Officer; Director
Harold E. Kinne............. 59 1998 President and Chief Operating Officer; Director
John M.D. Cheesmond......... 49 1996 Director
Marshall S. Geller.......... 60 1994 Director
John J. McGraw.............. 58 1999 Director
Martin Riediker............. 47 1999 Director
Stanley Sherman............. 60 1996 Director
Martin L. Solomon........... 62 1996 Director
George S. Springer.......... 65 1993 Director
Franklin S. Wimer........... 63 1995 Director
</TABLE>
JOHN J. LEE, age 62, has served as Chairman of the Board of Directors of
Hexcel since February 1996, Chief Executive Officer since January 1994, Chairman
and Chief Executive Officer from January 1994 to February 1995, Chairman and
Co-Chief Executive Officer from July 1993 to December 1993 and a director since
May 1993. He also serves as Chairman of the Nominating Committee and is a member
of the Finance Committee of Hexcel. Mr. Lee is a director of Hvide Marine
Incorporated, a marine support and transportation services company. He has
served as Chairman of the Board, President and Chief Executive Officer of Lee
Development Corporation, a merchant banking company, since 1987. He is also a
trustee of Yale University. Mr. Lee was a director of Aviva Petroleum
Corporation, an oil and gas exploration company, from 1993 to 1998, a director
of XTRA Corporation, a transportation equipment leasing company, from 1990 to
1996 and Chairman of the Board and Chief Executive Officer of Seminole
Corporation, a manufacturer and distributor of fertilizer, from 1989 to 1993.
Mr. Lee served as an advisor to the Clipper Group, a private investment
partnership, from 1993 to 1998. Mr. Lee also served as a
17
<PAGE>
director of Tosco Corporation, a national refiner and marketer of petroleum
products, from 1988 to 1993 and as President and Chief Operating Officer of
Tosco Corporation from 1990 through 1993.
HAROLD E. KINNE, age 59, has served as President, Chief Operating Officer
and a member of the Board of Directors of Hexcel since July 1998. Prior to
joining Hexcel, he was President of the Additives Division, corporate vice
president, a member of the corporate management committee and a director of Ciba
Specialty Chemicals Corporation ("CSCC") from 1996 to June 1998. Mr. Kinne also
held the same positions in Ciba-Geigy Corporation ("CGC") from 1988 through
1996. Prior to that, Mr. Kinne served as Vice President, Pigments, for the
Plastics & Additives Division of CGC from 1986 to 1988. Mr. Kinne has held
various other technical and managerial positions with CGC from 1965 to 1986.
JOHN M.D. CHEESMOND, age 49, has been a director of Hexcel since February
1996. Mr. Cheesmond also serves as Chairman of the Executive Compensation
Committee and is a member of the Finance Committee of Hexcel and is Executive
Vice President of Ciba Specialty Chemicals, Inc. (Switzerland). Mr. Cheesmond
was Senior Vice President and Head of Regional Finance and Control of Ciba Geigy
Limited ("CGL") from 1994 to 1996. From 1991 to 1993, Mr. Cheesmond served as
Group Vice President, Planning, Information and Control at Ciba Vision
Corporation.
MARSHALL S. GELLER, age 60, served as Co-Chairman of the Board of Directors
of Hexcel from February 1995 to February 1996 and has been a director of Hexcel
since August 1994. Mr. Geller also serves as a member of the Audit, Executive
Compensation and Nominating Committees of Hexcel. Mr. Geller has served as
Chairman of the Board, Chief Executive Officer and founding partner at Geller &
Friends Capital Partners, Inc., a merchant banking firm, since 1995. Mr. Geller
was Senior Managing Director of Golenberg & Geller, Inc., a merchant banking
firm, from 1991 to 1995; Vice Chairman of Gruntal & Company, an investment
banking firm, from 1988 to 1990; and a Senior Managing Director of Bear, Stearns
& Co., Inc., an investment banking firm, from 1967 to 1988. Mr. Geller is
currently a director of Ballantyne of Omaha, Inc., Players International, Value
Vision International, Inc., iMall Inc., Cabletel Communications Corp., Stroud's,
Inc. and various other privately-held corporations and charitable organizations.
JOHN J. McGRAW, age 58, has been a director of Hexcel since February 1999.
Mr. McGraw is Vice President, General Counsel, Secretary and a member of the
Board of Directors of CSCC. Mr. McGraw served as Vice President, General Counsel
and Secretary of CGC from 1998 to 1996, and was a member of the Board of
Directors and of the Finance Committee of CGC from 1989 to 1996. Mr. McGraw also
serves on the Board of Directors of the Westchester Legal Aid Society.
MARTIN RIEDIKER, age 47, has been a director of Hexcel since February 1999.
Mr. Riediker is Global President of Ciba's Consumer Care Division and a member
of Ciba's Executive Committee and as such is also responsible for Ciba's
Performance Polymers Division. Mr. Riediker was appointed Head of CGL's Ciba
Chemicals Division in 1995. From 1994 to 1995 he served as head of CGC's US
Polymers Division and as a Management Committee member of CGC in the United
States.
STANLEY SHERMAN, age 60, has been a director of Hexcel since February 1996.
Mr. Sherman also serves as a member of the Executive Compensation and Finance
Committees of Hexcel. Mr. Sherman is President, Chief Executive Officer and
Chairman of the Board of Ciba Specialty Chemicals Corporation and Chairman of
the Board of Ciba Specialty Chemicals (Canada). Mr. Sherman served as a director
and Vice President and Chief Financial Officer of CGC from 1991 to 1996, and was
a member of the Finance Committee and the Corporate Management Committee of
CGC's Board of Directors. From 1986 to 1991, Mr. Sherman served as Vice
President-Corporate Planning of CGC. Mr. Sherman also serves on the Board of
Directors of the Chemical Manufacturers Association and of the Westchester
Educational Coalition.
MARTIN L. SOLOMON, age 62, has been a director of Hexcel since May 1996. Mr.
Solomon serves as Chairman of the Finance Committee and is a member of the Audit
and Executive Compensation Committees of Hexcel. Mr. Solomon has been Chairman
and Chief Executive Officer of American County Holdings, Inc., an insurance
holding company, since 1997 and a self-employed investor since 1990. Mr. Solomon
was a director and Vice Chairman of the Board of Directors of Great Dane
Holdings, Inc.,
18
<PAGE>
which is engaged in the manufacture of transportation equipment, automobile
stamping, the leasing of taxis and insurance, from 1985 to 1996, Managing
Partner of Value Equity Associates I, L.R., an investment partnership, from 1988
to 1990, and was an investment analyst and portfolio manager of Steinhardt
Partners, an investment partnership, from 1985 to 1987. Mr. Solomon has been a
director of XTRA Corporation since 1990, of Telephone and Data Systems Inc., a
diversified telecommunications service company, since 1997. Mr. Solomon is also
a director of various privately-held corporations and civic organizations.
GEORGE S. SPRINGER, age 65, has been a director of Hexcel since January
1993. Mr. Springer also serves as Chairman of the Technology Committee of
Hexcel. Mr. Springer is the Paul Pigott Professor and Chairman of the Department
of Aeronautics and Astronautics, and by courtesy, Professor of Mechanical
Engineering and Professor of Civil Engineering, at Stanford University. Mr.
Springer joined Stanford University's faculty in 1983.
FRANKLIN S. WIMER, age 63, was a director of Hexcel from February 1995 to
February 1996 and was reelected in May 1996. Mr. Wimer also serves as Chairman
of the Audit Committee and is a member of the Technology Committee of Hexcel.
Mr. Wimer is President and Principal of UniRock Management Corporation
("UniRock"), a private merchant banking firm based in Denver, Colorado. Mr.
Wimer has been with UniRock since 1987. UniRock acted as strategic planning
consultant to Hexcel from December 1993 through April 1996. Mr. Wimer is
currently Chairman of the Board of Vista Restaurants, Inc., Chairman of the
Board of Colorado Gaming & Entertainment Co. and is a director of the Denver
Paralegal Institute and Foresight Products, Inc.
(b) Listed below are the executive officers and other senior management of
Hexcel as of March 24, 1999, the positions held by them and a brief description
of their business experience. For additional information concerning Messrs. Lee
and Kinne, see Item 10(a).
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE SINCE POSITION(S) WITH HEXCEL
- -------------------------- --- ----------- ---------------------------------------------------------------------
<S> <C> <C> <C>
John J. Lee 62 1993 Chairman of the Board; Chief Executive Officer; Director
Harold E. Kinne 59 1998 President; Chief Operating Officer; Director
Stephen C. Forsyth 43 1994 Executive Vice President; Chief Financial Officer
Ira J. Krakower 58 1996 Senior Vice President; General Counsel; Secretary
Lynn L. Brown 49 1999 Vice President of Human Resources
Wayne C. Pensky 43 1993 Vice President; Corporate Controller; Chief Accounting Officer
Robert A. Petrisko 44 1993 Vice President of Research and Technology
Gary L. Sandercock 57 1989 Vice President of Manufacturing
Joseph H. Shaulson 33 1996 Vice President of Planning and Integration
David M. Wong 54 1996 Vice President of Corporate Affairs
Bruce D. Herman 43 1996 Treasurer
William Hunt 55 1996 President of the Composites Materials business unit
William D. Bennison 54 1998 President of the Hexcel Schwebel business unit
Justin P.S. Taylor 45 1996 President of the Structures and Interiors business unit
James N. Burns 58 1996 President of the Fibers business unit
</TABLE>
STEPHEN C. FORSYTH, age 43, has served as Executive Vice President of Hexcel
since June 1998, Chief Financial Officer since November 1996 and Senior Vice
President of Finance and Administration between February 1996 and June 1998. Mr.
Forsyth served as Vice President of International Operations of Hexcel from
October 1994 to February 1996, General Manager of Hexcel's Resins Business and
Export Marketing from 1989 to 1994 and has held other general management
positions with Hexcel from 1980 to 1989. Mr. Forsyth joined Hexcel in 1980.
IRA J. KRAKOWER, age 58, has served as Senior Vice President, General
Counsel and Secretary of Hexcel since September 1996. Prior to joining Hexcel,
Mr. Krakower served as Vice President and General
19
<PAGE>
Counsel to Uniroyal Chemical Corporation from 1986 to August 1996 and served on
the Board of Directors of and as Secretary of Uniroyal Chemical Company, Inc.
from 1989 to 1996.
LYNN L. BROWN, age 49, has served as Vice President of Human Resources since
March 1999. Prior to joining Hexcel, Ms. Brown served as Vice President of Human
Resources at MKE-Quantum Components, LLC from 1998 to February 1999, as Vice
President of Organizational Development and International Human Resources at
Burger King Corporation from 1996 to 1998, and as Director of Human Resources at
several business units of AlliedSignal, Inc. from 1993 to 1996.
WAYNE C. PENSKY, age 43, has served as Vice President of Hexcel since
December 1998 and as Corporate Controller and Chief Accounting Officer of Hexcel
since July 1993. Prior to joining Hexcel in 1993, Mr. Pensky was a partner at
Arthur Andersen & Co., an accounting firm, where he was employed from 1979 to
1993.
ROBERT A. PETRISKO, age 44, has served as Vice President of Research and
Technology of Hexcel since September 1993. Mr. Petrisko served at Hexcel's
Chandler facility as Manager of the Signature Technology Group from 1989 to
April 1993 and as Director of Aerospace Technology from April 1993 to September
1993. Mr. Petrisko joined Hexcel in 1989 after serving as a Research Specialist
with Dow Corning Corporation from 1985 to 1989.
GARY L. SANDERCOCK, age 57, has served as Vice President of Manufacturing of
Hexcel since October 1996. From February 1996 to October 1996, he served as
President of Hexcel's Special Process business unit. Mr. Sandercock served as
Vice President of Manufacturing of Hexcel from April 1993 to February 1996, Vice
President of the Reinforcement Fabrics business unit of Hexcel from 1989 to
1993, General Manager of the Trevarno Division of Hexcel from 1985 to 1989 and
has held other manufacturing and general management positions from 1967 to 1985.
Mr. Sandercock joined Hexcel in 1967.
JOSEPH H. SHAULSON, age 33, has served as Vice President of Planning and
Integration of Hexcel since November 1998. Mr. Shaulson served as Vice President
of Corporate Development of Hexcel from April 1996 to October 1998. In addition,
Mr. Shaulson served as Acting General Counsel and Acting Secretary of Hexcel
from April 1996 to September 1996. Prior to joining Hexcel, Mr. Shaulson was an
associate in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, where he
was employed from 1991 to 1996.
DAVID M. WONG, age 54, has served as Vice President of Corporate Affairs of
Hexcel since February 1996. Mr. Wong served as Hexcel's Director of Special
Projects from July 1993 to February 1996, Corporate Controller and Chief
Accounting Officer of Hexcel from 1983 to 1993 and has held other general
management positions from 1979 to 1983. Mr. Wong joined Hexcel in 1979.
BRUCE D. HERMAN, age 43, has served as Treasurer of Hexcel since April 1996.
Prior to joining Hexcel, Mr. Herman served as Vice President of Finance in the
Transportation and Industrial Financing Division of USL Capital Corp. (formerly
U.S. Leasing Inc.) ("USL") from 1993 to 1996. Mr. Herman also served as Vice
President of Finance in the Equipment Financing Group of USL from 1991 to 1993.
WILLIAM HUNT, age 55, has served as President of Hexcel's Global Materials
business unit since November 1998 and as President of the former Hexcel
EuroMaterials business unit since February 1996. Mr. Hunt served as President of
the EuroMaterials unit of the Ciba Composites Business from 1991 to February
1996 and as Managing Director of Ciba-Geigy Plastics ("CGP") from 1990 to 1991.
Prior to joining CGP in 1990, Mr. Hunt held various other technical and
managerial positions, including the position of Managing Director of Illford
Limited (Photographic) Co.
WILLIAM D. BENNISON, age 54, has served as President of the Hexcel Schwebel
business unit since November 1998. Mr. Bennison also serves as President of
Clark-Schwebel Tech-Fab Company and as a director of CS-Interglas AG and
Asahi-Schwebel Co. Ltd. Prior to joining Hexcel, Mr. Bennison was President of
Clark-Schwebel, Inc. from 1991 to September 1998.
JUSTIN P. S. TAYLOR, age 45, has served as President of Hexcel's Structures
and Interiors business unit since April 1996. From July 1995 to April 1996, Mr.
Taylor served as a member of CGL's strategic
20
<PAGE>
planning unit. Prior to July 1995, Mr. Taylor held various management positions
in the Heath Tecna Division of CGC.
JAMES N. BURNS, age 58, has served as President of Hexcel's Fibers business
unit since July 1996. Prior to his employment with Hexcel, Mr. Burns served in a
number of management positions with the Composite Products Division of Hercules
Incorporated, including Business Director from March 1995 to June 1996, Business
Unit Director of Advanced Composite Materials from June 1992 to March 1995 and
Vice President of Marketing from June 1986 to June 1992.
(c) There are no family relationships among any of Hexcel's directors or
executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in Item 11 will be contained in Hexcel's definitive
Proxy Statement for the 1999 Annual Meeting of Stockholders. Such information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required in Item 12 will be contained in Hexcel's definitive
Proxy Statement for the 1999 Annual Meeting of Stockholders. Such information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in Item 13 will be contained in Hexcel's definitive
Proxy Statement for the 1999 Annual Meeting of Stockholders. Such information is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. FINANCIAL STATEMENTS
The consolidated financial statements of Hexcel, notes thereto, and report
of independent accountants are listed on page 52 of this Annual Report on Form
10-K and are incorporated herein by reference.
B. REPORTS ON FORM 8-K
Current Report on Form 8-K dated March 29, 1999, relating to the Company's
outlook for the first quarter of 1999.
Current Report on Form 8-K dated March 17, 1999 relating to the closure of
the Company's facility in Cleveland, Georgia.
Current Report on Form 8-K dated January 25, 1999 relating to the Company's
fourth quarter 1998 and year-end net sales, EBITDA and net income.
Current Report on Form 8-K dated January 5, 1999 with respect to the
Company's proposed issuance of Senior Subordinated Notes due 2009.
Current Report on Form 8-K dated December 30, 1998 relating to the
consummation of the acquisition a 43.6% equity interest in CS-Interglas AG
and the Company's business consolidation program.
21
<PAGE>
Current Report on Form 8-K/A dated November 12, 1998 amending the Company's
Current Report on Form 8-K dated September 24, 1998 to include the financial
statements of Clark-Schwebel, Inc. and its subsidiaries.
Current Report on Form 8-K dated October 22, 1998 relating to the Company's
third quarter 1998 sales, EBITDA and net income.
Current Report on Form 8-K dated October 9, 1998 relating to the Company's
stock buyback plan.
C. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Strategic Alliance Agreement dated as of September 29, 1995 among Hexcel, Ciba-Geigy Limited and
Ciba-Geigy Corporation (incorporated herein by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated as of October 13, 1995).
2.1(a) Amendment dated as of December 12, 1995 to the Strategic Alliance Agreement among Hexcel, Ciba-Geigy
Limited and Ciba-Geigy Corporation (incorporated herein by reference to Exhibit 2.1(a) to the
Company's Current Report on Form 8-K dated as of March 15, 1996).
2.1(b) Letter Agreement dated as of February 28, 1996 among Hexcel, Ciba-Geigy Limited and Ciba-Geigy
Corporation (incorporated herein by reference to Exhibit 2.1(b) to the Company's Current Report on
Form 8-K dated as of March 15, 1996).
2.1(c) Distribution Agreement dated as of February 29, 1996 among the Company, Brochier S.A., Composite
Materials Limited, Salver S.r.l. and Ciba Geigy Limited (incorporated by reference to Exhibit
2.1(c) to the Company's Current Report on Form 8-K dated as of March 15, 1996).
2.1(d) Consent Letter dated February 21, 1997, between Hexcel and Ciba Specialty Chemicals Holding Inc.
(incorporated herein by reference to Exhibit 2.1(d) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1997).
2.2 Sale and Purchase Agreement dated as of April 15, 1996 among Hexcel Corporation, Hercules
Incorporated, Hercules Nederland BV and HISPAN Corporation (incorporated herein by reference to
Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the fiscal Quarter ended March 31,
1996).
2.2(a) Amendment Number One dated as of June 27, 1996 to the Sale and Purchase Agreement among Hexcel
Corporation, Hercules Incorporated, Hercules Nederland BV and HISPAN Corporation (incorporated
herein by reference to Exhibit 2.2 to Hexcel's Current Report on Form 8-K dated July 12, 1996).
2.2(b) Letter Agreement dated as of June 27, 1996 among Hexcel Corporation, Hercules Incorporated, Hercules
Nederland BV and HISPAN Corporation (incorporated herein by reference to Exhibit 2.3 to Hexcel's
Current Report on Form 8-K dated July 12, 1996).
2.3 Asset Purchase Agreement by and among Stamford FHI Acquisition Corp., Fiberite, Inc. and Hexcel
Corporation, dated as of April 21, 1997 (incorporated herein by reference to Exhibit 10.1 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
2.3(a) Amended and Restated Asset Purchase Agreement by and among Stamford FHI Acquisition Corp., Fiberite,
Inc. and Hexcel Corporation, dated as of August 25, 1997 (incorporated herein by reference to
Exhibit 10.11 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1997).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.4 License of Intellectual Property agreement, by and among Hexcel Corporation and Fiberite, Inc., dated
as of August 29, 1997 (incorporated herein by reference to Exhibit 10.12 to Hexcel's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 1997).
2.5 Asset Purchase Agreement by and among the Company, Stamford CS Acquisition Corp., Clark-Schwebel
Holdings, Inc. and Clark-Schwebel Inc., dated July 25, 1998 (incorporated herein by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K, filed on July 30, 1998).
2.5(a) Amendment No. 1 to Asset Purchase Agreement by and among the Company, Stamford CS Acquisition Corp.,
Clark-Schwebel Holdings, Inc. and Clark-Schwebel Inc., dated as of September 15, 1998 (incorporated
by reference to Exhibit 2.1 of the Company's Current Report on Form 8-K, filed on September 24,
1998).
2.5(b) Amendment No. 2 to Asset Purchase Agreement by and among the Company and EQCSI Holding Corp.,
formerly known as Clark-Schwebel, Inc., dated as of December 23, 1998 (incorporated herein by
reference to Exhibit 2.5(b) to the Company's Registration Statement on Form S-4 (No. 333-71601),
filed on February 2, 1999).
2.6 First Amended Plan of Reorganization dated as of November 7, 1994 (incorporated by reference to
Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the fiscal Quarter ended October 2,
1994).
3.1 Restated Certificate of Incorporation of Hexcel Corporation (incorporated herein by reference to
Exhibit 1 to Hexcel's Registration Statement on Form 8-A dated July 9, 1996, Registration No.
1-08472).
3.2 Amended and Restated Bylaws of Hexcel Corporation (incorporated herein by reference to Exhibit 2 to
Hexcel's Registration Statement on Form 8-A dated July 9, 1996, Registration No. 1-08472).
4.1 Indenture dated as of January 21, 1999 between Hexcel Corporation and The Bank of New York, as
trustee, relating to the issuance of the 9 3/4% Senior Subordinated Notes due 2009 (incorporated
herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-4 (No.
333-71601), filed on February 2, 1999).
4.2 Registration Rights Agreement dated as of January 21, 1999 by and among Hexcel Corporation, Credit
Suisse First Boston Corporation and Salomon Smith Barney Inc., relating to the issuance of the
9 3/4% Senior Subordinated Notes due 2009 (incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4 (No. 333-71601), filed on February 2, 1999).
4.3 Purchase Agreement dated as of January 15, 1999 by and among Hexcel Corporation, Credit Suisse First
Boston Corporation and Salomon Smith Barney Inc., relating to the issuance of the 9 3/4% Senior
Subordinated Notes due 2009 (incorporated herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4 (No. 333-71601), filed on February 2, 1999).
4.4 Indenture dated as of July 24, 1996 between Hexcel Corporation and First Trust of California,
National Association, as trustee, relating to the 7% Convertible Subordinated Notes due 2003 of the
Company (incorporated herein by reference to Exhibit 4 to Hexcel's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996).
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.5 Indenture dated as of February 29, 1996 between Hexcel and First Trust of California, National
Association, as trustee, relating to the Increasing Rate Senior Subordinated Notes due 2003 of the
Company (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form
8-K dated as of March 15, 1996).
4.5(a) First Supplemental Indenture dated as of June 27, 1996 between Hexcel and First Trust of California,
N.A., as trustee, to the Indenture dated as of February 29, 1996 between Hexcel and First Trust of
California, N.A., as trustee (incorporated herein by reference to Exhibit 4.2(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997).
4.5(b) Second Supplemental Indenture dated as of March 5, 1998 between Hexcel and First Trust of California,
N.A., as trustee, to the Indenture dated as of February 29, 1996 between Hexcel and First Trust of
California, N.A., as trustee (incorporated by reference to Exhibit 4.2(b) to Hexcel's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997).
4.5(c) Third Supplemental Indenture dated as of September 15, 1998 between Hexcel and U.S. Bank Trust
National Association (formerly known as First Trust of California, National Association) as trustee
(incorporated herein by reference to Exhibit 4.5(c) to the Company's Registration Statement on Form
S-4 (No. 333-71601), filed on March 12, 1999).
4.5(d) Fourth Supplemental Indenture dated as of January 21, 1999 between Hexcel and U.S. Bank Trust
National Association (formerly known as First Trust of California, National Association), as
trustee (incorporated herein by reference to Exhibit 4.5(d) to the Company's Registration Statement
on Form S-4 (No. 333-71601), filed on March 12, 1999).
4.6 Indenture dated as of August 1, 1986 between Hexcel and the Bank of California, N.A., as trustee,
relating to the 7% Convertible Subordinated Notes due 2011 of the Company (incorporated herein by
reference to Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
4.6(a) Instrument of Resignation, Appointment and Acceptance, dated as of October 1, 1993 (incorporated
herein by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.1 Credit Agreement dated as of June 27, 1996 among Hexcel and certain of its subsidiaries as borrowers,
the institutions party thereto as lenders, the institutions party thereto as issuing banks,
Citibank, N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein
by reference to Exhibit 99.2 to Hexcel's Current Report on Form 8-K dated July 12, 1996).
10.1(a) Consent Number 1 and First Amendment dated as of July 3, 1996 to the Credit Agreement dated as of
June 27, 1996 among Hexcel Corporation and certain of its subsidiaries as borrowers, the
institutions party thereto as lenders, the institutions party thereto as issuing banks, Citibank,
N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by
reference to Exhibit 10.2 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30,
1996).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.1(b) Modifications dated as of July 8, 1996 to the First Amendment to the Credit Agreement among Hexcel
Corporation and certain of its subsidiaries as borrowers, the institutions party thereto as
lenders, the institutions party thereto as issuing banks, Citibank, N.A. as collateral agent and
Credit Suisse as administrative agent (incorporated herein by reference to Exhibit 10.3 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1996).
10.1(c) Consent Number 2 and Second Amendment dated as of November 12, 1996 to the Credit Agreement dated as
of June 27, 1996 among Hexcel Corporation and certain of its subsidiaries as borrowers, the
institutions party thereto as lenders, the institutions party thereto as issuing banks, Citibank,
N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by
reference to Exhibit 10.4(b) to Hexcel's Annual Report on Form 10-K for the year ended December 31,
1996).
10.1(d) Consent Number 3 and Third Amendment dated as of February 27, 1997 to the Credit Agreement dated as
of June 27, 1996 among Hexcel Corporation and certain of its subsidiaries as borrowers, the
institutions party thereto as lenders, the institutions party thereto as issuing banks, Citibank,
N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by
reference to Exhibit 10.4(c) to Hexcel's Annual Report on Form 10-K for the year ended December 31,
1996).
10.1(e) Amended and Restated Credit Agreement dated as of March 5, 1998 among Hexcel and certain subsidiaries
as borrowers, the lenders and issuing banks party thereto, Citibank, N.A., as U.S. administrative
agent, Citibank International plc, as European administrative agent and Credit Suisse, as
syndication agent (incorporated herein by reference to Exhibit 10.4(d) to Hexcel's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.1(f) Second Amended and Restated Credit Agreement, dated as of September 15, 1998, by and among Hexcel and
certain of its subsidiaries as borrowers, the lenders from time to time parties thereto, Citibank,
N.A. as documentation agent, and Credit Suisse First Boston as lead arranger and as administrative
agent for the lenders (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 1998).
10.1(g) First Amendment dated as of December 31, 1998 to the Second Amended and Restated Credit Agreement by
and among Hexcel Corporation and the Foreign Borrowers from time to time party 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 (incorporated herein
by reference to Exhibit 10.1(g) to the Company's Registration Statement on Form S-4 (No.
333-71601), filed on March 12, 1999).
10.1(h) Consent Letter dated as of January 15, 1999 relating to the First Amendment dated December 31, 1998
to the Second Amended and Restated Credit Agreement dated September 15, 1998 (incorporated herein
by reference to Exhibit 10.1(h) to the Company's Registration Statement on Form S-4 (No.
333-71601), filed on March 12, 1999).
10.2 Schedule to the ISDA Master Agreement between Credit Lyonnais (New York Branch) and Hexcel
Corporation, dated as of September 15, 1998.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.2(a) Confirmation dated October 22, 1998 relating to transaction entered into pursuant to ISDA Master
Agreement between Credit Lyonnais (New York Branch) and Hexcel Corporation, dated as of September
15, 1998.
10.3 Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 (incorporated herein
by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No.
333-36163).
10.3(a) Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 and further amended
December 10, 1997 (incorporated herein by reference to Exhibit 10.5(a) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997).
10.4 Hexcel Corporation 1998 Broad Based Incentive Stock Plan (incorporated herein by reference to Exhibit
4.3 of the Company's Form S-8 filed on June 19, 1998, Registration No. 333-57223).
10.5 Hexcel Corporation Management Stock Purchase Plan (incorporated herein by reference to Exhibit 10.9
to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.6 Hexcel Corporation Management Incentive Compensation Plan (incorporated herein by reference to Annex
A of the Company's Proxy Statement dated April 20, 1998, which was previously filed
electronically).
10.7 Form of Employee Option Agreement (1998) (incorporated herein by reference to Exhibit 10.4 of the
Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).
10.8 Form of Employee Option Agreement (1997) (incorporated herein by reference to Exhibit 10.4 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.9 Form of Employee Option Agreement (1996) (incorporated herein by reference to Exhibit 10.5 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.10 Form of Employee Option Agreement (1995) (incorporated herein by reference to Exhibit 10.6 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.11 Form of Retainer Fee Option Agreement for Non-Employee Directors (1998).
10.12 Form of Retainer Fee Option Agreement for Non-Employee Directors (1997) (incorporated herein by
reference to Exhibit 10.8 to Hexcel's Annual Report on Form 10-K for the fiscal year ended December
31, 1997).
10.13 Form of Option Agreement (Directors) (incorporated herein by reference to Exhibit 10.13 to Hexcel's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.14 Form of Short-Term Option Agreement (incorporated herein by reference to Exhibit 10.8 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.15 Form of Performance Accelerated Restricted Stock Unit Agreement (1998) (incorporated herein by
reference to Exhibit 10.2 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31,
1998).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.16 Form of Performance Accelerated Restricted Stock Unit Agreement (1997) (incorporated herein by
reference to Exhibit 10.5 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30,
1997).
10.17 Form of Performance Accelerated Restricted Stock Unit Agreement (1996) (incorporated herein by
reference to Exhibit 10.9 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31,
1996).
10.18 Form of Reload Option Agreement (1997) (incorporated herein by reference to Exhibit 10.8 of Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.19 Form of Reload Option Agreement (1996) (incorporated herein by reference to Exhibit 10.10 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.20 Form of Performance Accelerated Stock Option Agreement (Director) (incorporated herein by reference
to Exhibit 10.6 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.21 Form of Performance Accelerated Stock Option (Employee) (incorporated herein by reference to Exhibit
10.7 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.22 Form of Grant of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.10
to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.23 Form of Exchange Performance Accelerated Stock Option Agreement (incorporated herein by reference to
Exhibit 10.3 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).
10.24 Hexcel Corporation 1997 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit
10.2 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.25 Employment Agreement dated as of February 29, 1996 between Hexcel and John J. Lee (incorporated
herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.25(a) Employee Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee (incorporated
herein by reference to Exhibit 10.14(a) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.25(b) Bankruptcy Court Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.14(b) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.25(c) Performance Accelerated Restricted Stock Unit Agreement dated as of February 29, 1996 between Hexcel
and John J. Lee (incorporated herein by reference to Exhibit 10.14(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.25(d) Short-Term Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.14(d) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.25(e) Form of Reload Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.14(e) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.25(f) Supplemental Executive Retirement Agreement dated as of May 20, 1998 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1998).
10.26 Summary of Terms of Employment (effective as of July 15, 1998) between Hexcel and Harold E. Kinne,
President and Chief Operating Officer of Hexcel (incorporated herein by reference to Exhibit 10.5
of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).
10.27 Employment Agreement dated as of July 25, 1998 (effective date September 15, 1998) between Hexcel and
William D. Bennison, President of Clark-Schwebel Corporation (a wholly-owned subsidiary of Hexcel)
(incorporated herein by reference to Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q
for the Quarter ended September 30, 1998).
10.28 Agreement dated September 3, 1996 between Hexcel Corporation and Ira J. Krakower (incorporated herein
by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.29 Agreement between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to
Exhibit 10.4(L) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1994).
10.30 Agreement between Hexcel Corporation and Gary L. Sandercock (incorporated herein by reference to
Exhibit 10.4(I) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1994).
10.31 Governance Agreement dated as of February 29, 1996 between Hexcel and Ciba-Geigy Limited
(incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.32 Registration Rights Agreement dated as of February 29, 1996 between Hexcel and Ciba-Geigy Limited
(incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.32(a) Amendment No.1 dated as of December 29, 1998 to the Registration Rights Agreement by and between
Ciba-Geigy Limited (which has since assigned the Registration Rights Agreement to Ciba Specialty
Chemical Holding Inc.) and Hexcel Corporation (incorporated herein by reference to Exhibit 10.29(a)
to the Company's Registration Statement on Form S-4 (No. 333-71601), filed on March 12, 1999).
10.33 Amendment dated as of November 22, 1995 to the Agreement Governing United States Employment Matters
between Hexcel and Ciba-Geigy Corporation (incorporated herein by reference to Exhibit 10.23(a) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.34 Employment Matters Agreement dated as of February 29, 1996 among Ciba-Geigy PLC, Composite Materials
Limited and Hexcel (incorporated herein by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.35 Lease Agreement, dated as of September 15, 1998, by and among Clark-Schwebel Corporation (a
wholly-owned subsidiary of Hexcel) as lessee, CSI Leasing Trust as lessor, and William J. Wade as
co-trustee for CSI Leasing Trust (incorporated herein by reference to Exhibit 10.2 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 1998).
12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Company.
21.1 Subsidiaries of the Company (incorporated herein by reference to Exhibit 21.2 of the Company's
Registration Statement on Form S-4 (No. 333-71706) filed on February 2, 1999).
23 Consent of Independent Accountants -- PricewaterhouseCoopers LLP.
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP.
27. Financial Data Schedule (electronic filing only).
</TABLE>
29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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, IN THE CITY OF
STAMFORD, STATE OF CONNECTICUT.
HEXCEL CORPORATION
March 29, 1999 By: /s/ JOHN J. LEE
------------------------------------------
John J. Lee,
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------
<C> <S> <C>
Chairman of the Board of
/s/ JOHN J. LEE Directors March 29, 1999
------------------------------------ and Chief Executive Officer
(John J. Lee) (PRINCIPAL EXECUTIVE
OFFICER)
/s/ HAROLD E. KINNE President, Chief Operating March 29, 1999
------------------------------------ Officer and Director
(Harold E. Kinne)
Executive Vice President and
/s/ STEPHEN C. FORSYTH Chief Financial Officer March 29, 1999
------------------------------------ (PRINCIPAL FINANCIAL
(Stephen C. Forsyth) OFFICER)
Vice President and Corporate
/s/ WAYNE C. PENSKY Controller March 29, 1999
------------------------------------ (PRINCIPAL ACCOUNTING
(Wayne C. Pensky) OFFICER)
/s/ JOHN M. D. CHEESMOND March 29, 1999
------------------------------------ Director
(John M. D. Cheesmond)
/s/ MARSHALL S. GELLER March 29, 1999
------------------------------------ Director
(Marshall S. Geller)
/s/ JOHN J. MCGRAW March 29, 1999
------------------------------------ Director
(John J. McGraw)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------
<C> <S> <C>
/s/ MARTIN RIEDIKER March 29, 1999
------------------------------------ Director
(Martin Riediker)
/s/ STANLEY SHERMAN March 29, 1999
------------------------------------ Director
(Stanley Sherman)
/s/ MARTIN L. SOLOMON March 29, 1999
------------------------------------ Director
(Martin L. Solomon)
/s/ GEORGE S. SPRINGER March 29, 1999
------------------------------------ Director
(George S. Springer)
/s/ FRANKLIN S. WIMER March 29, 1999
------------------------------------ Director
(Franklin S. Wimer)
</TABLE>
31
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes selected financial data for continuing
operations as of and for the five years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................ $ 1,089,044 $ 936,855 $ 695,251 $ 350,238 $ 313,795
Cost of sales............................................ 817,785 714,223 553,942 283,148 265,367
------------ ---------- ---------- ---------- ----------
Gross margin............................................. 271,259 222,632 141,309 67,090 48,428
Selling, general and administrative expenses............. 117,885 102,449 79,408 41,706 37,584
Research and technology expenses......................... 23,624 18,383 16,742 7,618 8,201
Business acquisition and consolidation expenses.......... 12,711 25,343 42,370 -- --
------------ ---------- ---------- ---------- ----------
Operating income......................................... 117,039 76,457 2,789 17,766 2,643
Interest expense......................................... 38,675 25,705 21,537 8,682 11,846
Other income, net........................................ -- -- (2,994) (791) (4,861)
Bankruptcy reorganization expenses....................... -- -- -- 3,361 20,152
------------ ---------- ---------- ---------- ----------
Income (loss) from continuing operations before income
taxes.................................................. 78,364 50,752 (15,754) 6,514 (24,494)
Provision (benefit) for income taxes..................... 28,442 (22,878) 3,436 3,313 3,586
Equity in earnings of affiliated companies............... 517 -- -- -- --
------------ ---------- ---------- ---------- ----------
Income (loss) from continuing operations................. $ 50,439 $ 73,630 $ (19,190) $ 3,201 $ (28,080)
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Income (loss) per share from continuing operations
Basic.................................................. $ 1.38 $ 2.00 $ (0.58) $ 0.21 $ (3.84)
Diluted................................................ 1.24 1.74 (0.58) 0.20 (3.84)
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Current assets........................................... $ 439,026 $ 387,050 $ 316,931 $ 128,055 $ 148,352
Non-current assets....................................... 965,135 424,536 384,805 102,547 95,105
------------ ---------- ---------- ---------- ----------
Total assets............................................. $ 1,404,161 $ 811,586 $ 701,736 $ 230,602 $ 243,457
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Current liabilities...................................... $ 219,444 $ 186,356 $ 188,812 $ 66,485 $ 171,307
Long-term liabilities.................................... 882,318 375,329 333,595 115,743 78,035
Stockholders' equity (deficit)........................... 302,399 249,901 179,329 48,374 (5,885)
------------ ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity............... $ 1,404,161 $ 811,586 $ 701,736 $ 230,602 $ 243,457
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
OTHER DATA:
Cash dividends per share................................. -- -- -- -- --
Shares outstanding at year-end........................... 36,329 36,856 36,561 18,091 7,301
</TABLE>
- ------------------------
A discussion of the impact of business acquisitions on 1998, 1997 and 1996
selected financial data is contained in Notes 1, 2 and 3 to the accompanying
consolidated financial statements.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales................................................. $ 1,089.0 $ 936.9 $ 695.3
Gross margin %............................................ 24.9% 23.8% 20.3%
Adjusted EBITDA(a)........................................ $ 177.2 $ 137.6 $ 71.9
Adjusted operating income %(b)............................ 11.9% 10.9% 6.5%
Business acquisition and consolidation expenses........... $ 12.7 $ 25.3 $ 42.4
Net income (loss)......................................... $ 50.4 $ 73.6 $ (19.2)
Adjusted net income(c).................................... $ 59.2 $ 47.6 $ 13.8
--------- --------- ---------
Diluted earnings (loss) per share......................... $ 1.24 $ 1.74 $ (0.58)
Adjusted diluted earnings per share(c).................... $ 1.43 $ 1.17 $ 0.48
--------- --------- ---------
</TABLE>
- ------------------------
(a) Earnings before business acquisition and consolidation expenses, other
income, interest, taxes, depreciation and amortization. See also "Financial
Condition and Liquidity" for a reconciliation of net income to EBITDA and
Adjusted EBITDA.
(b) Excludes business acquisition and consolidation expenses and other income.
(c) Excludes business acquisition and consolidation expenses and assumes a U.S.
effective tax provision of 36%.
Hexcel closed its 1998 fiscal year with record sales, Adjusted operating
income and Adjusted EBITDA. In the three years since the bottom of the aerospace
cycle in 1995, the Company has more than tripled its sales and has established a
solid record of profitability: gross margin increased from 19.2% to 24.9%,
Adjusted EBITDA improved from $29.4 million to $177.2 million, or a 503%
increase, and Adjusted net income increased more than 17 times from $3.3 million
to $59.2 million.
This dramatic turnaround was a result of three major factors. First, the
Company led the consolidation of the advanced structural materials industry
through its acquisitions of the Ciba and Hercules composite materials businesses
in 1996, and through the acquisition of the industrial fabrics business from
Clark-Schwebel in 1998. The Company's most recent acquisition diversifies
Hexcel's business beyond its base in commercial aerospace and establishes Hexcel
as a leading global materials supplier to the electronics industry. Second,
commercial aerospace build rates significantly increased, which led to record
deliveries for Boeing and Airbus during 1998. In 1998, there were 788 combined
aircraft deliveries as compared to 380 in 1995. Finally, the Company
substantially completed a business consolidation program that eliminated excess
capacity and integrated the Ciba and Hercules businesses.
Although the Company achieved record performance in 1998, there were
significant global changes in some of its markets which were triggered by the
Asian economic recession. Deferred or canceled aircraft orders by Pacific Rim
nations led to a reduction in Boeing's projected build rates. While the Company
will still benefit from the combined estimated sustained production levels that
should be well above 700 aircraft annually, developing other existing markets
and new applications for advanced structural materials will now be an important
driver of future growth for Hexcel. Lower anticipated future commercial aircraft
deliveries and Boeing's well publicized profitability and production issues
resulted in Hexcel's customers now emphasizing the need for material yield
improvement and cost and inventory reduction throughout the commercial aerospace
supply chain.
33
<PAGE>
The events in Asia also impacted the markets for fiberglass electronic
materials. Reduced Asian market demand and weak exchange rates have contributed
to certain Asian producers seeking to sell their products in western markets.
This has caused intense competition in the fiberglass fabric markets that the
Company serves. The impact of lower commercial aerospace orders and these
competitive factors in the electronic materials market are currently anticipated
to result in the Company's net sales being flat in 1999 compared to pro forma
1998 revenues. Responding to these market changes, both to remain competitive
and sustain profitability, Hexcel has intensified its efforts to improve
efficiencies and reduce total cost through its Lean Enterprise and value chain
initiatives, as well as its business consolidation activities.
Looking forward, the Company has positioned itself for the future through
the issuance of $240.0 million of Senior Subordinated Notes, due 2009, to
solidify its long-term capital structure. Business plans are focused on
adjusting the Company's cost and manufacturing capacity to earn attractive
returns and on generating free cash flow to repay debt. Hexcel's short-term goal
is to generate $100 million of free cash flow, before taking into account the
purchase of an equity interest in CS-Interglas, in the fifteen month period from
October 1, 1998 to December 31, 1999. In the fourth quarter of 1998, the Company
generated approximately $15 million in free cash flow before paying $19.0
million for its initial 43.6% equity interest in CS-Interglas, leaving
approximately $85 million of the goal to be generated in 1999.
RECENT DEVELOPMENTS
During the first quarter of 1999, demand in most of the markets that Hexcel
serves, including commercial aerospace, has been in line with the Company's
expectations. In addition, the Company has continued to make progress in its
business consolidation and integration action plans. However, competitive
conditions in the global market for electronic fiberglass materials have
remained intense, impacting sales volumes and margins to a greater extent than
the Company previously expected. Electronic market competitive conditions
resulting from the Asian economic situation are also impacting the performance
of Hexcel's joint ventures in Europe and Japan, reducing the amount of equity
income that the Company recognizes for these joint ventures in its financial
statements. As a result, despite higher net sales than in the fourth quarter of
1998, profitability in the first quarter of 1999 is anticipated to be lower than
that in the prior quarter.
Also during the first quarter of 1999, Hexcel has continued the
consolidation and integration of its global reinforcement materials operations.
On March 16, 1999, Hexcel expanded these actions, announcing its plan to close
its Cleveland, Georgia manufacturing facility. As a result, the Company
anticipates recording in its first quarter financial statements approximately $3
million of business acquisition and consolidation charges, primarily reflecting
the costs of closing this facility, of which $1.8 million will be non-cash
charges. A further charge related to this plant closure of about $1 million is
anticipated in the second and/or third quarter of 1999. Hexcel remains focused
on improving performance by continuing to reduce costs and improving
productivity through its Lean Enterprise initiatives. The Company has
substantially completed the business consolidation actions that it announced in
the fourth quarter of 1998 and continues to seek further opportunities to
eliminate cost.
BUSINESS ACQUISITIONS
Over the last three years, the Company has substantially expanded its size,
through both internal growth as well as through acquisitions. During 1998, 1997
and 1996, the Company acquired:
- certain assets and assumed certain operating liabilities of the industrial
fabrics business from Clark-Schwebel, Inc. and its subsidiaries'
("Clark-Schwebel") on September 15, 1998, including interests in three
joint ventures, one of which was acquired in December 1998 (the "Acquired
Clark-Schwebel Business");
- the worldwide composites division of Ciba, including most of Ciba's
composite materials, parts and structures businesses, on February 29,
1996. The Company subsequently acquired Ciba's Austrian
34
<PAGE>
composites business on May 30, 1996, and various remaining assets of
Ciba's worldwide composites division at various dates through February 28,
1997 (the "Acquired Ciba Business");
- the composite products division of Hercules Incorporated including
Hercules' carbon fibers and prepreg businesses, on June 27, 1996 (the
"Acquired Hercules Business"); and
- the satellite business and rights to certain technologies from Fiberite,
Inc., on September 30, 1997.
All of the above acquisitions were accounted for under the purchase method
of accounting. Accordingly, the consolidated balance sheets, statements of
operations, stockholders' equity, and cash flows include the financial position,
results of operations and cash flows of the businesses acquired as of such dates
and for such periods that these businesses were owned by Hexcel.
ACQUIRED CLARK-SCHWEBEL BUSINESS
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from Clark-Schwebel. The Acquired Clark-Schwebel
Business is engaged in the manufacture and sale of high-quality fiberglass
fabrics, which are used to make printed circuit boards ("PCBs") for electronic
equipment such as computers, cellular telephones, televisions and automobiles.
The Acquired Clark-Schwebel Business also produces high performance specialty
products for use in insulation, filtration, wall and facade claddings, soft body
armor and reinforcements for composite materials. The Acquired Clark-Schwebel
Business currently operates four manufacturing facilities in the southeastern
U.S. and has approximately 1,300 full time employees. As part of this
acquisition, Hexcel also acquired Clark-Schwebel's equity ownership interests in
the following three joint ventures, which are incorporated using the equity
method of accounting:
- a 43.6% share in CS-Interglas AG ("CS-Interglas"), headquartered in
Germany, together with fixed-price options to increase this equity
interest to 84.0%. Hexcel's acquisition of the CS-Interglas equity
interest and related options was completed on December 23, 1998;
- a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"),
headquartered in Japan, which in turn has its own joint venture with
AlliedSignal Inc. in Taiwan; and
- a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"),
headquartered in the United States.
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian electronics and telecommunications industries. CS Tech-Fab
manufactures non-woven materials for roofing, construction and other specialty
applications. The fixed-price options to increase the equity interest in
CS-Interglas are, in the Company's opinion, significantly higher than their
current fair market value. Accordingly, the Company does not currently
anticipate exercising the options, at the stated price, before their expiration
on December 31, 1999. The unconsolidated revenues in 1998 for these joint
ventures were in excess of $300 million.
The acquisition of the Acquired Clark-Schwebel Business was completed
pursuant to an Asset Purchase Agreement dated July 25, 1998, as amended, by and
among Hexcel, Stamford CS Acquisition Corp., and Clark-Schwebel (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 $472.8 million in cash, including the
$19.0 million paid on December 23, 1998. Hexcel also agreed to lease $50.0
million of property, plant and equipment used in the acquired business from an
affiliate of Clark-Schwebel, pursuant to a long-term lease with purchase
options. Refer to "Financial Resources" for a discussion on acquisition
financing.
35
<PAGE>
ACQUIRED CIBA BUSINESS
Hexcel acquired most of Ciba's composite materials, parts and structures
businesses on February 29, 1996, Ciba's Austrian composites business on May 30,
1996, and various remaining assets of Ciba's worldwide composites division at
various dates through February 28, 1997. The Acquired Ciba Business is engaged
in the manufacture and marketing of reinforcement fabrics and lightweight,
high-performance composite materials, parts and structures for commercial
aerospace, space and defense, general industrial and recreation markets.
The acquisition of the Acquired Ciba Business was consummated pursuant to a
Strategic Alliance Agreement dated as of September 29, 1995, among Ciba and
Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic
Alliance Agreement, the Company acquired the assets (including the capital
shares of certain non-U.S. subsidiaries) and assumed the liabilities of the
Acquired Ciba Business, other than certain excluded assets and liabilities, in
exchange for: (a) 18,022 newly issued shares of Hexcel common stock; (b) $25.0
million in cash; (c) senior subordinated notes in an aggregate principal amount
of $37.5 million, with a fair value of $34.5 million; and (d) senior demand
notes in an aggregate principal amount equal to the cash on hand at certain of
the non-U.S. subsidiaries included in the Acquired Ciba Business. The total
aggregate purchase price for the net assets acquired was approximately $209
million.
ACQUIRED HERCULES BUSINESS
Hexcel acquired the assets of the composite products division of Hercules on
June 27, 1996. The Acquired Hercules Business, which manufactures carbon fibers
and prepregs for commercial aerospace, space and defense, general industrial and
recreation markets, was purchased for $139.4 million in cash.
ACQUIRED FIBERITE ASSETS
On September 30, 1997, the Company acquired from Fiberite its satellite
business consisting of intangible assets and inventory, and certain
non-exclusive worldwide rights to other prepreg technologies, for $37.0 million
in cash. The acquisition was substantially downsized from the original agreement
whereby the Company had, subject to certain terms and conditions, committed to
purchase selected assets and businesses of Fiberite for approximately $300
million. As a result of the downsized transaction, the Company wrote-off $5.0
million of acquisition and financing costs to business acquisition and
consolidation expenses in 1997. In addition, the Company expensed $8.0 million
of acquired in-process research and technology purchased from Fiberite which is
included in the 1997 business acquisition and consolidation expenses.
Substantially all of the $37.0 million purchase price, less the $8.0 million
write-off of the acquired in-process research and technology, was allocated to
intangible assets.
Further discussion and analysis of the Company's business acquisitions is
contained in Notes 1, 2 and 3 to the accompanying consolidated financial
statements.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
NET SALES: Net sales for 1998 were $1,089.0 million, compared with net sales
for 1997 of $936.9 million. The results for 1998 include the results of the
Acquired Clark-Schwebel Business from the date of acquisition, September 15,
1998, through December 31, 1998. Excluding the results of the Acquired Clark-
Schwebel Business, 1998 sales were approximately $1,030.6 million, a 10%
increase over 1997. The sales growth was primarily due to strong sales of
composite products to the commercial aerospace market, primarily in Europe, as
well as to the space and defense markets. On a constant currency basis, 1998
sales would not have been materially different than reported.
36
<PAGE>
Pro forma net sales for 1998 and 1997 by product group and market segment,
after giving effect to the acquisition of the Acquired Clark-Schwebel Business
as if the transaction had occurred at the beginning of the year, were as
follows:
<TABLE>
<CAPTION>
COMMERCIAL SPACE & GENERAL
AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
----------- ----------- ----------- ----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1998 PRO FORMA NET SALES
Reinforcement products.................... $ 46.2 $ 26.4 $ 179.1 $ 101.2 $ 17.6 $ 370.5
Composite materials....................... 468.0 89.6 -- 57.4 38.6 653.6
Engineered products....................... 194.9 11.2 -- 4.5 -- 210.6
----------- ----------- ----------- ----------- ----- ---------
$ 709.1 $ 127.2 $ 179.1 $ 163.1 $ 56.2 $ 1,234.7
Total................................... 57% 10% 15% 13% 5% 100%
----------- ----------- ----------- ----------- ----- ---------
----------- ----------- ----------- ----------- ----- ---------
1997 PRO FORMA NET SALES
Reinforcement products.................... $ 49.5 $ 13.9 $ 203.8 $ 130.1 $ 13.0 $ 410.3
Composite materials....................... 403.9 64.2 -- 63.9 53.4 585.4
Engineered products....................... 169.8 10.2 -- 1.4 -- 181.4
----------- ----------- ----------- ----------- ----- ---------
$ 623.2 $ 88.3 $ 203.8 $ 195.4 $ 66.4 $ 1,177.1
Total................................... 53% 7% 17% 17% 6% 100%
----------- ----------- ----------- ----------- ----- ---------
----------- ----------- ----------- ----------- ----- ---------
</TABLE>
The 14% growth in pro forma net sales to the commercial aerospace market
from 1997 to 1998 was largely attributable to increased sales of composite
materials and reflects the increase in commercial aircraft build rates by the
Company's two largest customers, The Boeing Company ("Boeing") and Airbus
Industrie ("Airbus"). The increase also reflects an improvement in the
engineered products segment's shipments of retrofit interiors to airline
customers.
Approximately 35% and 36% of Hexcel's 1998 and 1997 net sales, respectively,
were identifiable as sales to Boeing and related subcontractors. Of the 35% of
sales attributable to Boeing and its subcontractors, 32% and 3% related to
commercial aerospace and space and defense market applications, respectively.
Approximately 11% and 10% of Hexcel's 1998 and 1997 net sales, respectively,
were identifiable as sales to Airbus and related subcontractors. Reported
commercial aircraft deliveries by Boeing and Airbus improved significantly in
1998, from a combined 557 aircraft in 1997 to 788 aircraft in 1998, including
559 and 229 deliveries from Boeing and Airbus, respectively. Depending on the
product, orders placed with Hexcel are received anywhere between one and
eighteen months prior to delivery of the aircraft to the customer. The Company
sells material for every model of commercial aircraft sold by Boeing and Airbus,
with sales per aircraft ranging from $0.2 million to over $1.0 million. Based on
published projections, combined deliveries for Boeing and Airbus are expected to
peak at 913 in 1999, before declining to approximately 800 in 2000. As the
Company supplies its products ahead of the delivery of a commercial aircraft, it
will start to see the impact of reduced Boeing production rates by summer 1999.
The Company's sales to regional and general aviation aircraft manufacturers
remain robust.
During 1998, the Company's commercial aerospace customers started
emphasizing the need for material yield improvement and cost and inventory
reduction throughout the industry's supply chain. In response to these
pressures, the Company reduced the price of certain products in 1999. Further,
the Company is aware that one customer is planning, in the third quarter of
1999, to substitute 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, the Company's various cost
reduction and efficiency improvement programs are focused on mitigating the
impact in whole or in part. Meanwhile the Company's sales of products used to
retrofit aircraft interiors continue to grow with a strong initial reception for
its kit product which extends the size of overhead stowage bins in narrow aisle
aircraft.
37
<PAGE>
Taking all of the above factors into account, the Company currently
anticipates that its net sales to the commercial aircraft market will show a
moderate reduction in 1999 compared to 1998 pro forma net sales, with the
greater impact being seen in the second half of the year.
Space and defense pro forma net sales increased 44% from 1997 to 1998,
reflecting an increase in sales of reinforcement products and composite
materials to select military and space programs, as well as the Company's
acquisition of Fiberite's satellite business on September 30, 1997. The Company
currently anticipates that its net sales to space and defense applications will
grow in 1999 over 1998 pro forma net sales, but not as rapidly as was seen in
1998.
In the last quarter of 1998, the Company experienced cancellations of
certain carbon fiber orders. 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
are therefore anticipating lower purchasing needs for 1999. These factors
resulted in surplus inventories throughout the supply chain, including Hexcel,
at December 31, 1998 and a significant reduction in the anticipated carbon fiber
production for 1999 as compared to 1998. The increase in worldwide carbon fiber
capacity limits both the Company's ability to sell its short-term excess
capacity to other markets and prices at which such surplus capacity can be sold.
Despite these short-term impacts, the Company still anticipates growth in
carbon fiber sales in 2000 and beyond as new military aircraft and launch
vehicle programs, in both the U.S. and Europe, enter full-scale production. The
military market uses a higher percentage of advanced structural materials and
higher value products than the commercial market. The Company is currently
qualified to supply materials to a broad range of military aircraft and
helicopters scheduled to enter full-scale production at the start of the next
decade. These programs include V-22 (Osprey) tilt-roter, F-22 (Raptor),
F/A-18E/F (Hornet), C-17 transport, European Fighter Aircraft (Typhoon), RAH-66
(Comanche) and NH90 helicopter.
Pro forma electronics net sales decreased 12% from 1997 to 1998. In the
second and third quarters of 1998, the electronics industry, including the
Company, experienced a worldwide reduction in sales volume, primarily resulting
from inventory adjustments across the supply chain. Towards the end of the third
quarter and into the fourth quarter of 1998, the Company experienced increased
order volume for woven fiberglass products used in electronic PCB applications,
suggesting an end to the inventory correction. However, intense competition from
manufacturers located in Asia continues to place pressure on volumes and prices
for these products. In light of market uncertainties, the Company cannot predict
as to when these conditions in the electronic market for woven fiberglass
products may recover and therefore continues to pursue opportunities to reduce
the cost of its products and enhance its ability to compete effectively. The
Company has been successful in partially offsetting these price reductions by
obtaining lower raw material prices. Nevertheless, the Company anticipates that
its electronic net sales in 1999 will be less than 1998 pro forma net sales.
Pro forma general industrial net sales for advanced structural materials
decreased 16% from 1997 to 1998, primarily reflecting a reduction in the level
of soft body armor sales to various government agencies. Nevertheless, the
Company anticipates that net sales to certain of the emerging markets for the
Company's products in the general industrial market will continue to grow in
1999 compared to 1998 pro forma net sales, with growth opportunities coming from
ground transportation, architectural and civil engineering, wind energy, and
soft body armor applications. This growth is currently anticipated to offset the
reduction in net sales in the commercial aerospace market.
Pro forma recreation net sales decreased 15% from 1997 to 1998, reflecting
reduced customer demand for certain products in this market, including, one
particular customer who is changing the design of many of its athletic shoes to
alternative materials. The Company currently anticipates that its 1999
recreation market revenues will be at the same level as 1998.
38
<PAGE>
Backlog for aerospace materials was $452.1 million as of December 31, 1998,
a 5% decrease over backlog as of December 31, 1997. The decrease in backlog
reflects a number of factors, including a continuing trend toward shorter lead
times and better supply-chain management by the industry overall. In light of
changing conditions in the aerospace industry, twelve month backlog information
may no longer be a meaningful trend indicator. The Company continues to closely
watch the economic situation in Asia, along with overall aircraft orders and
production trends, to monitor future sales.
Backlog for the non-aerospace markets was $41.0 million as of December 31,
1998, compared to $43.5 million as of December 31, 1997. The decrease in backlog
is primarily attributable to a decrease in orders from customers in the
recreation market. Customers in the electronics, general industrial and
recreation markets generally operate with little advance purchasing and thus,
backlog is subject to certain fluctuations. The Acquired Clark-Schwebel Business
also operates with nominal backlog. The Company's backlog in the non-aerospace
markets for the next twelve months is therefore not necessarily a meaningful
indicator of future sales.
GROSS MARGIN: Gross margin for 1998 was $271.3 million, or 24.9% of net
sales, compared with $222.6 million, or 23.8% of net sales, for 1997. Excluding
the Acquired Clark-Schwebel Business, 1998 gross margin was also 24.9%. The
improvement in 1998 gross margin relative to 1997 is the result of higher sales
volume and the benefit from the Company's 1996 consolidation and restructuring
program. While gross margin for 1998 increased over 1997, on a quarterly trend
basis, the Company's gross margin percentage has leveled off as the Company's
1996 business consolidation program has approached completion and commercial
aerospace growth has flattened. The Company is, however, pursuing efforts to
reduce its cost structure and increase its productivity through its Lean
Enterprise program, which was extended to all U.S. locations in the latter part
of 1998 and which will be extended to its European facilities in 1999. The
expected improvements in cost and productivity will be offset by customer demand
for reductions in the costs of the products that they purchase from the Company.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$117.9 million in 1998, or 10.8% of net sales. This compared to $102.4 million,
or 10.9% of net sales for 1997. The aggregate dollar increase in SG&A was
primarily attributable to the increased sales volume in commercial aerospace and
the Acquired Clark-Schwebel Business.
RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses were $23.6 million
in 1998, or 2.2% of net sales. This compared to $18.4 million, or 2.0% of net
sales for 1997. The aggregate dollar increase in R&T was attributable to
additional expenditures in 1998 resulting from an increased commitment to R&T
activities and, to a lesser extent, the Acquired Clark-Schwebel Business.
OPERATING INCOME: Operating income increased from $76.5 million, or 8.2% of
net sales, in 1997 to $117.0 million, or 10.8% of net sales, in 1998. The
aggregate increase in operating income reflects the higher sales volume,
improved gross margins, a $12.6 million decrease in business acquisition and
consolidation expenses and $7.6 million from the Acquired Clark-Schwebel
Business. Excluding business acquisition and consolidation expenses, operating
income as a percentage of sales increased from 10.9% in 1997 to 11.9% in 1998.
INTEREST EXPENSE: Interest expense was $38.7 million, or 3.6% of net sales,
for 1998 compared to $25.7 million, or 2.7% of net sales, for 1997. The increase
in interest expense was primarily due to the additional financing required for
the Acquired Clark-Schwebel Business as well as working capital needs, and a
$1.6 million write-off of capitalized loan fees relating to the Company's
previous credit facilities.
PROVISION FOR INCOME TAXES: The effective income tax rate for 1998 was 36%.
For the year ended December 31, 1997, the benefit for income taxes was $22.9
million, which included a $39.0 million reversal of a U.S. tax valuation
allowance.
Prior to September 30, 1997, the Company had fully provided valuation
allowances against its U.S. net deferred tax assets as there were uncertainties
regarding the Company's ability to generate sufficient future
39
<PAGE>
taxable income to realize these net deferred tax assets. On September 30, 1997,
the Company reversed its U.S. tax valuation allowance as it was more likely than
not that these tax assets would be realized. As a result, excluding the $39.0
million U.S. valuation allowance reversal, no provision for U.S. federal income
taxes had been recorded for the first nine months of 1997 due to the utilization
of net operating loss carryforwards. The Company continues to reserve the
balance of the net deferred tax assets of its Belgium operations.
NET INCOME: Net income for 1998 was $50.4 million or $1.24 per diluted
share compared with $73.6 million or $1.74 per diluted share for 1997. As part
of the Acquired Clark-Schwebel Business, net income for 1998 includes $0.5
million of equity in earnings from affiliated companies. Pro forma net income,
after giving effect to the acquisition of the Acquired Clark-Schwebel Business
as if the transaction had occurred at the beginning of the year, was $49.5
million. Excluding business acquisition and consolidation expenses of $12.7
million and $25.3 million in 1998 and 1997, respectively, and assuming a U.S.
effective income tax rate of 36% in 1997, net income would have been $1.43 and
$1.17 per diluted share in 1998 and 1997, respectively.
As of December 31, 1998 and 1997, there were 36.3 million and 36.9 million
shares of Hexcel common stock outstanding, respectively. See Note 13 to the
accompanying consolidated financial statements for the calculation, including
the number of shares used, of diluted net income per share.
1997 COMPARED TO 1996
NET SALES: Net sales for 1997 were $936.9 million, compared with net sales
for 1996 of $695.3 million. On a pro forma basis, including full year results of
the Acquired Ciba and Hercules Businesses, 1996 sales were approximately $798.5
million. The 17% increase from pro forma 1996 sales was largely attributable to
improved sales of composite materials to commercial aerospace customers and
sales of engineered products to Boeing. This increase was partially offset by
the translation effect of the strengthening U.S. dollar. On a constant currency
basis, 1997 sales would have been approximately $38.0 million higher, reflecting
a 22% increase over 1996 pro forma sales.
Approximately 46% of Hexcel's 1997 sales were to Boeing, Airbus, and related
subcontractors, as compared to 32% in 1996. The increase is primarily due to the
growth of the commercial aerospace market and to a much lesser extent Boeing's
acquisition of McDonnell Douglas Corporation, which was completed on August 1,
1997. Reported commercial aircraft deliveries by Boeing and Airbus improved
significantly in 1997, from a combined 397 aircraft in 1996 to 557 aircraft in
1997, including 375 from Boeing and 182 deliveries by Airbus. As previously
discussed, depending on the product, orders placed with Hexcel are received
anywhere between one and eighteen months prior to delivery of the aircraft to
the customer. The Company sells material for every model of commercial aircraft
sold by Boeing and Airbus, with sales per aircraft ranging from $0.2 million to
over $1.0 million per aircraft on the Boeing 777.
Net sales to third-party customers by product group and market segment for
1997 and on a pro forma basis for 1996, which includes full year results of the
Acquired Ciba and Hercules Businesses, are
40
<PAGE>
presented below. These net sales and pro forma net sales, excluding the effects
of the Acquired Clark-Schwebel Business were:
<TABLE>
<CAPTION>
COMMERCIAL SPACE & GENERAL
AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL
----------- ----------- ------------- ----------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1997 NET SALES
Reinforcement products...................... $ 23.7 $ 13.9 $ 48.3 $ 71.2 $ 13.0 $ 170.1
Composite materials......................... 403.9 64.2 -- 63.9 53.4 585.4
Engineered products......................... 169.8 10.2 -- 1.4 -- 181.4
----------- ----- ----- ----------- ----- ---------
$ 597.4 $ 88.3 $ 48.3 $ 136.5 $ 66.4 $ 936.9
Total..................................... 64% 9% 5% 15% 7% 100%
----------- ----- ----- ----------- ----- ---------
----------- ----- ----- ----------- ----- ---------
1996 PRO FORMA NET SALES
Reinforcement products...................... $ 17.4 $ 20.2 $ 47.2 $ 69.6 $ 27.4 $ 181.8
Composite materials......................... 317.1 60.8 -- 60.8 63.3 502.0
Engineered products......................... 102.5 10.4 -- 1.8 -- 114.7
----------- ----- ----- ----------- ----- ---------
$ 437.0 $ 91.4 $ 47.2 $ 132.2 $ 90.7 $ 798.5
Total..................................... 55% 11% 6% 17% 11% 100%]
----------- ----- ----- ----------- ----- ---------
----------- ----- ----- ----------- ----- ---------
</TABLE>
The 37% growth in net sales to the commercial aerospace market from 1996 to
1997 was largely attributable to increased sales of composite materials and
engineered products. The improvement in sales of composite materials reflects
the commercial aircraft build rate increase noted above. The improvement for
engineered products primarily reflects the production of structural and interior
components outsourced to Hexcel by Boeing throughout 1997, as well as strong
shipments of retrofit interiors to airline customers.
Space and defense net sales decreased 3% from 1996 to 1997, reflecting a
decrease in sales of reinforcement products, which were partially offset by
improved sales of composite materials to select military programs.
Electronics net sales in 1996 were comparable to 1997. The 3% increase in
general industrial net sales was largely due to improved sales of composite
materials for various transportation applications. Recreation net sales
decreased 27% from 1996 to 1997, reflecting the shift in emphasis of production
to the commercial aerospace market as a result of the increased demand. Hexcel
anticipated sales to the electronics, general industrial and recreation markets
to grow modestly throughout 1998.
GROSS MARGIN: Gross margin for 1997 was $222.6 million, or 23.8% of net
sales, compared with $141.3 million, or 20.3% of net sales, for 1996. The
improvement in 1997 gross margin relative to 1996 was the result of higher sales
volume, expansion of the Company's fibers capacity and continued advances in
manufacturing productivity resulting from the Company's consolidation and
restructuring activities. Product price changes were not a significant factor in
the 1997 gross margin improvement.
The integration of the Acquired Ciba and Hercules Businesses into Hexcel,
including the consolidation and rationalization of manufacturing facilities and
processes, is a primary objective of the business consolidation program. While
the Company began to realize the productivity improvements in 1997 as a result
of the program, these improvements will not be fully realized until 1999.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$102.4 million in 1997, or 10.9% of net sales. This compares to $79.4 million,
or 11.4% of net sales for 1996. The aggregate dollar increase in SG&A was
primarily attributable to the Acquired Ciba and Hercules Businesses.
RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: R&T expenses were $18.4 million
in 1997, or 2.0% of net sales. This compared to $16.7 million, or 2.4% of net
sales for 1996. The aggregate dollar increase in R&T was attributable to the
additional activity from the Acquired Ciba and Hercules Businesses.
41
<PAGE>
OPERATING INCOME: Operating income increased from $2.8 million, or 0.4% of
net sales, in 1996 to $76.5 million, or 8.2% of net sales, in 1997. The
aggregate increase in operating income reflects the higher sales volume,
improved gross margins and a $17.0 million decrease in business acquisition and
consolidation expenses. Excluding business acquisition and consolidation
expenses, operating income as a percentage of sales increased from 6.5% in 1996
to 10.9% in 1997.
INTEREST EXPENSE: Interest expense was $25.7 million, or 2.7% of net sales,
for 1997 compared to $21.5 million, or 3.1% of net sales, for 1996. The increase
in interest expense primarily represents the cost of financing the acquisitions
of the Acquired Ciba and Hercules Businesses. The 1996 amount also includes a
$3.4 million write-off of capitalized debt issuance costs.
PROVISION FOR INCOME TAXES: As previously discussed, in 1997 the Company
reversed $39.0 million of its U.S. valuation allowance reserves in accordance
with SFAS 109. Prior to 1997, the Company had fully provided valuation allowance
reserves against its net deferred tax assets in the U.S. and Belgium where there
were uncertainties in generating sufficient future taxable income.
NET INCOME (LOSS): Net income for 1997 was $73.6 million or $1.74 per
diluted share compared with a net loss of $19.2 million or $0.58 per diluted
share for 1996. Excluding the $25.3 million in business acquisition and
consolidation expenses and assuming a U.S. effective income tax rate of 36%,
1997 adjusted net income would have been $1.17 per diluted share. Pro forma net
income for 1996 would have been $0.48 per diluted share on a comparable basis.
There were 36.7 million weighted average shares outstanding in 1997 compared
to 33.4 million during 1996. The increase in the number of weighted average
shares in 1997 was primarily attributable to the full year impact of the
delivery of 18.0 million newly issued shares of Hexcel common stock to Ciba on
February 29, 1996 in connection with the purchase of the Acquired Ciba Business.
As of December 31, 1997, there were 36.9 million shares of Hexcel common stock
issued and outstanding. See Note 13 to the accompanying consolidated financial
statements for the calculation, including the number of shares used, of diluted
net income per share.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL RESOURCES
In connection with the acquisition of 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, prior to the issuance in January 1999 of
$240.0 million principal amount of 9.75% Senior Subordinated Notes due 2009 (the
"Senior Subordinated Notes"), provided for up to $910.0 million of borrowing
capacity. Available committed borrowing capacity under the Senior Credit
Facility at December 31, 1998, was $281.0 million, of which $115.5 million could
have been drawn after recognition of certain loan covenants that form part of
this credit agreement.
On January 21, 1999, the Company issued $240.0 million of Senior
Subordinated Notes. Net proceeds of approximately $231 million from this
offering were used to repay amounts owed under the Senior Credit Facility.
Simultaneously with the closing of this offering, the Company amended the Senior
Credit Facility to, among other things, reduce the available borrowing capacity
to $672.0 million, modify certain financial covenants and to permit the
offering. On February 17, 1999, the Company also redeemed $12.5 million of its
increasing rate senior subordinated notes payable to Ciba. Such repayment was
financed with borrowings under the Company's Senior Credit Facility. The Company
anticipates making further redemptions as it generates free cash flow.
In connection with the purchase of the Acquired Hercules Business in 1996,
Hexcel obtained a revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility was obtained to:
42
<PAGE>
(a) refinance outstanding indebtedness under a senior secured credit facility;
(b) finance the purchase of the Acquired Hercules Business; and (c) provide for
the ongoing working capital and other financing requirements of the Company,
including business consolidation activities, on a worldwide basis. The Revolving
Credit Facility was amended in March 1998 (the "Amended Revolving Credit
Facility") and in September 1998, the Senior Credit Facility replaced the
Amended Revolving Credit Facility. The Amended Revolving Credit Facility, prior
to its replacement, had provided up to $355.0 million of borrowing capacity and
would have expired in March 2003.
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. Nonetheless, one of the Company's primary goals over
the next few years is generating operating cash flow to reduce debt, including
reducing working capital. Further discussion of the Company's financial
resources is contained in Note 7 to the accompanying consolidated financial
statements.
CAPITAL LEASE OBLIGATION
Hexcel entered into a $50.0 million capital lease for property, plant and
equipment used in the Acquired Clark-Schwebel Business. The lease expires in
September 2006 and includes various purchase options.
STOCK BUYBACK PLANS
In 1998, the Company's Board of Directors approved plans to repurchase up to
$20.0 million of the Company's common stock. During the year ended December 31,
1998, the Company repurchased 0.8 million shares of its common stock at an
average cost of $12.32 per share, for a total of $10.0 million. The Board of
Directors may also approve additional stock buybacks from time to time subject
to market conditions and the terms of the Company's credit agreements and
indentures. The purchases may be made in the open market at prevailing prices or
in privately negotiated transactions. The Company does not currently anticipate
repurchasing additional common stock in 1999.
OTHER CAPITAL COMMITMENTS
Mandatory redemption of the Company's 7% convertible subordinated
debentures, due 2011, is scheduled to begin in 2002 through annual sinking fund
requirements of $1.1 million in 2002 and $1.8 million in each year thereafter.
The Company has total estimated financial commitments to its proposed joint
ventures in China and Malaysia of approximately $31 million. These commitments
are expected to be made in increments through 2001.
CAPITAL EXPENDITURES
Capital expenditures were $66.5 million in 1998 compared with $57.4 million
in 1997 and $43.6 million in 1996. Pro forma 1998 capital expenditures were
approximately $70 million. The increase in 1998 expenditures over prior years
reflects the impact of the Company's various acquisitions on capital
requirements, including the impact of certain business consolidation activities.
The increase also reflects expenditures on manufacturing equipment necessary to
improve manufacturing processes and to expand production capacity for select
product lines. As a result of the Company's consolidation activities and the
global capacity review that will be performed in 1999, the Company expects that
capital spending will decrease in 1999 to approximately $45 to $50 million.
43
<PAGE>
ADJUSTED EBITDA, CASH FLOWS AND RATIO OF EARNINGS TO FIXED CHARGES
1998: Earnings before business acquisition and consolidation expenses,
other income, interest, bankruptcy reorganization expenses, taxes, depreciation
and amortization ("Adjusted EBITDA") was $177.2 million. Pro forma Adjusted
EBITDA, giving effect to the acquisition of the Acquired Clark-Schwebel Business
as if the transaction had occurred at the beginning of the year, was
approximately $208 million. Net cash provided by operating activities was $93.8
million, as $50.4 million of net income and $54.3 million of non-cash
depreciation, amortization and deferred income taxes, was partially offset by
increased working capital of $14.5 million which resulted from the increase in
sales volume.
Net cash used for investing activities was $539.2 million, reflecting $472.8
million of net cash paid for the Acquired Clark-Schwebel Business, and $66.5
million of capital expenditures. Net cash provided by financing activities was
$440.7 million, primarily reflecting $459.7 million of net funds borrowed under
the Senior and Revolving Credit Facilities, including the financing of the
Acquired Clark-Schwebel Business, offset in part by the repurchase of $10.0
million of treasury stock and $10.3 million of debt issuance costs related to
the Senior and Amended Revolving Credit Facilities.
1997: Adjusted EBITDA for 1997 was $137.6 million and pro forma Adjusted
EBITDA was $188.3 million. Net cash provided from operations was $29.2 million
including $33.6 million of business acquisition and consolidation payments and a
$46.7 million increase in working capital as a result of the increase in sales
volume.
Net cash used for investing activities was $82.9 million, including $57.4
for capital expenditures and $37.0 million for the Fiberite transaction,
partially offset by $13.5 million of proceeds from the sale of the Anaheim
facility and the Company's 50% interest in the Knytex joint venture to Owens
Corning. These investing activities were funded by cash from operations and
$57.2 million of borrowings primarily under the Revolving Credit Facility.
1996: Adjusted EBITDA was $71.9 million. Pro forma Adjusted EBITDA, giving
effect to the acquisitions of the Acquired Ciba and Hercules Businesses as if
those transactions had occurred at the beginning of the year, was approximately
$86 million.
Net cash provided by operating activities was $33.8 million. Net cash used
for investing activities was $206.4 million, including $164.4 million used in
connection with the acquisitions of the Acquired Ciba and Hercules Businesses
and $43.6 million for capital expenditures. Net cash provided by financing
activities, including borrowings under the Revolving Credit Facility and
proceeds from the issuance of $114.5 million in convertible subordinated notes,
was $174.4 million. Non-cash financing of the purchase of the Acquired Ciba
Business included the issuance of debt securities valued at $37.2 million and
the issuance of 18.0 million shares of Hexcel common stock valued at $144.2
million.
Adjusted EBITDA and pro forma Adjusted EBITDA have been presented to provide
a measure of Hexcel's operating performance that is commonly used by investors
and financial analysts to analyze and compare companies. Adjusted EBITDA may not
be comparable to similarly titled financial measures of other companies.
Adjusted EBITDA and pro forma Adjusted EBITDA do not represent alternative
measures of 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
44
<PAGE>
principles. A reconciliation of net income to EBITDA and Adjusted EBITDA for
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net income (loss)........................................... $ 50.4 $ 73.6 $ (19.1)
Provision (benefit) for income taxes........................ 28.4 (22.9) 3.4
Interest expense............................................ 38.7 25.7 21.5
Depreciation and amortization expense....................... 47.5 35.9 26.7
Equity in earnings of affiliated companies.................. (0.5) -- --
--------- --------- ---------
EBITDA...................................................... 164.5 112.3 32.5
Business acquisition and consolidation expenses............. 12.7 25.3 42.4
Other income................................................ -- -- (3.0)
--------- --------- ---------
Adjusted EBITDA............................................. $ 177.2 $ 137.6 $ 71.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
The ratio of earnings to fixed charges for 1998 and 1997 was 2.9. In 1996,
the deficiency of earnings to fixed charges was $15.8 million. The calculation
of earnings to fixed charges assumes that one-third of the Company's rental
expense, representing a reasonable approximation of such rentals, is
attributable to interest expense.
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. These actions are intended to eliminate redundancies,
improve manufacturing planning, and enhance customer service, and resulted in
the elimination of approximately 100 operating, sales, marketing and
administrative positions. The cost of these actions, together with a $6.4
million non-cash charge for writing down certain assets held for disposition and
another $0.7 million incurred for costs related to a proposed acquisition that
was not consummated, resulted in the recognition of $12.7 million in business
acquisition and consolidation expenses in 1998. Beginning in 1999, the Company
anticipates annual cash savings from these business consolidation activities to
be approximately $10 million.
In addition to these initiatives, the Company expects to complete a global
capacity review of its worldwide facilities requirements during 1999. On March
16, 1999, the Company announced the closing of its Cleveland, Georgia facility,
which currently employs 100 people and produces fabrics for the electronics
market. Production equipment from the facility will be relocated to the
Company's Anderson, S.C., facility, with the closure expected to be completed by
July 1, 1999. Anticipated cash savings from this business consolidation activity
will help offset competitive pricing pressures in the Company's electronics
market. In addition to this facility closure, the global capacity review may
result in the closing or right-sizing of additional facilities and, as a result,
additional consolidation charges will be recognized in 1999.
In 1996, Hexcel announced plans to consolidate the Company's operations over
a period of three years. The objective of the program was to integrate acquired
assets and operations into Hexcel, and to reorganize the Company's manufacturing
and research activities around strategic centers dedicated to select product
technologies. The business consolidation program was also intended to eliminate
excess manufacturing capacity and redundant administrative functions. Specific
actions of the consolidation program included the elimination of 245
manufacturing, marketing and administrative positions, the closure of the
Anaheim, California facility acquired in connection with the purchase of the
Acquired Ciba Business (the building was sold in 1997 for net proceeds of
approximately $8.5 million), the reorganization of the Company's manufacturing
operations in Europe, the consolidation of the Company's U.S. special
45
<PAGE>
process manufacturing activities, and the integration of sales, marketing and
administrative resources. Management expected that this consolidation program
would take approximately three years to complete, in part because of the
aerospace industry requirements to "qualify" specific equipment and
manufacturing facilities for the manufacture of certain products. These
qualification requirements increase the complexity, cost and time of moving
equipment and rationalizing manufacturing activities.
As of December 31, 1998, the primary remaining activities of this
consolidation program relate to the Company's European operations and certain
customer qualifications of equipment transferred within the U.S. The Company
expects that activities related to this consolidation program will be completed
in 1999. Total expenses for this program, which remains unchanged since December
31, 1997, were $54.7 million, excluding $13.0 million of expenses relating to
the Fiberite transaction, which were not included in the original program. The
Company anticipates no additional expenses in relation to this consolidation
program.
The Company initially estimated that 1996 business consolidation program
would result in annual cost reductions of $32 million per year, beginning in
1999. Due to the nature of the program (i.e., consolidation of existing and
acquired businesses, while at the same time the Company was experiencing an
increase in its commercial aerospace market), the exact amount of annual savings
is difficult to isolate. However, the Company continues to believe that cost
savings have been achieved and, upon completion of the program, estimated cost
savings will equal or exceed the target of $32 million per year. The program was
a key contributor to the Company's improvement in operating margins in 1997 and
1998.
Further discussion and analysis of the Company's business consolidation
programs is contained in Note 3 to the accompanying consolidated financial
statements.
MARKET RISKS
The Company's financial position, results of operations and cash flows are
subject to market risks, which primarily include fluctuations in interest rates
and exchange rate variability.
INTEREST RATE RISKS
The Company's long-term debt bears interest at both fixed and variable
rates. As a result, the Company's results of operations are affected by interest
rate changes on its variable rate debt. In order to mitigate a portion of this
risk, in 1998 the Company entered into an interest rate cap agreement which
covers a notional amount of $50.0 million of the Company's variable rate debt
under the Senior Credit Facility. In addition, on January 21, 1999, the Company
issued $240.0 million of 9.75% Senior Subordinated Notes, due 2009. Net proceeds
of approximately $231 million from this offering were used to redeem variable
rate amounts owed under the Senior Credit Facility. On February 17, 1999, the
Company repaid $12.5 million of its senior subordinated notes payable to Ciba,
which was fixed (but increasing) rate debt. The repayment was financed with
borrowings under the Company's Senior Credit Facility.
The table below presents the impact on the Company's net income and pro
forma net income, as if the acquisition of the Acquired Clark-Schwebel Business
had occurred at the beginning of the year and, after adjusting interest expense
for the above refinancings, of a 10% favorable and a 10% unfavorable change in
the Company's variable rate debt:
<TABLE>
<CAPTION>
10% 10%
FAVORABLE UNFAVORABLE
AS REPORTED CHANGE CHANGE
----------- ----------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
Net income............................................ $ 50.4 $ 52.0 $ 48.9
Pro forma net income.................................. 49.5 52.4 46.5
</TABLE>
46
<PAGE>
FOREIGN CURRENCY RISKS
The Company is subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers using non-local or
"non-functional" currencies. In general, the Company maintains a "naturally
hedged" position where it balances customer receipts and supplier payments with
similar currencies. Net exposures are hedged by purchasing foreign currency
forward contracts. Consistent with the nature of the economic hedge of such
foreign exchange contracts, any unrealized gain or loss would be offset by
corresponding decreases or increases, respectively, of the underlying
transaction being hedged. As of December 31, 1998, the Company had limited net
exposure in relation to its non-functional currencies as well as a limited
amount of outstanding foreign exchange contracts. Accordingly, the impact of a
10% appreciation and a 10% depreciation of the U.S. dollar against the Company's
net non-functional currencies and foreign exchange contracts would not represent
a material potential gain or loss in fair value, earnings or cash flows. In
addition, the Company is generally not exposed to Asian currencies as
transactions with customers in Pacific Rim countries are predominately
denominated in U.S. dollars, British pounds or French francs.
The primary currencies for which the Company has foreign currency
translation exchange rate exposure are the U.S. dollar versus the British pound,
French franc, German mark, Belgium franc, Austrian schilling and Spanish peseta.
With the introduction of the Euro, the Company's primary exposures are now
between the U.S. dollar, British pound and the Euro. The Company does not
participate in hedging activities to offset translation effects of changes in
foreign exchange rates on the Company's consolidated financial position, results
of operations and cash flows. The impact of a 10% appreciation or 10%
depreciation of the U.S. dollar against the Company's net underlying foreign
currency translation exposures could be significant.
OTHER RISKS
As of December 31, 1998, the aggregate fair values of the Company's
convertible subordinated notes, due 2003, and the convertible subordinated
debentures, due 2011, were $96.1 million and $19.0 million, respectively. These
debt securities are convertible into Hexcel common stock at a conversion price
of $15.81 and $30.72 per share, respectively. Fair values were estimated on the
basis of quoted market prices, although trading in these debt securities is
limited and may not reflect fair value. Due to the conversion feature in these
debt securities, fair values are subject to fluctuations based on the value of
the Company's stock and the Company's credit rating, as well as changes in
interest rates for debt securities with similar terms. Assuming all other
factors remain constant, the fair values of the Company's convertible
subordinated notes, due 2003, and the convertible subordinated debentures, due
2011, would be approximately $99.6 million and $19.2 million, respectively,
assuming a 10% favorable change in the market price of the Company's common
stock, and $92.7 million and $18.7 million, respectively, assuming a 10%
unfavorable change in market price.
YEAR 2000 READINESS DISCLOSURE
Hexcel, like most other companies, is continuing to address whether its
information technology systems and non-information technology devices with
embedded microprocessors (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. The Company does not,
however, manufacture or sell products that contain microprocessors or software.
The Company has established a central Year 2000 project office to coordinate
and monitor progress towards achieving corporate-wide Year 2000 compliance. A
discussion of the Company's Business Systems
47
<PAGE>
and Devices, suppliers and vendors as they pertain to the Company's Year 2000
issues, as of February 28, 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, the Company has 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. In implementing this plan, the Company has been, and continues to be
substantially on schedule. The components of this plan and their related status,
as of February 28, 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 consists 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 performs a variety of tasks including, obtaining Year 2000
compliance statements and information from the Company's vendors and service
providers. This phase is substantially complete, with final completion
estimated by March 31, 1999. However, in order to complete this phase, the
Company is dependent upon the cooperation from its suppliers and service
providers as well as the completeness and accuracy of their responses.
(4) REPAIRING OR REPLACING: This phase consists of repairing and replacing
non-Year 2000 compliant Business Systems and Devices which are essential to
the Company's operations. This phase is approximately 50% complete, with
substantial completion estimated by June 30, 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. The Company also intends to test the integration of the various
Business Systems and Devices within the Company's manufacturing processes.
This phase is approximately 45% complete, with substantial completion
estimated by June 30, 1999. The results of this phase may change the
estimated timing of completion of phase four.
(6) DEVELOPING CONTINGENCY PLANS: This phase consists of developing alternative
plans in the event that a business interruption occurs from a Year 2000
issue. The Company is in the early stages of this phase. The Company has
targeted September 30, 1999 as the date of substantially completing its
contingency plans, however, the Company believes that this phase will be
on-going through to the year 2000.
SUPPLIERS & CUSTOMERS
The Company is also monitoring the status of its significant suppliers and
customers 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. The Company is, however, dependent upon its
suppliers and customers with respect to the completeness and accuracy of such
responses.
As of February 28, 1999, the Company has received responses from nearly
two-thirds and one-third of its significant suppliers and customers,
respectively. The responses from the Company'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
48
<PAGE>
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 Company'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 the Company's Year 2000 issues, including
preparing the Company's Business Systems and Devices to become Year 2000
compliant, is approximately $5.5 million, of which approximately $1.5 million
has been incurred as of February 28, 1999. The total estimated costs includes
approximately $1 million of capital expenditures to be used for the purchase of
certain capital equipment to replace equipment which is currently not Year 2000
compliant. The estimate also includes the cost of certain internal resources
fully dedicated to this project, however, it does not include any costs
associated with the implementation of contingency plans, which have not yet been
developed. The Company 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.
As the Company has not yet developed its contingency plans (these plans are
expected to be complete by September 30, 1999), it is unable to assess the most
reasonably likely worst case scenario. However, if necessary remediation actions
are not completed in a timely manner, or if the Company'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 the
Company. 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 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
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 133 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, 1999. Hexcel will adopt this accounting standard as
required by January 1, 2000.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This annual report includes forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
future prospects, developments and business strategies. These forward-looking
statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "will" and similar terms and phrases, including references
to assumptions. Such statements are based on current expectations, are
inherently uncertain, and are subject to changing assumptions.
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) estimates of the change
49
<PAGE>
in net sales in total and by market compared to 1998 pro forma net sales; (c)
expectations regarding the growth in the production of military aircraft and
launch vehicle programs in 2000 and beyond; (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 suppliers; (f)
expectations regarding future sales based on current backlog; (g) expectations
regarding sales growth, sales mix, gross margins, manufacturing productivity,
capital expenditures and treasury stock repurchases; (h) expectations regarding
Hexcel's financial condition and liquidity, as well as future free cash flows
and earnings; (i) estimates of the total cost of Hexcel's 1996 business
consolidation program and the likelihood that additional business acquisition
and consolidation expenses would be incurred in 1999; (j) expectations regarding
the costs and benefits of accelerating and expanding Hexcel's Lean Enterprise
and business consolidation programs, including the closure of the Company's
Cleveland, GA facility, and implementing a value chain management program; (k)
expectations regarding the exercise of the CS-Interglas options at their stated
price; (l) the impact of various market risk fluctuations, including
fluctuations in: the Company's variable rate debt; currencies in which the
Company has translation exposure to; and changes in the market value of the
Company's common stock; and; (m) the impact of the Year 2000 issue, the
estimated costs associated with becoming Year 2000 compliant and the estimated
target date for substantial completion of remediation.
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.
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, our actual results may vary materially from those
expected, estimated or projected. In addition to other factors that affect the
Company's operating results and financial position, past financial performance
or the Company's expectations should not be considered to be a reliable
indicator of future performance. Investors should not use historical trends to
anticipate results or trends in future periods. Further, the Company's stock
price is subject to volatility. Any of the factors discussed above could have an
adverse impact on the Company's stock price. In addition, failure of sales or
income in any quarter to meet the investment community's expectations, as well
as broader market trends, can have an adverse impact on the Company's stock
price.
The Company does not undertake an obligation to update its forward-looking
statements or risk factors to reflect future events or circumstances.
50
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ------------------------------------------------------------------------ ------
<S> <C>
Management Responsibility for Consolidated Financial Statements......... 53
Report of Independent Accountants....................................... 54
Independent Auditors' Report............................................ 55
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997.......... 56
Consolidated Statements of Operations for the three years ended
December 31, 1998................................................... 57
Consolidated Statements of Stockholders' Equity for the three years
ended
December 31, 1998................................................... 58
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998................................................... 59
Notes to the Consolidated Financial Statements........................ 60-86
</TABLE>
50
<PAGE>
MANAGEMENT RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
Hexcel management has prepared and is responsible for the consolidated
financial statements and the related financial data contained in this report.
These financial statements, which include estimates, were prepared in accordance
with generally accepted accounting principles. Management uses its best judgment
to ensure that such statements reflect fairly the consolidated financial
position, results of operations and cash flows of the Company.
Hexcel maintains accounting and other control systems, which management
believes provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements and that assets are safeguarded and
accounted for properly. Underlying this concept of reasonable assurance is the
premise that the cost of control should not exceed benefits derived from
control.
The Audit Committee of the Board of Directors reviews and monitors the
financial reports and accounting practices of Hexcel. These reports and
practices are reviewed regularly by management and by the Company's independent
accountants, PricewaterhouseCoopers LLP, in connection with the audit of the
Company's financial statements. The Audit Committee, composed solely of outside
directors, meets periodically, separately and jointly, with management and the
independent accountants.
/s/ JOHN J. LEE
- --------------------------------------
John J. Lee
CHIEF EXECUTIVE OFFICER
/s/ STEPHEN C. FORSYTH
- --------------------------------------
Stephen C. Forsyth
CHIEF FINANCIAL OFFICER
/s/ WAYNE C. PENSKY
- --------------------------------------
Wayne C. Pensky
CHIEF ACCOUNTING OFFICER
51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Hexcel Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Hexcel
Corporation and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The financial
statements of Hexcel Corporation for the year ended December 31, 1996 were
audited by other independent accountants whose report dated February 28, 1997
expressed an unqualified opinion on those statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 21, 1999, except as to
Ciba Senior Subordinated Notes Payable and
Aggregate Maturities of Notes Payable and
Indebtedness to Related Parties in Note 7,
which are as of February 17, 1999
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Hexcel Corporation:
We have audited the consolidated statement of operations, stockholders'
equity and cash flows of Hexcel Corporation and subsidiaries for the year ended
December 31, 1996. These financial statements are the responsibility of Hexcel's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of Hexcel
Corporation and subsidiaries for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------
DELOITTE & TOUCHE LLP
Oakland, California
February 28, 1997
53
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1998 1997
------------ -------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 7,504 $ 9,033
Accounts receivable............................................................... 188,368 181,192
Inventories....................................................................... 213,199 165,321
Prepaid expenses and other assets................................................. 10,111 6,665
Deferred tax asset................................................................ 19,844 24,839
------------ -------------
Total current assets............................................................ 439,026 387,050
------------ -------------
Property, plant and equipment....................................................... 628,533 488,916
Less accumulated depreciation....................................................... (195,960) (157,439)
------------ -------------
Net property, plant and equipment................................................. 432,573 331,477
Goodwill and other purchased intangibles, net of accumulated amortization of $11,742
in 1998 and $4,657 in 1997........................................................ 425,405 67,184
Investment in affiliated companies and other assets................................. 107,157 25,875
------------ -------------
Total assets.................................................................... $1,404,161 $ 811,586
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of capital lease obligations................. $ 26,867 $ 13,858
Accounts payable.................................................................. 81,869 70,011
Accrued compensation and benefits................................................. 42,172 37,306
Other accrued liabilities......................................................... 68,536 65,181
------------ -------------
Total current liabilities....................................................... 219,444 186,356
------------ -------------
Long-term notes payable and capital lease obligations............................... 802,376 304,546
Indebtedness to related parties..................................................... 35,675 34,967
Other non-current liabilities....................................................... 44,267 35,816
------------ -------------
Total liabilities............................................................... 1,101,762 561,685
------------ -------------
Commitments and contingent liabilities (see notes)
Stockholders' equity:
Preferred stock, no par value, 20,000 stock authorized, no stock issued or
outstanding in 1998 and 1997.................................................... -- --
Common stock, $0.01 par value, 100,000 stock authorized, stock issued and
outstanding of 37,176 in 1998 and 36,891 in 1997................................ 372 369
Additional paid-in capital........................................................ 271,469 266,830
Retained earnings (accumulated deficit)........................................... 34,898 (15,541)
Accumulated other comprehensive income (loss)..................................... 6,313 (1,104)
------------ -------------
313,052 250,554
Less--treasury stock, at cost, 847 stock in 1998, 35 stock in 1997................ (10,653) (653)
------------ -------------
Total stockholders' equity........................................................ 302,399 249,901
------------ -------------
Total liabilities and stockholders' equity........................................ $1,404,161 $ 811,586
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
53
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Net sales.................................................................. $ 1,089,044 $ 936,855 $ 695,251
Cost of sales.............................................................. 817,785 714,223 553,942
------------ ---------- ----------
Gross margin............................................................. 271,259 222,632 141,309
Selling, general and administrative expenses............................... 117,885 102,449 79,408
Research and technology expenses........................................... 23,624 18,383 16,742
Business acquisition and consolidation expenses............................ 12,711 25,343 42,370
------------ ---------- ----------
Operating income......................................................... 117,039 76,457 2,789
Interest expense........................................................... 38,675 25,705 21,537
Other income, net.......................................................... -- -- (2,994)
------------ ---------- ----------
Income (loss) before income taxes........................................ 78,364 50,752 (15,754)
Provision (benefit) for income taxes....................................... 28,442 (22,878) 3,436
Equity in earnings of affiliated companies................................. 517 -- --
------------ ---------- ----------
Net income (loss)........................................................ $ 50,439 $ 73,630 $ (19,190)
------------ ---------- ----------
------------ ---------- ----------
Net income (loss) per share:
Basic.................................................................... $ 1.38 $ 2.00 $ (0.58)
Diluted.................................................................. $ 1.24 $ 1.74 $ (0.58)
Weighted average shares:
Basic.................................................................... 36,675 36,748 33,351
Diluted.................................................................. 45,671 45,997 33,351
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
54
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER TOTAL
PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS'
PAR CAPITAL DEFICIT) INCOME (LOSS) SHARES EQUITY
--------- ----------- ------------- --------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996................ $ 181 $ 111,259 $ (69,981) $ 6,915 $ -- $ 48,374
Net loss.............................. (19,190) (19,190)
Pension obligation adjustment......... 535 535
Currency translation adjustment....... 1,092 1,092
Comprehensive loss..................
Issuance of stock to Ciba, net of
issuance costs of $2,993............ 180 141,001 141,181
Activity under stock plans............ 4 7,689 7,693
Other issuance of stock............... 1 199 200
Treasury stock purchased.............. (556) (556)
--------- ----------- ------------- ------- ----------- -------------
BALANCE, DECEMBER 31, 1996.............. 366 260,148 (89,171) 8,542 (556) 179,329
Net income............................ 73,630 73,630
Currency translation adjustment......... (9,646) (9,646)
Comprehensive income................
Activity under stock plans............ 3 6,632 6,635
Conversion of Subordinated Notes...... 50 50
Treasury stock purchased.............. (97) (97)
--------- ----------- ------------- ------- ----------- -------------
BALANCE, DECEMBER 31, 1997.............. 369 266,830 (15,541) (1,104) (653) 249,901
Net income.............................. 50,439 50,439
Currency translation adjustment....... 7,417 7,417
--------- ----------- ------------- ------- ----------- -------------
Comprehensive income................
Activity under stock plans............ 3 4,624 4,627
Conversion of Subordinated Notes...... 15 15
Treasury stock purchased.............. (10,000)
--------- ----------- ------------- ------- ----------- -------------
BALANCE, DECEMBER 31, 1998.............. $ 372 $ 271,469 $ 34,898 $ 6,313 $ (10,653) $ 302,399
--------- ----------- ------------- ------- ----------- -------------
--------- ----------- ------------- ------- ----------- -------------
<CAPTION>
COMPREHENSIVE
INCOME (LOSS)
---------------
<S> <C>
BALANCE, JANUARY 1, 1996................
Net loss.............................. $ (19,190)
Pension obligation adjustment......... 535
Currency translation adjustment....... 1,092
---------------
Comprehensive loss.................. (17,563)
---------------
Issuance of stock to Ciba, net of
issuance costs of $2,993............
Activity under stock plans............
Other issuance of stock...............
Treasury stock purchased..............
BALANCE, DECEMBER 31, 1996..............
Net income............................ 73,630
Currency translation adjustment......... (9,646)
---------------
Comprehensive income................ 63,984
---------------
Activity under stock plans............
Conversion of Subordinated Notes......
Treasury stock purchased..............
BALANCE, DECEMBER 31, 1997..............
Net income.............................. 50,439
Currency translation adjustment....... 7,417
---------------
Comprehensive income................ $ 57,856
---------------
---------------
Activity under stock plans............
Conversion of Subordinated Notes......
Treasury stock purchased..............
BALANCE, DECEMBER 31, 1998..............
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
55
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................................... $ 50,439 $ 73,630 $ (19,190)
Reconciliation to net cash provided by operating activities:
Depreciation............................................................ 37,442 33,214 24,656
Amortization............................................................ 10,012 2,583 2,074
Deferred income taxes................................................... 6,850 (33,203) (520)
Accrued business acquisition and consolidation expenses................. 12,711 25,343 42,370
Business acquisition and consolidation payments......................... (8,651) (33,595) (11,579)
Write-off of purchased in-process technologies.......................... -- 8,000 --
Equity in earnings of affiliated companies.............................. (517) -- --
Other income............................................................ -- -- (1,560)
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable............................ 18,214 (37,557) (14,695)
Increase in inventories............................................... (9,316) (23,797) (5,072)
Decrease (increase) in prepaid expenses and other assets.............. (2,858) 1,667 (1,430)
Increase (decrease) in accounts payable and accrued liabilities....... (17,067) 23,567 15,549
Changes in other non-current assets and long-term liabilities......... (3,479) (10,606) 3,225
----------- ---------- -----------
Net cash provided by operating activities............................... 93,780 29,246 33,828
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................................... (66,530) (57,369) (43,569)
Cash paid for business acquisitions....................................... (472,770) (37,000) (164,400)
Dividends received from affiliated companies.............................. 1,399 -- --
Proceeds from sale of other assets........................................ -- 13,500 1,560
Advances to affiliated companies.......................................... (1,250) (2,000) --
----------- ---------- -----------
Net cash used by investing activities................................... (539,151) (82,869) (206,409)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................................. 276 3,199 286,974
Repayments of long-term debt.............................................. (1,805) (9,679) (124,288)
Proceeds from the Senior and Revolving Credit Facilities.................. 726,044 84,686 15,319
Repayments of the Senior and Revolving Credit Facilities.................. (266,339) (27,500) --
Debt issuance costs....................................................... (10,264) -- (6,792)
Purchase of treasury stock................................................ (10,000) (97) (556)
Activity under stock plans................................................ 2,753 3,363 3,729
----------- ---------- -----------
Net cash provided by financing activities............................... 440,665 53,972 174,386
----------- ---------- -----------
Effect of exchange rate changes on cash and cash equivalents................ 3,177 709 2,341
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents........................ (1,529) 1,058 4,146
Cash and cash equivalents at beginning of year.............................. 9,033 7,975 3,829
----------- ---------- -----------
Cash and cash equivalents at end of year.................................... $ 7,504 $ 9,033 $ 7,975
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
56
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF ACCOUNTING
The accompanying consolidated financial statements include the accounts of
Hexcel Corporation and subsidiaries ("Hexcel" or the "Company"), after
elimination of intercompany transactions and accounts. Hexcel is a leading
international producer of advanced structural materials. The Company develops,
manufactures and markets lightweight, high-performance reinforcement products,
composite materials and engineered products for use in the commercial aerospace,
space and defense, electronics, general industrial and recreation markets. The
Company serves international markets through manufacturing and marketing
facilities located in the United States and Europe, as well as sales offices in
Asia, Australia and South America. The Company is also a member of four joint
ventures that manufacture and market reinforcement products and composite
materials in Europe, Asia and the United States.
As discussed in Note 2, Hexcel acquired:
- certain assets and assumed certain operating liabilities from
Clark-Schwebel, Inc. and its subsidiaries' ("C-S") industrial fabrics
business (the "Acquired Clark-Schwebel Business") on September 15, 1998,
including interests in three joint ventures, one of which was acquired on
December 23, 1998;
- the worldwide composites division of Ciba-Geigy Limited ("CGL"), a Swiss
corporation, and Ciba-Geigy Corporation, a New York corporation ("CGC" and
together with CGL, "Ciba"), including most of Ciba's composite materials,
parts and structures businesses, on February 29, 1996. The Company
subsequently acquired Ciba's Austrian composites business on May 30, 1996,
and various remaining assets of Ciba's worldwide composites division at
various dates through February 28, 1997 (the "Acquired Ciba Business");
- the composite products division of Hercules Incorporated ("Hercules"),
including Hercules' carbon fibers and prepreg businesses (the "Acquired
Hercules Business"), on June 27, 1996; and
- the satellite business and rights to certain technologies from Fiberite,
Inc. ("Fiberite"), on September 30, 1997.
All of the above acquisitions were accounted for under the purchase method
of accounting. Accordingly, the accompanying consolidated balance sheets,
statements of operations, stockholders' equity, and cash flows include the
financial position, results of operations and cash flows of the businesses
acquired as of such dates and for such periods that these businesses were owned
by Hexcel.
ESTIMATES AND ASSUMPTIONS
The accompanying consolidated financial statements and related notes reflect
estimates and assumptions made by the management of Hexcel. These estimates and
assumptions affect the reported amounts of assets and liabilities, the
disclosures with respect to contingent assets and liabilities, and the reported
amounts of revenues and expenses. Although management believes that the
estimates and assumptions used in preparing the accompanying consolidated
financial statements and related notes are reasonable in light of known facts
and circumstances, actual results could differ materially from the estimates
used.
57
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Hexcel invests excess cash in investments with original maturities of less
than three months. The investments consist primarily of Eurodollar time deposits
and are stated at cost, which approximates fair value. The Company considers
such investments to be cash equivalents for purposes of the statements of cash
flows.
ACCOUNTS RECEIVABLE
Accounts receivable are net of reserves for doubtful accounts of $6,785 and
$6,641 as of December 31, 1998 and 1997, respectively.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out and average cost methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs and maintenance
are charged to expense as incurred; replacements and betterments are
capitalized. Property, plant and equipment are depreciated over estimated useful
lives, using accelerated and straight-line methods. The estimated useful lives
range from 10 to 40 years for buildings and improvements and from 3 to 20 years
for machinery and equipment.
GOODWILL AND OTHER PURCHASED INTANGIBLES
Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of net assets of businesses acquired, and other purchased
intangibles, are amortized on a straight-line basis over estimated economic
lives which are as follows:
<TABLE>
<CAPTION>
<S> <C>
Goodwill from the Acquired Clark-Schwebel Business............................. 40 years
Goodwill from the Acquired Ciba Business....................................... 20 years
Other purchased intangibles.................................................... 10-15 years
</TABLE>
The Company periodically reviews the recoverability of all long-term assets,
including the related amortization period, whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. The Company determines whether there has been an impairment by
comparing the anticipated undiscounted future net cash flows to the related
asset's carrying value. If an asset is considered impaired, the asset is written
down to fair value which is either determined based on discounted cash flows or
appraised values, depending on the nature of the asset.
INVESTMENT IN AFFILIATED COMPANIES
Investment in affiliated companies consists of equity interests in joint
ventures, which are accounted for using the equity method of accounting.
58
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEBT FINANCING COSTS
Debt financing costs are deferred and amortized over the life of the related
debt, which ranges from 7 to 8 years.
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense is not recognized when options are
granted at the fair market value at the date of grant. The Company also provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation".
CURRENCY TRANSLATION
The assets and liabilities of non-U.S. subsidiaries are translated into U.S.
dollars at year-end exchange rates, and revenues and expenses are translated at
average exchange rates during the year. Cumulative currency translation
adjustments are included in "stockholders' equity". Realized gains and losses
from currency exchange transactions are recorded in "selling, general and
administrative expenses" in the accompanying consolidated statements of
operations and were not material to the Company's consolidated results of
operations in 1998, 1997 or 1996.
REVENUE RECOGNITION
Product sales are recognized on the date of shipment.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs an interest rate cap agreement and foreign currency
forward contracts in the management of its interest rate and currency exposures.
The Company designates its interest rate cap agreement against a specific debt
instrument and recognizes interest differentials as adjustments to interest
expense as the differentials occur. Realized and unrealized gains and losses
arising from foreign currency forward contracts are recognized in income as
offsets to gains and losses resulting from the underlying hedged transaction.
The Company does not hold financial instruments for trading purposes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's sales to two customers and their related subcontractors accounted
for approximately 46% of the Company's 1998 and 1997 net sales (see Note 16).
The Company performs on-going credit evaluations of its customers' financial
condition but generally does not require collateral or other security to support
customer receivables. The Company establishes an allowance for doubtful accounts
based on factors surrounding the credit risk of specific customers, historical
trends and other financial information.
RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. SFAS 133 requires companies to record
derivatives on the balance sheet as assets and liabilities,
59
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS 133 is not expected to have
a material impact on Hexcel's consolidated financial statements. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. Hexcel will adopt this
accounting standard as required by January 1, 2000.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 1998
presentation.
NOTE 2 -- BUSINESS ACQUISITIONS
ACQUIRED CLARK-SCHWEBEL BUSINESS
On September 15, 1998, the Company acquired certain assets and assumed
certain operating liabilities from C-S. The Acquired Clark-Schwebel Business is
engaged in the manufacture and sale of high-quality fiberglass fabrics, which
are used to make printed circuit boards ("PCBs") for electronic equipment such
as computers, cellular telephones, televisions and automobiles. The Acquired
Clark-Schwebel Business also produces high performance specialty products for
use in insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials. The Acquired Clark-Schwebel Business
currently operates four manufacturing facilities in the southeastern U.S. and
has approximately 1,300 full time employees. As part of this acquisition, Hexcel
also acquired C-S's equity ownership interests in the following three joint
ventures:
- a 43.6% share in CS-Interglas AG ("CS-Interglas"), headquartered in
Germany, together with fixed-price options to increase this equity
interest to 84.0%. Hexcel's acquisition of the CS-Interglas equity
interest and related options was completed on December 23, 1998;
- a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"),
headquartered in Japan, which in turn has its own joint venture with
AlliedSignal Inc. in Taiwan; and
- a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"),
headquartered in the United States.
CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian electronics and telecommunications industries. CS Tech-Fab
manufactures non-woven materials for roofing, construction and other specialty
applications. The fixed-price options to increase the equity interest in
CS-Interglas are significantly higher than their fair market value and expire on
December 31, 1999. The unconsolidated net sales in 1998 for these joint ventures
were in excess of $300,000.
The acquisition of the Acquired Clark-Schwebel Business was completed
pursuant to an Asset Purchase Agreement dated July 25, 1998, as amended, by and
among Hexcel, Stamford CS Acquisition Corp., and C-S (the "Asset Purchase
Agreement"). Under the Asset Purchase Agreement, Hexcel acquired the net assets
of the acquired business, other than certain excluded assets and liabilities, in
exchange for
60
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- BUSINESS ACQUISITIONS (CONTINUED)
approximately $473,000 in cash, including the $19,000 paid on December 23, 1998.
The assets acquired and the liabilities assumed or incurred were:
<TABLE>
<CAPTION>
<S> <C>
Estimated fair value of assets acquired:
Cash............................................................................ $ 5,049
Accounts receivable............................................................. 20,249
Inventories..................................................................... 35,508
Net property, plant and equipment............................................... 70,000
Investment in joint ventures, intangibles and other assets...................... 68,389
Goodwill........................................................................ 365,286
----------
Total assets acquired............................................................. 564,481
----------
Estimated fair value of liabilities assumed or incurred:
Accounts payable and accrued liabilities........................................ 32,523
Capital lease obligations....................................................... 50,000
Other non-current liabilities................................................... 4,139
----------
Total liabilities assumed or incurred............................................. 86,662
----------
Estimated fair value of net assets acquired....................................... $ 477,819
----------
Less--cash acquired............................................................... (5,049)
----------
Net cash paid..................................................................... $ 472,770
----------
----------
</TABLE>
The allocations of purchase price to the assets acquired and liabilities
assumed or incurred in connection with the Acquired Clark-Schwebel Business are
based on current estimates of fair values, and are subject to change until
September 15, 1999. In addition to the above assets and liabilities, Hexcel
entered into a $50,000 lease for property, plant and equipment used in the
acquired business from an affiliate of C-S, pursuant to a long-term lease which
includes purchase options. Refer to Note 7 for acquisition financing.
ACQUIRED CIBA BUSINESS & ACQUIRED HERCULES BUSINESS
Hexcel acquired most of Ciba's composite materials, parts and structures
businesses on February 29, 1996, Ciba's Austrian composites business on May 30,
1996, and various remaining assets of Ciba's worldwide composites division at
various dates through February 28, 1997. The Acquired Ciba Business is engaged
in the manufacture and marketing of reinforcement fabrics and lightweight,
high-performance composite materials, parts and structures for commercial
aerospace, space and defense, general industrial and recreation markets. Product
lines include reinforcement fabrics, pre-impregnated fabrics ("prepregs"),
structural adhesives, honeycomb core, sandwich panels and fabricated components,
as well as composite structures and interiors primarily for the commercial and
military aerospace markets.
The acquisition of the Acquired Ciba Business was consummated pursuant to a
Strategic Alliance Agreement dated as of September 29, 1995, among Ciba and
Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic
Alliance Agreement, the Company acquired the assets (including the capital
shares of certain non-U.S. subsidiaries) and assumed the liabilities of the
Acquired Ciba Business, other than certain excluded assets and liabilities, in
exchange for: (a) 18,022 newly issued shares of Hexcel common stock; (b) $25,000
in cash; (c) senior subordinated notes in an aggregate principal amount of
61
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- BUSINESS ACQUISITIONS (CONTINUED)
$37,476 (the "Ciba Senior Subordinated Notes"), with a fair value of $34,450;
and (d) senior demand notes in an aggregate principal amount equal to the cash
on hand at certain of the non-U.S. subsidiaries included in the Acquired Ciba
Business (the "Senior Demand Notes"). The total aggregate purchase price for the
net assets acquired was approximately $209,000.
Hexcel acquired the assets of the composite products division of Hercules on
June 27, 1996. The Acquired Hercules Business, which manufactures carbon fibers
and prepregs for commercial aerospace, space and defense, general industrial and
recreation markets, was purchased for $139,400 in cash.
The assets acquired and the liabilities assumed or incurred were:
<TABLE>
<CAPTION>
ACQUIRED ACQUIRED
CIBA HERCULES
BUSINESS BUSINESS TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Estimated fair values of assets acquired:
Accounts receivable.................................... $ 53,861 $ 16,819 $ 70,680
Inventories............................................ 65,596 22,289 87,885
Property, plant and equipment.......................... 119,446 110,611 230,057
Goodwill and other purchased intangibles............... 39,851 -- 39,851
Prepaid pension asset.................................. 8,688 -- 8,688
Other assets........................................... 3,069 642 3,711
---------- ---------- ----------
Total assets acquired.................................... 290,511 150,361 440,872
---------- ---------- ----------
Estimated fair values of liabilities assumed or incurred:
Accounts payable and accrued liabilities............... 62,582 7,688 70,270
Notes payable and capital lease obligations............ 4,743 2,774 7,517
Deferred liabilities................................... 14,233 499 14,732
---------- ---------- ----------
Total liabilities assumed or incurred.................. 81,558 10,961 92,519
---------- ---------- ----------
Estimated fair values of net assets acquired........... $ 208,953 $ 139,400 $ 348,353
---------- ---------- ----------
---------- ---------- ----------
Purchase price:
Cash................................................... $ 25,000 $ 139,400 $ 164,400
Senior Subordinated Notes issued to Ciba, at aggregate
fair value........................................... 34,450 -- 34,450
Senior Demand Notes issued to Ciba..................... 5,329 -- 5,329
Hexcel common stock issued to Ciba, valued at $8 per
stock................................................ 144,174 -- 144,174
---------- ---------- ----------
Aggregate purchase price............................... $ 208,953 $ 139,400 $ 348,353
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
ACQUIRED FIBERITE ASSETS
On September 30, 1997, the Company acquired from Fiberite its satellite
business consisting of intangible assets and inventory, and certain
non-exclusive worldwide rights to other prepreg technologies, for $37,000 in
cash. The acquisition was substantially downsized from the original agreement
whereby the Company had, subject to certain terms and conditions, committed to
purchase selected assets and businesses of Fiberite for approximately $300,000.
As a result of the downsized transaction, the Company
62
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- BUSINESS ACQUISITIONS (CONTINUED)
wrote-off $4,973 of acquisition and financing costs to business acquisition and
consolidation expenses in 1997. In addition, the Company expensed $8,000 of
acquired in-process research and technology purchased from Fiberite which is
also included in the 1997 business acquisition and consolidation expenses.
The acquisition of the satellite business and certain technologies from
Fiberite on September 30, 1997 was accounted for using the purchase method.
Under this method, substantially all of the $37,000 purchase price, less the
$8,000 write-off of the acquired in-process research and technology, was
allocated to intangible assets. Transaction costs in relation to the downsized
transaction were not material.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma net sales, net income and diluted net income per share of
Hexcel for the years ended December 31, 1998 and 1997, giving effect to the
Acquired Clark-Schwebel Business, as if it had occurred at the beginning of the
periods presented were:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Pro forma net sales............................................... $ 1,234,772 $ 1,177,059
PRO FORMA NET INCOME.............................................. 49,494 76,336
------------ ------------
PRO FORMA DILUTED NET INCOME PER SHARE............................ $ 1.22 $ 1.79
------------ ------------
------------ ------------
</TABLE>
Pro forma adjustments giving effect to the Fiberite transaction as if it
occurred at the beginning of 1997 would not have had a material effect to the
Company's consolidated financial statements.
NOTE 3 -- BUSINESS CONSOLIDATION
In December 1998, Hexcel announced consolidation actions within its
reinforcement fabrics and composite materials businesses. These actions included
the integration of Hexcel's existing fabrics business with the U.S. operations
of the Acquired Clark-Schwebel Business, and the combination of the Company's
U.S., European and Pacific Rim composite materials businesses into a single,
global business unit. These actions are intended to eliminate redundancies,
improve manufacturing planning, and enhance customer service, and resulted in
the elimination of approximately 100 operating, sales, marketing and
administrative positions. As of December 31, 1998, the cost of these actions,
together with a $6,400 non-cash charge for writing down certain assets held for
disposition and another $711 incurred for costs related to a proposed
acquisition that was not consummated, resulted in the recognition of $12,711 in
business acquisition and consolidation expenses.
In 1996, Hexcel announced plans to consolidate the Company's operations over
a period of three years. The objective of the program was to integrate acquired
assets and operations into Hexcel, and to reorganize the Company's manufacturing
and research activities around strategic centers dedicated to select product
technologies. The business consolidation program was also intended to eliminate
excess manufacturing capacity and redundant administrative functions. Specific
actions of the consolidation program included the elimination of 245
manufacturing, marketing and administrative positions, the closure of the
Anaheim, California facility acquired in connection with the purchase of the
Acquired Ciba Business, the reorganization of the Company's manufacturing
operations in Europe, the consolidation of the Company's U.S. special process
manufacturing activities, and the integration of sales, marketing and
administrative resources. Management expected that this consolidation program
would take approximately three years to complete, in part because of the
aerospace industry requirements to "qualify" specific
63
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- BUSINESS CONSOLIDATION (CONTINUED)
equipment and manufacturing facilities for the manufacture of certain products.
These qualification requirements increase the complexity, cost and time of
moving equipment and rationalizing manufacturing activities.
As of December 31, 1998, the primary remaining activities of this
consolidation program relate to the Company's European operations and certain
customer qualifications of equipment transferred within the U.S. The Company
expects that activities related to this consolidation program will be completed
in 1999. Total expenses for this program, which remains unchanged since December
31, 1997, were $54,700, excluding $12,973 of expenses relating to the Fiberite
transaction, which were not included in the original program.
Total accrued business acquisition and consolidation expenses at December
31, 1998, 1997 and 1996 and activity during the three years then ended were as
follows:
<TABLE>
<CAPTION>
EMPLOYEE FIBERITE &
SEVERANCE FACILITY & OTHER
AND EQUIPMENT TRANSACTION
RELOCATION RELOCATION OTHER COSTS TOTAL
----------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1996........................ -- -- -- -- --
Business acquisition and consolidation expenses...... $ 17,285 $ 10,488 $ 14,597 $ -- $ 42,370
Liabilities assumed or incurred in business
acquisitions....................................... 7,104 2,497 -- -- 9,601
Cash expenditures.................................... (5,306) (1,109) (5,164) -- (11,579)
Non-cash usage....................................... -- (6,678) (8,357) -- (15,035)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1996...................... 19,083 5,198 1,076 -- 25,357
Business acquisition and consolidation expenses...... (25) 7,651 4,744 12,973 25,343
Cash expenditures.................................... (6,644) (8,771) (5,207) (12,973) (33,595)
Non-cash usage....................................... (2,759) (2,068) (105) -- (4,932)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1997...................... 9,655 2,010 508 -- 12,173
Business acquisition and consolidation expenses...... (3,225) 9,625 5,600 711 12,711
Cash expenditures.................................... (1,079) (6,353) (508) (711) (8,651)
Non-cash usage....................................... 517 (2,948) (5,600) -- (8,031)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1998...................... $ 5,868 $ 2,334 $ -- $ -- $ 8,202
----------- ----------- --------- ----------- ----------
----------- ----------- --------- ----------- ----------
</TABLE>
Non-cash items consist of asset write-downs and currency translation
effects. Accrued business consolidation costs of $8,202 and $12,173 as of
December 31, 1998 and 1997, respectively, were included in "other accrued
liabilities" in the accompanying consolidated balance sheets. Business
consolidation activities were financed with operating cash flows and borrowings
under the Senior and Revolving Credit Facilities. In addition, in 1997, the
Company received $8,500 of net proceeds, which approximated book value, from the
sale of its Anaheim, California facility.
NOTE 4 -- INVENTORIES
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 90,881 $ 90,429
Work in progress...................................................... 77,769 47,953
Finished goods........................................................ 44,549 26,939
---------- ----------
Inventories........................................................... $ 213,199 $ 165,321
---------- ----------
---------- ----------
</TABLE>
64
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land.............................................. $ 22,178 $ 17,773
Buildings......................................... 167,176 136,108
Equipment......................................... 439,179 335,035
----------- -----------
Property, plant and equipment..................... 628,533 488,916
Less accumulated depreciation..................... (195,960) (157,439)
----------- -----------
Net property, plant and equipment................. $ 432,573 $ 331,477
----------- -----------
----------- -----------
</TABLE>
NOTE 6 -- INVESTMENT IN AFFILIATED COMPANIES AND OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Investment in affiliated companies................ $ 70,291 $ --
Deferred tax asset................................ 10,503 9,901
Deferred debt financing costs, net of accumulated
amortization of $1,773 and $2,487 as of December
31, 1998 and 1997, respectively................. 11,452 4,030
Prepaid pension asset............................. 9,503 8,619
Other assets...................................... 5,408 3,325
---------- ---------
Investment in affiliated companies and other
assets.......................................... $ 107,157 $ 25,875
---------- ---------
---------- ---------
</TABLE>
INVESTMENT IN AFFILIATED COMPANIES
As part of the Acquired Clark-Schwebel Business, the Company acquired equity
ownership interests in three joint ventures: a 43.3% share in Asahi-Schwebel,
headquartered in Japan, which in turn has its own joint venture with
AlliedSignal Inc. in Taiwan; a 43.6% share in CS-Interglas, together with
fixed-price options to increase this equity interest to approximately 84%; and a
50.0% share in CS Tech-Fab, headquartered in the U.S. (see Note 2).
As of December 31, 1998 and 1997, Hexcel owned a 45% equity interest in
DIC-Hexcel Limited ("DHL"), a joint venture with Dainippon Ink and Chemicals,
Inc. ("DIC"). This joint venture, which owns and operates a manufacturing
facility in Komatsu, Japan, was formed in 1990 and produces and sells prepregs,
honeycomb, decorative laminates and bulk molding compounds using technology
licensed from Hexcel and DIC. In December of 1996, Hexcel and DIC reached an
agreement to continue the DHL joint venture and expand its operations. The
Company and DIC agreed to fund the joint venture's operations through 1998 by
each contributing an additional $3,250 in cash, payable in installments through
1998. Of this amount, $1,250 and $2,000 was paid in 1998 and 1997, respectively.
In addition, the Company and DIC agreed to contribute certain additional
technology and product manufacturing rights to DHL. Under the terms of the
agreements, Hexcel remains contingently liable to pay DIC up to $4,500 with
respect to DHL's bank debt, but the possibility that such repayment will be
required has diminished as a result of the improvement in DHL's business
prospects. As of December 31, 1998, the Company's investment in DIC is zero.
In addition to the above joint ventures, in 1998, the Company reached an
agreement in principle with The Boeing Company ("Boeing") and Aviation
Industries of China to form a joint venture,
65
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 -- INVESTMENT IN AFFILIATED COMPANIES AND OTHER ASSETS (CONTINUED)
BHA Aero Composite Parts Co., Ltd., to manufacture composite parts for secondary
structures and interior applications for commercial aircraft. This joint venture
will be located in Tianjin, China. Also in 1998, the Company signed an agreement
with Boeing, Sime Darby Berhad and Malaysia Helicopter Services (now known as
Naluri Berhad) to form another joint venture, Asian Composite Manufacturing Sdn.
Bhd., to manufacture composite parts for secondary structures for commercial
aircraft. This joint venture will be located in Alor Setar, Malaysia. Products
manufactured by both joint ventures will be shipped to the Company's Kent,
Washington facility for final assembly, inspection and shipment to Boeing as
well as other customers worldwide. It is anticipated that the first parts will
be delivered to customers in 2001. The Company's total estimated financial
commitment to both of these joint ventures will be approximately $31,000, which
is expected to be made in increments through 2001. However, completion of these
projects and related investments remain subject to certain significant
conditions, including foreign government approvals.
NOTE 7 -- NOTES PAYABLE
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Senior Credit Facility............................ $ 618,214 $ --
Revolving Credit Facility......................... -- 158,267
European Credit and Overdraft Facilities.......... 16,330 13,909
Convertible Subordinated Notes, due 2003.......... 114,435 114,450
Convertible Subordinated Debentures, due 2011..... 25,625 25,625
Various notes payable............................. 547 680
---------- ----------
Total notes payable............................... 755,151 312,931
Capital lease obligations (see Note 8)............ 54,092 5,473
Senior Subordinated Notes Payable to a related
party, net of unamortized discount of $1,801 and
$2,233 as of December 31, 1998 and 1997,
respectively.................................... 35,675 34,967
---------- ----------
Total notes payable, capital lease obligations and
indebtedness to related parties................. $ 864,918 $ 353,371
---------- ----------
---------- ----------
Notes payable and current maturities of capital
lease obligations............................... $ 26,867 $ 13,858
Long-term notes payable and capital lease
obligations, less current maturities............ 802,376 304,546
Indebtedness to related parties................... 35,675 34,967
---------- ----------
Total notes payable, capital lease obligations and
indebtedness to related parties................. $ 864,918 $ 353,371
---------- ----------
---------- ----------
</TABLE>
SENIOR CREDIT FACILITY
In connection with the acquisition of the Acquired Clark-Schwebel Business
(see Note 2) on September 15, 1998, Hexcel obtained the Senior Credit Facility
to: (a) fund the purchase of the Acquired Clark Schwebel Business; (b) refinance
the Company's existing revolving credit facility; and (c) provide for ongoing
working capital and other financing requirements of the Company. The Senior
Credit Facility, prior to the issuance in January 1999 of $240,000 of 9.75%
Senior Subordinated Notes, due 2009 (see
66
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
below), provided up to $910,000 of borrowing capacity, with available borrowings
of $281,000 at December 31, 1998, subject to certain loan covenants. After the
issuance of the 9.75% Senior Subordinated Notes, due 2009, the borrowing
capacity under the Senior Credit Facility was reduced to $672,000, subject to
certain loan covenants.
Depending on certain predetermined ratios and other conditions, interest on
outstanding borrowings under the Senior Credit Facility is computed at an annual
rate ranging from approximately 0.75% to 2.25% in excess of the applicable
London interbank rate, or at the option of Hexcel, at 0 to 1.25% in excess of
the base rate of the administrative agent for the lenders. In addition, the
Senior Credit Facility is subject to a commitment fee ranging from 0.23% to
0.50% per annum of the total facility. As of December 31, 1998, the Company had
an interest rate cap agreement outstanding which covers a notional amount of
$50,000 of the variable rate Senior Credit Facility providing a maximum fixed
rate of 5.5%. The cost of the interest rate cap is being amortized to interest
expense over the term of the contract and the unamortized amount approximated
fair value at December 31, 1998.
The Senior Credit Facility is secured by a pledge of shares of certain of
Hexcel's subsidiaries. In addition, the Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, and is generally
prohibited from paying dividends or redeeming capital stock. Approximately
$544,000 of the Senior Credit Facility, after the issuance of the Senior
Subordinated Notes, expires by September 2004, with the balance expiring in
2005.
As a result of obtaining the Senior Credit Facility and the Amended
Revolving Credit Facility (see below), the Company wrote off approximately
$1,600 of capitalized debt financing costs in 1998. This amount is included in
"interest expense" in the accompanying consolidated statement of operations for
1998.
REVOLVING CREDIT FACILITY
In connection with the purchase of the Acquired Hercules Business in 1996,
Hexcel obtained a revolving credit facility (the "Revolving Credit Facility").
The Revolving Credit Facility was obtained to: (a) refinance outstanding
indebtedness under a senior secured credit facility; (b) finance the purchase of
the Acquired Hercules Business; and (c) provide for the ongoing working capital
and other financing requirements of the Company, including business
consolidation activities, on a worldwide basis. The Revolving Credit Facility
was amended in March 1998 (the "Amended Revolving Credit Facility") and in
September 1998, the Senior Credit Facility replaced the Amended Revolving Credit
Facility. The Amended Revolving Credit Facility, prior to its replacement, had
provided up to $355,000 of borrowing capacity and would have expired in March
2003.
Interest on outstanding borrowings on the Amended Revolving Credit Facility
depended upon certain predetermined ratios and other conditions and was computed
at an annual rate ranging from approximately 0.3% to 1.1% in excess of the
applicable London interbank rate or, at the option of Hexcel, at the base rate
of the administrative agent for the lenders. In addition, the Amended Revolving
Credit Facility was subject to a commitment fee ranging from approximately 0.2%
to 0.4% per annum of the total facility. Interest on outstanding borrowings
under the Revolving Credit Facility was computed at an annual rate of 0.4% in
excess of the applicable London interbank rate or, at the option of Hexcel, at
the base rate of the administrative agent for the lenders. The Revolving Credit
Facility was also subject to a commitment fee of approximately 0.2% per annum on
the unused portion of the facility.
67
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
EUROPEAN CREDIT AND OVERDRAFT FACILITIES
In addition to the Senior Credit Facility, certain of Hexcel's European
subsidiaries have access to limited credit and overdraft facilities provided by
various local lenders. These credit and overdraft facilities, which are only
available to finance certain activities by specific subsidiaries, are primarily
uncommitted facilities that are terminable at the discretion of the lenders. The
credit and overdraft facilities in use by the Company's European subsidiaries as
of December 31, 1998 and 1997, other than the Senior or Revolving Credit
Facilities, bear interest at rates between 3.0% and 6.4% per annum.
CONVERTIBLE SUBORDINATED NOTES, DUE 2003
In July of 1996, Hexcel completed an offering of $114,500 in convertible
subordinated notes, due 2003 (the "Convertible Subordinated Notes"). The
Convertible Subordinated Notes carry an annual interest rate of 7% and are
convertible into Hexcel common stock at a conversion price of $15.81 per share,
subject to adjustment under certain conditions. Net proceeds of $111,351 from
this offering were used to repay amounts owed under the Company's Revolving
Credit Facility.
The Convertible Subordinated Notes are redeemable beginning in August of
1999, in whole or in part, at the option of Hexcel. The redemption prices range
from 103.5% to 100.0% of the outstanding principal amount, depending on the
period in which redemption occurs. As of December 31, 1998, $65 of the
Convertible Subordinated Notes had been converted resulting in the issuance of 4
shares of common stock.
CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011
The 7% convertible subordinated debentures, due 2011, are redeemable by
Hexcel prior to maturity. Mandatory redemption is scheduled to begin in 2002
through annual sinking fund requirements. The debentures are convertible prior
to maturity into common shares of the Company at $30.72 per share.
CIBA SENIOR SUBORDINATED NOTES PAYABLE
In connection with the purchase of the Acquired Ciba Business, Hexcel issued
to Ciba, the Ciba Senior Subordinated Notes in an aggregate principal amount of
$37,476. Hexcel also consented to an assignment by Ciba of Ciba's rights and
obligations under the Strategic Alliance Agreement to Ciba Speciality Chemical
Holdings Inc. and Ciba Specialty Chemicals Corporation (collectively "CSC"). In
connection with the assignment of these rights and obligations, the Ciba Senior
Subordinated Notes that were previously payable to Ciba are now payable to CSC.
The Ciba Senior Subordinated Notes are general unsecured obligations of
Hexcel that bear interest for three years at a rate of 7.5% per annum, payable
semiannually from February 29, 1996. The interest rate will increase to 10.5%
per annum on the third anniversary of the purchase of the Acquired Ciba Business
(February 28, 1999), and by an additional 0.5% per year thereafter until the
Ciba Senior Subordinated Notes mature in the year 2003.
At the date of issue, the aggregate fair value of the Ciba Senior
Subordinated Notes was $3,026 less than the aggregate principal amount. The
original discount of $3,026 reflects the absence of certain call protection
provisions from the terms of the Ciba Senior Subordinated Notes and the
difference between the stated interest rate on the Ciba Senior Subordinated
Notes and the estimated market rate for debt obligations of comparable quality
and maturity. This discount, which is amortized over the life of the Ciba
68
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
Senior Subordinated Notes, had an unamortized balance of $1,801 and $2,233 as of
December 31, 1998 and 1997, respectively.
On February 17, 1999, the Company repaid $12,500 of its Ciba Senior
Subordinated Notes payable. The repayment was financed with borrowings under the
Company's Senior Credit Facility. As a result of the repayment, the Company will
write-off approximately $600 of the unamortized discount in 1999.
As discussed in Note 9, Hexcel has various financial and other relationships
with CSC. Accordingly, the Company's net indebtedness to CSC under the Ciba
Senior Subordinated Notes has been classified as "indebtedness to related
parties" in the accompanying consolidated balance sheets.
9.75% SENIOR SUBORDINATED NOTES, DUE 2009
On January 21, 1999, the Company issued $240,000 of 9.75% Senior
Subordinated Notes, due 2009. Net proceeds of approximately $231,000 from this
offering were used to repay amounts owed under the Senior Credit Facility.
Simultaneously with the closing of this offering, the Company amended the Senior
Credit Facility to, among other things, reduce the available borrowing capacity
to $672,000, modify certain financial covenants and to permit the offering.
AGGREGATE MATURITIES OF NOTES PAYABLE AND INDEBTEDNESS TO RELATED PARTIES
As discussed above, on January 21, 1999, the Company issued $240,000 of
9.75% Senior Subordinated Notes, due 2009, for net proceeds of $231,000, and
amended its Senior Credit Facility. In addition, on February 17, 1999, the
Company repaid $12,500 of the Ciba Senior Subordinated Notes payable to CSC with
borrowings under the Senior Credit Facility. The table below reflects aggregate
maturities of notes payable and indebtedness to related parties, including the
amended due dates and maturities from the above events (see Note 8 for
maturities of capital lease obligations):
<TABLE>
<S> <C>
Payable during years ending December 31:
1999............................................ $ 21,983
2000............................................ 17,490
2001............................................ 20,154
2002............................................ 35,726
2003............................................ 176,000
2004 and thereafter............................. 548,473
---------
Total notes payable and indebtedness to related
parties......................................... $ 819,826
---------
---------
</TABLE>
ESTIMATED FAIR VALUES OF NOTES PAYABLE
The Senior Credit Facility, and substantially all of the various European
credit facilities and other notes payable outstanding as of December 31, 1998
and 1997, are variable-rate debt obligations. Accordingly, the estimated fair
values of each of these debt obligations approximates their respective book
values.
The aggregate fair values of the Convertible Subordinated Notes, due 2003,
and the Convertible Subordinated Debentures, due 2011, are estimated on the
basis of quoted market prices, although trading
69
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
in these debt securities is limited and may not reflect fair value. The
aggregate fair value of the Convertible Subordinated Notes, due 2003, was
approximately $96,100 and $196,000 as of December 31, 1998 and 1997,
respectively. The aggregate fair value of the Convertible Subordinated
Debentures, due 2011, was approximately $19,000 and $25,500 as of December 31,
1998 and 1997, respectively.
NOTE 8 -- LEASING ARRANGEMENTS
Assets, accumulated depreciation and related liability balances under
capital leasing arrangements as of December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Property, plant and equipment..................... $ 67,191 $ 10,197
Less accumulated depreciation..................... (6,593) (3,593)
--------- ---------
Net property, plant and equipment................. $ 60,598 $ 6,604
--------- ---------
--------- ---------
Capital lease obligations......................... $ 54,092 $ 5,473
Less current maturities........................... (4,884) (347)
--------- ---------
Long-term capital lease obligations, net.......... $ 49,208 $ 5,126
--------- ---------
--------- ---------
</TABLE>
As discussed in Note 2, Hexcel entered into a $50,000 capital lease for
property, plant and equipment used in the Acquired Clark-Schwebel Business. The
lease expires in September 2006 and includes various purchase options.
Certain sales and administrative offices, data processing equipment, and
manufacturing facilities are leased under operating leases. Rental expense under
operating leases was $4,656 in 1998, $4,559 in 1997 and $4,623 in 1996.
Future minimum lease payments as of December 31, 1998, were:
<TABLE>
<CAPTION>
TYPE OF LEASE
----------------------
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
Payable during years ending December 31:
1999............................................ $ 9,038 $ 4,377
2000............................................ 8,804 3,135
2001............................................ 8,513 1,691
2002............................................ 8,513 1,100
2003............................................ 8,022 474
2004 and thereafter............................. 29,158 2,380
--------- -----------
Total minimum lease payments.................. $ 72,048 $ 13,157
--------- -----------
--------- -----------
</TABLE>
Total minimum capital lease payments include $17,956 of imputed interest.
NOTE 9 -- RELATED PARTIES
In connection with the purchase of the Acquired Ciba Business, Hexcel
delivered 18,022 newly issued shares of Hexcel common stock to Ciba,
representing 49.9% of the Hexcel common stock issued and
70
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 -- RELATED PARTIES (CONTINUED)
outstanding at that date. In addition, the Company and Ciba entered into the
Strategic Alliance Agreement which currently provides for, among other things,
the designation by Ciba of four of the Company's ten directors, and the approval
of a majority of these four designated directors for the taking of certain
significant actions by the Company. On February 21, 1997, the Company consented
to an assignment by Ciba of Ciba's rights and obligations under the Strategic
Alliance Agreement to CSC. In connection with the assignment of these rights and
obligations, all of the Hexcel common stock previously held by Ciba is now held
by CSC.
As discussed in Notes 2 and 7, Hexcel delivered Ciba Senior Subordinated
Notes in an aggregate principal amount of $37,476 to Ciba in connection with the
purchase of the Acquired Ciba Business. In connection with the assignment of
Ciba's rights and obligations under the Strategic Alliance Agreement, the Senior
Subordinated Notes that were previously payable to Ciba are payable to CSC.
During 1996, the Company also delivered Senior Demand Notes to Ciba in an
aggregate principal amount of $5,329. The Senior Demand Notes were presented for
payment and paid in full prior to December 31, 1996. Aggregate interest expense
on the Ciba Senior Subordinated Notes in 1998, 1997 and 1996, was $2,811, $2,762
and $2,715, respectively.
Hexcel purchases certain raw materials from various CSC subsidiaries. The
Company's aggregate purchases from CSC subsidiaries for 1998, 1997 and 1996 were
$37,717, $34,255 and $15,116, respectively. Aggregate payables to various CSC
subsidiaries included in "accounts payable" and "accrued liabilities" as of
December 31, 1998 and 1997, were $3,314 and $1,196, respectively. In addition,
the Company sold certain finished products to the affiliates of CSC ("Ciba
Distributors") pursuant to a distribution agreement, which expired February 28,
1997. For the year ended December 31, 1998, there were no sales to Ciba
Distributors. For the years ended December 31, 1997 and 1996, aggregate sales to
Ciba Distributors were $5,620 and $32,408, respectively. As of December 31, 1998
and 1997, aggregate receivables from Ciba Distributors were not material to the
accompanying consolidated balance sheets.
71
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
RETIREMENT PLANS
Hexcel maintains defined benefit retirement plans covering most U.S. and
certain European employees as well as retirement savings plans covering eligible
U.S. employees. The defined benefit retirement plans are based on years of
service and employee compensation under either a career average or final pay
benefits' method. Hexcel's funding policy is to contribute the minimum amount
required by applicable regulations. In addition, the Company participates in a
union sponsored multi-employer pension plan covering certain U.S. employees with
union affiliations.
As part of the Acquired Ciba Business, the Company acquired a net pension
asset from a defined benefit retirement plan covering employees of a United
Kingdom subsidiary. Pursuant to the terms of the Strategic Alliance Agreement,
these employees continued to participate in a defined benefit retirement plan
sponsored by Ciba up to January 1, 1997, at which time, the accumulated benefit
obligation and net pension asset was valued and transferred to a newly created
plan sponsored by the Company.
Under the retirement savings plans, eligible U.S. employees may contribute
up to 16% of their compensation to an individual retirement savings account.
Hexcel makes matching contributions equal to 50% of employee contributions, not
to exceed 3% of employee compensation. In addition, the Company makes profit
sharing contributions when the Company meets or exceeds certain annual
performance targets. The net expense for these retirement savings plans was
approximately $5,798 for 1998, $5,957 for 1997 and $5,396 for 1996.
OTHER POSTRETIREMENT BENEFIT PLANS
Hexcel provides certain postretirement health care and life insurance
benefits to eligible retirees. Substantially all U.S. employees hired on or
before December 31, 1995, are eligible for benefits, as well as senior
executives and certain U.S. employees hired in connection with the Acquired Ciba
Business and the Acquired Hercules Business. The Company also maintains a
postretirement medical plan for its employees hired in connection with the
Acquired Clark-Schwebel Business.
Benefits are available to eligible employees who retire on or after age 58
after rendering at least 15 years of service to Hexcel, including years of
service rendered to the Acquired Ciba Business or the Acquired Hercules Business
prior to the dates of acquisition. Benefits consist of coverage of up to 50% of
the annual cost of certain health insurance plans, as well as annual life
insurance coverage equal to 65% of the final base pay of the retiree until the
age of 70. Upon reaching 70 years of age, life insurance coverage is reduced.
As part of the Acquired Clark-Schwebel Business, the Company assumed a
defined benefit postretirement medical plan, which covers substantially all
salaried and nonsalaried employees. The plan provides medical coverage to age 65
for employees who retire at age 62 or later, have at least 25 years of service
and participated in the plan prior to retirement.
72
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
The net periodic cost of Hexcel's defined benefit retirement and U.S.
postretirement plans for the years ended December 31, 1998, 1997 and 1996, were:
<TABLE>
<CAPTION>
U.S. PLANS EUROPEAN PLANS
RETIREMENT PLANS 1998 1997 1996 1998 1997 1996
- -------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year..... $ 3,314 $ 2,310 $ 2,365 $ 2,063 $ 1,933 $ 150
Interest cost on projected benefit obligation..... 1,180 817 646 2,301 2,168 132
Expected return on plan assets.................... (805) (739) (477) (4,365) (6,799) (109)
Net amortization and deferral..................... 567 265 273 898 4,002 --
--------- --------- --------- --------- --------- ---------
Net periodic pension cost......................... $ 4,256 $ 2,653 $ 2,807 $ 897 $ 1,304 $ 173
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
POSTRETIREMENT PLANS 1998 1997 1996
- -------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the year..... $ 127 $ 91 $ 80
Interest cost on projected benefit obligation..... 691 752 701
Net amortization and deferral..................... (318) (213) (222)
--------- --------- ---------
Net periodic postretirement benefit cost.......... $ 500 $ 630 $ 559
--------- --------- ---------
--------- --------- ---------
</TABLE>
73
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
The benefit obligation, fair value of plan assets, funded status and amounts
recognized in the consolidated financial statements, for Hexcel's retirement
plans and U.S. postretirement plans, as of and for the years ended December 31,
1998 and 1997 were:
<TABLE>
<CAPTION>
RETIREMENT PLANS
U.S. PLANS EUROPEAN PLANS POSTRETIREMENT PLANS
1998 1997 1998 1997 1998 1997
---------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation--beginning of year........... $ 14,910 $ 11,071 $ 32,627 $ 27,479 $ 10,836 $ 10,294
Service cost.................................... 3,314 2,310 2,063 1,933 127 91
Interest cost................................... 1,180 817 2,301 2,168 691 752
Introduction of a new plan...................... 1,200 -- -- -- -- --
Plan participants' contributions................ -- -- 511 459 41 53
Plan from the Acquired Clark-Schwebel
Business...................................... -- -- -- -- 4,139 --
Actuarial loss (gain)........................... 1,781 1,253 9,080 750 (1,927) 235
Benefits paid................................... (840) (541) (188) (162) (526) (589)
Other........................................... -- -- 705 -- -- --
---------- --------- --------- --------- ---------- ----------
Benefit obligation--end of year................... 21,545 14,910 47,099 32,627 13,381 10,836
---------- --------- --------- --------- ---------- ----------
Change in plan assets:
Fair value of plan assets-beginning of year..... 8,343 5,974 44,557 36,282 -- --
Actual return on plan assets.................... 1,517 739 4,941 6,798 -- --
Employer contributions.......................... 2,525 2,171 1,172 1,180 416 536
Plan participants' contributions................ -- -- 511 459 41 53
Benefits paid................................... (840) (541) (188) (162) (457) (589)
Other........................................... -- -- 705 -- -- --
---------- --------- --------- --------- ---------- ----------
Fair value of plan assets--end of year............ 11,545 8,343 51,698 44,557 -- --
---------- --------- --------- --------- ---------- ----------
Funded status:
Benefit obligation in excess of plan assets..... (10,000) (6,567) 4,598 11,930 (13,420) (10,836)
Unrecognized actuarial loss (gain).............. 2,369 1,436 4,905 (3,311) (549) (556)
Unrecognized net liability...................... 126 169 -- -- -- --
Unrecognized prior service cost................. 816 4 -- -- (4,743) (3,210)
---------- --------- --------- --------- ---------- ----------
Prepaid (accrued) benefit cost.................... $ (6,689) $ (4,958) $ 9,503 $ 8,619 $ (18,712) $ (14,602)
---------- --------- --------- --------- ---------- ----------
---------- --------- --------- --------- ---------- ----------
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $21,545, $18,858 and $11,545, respectively, as of
December 31, 1998 and $14,910, $13,037 and $8,343, respectively, as of December
31, 1997. In 1998, the Company updated certain assumptions with respect to its
European plans, resulting in an actuarial loss. Amortization of this loss and
other prior service costs, is calculated on a straight-line basis over the
expected future years of service of the plans' active participants. Assets for
the defined benefit pension plans generally consist of publicly traded
securities, bonds and cash investments.
74
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
As of December 31, 1998 and 1997, the prepaid benefit cost was included in
"investment in affiliated companies and other assets" in the accompanying
consolidated balance sheets. For the same periods, the accrued benefit cost was
included in "accrued compensation and benefits" and "other non-current
liabilities" in the accompanying consolidated balance sheets.
Assumptions used to estimate the actuarial present value of benefit
obligations as of December 31, 1998, 1997 and 1996, were:
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
U.S. defined benefit retirement plans:
Discount rates.................................. 7.0% 7.0% 7.5%
Rate of increase in compensation................ 4.5% 4.5% 4.5%
Expected long-term rate of return on plan
assets........................................ 9.0% 9.0% 9.0%
European defined benefit retirement plans:
Discount rates.................................. 5.5% - 5.8% 6.5% - 7.0% 6.5% - 7.5%
Rates of increase in compensation............... 1.5% - 4.0% 2.0% - 5.0% 2.0% - 4.5%
Expected long-term rates of return on plan
assets........................................ 6.5% - 7.0% 6.5% - 7.5% 6.5% - 9.0%
Postretirement benefit plans:
Discount rates.................................. 6.8% - 7.0% 7.0% 7.5%
</TABLE>
For measurement purposes, the annual rate of increase in the per capita cost
of covered health care benefits were assumed at 7.5% to 10.2% for medical, and
5.0% for dental and vision for 1999. These rates were assumed to decrease
gradually to 5.5% to 8.4%, and remain at 5.0%, respectively, by the year 2002.
The table below presents the impact of a one-percentage point increase and a
one-percentage point decrease in the assumed health care cost trend on the total
of service and interest cost components and on the postretirement benefit
obligation.
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
One-percentage point increase:
Effect on total service and interest cost
components.................................... $ 67 $ 47
Effect on postretirement benefit obligation..... 778 608
One-percentage point decrease:
Effect on total service and interest cost
components.................................... (55) (43)
Effect on postretirement benefit obligation..... (662) (527)
</TABLE>
75
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- INCOME TAXES
PROVISION FOR INCOME TAXES
Income (loss) before income taxes and the provision (benefit) for income
taxes for the years ended December 31, 1998, 1997 and 1996, were:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S............................................. $ 30,590 $ 24,197 $ (11,956)
International................................... 47,774 26,555 (3,798)
--------- ---------- ----------
Total income (loss) before income taxes........... $ 78,364 $ 50,752 $ (15,754)
--------- ---------- ----------
--------- ---------- ----------
Provision (benefit) for income taxes:
Current:
U.S............................................. $ 6,352 $ 798 $ (1,600)
International................................... 15,240 9,527 5,556
--------- ---------- ----------
Current provision for income taxes................ 21,592 10,325 3,956
--------- ---------- ----------
--------- ---------- ----------
Deferred:
U.S............................................. 4,662 (33,935) --
International................................... 2,188 732 (520)
--------- ---------- ----------
Deferred provision (benefit) for income taxes..... 6,850 (33,203) (520)
--------- ---------- ----------
Total provision (benefit) for income taxes........ $ 28,442 $ (22,878) $ 3,436
</TABLE>
A reconciliation of the provision (benefit) to the U.S. federal statutory
income tax rate of 35%, 35% and 34% for the years ended December 31, 1998, 1997
and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ---------
<S> <C> <C> <C>
Provision (benefit) at U.S. federal statutory
rate............................................ $ 27,732 $ 17,763 $ (5,356)
U.S. state taxes, less federal tax benefit........ 807 519 21
Impact of different international tax rates,
adjustments to income tax accruals and other.... 1,103 18,773 (9,656)
Valuation allowance............................... (1,200) (59,933) 18,427
--------- ---------- ---------
Total provision (benefit) for income taxes........ $ 28,442 $ (22,878) $ 3,436
</TABLE>
In accordance with SFAS No. 109, "Accounting for Income Taxes", in 1996 the
Company had fully provided valuation allowance reserves against its net deferred
tax assets primarily in the U.S. and Belgium where there were uncertainties
concerning the Company's ability to generate sufficient future taxable income to
realize these assets. In 1997, the Company reversed $59,900 of its valuation
allowance reserve as follows: $17,000 due to current year profitable U.S.
operations, $39,000 due to the Company's assessment that the realization of the
remaining U.S. net deferred tax assets is more likely than not, and $3,900 in
Belgium due to a gain on sale of certain tangible and intangible assets to other
Hexcel subsidiaries. The Company continues to reserve the balance of the net
deferred tax asset related to its Belgium operations.
The Company has made no U.S. income tax provision for approximately $76,000
of undistributed earnings of international subsidiaries as of December 31, 1998.
Such earnings are considered to be
76
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- INCOME TAXES (CONTINUED)
permanently reinvested. The additional U.S. income tax on these earnings, if
repatriated, would be offset in part by foreign tax credits.
DEFERRED INCOME TAXES
Deferred income taxes result from temporary differences between the
recognition of items for income tax purposes and financial reporting purposes.
Principal temporary differences as of December 31, 1998 and 1997, were:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net operating loss carryforwards.................. $ 19,200 $ 21,000
Reserves and other, net........................... 24,150 31,580
Accrued business acquisition and consolidation
expenses........................................ 3,000 4,380
Accelerated depreciation and amortization......... (14,130) (16,690)
Valuation allowance............................... (7,300) (8,500)
---------- ----------
Net deferred tax asset............................ $ 24,920 $ 31,770
</TABLE>
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1998, Hexcel had net operating loss ("NOL") carryforwards
for U.S. federal and Belgium income tax purposes of approximately $45,000 and
$4,500, respectively. The U.S. NOL carryforwards, which are available to offset
future taxable income, expire at various dates through the year 2012. As a
result of the ownership change, which occurred in connection with the purchase
of the Acquired Ciba Business, the Company has a limitation on the utilization
of U.S. NOL carryforwards of approximately $12,000 per year.
NOTE 12 -- STOCKHOLDERS' EQUITY
COMMON STOCK OUTSTANDING
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(NUMBER OF SHARES -- IN
THOUSANDS)
<S> <C> <C> <C>
Common stock:
Balance, beginning of year........................ 36,891 36,592 18,091
Issuance of stock to Ciba......................... -- -- 18,022
Activity under stock plans and other.............. 284 296 479
Conversion of Subordinated Notes.................. 1 3 --
--------- --------- ---------
Balance, end of year.............................. 37,176 36,891 36,592
--------- --------- ---------
Treasury stock:
Balance, beginning of year........................ 35 31 --
Repurchased....................................... 812 4 31
--------- --------- ---------
Balance, end of year.............................. 847 35 31
--------- --------- ---------
Common stock outstanding.......................... 36,329 36,856 36,561
--------- --------- ---------
</TABLE>
77
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 -- STOCKHOLDERS' EQUITY (CONTINUED)
In 1998, the Company's Board of Directors approved plans to repurchase up to
$20,000 of the Company's common stock. During the year ended December 31, 1998,
the Company repurchased 812 shares of its common stock at an average cost of
$12.32 per share, for a total of $10,000. The Board of Directors may also
approve additional stock buybacks from time to time subject to market conditions
and the terms of the Company's credit agreements and indentures.
STOCK-BASED INCENTIVE PLANS
The Company has various stock option and management incentive plans for
eligible employees, officers, directors and consultants. These plans provide for
awards in the form of stock options, stock appreciation rights, restricted
stock, restricted stock units, and other stock-based awards. Options to purchase
common stock are generally granted at the fair market value on the date of
grant. Substantially all of these options have a ten-year term and generally
vest over a 3-year period. In 1998 and 1997, Hexcel's stockholders approved
various amendments to the Company's stock-based incentive plans, which increased
the aggregate number of stock issuable under these plans by 4,500 to 7,350.
As of December 31, 1998, 1997 and 1996, the Company had outstanding a total
of 518, 353 and 286, of performance accelerated restricted stock units ("PARS"),
respectively. PARS are convertible to an equal number of shares of Hexcel common
stock and generally vest in increments through 2005, subject to certain terms of
employment and other circumstances which may accelerate the vesting period. As
of December 31, 1998, 1997 and 1996, 301, 286, and 0 PARS were vested,
respectively. Approximately $1,660, $3,272 and $529 of compensation expense was
recognized in 1998, 1997 and 1996, respectively, with respect to the PARS and
certain other stock-based incentive plans.
In addition to the above, during 1996, the Company recognized $3,635 of
compensation expense under the intrinsic value method resulting from stock
options which vested in connection with the purchase of the Acquired Ciba
Business. This compensation expense was based on the difference between the
exercise price of the stock options granted and the market price of Hexcel
common stock on the date that the Company's stockholders approved the Incentive
Stock Plan under which these options were granted. The recognition of
compensation expense in connection with these stock options resulted in a
corresponding $3,635 increase in the additional paid-in capital of the Company.
78
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 -- STOCKHOLDERS' EQUITY (CONTINUED)
Stock option data for the three years ended December 31, 1998, 1997 and
1996, were:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
----------- -----------
<S> <C> <C>
Options outstanding at January 1, 1996............ 1,014 $ 7.27
Options granted................................... 1,577 $ 12.69
Options exercised................................. (447) $ 9.40
Options expired or canceled....................... (85) $ 11.45
----------- -----------
Options outstanding at December 31, 1996.......... 2,059 $ 10.36
Options granted................................... 3,094 $ 18.24
Options exercised................................. (289) $ 9.64
Options expired or canceled....................... (25) $ 15.51
----------- -----------
Options outstanding at December 31, 1997.......... 4,839 $ 15.39
Options granted................................... 3,253 $ 12.23
Options exercised................................. (237) $ 8.53
Options expired or canceled....................... (2,740) $ 18.52
----------- -----------
Options outstanding at December 31, 1998.......... 5,115 $ 12.05
----------- -----------
</TABLE>
The number of options exercisable as of December 31, 1998, 1997 and 1996
were 1,505, 1,193 and 841, respectively, at a weighted average exercise price of
$11.54, $9.80 and $8.64, respectively.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
OPTIONS REMAINING LIFE EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- -------------------------------------------------- ----------- -------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.18 - 4.75.................................... 173 5.9 $ 4.58 120 $ 4.75
$ 4.76 - 10.00.................................... 907 8.8 $ 8.10 252 $ 6.41
$10.01 - 15.00.................................... 3,322 8.9 $12.17 900 $12.46
$15.01 - 20.00.................................... 550 7.9 $16.58 226 $16.62
$20.01 - 24.00.................................... 141 9.0 $23.98 -- --
$24.01 - 30.00.................................... 20 9.3 $26.95 7 $26.95
$30.01 - 32.06.................................... 2 8.2 $30.49 -- $30.68
--
----- -------- ----- --------
$ 4.18 - 32.06.................................... 5,115 8.7 $12.05 1,505 $11.54
--
--
----- -------- ----- --------
----- -------- ----- --------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
In July 1997, the Company established an ESPP to provide eligible employees
an additional opportunity to share in the ownership of Hexcel. The maximum
number of common stock reserved for issuance under the ESPP is 200. Under the
ESPP, eligible employees may contribute up to 10% of their base earnings toward
the quarterly purchase of the Company's common stock at a purchase price equal
to
79
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 -- STOCKHOLDERS' EQUITY (CONTINUED)
85% of the fair market value of the common stock on the purchase date. During
1998, approximately 36 common stock were issued under the ESPP.
PRO FORMA DISCLOSURES
The Company has elected to continue to follow APB Opinion No. 25 for
accounting for its stock-based incentive plans. Had compensation expense for the
Company's stock option plans been determined as prescribed by SFAS 123, pro
forma net income (loss) and related per share amounts, would have been as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported..................................... $ 50,439 $ 73,630 $ (19,190)
Pro forma....................................... 48,172 67,355 (19,233)
Basic net income (loss) per share:
As reported..................................... $ 1.38 $ 2.00 $ (0.58)
Pro forma....................................... 1.31 1.83 (0.58)
Diluted net income (loss) per share:
As reported..................................... $ 1.24 $ 1.74 $ (0.58)
Pro forma....................................... 1.19 1.60 (0.58)
</TABLE>
The weighted average fair value of options granted during 1998, 1997 and
1996 was $12.23, $18.24 and $12.75, respectively. The following ranges of
assumptions were used in the Black-Scholes pricing models for options granted in
1998, 1997 and 1996: risk-free interest of 4.6% to 6.3%, estimated volatility of
40% to 51%, dividend yield of 0.0%, and an expected life of 1 to 10 years.
80
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 -- NET INCOME (LOSS) PER SHARE
Computations of basic and diluted net income (loss) per share for the years
ended December 31, 1998, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ----------
<S> <C> <C> <C>
Basic net income (loss) per share:
Net income (loss)......................................... $ 50,439 $ 73,630 $ (19,190)
--------- --------- ----------
Weighted average common shares outstanding................ 36,675 36,748 33,351
--------- --------- ----------
Basic net income (loss) per share........................... $ 1.38 $ 2.00 $ (0.58)
--------- --------- ----------
Diluted net income (loss) per share:
Net income (loss)......................................... $ 50,439 $ 73,630 $ (19,190)
Effect of dilutive securities --
Senior Subordinated Notes, due 2003....................... 5,087 5,087 --
Senior Subordinated Debentures, due 2011.................. 1,139 1,139 --
--------- --------- ----------
Adjusted net income (loss).................................. $ 56,665 $ 79,856 $ (19,190)
--------- --------- ----------
Weighted average common shares outstanding.................. 36,675 36,748 33,351
Effect of dilutive securities --
Stock options............................................. 924 1,176 --
Senior Subordinated Notes, due 2003....................... 7,238 7,239 --
Senior Subordinated Debentures, due 2011.................. 834 834 --
--------- --------- ----------
Diluted weighted average common shares outstanding.......... 45,671 45,997 33,351
--------- --------- ----------
Diluted net income (loss) per share......................... $ 1.24 $ 1.74 $ (0.58)
--------- --------- ----------
--------- --------- ----------
</TABLE>
The Convertible Subordinated Notes, due 2003, which were issued in 1996, and
the Convertible Subordinated Debentures, due 2011, were excluded from the 1996
computation of diluted net loss per share as they were antidilutive.
Substantially all of the Company's stock options were included in the
calculation of the diluted earnings per share for the years ended December 31,
1998 and 1997.
NOTE 14 -- CONTINGENCIES
Hexcel is involved in litigation, investigations and claims arising out of
the conduct of its business, including those relating to commercial
transactions, and environmental, health and safety matters. The Company
estimates and accrues its liabilities resulting from such matters based on a
variety of factors, including outstanding legal claims and proposed settlements,
assessments by internal and external counsel of pending or threatened
litigation, and assessments by environmental engineers and consultants of
potential environmental liabilities and remediation costs. Such estimates
exclude counterclaims against other third parties. Such estimates are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
Although it is impossible to determine the level of future expenditures for
legal, environmental and related matters with any degree of certainty, it is the
Company's opinion, based on available information, that it is unlikely that
these matters, individually or in the aggregate, will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
81
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 -- CONTINGENCIES (CONTINUED)
LEGAL AND ENVIRONMENTAL CLAIMS AND PROCEEDINGS
Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess which are
included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. The
Company believes that it has limited or no liability for cleanup costs at these
sites and intends to vigorously defend itself in these matters.
Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act,
Hexcel signed an administrative consent order to pay for the environmental
remediation of a manufacturing facility it owns and formerly operated in Lodi,
New Jersey. The Company's estimate of the remaining cost to satisfy this consent
order is accrued in the accompanying consolidated balance sheets. The ultimate
cost of remediating the Lodi site will depend on developing circumstances.
In connection with the purchase of the Acquired Ciba Business, Hexcel
assumed various liabilities including a liability with respect to certain
environmental remediation activities at an acquired facility in Kent,
Washington. The Company was a party to a cost sharing agreement regarding the
operation of certain environmental remediation systems necessary to satisfy a
post-closure care permit issued to a previous owner of the Kent site by the U.S.
Environmental Protection Agency. Under the terms of the cost sharing agreement,
the Company was obligated to reimburse the previous owner for a portion of the
cost of the required remediation activities. The Company has determined that the
cost sharing agreement terminated on December 22, 1998, however, the other party
disputes this determination. The Company's estimate of other costs associated
with the cleanup of the Kent site are accrued in the accompanying consolidated
balance sheets.
PRODUCT CLAIMS
In 1993, Hexcel became aware of an aluminum honeycomb sandwich panel
delamination problem with panels produced by its wholly-owned Belgium
subsidiary, Hexcel Composites S.A., and installed in rail cars in France and
Spain. Two customers alleged that Hexcel Composites S.A. was responsible for the
problem. In 1998, the Company negotiated a settlement to be paid in 1999 with
one customer and the Company expects to settle with the remaining customer in
1999. The Company's estimated liability for this matter is accrued in the
accompanying consolidated balance sheets.
82
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information, including non-cash financing and
investing activities, for the years ended December 31, 1998, 1997 and 1996,
consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash paid for:
Interest....................................................................... $ 28,774 $ 22,300 $ 14,061
Taxes.......................................................................... 26,359 3,929 8,911
--------- --------- ---------
Non-cash items:
Debt issued in connection with the Acquired Ciba Business...................... -- -- 37,231
Common stock issued in connection with the Acquired Ciba Business.............. -- -- 144,174
Common stock issued under incentive plans...................................... 1,874 3,272 529
Conversion of Senior Subordinated Notes........................................ 15 50 --
Compensation expense in connection with the issuance of common stock (see Note
12).......................................................................... -- -- 3,635
Capital lease obligation in connection with the Acquired Clark-Schwebel
Business..................................................................... 50,000 -- --
</TABLE>
83
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- SEGMENT INFORMATION
The financial results for Hexcel's operating segments have been prepared
using a management approach, which is consistent with the basis and manner in
which Hexcel management internally segregates financial information for the
purposes of assisting in making internal operating decisions. Hexcel's operating
segments and related products, are as follows:
REINFORCEMENT PRODUCTS: This segment manufactures and sells carbon fibers
and carbon, glass and aramid fiber fabrics. These reinforcement products
comprise the foundation of most composite materials, parts and structures. The
segment weaves electronic fiberglass fabrics that are a substrate for PCBs. All
of the Company's electronic sales come from reinforcement fabric sales. This
segment also sells products for general industrial and recreation applications
such as decorative blinds and soft body armor. In addition, this segment sells
to the Company's Composite Materials segment and other third party customers in
the commercial aerospace and space and defense markets. Sales from the Acquired
Clark-Schwebel Business are included in this segment.
COMPOSITE MATERIALS: This segment manufactures and sells composite
materials, including prepregs, honeycomb, structural adhesives, sandwich panels
and specially machined honeycomb parts, primarily to the commercial aerospace
and space and defense markets, as well as to the general industrial and
recreational markets. This segment also sells to the Company's Engineered
Products segment.
ENGINEERED PRODUCTS: This segment manufactures and sells a range of
lightweight, high strength composite structures and interiors, primarily to the
commercial aerospace and space and defense markets.
Hexcel evaluates performance based on adjusted income before business
acquisition and consolidation ("BA&C") expenses, interest and taxes ("Adjusted
EBIT"), and generally accounts for intersegment sales based on arm's length
prices. Corporate and other expenses are not allocated to the operating
segments. The following table presents financial information on the Company's
operating segments as of December 31, 1998, 1997 and 1996, and for the years
then ended:
<TABLE>
<CAPTION>
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
1998
Net sales to external customers............................ $ 224,815 $ 653,484 $ 210,745 $ 1,089,044
Intersegment sales......................................... 130,288 11,807 50 142,145
------------- ----------- ----------- ------------
Total sales................................................ 355,103 665,291 210,795 1,231,189
Adjusted EBIT.............................................. 57,433 87,126 16,009 160,568
Depreciation and amortization.............................. 23,558 17,106 3,669 44,333
Equity in earnings of affiliated companies................. 517 -- -- 517
BA&C expenses.............................................. 1,645 3,171 5,500 10,316
Segment assets............................................. 788,445 423,183 133,715 1,345,343
Investment in non-consolidated affiliates.................. 70,291 -- -- 70,291
Capital expenditures....................................... 21,137 33,168 9,324 63,629
BA&C payments.............................................. $ 598 $ 7,141 $ -- $ 7,739
------------- ----------- ----------- ------------
</TABLE>
84
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
REINFORCEMENT COMPOSITE ENGINEERED
PRODUCTS MATERIALS PRODUCTS TOTAL
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
1997
Net sales to external customers............................ $ 171,072 $ 577,118 $ 188,665 $ 936,855
Intersegment sales......................................... 124,736 16,710 -- 141,446
------------- ----------- ----------- ------------
Total sales................................................ 295,808 593,828 188,665 1,078,301
Adjusted EBIT.............................................. 40,399 84,151 14,702 139,252
Depreciation and amortization.............................. 13,791 16,594 2,958 33,343
BA&C expenses.............................................. 1,707 9,579 -- 11,286
Segment assets............................................. 221,335 413,043 128,678 763,056
Capital expenditures....................................... 23,360 22,617 8,399 54,376
BA&C payments.............................................. 2,849 16,796 -- 19,645
------------- ----------- ----------- ------------
1996
Net sales to external customers............................ 155,231 438,220 101,800 695,251
Intersegment sales......................................... 57,168 7,609 23 64,800
------------- ----------- ----------- ------------
Total sales................................................ 212,399 445,829 101,823 760,051
Adjusted EBIT.............................................. 25,806 44,604 2,889 73,299
Depreciation and amortization.............................. 8,877 13,022 2,455 24,354
BA&C expenses.............................................. 1,699 27,998 -- 29,697
Segment assets............................................. 227,415 350,218 118,383 696,016
Capital expenditures....................................... 21,569 15,056 3,883 40,508
BA&C payments.............................................. $ 1,555 $ 6,456 $ -- $ 8,011
------------- ----------- ----------- ------------
</TABLE>
85
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- SEGMENT INFORMATION (CONTINUED)
RECONCILIATION OF REPORTABLE SEGMENTS TO CONSOLIDATED TOTALS
Reconciliations of the totals reported for the operating segments to the
applicable line items in the consolidated financial statements are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES:
Total Adjusted EBIT for reportable segments................................ $ 160,568 $ 139,252 $ 73,299
Less:
Total BA&C expenses for reportable segments................................ 10,316 11,286 29,697
Corporate BA&C expenses.................................................... 2,395 14,057 12,673
------------ ---------- ----------
Total consolidated BA&C expenses........................................... 12,711 25,343 42,370
Corporate & other expenses................................................. 30,818 33,338 25,125
Interest expense........................................................... 38,775 25,705 21,537
Other income............................................................... -- -- (2,994)
Eliminations............................................................... (100) 4,114 3,015
------------ ---------- ----------
Consolidated income (loss) before income taxes............................. 78,364 50,752 (15,754)
------------ ---------- ----------
DEPRECIATION AND AMORTIZATION:
Total depreciation and amortization for reportable segments................ 44,333 33,343 24,354
Corporate depreciation and amortization.................................... 3,121 2,454 2,376
------------ ---------- ----------
Total consolidated depreciation and amortization........................... 47,454 35,797 26,730
------------ ---------- ----------
ASSETS:
Total assets for reportable segments....................................... 1,345,343 763,056 696,016
Corporate assets........................................................... 96,376 86,381 44,670
Eliminations............................................................... (37,558) (37,851) (38,950)
------------ ---------- ----------
Total consolidated assets.................................................. $ 1,404,161 $ 811,586 $ 701,736
------------ ---------- ----------
CAPITAL EXPENDITURES:
Total capital expenditures for reportable segments......................... $ 63,629 $ 54,376 $ 40,508
Corporate expenditures..................................................... 2,901 2,993 3,061
------------ ---------- ----------
Total consolidated capital expenditures.................................... 66,530 57,369 43,569
------------ ---------- ----------
BA&C PAYMENTS:
Total BA&C payments for reportable segments................................ 7,739 19,645 8,011
Corporate BA&C payments.................................................... 912 13,950 3,568
------------ ---------- ----------
Total consolidated BA&C payments........................................... $ 8,651 $ 33,595 $ 11,579
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
86
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- SEGMENT INFORMATION (CONTINUED)
GEOGRAPHIC DATA
Sales and long-lived assets, by geographic area, consisted of the following
for the three years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ---------- ----------
<S> <C> <C> <C>
NET SALES TO EXTERNAL CUSTOMERS:
United States.............................................................. $ 687,566 $ 598,555 $ 394,524
International
France................................................................... 178,878 165,738 151,638
United Kingdom........................................................... 65,999 49,395 48,172
Other.................................................................... 156,601 123,167 100,917
------------ ---------- ----------
Total international........................................................ 401,478 338,300 300,727
------------ ---------- ----------
Total consolidated net sales............................................... 1,089,044 936,855 695,251
------------ ---------- ----------
LONG-LIVED ASSETS:
United States.............................................................. 831,382 304,191 266,191
International
France................................................................... 42,155 37,313 42,661
United Kingdom........................................................... 46,428 43,123 41,444
Other.................................................................... 31,689 30,008 34,509
------------ ---------- ----------
Total international........................................................ 120,272 110,444 118,614
------------ ---------- ----------
Total consolidated long-lived assets....................................... $ 951,654 $ 414,635 $ 384,805
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Net sales are attributed to geographic areas based on the location in which
the sale originated. U.S. net sales include U.S. exports to non-affiliates of
$99,976, $70,875 and $53,333, for the years ended December 31, 1998, 1997 and
1996, respectively. Long-lived assets primarily consist of property, plant and
equipment, intangibles, investments in affiliated companies and other assets,
less long-term deferred tax assets.
SIGNIFICANT CUSTOMERS
To the extent that the end application of net sales can be identified, the
Boeing Company and their subcontractors accounted for approximately 35%, 36% and
22% of 1998, 1997 and 1996 net sales, respectively. Similarly, the Airbus
Industrie consortium and their subcontractors accounted for approximately 11%,
10% and 10%, of 1998, 1997 and 1996 net sales, respectively.
87
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 17 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1998 and 1997,
were:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1998
Net sales........................................................ $ 256,741 $ 273,537 $ 255,303 $ 303,463
Gross margin..................................................... 66,096 71,221 61,847 72,095
Business acquisition and consolidation expenses.................. -- -- (711) (12,000)
Operating income................................................. 33,736 38,156 27,563 17,584
Net income....................................................... 17,070 19,978 11,498 1,893
---------- ---------- ---------- ----------
Net income per share:
Basic.......................................................... $ 0.46 $ 0.54 $ 0.31 $ 0.05
Diluted........................................................ 0.40 0.46 0.29 0.05
Dividends per share.............................................. -- -- -- --
---------- ---------- ---------- ----------
Market price:
High........................................................... $ 28.13 $ 31.38 $ 24.38 $ 14.19
Low............................................................ 21.25 22.63 9.69 7.06
---------- ---------- ---------- ----------
1997
Net sales........................................................ $ 214,009 $ 241,629 $ 226,611 $ 254,606
Gross margin..................................................... 46,889 57,818 54,967 62,958
Business acquisition and consolidation expenses.................. (2,899) (2,818) (15,433) (4,193)
Operating income................................................. 16,384 24,516 9,331 26,226
Net income....................................................... 8,226 15,135 37,948 12,321
---------- ---------- ---------- ----------
Net income per share:
Basic.......................................................... $ 0.22 $ 0.41 $ 1.03 $ 0.33
Diluted........................................................ 0.22 0.38 0.87 0.30
Dividends per share.............................................. -- -- -- --
---------- ---------- ---------- ----------
Market price:
High............................................................. $ 21.38 $ 20.00 $ 30.25 $ 31.75
Low.............................................................. 16.00 16.38 18.75 22.25
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Results for the quarters ended September 30, 1998 and December 31, 1998,
include the results of the Acquired Clark-Schwebel Business, which was acquired
on September 15, 1998. The Acquired Clark-Schwebel Business had net sales and
operating income of $7,000 and $400, and $51,400 and $7,200, for the quarters
ended September 30, 1998 and December 31, 1998, respectively. For the nine
months ended September 30, 1997, except for the $39,000 reversal of the U.S. tax
valuation allowance reserve on September 30, 1997, there was no net federal tax
provision recorded on the Company's U.S. income.
88
<PAGE>
Exhibit 10.2
SCHEDULE
TO THE
MASTER AGREEMENT
dated as of September 15, 1998
between
CREDIT LYONNAIS NEW YORK BRANCH ("PARTY A")
the New York Branch of Credit Lyonnais S.A., a banking corporation
organized and existing under the laws of the Republic of France
and
HEXCEL CORPORATION ("PARTY B")
a corporation organized and existing
under the laws of the State of Delaware
PART 1. TERMINATION PROVISIONS
(a) "SPECIFIED ENTITY" means in relation to Party A for the purpose of:
Section 5(a)(v), None
Section 5(a)(vi), None
Section 5(a)(vii), None
Section 5(b)(iv), None
and in relation to Party B for the purpose of:
Section 5(a)(v), Affiliates
Section 5(a)(vi), Affiliates
Section 5(a)(vii), Material Subsidiary
Section 5(b)(iv), None
(b) "SPECIFIED TRANSACTION" will have the meaning specified in Section 14
of this Agreement.
(c) The "CROSS DEFAULT" provisions of Section 5(a)(vi) of this Agreement
will apply to both parties, but shall exclude any payment default that
results solely from wire transfer difficulties or an error or omission
of an administrative or operational nature (so long as sufficient
funds are available to the relevant party on the relevant date), but
only if payment is made within three Business Days after such transfer
difficulties have been corrected or the error or omission has been
discovered, provided however, that in line seven the phrase "or
becoming capable at such time of being declared" is hereby deleted
If such provisions apply:
"SPECIFIED INDEBTEDNESS" will have the meaning specified in Section 14
of this Agreement, except that such term shall not include any
obligation in respect of deposits received in the ordinary course of
Party A's banking business.
<PAGE>
"THRESHOLD AMOUNT" means U.S. $10,000,000 for Party A and Party B (or
its equivalent in any other currency, currency unit or combination
thereof).
(d) "TERMINATION CURRENCY" means United States Dollars.
(e) The "CREDIT EVENT UPON MERGER" provisions of Section 5(b)(iv) of this
Agreement will apply to Party A and to Party B.
(f) The "AUTOMATIC EARLY TERMINATION" provision of Section 6(a) of this
Agreement will not apply to Party A and will not apply to Party B.
(g) PAYMENTS ON EARLY TERMINATION. For the purpose of Section 6(e) of
this Agreement:
(i) Market Quotation will apply.
(ii) The Second Method will apply.
(h) ADDITIONAL TERMINATION EVENT will not apply.
(i) ADDITIONAL EVENT OF DEFAULT will not apply.
PART 2. TAX REPRESENTATIONS
(a) PAYER REPRESENTATIONS. For the purpose of Section 3(e) of this
Agreement, each of Party A and Party B represent that it is not
required by any applicable law, as modified by the practice of any
relevant governmental revenue authority, of any Relevant Jurisdiction
to make any deduction or withholding for or on account of any Tax from
any payment (other than interest under Section 2(e), 6(d)(ii) or 6(e)
of this Agreement) to be made by it to the other party under this
Agreement. In making this representation, it may rely on(i) the
accuracy of any representation made by the other party pursuant to
Section 3(f) of this Agreement; (ii) the satisfaction of the agreement
of the other party contained in Section 4(a)(i) or 4(a)(iii) of this
Agreement and the accuracy and effectiveness of any document provided
by the other party pursuant to Section 4(a)(i) or 4(a)(iii) of this
Agreement; and (iii) the satisfaction of the agreement of the other
party contained in Section 4(d) of this Agreement; PROVIDED, that it
shall not be a breach of this representation where reliance is placed
on clause (ii) and the other party does not deliver a form or document
under Section 4(a)(iii) of this Agreement by reason of material
prejudice to its legal or commercial position.
(b) PAYEE REPRESENTATIONS
(i) PARTY A /PAYEE TAX REPRESENTATION. For the purpose of Section
3(f) of this Agreement, Party A represents that each payment received
or to be received by it in connection with this Agreement will be
effectively connected with its conduct of a trade or business in the
United States of America.
(ii) PARTY B/ PAYEE TAX REPRESENTATION. For the purpose of Section
3(f) of this Agreement, Party B represents that it is a corporation
organized under the laws of the State of Delaware.
PART 3. AGREEMENT TO DELIVER DOCUMENTS
For the purpose of Sections 4(a)(i) and (ii) of this Agreement each
party agrees to deliver the following documents, as applicable:
<PAGE>
(a) Tax forms, documents or certificates to be delivered are:
Party A agrees to execute and deliver to Party B, a United States
Internal Revenue Service Form 4224, or any successor form, (i) upon
execution of this Agreement, (ii) promptly upon reasonable demand by
Party B, and (iii) promptly upon learning that any such form
previously provided by Party A has become obsolete or incorrect.
(b) Other documents to be delivered are:
<TABLE>
<CAPTION>
COVERED BY
PARTY REQUIRED TO DATE BY WHICH SECTION 3(d)
DELIVER DOCUMENT FORM/DOCUMENT/CERTIFICATE TO BE DELIVERED REPRESENTATION
- --------------------------- -------------------------------------- ----------------- --------------
<S> <C> <C> <C>
Certified copies of all documents
Party B evidencing necessary corporate or Upon execution of Yes
partnership or other authorizations and Agreement
approvals with respect to Party B's entry
into Swap Transactions and Agreements
thereof.
A certificate of an authorized officer of
Party A and Party B the party or Credit Support Provider in Upon execution of the Yes
respect of such party, if any, certifying Agreement
the names, true signatures and authority
of the officers of the party signing this
Agreement, each Confirmation and any
applicable Credit Support Document.
Party A An internal legal opinion. Upon execution of No
this Agreement
Party B An opinion of counsel to Party B in form Upon execution of this No
and substance satisfactory to Party A. Agreement
Party B Evidence of acceptance of appointment by Upon execution of No
Process Agent. this Agreement
Party B Quarterly unaudited financial statements. Promptly upon Yes
request
Party A and Party B Annual audited financial statements.* Promptly upon Yes
request
</TABLE>
*ANNUAL FINANCIAL STATEMENTS PROVIDED BY PARTY A SHALL BE THE ANNUAL REPORT OF
CREDIT LYONNAIS, S.A.
<PAGE>
PART 4. MISCELLANEOUS
(a) ADDRESSES FOR NOTICES. For the purpose of Section 12(a) of this
Agreement:
Address for notices or communications to Party A:
Address: 1301 Avenue of the Americas, New York, New York 10019
Attention: Treasury Department
Telex No.: 62410 Answerback: CREDW
Telephone No: (212) 261-7310
Facsimile No.: (212) 459-3167
Address for notices or communications to Party B:
Address: Two Stamford Plaza, 281 Tresser Boulevard, 16th Floor,
Stamford, CT 06901-3238
Attention: Treasurer
Telephone No.: (203) 969-0666
Facsimile No.: (203) 358-3993
(b) PROCESS AGENT. For the purpose of Section 13(c) of this Agreement,
Party B appoints as its Process Agent: Corporation Service Company,
80 State Street, 6th floor, Albany, New York 12207-2543.
(c) OFFICES. The provisions of Section 10(a) will apply to Party A and
Party B.
(d) MULTIBRANCH PARTY. For the purpose of Section 10(c), (i) Party A is
not a Multibranch Party, and (ii) Party B is not a Multibranch Party.
(e) CALCULATION AGENT. The Calculation Agent shall be Party A.
CREDIT SUPPORT DOCUMENT. None.
(g) CREDIT SUPPORT PROVIDER. Credit Support Provider means: (i) in
relation to Party A: None; (ii) in relation to Party B: None.
(h) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT
REFERENCE TO ANY CHOICE OF LAW DOCTRINE THAT WOULD RESULT IN THE
APPLICATION OF THE LAWS OF ANOTHER JURISDICTION.
(i) NETTING OF PAYMENTS. Subparagraph (ii) of Section 2(c) of this
Agreement will not apply to any Transaction.
(j) "AFFILIATE" will have the meaning specified in Section 14 of this
Agreement, except that for purposes of Section 3(c), "Affiliate" means
with respect to Party A, any entity controlled, directly or indirectly
by Party A. For this purpose, "control of a majority of person" means
ownership of a majority of the voting power of the entity or person.
PART 5. OTHER PROVISIONS
(a) PROCEDURES FOR ENTERING INTO TRANSACTIONS. With respect to each
Transaction entered into pursuant to this Agreement, Party A will, on
or promptly after the Trade Date thereof (by mail, telex, telecopier
or other electronic means), send Party B a Confirmation of each
Transaction between them on the standard form used by Party A or in
such other form as is mutually agreed
<PAGE>
upon by the parties. Party B will promptly thereafter accept the
terms thereof by executing and returning to Party A an executed
copy or request the correction of such Confirmation. If Party B
fails to accept or dispute the Confirmation in the manner set forth
above within five Local Business Days after receipt from Party A,
such failure shall constitute its agreement to the terms of the
Transaction set out in such Confirmation, absent manifest error,
and the requirement of this Agreement that the parties exchange
Confirmations shall for all purposes be deemed satisfied by a
Confirmation sent and an agreement deemed given as provided herein.
(b) DEFINITIONS. Unless otherwise specified in a Confirmation, this
Agreement and each Transaction between the parties shall be subject to
the 1991 ISDA Definitions (the "1991 Definitions"), the 1992 FX and
Currency Options Definitions (the "FX Definitions") and the 1996 ISDA
Equity Derivatives Definitions (the "Equity Derivatives Definitions"),
each as published by the International Swap and Derivatives
Association, Inc. ("ISDA") without reference to any amendment
subsequent to the date hereof. For these purposes, (i) all references
in the 1991 Definitions and Equity Derivatives Definitions to a "Swap
Transaction" and all references in the FX Definitions to an FX
Transaction or Currency Option shall be deemed to apply to each
Transaction under this Agreement and (ii) all references in the 1991
Definitions to a Business Day shall be deemed references to a Local
Business Day under this Agreement. The provisions of the 1991
Definitions and Equity Derivatives Definitions relating to Market
Disruption Events and Adjustments to Indices and Extraordinary Events
Affecting Shares (and their effects as well) will apply to a
Transaction under this Agreement only to the extent not inconsistent
with the provisions of the applicable Confirmation. In the event of
any inconsistency between the 1991 Definitions and the FX Definitions,
the FX Definitions will prevail with respect to an FX Transaction or a
Currency Option. In the event of any inconsistency between the
provisions of this Agreement, the 1991 Definitions, the FX Definitions
and the Equity Derivatives Definitions, the provisions of this
Agreement will prevail. Any definition incorporated into a
Confirmation shall prevail over the provisions of this Agreement, the
1991 Definitions, the FX Definitions and the Equity Derivatives
Definitions.
(c) INDEMNIFIABLE TAX. For purposes of Section 14 of this Agreement, the
following shall be added at the end of the definition of
"Indemnifiable Tax":
"Notwithstanding the foregoing, "Indemnifiable Tax" also means any Tax
imposed in respect of payment under this Agreement by reason of a
Change in Tax Law by a government or taxing authority of a Relevant
Jurisdiction with respect to the party making such payment, unless the
other party is incorporated, organized, managed and controlled or
considered to have its seat in such jurisdiction, or is acting for
purposes of this Agreement through a branch office located in such
jurisdiction."
(d) ADDITIONAL AGREEMENT. For purposes of Section 4(a)(iii) of this
Agreement, the following shall be added immediately prior to the
existing text: "upon learning that such form or document is required
or".
(e) RIGHT OF SET-OFF. Any amount (the "Early Termination Amount") payable
to one party (the "Payee") by the other party (the "Payer") under
Section 6(e), in circumstances where there is (i) a Defaulting Party
or (ii) one Affected Party in the case where a Termination Event under
Section 5(b) (iv) has occurred, will, at the option of the party ("X")
other than the Defaulting Party or the Affected Party (and without
prior notice to the Defaulting Party or the Affected party), be
reduced by its set-off against any amount(s) (the "Other Agreement
Amount") payable (whether at such time or in the future or upon the
occurrence of a contingency) by the Payee to the Payer (irrespective
of the currency, place of payment or booking office of the obligation)
under any other agreement(s) between the Payee and the Payer or
instrument(s) or undertaking (s) issued or
<PAGE>
executed by one party to, or in favor of, the other party, except
as otherwise specified in those agreement(s), instruments(s), or
undertaking(s) or separately agreed between the Payer and the Payee
(and the Other Agreement Amount will be discharged promptly and in
all respects to the extent it is so set-off). X will give notice
to the other party of any set-off so effected under this
ection 6(e).
For this purpose, either the Early Termination Amount or the Other
Agreement Amount (or the relevant portion of such amounts) may be
converted by X into the currency in which the other is denominated at
the rate of exchange at which such party would be able, acting in a
reasonable manner and in good faith, to purchase the relevant amount
of such currency.
If an obligation is unascertained, X may in good faith estimate that
obligation and set-off in respect of the estimate, subject to the
relevant party accounting to the other when the obligation is
ascertained.
Nothing in this Section 6(e) shall be effective to create a charge or
other security interest. This Section 6(e) provision shall be without
prejudice and in addition to any right of set-off, combination of
accounts, lien or other right to which any party is at any time
otherwise entitled (whether by operation of law, contract or
otherwise).
(f) ESCROW. If either party in its reasonable judgment determines at
any time that there has been a material adverse change that is likely
to affect the other party's ability to perform its ensuing payment
obligation in connection with a Transaction or Transactions involving
payments due from each of the parties on the same day in different
currencies, the party that has formed that judgment may notify the
other that the payments due on that day in connection with that
Transaction or those Transactions are to be made in escrow, to a major
commercial bank selected by that party in good faith and that has
offices in the cities in which both payments are to be made. If such
an election is made, each party shall make the payment due from it on
that day by deposit into escrow with that escrow agent, for value on
that day, with irrevocable instructions (i) to release the payment to
the intended payee upon receipt by the escrow agent of the required
counter payment due from that payee on the same day in connection with
that Transaction accompanied by irrevocable instructions to the same
effect, or (ii) if the required deposit in escrow of the counter
payment due is not so made on the same day, for value on that day, to
return the payment deposited in escrow to the party that made the
escrow deposit. The party that elects to have payments made in escrow
shall pay the costs of the escrow arrangements and cause those
arrangements to provide that the escrow agent will pay interest on
each amount deposited in escrow with it in either of the relevant
cities, for each day such amount remains in escrow past 5:00 p.m.
local time in the city, at the same rate per annum, and calculated in
the same way, as it would pay on overnight deposits placed with it in
the relevant currency and city for value on such day. The escrow
arrangements shall also provide that such interest on any amount in
escrow shall be payable to the intended payee of that amount, provided
that it has deposited the counter payment due from it into escrow as
contemplate herein, and that, if it has not done so, such interest
shall be payable to the other party.
(g) JURY TRIAL. Each party hereby waives its respective right to jury
trial with respect to any litigation arising under, or in connection
with, this Agreement or any Transaction.
(h) REPRESENTATIONS. Section 3 is hereby amended by adding at the end
thereof the following Subparagraphs (g), (h), and (i):
<PAGE>
(g) LINE OF BUSINESS. It has entered into this Agreement (including each
Transaction evidenced hereby) in conjunction with its line of business
(including financial intermediation services) or the financing of its
business.
(h) ELIGIBLE SWAP PARTICIPANT. It constitutes an "eligible swap
participant" as such term is defined in Rule 35.1 (b) (2) of the
Commodity Futures Trading Commission, 17 C.F.R. 35.1 (b) (2) (1993).
(i) RELATIONSHIP BETWEEN PARTIES. Each party will be deemed to represent
to the other party on the date on which it enters into a Transaction
that (absent written agreement between the parties that expressly
imposes affirmative obligations to the contrary for that Transaction):
(a) NON- RELIANCE. It is acting for its own account, and it has made
its own independent decisions to enter into that Transaction and
as to whether that Transaction is appropriate or proper for it
based upon its own judgment and upon advice from such advisers as
it has deemed necessary. It is not relying on any communication
(written or oral) of the other party as investment advice or as a
recommendation to enter into that Transaction; it being
understood that information and explanations related to the terms
and conditions of a Transaction shall not be considered
investment advice or a recommendation to enter into that
Transaction. No communication (written or oral) received from
the other party shall be deemed to be an assurance or guarantee
as to the expected results of that Transaction.
(b) ASSESSMENT AND UNDERSTANDING. It is capable of assessing the
merits of and understanding (on its own behalf or through
independent professional advice), and understands and accepts,
the terms, conditions and risks of that Transaction. It is also
capable of assuming, and assumes, the risks of that Transaction.
(c) STATUS OF PARTIES. The other party is not acting as a fiduciary
for or an adviser to it in respect of that Transaction.
(i) MONITORING AND RECORDING. Each party (i) consents to the monitoring
or recording, at any time and from time to time, by the other party of
any and all communications between officers or employees of the
parties, (ii) waives any further notice of such monitoring or
recording, (iii) agrees to notify its officers and employees of such
monitoring and recording, and (iv) agrees that any such recordings may
be submitted in evidence to any court or in any proceeding relating to
this Agreement and such recordings shall be accessible to the outside
party in question only upon request.
(j) SEVERABILITY. In the event any one or more of the provisions
contained in this Agreement should be held invalid, illegal, or
unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not
in any way be affected or impaired thereby. The parties shall
endeavor, in good faith negotiations, to replace the invalid, illegal
or unenforceable provisions with valid provisions the economic effect
of which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
(k) SCOPE OF AGREEMENT. Notwithstanding anything contained in the
Agreement to the contrary, upon the effectiveness of the Agreement
(unless otherwise agreed to in writing by the parties) (i) any
Specified Transaction then outstanding and (ii) any Specified
Transaction subsequently entered into by the parties shall be
"Transactions" for purposes of and be subject to, governed by and
construed in accordance with the terms of this Agreement and each
related confirmation shall be a "Confirmation" for purposes of, and be
read and construed as one with, this Agreement.
<PAGE>
(l) PARI PASSU. As long as Party A is, and continues to be a lender (or
an affiliate or subsidiary thereof) under the Credit Agreement, Party
B's payment obligations under this Agreement shall, pursuant to the
terms of the Credit Agreement, be deemed to be "Obligations" under the
Credit Agreement and Party A shall be entitled to the benefits of the
collateral pledged pursuant to the Collateral Agreement as defined in
the Credit Agreement to the same extent as the Lenders under the
Credit Agreement.
CREDIT AGREEMENT. Shall mean the Second Amended and Restated Credit
Agreement dated as of September 15, 1998, among HEXCEL CORPORATION, a
Delaware corporation (with its successors and permitted assigns, the
"Company"); the FOREIGN BORROWERS from time to time parties thereto
(together with the Company, the "Borrowers"); the LENDERS from time to
time parties thereto; CITIBANK, N.A., a national banking association,
as documentation agent (the "Documentation Agent"); and CREDIT SUISSE
FIRST BOSTON, a Swiss banking association ("CSFB"), as arranger (in
such capacity, the "Arranger") and as administrative agent (in such
capacity, the "Administrative Agent") for the Lenders.
Please confirm your agreement to the terms of the foregoing Schedule by signing
below.
CREDIT LYONNAIS NEW YORK BRANCH
By:
Name: Pascal Poupelle
Title: Executive Vice President
HEXCEL CORPORATION
By:
Name:
Title:
<PAGE>
EXHIBIT I
[Letterhead of Counsel for Party B]
Re: Master Agreement, dated as of September 15, 1998, (the
"Agreement"), between Credit Lyonnais New York Branch ("Party A")
and Hexcel Corporation ("Party B")
Dear Sirs:
I am an attorney admitted to practice in ____________ and am counsel
to Party B, and as such am generally familiar with its affairs. I have examined
the Agreement and such other records and instruments as I deemed advisable.
Based upon the foregoing, and having regard for legal considerations
which I deem relevant, I am of the opinion that:
1. Party B is duly organized and validly existing under the laws of
the jurisdiction of its organization or incorporation and, if relevant under
such laws, in good standing.
2. Party B has the power (a) to execute and deliver the Agreement,
any other required documentation relating to the Agreement and any Credit
Support Document to which it is a party, and (b) to perform its obligations
under the Agreement and any obligations it has under any Credit Support Document
to which it is a party, and has taken all necessary action to authorize such
execution, delivery and performance.
3. Such execution, delivery and performance do not violate or
conflict with any law applicable to Party B, any provision of its constitutional
documents, any order or judgment of any court or other agency of government
applicable to it or any of its assets or any contractual restriction binding on
or affecting Party B.
4. All governmental and other consents that are required to have
been obtained by it with respect to the Agreement or any Credit Support Document
to which Party B is a party have been obtained and are in full force and effect
and it has complied with all conditions of any such consents.
5. The obligations of Party B under the Agreement and any Credit
Support Document to which it is a party constitute its legal, valid and binding
obligations, enforceable in accordance with their respective terms (subject as
to enforceability to applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting creditors' rights generally and to
equitable principles of general application (regardless of whether enforcement
is sought in a proceeding in equity or at law)).
Very truly yours,
<PAGE>
Exhibit 10.2(a)
- -------------------------------------------------------------------------------
[LOGO] CREDIT LYONNAIS AMERICAS
OPERATION AND PROJECT MANAGEMENT
- -------------------------------------------------------------------------------
TREASURY OPERATIONS DERIVATIVE PRODUCTS
October 22, 1998
CONFIRMATION
To: Hexcel Corporation (the "Counterparty")
Two Stamford Boulevard
Stamflord, CT 06901-3238
ATTN: MR. BRUCE HERMAN
Fax: 203-358-3993 Tel: 203-969-0666 ex 407
From: Credit Lyonnais New York Branch ("CLNY")
1301 Avenue of the Americas, 15th Floor
New York, New York 10019
ATTN: LILY DU
Tel: 212-261-7235 Fax: 212-459-3166
Re: Cap Transaction dated as of October 22, 1998
CLNY new ref: 2616
- --------------------------------------------------------------------------------
The purpose of this letter agreement (this "Confirmation") is to confirm the
terms and conditions of the Transaction entered into between us on October 22,
1998 ISDA Master Agreement specified below.
The definitions and provisions contained in the 1991 ISDA Definitions as
published by the International Swaps Dealers Association, Inc. (known since June
14, 1993 as the International Swaps and Derivatives Association, Inc.) ("ISDA")
are incorporated into this Confirmation. In the event of any inconsistency
between those definitions and provisions and this Confirmation, this
Confirmation will govern.
1. This Confirmation supplements, forms part of, and is subject to, the ISDA
Master Agreement dated as of 15-Sep-98, as amended and supplemented from time to
time (the "Agreement"), between Credit Lyonnais New York Branch and Hexcel
Corporation. All provisions contained in the Agreement govern this Confirmation
except as expressly modified below.
This Confirmation will be governed by and construed in accordance with the laws
of the State of New York.
2. The terms of the particular Cap Transaction to which this Confirmation
relates are as follows:
<TABLE>
<S> <C>
Notional Amount: USD 50,000,000
Trade Date: October 22, 1998
Effective Date: October 27, 1998
Termination Date: October 28, 2002, subject to adjustment in
accordance with the Modified Following
Business Day Convention
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
FIXED AMOUNTS:
Fixed Rate Payer: Counterparty
Fixed Amount: USD 585,000.00
Fixed Amount Payment Date: October 26, 1998
FLOATING AMOUNTS:
Floating Rate Payer: CLNY
Floating Rate Payer
Payment Dates: Quarterly on the 27th day of each January,
April, July and October, commencing on
January 27, 1999 and terminating on the
Termination Date, subject to adjustment in
accordance with the Modified Following
Business Day Convention.
Cap Rate: 5.50 %
Floating Rate Option: USD-LIBOR-BBA
Designated Maturity: Three (3) Months
Floating Rate Day Count Fraction: Actual/360
Reset Dates: The first day of each Calculation Period
Business Days: New York & London
Calculation Agent: CLNY
3. Other Provisions: None
4. Account Details:
Payment to CLNY: CREDIT LYONNAIS NEW YORK
ABA #: 026008073
A/C #: 01-88180-3211-00-001-180
Ref: Derivative Products
Payment to Counterparty: Citibank, New York
ABA : 021 000 089
Swift: CITIUS33
A/C #: 4066-7408
F/O Hexcel Corporation
5. Offices and Address for Notice: in Connection With This Cap Transaction:
(a) CLNY: its branch office is at 1301 Avenue of the Americas,
New York, NY 10019
(b) Counterparty: its office is Stamford.
</TABLE>
2
<PAGE>
6. THE COUNTERPARTY IS HEREBY REQUESTED TO SIGNIFY ITS ACCEPTANCE OF THE TERMS
OF THIS CONFIRMATION PROMPTLY BY SIGNING A COPY HEREOF AND RETURNING IT TO
CREDIT LYONNAIS NEW YORK BRANCH IN THE MANNER PROVIDED IN SECTION 12 OF THE
AGREEMENT.
UNLESS CREDIT LYONNAIS NEW YORK BRANCH SHALL HAVE RECEIVED WRITTEN OBJECTION TO
THE TERMS OF THIS CONFIRMATION WITHIN FIVE BUSINESS DAYS (DEFINED BELOW) OF THE
DATE FIRST ABOVE WRITTEN, THE COUNTERPARTY SHALL BE DEEMED TO HAVE ACCEPTED SUCH
TERMS WITHOUT ANY FURTHER ACT ON THE PART OF CREDIT LYONNAIS NEW YORK BRANCH,
THE COUNTERPARTY, OR ANY OTHER PERSON. FOR PURPOSES HEREOF, "BUSINESS DAY"
SHALL HAVE THE MEANING SET FORTH IN SECTION 5-701 B.3. (B) OF THE GENERAL
OBLIGATIONS LAW OF THE STATE OF NEW YORK.
Each party agrees to make payments to the other party in accordance with the
provisions set forth or incorporated by reference in this Confirmation.
IN WITNESS WHEREOF the parties have executed this Confirmation as of the date
first above written.
CREDIT LYONNAIS HEXCEL CORPORATION
NEW YORK BRANCH
Authorized Signature: Authorized Signature:
- ---------------------------- ----------------------------
Name: Christine Derkasch Name:
--------------------- ----------------------
Title: Asst Vice President Title:
--------------------- ----------------------
CLNY ref: 2616
3
<PAGE>
EXHIBIT 10.11
RETAINER FEE OPTION AGREEMENT
For
Non-Employee Directors
OPTION AGREEMENT, dated as of the Grant Date, by and between the Optionee and
Hexcel Corporation (the "Corporation").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Corporation has adopted the Hexcel Corporation Incentive Stock
Plan (the "Plan"); and
WHEREAS, the Board of Directors of the Corporation (the "Board") has
determined that it is desirable and in the best interests of the Corporation
to grant to the Optionee a stock option as an incentive for the Optionee to
advance the interests of the Corporation;
NOW, THEREFORE, the parties agree as follows:
1. NOTICE OF GRANT; INCORPORATION OF PLAN. A Notice of Grant is attached
hereto as Annex A and incorporated by reference herein. Unless otherwise
provided herein, capitalized terms used herein and set forth in such Notice
of Grant shall have the meanings ascribed to them in the Notice of Grant and
capitalized terms used herein and set forth in the Plan shall have the
meanings ascribed to them in the Plan. The Plan is incorporated by reference
and made a part of this Option Agreement, and this Option Agreement shall be
subject to the terms of the Plan, as the Plan may be amended from time to
time, provided that any such amendment of the Plan must be made in accordance
with Section X of the Plan. The Option granted herein constitutes an Award
within the meaning of the Plan.
2. GRANT OF OPTION. Pursuant to the Plan and subject to the terms and
conditions set forth herein and therein, the Corporation hereby grants to the
Optionee the right and option (the "Option") to purchase all or any part of
the Option Shares of the Corporation's common stock, $.01 par value per share
(the "Common Stock"), which Option is not intended to qualify as an incentive
stock option, as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
3. PURCHASE PRICE. The purchase price per share of the Option Shares shall
be the Purchase Price.
<PAGE>
4. TERMS OF OPTION.
(a) EXPIRATION DATE; TERM. Subject to Section 4(d) below, the Option
shall expire on, and shall no longer be exercisable following, the
fifth anniversary of the Grant Date. The five-year period from the
Grant Date to its fifth anniversary shall constitute the "Term" of the
Option.
(b) VESTING PERIOD; EXERCISABILITY. Subject to Section 4(c) and 4(d)
below, the Option shall vest in proportion to the time elapsed between
the Grant Date and the first anniversary of the Grant Date.
(c) CHANGE OF CONTROL. In the event of a Change in Control (as defined
in the last Section hereof), the Option shall immediately become fully
vested and exercisable.
(d) TERMINATION OF SERVICE AS DIRECTOR. (i) Except as provided in
Section 4(d)(ii) hereof, if the Optionee's service as a member of the
Board is terminated for any reason (other than death or disability),
the Option (to the extent vested on the date of termination) may be
exercised at any time within ninety days after such termination (but
not beyond the Term of the Option). The Option, to the extent not then
vested, shall immediately expire upon such termination.
(ii) In the event the Optionee's service as a member of the Board is
terminated because of death or disability, the Option (to the extent
vested on the date of termination) may be exercised at any time within
one year after the Optionee's death or disability (but not beyond the
Term of the Option). The Option, to the extent not vested, shall
immediately expire upon such termination.
5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) The aggregate number of Option Shares and the Purchase Price shall
be appropriately adjusted by the Committee for any increase or decrease
in the number of issued shares of Common Stock resulting from a
subdivision or consolidation of shares or other capital adjustment, or
the payment of a stock dividend or other increase or decrease in such
shares, effected without receipt of consideration by the Corporation,
or other change in corporate or capital structure. The Committee shall
also make the foregoing changes and any other changes, including
changes in the classes of securities available, to the extent
reasonably necessary or desirable to preserve the intended benefits
under this Option Agreement in the event of any other reorganization,
recapitalization, merger, consolidation, spin-off, extraordinary
dividend or other distribution or similar transaction involving the
Corporation.
2
<PAGE>
(b) Any adjustment under this Section 5 in the number of Option Shares
and the Purchase Price shall apply to only the unexercised portion
of the Option. If fractions of a share would result from any such
adjustment, the adjustment shall be rounded down to the nearest whole
number of shares.
6. METHOD OF EXERCISING OPTION AND WITHHOLDING.
(a) The Option shall be exercised by the delivery by the Optionee to
the Corporation at its principal office (or at such other address as
may be established by the Committee) of written notice of the number
of Option Shares with respect to which the Option is exercised,
accompanied by payment in full of the aggregate Purchase Price for such
Option Shares. Payment for such Option Shares shall be made (i) in
U.S. dollars by personal check, bank draft or money order payable to
the order of the Corporation, or by money transfers or direct account
debits to an account designated by the Corporation; (ii) through the
delivery of shares of Common Stock with a Fair Market Value equal to
the total payment due from the Optionee; (iii) pursuant to a "cashless
exercise" program if such a program is established by the Corporation;
or (iv) by any combination of the methods described in (i) through
(iii) above.
(b) The Corporation's obligation to deliver shares of Common Stock upon
the exercise of the Option shall be subject to the payment by the
Optionee of applicable federal, state and local withholding tax, if
any. The Corporation shall, to the extent permitted by law, have the
right to deduct from any payment of any kind otherwise due to the
Optionee any federal, state or local taxes required to be withheld with
respect to such payment.
7. TRANSFER. Except as provided in this Section 7, the Option is not
transferable otherwise than by will or the laws of descent and
distribution, and the Option may be exercised during the Optionee's
lifetime only by the Optionee. Any attempt to transfer the Option in
contravention of this Section 7 is void AB INITIO. The Option shall
not be subject to execution, attachment or other process. Notwithstanding
the foregoing, the Optionee shall be permitted to transfer the Option to
members of his or her immediate family (I.E., children, grandchildren or
spouse), trusts for the benefit of such family members, and partnerships
whose only partners are such family members; provided, however, that no
consideration can be paid for the transfer of the Option and the
transferee of the Option shall be subject to all conditions applicable
to the Option prior to its transfer.
8. NO RIGHTS IN OPTION SHARES. The Optionee shall have none of the rights
of a stockholder with respect to the Option Shares unless and until
shares of Common Stock are issued upon exercise of the Option.
3
<PAGE>
9. NO RIGHT TO CONTINUED SERVICE AS DIRECTOR. Nothing contained herein shall
be deemed to confer upon the Optionee any right to continue to serve as a
member of the Board.
10. GOVERNING LAW/JURISDICTION. This Option Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware without
reference to principles of conflict of laws.
11. RESOLUTION OF DISPUTES. Any disputes arising under or in connection with
this Option Agreement shall be resolved by binding arbitration before a
single arbitrator, to be held in New York in accordance with the commercial
rules and procedures of the American Arbitration Association. Judgment upon
the award rendered by the arbitrator shall be final and subject to appeal
only to the extent permitted by law. Each party shall bear such party's own
expenses incurred in connection with any arbitration; PROVIDED, HOWEVER,
that the cost of the arbitration, including without limitation, reasonable
attorneys' fees of the Optionee, shall be borne by the Corporation in the
event the Optionee is the prevailing party in the arbitration. Anything to
the contrary notwithstanding, each party hereto has the right to proceed
with a court action for injunctive relief or relief from violations of law
not within the jurisdiction of an arbitrator.
12. NOTICES. Any notice required or permitted under this Option Agreement
shall be deemed given when delivered personally, or when deposited in a
United States Post Office, postage prepaid, addressed, as appropriate, to
the Optionee at the last address specified in Optionee's records with the
Corporation, or such other address as the Optionee may designate in writing
to the Corporation, or to the Corporation, Attention: Corporate Secretary,
or such other address as the Corporation may designate in writing to the
Optionee.
13. FAILURE TO ENFORCE NOT A WAIVER. The failure of either party hereto to
enforce at any time any provision of this Option Agreement shall in no way
be construed to be a waiver of such provision or of any other provision
hereof.
14. COUNTERPARTS. This Option Agreement may be executed in two or more
counterparts, each of which shall be an original but all of which together
shall represent one and the same agreement.
15. MISCELLANEOUS. This Option Agreement cannot be changed or terminated
orally. This Option Agreement and the Plan contain the entire agreement
between the parties relating to the subject matter hereof. The section
headings herein are intended for reference only and shall not affect the
interpretation hereof.
4
<PAGE>
16. DEFINITIONS. For purposes of this Option Agreement:
(I) the term "Beneficial Owner" (and variants thereof) shall have the
meaning given in Rule 13d-3 promulgated under the Exchange Act;
(II) the term "Change in Control" shall mean any of the following events:
(1)(a) any Person (as defined in this Section) is or
becomes the Beneficial Owner of 20% or more of either (i) the
then outstanding Common Stock of the Corporation (the
"Outstanding Common Stock") or (ii) the combined voting power
of the then outstanding securities entitled to vote generally
in the election of directors of the Corporation (the "Total
Voting Power"); excluding, however, the following: (A) any
acquisition by the Corporation or any of its affiliates or (B)
any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Corporation or any of its
affiliates and (b) Ciba (as defined in this Section)
beneficially owns, in the aggregate, a lesser percentage of the
Total Voting Power than such Person beneficially owns; or
(2) a change in the composition of the Board such that the
individuals who, as of the effective date of this Employee Option
Agreement, constitute the Board (such individuals shall be
hereinafter referred to as the "Incumbent Directors") cease
for any reason to constitute at least a majority of the Board;
PROVIDED, HOWEVER, for purposes of this definition, that any
individual who becomes a director subsequent to such effective
date, whose election, or nomination for election by the
Corporation's stockholders, was made or approved pursuant to
the Governance Agreement (as defined in this Section) or by a
vote of at least a majority of the Incumbent Directors (or
directors whose election or nomination for election was
previously so approved) shall be considered a member of the
Incumbent Board; but, PROVIDED, FURTHER, that any such
individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a person or legal entity other than the Board shall not be
considered a member of the Incumbent Board; or
(3) the approval by the stockholders of the Corporation of
a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Corporation ("Corporate Transaction"); excluding, however,
such a Corporate Transaction (a) pursuant to which all or
substantially all of the individuals and entities who are the
beneficial owners, respectively, of the Outstanding Common
Stock and Total Voting Power immediately prior to such
Corporate Transaction will
5
<PAGE>
beneficially own, directly or indirectly, more than 50%,
respectively, of the outstanding common stock and the combined
voting power of the then outstanding securities entitled to
vote generally in the election of directors of the company
resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction
owns the Corporation or all or substantially all of the
Corporation's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership immediately prior to such Corporate Transaction of the
Outstanding Common Stock and Total Voting Power, as the case may
be, or (b) after which no Person beneficially owns a greater
percentage of the combined voting power of the then outstanding
securities entitled to vote generally in the election of
directors of such corporation than does Ciba; or
(4) Ciba shall become the Beneficial Owner of more than
57.5% of the Total Voting Power; or
(5) the approval by the stockholders of the Corporation of
a complete liquidation or dissolution of the Corporation;
(III) the term "Ciba" shall mean Ciba Specialty Chemicals Holding Inc.,
a Swiss corporation, together with its affiliates holding Corporation
voting securities pursuant to Section 4.01(b) of the Governance
Agreement;
(IV) the term "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time;
(V) the term "Governance Agreement" shall have the meaning given in the
Strategic Alliance Agreement (as defined in this Section);
(VI) the term "Person" shall have the meaning given in Section 3(a)(9)
of the Exchange Act, as modified and used in Sections 13(d) and 14(d)
of the Exchange Act, but excluding Ciba for so long as Ciba is subject
to the restrictions imposed by the Governance Agreement; and
(VII) the term "Strategic Alliance Agreement" shall mean the Strategic
Alliance Agreement among the Corporation, Ciba-Geigy Limited and
Ciba-Geigy Corporation, dated as of September 29, 1995, as amended, and
any of their respective permitted successors or assigns thereunder.
6
<PAGE>
ANNEX A
NOTICE OF GRANT
---------------
STOCK OPTION
------------
HEXCEL CORPORATION INCENTIVE STOCK PLAN
---------------------------------------
The following member of the Board of Directors of Hexcel Corporation, a
Delaware corporation ("Hexcel"), has been granted an option to purchase
shares of the Common Stock of Hexcel, $.01 par value per share, in accordance
with the terms of this Notice of Grant and the Retainer Fee Option Agreement
to which this Notice of Grant is attached.
The following is a summary of the principal terms of the option which
has been granted. The terms below shall have the meanings ascribed to them
below when used in the Option Agreement.
- -------------------------------------------------------------------------------
Optionee
[Non-employee director]
- -------------------------------------------------------------------------------
Address of Optionee
- -------------------------------------------------------------------------------
Grant Date
December 9, 1998
- -------------------------------------------------------------------------------
Purchase Price
$4.1875
- -------------------------------------------------------------------------------
Aggregate Number of Shares
Granted (the "Option Shares")
7,164*
- -------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice
of Grant and the Retainer Fee Option Agreement to which this Notice of Grant
is attached and execute this Notice of Grant and Option Agreement as of the
Grant Date.
- --------------------------- HEXCEL CORPORATION
Optionee
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
*Number of options for each non-employee director. Each committee chairman
received an additional 716 options.
<PAGE>
Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------------------------
For the year ended December 31,
--------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations before
income taxes (24,494) 6,514 (15,754) 50,752 78,364
Interest expense, including amortization of debt
issuance costs 11,846 8,682 21,537 25,705 38,675
Portion of rental expense deemed to represent
interest (a) 1,225 957 1,541 1,520 1,552
------------ ------------- ----------- ----------- -----------
Total fixed charges 13,071 9,639 23,078 27,225 40,227
Earnings before fixed charges (11,423) 16,153 7,324 77,977 118,591
Fixed charges 13,071 9,639 23,078 27,225 40,227
Ratio of earnings to fixed charges -- 1.7x -- 2.9x 2.9x
Deficiency of earnings to fixed charges 24,494 -- 15,754 -- --
------------ ------------- ----------- ----------- -----------
</TABLE>
(a) Calculated as approximately one-third of rental expense, representing a
reasonable approximation of such rentals deemed to be attributable to
interest.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-36163, 333-36099, 333-01225, 333-31125 and
333-57223) of Hexcel Corporation of our report dated January 21, 1999, except
as to Ciba Senior Subordinated Notes Payable and Aggregate Maturities of
Notes Payable and Indebtedness to Related Parties in Note 7, which are as of
February 17, 1999, which appears on page 54 of this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
San Jose, California
March 25, 1999
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos.333-36163, 333-36099, 333-01225, 333-31125 and 333-57223 of Hexcel
Corporation, each on Form S-8, of our report dated February 28, 1997,
appearing in this Annual Report on Form 10-K of Hexcel Corporation for the
year ended December 31, 1996.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Oakland, California
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 7,504
<SECURITIES> 0
<RECEIVABLES> 195,153
<ALLOWANCES> 6,785
<INVENTORY> 213,199
<CURRENT-ASSETS> 439,026
<PP&E> 628,533
<DEPRECIATION> 195,960
<TOTAL-ASSETS> 1,404,161
<CURRENT-LIABILITIES> 219,444
<BONDS> 838,051
0
0
<COMMON> 372
<OTHER-SE> 302,027
<TOTAL-LIABILITY-AND-EQUITY> 1,404,161
<SALES> 1,089,044
<TOTAL-REVENUES> 1,089,044
<CGS> 817,785
<TOTAL-COSTS> 817,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,675
<INCOME-PRETAX> 78,364
<INCOME-TAX> 28,442
<INCOME-CONTINUING> 50,439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,439
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.24
</TABLE>
