-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GDPwz+B/KynQ/9KP5s/1Wi8jkvQQzD5i7NGOcWIk9VB8WhuYBDsVPwNbJxPnbEsu a/shSjLNEyY8BX95nLR20A== 0000912057-02-012146.txt : 20020415 0000912057-02-012146.hdr.sgml : 20020415 ACCESSION NUMBER: 0000912057-02-012146 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEXCEL CORP /DE/ CENTRAL INDEX KEY: 0000717605 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 941109521 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08472 FILM NUMBER: 02590425 BUSINESS ADDRESS: STREET 1: TWO STAMFORD PLAZA STREET 2: 281 TRESSER BLVD., 16TH FLOOR CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 203-969-0666 MAIL ADDRESS: STREET 1: TWO STAMFORD PLAZA STREET 2: 281 TRESSER BLVD., 16TH FLOOR CITY: STAMFORD STATE: CT ZIP: 06901 10-K 1 a2074704z10-k.txt 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 1-8472 HEXCEL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-1109521 (State of Incorporation) (I.R.S. Employer Identification No.)
281 TRESSER BOULEVARD Stamford, Connecticut 06901 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (203) 969-0666 Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK NEW YORK STOCK EXCHANGE PACIFIC STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: 7% CONVERTIBLE SUBORDINATED NOTES DUE 2003 7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011 9 3/4% SENIOR SUBORDINATED NOTES DUE 2009 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 22, 2002 of voting stock held by nonaffiliates of the registrant: $102,814,779 The number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF MARCH 22, 2002 ----- -------------------------------- COMMON STOCK 38,356,174
DOCUMENTS INCORPORATED BY REFERENCE: PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS (TO THE EXTENT SPECIFIED HEREIN)--PART III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 and its subsidiaries (herein referred to as "Hexcel" or "the Company"), is the world's 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, and industrial 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 wiring boards, computers, cellular telephones, televisions, soft body armor, high-speed trains and ferries, cars and trucks, wind turbine blades, reinforcements for bridges and other structures, window blinds and a wide variety of recreational equipment. The Company serves international markets through manufacturing facilities and sales offices located in the United States and Europe, and through sales offices located in Asia, Australia and South America. The Company is also a member of six joint ventures, four of which manufacture and market reinforcement products and composite materials in Europe, Asia and the United States, and two of which were established in Asia to manufacture composite structures and interiors for aircraft. NARRATIVE DESCRIPTION OF BUSINESS AND BUSINESS SEGMENTS Hexcel is a vertically integrated manufacturer of products within a single industry: Advanced Structural Materials. Hexcel's advanced structural materials business is organized around three strategic business segments: Reinforcement Products, Composite Materials and Engineered Products. REINFORCEMENT PRODUCTS The Reinforcement Products business segment manufactures and markets carbon fibers and industrial fabrics. The following table identifies the Reinforcement Products business segment's principal products and examples of the primary end-uses:
BUSINESS SEGMENT PRODUCTS PRIMARY END-USE - ---------------- ------------------------ ------------------------------------------------ REINFORCEMENT PRODUCTS Carbon Fibers - Raw materials for industrial fabrics and prepregs - Filament winding for various space, defense and industrial applications Industrial Fabrics - Printed wiring board substrates - Raw materials for prepregs and honeycomb - Structual materials/components used in aerospace, wind energy, automotive, marine and other industrial applications - Window screens and blinds - Soft body armor and other security applications - Civil engineering and construction applications
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 pre-impregnated composite materials (referred to as "prepregs") and used in filament winding and advanced fiber placement to produce various other composite materials. Key product applications 1 include structural components for commercial and military aircraft and space launch vehicles, as well as certain other applications such as recreational equipment. 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 reinforcement products are sold to third-party customers for use in a wide range of applications, including printed wiring boards, soft body armor and other security products, window screens and other architectural products, and a variety of structural materials and components used in aerospace, wind energy, marine and other industrial applications. They are also used internally to manufacture prepregs and other composite materials. REINFORCEMENT PRODUCTS
KEY CUSTOMERS MANUFACTURING FACILITIES - ------------- ------------------------------------- Alliant Techsystems Anderson, SC Cytec Engineered Materials Decatur, AL DHB Decines, France Isola Les Avenieres, France Nelco Salt Lake City, UT Piad Seguin, TX Second Chance Statesville, NC Washington, GA
The Reinforcement Products business segment's net sales to third party customers were $276.8 million in 2001, $359.2 million in 2000 and $330.9 million in 1999, which represented approximately 28%, 34% and 29% of the Company's net sales, respectively. In addition, approximately 27%, 21% and 25% of the Company's total production of reinforcement products was used internally to manufacture composite materials in 2001, 2000 and 1999, respectively. The Company also has equity ownership interests in three reinforcement product joint ventures: a 43.6% share in Interglas Technologies AG ("Interglas"), headquartered in Germany; a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn owns interests in two joint ventures in Taiwan--a 50% interest in Nittobo Asahi Glass and 51% interest in Asahi-Schwebel Taiwan; and a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"), headquartered in the United States. 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. COMPOSITE MATERIALS The Composite Materials business segment has worldwide responsibility for manufacturing and marketing prepregs, structural adhesives, honeycomb, specially machined honeycomb parts and composite panels, fiber reinforced thermoplastics, sheet moulding compounds, polyurethane systems and laminates. 2 The following table identifies the Composite Materials business segment's principal products and examples of the primary end-uses:
BUSINESS SEGMENT PRODUCTS PRIMARY END-USE - ---------------- ------------------------ --------------------------------------------------- COMPOSITE MATERIALS Prepregs - Materials for composite structures - Commercial and military aircraft components - Satellites and launchers - Aeroengines - Wind turbine rotor blades - Yachts, trains and motor racing vehicles - Skis, snowboards, fishing rods, tennis rackets and bicycles Structural Adhesives - Bonding of metals, honeycomb and composite materials - Aerospace, ground transportation and industrial applications Honeycomb, Honeycomb - Materials for composite structures and interiors Parts & Composite - Semi-finished components used in: Panels Helicopter blades Aircraft surfaces (flaps, wing tips, elevators and fairings) High-speed ferries, truck and train components Automotive components and impact protection
PREPREGS: Prepregs are manufactured for sale to third party customers and for use in manufacturing composite laminates and monolithic 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 glass, carbon, aramid, quartz, ceramic, polyethylene and other specialty reinforcements. Resin matrices include bismaleimide, cyanate ester, epoxy, phenolic, polyester, polyimide and other specialty resins. Hexcel is a worldwide leader in the production of prepregs and has led the development of applications for prepregs for over thirty years. OTHER FIBER-REINFORCED MATRIX MATERIALS: New fiber reinforced matrix developments include HexMC-Registered Trademark-, a carbon fiber/epoxy sheet moulding compound that enables small to medium sized composite components to be mass produced. Hexcel's HexFIT-TM- film infusion material is a product that combines resin films and dry fibre reinforcements to save lay-up time in production and enables large contoured composite structures, such as wind turbine blades, to be manufactured. Resin Film infusion and Resin Transfer Moulding products are enabling quality aerospace components to be manufactured using highly cost-effective processes. STRUCTURAL ADHESIVES: Hexcel designs and markets a comprehensive range of Redux-Registered Trademark- film adhesives. These structural adhesives, which bond metal to metal, composites and honeycomb structures, are widely used in the aerospace industry and for many industrial 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. Honeycomb is primarily used as a lightweight core material and is a highly efficient energy absorber. When sandwiched between composite or metallic facing skins, honeycomb significantly increases the stiffness of the structure, whilst adding very little weight. 3 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 other specialty materials. Hexcel sells honeycomb as standard blocks and in slices cut from a block. Honeycomb is also supplied as sandwich panels, with facing skins bonded to either side of the core material. Hexcel also possesses advanced processing capabilities that enable the Company to design and manufacture complex fabricated honeycomb parts and bonded assemblies to meet customer specifications. Aerospace is the largest market for honeycomb products. Hexcel 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 industrial uses. In addition, the Company produces honeycomb for its Engineered Products business segment for use in manufacturing finished parts for airframe Original Equipment Manufacturers (OEMs). COMPOSITE MATERIALS
KEY CUSTOMERS MANUFACTURING FACILITIES - ------------- ------------------------------------- Alenia Burlington, WA Boeing Casa Grande, AZ Bombardier Clearwater, FL British Aerospace Dagneux, France CFAN Duxford, England Durakon Industries Lancaster, OH EADS (Airbus) Linz, Austria Embraer-Empresa Livermore, CA GKN Parla, Spain Goodrich Pottsville, PA Lockheed Martin Salt Lake City, UT Northrop Grumman Welkenraedt, Belgium United Technologies Vestas
The Company operates sales offices in the United States located in Bedford, Texas; Danbury, Connecticut; Dublin, California; Redmond, Washington; and Novi, Michigan. In Europe, the Company operates sales offices at it manufacturing sites as well as Pasching, Austria; Munich, Germany; and Saronno, Italy. The Company also operates sales offices in Melbourne, Australia; Shanghai, China; and Sao Paulo, Brazil. As part of Hexcel's business consolidation and restructuring activities, the Company's Gilbert, Arizona manufacturing facility was closed in the fourth quarter of 2001. It is anticipated that the Lancaster, Ohio manufacturing facility will be closed in the second quarter of 2002. The manufacturing output from these facilities will be produced by the Livermore, California and Salt Lake City, Utah facilities. The Composite Materials business segment's net sales to third party customers were $607.7 million in 2001, $567.0 million in 2000 and $605.9 million in 1999, which represented approximately 60%, 54% and 52% of the Company's net sales, respectively. Net sales for composite materials are highly dependent upon commercial aircraft build rates as further discussed under the captions "Markets and Customers" and "Management's Discussion and Analysis of Financial Condition and Results of 4 Operations." In addition, about 2% of the Company's total production of composite materials is used internally to manufacture OEM composite structures and interiors. The Company also owns a 45% equity interest in DIC-Hexcel Limited, a joint venture with Dainippon Ink and Chemicals, Inc. This composite materials joint venture is located in Komatsu, Japan, and produces and sells prepregs, honeycomb and decorative laminates using technology licensed from Hexcel and Dainippon Ink and Chemicals, Inc. ENGINEERED PRODUCTS The Engineered Products business segment has worldwide responsibility for manufacturing and marketing composite structures primarily for use in the aerospace industry, as well as OEM aircraft interiors. Composite structures and aircraft interior components are manufactured from a variety of composite and other materials, including 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. Aircraft interior components include such items as overhead storage bins, flight deck panels and door liners. The following table identifies the Engineered Products business segment's principal products and examples of the primary end-uses:
BUSINESS SEGMENT PRODUCTS PRIMARY END-USE - ---------------- ------------------------ ------------------------------------------------ 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 OEM aircraft interiors - OEM aircraft interiors, including: Overhead storage compartments Flight deck panels Door liners
In April 2000, the Company sold its Bellingham aircraft interiors business. This business was responsible for the design, engineering and manufacture of commercial aircraft interior components and systems for airline refurbishment applications. ENGINEERED PRODUCTS
KEY CUSTOMERS MANUFACTURING FACILITY - ------------- ------------------------------------- Aviation Partners Boeing Kent, WA Boeing Mitsubishi Heavy Industries Vought
5 The Engineered Products business segment's net sales and pro forma net sales to third party customers, after giving effect to the disposition of the Bellingham aircraft interiors business as if the transaction occurred at the beginning of 1999, were as follows:
2001 2000 1999 -------- -------- -------- (IN MILLIONS) Net sales........................................... $124.9 $129.5 $214.7 Pro forma net sales................................. 124.9 110.6 144.7
The Engineered Products business segment's net sales to third party customers represented approximately 12%, 12% and 19% of the Company's net sales in 2001, 2000 and 1999, respectively. In addition, Hexcel has equity ownership interests in two engineered product joint ventures: BHA Aero Composite Parts Co., Ltd. ("BHA Aero") and Asian Composites Manufacturing Sdn. Bhd. ("Asian Composites"). In 1999, Hexcel formed BHA Aero with Boeing and Aviation Industries of China (now known as China Aviation Industry Corporation I) to manufacture composite parts for secondary structures and interior applications for commercial aircraft. Hexcel has a 33% equity ownership interest in this joint venture, which is located in Tianjin, China. Also in 1999, Hexcel formed Asian Composites with Boeing, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture composite parts for secondary structures for commercial aircraft. Hexcel has a 25% equity ownership interest in this joint venture, which is located in Alor Setar, Malaysia. Asian Composites began manufacturing and shipping products during the second half of 2001, while BHA Aero will begin shipping engineered products in the first half of 2002. 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 each of the three years ended December 31:
2001 2000(1) 1999(1) -------- -------- -------- NET SALES BY MARKET Commercial aerospace........................................ 53% 49% 55% Space and defense........................................... 14 12 13 Electronics................................................. 8 17 14 Industrial.................................................. 25 22 18 --- --- --- Total................................................... 100% 100% 100% === === === NET SALES BY GEOGRAPHY(2) United States............................................... 52% 57% 57% U.S. exports................................................ 7 5 8 International............................................... 41 38 35 --- --- --- Total................................................... 100% 100% 100% === === ===
- ------------------------ (1) Net Sales by Market have been restated in 2000 and 1999 for comparative purposes to conform to the 2001 presentation. (2) Net Sales by Geography were based on the location in which the sale was manufactured. 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. 6 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. 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 The Boeing Company ("Boeing") and Airbus Industrie ("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 record peak of 914 in 1999. Combined aircraft deliveries declined to 800 aircraft in 2000 and rebounded to 852 aircraft in 2001. In light of the tragic events that occurred on September 11, 2001 and the negative impact on the commercial aerospace market, Boeing and Airbus have significantly reduced their build rate projections for 2002 and 2003 from rates previously expected. The impact of these changes on Hexcel will be influenced by two factors: the mix of aircraft produced and the inventory supply chain effects of reduced aircraft production. The dollar value of Hexcel's materials varies by aircraft type--twin aisle aircraft use more Hexcel materials and products than narrow body aircraft and newer designed aircraft use more than older generations. The speed by which the aircraft manufacturers reduce their production to the new demand levels, and thereby their inventories, will impact their requirements for Hexcel's products. On average, Hexcel delivers products into the supply chain about six months prior to aircraft delivery. Depending on the product, orders placed with Hexcel are received anywhere between one and eighteen months prior to delivery of the aircraft to the customer. Hexcel anticipates that its commercial aerospace revenues will decline approximately 25-30% in 2002 compared with 2001, and may decline further in 2003. Set forth below are historical deliveries as published by Boeing and Airbus:
1992 1993 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- -------- -------- Boeing (including McDonnell Douglas)............ 573 409 311 256 271 375 559 Airbus.......................................... 157 138 127 124 126 182 229 --- --- --- --- --- --- --- Total........................................... 730 547 438 380 397 557 788 === === === === === === === 1999 2000 2001 -------- -------- -------- Boeing (including McDonnell Douglas)............ 620 489 527 Airbus.......................................... 294 311 325 --- --- --- Total........................................... 914 800 852 === === ===
Approximately 23%, 20% and 27% of Hexcel's 2001, 2000 and 1999 net sales, respectively, were to Boeing and related subcontractors. Of the 23% of sales to Boeing and its subcontractors in 2001, 20% and 3% related to commercial aerospace and space and defense market applications, respectively. Approximately 16%, 13% and 11% of Hexcel's 2001, 2000 and 1999 net sales, respectively, were to EADS, including Airbus, and its subcontractors. Of the 16% of sales to EADS and its subcontractors in 2001, 14% and 2% related to commercial aerospace and space and defense market applications, respectively. The loss of all or a significant portion of the business with Boeing or EADS would likely have a material adverse effect on the Company's consolidated results of operations. SPACE AND DEFENSE The space and defense markets have historically been innovators in and sources of significant demand for advanced structural materials. The aggregate demand by space and defense customers is 7 primarily a function of military aircraft procurement by the U.S. and certain European governments. Presently, there are a number of potentially significant military aircraft programs in various stages of development or initial production that utilize advanced structural materials. The Company is currently qualified to supply materials to a broad range of military aircraft and helicopter programs anticipated either to enter full-scale production in the near future or to significantly increase production rates. These programs include the F/A-18E/F Hornet, the F-22 Raptor, and the Eurofighter/Typhoon, as well as the C-17, the V-22 Osprey tiltrotor aircraft, and the RAH-66 Comanche and the NH90 helicopters. The benefits that the Company obtains from these programs will depend upon which ones are funded and the extent of such funding. 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 costs incurred plus a provision for profit on the incurred costs. In addition, the Company is subject to U.S. government cost accounting standards in accordance with applicable Federal Acquisition Regulations. ELECTRONICS The Company is one of the largest producers of high-quality, lightweight fiberglass fabric substrates used in the fabrication of multilayer printed wiring boards. In addition to its U.S. businesses, the Company has ownership positions in the Interglas and Asahi-Schwebel joint ventures. Interglas and Asahi-Schwebel are leading fiberglass fabric manufacturers in Europe, Japan and Southeast Asia. Fiberglass fabric substrates are a critical component used in the production of printed wiring boards, which are integral to most advanced electronic products, including computers, telecommunications equipment, advanced cable television equipment, network servers, televisions, automotive equipment and home appliances. The printed wiring board market experienced considerable growth in recent years due to growth in electronic equipment markets for products such as cellular phones, computers, and pagers. In addition, many other products such as automobiles, home appliances and medical equipment now have ever-increasing electronic content, which also drives growth for printed wiring boards. During the second quarter of 2001, the industry experienced a severe downturn, and a corresponding inventory correction began working its way through the supply chain significantly impacting demand for fiberglass substrates. As the downturn continued through 2001, competition intensified for the business that remained and pricing pressure increased. Depressed conditions in this sector have continued into the first quarter of 2002. Meanwhile, import quotas limiting Asian imports of fiberglass fabrics into the United States expired at the end of 2001 and the migration of lower layer count printed wiring board production to Asia has continued. Given the length and complexity of the supply chain and the large number of electronics devices that incorporate printed wiring boards manufactured using the Company's products, it is difficult to predict when the inventory correction will end, and when, and to what extent, the industry will recover. As a result of these factors, the Company's sales to the electronics market in 2001 decreased $104.2 million, or 57.5%, from sales in 2000. INDUSTRIAL MARKETS Hexcel has focused its participation in industrial 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. Future opportunities and growth depend primarily upon the success of the individual programs and industries in which the Company has elected to participate. Within industrial markets, key applications include surface transportation (automobiles, mass transit and high-speed rail and 8 marine applications), wind energy, civil engineering, skis, snowboards, fishing rods, tennis rackets, bicycles and soft body armor. 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 industrial markets. 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." FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS AND GEOGRAPHIC AREAS Financial information and further discussion of Hexcel's business segments and geographic areas, including external sales, long-lived assets and significant customers, are contained throughout the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 18 to the accompanying consolidated financial statements of this Annual Report on Form 10-K. BACKLOG In recent years, Hexcel's customers have increasingly demanded shorter order lead times and "just-in-time" delivery performance. While the Company has many multi-year contracts with its major aerospace customers, most of these contracts specify the proportion of the customers' requirements that will be supplied by the Company and the terms under which the sales will occur, not the specific quantities to be procured. The Company's electronic and industrial customers have always desired to order their requirements on as short a lead-time as possible. As a result, the Company has recognized that over the last few years the twelve-month order backlog is no longer a meaningful trend indicator and, as a result, ceased monitoring it in the management of the business. 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 polyacrylonitrile ("PAN") precursor material used in the manufacture of carbon fibers. The Company consumed internally approximately 49% and 27% of its carbon fiber and industrial fabric production, respectively, in 2001. However, the Company purchases most of the raw materials used in production from third parties. 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 the Company's consolidated results of operations. In addition, certain raw materials and operating supplies used by Hexcel are subject to price fluctuations caused by the volatility of underlying commodity prices. The commodities most likely to have an impact on the Company's consolidated results of operations in the event of significant price changes are electricity, natural gas, aluminum and certain chemicals. The Company attempts to minimize the impact of commodity price risk, when feasible, by entering into supply agreements that specify raw material prices or limit price increases for a reasonable period of time. The Company generally does not employ forward contracts or other financial instruments to hedge commodity price risk. 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. 9 RESEARCH AND TECHNOLOGY; PATENTS AND KNOW-HOW Hexcel's Research and Technology ("R&T") departments support 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 composite structures, process engineering, application development 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 United States and Europe for strategically important customers and government agencies in the areas of carbon fiber ceramics, high 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. The Company believes that it possesses unique capabilities to design, develop and manufacture composite materials and structures. 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 $18.6 million for research and technology in 2001, $21.2 million in 2000 and $24.8 million in 1999. These expenditures were expensed as incurred. ENVIRONMENTAL MATTERS The Company is subject to federal, state and local laws and regulations designed to protect the environment and to regulate the discharge of materials into the environment. The Company believes that its policies, practices and procedures are properly designed to prevent unreasonable risk of environmental damage and of associated financial liability. To date, environmental control regulations have not had a significant adverse effect on the Company's overall operations. A discussion of environmental matters is contained in Item 3, "Legal Proceedings," and in Note 16 to the accompanying consolidated financial statements included in this Annual Report on Form 10-K. 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. 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 producers of substitute structural materials such as structural foam, wood, metal, and concrete. Depending upon the material and markets, relevant competitive factors include price, delivery, service, quality and product performance. 10 EMPLOYEES As of December 31, 2001, Hexcel employed 5,376 full-time employees, 3,379 in the United States and 1,997 internationally. The number of full-time employees has declined from 6,072 and 6,328 as of December 31, 2000 and 1999, respectively, primarily due to Hexcel's business consolidation and restructuring programs and the sale of the Bellingham aircraft interiors business in April 2000. The Company's business consolidation and restructuring programs include the right-sizing of the Company in response to the forecasted reductions in commercial aircraft production and the continued weakness in electronics and the closure of manufacturing facilities, such as the facilities in Gilbert, Arizona and Lancaster, Ohio. The Company expects to further reduce the number of employees to less than 4,500 by the end of 2002. For further discussion, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and to Note 4 to the accompanying consolidated financial statements of this Annual Report on Form 10-K. 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. The Company's research and technology administration, and certain laboratories are located in Dublin, California; Duxford, United Kingdom; Decines, France; and Anderson, South Carolina. The following table lists the manufacturing facilities of Hexcel by geographic location, approximate square footage, and principal products manufactured. This table does not include manufacturing facilities owned by entities in which the Company has a joint venture interest. MANUFACTURING FACILITIES
APPROXIMATE FACILITY LOCATION SQUARE FOOTAGE BUSINESS SEGMENT PRINCIPAL PRODUCTS - ----------------- -------------- ----------------------- -------------------------------------- United States: Anderson, South Carolina................ 432,000 Reinforcement Products Industrial Fabrics Burlington, Washington.... 73,000 Composite Materials Honeycomb Parts Casa Grande, Arizona...... 307,000 Composite Materials Honeycomb and Honeycomb Parts Clearwater, Florida....... 40,000 Composite Materials Prepregs Decatur, Alabama.......... 159,000 Reinforcement Products PAN Precursor (used to produce Carbon Fibers) Kent, Washington.......... 733,000 Engineered Products Composite Structures Lancaster, Ohio........... 49,000 Composite Materials Prepregs Livermore, California..... 141,000 Composite Materials Prepregs Pottsville, Pennsylvania............ 134,000 Composite Materials Honeycomb Parts Salt Lake City, Utah...... 457,000 Reinforcement Products; Carbon Fibers; Prepregs Composite Materials Seguin, Texas............. 204,000 Reinforcement Products Industrial Fabrics Statesville, North Carolina................ 553,000 Reinforcement Products Electronic Fabrics; Industrial fabrics Washington, Georgia....... 160,000 Reinforcement Products Electronic Fabrics International: Dagneux, France........... 130,000 Composite Materials Prepregs Decines, France........... 90,000 Reinforcement Products Industrial Fabrics Duxford, United Kingdom... 440,000 Composite Materials Prepregs; Honeycomb and Honeycomb Parts Les Avenieres, France..... 476,000 Reinforcement Products Electronic Fabrics; Industrial Fabrics Linz, Austria............. 163,000 Composite Materials Prepregs Parla, Spain.............. 43,000 Composite Materials Prepregs Welkenraedt, Belgium...... 223,000 Composite Materials Honeycomb and Honeycomb Parts
11 Hexcel leases the facilities located in Anderson, South Carolina; Washington, Georgia; Clearwater, Florida; Statesville, North Carolina; and the land on which the Burlington, Washington, facility is located. The Company also leases portions of the facilities located in Casa Grande, Arizona; Linz, Austria; and Les Avenieres, France. The remaining facilities are owned by the Company. The facilities located in Casa Grande, Arizona; Decatur, Alabama; Dublin; California; Kent, Washington; Livermore, California; Salt Lake City, Utah; and Seguin, Texas are subject to mortgages in support of the bank syndicate that provides the Company with its Senior Credit Facility. As part of Hexcel's business consolidation and restructuring programs, the Lancaster, Ohio manufacturing facility will be closed during the second quarter of 2002. The manufacturing of products from this facility will be moved to the Livermore, California and Salt Lake City, Utah sites. ITEM 3. LEGAL PROCEEDINGS Hexcel is involved in litigation, investigations and claims arising out of the normal conduct of its business, including those relating to commercial transactions, as well as to 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 and 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"). While the Company believes, based on the amount and the nature of its waste, and the number of other financially viable PRPs, that its liability in connection with such matters will not be material, the Company has nonetheless accrued an estimate of its liability with respect to these matters. Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act, Hexcel signed an administrative consent order and later entered into a Remediation Agreement 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 and Remediation Agreement is accrued in its consolidated balance sheets. The ultimate cost of remediating the Lodi site will depend on developing circumstances. 12 Hexcel was 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 Company's Kent, Washington, 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. Management has determined that the cost-sharing agreement terminated in December 1998; however, the other party disputes this determination. The Company's estimate of the remaining costs associated with its responsibility for the cleanup of this site is accrued in its consolidated balance sheets. Hexcel 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. It appears that Toho Tenax Co. Ltd., one of its subsidiaries and one of its employees have been indicted for obstruction of justice. No other indictments have been issued in the case to date. The Company is not in a position to predict the direction or outcome of the investigation; however, it is cooperating with the Department of Justice. In 1999, Hexcel was joined in a purported class action lawsuit alleging antitrust violations in the sale of carbon fiber, carbon fiber industrial fabrics and carbon fiber prepreg (Thomas & Thomas Rodmakers, Inc. et. al. v. Newport Adhesives and Composites, Inc., et. al., Amended and Consolidated Class Action Complaint filed October 4, 1999, United States District Court, Central District of California, Western Division, CV-99-07796-GHK (CTx)). The Company was one of many manufacturers joined in the lawsuit, which was spawned from the Department of Justice investigation. The Court has issued a tentative ruling to certify the class, but no final ruling has been issued. If the tentative ruling becomes final, discovery is expected to continue to proceed. The Company is not in a position to predict the outcome of the lawsuit, but believes that the lawsuit is without merit as to the Company. The Company has also been joined as a party in numerous purported class actions in California spawned by the Thomas & Thomas class action. These actions also allege antitrust violations and are brought on behalf of purchasers located in California who indirectly purchased carbon fiber products. The cases have been ordered to be coordinated in the Superior Court for the County of San Francisco and are currently referred to as Carbon Fibers Cases I, II and III, Judicial Council Coordinator Proceeding Numbers 4212, 4216 and 4222. The cases are Lazio v. Amoco Polymers Inc., et.al., filed August 21, 2000; Proiette v. Newport Adhesives and Composite, Inc. et. al., filed September 12, 2001; Simon v. Newport Adhesives and Composite, Inc. et. al., filed September 21, 2001; Badal v. Newport Adhesives and Composite, Inc. et.al., filed September 26, 2001; Yolles v. Newport Adhesives and Composite, Inc. et.al., filed September 26, 2001; Regier v. Newport Adhesives and Composite, Inc. et.al., filed October 2, 2001; and Connolly v. Newport Adhesives and Composite, Inc. et.al., filed October 4, 2001; Elisa Langsam v Newport Adhesives and Composites, Inc, et al., filed October 4, 2001; Jubal Delong et al. v Amoco Polymers, Inc. et al., filed October 26, 2001; and Louis V. Ambrosio v Amoco Polymers, Inc. et. al., filed October 25, 2001. At its Livermore, California facility, Hexcel has received a series of notices of violation of air quality standards from the Bay Area Air Quality Management District. Hexcel is investigating the issues and is cooperating with the District. On May 10, 1999, the Company filed a complaint against Hercules, Inc., in the Supreme Court of New York, seeking recovery of certain disputed items relating to the 1996 purchase by Hexcel of the Hercules Composite Products Division. On June 1, 2001, Hexcel was awarded a judgment in the amount of $7.3 million plus interest for a total of $10.2 million; interest on the judgment continues to accrue. Hercules appealed the judgment and delivered a bond to secure collection of the judgment. In 13 the first quarter of 2002, the judgment was upheld by the appellate division, but the judgment has not become final. Hexcel strongly believes that the judgment will become final. 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 22 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 2001, 2000 or 1999. The payment of dividends is generally prohibited under the terms of certain of the Company's debt agreements. On March 22, 2002, there were 1,384 holders of record of Hexcel common stock. ITEM 6. SELECTED FINANCIAL DATA The information required by Item 6 is contained on page 29 of this Annual Report on Form 10-K under the caption "Selected Financial Data" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by Item 7 is contained on pages 30 to 57 of this Annual Report on 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 DISCLOSURES ABOUT MARKET RISK The information required by Item 7A is contained under the heading "Market Risks" on pages 54 to 56 of this Annual Report on 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 58 to 94 of this Annual Report on Form 10-K under "Consolidated Financial Statements and Supplementary Data" and is incorporated herein by reference. The report of the independent public accountants for the years ended December 31, 2001, 2000 and 1999 is contained on page 60 of this Annual Report on Form 10-K under the caption "Report of Independent Accountants" and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT: The information required by Item 10 will be contained in Hexcel's definitive proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2001. Such information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 will be contained in Hexcel's definitive proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2001. Such information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 will be contained in Hexcel's definitive proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2001. Such information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 will be contained in Hexcel's definitive proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year ended December 31, 2001. Such information is incorporated herein by reference. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K A. 1. FINANCIAL STATEMENTS The consolidated financial statements of Hexcel, the notes thereto, and the report of independent accountants are listed on page 58 of this Annual Report on Form 10-K and are incorporated herein by reference. 2. FINANCIAL STATEMENT SCHEDULES The financial statement schedule and the report of independent accountants required by Item 14(a)(2) are listed on page 58 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 October 25, 2001, relating to third quarter 2001 financial results. C. EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 2.1 Asset Purchase Agreement dated March 31, 2000 between Hexcel Corporation and Britax Cabin Interiors, Inc. (incorporated herein by reference to Exhibit 2.1 to Hexcel's Current Report on Form 8-K dated May 10, 2000). 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 3.2 to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001) 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 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). 4.3 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). 4.3(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).
16
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.1 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(a) 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(b) 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). 10.1(c) Second Amendment dated August 13, 1999 to the Second Amended and Restated Credit Agreement by and among Hexcel Corporation and the Foreign Borrowers from time to time parties thereto, the banks and other financial institutions from time to time parties thereto, Citibank, N.A., as Documentation Agent, and Credit Suisse First Boston, as Administrative Agent (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1999). 10.1(d) Third Amendment dated March 7, 2000 to the Second Amended and Restated Credit Agreement by and among Hexcel Corporation and the Foreign Borrowers from time to time parties thereto, the banks and other financial institutions from time to time parties thereto, Citibank, N.A., as Documentation Agent, and Credit Suisse First Boston, as Administrative Agent (incorporated by reference to Exhibit 10.1(j) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.1(e) Consent Letter dated March 30, 2000 relating to the Third Amendment dated March 7, 2000 to the Second Amended and Restated Credit Agreement dated September 15, 1998 (incorporated herein by reference to Exhibit 2.1 of the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000). 10.1(f) Fourth Amendment and Consent, dated as of October 26, 2000, to the Second and Amended and Restated Credit Agreement, dated as of September 15, 1998, among Hexcel Corporation and the Foreign Borrowers from time to time party thereto, the banks and other financial institutions from time to time party thereto, Citibank, N.A., as Documentation Agent, and Credit Suisse First Boston, as Administrative Agent (incorporated herein by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.1(g) Fifth Amendment and Consent, dated as of May 11, 2001, to the Second Amended and Restated Credit Agreement, dated as of September 15, 1998, 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 by reference herein to Exhibit 10.1(h) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).
17
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.1(h) Sixth Amendment and Consent, dated as of June 21, 2001, to the Second Amended and Restated Credit Agreement, dated as of September 15, 1998, 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 by reference herein to Exhibit 10.1(i) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.1(i) Waiver, dated as of December 31, 2001, to the Second Amended and Restated Credit Agreement, dated as of September 15, 1998, 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 by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K, filed on January 10, 2002). 10.1(j) Seventh Amendment and Consent, dated as of January 25, 2002, to the Second Amended and Restated Credit Agreement, dated as of September 15, 1998, 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 by reference to Exhibit 99.1 of the Company's Current Report on Form 8-K, filed on January 28, 2002). 10.1(k) Amended and Restated Collateral Agreement dated March 7, 2000 to the Second Amended and Restated Credit Agreement by and among Hexcel Corporation and the Foreign Borrowers from time to time parties thereto, the banks and other financial institutions from time to time parties thereto, Citibank, N.A., as Documentation Agent, and Credit Suisse First Boston, as Administrative Agent (incorporated by reference to Exhibit 10.1(k) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.1(l) First Amendment to Amended and Restated Collateral Agreement dated as of Januay 25, 2002, to the Amended and Restated Collateral Agreement dated March 7, 2000 to the Second Amended and Restated Credit Agreement by and among Hexcel Corporation and the Foreign Borrowers from time to time parties thereto, the banks and other financial institutions from time to time parties thereto, Citibank, N.A., as Documentation Agent, and Credit Suisse First Boston, as Administrative Agent (incorporated by reference to Exhibit 99.2 of the Company's Current Report on Form 8-K, filed on January 28, 2002). 10.2 Schedule to the ISDA Master Agreement between Credit Lyonnais (New York Branch) and Hexcel Corporation, dated as of September 15, 1998 (incorporated by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 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 (incorporated by reference to Exhibit 10.2(a) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 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).
18
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 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). 10.3(b)* Hexcel Corporation Incentive Stock Plan, as amended and restated on January 30, 1997, and further amended on December 10, 1997 and March 25, 1999 (incorporated herein by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8 filed on July 26, 1999). 10.3(c)* Hexcel Corporation Incentive Stock Plan, as amended and restated on January 30, 1997, and further amended on December 10, 1997, March 25, 1999 and December 2, 1999 (incorporated by reference to Exhibit 10.3(c) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.3(d)* Hexcel Corporation Incentive Stock Plan, as amended and restated on February 3, 2000 (incorporated herein by reference to Annex A of the Company's Proxy Statement dated March 31, 2000). 10.3(e)* Hexcel Corporation Incentive Stock Plan, as amended and restated on December 19, 2000 (incorporated herein by reference to Exhibit 10.3(e) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.3(f)* Hexcel Corporation Incentive Stock Plan, as amended and restated on December 19, 2000 and further amended on January 10, 2002. 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). 10.4(a)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000 (incorporated by reference to Exhibit 10.1 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000). 10.4(b)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001 (incorporated herein by reference to Exhibit 10.4(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.4(c)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as amended on February 3, 2000, and further amended on February 1, 2001 and January 10, 2002. 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). 10.5(a)* Hexcel Corporation Management Stock Purchase Plan, as amended on March 25, 1999 (incorporated herein by reference to Exhibit 4.3 of the Company's Registration Statement on Form S-8 filed on July 26, 1999). 10.5(b)* Hexcel Corporation Management Stock Purchase Plan, as amended on March 25, 1999 and December 2, 1999 (incorporated by reference to Exhibit 10.5(b) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.5(c)* Hexcel Corporation Management Stock Purchase Plan, as amended and restated on February 3, 2000 (incorporated herein by reference to Annex B of the Company's Proxy Statement dated March 31, 2000).
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EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.5(d)* Hexcel Corporation Management Stock Purchase Plan, as amended and restated on December 19, 2000 (incorporated herein by reference to Exhibit 10.5(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.6* Hexcel Corporation Management Incentive Compensation Plan, as amended and restated on December 19, 2000 and as further amended on February 27, 2002. 10.7* Hexcel Corporation Long-Term Incentive Plan. 10.8* Form of Employee Option Agreement (2002). 10.9 * Form of Employee Option Agreement (2000) (incorporated herein by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.10 * Form of Employee Option Agreement Special Executive Grant (2000) dated December 20, 2000 (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.11* Form of Employee Option Agreement Special Executive Grant (1999) dated December 2, 1999 (incorporated by reference to Exhibit 10.7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.12* Form of Employee Option Agreement (1999) dated December 2, 1999 (incorporated by reference to Exhibit 10.8 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.13* Form of Employee Option Agreement (1999) (incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999). 10.14* 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). 10.15* 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). 10.16* 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). 10.17* 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). 10.18* Form of Retainer Fee Option Agreement for Non-Employee Directors (2000) (incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.19* Form of Retainer Fee Option Agreement for Non-Employee Directors (1999) (incorporated by reference to Exhibit 10.14 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.20* Form of Retainer Fee Option Agreement for Non-Employee Directors (1998) (incorporated herein by reference to Exhibit 10.11 to Hexcel's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
20
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.21* 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). 10.22* 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). 10.23* Form of Supplemental Compensation Option Agreement (Directors). 10.24* Form of Performance Accelerated Restricted Stock Unit Agreement (December 20, 2000) (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, 2000). 10.25* Form of Performance Accelerated Restricted Stock Unit Agreement (Special Executive Grant December 2, 1999) (incorporated by reference to Exhibit 10.19 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.26* Form of Performance Accelerated Restricted Stock Unit Agreement (December 2, 1999) (incorporated by reference to Exhibit 10.20 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.27* Form of Performance Accelerated Restricted Stock Unit Agreement (1999) (incorporated herein by reference to Exhibit 10.2 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999). 10.28* 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). 10.29* 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). 10.30* 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). 10.31* Form of Restricted Stock Unit Agreement (2002). 10.32* 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). 10.33* 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). 10.34* 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). 10.35* 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). 10.36* 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).
21
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.37* Form of Grant of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.3 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999). 10.38* 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). 10.39* Hexcel Corporation 1997 Employee Stock Purchase Plan, and amended on March 19, 2001. 10.40* Employment Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37 to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.40(a)* Employee Option Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(a) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.40(b)* Employment Option Agreement (performance-based option) dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(b) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.40(c)* Restricted Stock Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(c) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.40(d)* Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(d) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.40(e)* Letter Agreement dated August 1, 2001 between Hexcel Corporation and David E. Berges (incorporated by reference herein to Exhibit 10.37(e) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.40(f)* Letter Agreement dated August 28, 2001 between Hexcel Corporation and David E. Berges (incorporated herein by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). 10.40(g)* Agreement, dated as of April 27, 2001, by and between Hexcel Corporation and John J. Lee (incorporated by reference herein to Exhibit 10.38(n) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.41* Amended and Restated Employment Agreement dated October 11, 2000 between Hexcel and John J. Lee (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000). 10.41(a)* Amendment to Amended and Restated Employment Agreement dated October 11, 2000 between Hexcel and John J. Lee (incorporated herein by reference to Exhibit 10.37(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.41(b)* 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).
22
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.41(c)* 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). 10.41(d)* 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). 10.41(e)* 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). 10.41(f)* 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). 10.41(g)* 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). 10.41(h)* Amendment to Supplemental Executive Retirement Agreement dated January 21, 1999, between Hexcel Corporation and John J. Lee (incorporated herein by reference to Exhibit 10.37(h) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.41(i)* Second Amendment to Supplemental Executive Retirement Agreement dated October 11, 2000, between Hexcel Corporation and John J. Lee (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.41(j)* Split Dollar Agreement dated as of January 21, 1999 among Hexcel, John J. Lee and certain Trustees (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999). 10.41(k)* Executive Severance Agreement between Hexcel and John J. Lee dated as of February 3, 1999 (incorporated herein by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999). 10.41(l)* Letter dated December 2, 1999 from Hexcel Corporation to John J. Lee, regarding the Company's Management Incentive Compensation Plan for 1999 (incorporated by reference to Exhibit 10.33(i) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.41(m)* Employee Option Agreement dated as of December 20, 2000 between Hexcel and John J. Lee (incorporated herein by reference to Exhibit 10.37(m) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.42* Severance and Termination Agreement dated as of December 17, 2001 between Hexcel Corporation and Harold E. Kinne. 10.42(a)* 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).
23
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.42(b)* Letter dated December 2, 1999 from Hexcel Corporation to Harold E. Kinne, regarding the Company's Management Incentive Compensation Plan for 1999 (incorporated by reference to Exhibit 10.34(a) of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.42(c)* Supplemental Executive Retirement Agreement dated as of May 10, 2000 between Hexcel Corporation and Harold E. Kinne (incorporated herein by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000). 10.42(d) First Amendment to Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and Harold E. Kinne. 10.42(e)* Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Harold E. Kinne (incorporated herein by reference to Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.42(f)* Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Harold E. Kinne (incorporated herein by reference to Exhibit 10.38(d) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.43* Letter dated December 2, 1999 from Hexcel Corporation to Stephen C. Forsyth, regarding the Company's Management Incentive Compensation Plan for 1999 (incorporated by reference to Exhibit 10.35 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999). 10.43(a)* Supplemental Executive Retirement Agreement dated as of May 10, 2000 between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.5 of the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000). 10.43(b)* Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.8 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.43(c)* Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Stephen C. Forsyth (incorporated herein by reference to Exhibit 10.39(c) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.43(d)* First Amendment to Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and Stephen C. Forsyth. 10.44* Letter dated December 2, 1999 from Hexcel Corporation to Ira J. Krakower, regarding the Company's Management Incentive Compensation Plan for 1999 (incorporated herein by reference to Exhibit 10.40 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.43(a)* Supplemental Executive Retirement Agreement dated as of May 10, 2000 between Hexcel and Ira J. Krakower (incorporated herein by reference to Exhibit 10.6 of the Company's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000). 10.43(b)* Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Ira J. Krakower (incorporated herein by reference to Exhibit 10.7 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000).
24
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.44(c)* First Amendment to Supplemental Executive Retirement Agreement dated as of July 30, 2001 between Hexcel Corporation and Ira J. Krakower. 10.45* Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999 (incorporated herein by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999). 10.46* Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999 (incorporated herein by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1999). 10.47* Executive Severance Agreement between Hexcel and Robert F. Matthews dated as of July 1, 2000 (incorporated by reference to Exhibit 10.2 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 2000). 10.47(a)* Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Robert F. Matthews (incorporated herein by reference to Exhibit 10.11 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.47(b)* Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Robert F. Matthews (incorporated herein by reference to Exhibit 10.43(b) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.48* Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.14 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.48(a)* Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and William Hunt (incorporated herein by reference to Exhibit 10.45(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.49* Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and David Tanonis (incorporated herein by reference to Exhibit 10.12 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.50* Amendment to Agreements, dated as of October 11, 2000 by and between Hexcel Corporation and Joseph Shaulson (incorporated herein by reference to Exhibit 10.9 of the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 2000). 10.50(a)* Amendment to Amendments to Agreements, dated as of November 21, 2000, by and between Hexcel Corporation and Joseph Shaulson (incorporated herein by reference to Exhibit 10.48(a) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000). 10.51 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). 10.52 Governance Agreement, dated as of December 19, 2000, among LXH L.L.C., LXH II, L.L.C., Hexcel Corporation and the other parties listed on the signature pages thereto (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated December 22, 2000).
25
EXHIBIT NO. DESCRIPTION - ----------- ------------------------------------------------------------ 10.52(a) Amendment, dated as of April 25, 2001, to the Governance Agreement dated as of December 19, 2000 among LXH, L.L.C., LXH II, L.L.C., Hexcel Corporation and the other parties listed on the signature pages thereto (incorporated by reference herein to Exhibit 10.51(a) to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 10.53 Registration Rights Agreement, dated as of December 19, 2000, by and among Hexcel Corporation, LXH, L.L.C. and LXH II, L.L.C. (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated December 22, 2000). 10.54 Agreement, dated October 11, 2000, by and among Hexcel Corporation, LXH, L.L.C. and LXH II, L.L.C. (incorporated herein by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated October 13, 2000). 10.55 Consent and Termination Agreement, dated as of October 11, 2000, by and between Hexcel Corporation and Ciba Specialty Chemicals Holding Inc. (incorporated herein by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K dated October 13, 2000). 10.56 Purchase Agreement, dated as of June 15, 2001, between Hexcel Corporation and Credit Suisse First Boston Corporation, Deutsche Banc Alex. Brown Inc., Goldman, Sachs & Co. and J.P. Morgan Securities Inc. 12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Company. 21.1 Subsidiaries of the Company (incorporated by reference herein to Exhibit 21.1 to Hexcel's Registration Statement on Form S-4 (No. 333-66582), filed on August 2, 2001). 23 Consent of Independent Accountants--PricewaterhouseCoopers LLP.
- ------------------------ * Indicates management contract or compensatory plan or arrangement. 26 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 26, 2002 /s/ DAVID E. BERGES - ------------------------------------------ ------------------------------------------ (Date) David E. Berges 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.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID E. BERGES Chairman of the Board of Directors, March 26, 2002 --------------------------------- President and Chief Executive Officer (David E. Berges) (PRINCIPAL EXECUTIVE OFFICER) /s/ STEPHEN C. FORSYTH Executive Vice President and March 26, 2002 --------------------------------- Chief Financial Officer (Stephen C. Forsyth) (PRINCIPAL FINANCIAL OFFICER) /s/ WILLIAM J. FAZIO Corporate Controller March 26, 2002 --------------------------------- (PRINCIPAL ACCOUNTING OFFICER) (William J. Fazio) /s/ H. ARTHUR BELLOWS, JR. Director March 26, 2002 --------------------------------- (H. Arthur Bellows, Jr.) /s/ SANDRA L. DERICKSON Director March 25, 2002 --------------------------------- (Sandra L. Derickson) /s/ JAMES J. GAFFNEY Director March 26, 2002 --------------------------------- (James J. Gaffney) /s/ MARSHALL S. GELLER Director March 26, 2002 --------------------------------- (Marshall S. Geller)
27
SIGNATURE TITLE DATE --------- ----- ---- /s/ SANJEEV K. MEHRA Director March 26, 2002 --------------------------------- (Sanjeev K. Mehra) /s/ LEWIS RUBIN Director March 26, 2002 --------------------------------- (Lewis Rubin) /s/ PETER M. SACERDOTE Director March 26, 2002 --------------------------------- (Peter M. Sacerdote) /s/ MARTIN L. SOLOMON Director March 26, 2002 --------------------------------- (Martin L. Solomon)
28 SELECTED FINANCIAL DATA (IN MILLIONS, EXCEPT PER SHARE DATA) The following table summarizes selected financial data as of and for the five years ended December 31:
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- RESULTS OF OPERATIONS(A): Net sales............................................ $1,009.4 $1,055.7 $1,151.5 $1,089.0 $936.9 Cost of sales........................................ 818.6 824.3 909.0 817.7 714.3 -------- -------- -------- -------- ------ Gross margin....................................... 190.8 231.4 242.5 271.3 222.6 Selling, general and administrative expenses........... 120.9 123.9 128.7 117.9 102.4 Research and technology expenses....................... 18.6 21.2 24.8 23.7 18.4 Business consolidation and restructuring expenses...... 58.4 10.9 20.1 12.7 25.3 Impairment of goodwill and other purchased intangibles.......................................... 309.1 -- -- -- -- -------- -------- -------- -------- ------ Operating income (loss).............................. (316.2) 75.4 68.9 117.0 76.5 Gain on sale of Bellingham aircraft interiors business............................................. -- 68.3 -- -- -- Interest expense....................................... 64.8 68.7 73.9 38.7 25.8 -------- -------- -------- -------- ------ Income (loss) before income taxes.................... (381.0) 75.0 (5.0) 78.3 50.7 Provision for (benefit from) income taxes.............. 40.5 26.3 (1.7) 28.4 (22.9) -------- -------- -------- -------- ------ Income (loss) before equity in earnings and extraordinary item................................. (421.5) 48.7 (3.3) 49.9 73.6 Equity in earnings (losses) of and write-downs of an investment in affiliated companies................... (9.5) 5.5 (20.0) 0.5 -- Extraordinary loss on early retirement of debt......... (2.7) -- -- -- -- -------- -------- -------- -------- ------ Net income (loss).................................... $ (433.7) $ 54.2 $ (23.3) $ 50.4 $ 73.6 ======== ======== ======== ======== ====== Net income (loss) per share: Basic................................................ $ (11.54) $ 1.47 $ (0.64) $ 1.38 $ 2.00 Diluted.............................................. (11.54) 1.32 (0.64) 1.24 1.74 Weighted average shares outstanding: Basic................................................ 37.6 36.8 36.4 36.7 36.7 Diluted.............................................. 37.6 45.7 36.4 45.7 46.0 -------- -------- -------- -------- ------ FINANCIAL POSITION: Total assets......................................... $ 789.4 $1,211.4 $1,261.9 $1,404.2 $811.6 Working capital...................................... $ 80.5 $ 128.1 $ 117.3 $ 219.6 $200.7 Long-term notes payable and capital lease obligations........................................ $ 668.5 $ 651.5 $ 736.6 $ 838.1 $339.5 Stockholders' equity(b).............................. $ (132.6) $ 315.7 $ 270.1 $ 302.4 $249.9 -------- -------- -------- -------- ------ OTHER DATA: EBITDA(c)............................................ $ 56.1 $ 202.3 $ 130.3 $ 164.5 $112.3 Adjusted EBITDA(d)................................... $ 119.2 $ 144.9 $ 150.4 $ 177.2 $137.6 Depreciation and amortization........................ $ 63.2 $ 58.7 $ 61.3 $ 47.5 $ 35.8 Capital expenditures................................. $ 38.8 $ 39.6 $ 35.6 $ 66.5 $ 57.4 Shares outstanding at year-end, less treasury stock.............................................. 38.2 37.1 36.6 36.4 36.9 -------- -------- -------- -------- ------
- -------------------------- (a) The comparability of the data may be affected by certain acquisitions and the sale of the Bellingham aircraft interiors business. The Company acquired Clark-Schwebel, a manufacturer of high-quality fiberglass fabrics used to make printed wiring boards and high performance specialty products used in insulation, filtration, wall and facade claddings, soft body armor and reinforcements for composite materials in 1998 and the satellite business and certain technologies from Fiberite in 1997. Both acquisitions were accounted for using the purchase method of accounting. (b) No cash dividends were declared per common stock during the five years ended December 31, 2001. (c) Earnings before interest, taxes, depreciation, amortization, impairment of goodwill and other purchased intangibles, equity in earnings (losses) of and write-downs of an investment in affiliated companies, and extraordinary loss on early retirement of debt. (d) Earnings before business consolidation and restructuring expenses, impairment of goodwill and other purchased intangibles, gain on sale of Bellingham aircraft interiors business, compensation expenses associated with the former CEO's retirement, interest, taxes, depreciation, amortization, equity in earnings (losses) of and write-downs of an investment in affilitated companies, and extraordinary loss on early retirement of debt. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW
YEAR ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 -------- -------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) PRO FORMA (A): Net Sales................................................. $1,009.4 $1,036.8 $1,081.5 Adjusted EBITDA (b)....................................... $ 119.2 $ 144.0 $ 141.3 -------- -------- -------- AS REPORTED: Net Sales................................................. $1,009.4 $1,055.7 $1,151.5 Gross margin %............................................ 18.9% 21.9% 21.1% Adjusted operating income (c)............................. $ 56.0 $ 86.3 $ 89.0 Adjusted operating income % (c)........................... 5.5% 8.2% 7.7% Adjusted EBITDA (b)....................................... $ 119.2 $ 144.9 $ 150.4 Provision for (benefit from) income taxes (d)............. $ 40.5 $ 26.3 $ (1.7) Equity in earnings (losses) of and write-downs of an investment in affiliated companies...................... $ (9.5) $ 5.5 $ (20.0) Extraordinary loss on early retirement of debt............ $ (2.7) $ -- $ -- Net income (loss)......................................... $ (433.7) $ 54.2 $ (23.3) Diluted earnings (loss) per share......................... $ (11.54) $ 1.32 $ (0.64)
- ------------------------ (a) Pro forma results give effect to the April 26, 2000 sale of the Bellingham aircraft interiors business as if the transaction had occurred on January 1, 1999. (b) Excludes business consolidation and restructuring expenses, impairment of goodwill and other purchased intangibles, compensation expenses associated with the former CEO's retirement, the gain from the April 2000 sale of the Bellingham business, interest, taxes, depreciation, amortization, equity in earnings (losses) of and write-downs of an investment in affiliated companies, and the extraordinary loss on early retirement of debt. (c) Excludes business consolidation and restructuring expenses, impairment of goodwill and other purchased intangibles, and compensation expenses associated with the former CEO's retirement. (d) The 2001 results reflect the impact of the write-down of U.S. deferred tax assets and the impact of ceasing to record the tax benefits from U.S. operating losses commencing during the second quarter of 2001. The 2000 results include $24.0 million of provision for income taxes on the April 2000 gain from the sale of the Bellingham aircraft interiors business. During 2001, significant changes occurred in a number of the markets served by Hexcel. These changes impacted the Company's operations and its actions. The following is a summary of several significant developments during the year. MARKET DEVELOPMENTS: - ELECTRONICS. Hexcel manufactures high-quality, lightweight fiberglass fabric substrates used in the fabrication of multilayer printed wiring boards. In the latter part of the first quarter of 2001, sales of these products fell sharply. In the second quarter of 2001, U.S. demand weakened further and our European operations, together with our joint venture interests in Europe and Asia, saw the same sharp decline in customer demand. These reduced demand conditions persisted for the balance of 2001 with revenues down in excess of 65% for the second, third and fourth quarters compared to the same quarters in 2000. The dramatic reductions the Company 30 saw in its electronic revenues were part of the global downturn and supply chain correction seen throughout the electronics industry in 2001. The origins of this downturn have many causes including the end of the so called "tech boom," a sharp reduction in telecommunications infrastructure investments and declining macroeconomic trends. With significant inventory positions existing throughout the electronics supply chain in anticipation of continuing high growth rates, the impact of the decline in electronics end market demand was magnified down the supply chain resulting in the unprecedented declines in sales seen by Hexcel and other electronics supply chain participants. As the downturn continued through 2001, competition intensified for the business that remained and pricing pressure increased. Depressed conditions in this sector have continued into the first quarter of 2002. Meanwhile, import quotas limiting Asian imports of fiberglass fabrics into the U.S. expired at the end of 2001 and the migration of lower layer count printed wiring board production to Asia has continued. Given the length and complexity of the supply chain and the large number of electronics devices that incorporate printed wiring boards manufactured using the Company's products, it is difficult to predict when the inventory correction will end, and when, and to what extent, the industry will recover. - COMMERCIAL AEROSPACE. 2001 was a growth year for commercial aerospace with revenues 4.1% higher than 2000. The industry benefited from higher commercial aircraft production as deliveries grew and new aircraft backlog remained strong. The tragic events of September 11, 2001 dramatically changed the outlook for the industry and for Hexcel. The sharp reduction in passenger traffic post September 11th in both the United States and overseas significantly impacted airline profitability. The airlines cut capacity and started canceling and pushing out aircraft orders. As a result, The Boeing Company ("Boeing") plans significant reductions in aircraft production rates in 2002 and Airbus Industrie ("Airbus") cancelled previous plans to increase aircraft production rates in 2002. Combined, Boeing and Airbus delivered 852 aircraft in 2001, and have indicated that 2002 deliveries will be approximately 680 aircraft. Additionally, public statements of Boeing and Airbus suggest that less than 600 aircraft combined will be delivered in 2003. As a result, Hexcel anticipates its commercial aerospace sales will be in the order of 25-30% lower in 2002 than in 2001, and may decline further in 2003. These declines may be exaggerated in the short term as the industry corrects inventory levels throughout its supply chain in response to the lowered level of output expected over the next two years. - SPACE & DEFENSE AND INDUSTRIAL. While electronic revenues declined in 2001 and the outlook for commercial aerospace changed, revenues from space & defense and industrial (emerging) applications grew. Revenues from fixed wing and rotary military aircraft grew as the next generation of aircraft started to enter full-scale production. Hexcel benefited from continued strong sales of reinforcement fabrics used in soft body armor and other ballistic applications. The growth came from military replacement programs as well as continued law enforcement agency demand. The use of Hexcel's composite materials in wind energy and automotive applications continued to expand, resulting in double-digit revenue growth for these industrial markets. Installed wind energy capacity continues to increase at a rapid rate, primarily in Europe, and with it the size of the wind generators being built. The number of automobile models that use Hexcel's products for impact protection of structural applications continues to grow. BUSINESS CONSOLIDATION, RESTRUCTURING AND IMPAIRMENTS: With the changes in the electronics market during 2001 and the outlook for commercial aerospace in 2002, Hexcel embarked upon a re-shaping of its business to face its new realities: - The Company's initial response to the downturn in electronics demand was to idle plants and equipment and furlough employees. As the extent of the industry downturn became apparent, the Company reduced employment in its reinforcement products business and its corporate staff. 31 - The impact of the events of September 11, 2001 called for a reshaping of the Company. On November 7, 2001, the Company announced a program to reduce its cash fixed overhead costs by approximately $60.0 million, or 20%, compared to previous spending rates, primarily through reductions in headcount. The majority of the fixed cost reductions were completed in the fourth quarter of 2001 with most of the remaining actions scheduled to be completed in the first quarter of 2002. As a result, the Company anticipates that the benefit of this cost reduction initiative will be evident in its second quarter 2002 financial results. With the impact of these fixed cost reductions and the results of reducing direct production employees as sales decline, the Company anticipates its employment will be less than 4,500 by the end of 2002 compared to 6,188 on June 30, 2001. The Company recorded a restructuring charge of $47.9 million with respect to these actions, of which approximately $35.0 million will be cash expenditures. About $3.0 million of these cash expenditures were incurred in the fourth quarter of 2001, with the balance to be incurred throughout 2002. - In December 2001, Hexcel announced that it had completed the previously announced closure of its Gilbert, Arizona composites facility ahead of schedule. It further noted that it would complete the closure of its Lancaster, Ohio facility in the second quarter of 2002. Business consolidation and restructuring activities are discussed more fully below under "Business Consolidation and Restructuring Programs." - During the second quarter of 2001, Hexcel determined that it needed to change the tax reporting of its U.S. operating losses because of its business outlook at that time. Previously, the Company had recorded the benefit of these net operating losses by increasing the deferred tax asset carried on its consolidated balance sheet. Beginning in the second quarter of 2001, the Company established a valuation allowance against the benefits of subsequent U.S. net operating losses until the U.S. operations return to consistent profitability. In light of the significant events that occurred in the second half of 2001, including the delay in the anticipated recovery of the electronics market, anticipated reductions in future commercial aircraft production, and a general weakening of the economy, expectations of future operating performance of the Company have been reduced. These lowered estimates of U.S. taxable income made it unlikely that the Company would generate sufficient income during the carry-forward period to utilize the U.S. deferred tax assets on its consolidated balance sheet. Therefore, Hexcel wrote off its $32.6 million U.S. deferred tax asset during the fourth quarter of 2001. - In the fourth quarter of 2001, Hexcel recorded a non-cash charge of $309.1 million related to the impairment of a substantial portion of goodwill and other intangible assets acquired in the Clark-Schwebel transaction of 1998 and the Fiberite transaction of 1997. These write-downs came as a result of an extensive review of long-lived assets, particularly goodwill and other intangible assets acquired in recent years in light of the changes in market conditions and the current market outlook. The announced reductions in future commercial aircraft production, the unprecedented decline in demand for woven glass fabrics, along with the overall weakness in the U.S. economy have led to lowered revenue forecasts for the relevant business segments and have led Hexcel to the conclusion that certain items of goodwill and other purchased intangibles were not recoverable. Hexcel determined the fair value of the impaired assets using discounted cash flow models, market valuations and third party appraisals, where appropriate. Additionally, in light of the aforementioned trends, the Company also recorded a $7.8 million non-cash write-down in connection with its investment in Interglas Technologies AG ("Interglas"), a company that had also been severely impacted by the unprecedented downturn in the electronics market. 32 OTHER EVENTS: - In April 2001, Hexcel announced that its Chairman and Chief Executive Officer had been diagnosed with cancer and was stepping down as Chairman and Chief Executive Officer. - In June 2001, Hexcel issued $100.0 million of 9.75% senior subordinated debentures, due 2009. The debentures were issued under the same indenture as the $240.0 million notes issued in January 1999. Hexcel used a portion of the net proceeds to redeem $25.0 million principal amount of its increasing rate senior subordinated note, due 2003 held by Ciba Specialty Chemicals Holding Inc. The remaining net proceeds were used to retire $67.5 million face value of its 7% convertible subordinated notes, due 2003. - In July 2001, Hexcel appointed David E. Berges as its new Chairman and Chief Executive Officer. Mr. Berges had previously held positions with General Electric, the Barnes Group and Honeywell (Allied Signal), the latest of which was President of Honeywell's Automotive Products Group. RESULTS OF OPERATIONS 2001 COMPARED TO 2000 NET SALES: Consolidated net sales were $1,009.4 million in 2001, a 4.4% decline from $1,055.7 million in 2000, and a 2.6% decline from pro forma net sales of $1,036.8 million, which gives effect to the sale of the Bellingham aircraft interiors business as if the transaction had occurred on January 1, 2000. The decline was due to a severe industry downturn and inventory correction in the electronics market for the Company's Reinforcement Products' woven glass fabrics, with net sales to that market down $104.2 million, or 57.5%, year on year. The downturn was partially offset by modest growth in the Composite Materials segment of $40.7 million, or 7.2%, continued expansion in other markets for Reinforcement Products of $21.8 million, or 12.2%, and increased revenues for Engineered Products of $14.3 million, or 12.9%, excluding the revenues in 2000 of the Bellingham aircraft interiors business sold in April 2000 as if the sale of the business occurred on January 1, 2000. Net sales in 2000 generated by the Bellingham aircraft interiors business prior to its sale were $18.9 million. Had the same U.S. dollar, British pound and Euro exchange rates applied in 2001 as in 2000, consolidated net sales would have been approximately $1,019.5 million in 2001. Hexcel has three reportable segments: Reinforcement Products, Composite Materials and Engineered Products. Although these strategic business units provide customers with different products and services, they often overlap within four end markets: Commercial Aerospace, Space & Defense, Electronics and Industrial. The Company finds it meaningful to evaluate the performance of its segments through the four end markets. Further discussion and additional financial information about the Company's segments may be found in Note 18 to the accompanying consolidated financial statements of this Annual Report on 10-K. 33 The following table summarizes actual and pro forma net sales to third-party customers by segment and end market in 2001 and 2000:
UNAUDITED ----------------------------------------------------------- COMMERCIAL SPACE & AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL ---------- -------- ----------- ---------- -------- (IN MILLIONS) 2001 NET SALES Reinforcement products.................... $ 63.6 $ 16.2 $ 77.0 $120.0 $ 276.8 Composite materials....................... 365.0 112.5 -- 130.2 607.7 Engineered products....................... 110.3 14.6 -- -- 124.9 ------ ------ ------ ------ -------- Total................................... $538.9 $143.3 $ 77.0 $250.2 $1,009.4 53% 14% 8% 25% 100% ------ ------ ------ ------ -------- 2000 NET SALES Reinforcement products.................... $ 60.6 $ 13.6 $181.2 $103.8 $ 359.2 Composite materials (a)................... 336.8 106.2 -- 124.0 567.0 Engineered products....................... 120.3 9.2 -- -- 129.5 ------ ------ ------ ------ -------- Total................................... $517.7 $129.0 $181.2 $227.8 $1,055.7 49% 12% 17% 22% 100% ------ ------ ------ ------ -------- PRO FORMA 2000 NET SALES Total (b)................................. $498.8 $129.0 $181.2 $227.8 $1,036.8 48% 12% 18% 22% 100% ====== ====== ====== ====== ========
- ------------------------ (a) Market allocations for the Composite Materials segment have been restated for comparative purposes to conform to the 2001 presentation. (b) Pro forma net sales for 2000 give effect to the sale of the Bellingham aircraft interiors business, that occurred on April 26, 2000, as if it had occurred on January 1, 2000 and exclude $18.9 million of commercial aerospace net sales by the Bellingham business. This business was a component of the Company's Engineered Products segment until this business was sold. Commercial aerospace net sales increased 4.1% to $538.9 million in 2001 compared with $517.7 million in 2000, or 8.0%, compared with pro forma net sales in 2000 of $498.8 million. The increase in comparable net sales reflects higher build rates of commercial aircraft produced at Airbus, Boeing and several regional aircraft manufacturers. Airbus and Boeing delivered a combined 852 commercial aircraft in 2001, a 6.5% improvement over the 800 delivered in 2000. Both Airbus and Boeing have reduced their previously projected aircraft delivery rates for 2002 due to the sharp downturn in air travel following the tragic events of September 11, 2001 and the resulting impact on airline profitability and their demand for new aircraft. Boeing estimates its deliveries in 2002 to be about 380 aircraft, while Airbus anticipates 2002 deliveries to be slightly lower than in 2001, rather than ramping up production as they had previously indicated. Both Boeing and Airbus anticipate further reductions in deliveries in 2003. This guidance suggests that combined Boeing and Airbus commercial aircraft deliveries in 2002 will be about 20% lower than in 2001. Given the timing of production and the projected reduction in 2003 aircraft deliveries compared to 2002, commercial aircraft build rates in 2002 will be lower than deliveries. As a result, the impact on Hexcel's 2002 commercial aerospace revenues will be greater. In addition, both Boeing and Airbus will initially have to consume excess supply chain inventories as production is reduced. Industry forecasts suggest that regional aircraft production will be less impacted. While regional aircraft manufacturers will not increase deliveries as indicated before September 11, 2001, the aim is to deliver a similar number of aircraft as they did in 2001. The impact of these changes on the Company will be influenced by two 34 additional factors: (a) the mix of aircraft that are produced, as twin aisle aircraft use more of the Company's products than narrow body aircraft and newly designed aircraft use more than older generations, and (b) the speed by which the aircraft manufacturers reduce their production to the new demand levels and, thereby, the effect of reduced aircraft production on the inventory supply chain. Reflecting the forgoing, the Company anticipates that commercial aerospace revenues will decline approximately 25-30% in 2002 compared with 2001. The Company delivers its products on average six months before an aircraft is ready for airline delivery and, therefore, has already been producing to its customer's previously anticipated 2002 delivery rates. Unlike many aerospace suppliers, Hexcel's sales to this market are almost entirely driven by new aircraft build rates with no material aftermarket content. Space and defense net sales in 2001 were $143.3 million, which reflects a $14.3 million, or 11.1%, increase from 2000. Sales associated with military aircraft and helicopters continue to trend upwards as the new generation of military aircraft in the United States and Europe ramp up in production. Forecasts by both the United States and European defense departments support this outlook of increased production of military fixed wing aircraft and helicopters. The Company is currently qualified to supply materials to a broad range of military aircraft and helicopters scheduled to enter either full-scale production or significantly increase existing production rates in the near future. These programs, which utilize significantly greater amounts of Hexcel products than previous generations, include the F/A-18E/F (Hornet), the F-22 (Raptor), the European Fighter Aircraft (Typhoon) as well as the C-17, the V-22 (Osprey) tilt rotor aircraft, the RAH-66 (Comanche) and the NH90 helicopters. The benefits that the Company obtains from these programs will depend upon which ones are funded and the extent of such funding. Electronics net sales were $77.0 million in 2001, a decrease of 57.5% from net sales of $181.2 million in 2000. This decline reflects the impact of a severe industry downturn and inventory correction in the global electronics industry that impacted the demand for the Company's fiberglass fabric substrates used in the fabrication of multilayer printed wiring boards. The origins of this downturn have many causes including the end of the so called "tech boom," a sharp reduction in telecommunications infrastructure investments and declining macroeconomic trends. Lower demand resulted in finished goods producers and their subcontractors seeking to liquidate their excess electronics inventories by cutting back on their purchases, which has affected the entire supply chain. The Company first saw the impact of this downturn in its U.S. operations in the latter part of the first quarter of 2001. In the second quarter of 2001, U.S. demand weakened further and the Company's European operations, together with its joint venture interests in Europe and Asia, saw the same precipitative decline in customer demand. These reduced demand conditions persisted for the balance of 2001 with sales revenues down in excess of 65% for the second, third and fourth quarters compared to the same quarters in 2000. As the downturn continued through 2001, competition intensified for the business that remained and pricing pressure increased. Depressed conditions in this sector have continued into the first quarter of 2002. Meanwhile, import quotas limiting Asian imports of fiberglass fabrics into the U.S. expired at the end of 2001 and the migration of lower layer count printed wiring board production to Asia has continued. Given the length and complexity of the supply chain and the large number of electronics devices that incorporate printed wiring boards manufactured using the Company's products, it is difficult to predict when the inventory correction will end, and when, and to what extent, the industry will recover. While Hexcel's electronics revenues first quarter to date are running at a moderately higher level than the depressed fourth quarter of 2001, there is not yet any evidence of a general recovery in the industry. Industrial net sales increased 9.8% to $250.2 million in 2001 from $227.8 million in 2000. The increase reflects strong sales growth in fabrics used in the manufacture of soft body armor (bullet-proof and puncture resistant vests) and in materials for wind energy applications. The Company also continues to obtain growth through new automotive applications driven by new programs that use the 35 Company's honeycomb core to provide impact protection and lightweight structural products. Growth in this market was negatively impacted by slightly lower net sales to recreational markets tracking macroeconomic trends in consumer spending and travel. The Company believes that revenues to the industrial market will continue to exhibit growth in 2002, as demand for renewable energy, such as wind energy, soft body armor and new automotive products remains firm. GROSS MARGIN: Gross margin for 2001 was $190.8 million, or 18.9% of sales, versus $231.4 million, or 21.9% of sales, in 2000. The decrease primarily reflects the impact of the sharp decline in electronics sales in the Company's Reinforcement Products segment where gross margin fell approximately 5.0% to 19.6% of sales. While the Company has taken actions to significantly reduce costs in the electronics business, it has not to date been able to reduce fixed costs pro-rata to the change in sales given the magnitude of the shortfall in revenues and its decision to retain manufacturing capacity to meet increased demand when the market recovers. Gross margins earned by the Company's Composite Materials and Engineered Products segments, as a percent of sales, declined approximately 2.0% to 3.0% below those earned in 2000 due to factors including the impact of the company-wide focus on dramatically reducing inventories ahead of 2002's anticipated fall-off in commercial aerospace revenues, higher utility costs and changes in sales mix. The Company's inventories declined $23.7 million during 2001 to $131.7 million. Utility costs in the United States for 2001 increased by approximately $3.2 million compared to 2000. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: Selling, general and administrative expenses were $120.9 million, or 12.0% of net sales, in 2001 compared with $123.9 million, or 11.7% of net sales, in 2000. SG&A expenses, excluding the $4.7 million of compensation expenses associated with the former CEO's retirement, were $116.2 million, or 11.5% of net sales, in 2001 compared with $121.3 million, or 11.7% of net sales, in 2000 on a pro forma basis giving effect to the sale of the Bellingham business as if it had occurred on January 1, 2000. This decrease reflects lower corporate expenses of $4.1 million, of which $2.2 million reflects costs incurred in connection with the change in control event in 2000. SG&A expenses were lower by $2.4 million in the Reinforcement Products segment primarily to mitigate the reduction in sales to the electronics market but slightly higher by $0.6 million and $0.8 million in the Composites Materials and Engineered Products segments, respectively. Amortization expense of $12.5 million and $13.1 million was included in SG&A expenses for 2001 and 2000, respectively. RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: Research and technology expenses were $18.6 million, or 1.8% of net sales, in 2001 compared to $21.2 million, or 2.0% of net sales, in 2000. On a pro forma basis, giving effect to the sale of the Bellingham aircraft interiors business as if it had occurred January 1, 2000, research and technology expenses were $19.5 million in 2000, or 1.9% of net sales. Nearly seventy percent of R&T expenses related to developing new applications for composite materials. OPERATING INCOME: Operating loss for 2001 was $316.2 million compared with operating income of $75.4 million for 2000. Excluding a $309.1 million impairment of goodwill and other purchased intangibles and $4.7 million of compensation expenses associated with the former CEO's retirement in 2001, along with business consolidation and restructuring expenses of $58.4 million and $10.9 million incurred during 2001 and 2000, respectively, adjusted operating income was $56.0 million, or 5.5% of net sales, in 2001 compared with $86.3 million, or 8.2% of net sales, in 2000. Adjusted operating income in the Reinforcement Products segment declined by $31.2 million, as compared with 2000, reflecting the electronics industry downturn during the year. The Composite Materials and the Engineering Products segment's operating income decreased by $0.3 million and $3.0 million, respectively, as compared with 2000. The Company did not allocate corporate operating expenses of $31.1 million and $36.4 million to operating segments in 2001 and 2000, respectively. 36 INTEREST EXPENSE: Interest expense for 2001 was $64.8 million compared to $68.7 million in 2000. Although the Company slightly increased its average borrowings during 2001 compared to 2000, interest expense declined when compared to 2000 due to lower weighted average interest rates on the Company's Senior Credit Facility resulting from the progressive reductions in LIBOR during the year. Included in interest expense in 2001 are bank amendment fees of approximately $1.0 million related to the May 2001 amendment of certain financial covenants under the Senior Credit Facility. EQUITY IN EARNINGS (LOSSES) OF AND WRITE-DOWNS OF AN INVESTMENT IN AFFILIATED COMPANIES: Equity in losses of affiliated companies was $9.5 million in 2001, including a $7.8 million write-down of the Company's investment in Interglas. Excluding the Interglas write-down, equity in losses of affiliated companies was $1.7 million compared with earnings of $5.5 million in 2000, reflecting the impact of the electronics industry downturn on the operating results of the Company's Reinforcement Products joint venture in Asia as well as start-up losses associated with the Engineered Products joint ventures in China and Malaysia. The $7.8 million write-down of Interglas was the result of an assessment that an other-than-temporary decline in value in the investment had occurred due to a severe industry downturn and the resulting impact on the financial condition of this company. The amount of the write-down was determined based on available market information and appropriate valuation methodologies. The Company did not record deferred tax benefits on the write-down because of limitations imposed by foreign tax laws and the Company's ability to realize the tax benefits. PROVISION FOR INCOME TAXES: The Company's tax provision of $40.5 million in 2001 reflects the impact of reduced tax benefits recorded for U.S. operating losses resulting from a change in business outlook for the Company and the inclusion in its tax provision of a $30.7 million valuation allowance for previously reported U.S. deferred tax assets. In 2000, the provision for income taxes was $26.3 million, which primarily related to a gain on the sale of the Bellingham aircraft interiors business. Due to a sharp decline in electronics revenues, the Company determined during the second quarter of 2001 to increase its tax provision rate through the establishment of a non-cash valuation allowance attributable to currently generated U.S. net operating losses until such time as the U.S. operations return to consistent profitability. Due to the effect of significant events that have occurred since the end of the second quarter, including the delay in the anticipated recovery in the electronics market, anticipated reductions in commercial aircraft production, and a general weakening of the economy, along with the sizable impairments to certain long-lived assets in the fourth quarter of 2001, the Company reduced its estimates for future U.S. taxable income during the carryforward period. As a result, the Company concluded that it was appropriate to establish a full valuation allowance of $181.7 million on its U.S. deferred tax assets, which resulted in a $32.6 million valuation allowance for previously reported tax assets. For additional information, see Note 12 to the accompanying consolidated financial statements of this Annual Report on Form 10-K. EXTRAORDINARY LOSS: An extraordinary loss of $2.7 million was recorded in 2001 as a result of the early retirement of $67.5 million aggregate principal amount of the Company's outstanding 7% convertible subordinated notes, due 2003, and the redemption of the entire principal amount of $25.0 million of the Company's increasing rate senior subordinated notes, due 2003. There was no tax benefit recognized on the extraordinary loss because of limitations on the Company's ability to realize the tax benefits. 37 NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE:
2001 2000 -------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net income (loss)........................................... $(433.7) $54.2 Diluted net income (loss) per share......................... $(11.54) $1.32 Diluted net income (loss) per share, excluding goodwill amortization.............................................. $(11.25) $1.51 Diluted weighted average shares outstanding................. 37.6 45.7
The Company's convertible subordinated notes, due 2003, its convertible subordinated debentures, due 2011 and all of its stock options were excluded from the 2001 computation of diluted net loss per share, as they were antidilutive. Approximately 4.5 million stock options were excluded from the 2000 calculation of diluted net income per share as their exercise price was higher than the Company's average share price. Refer to Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K for the calculation and number of shares used for diluted net income (loss) per share. 2000 COMPARED TO 1999 NET SALES: Consolidated net sales were $1,055.7 million in 2000, a decrease of $95.8 million, or 8.3%, from net sales of $1,151.5 million in 1999. Approximately $51.1 million of the decrease was attributable to the sale of the Bellingham aircraft interiors business on April 26, 2000. An additional $45.0 million of the decrease was due to changes in currency exchange rates--primarily the decline of the British pound and the Euro relative to the U.S. dollar. On a pro forma basis, giving effect to the sale of the Bellingham business as if it had occurred on January 1, 1999, pro forma net sales were $1,036.8 million in 2000, compared with pro forma net sales of $1,081.5 million in 1999. Had the same U.S. dollar, British pound and Euro exchange rates applied in 2000 as in 1999, pro forma revenues in 2000 would have been approximately $1,082.0 million. 38 The following table summarizes actual and pro forma net sales to third-party customers by segment and end market in 2000 and 1999:
COMMERCIAL SPACE & AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL TOTAL ---------- -------- ----------- ---------- -------- (IN MILLIONS) 2000 NET SALES Reinforcement products.................... $ 60.6 $ 13.6 $181.2 $103.8 $ 359.2 Composite materials (a)................... 336.8 106.2 -- 124.0 567.0 Engineered products (b)................... 120.3 9.2 -- -- 129.5 ------ ------ ------ ------ -------- Total (b)............................... $517.7 $129.0 $181.2 $227.8 $1,055.7 49% 12% 17% 22% 100% ------ ------ ------ ------ -------- PRO FORMA 2000 NET SALES Total (c)............................... $498.8 $129.0 $181.2 $227.8 $1,036.8 48% 12% 18% 22% 100% ------ ------ ------ ------ -------- 1999 NET SALES Reinforcement products.................... $ 52.0 $ 18.2 $166.4 $ 94.3 $ 330.9 Composite materials (a)................... 378.2 113.0 -- 114.7 605.9 Engineered products (b)................... 201.7 13.0 -- -- 214.7 ------ ------ ------ ------ -------- Total (b)............................... $631.9 $144.2 $166.4 $209.0 $1,151.5 55% 13% 14% 18% 100% ------ ------ ------ ------ -------- PRO FORMA 1999 NET SALES Total (c)............................... $561.9 $144.2 $166.4 $209.0 $1,081.5 52% 14% 15% 19% 100% ------ ------ ------ ------ --------
- ------------------------ (a) Market allocations for the Composite Materials segment have been restated for comparative purposes to conform to the 2001 presentation. (b) Net sales in 2000 include $18.9 million of commercial aerospace net sales by the Bellingham business, which was a component of the Company's Engineered Products segment until this business was sold on April 26, 2000. Net sales in 1999 include $70.0 million of commercial aerospace net sales by the Bellingham business. (c) Pro forma net sales in 2000 and 1999 give effect to the sale of the Bellingham business that occurred on April 26, 2000, as if it had occurred on January 1, 2000 and January 1, 1999, respectively. Net sales to commercial aerospace customers in 2000 were $517.7 million, compared with $631.9 million in 1999. The decrease of $114.2 million, or 18.1%, is primarily attributable to: - The sale of the Bellingham aircraft interiors business on April 26, 2000. This business generated $70.0 million of commercial aerospace revenue during 1999 and $18.9 million during the first four months of 2000. - Boeing's reduction in aircraft production rates during the second half of 1999 and the first half of 2000, together with certain product substitutions and price reductions. Boeing delivered 489 aircraft to its customers in 2000, compared with 620 aircraft in 1999. The impact of this reduction was most pronounced on the Company's Engineered Products segment, which delivers its products to Boeing just prior to the aircraft being completed and delivered to the ultimate customer. - The impact of changes in currency exchange rates. 39 Net sales to space and defense markets totaled $129.0 million in 2000, a decline of $15.2 million, or 10.5%, from 1999 net sales of $144.2 million. This decline reflects the conclusion of one military contract, as well as reduced demand for carbon fiber and pre-impregnated composites for use in satellites and satellite launch vehicles. The satellite market continues to suffer from the impact of a number of launch failures over the past two years, and from concerns about the financial viability of certain commercial satellite ventures. Electronics net sales grew to $181.2 million in 2000, an increase of $14.8 million, or 8.9%, over 1999 net sales of $166.4 million. This sales growth reflected an increase in demand for lightweight fiberglass fabrics used in electronics applications, driven by improved economic conditions in Asia and Europe and by growing worldwide demand for increasingly sophisticated electronic devices. During 2000, Hexcel switched some of its heavyweight fabric production capacity to meet lightweight fabric demand, and also began to install additional lightweight fabric looms to meet the expected continuing growth in demand in this market. Nevertheless, the Company ended the year capacity constrained. In addition, the Company was able to raise prices on certain fiberglass fabrics, although these price increases were accompanied by increases in the price of fiberglass yarns used as raw materials. Net sales to industrial markets rose to $227.8 million in 2000, up from $209.0 million in 1999. This increase of $18.8 million, or 9.0%, was largely due to the following: - Increased sales of aramid fabrics used in the manufacture of soft body armor (bullet-proof and puncture resistant vests), driven by military and civilian demand for lighter, tougher vests. - Increased sales of newly developed glass fabrics used in certain window screen and architectural applications, such as screens designed to reduce glare for computer users in commercial offices. - Increased sales of prepreg composites products to European customers for use in producing components for wind energy turbines. - Increased sales of honeycomb core and machined honeycomb parts used in certain automotive applications, such as inserts for automobile headliners to better protect vehicle occupants in collisions. Aggregate sales to other industrial market segments, such as surface transportation and recreation markets, were relatively unchanged from 1999 to 2000, after adjusting for changes in currency exchange rates. GROSS MARGIN: Gross margin was $231.4 million, or 21.9% of net sales, in 2000 compared with $242.5 million, or 21.1% of net sales, in 1999. The improvement in gross margin, as a percentage of sales during 2000, primarily reflects the impact of productivity improvements and cost reductions. Price increases for certain fiberglass fabrics were offset by price decreases for other select products, with the result that net price changes had minimal impact on gross margin performance. While other segments successfully obtained productivity improvements and cost reductions, the Company's Engineered Products segment suffered from declining sales and reduced productivity, attributable to the timing of customer programs and to the impact of Boeing's 1999 aircraft build rate reductions. This segment initiated a series of actions intended to align its cost structure with its revenue base and to improve manufacturing productivity. These actions were undertaken in anticipation of transferring the manufacture of certain Boeing aircraft structures to the Company's joint venture affiliates in Malaysia and China. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative expenses were $123.9 million in 2000, or 11.7% of net sales compared with $128.7 million, or 11.2% of net sales, in 1999. The net decline in SG&A expenses is attributable in part to the recognition of a $5.1 non-cash benefit resulting from the curtailment of a U.S. defined benefit retirement plan, partially offset by $2.2 million of expenses resulting from the purchase of Hexcel common stock by the Goldman Sachs 40 investor group. The remainder of the net decline primarily reflects the impact of the sale of the Bellingham aircraft interiors business and changes in currency exchange rates. RESEARCH AND TECHNOLOGY EXPENSES: Research and technology expenses were $21.2 million in 2000, or 2.0% of net sales compared with $24.8 million, or 2.2% of net sales, in 1999. The aggregate dollar decrease primarily reflects the completion of specific R&T projects, as well as changes in currency exchange rates. OPERATING INCOME: Operating income was $75.4 million or 7.1% of net sales for 2000, of which $0.6 million was contributed by the Bellingham business. This compares with operating income of $68.9 million or 6.0% of net sales for 1999, of which $8.0 million was contributed by the Bellingham aircraft interiors business. Excluding business consolidation expenses, operating income was $86.3 million or 8.2% of net sales for the 2000 period, and $89.0 million or 7.7% of net sales for the 1999 period. Business consolidation and restructuring expenses, which totaled $10.9 million and $20.1 million in 2000 and 1999, respectively, are discussed further under "Business Consolidation and Restructuring Programs" below. The divestiture of the Bellingham business on April 26, 2000 reduced operating income before business consolidation and restructuring expenses by $7.7 million compared with 1999. This decline was partially offset by reductions in SG&A and R&T expenses during 2000. The improvement in operating income before business consolidation and restructuring expenses as a percentage of net sales primarily reflects the aggregate improvement in gross margin performance noted above. INTEREST EXPENSE: Interest expense was $68.7 million in 2000, versus $73.9 million in 1999. The decrease in interest expense primarily reflects the use of proceeds from the sale of the Bellingham business to reduce outstanding term debt under Hexcel's Senior Credit Facility, partially offset by higher interest rates on variable-rate debt. PROVISION FOR (BENEFIT FROM) INCOME TAXES: In 2000, the provision for income taxes was $26.3 million, compared with a benefit from income taxes of $1.7 million in 1999. The provision in 2000 primarily related to a gain on the sale of the Bellingham aircraft interiors business. Hexcel's effective income tax rate was approximately 35% in both years. EQUITY IN EARNINGS OF AND WRITE-DOWNS OF AN INVESTMENT IN AFFILIATED COMPANIES: Equity in earnings of affiliated companies was $5.5 million in 2000. The primary source of these earnings was Asahi-Schwebel Co. Ltd., an electronic fabrics joint venture in Asia that benefited from an increase in worldwide demand for electronic devices. The earnings contributed by this Reinforcement Products joint venture were partially offset by the Company's share of the start-up losses from its Engineered Products joint ventures in China and Malaysia. In 1999, Hexcel wrote-down its investment in one of its Reinforcement Products joint ventures, Interglas, by $20.0 million. The write-down was the result of an assessment that an other-than-temporary decline in value of the investment had occurred due to severe industry downturns and the resulting impact on the financial condition of this company, and a decision to allow fixed-price options, that would increase the Company's equity investment in Interglas from 43.6% to 84%, to expire unexercised. The amount of the write-down was determined based on available market information and appropriate valuation methodologies. The Company did not record a deferred tax benefit on the write-down because of limitations imposed by foreign tax laws and the Company's ability to realize a tax benefit. 41 NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE:
2000 1999 -------- -------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net income (loss)........................................... $54.2 $(23.3) Diluted net income (loss) per share......................... $1.32 $(0.64) Diluted net income (loss) per share, excluding goodwill amortization.............................................. $1.51 $(0.40) Diluted weighted average shares outstanding................. 45.7 36.4
The Company's convertible subordinated notes, due 2003, its convertible subordinated debentures, due 2011, and its stock options were excluded from the 1999 computation of net loss per diluted share, as they were antidilutive. Refer to Note 14 to the accompanying consolidated financial statements of this Annual Report on Form 10-K for the calculation and the number of shares used for diluted net income (loss) per share. IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLES During the fourth quarter of 2001, the Company reviewed its long-lived assets, particularly goodwill and other purchased intangibles acquired in recent years, for impairment. The review was undertaken in response to changes in market conditions and the Company's revised outlook resulting from a sharp decline in demand for the Company's woven glass fabrics, primarily in the electronics market, and the announced reductions in commercial airline production due to the tragic events of September 11, 2001. The Company also revised its forecasts of revenue growth for its acquired satellite business due to the continuing slow down in commercial satellite launches following the financial failures of a number of satellite based telecommunication projects and the postponement of others. These adverse changes in market conditions have led to the lowering of revenue forecasts associated with certain businesses in the Reinforcement Products and Composite Materials segments. Based on this review, the Company determined that the long-lived assets of the fabrics business acquired from Clark-Schwebel in 1998 and the satellite business acquired from Fiberite, Inc. in 1997 were not fully recoverable. The Company recorded non-cash impairment charges of $292.1 million and $17.0 million related to the goodwill and other purchased intangibles associated with the Clark-Schwebel and Fiberite acquisitions, respectively. The amounts of the impairment charges were calculated as the excess of the carrying value of the assets over their fair values. Fair values were determined using discounted future cash flows models, market valuations and third party appraisals, where appropriate. There were no tax benefits recognized on the impairments because of limitations on the Company's ability to realize the tax benefits. BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS During the fourth quarter of 2001, the Company announced a plan to restructure its business operations in accordance with a revised business outlook, in light of anticipated reductions in commercial aircraft production in both 2002 and 2003, the continued depressed business conditions in the electronics market and the weakness in the general economy. The plan targets a 20% reduction in cash fixed overhead costs, or $60.0 million, compared to previous spending rates. The reductions in cash fixed costs are primarily being achieved through company-wide reductions in managerial, professional, indirect manufacturing and administrative employees along with organizational rationalization. In addition, the Company will reduce its direct manufacturing costs as customer orders decline. As a result, the Company has reduced the number of employees by almost 10% from the third quarter to 5,376 employees at December 31, 2001, and expects to further reduce that number to less than 4,500 by the end of 2002. The majority of the actions necessary to affect these cash fixed cost 42 reductions had been taken by the end of 2001, and the Company expects most of the remaining actions to be completed in the first quarter of 2002. The Company recognized charges of $47.9 million in the fourth quarter of 2001 related to this restructuring plan, and estimates that the total cash costs of this restructuring plan will be approximately $35.0 million. Cash spending related to this action in the fourth quarter of 2001 was approximately $3.0 million, with the balance anticipated to be paid throughout 2002. The Company anticipates recording approximately $5.0 million of additional restructuring expense during 2002 relating to equipment relocation and re-qualification expenses that have to be expensed as incurred. These costs relate both to the planned closure of the Lanacaster, Ohio facility discussed below as well as actions associated with the program announced in the fourth quarter of 2001. As a result of the weakness in the electronics market, the Company initiated cost reduction actions in July 2001. These actions built upon earlier steps to furlough employees, idle manufacturing and cut non-essential expenditures, by effecting a reduction in the work force of approximately 275 employees in the Reinforcement Products segment and elsewhere in the Company. These actions resulted in business consolidation and restructuring expenses of approximately $4.0 million in the third quarter of 2001. As a result of four substantial business acquisitions, the Company initiated three business consolidation programs in May 1996, December 1998 and September 1999. The primary purpose of these programs was to integrate acquired assets and operations into the Company, and to close or restructure insufficiently profitable facilities and activities. Due to aerospace industry requirements to "qualify" specific equipment and manufacturing processes for certain products, some business consolidation actions have taken up to three years to complete. These qualification requirements increase the complexity, cost and time of moving equipment and rationalizing manufacturing activities. In connection with these business consolidation programs, the Company has closed three manufacturing facilities, vacated approximately 560 thousand square feet of manufacturing space, and eliminated more than 700 manufacturing, marketing and administrative positions. All of the business consolidation activities in 1996, 1998 and 1999 have been completed as of December 31, 2001. In 2000, the Company added two further actions to the September 1999 business consolidation program. The Company decided to close the two smaller of its four U.S. prepreg manufacturing facilities--one in Lancaster, Ohio and another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in the fourth quarter of 2001 and it is anticipated that the closure of the Lancaster, Ohio facility will be completed during the second quarter of 2002. The manufacturing output from these two plants will now be produced by the two remaining U.S. prepreg facilities in Livermore, California and Salt Lake City, Utah. In 2000, the Company amended its September 1999 business consolidation program in response to the manufacturing constraints caused by a stronger than expected increase in sales and production for its electronic woven glass fabrics and its ballistic protection products. Based on these improved market conditions, which were expected to continue beyond 2000, and a manufacturing capacity review, the Company concluded to expand its capacity by purchasing additional looms and revising the previous decision to consolidate a number of weaving activities at two of the Company's facilities. As a result of the decision to not proceed to consolidate production, the Company reversed a total of $3.4 million of business consolidation expenses that were previously recognized in 1999, including $3.1 million in non-cash write-downs of machinery and equipment that was to have been sold or scrapped as a result of the consolidation. 43 Business consolidation and restructuring activities for the three years ended December 31, 2001, consisted of the following:
EMPLOYEE FACILITY & SEVERANCE EQUIPMENT TOTAL --------- ----------- -------- (IN MILLIONS) BALANCE AS OF JANUARY 1, 1999.................... $ 5.8 $ 2.4 $ 8.2 Business consolidation expenses.................. 5.1 15.0 20.1 Cash expenditures................................ (6.7) (2.8) (9.5) Non-cash usage, including asset write-downs...... (0.7) (14.0) (14.7) ----- ------ ------ BALANCE AS OF DECEMBER 31, 1999.................. 3.5 0.6 4.1 Business consolidation expenses: Current period expenses........................ 3.7 10.6 14.3 Reversal of 1999 business consolidation expenses..................................... (0.3) (3.1) (3.4) ----- ------ ------ Net business consolidation expenses............ 3.4 7.5 10.9 Cash expenditures................................ (3.9) (7.9) (11.8) Non-cash items: Reversal of 1999 business consolidation expenses..................................... -- 3.1 3.1 Other non-cash usage, including asset write-downs.................................. (0.6) (3.0) (3.6) ----- ------ ------ Total non-cash items........................... (0.6) 0.1 (0.5) ----- ------ ------ BALANCE AS OF DECEMBER 31, 2000.................. 2.4 0.3 2.7 Business consolidation and restructuring expenses....................................... 34.5 23.9 58.4 Cash expenditures................................ (6.4) (5.6) (12.0) Non-cash usage, including asset write-downs...... -- (15.7) (15.7) ----- ------ ------ BALANCE AS OF DECEMBER 31, 2001.................. $30.5 $ 2.9 $ 33.4 ===== ====== ======
As part of a business consolidation program, the Company disposed of its operations in Brindisi, Italy (the "Italian Operations") in 1999. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), the Company recorded a charge of $5.6 million prior to 1999 for an asset impairment related to its Italian Operations. The estimate of fair value used in determining the impairment charge was based on offers received from interested buyers. The Italian Operations were disposed of for net proceeds that approximated amounts accrued and were accounted for under the Company's Engineered Products business segment. Financial operating results for this business were not material to Hexcel's consolidated financial statements. RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS Effective December 31, 2000, the Company made certain changes to its U.S. retirement benefit plans that were intended to improve the flexibility and visibility of future retirement benefits for employees. These changes included an increase in the amount that the Company will contribute to individual 401(k) retirement savings accounts and an offsetting curtailment of the Company's U.S. qualified defined benefit retirement plan. Beginning January 1, 2001, the Company started to contribute an additional 2% to 3% of each eligible employee's salary to an individual 401(k) retirement savings account, depending on the employee's age. This increases the maximum contribution to individual employee savings accounts to between 5% and 6% per year, before any profit sharing contributions. Offsetting the estimated incremental cost of this additional benefit, participants in the Company's U.S. qualified defined benefit retirement plan no longer accrued benefits under this plan after December 31, 2000, and no new employees will become participants. However, employees retained all benefits earned under this plan as of that date. The 2000 results include $5.1 million of 44 non-cash pre-tax income (equivalent to $3.3 million of after-tax income) attributable to the curtailment of this defined benefit retirement plan. SIGNIFICANT CUSTOMERS Approximately 23%, 20% and 27% of the Company's 2001, 2000 and 1999 net sales, respectively, were to Boeing and its subcontractors. Of the 23% of sales to Boeing and its subcontractors in 2001, 20% and 3% related to commercial aerospace and space and defense market applications, respectively. Approximately 16%, 13% and 11% of the Company's 2001, 2000 and 1999 net sales, respectively, were to EADS, including Airbus, and its subcontractors. Of the 16% of sales to EADS and its subcontractors in 2001, 14% and 2% related to commercial aerospace and space and defense market applications, respectively. The loss of all or a significant portion of the business with Boeing or EADS would likely have a material adverse effect on sales and earnings. SIGNIFICANT TRANSACTIONS PURCHASE OF APPROXIMATELY 14.5 MILLION SHARES OF HEXCEL COMMON STOCK BY AN INVESTOR GROUP On December 19, 2000, an investor group controlled by subsidiaries of The Goldman Sachs Group, Inc. (the "Investor Group") completed the purchase of approximately 14.5 million of the approximately 18 million shares of Hexcel common stock owned by subsidiaries of Ciba Specialty Chemicals Holding, Inc. (together with its subsidiaries, "Ciba"). The shares acquired by the Investor Group represented approximately 39% of the Company's outstanding common stock. In addition, the Company and the Investor Group have entered into a governance agreement that became effective on December 19, 2000. Under this governance agreement, the Investor Group has the right to, among other things, designate up to three directors to sit on the Company's board of directors. Hexcel incurred $2.2 million of costs in connection with this transaction, all of which were included in "selling, general, and administrative expenses" during the fourth quarter of 2000. These costs and expenses included legal, consulting, and regulatory compliance expenses, as well as a non-cash charge attributable to the accelerated vesting of certain stock-based compensation and to certain amendments to an executive retirement plan. Under the terms of the Company's various stock option and management incentive plans, the transaction constituted a "change in control" event, resulting in all outstanding stock options becoming vested and exercisable. The former Chief Executive Officer waived the vesting of his stock options by such event. In addition, nine of the most senior executive officers other than the former Chief Executive Officer agreed to defer the vesting of their stock options such that any of their stock options that would have otherwise vested immediately (or would have otherwise vested by their terms) will vest one year after the closing with respect to half of such options, and two years after the closing with respect to the remaining half of such options, subject to earlier vesting in certain circumstances. As a result, approximately 1.3 million stock options, with exercise prices ranging from $2.41 to $29.63 per share, and a weighted average exercise price of $8.99 per share, vested and became exercisable on December 19, 2000. In addition, due to the change in control event, shares of Hexcel's common stock underlying a total of approximately 0.8 million restricted stock units and performance accelerated restricted stock units (collectively, "stock units") were distributed. However, the former Chief Executive Officer waived the vesting of his stock units, and nine of the most senior executive officers other than the former Chief Executive Officer agreed to defer the distribution of shares underlying their stock units (although not the vesting of such stock units) such that any shares of common stock that would have otherwise been distributed immediately will be distributed one year after the closing with respect to half of such stock units, and two years after the closing with respect to the remaining half of such stock units, subject to earlier distribution under certain circumstances. 45 SALE OF THE BELLINGHAM AIRCRAFT INTERIORS BUSINESS On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business to Britax Cabin Interiors, Inc., a wholly owned subsidiary of Britax International plc, for cash proceeds of $113.3 million. The sale resulted in a pre-tax gain of $68.3 million and an after-tax gain of $44.3 million, or $0.97 per diluted share. Net proceeds from the sale were used to repay $111.6 million of outstanding term debt under the Company's Senior Credit Facility. The Bellingham business generated net sales of $18.9 million and $70.0 million for the period from January 1 through April 26, 2000, and full year 1999, respectively, and contributed $0.6 million and $8.0 million of operating income in the corresponding periods, respectively. The Bellingham business was engaged in the manufacture and sale of airline interior refurbishment products and its operating results were reflected as a component of the Company's Engineered Products business segment up to the date of disposal. EBITDA, ADJUSTED EBITDA, PRO FORMA ADJUSTED EBITDA AND ADJUSTED OPERATING INCOME EBITDA, Adjusted EBITDA, Pro forma Adjusted EBITDA and Adjusted Operating Income are not based on accounting principles generally accepted in the United States of America, but are presented to explain the impact of certain items and to provide a measure of the Company's operating performance in a way that is commonly used by investors and financial analysts to analyze and compare companies. Adjusted EBITDA and Pro forma Adjusted EBITDA are used in the calculation of financial covenants under the Company's Senior Credit Facility. These measures may not be comparable to similarly titled financial measures of other companies, do not represent alternative measures of the Company's cash flows or operating income, and should not be considered in isolation or as substitutes for measures of performance presented in accordance with generally accepted accounting principles. 46 A reconciliation of net income (loss) to EBITDA, Adjusted EBITDA, and Pro forma Adjusted EBITDA and a reconciliation of operating income (loss) to Adjusted Operating Income for the years ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999 -------- -------- -------- (IN MILLIONS) Net income (loss).................................. $(433.7) $ 54.2 $(23.3) Provision for (benefits from) income taxes......... 40.5 26.3 (1.7) Interest expense................................... 64.8 68.7 73.9 Depreciation and amortization...................... 63.2 58.7 61.3 Impaiment of goodwill and other purchased intangibles...................................... 309.1 -- -- Equity in (earnings) losses of and write-downs of an investment in affiliated companies............ 9.5 (5.5) 20.0 Extraordinary loss on early retirement of debt..... 2.7 -- -- Other.............................................. -- (0.1) 0.1 ------- ------ ------ EBITDA............................................. $ 56.1 $202.3 $130.3 Business consolidation and restructuring expenses......................................... 58.4 10.9 20.1 Compensation expenses associated with the former CEO's retirement................................. 4.7 -- -- Gain on sale of Bellingham aircraft interiors business......................................... -- (68.3) -- ------- ------ ------ ADJUSTED EBITDA.................................... $ 119.2 $144.9 $150.4 Bellingham aircraft interiors business: Net sales........................................ -- (18.9) (70.0) Cost of sales.................................... -- 14.4 55.1 Operating expense................................ -- 4.3 6.9 Other............................................ -- (0.7) (1.1) ------- ------ ------ PRO FORMA ADJUSTED EBITDA.......................... $ 119.2 $144.0 $141.3 ======= ====== ====== Operating income (loss)............................ $(316.2) $ 75.4 $ 68.9 Business consolidation and restructuring expenses......................................... 58.4 10.9 20.1 Impairment of goodwill and other purchased intangibles...................................... 309.1 -- -- Compensation expenses associated with the former CEO's retirement................................. 4.7 -- -- ------- ------ ------ ADJUSTED OPERATING INCOME.......................... $ 56.0 $ 86.3 $ 89.0 ======= ====== ======
FINANCIAL CONDITION LIQUIDITY: As of December 31, 2001, the Company had cash and cash equivalents of $11.6 million and available undrawn commitments under its Senior Credit Facility of $74.8 million, having given effect to the $15.0 million reduction in commitments under the terms of the January 25, 2002 amendment. Although the Company will reduce its cash fixed costs during 2002, has planned to reduce capital expenditures, and anticipates generating cash through reduced working capital needs, it anticipates that it may need to draw upon its Senior Credit Facility to fund some of the costs of its restructuring program during 2002. As of December 31, 2001, the Company's total debt, net of cash, was $674.3 million, an increase of $5.8 million from $668.5 million as of December 31, 2000. The increase in net debt reflects (a) the funding of capital expenditures made for process improvements, capacity additions, and environmental and safety initiatives; (b) business consolidation and restructuring payments, as the Company continues to integrate acquired assets and operations, to close insufficiently profitable facilities and activities, and 47 to appropriately size its operations for industry downturns; and (c) the costs associated with the issuance of senior subordinated debt. CREDIT FACILITY: Hexcel has a global credit facility (the "Senior Credit Facility") with a syndicate of banks to provide for ongoing working capital and other financing requirements. The Senior Credit Facility, which consists of revolving credit, overdraft and term loan facilities, provided Hexcel with committed lines of approximately $353.7 million as of December 31, 2001, subject to certain limitations. Effective January 25, 2002, and in connection with an amendment entered into with the bank syndicate, these commitments were reduced to $338.7 million. These commitments consisted of funded term loans of $118.7 million and revolving credit and overdraft facilities of $220.0 million. As of December 31, 2001, drawings under the revolving credit facility were $115.2 million. In addition, the Company may issue letters of credit up to a value of $30.0 million under the Senior Credit Facility. The letters of credit facility reduces the funded debt the Company may draw under the revolving credit and overdraft facilities. As of December 31, 2001, letters of credit issued under the facility approximated $19.4 million, of which $11.1 million was issued in support of a loan to the Company's BHA Aero joint venture. Undrawn commitments under the revolving credit and overdraft facilities as of December 31, 2001, having given effect to the provisions of the January 25, 2002 amendment, were $74.8 million. The Company is subject to various financial covenants and restrictions under the Senior Credit Facility, including limitations on incurring debt, granting liens, selling assets, redeeming capital stock and paying dividends. The Senior Credit Facility is scheduled to expire in 2004, except for approximately $57.7 million of term loans that are due for repayment in 2005. Relating to the fourth quarter of 2001, the Company received a waiver from compliance with the financial covenants under the Senior Credit Facility for the period ending December 31, 2001. Effective January 25, 2002, Hexcel and the bank syndicate entered into an amendment to the Senior Credit Facility. The amendment provides for revised financial covenants through 2002; a 100 basis point increase in the interest spread payable over LIBOR for advances under the facility; an immediate decrease in the commitment of revolving credit and overdraft facilities from a cumulative amount of $235.0 million to $220.0 million, with a further reduction to $212.0 million on or before September 30, 2002; and a requirement that the unused borrowing capacity available under the Senior Credit Facility, together with all cash and cash equivalents held by the Company, equal at least $30.0 million on June 30, 2002. The revised covenants were derived from the Company's financial projections plus a moderate cushion for unanticipated events. The Senior Credit Facility financial covenants set certain maximum values for the Company's leverage (the ratios of total and senior debt to Adjusted EBITDA), and certain minimum values for its interest coverage (the ratio of Adjusted EBITDA to cash interest expense) and fixed charge coverage (the ratio of Adjusted EBITDA less capital expenditures to the sum of certain fixed expenses). In addition, during the term of the amendment, all net proceeds generated through asset sales, and most other liquidity events, in each case to the extent in excess of $2.5 million, and 100% of all net proceeds generated from litigation settlements and judgements, must be used to prepay loans under the Senior Credit Facility. Hexcel has also agreed to limit capital expenditures to $25.0 million during 2002, with a $10.0 million limit during any quarter in 2002. In connection with the credit agreement amendment, Hexcel also agreed to grant additional collateral. The Company had previously granted a security interest in most of its U.S. accounts receivable, inventory, property, plant, equipment and real estate. It had also pledged some or all of the shares of certain subsidiaries. Under the terms of the amendment, Hexcel has granted to the banks a security interest in additional U.S. accounts receivable, inventory, property, plant, equipment and real estate, as well as its intellectual property. In addition, each of a group of Hexcel's European subsidiaries will grant a security interest in its accounts receivable that will secure certain local borrowings advanced to that subsidiary. The Senior Credit Facility has been subject to several previous amendments to accommodate, among other things, the planned sale of assets, the planned investments in additional manufacturing 48 capacity for selected products, the impact of the decline of the Company's operating results on certain financial covenants, the purchase by an investor group of approximately 14.5 million shares of Hexcel common stock held by a significant shareholder of the Company, a restructuring of the ownership of certain of the Company's European subsidiaries, the issuance of additional senior subordinated debt and the early redemption of certain term debt. Given its financial leverage, the Company's future compliance with the financial covenants and other terms of the Senior Credit Facility could be compromised if its financial performance were to deteriorate as a result of further declines in the general macroeconomic environment or in key markets served by the Company, or by other unforeseen events. There can be no assurance that relief from financial covenants, if necessary, will be obtained or as to the terms under which it may be granted by the senior lenders. Under the terms of the amendment, the financial covenants effective beginning with the quarter ending March 31, 2003 are those that applied before the amendment. The Company will need to substantially improve its financial performance or substantially reduce its indebtedness in order to comply with the financial covenants in 2003, or will need to obtain a further amendment from its Senior Credit Facility banks. There can be no assurance that the Company will be able to effect any such amendment on commercially reasonable terms, or at all. OPERATING ACTIVITIES: Net cash flows provided by operating activities were $35.0 million in 2001. Although the Company's net loss for the year was $433.7 million, its operating earnings generated $22.8 million of cash in 2001 after excluding non-cash equity losses of $9.5 million, $309.1 million of non-cash impairment charges for goodwill and other purchased intangibles, $63.2 million of non-cash depreciation and amortization charges, $27.6 million of non-cash charges in deferred tax assets, $0.7 million of non-cash extraordinary charges and $46.4 million of non-cash and unpaid business consolidation and restructuring expenses. During 2001, working capital management resulted in reductions in accounts receivable and inventory balances. These reductions along with reductions in other assets were offset in part by increases in accounts payable and accrued expenses resulting in an increase in cash of $12.2 million. In 2000, net cash provided by operating activities was $33.0 million with the major sources of cash provided by net income, excluding the after-tax gain from the sale of the Bellingham aircraft interiors business, of $9.9 million and non-cash depreciation and amortization of $58.7 million. However, these sources of operating cash flow were offset by $5.5 million of non-cash income from affiliated companies and $5.1 million of non-cash income from the curtailment of a U.S. defined benefit retirement plan. In addition, increases in accounts receivable and inventories used a total of $24.7 million of cash. In 1999, net cash provided by operating activities was $133.7 million, as $61.3 million of non-cash depreciation and amortization, a $20.0 million non-cash write-down of an investment in an affiliated company, $78.5 million of net working capital reductions and $20.1 million of business consolidation expenses more than offset $23.3 million of net loss, $15.8 million of non-cash deferred income taxes, and cash used by all other operating activities. The decrease in net working capital reflected lower levels of receivables and inventory due to aggressive working capital management and lower sales volumes. INVESTING ACTIVITIES: Net cash used for investing activities was $38.3 million in 2001, primarily reflecting capital expenditures of $38.8 million and the receipt of $0.8 million from an investment in an affiliated company. Net cash provided by investing activities was $68.8 million in 2000, reflecting net cash proceeds from the sale of the Bellingham aircraft interiors business of $113.3 million and from the sale of other assets of $3.4 million, partially offset by $39.6 million of capital expenditures and $8.3 million of investments in joint venture affiliates in China and Malaysia. 49 Net cash used for investing activities during 1999 was $40.3 million, reflecting Hexcel's capital expenditures of $35.6 million and investments in joint venture affiliates in China and Malaysia of $4.7 million. During the three years ended December 31, 2001, the majority of the Company's capital expenditures have been directed toward: (a) process improvements intended to increase productivity and reduce costs; (b) manufacturing capacity additions for high-growth product applications, such as electronics, automotive and wind energy; and (c) environmental, safety and maintenance initiatives. Due to recent changes in the Company's outlook, the Company is limiting capital expenditures to $25.0 million during 2002. The January 25, 2002 amendment to the Senior Credit Facility incorporates this planned level of capital expenditures in 2002 as a limit for the year, and restricts the Company to $10.0 million of capital expenditures in any one quarter of 2002. FINANCING ACTIVITIES: Net cash provided by financing activities was $8.6 million in 2001, largely due to net borrowings of $12.5 million. During 2001, the Company issued an additional $100.0 million of 9.75% senior subordinated notes, due 2009, at a price of 98.5%. Net proceeds from the issuance were used to redeem $67.5 million aggregate principal amount of the Company's outstanding convertible subordinated notes, due 2003, and to pay the entire principal amount of $25.0 million of the increasing rate senior subordinated note, due 2003. In addition, the Company paid $3.5 million of debt issuance costs. Net cash used for financing activities was $95.0 million in 2000, as net cash proceeds from the sale of the Bellingham aircraft interiors business were used to reduce outstanding indebtedness under the Company's Senior Credit Facility. Net cash used for financing activities was $99.5 million in 1999, primarily reflecting net debt reduction of $89.9 million and $11.0 million of debt issuance costs pertaining to the issuance of the senior subordinated notes, due 2009. FINANCIAL OBLIGATIONS AND COMMITMENTS: As of December 31, 2001, current maturities of notes payable and capital lease obligations were $17.4 million with no substantial debt repayments due until the maturity of $46.9 million convertible subordinated notes in August 2003. Scheduled amortization under the Company's Senior Credit Facility will be approximately $8.3 million in 2002. Capital lease principal amortization in 2002 will approximate $5.6 million. Limited credit and overdraft facilities of $3.5 million provided to certain of the Company's European subsidiaries by lenders outside of the Senior Credit Facility are primarily uncommitted facilities that are terminable at the discretion of the lenders. The Senior Credit Facility consists of revolving credit and overdraft facilities and term loan borrowings. Revolving credit borrowings under the facility of $115.2 million are repayable in 2004. Term loan borrowings totaling $118.7 million at December 31, 2001 are repayable in installments of $8.3 million in 2002, $8.8 million in 2003, $43.9 million in 2004 and $57.7 million in 2005. The convertible subordinated debentures due 2011 are repayable under mandatory redemptions 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 satisfied the 2002 annual sinking fund requirement in October 2001. The $340.0 million principal amount of senior subordinated notes is repayable in full in 2009. The Company entered into a $50.0 million capital lease in 1998 for property, plant and equipment used in the acquired Clark-Schwebel business. The lease expires in September 2006 and includes various purchase options. The last fixed price purchase option is on September 30, 2003 for an amount of $24.9 million. If the Company does not exercise its purchase option, on the lease expiration date, the Company will have the option to purchase the leased assets at the greater of $5.0 million or the fair value of the assets as of that date. The Company has also entered into several capital leases for 50 buildings and warehouses with expirations through 2009. In addition, certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases. On June 29, 2001, the Company issued $100.0 million of senior subordinated notes, due 2009, at a price of 98.5%. Net proceeds from the issuance were used to redeem $67.5 million aggregate principal amount of the Company's outstanding convertible subordinated notes, due 2003, and to pay the entire principal amount of $25.0 million of the Company's increasing rate senior subordinated note, due 2003. The refinancing reduced the Company's 2003 debt maturities from $149.5 million to $57.6 million. The net impact of the refinancing is estimated to increase annual interest expense by approximately $2.4 million before tax. The cash costs associated with the issuance and early retirements amounted to approximately $6.5 million. In 1999, the Company, Boeing and Aviation Industries of China (now known as China Aviation Industry Corporation I) formed a joint venture, BHA Aero Composite Parts Co., Ltd ("BHA Aero"), to manufacture composite parts for secondary structures and interior applications for commercial aircraft. Hexcel has a 33% equity interest in this joint venture, which is located in Tianjin, China. In addition, in 1999, the Company formed another joint venture, Asian Composites Manufacturing Sdn. Bhd. ("Asian Composites"), with Boeing, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture composite parts for secondary structures for commercial aircraft. Hexcel has a 25% equity ownership interest in this joint venture, which is located in Alor Setar, Malaysia. Asian Composites began shipping engineered products to customers during the second half of 2001, while it is anticipated that BHA Aero will begin deliveries in early 2002. During 2000 and 1999, Hexcel made cash equity investments totaling $8.3 million and $4.7 million, respectively, in these joint ventures. No additional cash equity investments were made during 2001. As of December 31, 2001, the Company had an outstanding letter of credit of $11.1 million in support of a loan to BHA Aero. The following table summarizes the maturities of financial obligations and expiration dates of commitments:
2002 2003 2004 2005 2006 THEREAFTER TOTAL -------- -------- -------- -------- -------- ---------- -------- (IN MILLIONS) Long-term debt............. $11.8 $57.6 $160.9 $59.4 $ 1.8 $357.4 $648.9 Capital lease obligations.............. 5.6 6.0 6.5 7.0 10.7 2.6 38.4 Operating leases........... 2.9 2.4 2.1 1.9 1.4 2.5 13.2 ----- ----- ------ ----- ----- ------ ------ Total financial obligations.............. $20.3 $66.0 $169.5 $68.3 $13.9 $362.5 $700.5 ===== ===== ====== ===== ===== ====== ====== Letters of credit.......... $19.4 $ -- $ -- $ -- $ -- $ -- $ 19.4 Other commitments.......... -- 2.3 -- -- -- -- 2.3 ----- ----- ------ ----- ----- ------ ------ Total commitments.......... $19.4 $ 2.3 $ -- $ -- $ -- $ -- $ 21.7 ===== ===== ====== ===== ===== ====== ======
Total letters of credit issued and outstanding were $19.4 million as of December 31, 2001, of which $11.1 million was issued in support of a loan to BHA Aero. While the letters of credit issued on behalf of the Company will expire under their terms in 2002, most, if not all, will be re-issued. The Company's ability to make scheduled payments of principal, or to pay interest on, or to refinance its indebtedness, including its public notes, or to fund planned capital expenditures, will depend on its future performance and conditions in the financial markets. The Company's future performance is subject to economic, financial, competitive, legislative, regulatory and other factors that are beyond its control. There can be no assurance that the Company will generate sufficient cash flow from its operations, or that sufficient future borrowings will be available under its Senior Credit Facility, to enable the Company to service its indebtedness, including its public notes, or to fund its other liquidity needs. In addition, the Company may need to refinance or amend all or a substantial 51 portion of its indebtedness on or before maturity. Furthermore, effective with the January 25, 2002 amendment, the Company and the bank syndicate to the Senior Credit Facility revised its financial covenants through 2002. Under the terms of the amendment, the financial covenants beginning with the quarter ending March 31, 2003 are those that applied before the amendment. The Company will need to substantially improve its financial performance or substantially reduce its indebtedness in order to comply with the financial covenants in 2003, or will need to obtain a further amendment from its Senior Credit Facility banks. There can be no assurance that the Company will be able to effect any such refinancing or amendment on commercially reasonable terms, or at all. For further information regarding the Company's financial obligations and commitments, see Notes 8 and 16 to the accompanying consolidated financial statements of this Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES Hexcel's discussion and analysis of its financial condition and results of operations are based upon Hexcel's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires Hexcel to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses. Although Hexcel evaluates its estimates, which are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, on an on-going basis, actual results may differ from these estimates under different assumptions or conditions. Hexcel believes the following items are the Company's critical accounting policies and more significant estimates and assumptions used in the preparation of its consolidated financial statements. Hexcel estimates the collectibility of its accounts receivable from customers by establishing allowances for doubtful accounts. A considerable amount of judgment is necessary to assess the realizability of these receivables and the credit-worthiness of each customer. If the financial condition of Hexcel's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Hexcel states inventories at the lower of cost or market. This requires Hexcel to write-down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value to reflect assumptions about future demand and market conditions. If actual future demand and market conditions are less favorable than anticipated, additional inventory write-downs may be required. Hexcel records significant reserves in connection with its business consolidation and restructuring programs. These reserves include estimates for employee severance costs, the settlement of contractual obligations, the fair value of certain assets held for sale and the timing of facility closures. Management closely monitors these actions and the related costs, and believes such estimates to be reasonable. However, if actual results differ from these estimates, it would have an impact on Hexcel's financial performance in the period such revision was made. In addition, certain of the expenses associated with the Company's business consolidation programs, including equipment moving and relocation costs, can not be accrued under accounting principles generally accepted in the United States of America and are recorded as incurred. Therefore, the Company expects to record additional charges of approximately $5.0 million in 2002 for these actions. Hexcel has significant intangible assets, including goodwill and other purchased intangibles. Hexcel reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In 2001, the Company reviewed the intangible assets arising from several acquired businesses for potential impairment as a result of the unprecendented downturn in the electronic components market and the expected decline in the 52 commercial aerospace market resulting from the events of September 11, 2001. The assessment of possible impairment is based on Hexcel's ability to recover the carrying value of the asset from the estimated undiscounted future net cash flows, before interest and taxes, of the related operations. If these cash flows are less than the carrying value of such assets, an impairment loss is recognized for the difference between estimated fair value and carrying value of the assets. The measurement of impairment requires estimates of these cash flows and fair value, which may be determined based either on discounted cash flows or third party appraised values depending on the nature of the asset. Events or changes in circumstances, such as market conditions, could significantly impact these judgments and require adjustments to the recorded asset balances in the future. In 2001, the Company recognized an impairment of $309.1 million on goodwill and other purchased intangibles acquired through previous acquisitions. Hexcel records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While Hexcel has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, these factors are highly subjective and are subject to change based upon market conditions, the Company's ability to execute its restructuring programs and other factors. In 2001, Hexcel has recorded a valuation allowance against nearly all of its deferred tax assets. In the event Hexcel were to determine that it would be able to realize its deferred tax assets in the future, an adjustment to the valuation allowance on deferred tax assets would increase income in the period such determination was made. Likewise, should Hexcel determine that it would not be able to realize all or part of its remaining net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Hexcel holds equity interests in affiliated companies having operations or technology in areas within its strategic focus, one of which is publicly traded. Hexcel records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. This judgmental decision reflects many factors. Future adverse changes in market conditions or poor operating results of underlying investments could result in further losses or an inability to recover the carrying value of the investments, thereby possibly requiring an impairment charge in the future. Hexcel has designated certain derivative financial instruments as hedges of future sales transactions at certain foreign subsidiaries. Unrealized losses on these foreign exchange contracts have not been recognized in the Company's consolidated statement of operations based on management's determination that the forecasted sales are probable of occurring and that the hedges have been effective in mitigating the foreign exchange risks associated with these future sales. The hedging contracts cover only a portion of the forecasted sales, and therefore, management considers the likelihood of not reaching the designated level of forecasted sales to be low. However, if the designated levels of forecasted sales are not achieved in the timeframe that management anticipates, Hexcel would need to report the unrealized losses on these derivative instruments in income. Hexcel is involved in litigation, investigations and claims arising out of the normal conduct of its business, including those relating to commercial transactions, as well as to 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. The Company believes it has adequately accrued for these potential liabilities; however, facts and circumstances may change that could cause the actual liability to exceed the estimates, or that may require adjustments to the recorded liability balances in the future. 53 MARKET RISKS As a result of its global operating and financing activities, Hexcel is exposed to various market risks that may affect its consolidated results of operations and financial position. These market risks include fluctuations in interest rates, which impact the amount of interest the Company must pay on certain variable-rate debt, and fluctuations in currency exchange rates, which impact the U.S. dollar value of transactions, assets and liabilities denominated in foreign currencies. The Company's primary currency exposures are in Europe, where the Company has significant business activities. To a lesser extent, the Company is also exposed to fluctuations in the prices of certain commodities, such as electricity, natural gas, aluminum and certain chemicals. Hexcel attempts to net individual exposures on a consolidated basis, when feasible, to take advantage of natural offsets. In addition, the Company employs an interest rate cap agreement and foreign currency forward exchange contracts for the purpose of hedging certain specifically identified interest rate and net currency exposures. The use of these financial instruments is intended to mitigate some of the risks associated with fluctuations in interest rates and currency exchange rates, but does not eliminate such risks. The Company does not use financial instruments for trading or speculative purposes. INTEREST RATE RISKS Hexcel's long-term debt bears interest at both fixed and variable rates. As a result, the Company's consolidated results of operations are affected by interest rate changes on its variable rate debt. Assuming a 10% favorable and a 10% unfavorable change in the underlying weighted average interest rates of the Company's variable rate debt, interest expense for 2001 of $64.8 million would have been $63.2 million and $66.5 million, respectively. In order to partially mitigate interest rate risks, Hexcel entered into a five-year interest rate cap agreement in 1998. This agreement provides for a maximum fixed interest rate of 5.5% on the applicable London interbank rate used to determine the interest on $50.0 million of variable rate debt under the Senior Credit Facility. The fair value and carrying amount of this agreement at December 31, 2001 and 2000, along with hedge ineffectiveness for the year ended December 31, 2001, were not material. CURRENCY EXCHANGE RISKS Hexcel has significant business activities in Europe. The Company operates seven manufacturing facilities in Europe, which generated approximately 41% of 2001 consolidated net sales. The Company's European business activities primarily involve three major currencies--the U.S. dollar, the British pound, and the Euro. The Company also conducts business or has joint venture investments in Japan, China, Malaysia, Australia and Brazil, and sells products to customers throughout the world. The majority of the Company's transactions with customers and joint venture affiliates outside of Europe are denominated in U.S. dollars, thereby limiting the Company's exposure to short-term currency fluctuations involving these countries. However, the value of the Company's investments in these countries could be impacted by changes in currency exchange rates over time, as could the Company's ability to profitably compete in international markets. Hexcel attempts to net individual currency positions at its various European operations on a consolidated basis, to take advantage of natural offsets and reduce the need to employ foreign currency forward exchange contracts. The Company also enters into short-term foreign currency forward exchange contracts, usually with a term of ninety days or less, to hedge net currency exposures resulting from specifically identified transactions. Consistent with the nature of the economic hedge provided by such contracts, any unrealized gain or loss would be offset by corresponding decreases or increases, respectively, of the underlying transaction being hedged. 54 During 2001, Hexcel entered into a number of foreign currency forward exchange contracts to exchange U.S. dollars for Euros at fixed rates on specified dates through March 2005. The aggregate notional amount of these contracts was $83.9 million at December 31, 2001. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers which are denomintated in U.S. dollars. These contracts are expected to provide the Company with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing the Company's exposure to fluctuations in currency exchange rates. For the year ended December 31, 2001, hedge ineffectiveness was immaterial and the fair value of the foreign currency cash flow hedges recognized in "comprehensive loss" was a net loss of $5.9 million. Approximately $1.2 million of the other comprehensive losses are expected to be reclassified into earnings in 2002 as the hedged tranactions are recorded. Assuming a 10% increase in the value of the Euro relative to the U.S. dollar, the aggregate fair value of these contracts would constitute a $2.5 million asset of the Company. Alternatively, assuming a 10% decrease in the value of the Euro relative to the U.S. dollar, the aggregate fair value of these contracts would represent a $14.3 million liability of the Company. COMMODITY PRICE RISKS Certain raw materials and operating supplies used by Hexcel are subject to price fluctuations caused by the volatility of underlying commodity prices. The commodities most likely to have an impact on the Company's consolidated results of operations in the event of significant price changes are electricity, natural gas, aluminum and certain chemicals. The Company attempts to minimize the impact of commodity price risk, when feasible, by entering into supply agreements that specify raw material prices or limit price increases for a reasonable period of time. The Company generally does not employ forward contracts or other financial instruments to hedge commodity price risk. UTILITY PRICE RISKS The Company has exposure to utility price risks as a result of volatility in the cost and supply of energy and in natural gas prices, particularly in the western portion of the United States where Hexcel has many of its manufacturing facilities. To minimize this risk, the Company enters into fixed price contracts at certain of the manufacturing locations for a portion of its energy usage for periods of up to three years. Although these contracts would reduce the risk to the Company during the contract period, future volatility in the supply and pricing of energy and natural gas could have an impact on the consolidated results of operations of the Company. OTHER RISKS As of December 31, 2001, the aggregate fair values of the Company's senior subordinated notes, due 2009, convertible subordinated notes, due 2003, and the convertible subordinated debentures, due 2011, were $189.6 million, $27.0 million and $15.5 million, respectively. The convertible debt securities are convertible into Hexcel common stock at a 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. The market value of these debt securities has increased since December 31, 2001. The fair values are subject to fluctuations based on the Company's performance, its credit rating, and changes in interest rates for debt securities with similar terms. Due to the conversion feature in the convertible securities, changes in the value of the Company's stock may affect the fair value of these convertible securities. Assuming that all other factors remain constant, the fair values of Hexcel's convertible subordinated notes, due 2003, and the convertible subordinated debentures, due 2011, would not be 55 significantly impacted by a 10% change, either favorable or unfavorable, in the market price of the Company's common stock. Although fair value may be a proxy for the cost to repay the Company's indebtedness, the trust indentures for the Company's senior subordinated notes, due 2009; convertible subordinated notes, due 2003; and convertible subordinated debebtures, due 2011 require that the Company repay the principal value of the indebtedness at maturity. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141"), which requires all acquisitions subsequent to June 30, 2001 to be accounted for under the purchase method of accounting. The adoption of FAS 141 did not have a material effect on the Company's consolidated financial position and results of operations. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 changes the accounting for goodwill from an amortization method to an impairment only approach. Going forward, goodwill will be tested at the reporting unit level annually and whenever events or circumstances occur indicating that goodwill might be impaired. Amortization of goodwill, including goodwill recorded in past business combinations, will cease. While the Company adopted FAS 142 as of January 1, 2002 with no impact to its consolidated financial position, future consolidated results of operations will be impacted to the extent amortization is no longer recorded by the Company. In 2001, 2000 and 1999, the Company's reported results refected amortization charges of $12.5 million, $13.1 million and $13.4 million, respectively. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 143 establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations. Under FAS 143, the costs of retiring an asset will be recorded as a liability when the obligation arises, and will be amortized to expense over the life of the asset. The Company adopted FAS 143 as of January 1, 2002 with no impact to its consolidated financial position or results of operations. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 was issued to establish a single accounting model for long-lived assets to be disposed of by sale and to resolve implementation issues related to FAS 121. Although FAS 144 retains the requirements of FAS 121 to recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable, the statement removes goodwill and intangible assets not being amortized from FAS 121's scope. FAS 144 also requires long-lived assets to be abandoned to be treated as held for use and depreciated over their remaining expected lives and broadens the presentation of discontinued operations in the income statement to a component of an entity rather than a segment of a business. The Company adopted FAS 144 as of January 1, 2002 with no impact to its consolidated financial position or results of operations. 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 that 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," "should," "will," and similar terms 56 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 Airbus and Boeing; (b) expectations regarding growth in sales to regional and business aircraft manufacturers, and to the aircraft aftermarket; (c) expectations regarding the growth in the production of military aircraft, helicopters and launch vehicle programs in 2002 and beyond; (d) expectations regarding the recovery of demand for electronics fabrics used in printed wiring boards, as well as future business trends in the electronics fabrics industry; (e) expectations regarding the demand for soft body armor made of aramid and specialty fabrics; (f) expectations regarding growth in sales of composite materials for wind energy, automotive and other industrial applications; (g) estimates of changes in net sales by market compared to 2001; (h) expectations regarding the Company's actions to reduce headcount and eliminate $60.0 million of cash overhead expense; (i) estimates of the timing, expenses and cash expenditures required to complete the closure of the Lancaster, Ohio plant; (j) expectations regarding the Company's equity in the earnings of joint ventures, as well as joint venture investments and loan guarantees; (k) expectations regarding working capital trends and capital expenditures; (l) the availability and sufficiency of the Senior Credit Facility and other financial resources to fund the Company's worldwide operations in 2002 and beyond; and (m) the impact of various market risks, including fluctuations in the interest rates underlying the Company's variable-rate debt, fluctuations in currency exchange rates, fluctuations in commodity prices, and fluctuations in the market price of the Company's common stock. 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: changes in general economic and business conditions; changes in current pricing and cost 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 Airbus or Boeing; 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; and the availability, terms and deployment of capital. If one or more of these risks or uncertainties materialize, or if underlying assumptions prove incorrect, actual results may vary materially from those expected, estimated or projected. In addition to other factors that affect Hexcel's operating results and financial position, neither past financial performance nor the Company's expectations should be considered reliable indicators 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. 57 CONSOLIDATED FINANCIAL STATEMENTS
DESCRIPTION PAGE - ----------- -------- Management Responsibility for Consolidated Financial Statements................................................ 59 Report of Independent Accountants........................... 60 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2001 and 2000.................................................... 61 Consolidated Statements of Operations for each of the three years ended December 31, 2001..................... 62 Consolidated Statements of Stockholders' Equity and Comprehensive Income for each of the three years ended December 31, 2001....................................... 63 Consolidated Statements of Cash Flows for each of the three years ended December 31, 2001..................... 64 Notes to the Consolidated Financial Statements............ 65-94 Report of Independent Accountants on Financial Statement Schedule.................................................. 95 Schedule of Valuation and Qualifying Accounts............... 96
58 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 accounting principles generally accepted in the United States of America. 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 consolidated financial statements. The Audit Committee, composed solely of outside directors, meets periodically, separately and jointly, with management and the independent accountants. /s/ DAVID E. BERGES - --------------------------------- David E. Berges CHIEF EXECUTIVE OFFICER /s/ STEPHEN C. FORSYTH - --------------------------------- Stephen C. Forsyth CHIEF FINANCIAL OFFICER /s/ WILLIAM J. FAZIO - --------------------------------- William J. Fazio CHIEF ACCOUNTING OFFICER 59 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 comprehensive income and of cash flows present fairly, in all material respects, the financial position of Hexcel Corporation and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP PricewaterhouseCoopers LLP Stamford, Connecticut January 25, 2002 60 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, --------------------- 2001 2000 --------- --------- (IN MILLIONS, EXCEPT PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents................................. $ 11.6 $ 5.1 Accounts receivable, net.................................. 140.5 150.3 Inventories............................................... 131.7 155.4 Prepaid expenses and other assets......................... 4.4 15.2 ------- -------- Total current assets...................................... 288.2 326.0 Net property, plant and equipment........................... 329.2 359.7 Goodwill and other purchased intangibles, net of accumulated amortization of $48.6 in 2001 and $36.1 in 2000........... 72.4 391.7 Investments in affiliated companies......................... 56.9 72.1 Other assets................................................ 42.7 61.9 ------- -------- Total assets................................................ $ 789.4 $1,211.4 ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of capital lease obligations............................................. $ 17.4 $ 22.1 Accounts payable.......................................... 58.6 69.4 Accrued compensation and benefits......................... 47.5 45.3 Accrued interest.......................................... 18.8 17.6 Business consolidation and restructuring liabilities...... 33.4 2.7 Other accrued liabilities................................. 32.0 40.8 ------- -------- Total current liabilities................................. 207.7 197.9 Long-term notes payable and capital lease obligations....... 668.5 651.5 Other non-current liabilities............................... 45.8 46.3 ------- -------- Total liabilities......................................... 922.0 895.7 ------- -------- Commitments and contingencies (see Note 16) Stockholders' equity: Preferred stock, no par value, 20.0 shares of stock authorized, no shares issued or outstanding............. -- -- Common stock, $0.01 par value, 100.0 shares of stock authorized, shares issued of 39.4 at December 31, 2001 and 38.0 at December 31, 2000........................... 0.4 0.4 Additional paid-in capital................................ 287.7 280.7 Retained earnings (accumulated deficit)................... (367.9) 65.8 Accumulated other comprehensive loss...................... (39.7) (20.0) ------- -------- (119.5) 326.9 Less-Treasury stock, at cost, 1.2 shares at December 31, 2001 and 0.9 shares at December 31, 2000................ (13.1) (11.2) ------- -------- Total stockholders' equity................................ (132.6) 315.7 ------- -------- Total liabilities and stockholders' equity.................. $ 789.4 $1,211.4 ======= ========
The accompanying notes are an integral part of these consolidated financial statements. 61 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- (IN MILLIONS, EXCEPT PER SHARE DATA) Net sales................................................... $1,009.4 $1,055.7 $1,151.5 Cost of sales............................................... 818.6 824.3 909.0 -------- -------- -------- Gross margin.............................................. 190.8 231.4 242.5 Selling, general and administrative expenses................ 120.9 123.9 128.7 Research and technology expenses............................ 18.6 21.2 24.8 Business consolidation and restructuring expenses........... 58.4 10.9 20.1 Impairment of goodwill and other purchased intangibles...... 309.1 -- -- -------- -------- -------- Operating income (loss)................................... (316.2) 75.4 68.9 Gain on sale of Bellingham aircraft interiors business...... -- 68.3 -- Interest expense............................................ 64.8 68.7 73.9 -------- -------- -------- Income (loss) before income taxes......................... (381.0) 75.0 (5.0) Provision for (benefit from) income taxes................... 40.5 26.3 (1.7) -------- -------- -------- Income (loss) before equity in earnings................... (421.5) 48.7 (3.3) Equity in earnings (losses) of and write-downs of an investment in affiliated companies...................... (9.5) 5.5 (20.0) -------- -------- -------- Income (loss) before extraordinary item................... (431.0) 54.2 (23.3) Extraordinary loss on early retirement of debt.............. (2.7) -- -- -------- -------- -------- Net income (loss)......................................... $ (433.7) $ 54.2 $ (23.3) ======== ======== ======== Net income (loss) per share: Basic: Income (loss) before extraordinary item................. $ (11.47) $ 1.47 $ (0.64) Extraordinary loss on early retirement of debt.......... (0.07) -- -- -------- -------- -------- Net income (loss)....................................... $ (11.54) $ 1.47 $ (0.64) -------- -------- -------- Diluted: Income (loss) before extraordinary item................. $ (11.47) $ 1.32 $ (0.64) Extraordinary loss on early retirement of debt.......... (0.07) -- -- -------- -------- -------- Net income (loss)....................................... $ (11.54) $ 1.32 $ (0.64) -------- -------- -------- Weighted average shares: Basic..................................................... 37.6 36.8 36.4 Diluted................................................... 37.6 45.7 36.4 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 62 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMON STOCK --------------------- RETAINED ACCUMULATED ADDITIONAL EARNINGS OTHER TOTAL PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE PAR CAPITAL DEFICIT) INCOME (LOSS) SHARES EQUITY INCOME (LOSS) -------- ---------- ------------ ------------- -------- ------------- ------------- (IN MILLIONS) BALANCE, JANUARY 1, 1999.................... $0.4 $271.5 $ 34.9 $ 6.3 $(10.7) $ 302.4 Net loss.................. (23.3) (23.3) $ (23.3) Currency translation adjustment.............. (11.1) (11.1) (11.1) ------- Comprehensive loss...... (34.4) ------- Activity under stock plans................... 2.1 2.1 ---- ------ ------- ------ ------ ------- BALANCE, DECEMBER 31, 1999.................... 0.4 273.6 11.6 (4.8) (10.7) 270.1 Net income................ 54.2 54.2 54.2 Currency translation adjustment.............. (10.2) (10.2) (10.2) Minimum pension obligation.............. (5.0) (5.0) (5.0) ------- Comprehensive income.... 39.0 ------- Activity under stock plans and other............... 7.1 (0.5) 6.6 ---- ------ ------- ------ ------ ------- BALANCE, DECEMBER 31, 2000.................... 0.4 280.7 65.8 (20.0) (11.2) 315.7 Net loss.................. (433.7) (433.7) (433.7) Currency translation adjustment.............. (12.1) (12.1) (12.1) Net unrealized loss on financial instruments... (5.9) (5.9) (5.9) Minimum pension obligation.............. (1.7) (1.7) (1.7) ------- Comprehensive loss...... $(453.4) ======= Activity under stock plans and other............... 7.0 (1.9) 5.1 ---- ------ ------- ------ ------ ------- BALANCE, DECEMBER 31, 2001.................... $0.4 $287.7 $(367.9) $(39.7) $(13.1) $(132.6) ==== ====== ======= ====== ====== =======
The accompanying notes are an integral part of these consolidated financial statements. 63 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------ 2001 2000 1999 -------- -------- -------- (IN MILLIONS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)......................................... $(433.7) $ 54.2 $ (23.3) Reconciliation to net cash provided by operations: Depreciation............................................ 50.7 45.6 47.9 Amortization............................................ 12.5 13.1 13.4 Deferred income taxes................................... 27.6 8.6 (15.8) Business consolidation and restructuring expenses....... 58.4 10.9 20.1 Business consolidation and restructuring payments....... (12.0) (11.8) (9.5) Impairment of goodwill and other purchased intangibles........................................... 309.1 -- -- Equity in (earnings) losses of and write-downs of an investment in affiliated companies.................... 9.5 (5.5) 20.0 Write-down of deferred financing costs for retirement of debt.................................................. 0.7 -- -- Gain on sale of Bellingham aircraft interiors business.............................................. -- (68.3) -- Gain on curtailment of pension plan..................... -- (5.1) -- Changes in assets and liabilities: Decrease (increase) in accounts receivable............ 4.6 (7.7) 16.1 Decrease (increase) in inventories.................... 20.6 (17.0) 49.0 Decrease (increase) in prepaid expenses and other assets.............................................. 1.1 (0.4) 1.5 Increase (decrease) in accounts payable and accrued liabilities......................................... (19.2) 10.7 11.9 Changes in other non-current assets and long-term liabilities......................................... 5.1 5.7 2.4 ------- ------- ------- Net cash provided by operating activities............... 35.0 33.0 133.7 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures...................................... (38.8) (39.6) (35.6) Proceeds from sale of Bellingham aircraft interiors business................................................ -- 113.3 -- Proceeds from sale of other assets........................ -- 3.4 -- Investments in affiliated companies....................... 0.8 (8.3) (4.7) Other..................................................... (0.3) -- -- ------- ------- ------- Net cash provided by (used for) investing activities.... (38.3) 68.8 (40.3) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds (repayments) of credit facilities, net........... 24.6 29.5 (311.9) Proceeds from issuance of long-term debt.................. 98.5 -- 240.0 Repayments of long-term debt and capital lease obligations............................................. (110.6) (126.0) (18.0) Debt issuance costs....................................... (3.5) (0.9) (11.0) Activity under stock plans and other...................... (0.4) 2.4 1.4 ------- ------- ------- Net cash provided by (used for) financing activities.... 8.6 (95.0) (99.5) ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents............................................... 1.2 (1.9) (1.2) ------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 6.5 4.9 (7.3) Cash and cash equivalents at beginning of year.............. 5.1 0.2 7.5 ------- ------- ------- Cash and cash equivalents at end of year.................... $ 11.6 $ 5.1 $ 0.2 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA) NOTE 1--SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS AND BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of Hexcel Corporation and its subsidiaries ("Hexcel" or "the Company"), after elimination of intercompany transactions and accounts. Investments in affiliated companies in which the Company's interests are generally between 20% and 50%, but the Company does not control the financial and operating decisions, are accounted for using the equity method of accounting. Hexcel is the world's 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 commercial aerospace, space and defense, electronics, and industrial applications. The Company's materials are used in a wide variety of end products, such as commercial and military aircraft, space launch vehicles and satellites, printed wiring boards, computers, cellular telephones, televisions, soft body armor, high-speed trains and ferries, cars and trucks, wind turbine blades, reinforcements for bridges and other structures, window blinds, skis and snowboards, fishing poles, tennis rackets and bicycles. The Company serves international markets through manufacturing facilities and sales offices located in the United States and Europe, and through sales offices located in Asia, Australia and South America. The Company is also a member of six joint ventures, four of which manufacture and market reinforcement products and composite materials in Europe, Asia and the United States, and two of which manufacture composite structures and interiors in Asia. As discussed in Note 2, Hexcel sold its Bellingham aircraft interiors business on April 26, 2000. As a result of this transaction, the consolidated balance sheets, statements of operations, stockholders' equity and comprehensive income, and cash flows include the financial position, results of operations and cash flows of the Bellingham aircraft interiors business as of such dates and for such periods that the business was owned. USE OF ESTIMATES The preparation of the consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Estimates are used for, but not limited to, allowances for doubtful accounts, inventory allowances, product warranty, depreciation and amortization, business consolidation and restructuring costs, impairment of long-lived assets, employee benefits, taxes, and contingencies. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. These investments consist primarily of Eurodollar time deposits and are stated at cost, which approximates fair value. INVENTORIES Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out and average cost methods. The Company provides inventory allowances based on excess and obsolete inventories. 65 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and 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. Repairs and maintenance are charged to expense as incurred, while major replacements and betterments are capitalized. GOODWILL AND OTHER PURCHASED INTANGIBLES Goodwill, representing the excess of the purchase price over the fair value of the identifiable net assets of the businesses acquired, and other purchased intangibles were amortized on a straight-line basis over estimated economic lives, ranging from 15 years to 40 years. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Upon adoption, and in accordance with the standard, the Company will no longer amortize its goodwill and other purchased intangibles but instead will evaluate these assets for possible impairment at least annually and whenever events or circumstances occur that would indicate that these assets might be impaired. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including goodwill and other purchased intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset from the estimated undiscounted future net cash flows, before interest and taxes, of the related operations. If these cash flows are less than the carring value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires estimates of these cash flows and fair value, which may be determined based either on discounted cash flows or third party appraised values depending on the nature of the asset. In 2001, the Company recognized an impairment of $309.1 on goodwill and other purchased intangibles acquired through previous acquisitions (see Note 3). DEBT FINANCING COSTS Debt financing costs are deferred and amortized to interest expense over the life of the related debt, which ranges from 7 to 10 years. Deferred debt financing costs were $15.5 in 2001 and $16.7 in 2000, net of accumulated amortization of $10.7 and $8.7, respectively, and are included in "other assets" in the consolidated balance sheets. INVESTMENTS The Company has investments in affiliated companies with equity interests ranging from 25% to 50%. Hexcel does not control the financial and operating decisions of these companies and, therefore, accounts for its share of their operating performance using the equity method of accounting. Future adverse changes in market conditions or poor operating results of the underlying investments could result in losses and the inability to recover the carrying value of the investments, thereby possibly requiring an impairment charge. The Company reviews its investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. The Company records an investment impairment charge when the decline in value is considered to be other than temporary. In 2001 and 1999, the Company recorded impairments of $7.8 and $20.0, respectively, relating to its investment in Interglas Technologies AG (see Note 7). 66 STOCK-BASED COMPENSATION Stock-based compensation is accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, compensation expense is not recognized when options are granted at the fair market value at the date of grant. Hexcel also provides additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") (see Note 13). CURRENCY TRANSLATION The assets and liabilities of international 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 "accumulated other comprehensive loss" in the stockholders' equity section of the consolidated balance sheets. Realized gains and losses from currency exchange transactions are recorded in "selling, general and administrative expenses" in the consolidated statements of operations and were not material to Hexcel's consolidated results of operations in 2001, 2000 or 1999. REVENUE RECOGNITION Product sales are recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured, which is generally at the time of shipment. Revenues derived from design, installation and support services are recognized when the service is provided, or alternatively, when the product to which the service relates is delivered to the customer. The Company accrues for warranty costs and other sales allowances based on its experience at the time of sale. RESEARCH AND TECHNOLOGY Research and technology costs are expensed as incurred. INCOME TAXES The Company provides for income taxes using the liability method prescribed by the Financial Accounting Standards Board ("FASB") in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under the liability method, deferred income tax assets and liabilities reflect tax carryforwards and the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes. Deferred tax assets require a valuation allowance when it is more likely than not that some portion of the deferred tax assets may not be realized. The realization of deferred tax assets is dependent upon the timing and magnitude of future taxable income prior to the expiration of the deferred tax assets attributes. When events and circumstances so dictate, the Company evaluates the realizability of its deferred tax assets and the need for a valuation allowance by forecasting future taxable income. In 2001, the Company established a full valuation allowance on its U.S. deferred tax assets. The amount of the deferred tax assets considered realizable, however, could change if estimates of future U.S. taxable income during the carry-forward period improve (see Note 12). CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject Hexcel 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 39%, 33% and 38% of the Company's 2001, 2000 and 1999 net sales, respectively. The Company performs ongoing credit evaluations of its customers' financial 67 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. As of December 31, 2001 and 2000, the allowance for doubtful accounts was $7.8 and $7.1, respectively. Bad debt expense was $1.3, $0.6 and $0.7 in 2001, 2000 and 1999, respectively. DERIVATIVE FINANCIAL INSTRUMENTS Hexcel employs an interest rate cap agreement and foreign currency forward exchange contracts in the management of its interest rate and currency exchange exposures. The Company has designated its interest rate cap agreement as a cash flow hedge against a specific debt instrument and recognizes interest differentials as adjustments to interest expense as the differentials occur. The Company also designated its foreign currency forward exchange contracts as cash flow hedges against forecasted foreign currency denominated transactions and reports the effective portions of changes in fair value of the instruments in "other comprehensive income" until the underlying hedged transactions affect income. The Company does not use financial instruments for trading or speculative purposes. Hexcel adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), and its corresponding amendments under Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," effective January 1, 2001. FAS 133 requires an entity to recognize all derivatives as either assets or liabilities on its balance sheet and measure those instruments at fair value. Gains or losses resulting from changes in the fair values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. FAS 133 did not have a material effect on the Company's consolidated financial position or results of operations as of the date of adoption. RECENTLY ISSUED ACCOUNTING STANDARDS In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("FAS 141"), which requires all acquisitions subsequent to June 30, 2001 to be accounted for under the purchase method of accounting. The adoption of FAS 141 did not have a material effect on the Company's consolidated financial position and results of operations. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 changes the accounting for goodwill from an amortization method to an impairment only approach. Going forward, goodwill will be tested at the reporting unit level annually and whenever events or circumstances occur indicating that goodwill might be impaired. Amortization of goodwill, including goodwill recorded in past business combinations, will cease. While the Company adopted FAS 142 as of January 1, 2002 with no impact to its consolidated financial position, future consolidated results of operations will be impacted to the extent amortization is no longer recorded by the Company. In 2001, 2000 and 1999, the Company's consolidated results of operations included amortization expenses of $12.5 million, $13.1 million and $13.4 million, respectively. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 143 establishes accounting standards for recognition and measurement of a liability for the costs of asset retirement obligations. Under FAS 143, the costs of retiring an asset will be recorded as a liability when the obligation arises, and will be amortized to expense over the life of the asset. The Company adopted FAS 143 as of January 1, 2002 with no impact to its consolidated financial position or results of operations. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 was issued to establish a single accounting model for long-lived assets to be disposed of by sale and to resolve 68 implementation issues related to FASB's Statement No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Although FAS 144 retains the requirements of FAS 121 to recognize an impairment loss if the carrying amount of a long-lived asset is not recoverable, the statement removes goodwill and intangible assets not being amortized from FAS 121's scope. FAS 144 also requires long-lived assets to be abandoned to be treated as held for use and depreciated over their remaining expected lives and broadens the presentation of discontinued operations in the income statement to a component of an entity rather than a segment of a business. The Company adopted FAS 144 as of January 1, 2002 with no impact to its consolidated financial position or results of operations. RECLASSIFICATIONS Certain prior year amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 2001 presentation. NOTE 2--GAIN ON SALE OF BELLINGHAM AIRCRAFT INTERIORS BUSINESS On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business to Britax Cabin Interiors, Inc., a wholly owned subsidiary of Britax International plc, for cash proceeds of $113.3. The sale resulted in a pre-tax gain of $68.3 and an after-tax gain of approximately $44.3 (or $0.97 per diluted share). Net proceeds from the sale were used to repay $111.6 of outstanding term debt under the Company's Senior Credit Facility. The consolidated financial statements and accompanying notes reflect Bellingham's operating results as a continuing operation in the Engineered Products business segment up to the date of disposal. Net sales and operating income for the Bellingham business were as follows:
2000 1999 -------- -------- Net sales................................................... $18.9 $70.0 Operating income............................................ 0.6 8.0 ===== =====
NOTE 3--IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLES During the fourth quarter of 2001, the Company reviewed its long-lived assets, particularly goodwill and other purchased intangibles acquired in recent years, for impairment. The review was undertaken in response to changes in market conditions and the Company's revised outlook resulting from a sharp decline in demand for the Company's woven glass fabrics, primarily in the electronics market, and the announced reductions in commercial airline production due to the tragic events of September 11, 2001. The Company also revised its forecasts of revenue growth for its acquired satellite business due to the continuing slow down in commercial satellite launches following the financial failure of a number of satellite based telecommunication projects and the postponement of others. These adverse changes in market conditions have led to the lowering of revenue forecasts associated with certain businesses in the reinforcement products and composite materials segments. Based on this review, the Company determined that the long-lived assets of the fabrics business acquired from Clark-Schwebel in 1998 and the satellite business acquired from Fiberite in 1997 were not fully recoverable. The Company recorded non-cash impairment charges of $292.1 and $17.0 related to the goodwill and other purchased intangibles associated with the Clark-Schwebel and Fiberite acquisitions, respectively. The amounts of the impairment charges were calculated as the excess of the carrying value of the assets over their fair values. Fair values were determined using discounted future cash flow models, market valuations and third party appraisals, where appropriate. There were no tax benefits recognized on the impairments because of limitations on the Company's ability to realize the tax benefits. 69 NOTE 4--BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS During the fourth quarter of 2001, the Company announced a plan to restructure its business operations in accordance with a revised business outlook, in light of anticipated reductions in commercial aircraft production in both 2002 and 2003, the continued depressed business conditions in the electronics market and the weakness in the general economy. The plan includes company-wide reductions in managerial, professional, indirect manufacturing and administrative employees along with organizational rationalization. In addition, the Company will reduce its direct manufacturing costs as customer orders decline. As a result, the Company has reduced the number of employees by almost 10% from the third quarter to 5,376 employees at December 31, 2001, and expects to further reduce that number to less than 4,500 by the end of 2002. The majority of the actions had been taken by the end of 2001, and the Company expects most of the remaining actions to be completed in the first quarter of 2002. The Company recognized charges of $47.9 in the fourth quarter of 2001 related to this restructuring plan, and estimates that the total cash costs of this restructuring plan will be approximately $35.0. Cash spending related to this action in the fourth quarter of 2001 was approximately $3.0, with the balance to be paid throughout 2002. As a result of the weakness in the electronics market, the Company initiated cost reduction actions in July 2001. These actions built upon earlier steps to furlough employees, idle manufacturing and cut non-essential expenditures, by effecting a reduction in the work force of approximately 275 employees in the reinforcement products segment and elsewhere in the Company. These actions resulted in business consolidation and restructuring expenses of approximately $4.0 in the third quarter of 2001. As a result of four substantial business acquisitions, the Company initiated three business consolidation programs in May 1996, December 1998 and September 1999. The primary purpose of these programs was to integrate acquired assets and operations into the Company, and to close or restructure insufficiently profitable facilities and activities. Due to aerospace industry requirements to "qualify" specific equipment and manufacturing processes for certain products, some business consolidation actions have taken up to three years to complete. These qualification requirements increase the complexity, cost and time of moving equipment and rationalizing manufacturing activities. In connection with these business consolidation programs, the Company has closed three manufacturing facilities, vacated approximately 560 thousand square feet of manufacturing space, and eliminated more than 700 manufacturing, marketing and administrative positions. All of the business consolidation activities initiated in 1996, 1998 and 1999 have been completed as of December 31, 2001. In 2000, the Company added two further actions to the September 1999 business consolidation program. The Company decided to close the two smaller of its four U.S. prepreg manufacturing facilities--one in Lancaster, Ohio and another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in the fourth quarter of 2001 and it is anticipated that the closure of the Lancaster, Ohio facility will be completed during the second quarter of 2002. The manufacturing output from these two plants will now be produced by the two remaining U.S. prepreg facilities in Livermore, California and Salt Lake City, Utah. In 2000, Hexcel amended its September 1999 business consolidation program in response to the manufacturing constraints caused by a stronger than expected increase in sales and production for its electronic woven glass fabrics and its ballistic protection products. Based on these improved market conditions, which were expected to continue beyond 2000, and a manufacturing capacity review, the Company concluded to expand its capacity by purchasing additional looms and revising the previous decision to consolidate a number of weaving activities at two of the Company's facilities. As a result of the decision to not proceed to consolidate production, the Company reversed a total of $3.4 of business consolidation expenses that were previously recognized in 1999, including $3.1 in non-cash write-downs of machinery and equipment that was to have been sold or scrapped as a result of the consolidation. 70 Business consolidation and restructuring activities for the three years ended December 31, 2001, consisted of the following:
EMPLOYEE FACILITY & SEVERANCE EQUIPMENT TOTAL --------- ---------- -------- BALANCE AS OF JANUARY 1, 1999............................... $ 5.8 $ 2.4 $ 8.2 Business consolidation expenses............................. 5.1 15.0 20.1 Cash expenditures........................................... (6.7) (2.8) (9.5) Non-cash usage, including asset write-downs................. (0.7) (14.0) (14.7) ----- ------ ------ BALANCE AS OF DECEMBER 31, 1999............................. 3.5 0.6 4.1 Business consolidation expenses: Current period expenses................................... 3.7 10.6 14.3 Reversal of 1999 business consolidation expenses.......... (0.3) (3.1) (3.4) ----- ------ ------ Net business consolidation expenses....................... 3.4 7.5 10.9 Cash expenditures........................................... (3.9) (7.9) (11.8) Non-cash items: Reversal of 1999 business consolidation expenses.......... -- 3.1 3.1 Other non-cash usage, including asset write-downs......... (0.6) (3.0) (3.6) ----- ------ ------ Total non-cash items...................................... (0.6) 0.1 (0.5) ----- ------ ------ BALANCE AS OF DECEMBER 31, 2000............................. 2.4 0.3 2.7 Business consolidation and restructuring expenses........... 34.5 23.9 58.4 Cash expenditures........................................... (6.4) (5.6) (12.0) Non-cash usage, including asset write-downs................. -- (15.7) (15.7) ----- ------ ------ BALANCE AS OF DECEMBER 31, 2001............................. $30.5 $ 2.9 $ 33.4 ===== ====== ======
As part of a business consolidation program, Hexcel disposed of its operations in Brindisi, Italy (the "Italian Operations") in 1999. In accordance with FAS 121, the Company recorded a charge of $5.6 prior to 1999 for an asset impairment related to its Italian Operations. The estimate of fair value used in determining the impairment charge was based on offers received from interested buyers. The Italian Operations were disposed of for net proceeds that approximated amounts accrued and were accounted for under the Company's Engineered Products business segment. Financial operating results for this business were not material to Hexcel's consolidated financial statements. NOTE 5--INVENTORIES
DECEMBER 31, ------------------- 2001 2000 -------- -------- Raw materials............................................... $ 59.1 $ 74.5 Work in progress............................................ 35.2 45.2 Finished goods.............................................. 37.4 35.7 ------ ------ Inventories................................................. $131.7 $155.4 ====== ======
71 NOTE 6--NET PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, ------------------- 2001 2000 -------- -------- Land...................................................... $ 23.5 $ 23.9 Buildings................................................. 132.7 135.1 Equipment................................................. 443.8 434.4 Construction in Progress.................................. 17.0 21.9 ------- ------- Property, plant and equipment............................. 617.0 615.3 Less accumulated depreciation............................. (287.8) (255.6) ------- ------- Net property, plant and equipment......................... $ 329.2 $ 359.7 ======= =======
NOTE 7--INVESTMENTS IN AFFILIATED COMPANIES In 1999, Hexcel, Boeing and Aviation Industries of China (now known as China Aviation Industry Corporation I) formed a joint venture, BHA Aero Composite Parts Co., Ltd. ("BHA Aero"), to manufacture composite parts for secondary structures and interior applications for commercial aircraft. Hexcel has a 33% equity ownership interest in this joint venture, which is located in Tianjin, China. In addition, in 1999, Hexcel formed another joint venture, Asian Composites Manufacturing Sdn. Bhd. ("Asian Composites"), with Boeing, Sime Link Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture composite parts for secondary structures for commercial aircraft. Hexcel has a 25% equity ownership interest in this joint venture, which is located in Alor Setar, Malaysia. Asian Composites began shipping engineered products to customers during the second half of 2001, while it is anticipated that BHA Aero will begin deliveries in the first half of 2002. During 2000 and 1999, Hexcel made cash equity investments totaling $8.3 and $4.7, respectively, in these two joint ventures. No additional cash equity investments were made during 2001. As of December 31, 2001, the Company had an outstanding letter of credit of $11.1 in support of a loan to BHA Aero (see Note 16). The Company also has equity ownership interests in three reinforcement product joint ventures: a 43.6% share in Interglas Technologies AG ("Interglas"), headquartered in Germany; a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn owns interests in two joint ventures in Taiwan--a 50% interest in Nittobo Asahi Glass and a 51% interest in Asahi-Schwebel Taiwan; and a 50% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"), headquartered in the United States. Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian manufacturers of printed circuit board laminates and other reinforcement product applications. CS Tech-Fab manufactures non-woven materials for roofing, construction and other specialty applications. In 2001 and 1999, the Company wrote-down its investment in Interglas by $7.8 and $20.0, respectively. The write-downs were the result of an assessment that an other-than-temporary decline in value of the investment had occurred due to severe industry downturns and the resulting impact on the financial condition of this company. The amount of the write-downs were determined based on available market information and appropriate valuation methodologies. The write-down in 1999 was also due in part to a decision to allow its fixed price options to expire unexercised. The fixed price option would have increased the Company's equity investment in Interglas from 43.6% to 84%. The Company did not record deferred tax benefits on the write-downs because of limitations imposed by foreign tax laws and the Company's ability to realize the tax benefits. Lastly, Hexcel owns a 45% equity interest in DIC-Hexcel Limited ("DHL"), a joint venture with Dainippon Ink and Chemicals, Inc. ("DIC"). This composite materials joint venture is located in Komatsu, Japan, and produces and sells prepregs, honeycomb and decorative laminates using 72 technology licensed from Hexcel and DIC. Hexcel is contingently liable to pay DIC up to $2.3 with respect to DHL's bank debt under certain defined circumstances. NOTE 8--NOTES PAYABLE
DECEMBER 31, ------------------- 2001 2000 -------- -------- Senior Credit Facility...................................... $233.9 $211.9 European credit and overdraft facilities.................... 3.5 13.7 Senior subordinated notes, due 2009 (net of unamortized discount of $1.4 as of December 31, 2001)................. 338.6 240.0 Convertible subordinated notes, due 2003.................... 46.9 114.4 Convertible subordinated debentures, due 2011............... 24.5 25.6 Increasing rate senior subordinated note, due 2003 (net of unamortized discount of $0.6 as of December 31, 2000)..... -- 24.4 Various notes payable....................................... 0.1 0.3 ------ ------ Total notes payable......................................... 647.5 630.3 Capital lease obligations................................... 38.4 43.3 ------ ------ Total notes payable and capital lease obligations........... $685.9 $673.6 ====== ====== Notes payable and current maturities of capital lease obligations............................................... $ 17.4 $ 22.1 Long-term notes payable and capital lease obligations, less current maturities........................................ 668.5 651.5 ------ ------ Total notes payable and capital lease obligations........... $685.9 $673.6 ====== ======
SENIOR CREDIT FACILITY Hexcel has a global credit facility (the "Senior Credit Facility") with a syndicate of banks to provide for ongoing working capital and other financing requirements of the Company. The Senior Credit Facility, which consists of revolving credit, overdraft and term loan facilities, provided Hexcel with committed lines of approximately $353.7 as of December 31, 2001, subject to certain limitations. Effective January 25, 2002, and in connection with an amendment entered into with the bank syndicate, these commitments were reduced to $338.7. These commitments consisted of funded term loans of $118.7 and revolving credit and overdraft facilities of $220.0. As of December 31, 2001, drawings under the revolving credit facility were $115.2. In addition, the Company may issue letters of credit up to a value of $30.0 under the Senior Credit Facility. The letters of credit facility reduces the funded debt the Company may draw under the revolving credit and overdraft facilities. As of December 31, 2001, letters of credit issued under the facility approximated $19.4, of which $11.1 supports a loan to the Company's BHA Aero joint venture. Undrawn commitments under the revolving credit and overdraft facilities as of December 31, 2001, having given effect to the provisions of the January 25, 2002 amendment, were $74.8. The Company is subject to various financial covenants and restrictions under the Senior Credit Facility, including limitations on incurring debt, granting liens, selling assets, redeeming capital stock and paying dividends. The Senior Credit Facility is scheduled to expire in 2004, except for approximately $57.7 of term loans that are due for repayment in 2005. Relating to the fourth quarter of 2001, the Company received a waiver from compliance with the financial covenants under the Senior Credit Facility for the period ending December 31, 2001. Effective January 25, 2002, Hexcel and the bank syndicate entered into an amendment to the Senior Credit Facility. The amendment provides for revised financial covenants through 2002; a 100 basis point increase in the interest spread payable over LIBOR for advances under the facility; an immediate decrease in the the commitment of revolving credit and overdraft facilities from a cumulative amount of $235.0 to $220.0, with a further reduction to $212.0 on or before September 30, 2002; and a 73 requirement that the unused borrowing capacity available under the Senior Credit Facility, together with all cash and cash equivalents held by the Company, equal at least $30.0 on June 30, 2002. The revised covenants were derived from the Company's financial projections plus a moderate cushion for unanticipated events. The Senior Credit Facility financial covenants set certain maximum values for the Company's leverage (the ratios of total and senior debt to Adjusted EBITDA), and certain minimum values for its interest coverage (the ratio of Adjusted EBITDA to cash interest expense) and fixed charge coverage (the ratio of Adjusted EBITDA less capital expenditures to the sum of certain fixed expenses). In addition, during the term of the amendment, all net proceeds generated through asset sales, and most other liquidity events, in each case to the extent in excess of $2.5, and 100% of all net proceeds generated from litigation settlements and judgements, must be used to prepay loans under the Senior Credit Facility. Hexcel has also agreed to limit capital expenditures to $25.0 during 2002, with a $10.0 limit during any quarter in 2002. In connection with the credit agreement amendment, Hexcel also agreed to grant additional collateral. The Company had previously granted a security interest in most of its U.S. accounts receivable, inventory, property, plant, equipment and real estate. It had also pledged some or all of the shares of certain subsidiaries. Under the terms of the amendment, Hexcel has granted to the banks a security interest in additional U.S. accounts receivable, inventory, property, plant, equipment and real estate, as well as its intellectual property. In addition, each of a group of Hexcel's European subsidiaries will grant a security interest in its accounts receivable that will secure certain local borrowings advanced to that subsidiary. The Senior Credit Facility has been subject to several previous amendments to accommodate, among other things, the planned sale of assets, the planned investments in additional manufacturing capacity for selected products, the impact of the decline of the Company's operating results on certain financial covenants, the purchase by an investor group of approximately 14.5 shares of Hexcel common stock held by a significant shareholder of the Company, a restructuring of the ownership of certain of the Company's European subsidiaries, the issuance of additional senior subordinated debt and the early redemption of certain term debt. Given its financial leverage, the Company's future compliance with the financial covenants and other terms of the Senior Credit Facility could be compromised if its financial performance were to deteriorate as a result of further declines in the general macroeconomic environment or in key markets served by the Company, or by other unforeseen events. There can be no assurance that relief from financial covenants, if necessary, will be obtained or as to the terms under which it may be granted by the senior lenders. Under the terms of the amendment, the financial covenants effective beginning with the quarter ending March 31, 2003 are those that applied before the amendment. The Company will need to substantially improve its financial performance or substantially reduce its indebtedness in order to comply with the financial covenants in 2003, or will need to obtain a further amendment from its Senior Credit Facility banks. There can be no assurance that the Company will be able to effect any such amendment on commercially reasonable terms, or at all. The weighted average interest rate on the Senior Credit Facility was 8.50% and 11.55% for the years ended December 31, 2001 and 2000, respectively. Effective January 25, 2002, interest on outstanding borrowings under the Senior Credit Facility ranges from 2.00% to 4.25% in excess of the applicable London interbank rate, or at the option of the Company, from 1.25% to 3.25% in excess of 74 the base rate of the administrative agent for the lenders. During the three years ended December 31, 2001, interest rates have been in the following ranges:
IN EXCESS OF THE BASE RATE OF IN EXCESS OF THE APPLICABLE THE ADMINISTRATIVE AGENT LONDON INTERBANK RATE FOR THE LENDERS --------------------------- ----------------------------- May 2001 to January 2002........................ 1.00% - 3.25% 0.25% - 2.25% March 2000 to May 2001.......................... 0.75% - 3.00% 0.00% - 2.00% Prior to March 2000............................. 0.75% - 2.50% 0.00% - 1.50%
The Senior Credit Facility is subject to a commitment fee varying from approximately 0.20% to 0.50% per annum of the total facility. At December 31, 2001 and 2000, Hexcel had an interest rate cap agreement outstanding which covered a notional amount of $50.0 of the Senior Credit Facility, providing a maximum fixed rate of 5.50% on the applicable London interbank rate (see Note 15). 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 banks. These credit and overdraft facilities are primarily uncommitted facilities that are terminable at the discretion of the lenders. The interest rates on these credit and overdraft facilities for the years ended December 31, 2001, 2000 and 1999 ranged from 3.0% to 6.6% per annum. SENIOR SUBORDINATED NOTES, DUE 2009 On January 21, 1999, the Company issued $240.0 of 9.75% senior subordinated notes, due 2009. On June 29, 2001, the Company offered an additional $100.0 under the same indenture at a price of 98.5% of face value. Net proceeds from the subsequent offering were used to redeem $67.5 aggregate principal amount of the Company's outstanding 7% convertible subordinated notes, due 2003, and to pay the entire principal amount of $25.0 of the increasing rate senior subordinated note, due 2003. The senior subordinated notes are general unsecured obligations of Hexcel. CONVERTIBLE SUBORDINATED NOTES, DUE 2003 The convertible subordinated notes carry an annual interest rate of 7.00% and are convertible into Hexcel common stock at any time on or before August 1, 2003, unless previously redeemed, at a conversion price of $15.81 per share, subject to adjustment under certain conditions. The convertible subordinated notes are redeemable, in whole or in part, at the Company's option at any time, at various redemption prices set forth in the convertible notes indenture, plus accrued interest. On June 29, 2001, $67.5 aggregate principal amount of the convertible subordinated notes were redeemed. CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011 The convertible subordinated debentures carry an annual interest rate of 7.00% and are convertible into shares of Hexcel common stock prior to maturity, unless previously redeemed, at a conversion price of $30.72 per share. Mandatory redemption of the convertible debentures is scheduled to begin in 2002 through annual sinking fund requirements of $1.1 in 2002 and $1.8 in each year thereafter. The Company satisfied the 2002 annual sinking fund requirement in October 2001. INCREASING RATE SENIOR SUBORDINATED NOTE, DUE 2003 The increasing rate senior subordinated note, due 2003 was a general unsecured obligation payable to certain subsidiaries of Ciba Specialty Chemicals Holding, Inc. (collectively, "Ciba"). Prior to 75 February 1999, the note bore interest at a rate of 7.50% per annum. Effective February 1999, interest on the note was increased to a rate of 10.50% per annum, a rate which increased by 0.50% per annum each February thereafter until the note matured or until repayment of principal. The average interest rate on the note was 11.42% in 2001, 10.96% in 2000 and 10.25% in 1999. The note was redeemed in full on June 29, 2001 with the proceeds of the $100.0 issuance of 9.75% senior subordinated notes, due 2009. AGGREGATE MATURITIES OF NOTES PAYABLE The table below reflects aggregate maturities of notes payable, excluding capital lease obligations (see Note 9):
PAYABLE DURING THE YEARS ENDING DECEMBER 31: - -------------------------------------------- 2002........................................................ $ 11.8 2003........................................................ 57.6 2004........................................................ 160.9 2005........................................................ 59.4 2006........................................................ 1.8 Thereafter.................................................. 357.4 ------ Total notes payable......................................... $648.9 ======
The aggregate maturities of notes payable in 2002 include European credit and overdraft facilities of $3.5, which are repayable on demand. At December 31, 2001, the unamortized discount on the additional $100.0 senior subordinated notes, due 2009, issued on June 29, 2001, was approximately $1.4. ESTIMATED FAIR VALUES OF NOTES PAYABLE The Senior Credit Facility and the various European credit facilities outstanding as of December 31, 2001 and 2000 are variable-rate debt obligations. Accordingly, the estimated fair values of each of these debt obligations approximate their respective book values. The aggregate fair values of the Company's other notes payable as of December 31, 2001 and 2000 were as follows:
2001 2000 -------- -------- Senior subordinated notes, due 2009......................... $190.4 $211.2 Convertible subordinated notes, due 2003.................... 27.0 99.5 Convertible subordinated debentures, due 2011............... 15.5 17.9 ====== ======
The aggregate fair values of the above notes payable were estimated on the basis of quoted market prices; however, trading in these securities is limited and may not reflect fair value. 76 NOTE 9--LEASING ARRANGEMENTS Assets, accumulated depreciation, and related liability balances under capital leasing arrangements, as of December 31, 2001 and 2000, were:
2001 2000 -------- -------- Property, plant and equipment............................... $ 61.1 $ 62.0 Less accumulated depreciation............................... (26.3) (22.2) ------ ------ Net property, plant and equipment........................... $ 34.8 $ 39.8 ====== ====== Capital lease obligations................................... $ 38.4 $ 43.3 Less current maturities..................................... (5.6) (5.3) ------ ------ Long-term capital lease obligations, net.................... $ 32.8 $ 38.0 ====== ======
Certain sales and administrative offices, data processing equipment and manufacturing facilities are leased under operating leases. Rental expense under operating leases was $5.4 in 2001, $7.0 in 2000, and $9.4 in 1999. Future minimum lease payments as of December 31, 2001 were:
TYPE OF LEASE -------------------- PAYABLE DURING YEARS ENDING DECEMBER 31: CAPITAL OPERATING - ---------------------------------------- -------- --------- 2002....................................................... $ 8.5 $ 2.9 2003....................................................... 8.5 2.4 2004....................................................... 8.5 2.1 2005....................................................... 8.4 1.9 2006....................................................... 11.4 1.4 Thereafter................................................. 3.4 2.5 ----- ----- Total minimum lease payments............................... $48.7 $13.2 ===== ===== Less amounts representing interest......................... 10.3 ----- Present value of future minimum capital lease payments..... 38.4 Less current obligations under capital leases.............. 5.6 ----- Long-term obligations under capital lease.................. $32.8 =====
NOTE 10--RELATED PARTIES CHANGE IN CONTROL On December 19, 2000, an investor group controlled by subsidiaries of The Goldman Sachs Group, Inc. (the "Investor Group") completed a previously announced purchase of approximately 14.5 of the approximately 18 shares of Hexcel common stock owned by subsidiaries of Ciba Specialty Chemicals Holding, Inc. (together with its subsidiaries, "Ciba"). The shares acquired by the Investor Group represented approximately 39% of the Company's outstanding common stock. In addition, the Company and the Investor Group entered into a governance agreement that became effective on December 19, 2000. Under this governance agreement, the Investor Group has the right to, among other things, designate up to three directors to sit on the Company's board of directors. 77 Hexcel incurred $2.2 of costs in connection with this transaction, all of which were included in "selling, general, and administrative expenses" during the fourth quarter of 2000. These costs and expenses included legal, consulting, and regulatory compliance expenses, as well as a non-cash charge attributable to the accelerated vesting of certain stock-based compensation and to certain amendments to an executive retirement plan. Under the terms of the Company's various stock option and management incentive plans, the transaction constituted a "change in control" event, resulting in all outstanding stock options becoming vested and exercisable. The former Chief Executive Officer waived the vesting of his stock options by such event. In addition, nine of the most senior executive officers other than the former Chief Executive Officer agreed to defer the vesting of their stock options such that any of their stock options that would have otherwise vested immediately (or would have otherwise vested by their terms) will vest one year after the closing with respect to half of such options, and two years after the closing with respect to the remaining half of such options, subject to earlier vesting in certain circumstances. As a result, approximately 1.3 stock options, with exercise prices ranging from $2.41 to $29.63 per share, and a weighted average exercise price of $8.99 per share, vested and became exercisable on December 19, 2000 (see Note 13). In addition, due to the change in control event, shares of the Company's common stock underlying a total of approximately 0.8 restricted stock units and performance accelerated restricted stock units (collectively, "stock units") were distributed. However, the former Chief Executive Officer waived the vesting of his stock units, and nine of the most senior executive officers other than the former Chief Executive Officer agreed to defer the distribution of shares underlying their stock units (although not the vesting of such stock units) such that any shares of common stock that would have otherwise been distributed immediately will be distributed one year after the closing with respect to half of such stock units, and two years after the closing with respect to the remaining half of such stock units, subject to earlier distribution under certain circumstances (see Note 13). NOTE 11--RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS Hexcel maintains qualified and nonqualified defined benefit retirement plans covering certain U.S. and European employees, as well as retirement savings plans covering eligible U.S. employees. The defined benefit retirement plans are generally based on years of service and employee compensation under either a career average or final pay benefits method, except as described below. The Company also participates in a union sponsored multi-employer pension plan covering certain U.S. employees with union affiliations. Under the retirement savings plans, eligible U.S. employees can 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. The Company also makes profit sharing contributions when it meets or exceeds certain performance targets, which are set annually. Effective December 31, 2000, the Company made certain changes to its U.S. retirement benefit plans that were intended to improve the flexibility and visibility of future retirement benefits for employees. These changes included an increase in the amount that the Company will contribute to individual 401(k) retirement savings accounts and an offsetting curtailment of the Company's U.S. qualified defined benefit retirement plan. Beginning January 1, 2001, the Company started to contribute an additional 2% to 3% of each eligible employee's salary to an individual 401(k) retirement savings account, depending on the employee's age. This increases the maximum contribution to individual employee savings accounts to between 5% and 6% per year, before any profit sharing contributions. Offsetting the estimated incremental cost of this additional benefit, participants in the Company's U.S. qualified defined benefit retirement plan no longer accrued benefits under this plan after December 31, 2000, and no new employees will become participants. However, employees retained all benefits earned under this plan as of that date. The Company recognized a non-cash 78 curtailment gain of $5.1 (an after-tax gain of approximately $3.3) in 2000 as a result of the amendment to its defined benefit retirement plan. The net periodic expense for all of these defined benefit and retirement savings plans, for the three years ended December 31, 2001, was:
2001 2000 1999 -------- -------- -------- Defined benefit retirement plans............................ $ 4.1 $(1.2) $ 6.3 Union sponsored multi-employer pension plan................. 0.3 0.3 0.4 Retirement savings plans--matching contributions............ 4.6 2.9 3.4 Retirement savings plans--profit sharing and incentive contributions............................................. 4.0 5.0 5.4 ----- ----- ----- Net periodic expense........................................ $13.0 $ 7.0 $15.5 ===== ===== =====
In addition to defined benefit and retirement savings plan benefits, Hexcel also provides certain postretirement health care and life insurance benefits to eligible U.S. retirees. Depending upon the plan, benefits are available to eligible employees who retire on or after age 58 or 65 after rendering a minimum of 15 years or 25 years of service to Hexcel. The net periodic cost of Hexcel's defined benefit retirement and U.S. postretirement plans for the three years ended December 31, 2001, were:
U.S. PLANS EUROPEAN PLANS ------------------------------ ------------------------------ DEFINED BENEFIT RETIREMENT PLANS 2001 2000 1999 2001 2000 1999 - -------------------------------- -------- -------- -------- -------- -------- -------- Service cost........................................ $ 0.6 $ 3.0 $ 3.6 $ 2.4 $ 2.4 $ 2.7 Interest cost....................................... 1.8 1.8 1.5 2.9 2.5 2.4 Expected return on plan assets...................... (1.4) (1.3) (1.0) (4.1) (4.5) (3.6) Net amortization and deferral....................... 0.5 0.4 0.7 -- (0.2) -- ----- ----- ----- ----- ----- ----- Sub-total........................................... 1.5 3.9 4.8 1.2 0.2 1.5 Curtailment and settlement (gain) loss.............. 1.0 (5.3) -- 0.4 -- -- ----- ----- ----- ----- ----- ----- Net periodic pension cost (benefit)................. $ 2.5 $(1.4) $ 4.8 $ 1.6 $ 0.2 $ 1.5 ===== ===== ===== ===== ===== =====
POSTRETIREMENT PLANS--U.S. PLANS 2001 2000 1999 - -------------------------------- -------- -------- -------- Service cost........................................ $ 0.2 $ 0.2 $ 0.2 Interest cost....................................... 1.0 1.0 0.9 Net amortization and deferral....................... (0.4) (0.4) (0.3) ----- ----- ----- Net periodic postretirement benefit cost............ $ 0.8 $ 0.8 $ 0.8 ===== ===== =====
79 The benefit obligation, fair value of plan assets, funded status, and amounts recognized in the consolidated financial statements for Hexcel's defined benefit retirement plans and U.S. postretirement plans, as of and for the years ended December 31, 2001 and 2000, were:
DEFINED BENEFIT RETIREMENT PLANS ----------------------------------------- POSTRETIREMENT U.S. PLANS EUROPEAN PLANS PLANS ------------------- ------------------- ------------------- 2001 2000 2001 2000 2001 2000 -------- -------- -------- -------- -------- -------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation--beginning of year........ $ 24.1 $ 21.4 $49.8 $45.0 $ 14.2 $ 13.0 Service cost................................. 0.6 3.0 2.4 2.4 0.2 0.2 Interest cost................................ 1.8 1.8 2.9 2.5 1.0 1.0 Plan participants' contributions............. -- -- 0.7 0.5 0.1 0.1 Amendments................................... 1.8 -- -- -- -- -- Actuarial loss............................... 3.6 4.3 2.4 4.0 0.2 1.0 Benefits paid................................ (1.9) (2.0) (0.8) (0.8) (1.0) (1.1) Curtailment and settlement (gain) loss....... (2.3) (5.3) 0.4 -- (0.5) -- Foreign exchange translation................. -- -- (1.5) (3.3) -- -- Other........................................ -- 0.9 -- (0.5) -- -- ------ ------ ----- ----- ------ ------ Benefit obligation--end of year................ $ 27.7 $ 24.1 $56.3 $49.8 $ 14.2 $ 14.2 ------ ------ ----- ----- ------ ------ CHANGE IN PLAN ASSETS: Fair value of plan assets--beginning of year....................................... 14.7 13.6 60.4 66.2 -- -- Actual return on plan assets................. (0.5) (0.6) (8.3) (1.7) -- -- Employer contributions....................... 2.2 3.8 1.2 1.3 0.9 1.0 Plan participants' contributions............. -- -- 0.7 0.5 0.1 0.1 Benefits paid................................ (1.9) (2.0) (0.8) (0.8) (1.0) (1.1) Foreign exchange translation................. -- -- (1.7) (4.9) -- -- Other........................................ -- (0.1) 0.4 (0.2) -- -- ------ ------ ----- ----- ------ ------ Fair value of plan assets--end of year......... $ 14.5 $ 14.7 $51.9 $60.4 $ -- $ -- ------ ------ ----- ----- ------ ------ RECONCILIATION OF FUNDED STATUS TO NET AMOUNT RECOGNIZED: Funded (unfunded) status....................... (13.2) (9.4) (4.4) 10.6 (14.2) (14.2) Unrecognized actuarial loss (gain)........... 6.1 3.5 13.0 (1.6) 0.9 0.6 Unrecognized prior service cost.............. 1.9 0.8 -- -- (5.2) (5.0) ------ ------ ----- ----- ------ ------ Net amount recognized.......................... $ (5.2) $ (5.1) $ 8.6 $ 9.0 $(18.5) $(18.6) ------ ------ ----- ----- ------ ------ AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS: Prepaid benefit costs........................ -- -- 8.6 9.0 -- -- Intangible asset............................. 1.5 -- -- -- -- -- Accrued benefit liability.................... (13.4) (10.1) -- -- (18.5) (18.6) Accumulated other comprehensive income....... 6.7 5.0 -- -- -- -- ------ ------ ----- ----- ------ ------ Net amount recognized.......................... $ (5.2) $ (5.1) $ 8.6 $ 9.0 $(18.5) $(18.6) ====== ====== ===== ===== ====== ======
The total accumulated benefit obligation for pension plans with accumulated benefit obligations in excess of plan assets was $23.1 and $22.9 as of December 31, 2001 and 2000, respectively. A minimum pension obligation was recorded to the extent such excesses exceed the liability recognized under Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions." Offsetting amounts were recorded in "intangible assets" to the extent of unrecognized prior service costs, with the remainder recorded in "accumulated other comprehensive income." Amortization of loss and other prior service costs is calculated on a straight-line basis over the expected future years of service of the 80 plans' active participants. Assets for the defined benefit pension plans generally consist of publicly traded securities, bonds and cash investments. As of December 31, 2001 and 2000, the prepaid benefit cost was included in "other assets" in the accompanying consolidated balance sheets. For the same periods, the accrued benefit costs for the U.S. defined retirement plans and postretirement benefit plans were included in "accrued compensation and benefits" and "other non-current liabilities," respectively, in the accompanying consolidated balance sheets. Assumptions used to estimate the actuarial present value of benefit obligations at December 31, 2001, 2000 and 1999 were as follows:
2001 2000 1999 ------------------- ------------------- ------------------- U.S. defined benefit retirement plans: Discount rates................................ 7.3% 7.5% 8.0% 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................................ 5.8% - 6.0% 5.8% - 6.0% 5.8% - 6.0% Rates of increase in compensation............. 2.5% - 4.0% 2.5% - 4.0% 2.0% - 4.0% Expected long-term rates of return on plan assets...................................... 5.8% - 7.0% 6.5% - 7.0% 6.5% - 7.0% Postretirement benefit plans: Discount rates................................ 7.0% - 7.3% 7.0% - 7.5% 7.0% - 8.0% =================== =================== ===================
For measurement purposes, the annual rate of increase in the per capita cost of covered health care benefits is assumed to be approximately 7.0% for medical and 5.0% for dental and vision for 2002. The medical rates are assumed to gradually decline to 5.7% by 2006, whereas dental and vision rates are assumed to remain constant at 5.0%. 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.
2001 2000 -------- -------- One-percentage-point increase: Effect on total service and interest cost components...... $ 0.1 $ 0.1 Effect on postretirement benefit obligation............... 1.1 0.9 One-percentage-point decrease: Effect on total service and interest cost components...... $(0.1) $(0.1) Effect on postretirement benefit obligation............... (0.9) (0.8)
81 NOTE 12--INCOME TAXES Income (loss) before income taxes and the provision for (benefit from) income taxes, for the years ended December 31, 2001, 2000, and 1999, were:
2001 2000 1999 -------- -------- -------- Income (loss) before income taxes: U.S............................................... $(409.2) $22.4 $(47.5) International..................................... 28.2 52.6 42.5 ------- ----- ------ Total income (loss) before income taxes............. $(381.0) $75.0 $ (5.0) ------- ----- ------ Provision for (benefit from) income taxes: Current: U.S............................................... $ -- $ -- $ (0.8) International..................................... 12.9 17.7 14.9 ------- ----- ------ Current provision for income taxes.................. 12.9 17.7 14.1 ------- ----- ------ Deferred: U.S............................................... 30.7 9.0 (17.1) International..................................... (3.1) (0.4) 1.3 ------- ----- ------ Deferred provision for (benefit from) income taxes............................................. 27.6 8.6 (15.8) ------- ----- ------ Total provision for (benefit from) income taxes..... $ 40.5 $26.3 $ (1.7) ======= ===== ======
A reconciliation of the provision for (benefit from) income taxes at the U.S. federal statutory income tax rate of 35% to the effective income tax rate, for the years ended December 31, 2001, 2000, and 1999, is as follows:
2001 2000 1999 -------- -------- -------- Provision for (benefit from) taxes at U.S. federal statutory rate..................................... $(133.4) $26.3 $(1.8) U.S. state taxes, less federal tax benefit........... -- 0.3 (1.1) Impact of different international tax rates, permanent differences and other.................... (3.1) (0.2) 1.5 Valuation allowance.................................. 177.0 (0.1) (0.3) ------- ----- ----- Total provision for (benefit from) income taxes...... $ 40.5 $26.3 $(1.7) ======= ===== =====
The Company has made no U.S. income tax provision for approximately $134.1 of undistributed earnings of international subsidiaries as of December 31, 2001. Such earnings are considered to be permanently reinvested. 82 DEFERRED INCOME TAXES Deferred income taxes result from net operating loss carryforwards and temporary differences between the recognition of items for income tax purposes and financial reporting purposes. Principal components of deferred income taxes as of December 31, 2001 and 2000, were:
2001 2000 -------- -------- Net operating loss carryforwards........................... $ 70.0 $ 43.0 Reserves and other, net.................................... 47.4 30.5 Accelerated depreciation................................... (23.5) (24.8) Accelerated amortization................................... 92.3 (10.4) Valuation allowance........................................ (181.7) (6.2) ------- ------ Net deferred tax asset..................................... $ 4.5 $ 32.1 ======= ======
Since 1999, the Company has generated taxable income in Europe offset by net operating loss ("NOL") carryforwards in the United States. The Company's U.S. operations have generated such losses, in part, because most of the Company's interest expense and goodwill amortization are serviced in the United States. Through the first quarter of 2001, the Company recognized the benefit of these NOL carryforwards by increasing the deferred tax asset carried on its balance sheet. During the second quarter of 2001, the Company began to experience a sharp decline in revenues from its electronics market. As a result, the Company reevaulated its ability to continue to recognize a benefit for U.S. net operating losses generated, and determined to increase its tax provision rate through the establishment of a non-cash valuation allowance attributable to the currently generated U.S. net operating losses until such time as the U.S. operations return to consistent profitability. Due to the effect of significant events that have occurred since such time, including the delay in anticipated recovery in the electronics market, anticipated reductions in commercial aircraft production, and a general weakening of the economy, along with the sizable impairments on certain long-lived assets recognized in the fourth quarter of 2001, the Company has reduced its estimates for future U.S. taxable income during the carryforward period. As such, the Company has established a full valuation allowance of $181.7 on its U.S. deferred tax assets, which resulted in a tax provision of $32.6 in the fourth quarter of 2001 to record a valuation allowance on previously reported tax assets. Deferred tax assets require a valuation allowance when it is more likely than not that some portion of the deferred tax assets may not be realized. The realization of the deferred tax assets is dependent upon the timing and magnitude of future taxable income prior to the expiration of the deferred tax attributes. The amount of the deferred tax assets considered realizable, however, could change if estimates of future taxable U.S. income during the carry-forward period improve. NET OPERATING LOSS CARRYFORWARDS As of December 31, 2001, Hexcel had net operating loss carryforwards for U.S. federal and Belgium income tax purposes of approximately $194.6 and $5.3, respectively. The U.S. NOL carryforwards, which are available to offset future taxable income, expire at various dates through the year 2020. As a result of a change in ownership that occurred in connection with the purchase of 14.5 shares of Hexcel common stock by the "investor group" in 2000, the Company has a limitation on the utilization of $36.5 of U.S. NOL carryforwards subject to an annual limitation of $22.7. 83 NOTE 13--STOCKHOLDERS' EQUITY COMMON STOCK OUTSTANDING
2001 2000 1999 -------- -------- -------- (NUMBER OF SHARES) Common stock: Balance, beginning of year.............................. 38.0 37.4 37.2 Activity under stock plans.............................. 1.4 0.6 0.2 ---- ---- ---- Balance, end of year...................................... 39.4 38.0 37.4 ---- ---- ---- Treasury stock: Balance, beginning of year.............................. 0.9 0.8 0.8 Repurchased............................................. 0.3 0.1 -- ---- ---- ---- Balance, end of year...................................... 1.2 0.9 0.8 ---- ---- ---- Common stock outstanding.................................. 38.2 37.1 36.6 ==== ==== ====
STOCK-BASED INCENTIVE PLANS Hexcel has various stock option and management incentive plans for eligible employees, officers, and directors. 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 three-year period, except that the vesting period may be accelerated under certain circumstances. In 2000, the aggregate number of shares of stock issuable under these plans was increased from 7.4 to 9.1. As of December 31, 2001, 2000, and 1999, Hexcel had outstanding a total of 0.2, 0.7, and 0.3 of performance accelerated restricted stock units ("PARS"), respectively. PARS are convertible to an equal number of shares of Hexcel common stock and generally vest at the end of a seven-year period, subject to certain terms of employment and other circumstances that may accelerate the vesting period. In 2001, 2000, and 1999, 0.1, 0.6 and 0.1 PARS were granted, respectively, 0.1, 0.7, and 0.1 PARS vested, respectively, and 0.6, 0.2 and 0.3 PARS were converted into shares of Hexcel common stock, respectively. In addition, the Company's Chief Executive Officer received approximately 0.1 shares of restricted stock in connection with his hiring in July 2001. Approximately $2.0 of compensation expense was recognized in 2001 with respect to the PARS and the Chief Executive Officer's restricted stock, and approximately $4.5 and $0.5 of compensation expense was recognized in 2000 and 1999, respectively, with respect to the PARS. In 2000, $2.4 of PARS compensation expense was recognized due to accelerated vesting as a result of the attainment of certain financial and other performance targets as well as the change in control event. Compensation expense is recognized based on the quoted market price of Hexcel common stock on the date of grant. 84 Stock option data for the three years ended December 31, 2001, 2000, and 1999, was:
NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- ---------------- Options outstanding as of January 1, 1999.......... 5.1 $12.05 Options granted.................................... 1.0 $ 6.57 Options expired or canceled........................ (0.2) $11.81 ---- ------ Options outstanding as of December 31, 1999........ 5.9 $11.18 Options granted.................................... 1.6 $ 9.23 Options exercised.................................. (0.3) $ 6.52 Options expired or canceled........................ (0.5) $11.85 ---- ------ Options outstanding as of December 31, 2000........ 6.7 $10.56 Options granted.................................... 1.3 $10.17 Options exercised.................................. (0.2) $ 6.02 Options expired or canceled........................ (0.4) $10.72 ---- ------ Options outstanding as of December 31, 2001........ 7.4 $10.62 ==== ======
As previously discussed in Note 10, approximately 1.3 of stock options, with exercise prices ranging from $2.41 to $29.63 per share, and having a weighted average exercise price of $8.99 per share, became vested as a result of the change in control event in 2000. The total number of options exercisable as of December 31, 2001, 2000 and 1999 were 5.4, 3.9 and 2.1, respectively, at a weighted average exercise price per share of $10.70, $10.80 and $12.02, respectively. The following table summarizes information about stock options outstanding as of December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ---------------------- WEIGHTED WEIGHTED WEIGHTED NUMBER OF AVERAGE AVERAGE NUMBER OF EXERCISE RANGE OF OPTIONS REMAINING EXERCISE OPTIONS AVERAGE EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE - --------------- ----------- --------------- -------- ----------- -------- $ 2.87 - 6.36.......... 1.3 5.58 $ 5.55 1.1 $ 5.53 $ 6.37 - 10.50.......... 2.4 7.52 $ 9.78 1.0 $ 9.08 $10.51 - 11.88.......... 0.9 5.09 $11.14 0.7 $11.17 $11.89 - 12.11.......... 1.7 5.21 $12.00 1.5 $12.00 $12.12 - 29.63.......... 1.1 4.33 $15.42 1.1 $15.37 $ 2.87 - 29.63.......... 7.4 5.86 $10.62 5.4 $10.70
EMPLOYEE STOCK PURCHASE PLAN ("ESPP") Hexcel maintains an ESPP, under which 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 85% of the fair market value of the common stock on the purchase date. The maximum number of shares of common stock reserved for issuance under the ESPP is 0.5. During 2001, 2000 and 1999, an aggregate total of approximately 0.2 shares of 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 85 determined as prescribed by FAS 123, pro forma net income (loss) and related per share amounts would have been as follows:
2001 2000 1999 -------- -------- -------- Net income (loss): As reported....................................... $(433.7) $54.2 $(23.3) Pro forma......................................... $(437.6) $48.9 $(25.8) Basic net income (loss) per share: As reported....................................... $(11.54) $1.47 $(0.64) Pro forma......................................... $(11.64) $1.33 $(0.71) Diluted net income (loss) per share: As reported....................................... $(11.54) $1.32 $(0.64) Pro forma......................................... $(11.64) $1.21 $(0.71)
The weighted average fair value of options granted, as determined by the Black-Scholes pricing model, during 2001, 2000 and 1999 was $4.87, $4.48 and $3.20, respectively. The following ranges of assumptions were used in the Black-Scholes pricing models for options granted in 2001, 2000 and 1999: risk-free interest of 4.4% to 6.5%; estimated volatility of 40% to 69%; dividend yield of 0.0%; and an expected life of 4 to 5 years. NOTE 14--NET INCOME (LOSS) PER SHARE Computations of basic and diluted net income (loss) per share for the years ended December 31, 2001, 2000 and 1999, are as follows:
2001 2000 1999 -------- -------- -------- NET INCOME (LOSS): Income (loss) before extraordinary item..................... $(431.0) $54.2 $(23.3) Extraordinary loss on early retirement of debt.............. (2.7) -- -- ------- ----- ------ Net income (loss)......................................... (433.7) 54.2 (23.3) Effect of dilutive securities: Convertible subordinated notes, due 2003.................... -- 5.1 -- Convertible subordinated debentures, due 2011............... -- 1.1 -- ------- ----- ------ Adjusted net income (loss) for diluted purposes........... $(433.7) $60.4 $(23.3) ======= ===== ====== BASIC NET INCOME (LOSS) PER SHARE: Weighted average common shares outstanding.................. 37.6 36.8 36.4 Income (loss) before extraordinary item per share........... $(11.47) $1.47 $(0.64) Extraordinary loss per share................................ (0.07) -- -- ------- ----- ------ Basic net income (loss) per share........................... $(11.54) $1.47 $(0.64) ======= ===== ====== DILUTED NET INCOME (LOSS) PER SHARE: Weighted average common shares outstanding.................. 37.6 36.8 36.4 Effect of dilutive securities: Stock options............................................. -- 0.8 -- Convertible subordinated notes, due 2003.................. -- 7.2 -- Convertible subordinated debentures, due 2011............. -- 0.9 -- ------- ----- ------ Diluted weighted average common shares outstanding.......... 37.6 45.7 36.4 ------- ----- ------ Income (loss) before extraordinary item per share........... $(11.47) $1.32 $(0.64) Extraordinary loss per share................................ (0.07) -- -- ------- ----- ------ Diluted net income (loss) per share......................... $(11.54) $1.32 $(0.64) ======= ===== ======
86 The convertible subordinated notes, due 2003, the convertible subordinated debentures, due 2011, and all of the stock options were excluded from the 2001 and 1999 computation of diluted net loss per share, as they were antidilutive. Approximately 4.5 stock options were excluded from the 2000 calculation of diluted net income per share as their exercise price was higher than the Company's average stock price. The exercise price for these stock options ranged from approximately $9.19 to $29.63 per share, with the weighted average price being approximately $12.55 per share. NOTE 15--DERIVATIVE FINANCIAL INSTRUMENTS INTEREST RATE CAP AGREEMENT The Company's financial results are affected by interest rate changes on its variable rate debt. In order to partially mitigate this interest rate risk, the Company entered into a five-year interest rate cap agreement in 1998. The agreement provides for a maximum fixed rate of 5.5% on the applicable London interbank rate used to determine the interest on a notional amount of $50.0 million of variable rate debt under the Senior Credit Facility. The fair value and carrying amount of this contract at December 31, 2001 and 2000, along with hedge ineffectiveness for the year ended December 31, 2001, were not material. FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS A number of the Company's European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries' functional currencies, being either the Euro or the British pound sterling. During 2001, Hexcel entered into a number of foreign currency forward exchange contracts to exchange U.S. dollars for Euros at fixed rates on specified dates through March 2005. The aggregate notional amount of these contracts was $83.9 at December 31, 2001. The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers. These contracts are expected to provide the Company with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing the Company's exposure to fluctuations in currency exchange rates. For the year ended December 31, 2001, hedge ineffectiveness was immaterial and the fair value of the foreign currency cash flow hedges recognized in "comprehensive loss" was a net loss of $5.9. Approximately $1.2 of the other comprehensive losses are expected to be reclassified into earnings in fiscal 2002 as the hedged sales are recorded. NOTE 16--COMMITMENTS AND CONTINGENCIES Hexcel is involved in litigation, investigations and claims arising out of the normal conduct of its business, including those relating to commercial transactions, as well as to 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. 87 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 and a later Remediation Agreement 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. Hexcel was 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 Company's Kent, Washington 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. Management has determined that the cost-sharing agreement terminated on December 22, 1998; however, the other party disputes this determination. The Company's estimate of the remaining costs associated with the cleanup of this site is accrued in the accompanying consolidated balance sheets. At its Livermore, California facility, Hexcel has received a series of notices of violation of air quality standards from the Bay Area Air Quality Management District. Hexcel is investigating the issues and is cooperating with the District. OTHER PROCEEDINGS Hexcel 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. It appears that Toho Tenax Co. Ltd., one of its subsidiaries and one of its employees have been indicted for obstruction of justice. No other indictments have been issued in the case to date. The Company is not in a position to predict the direction or outcome of the investigation; however, it is cooperating with the Department of Justice. In 1999, Hexcel was joined in a purported class action lawsuit alleging antitrust violations in the sale of carbon fiber, carbon fiber industrial fabrics and carbon fiber prepreg. The Company was one of many manufacturers joined in the lawsuit, which was spawned from the Department of Justice investigation. The Court has issued a tentative ruling to certify the class, but no final ruling has been issued. If the tentative ruling becomes final, discovery is expected to continue to proceed. The Company is not in a position to predict the outcome, but believes that the lawsuit is without merit as to the Company. In addition, spawned by the class action lawsuit described in the preceding paragraph, the Company has been joined as a party in numerous purported class actions in California. These actions also allege antitrust violations and are brought on behalf of purchasers located in California who directly purchased carbon fiber products. The Company is not in a position to predict the outcome, but believes that the lawsuits are without merit as to the Company. 88 On May 10, 1999, the Company filed a complaint against Hercules, Inc., seeking recovery of certain disputed items relating to the 1996 purchase by Hexcel of the Hercules Composite Products Division. On June 1, 2001, Hexcel was awarded a judgment in the amount of $7.3, plus interest for a total of $10.2; interest on the judgment continues to accrue. Hercules appealed the judgment and delivered a bond to secure collection of the judgment. In the first quarter of 2002, the judgment was upheld, but the judgment has not become final. Hexcel strongly believes that the judgment will become final. LETTERS OF CREDIT Letters of credit are purchased guarantees that ensure the performance or payment to third parties in accordance with specified terms and conditions. The Company had $19.4 and $7.3 letters of credit outstanding at December 31, 2001 and 2000, respectively, of which $11.1 was issued in support of a loan to the Company's BHA Aero joint venture in 2001. LOAN GUARANTEES Hexcel is contingently liable to pay DIC up to $2.3 with respect to DHL's bank debt (see Note 7). NOTE 17--SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information, including non-cash financing and investing activities, for the years ended December 31, 2001, 2000 and 1999, consist of the following:
2001 2000 1999 -------- -------- -------- Cash paid for: Interest............................................. $62.0 $63.3 $59.1 Taxes................................................ $20.4 $11.5 $17.7 ----- ----- ----- Non-cash items: Common stock issued under incentive plans............ $ 6.6 $ 4.2 $ 0.7 ----- ----- -----
NOTE 18--SEGMENT INFORMATION Hexcel's business 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 printed circuit boards. All of the Company's electronics sales come from reinforcement fabric sales. This segment also sells products for industrial applications such as decorative blinds and soft body armor. In addition, this segment sells to the Company's Composite Materials business segment, and to other third-party customers in the commercial aerospace and space and defense markets. 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 industrial markets. This segment also sells to the Company's Engineered Products business segment. ENGINEERED PRODUCTS: This segment manufactures and sells a range of lightweight, high-strength composite structures primarily to the commercial aerospace and space and defense markets. As discussed in Note 2, the Engineered Products business segment includes the results of the Bellingham aircraft interiors business, up to the date of its disposal on April 26, 2000. This business manufactured and sold composite interiors to the aircraft refurbishment market. 89 The financial results for Hexcel's business 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 evaluates performance based on operating income before business consolidation and restructuring expenses, impairment of goodwill and other purchased intangibles, and compensation expenses associated with the former CEO's retirement ("adjusted operating income"), and generally accounts for intersegment sales based on arm's-length prices. Corporate and other expenses are not allocated to the business segments, except to the extent that the expenses can be directly attributable to the business segments. Accounting principles used in the segment information are generally the same as those used for the consolidated financial statements. 90 The following table presents financial information on the Company's business segments as of December 31, 2001, 2000 and 1999, and for the years then ended:
REINFORCEMENT COMPOSITE ENGINEERED CORPORATE/ PRODUCTS MATERIALS PRODUCTS ELIMINATIONS TOTAL ------------- --------- ---------- ------------ -------- Third-Party Sales 2001....................................... $276.8 $607.7 $124.9 $ -- $1,009.4 2000....................................... 359.2 567.0 129.5 -- 1,055.7 1999....................................... 330.9 605.9 214.7 -- 1,151.5 ------ ------ ------ ------- -------- Intersegment sales 2001....................................... $104.7 $ 7.9 $ -- $(112.6) $ -- 2000....................................... 97.5 7.1 -- (104.6) -- 1999....................................... 111.0 9.0 -- (120.0) -- ------ ------ ------ ------- -------- Adjusted operating income 2001....................................... $ 14.9 $ 69.8 $ 2.4 $ (31.1) $ 56.0 2000....................................... 46.2 68.5 6.0 (34.4) 86.3 1999....................................... 33.7 68.0 22.4 (35.1) 89.0 ------ ------ ------ ------- -------- Depreciation & amortization 2001....................................... $ 37.8 $ 20.3 $ 3.0 $ 2.1 $ 63.2 2000....................................... 34.1 18.5 3.3 2.8 58.7 1999....................................... 34.4 20.3 3.5 3.1 61.3 ------ ------ ------ ------- -------- Equity in earnings (losses) of and write-downs of an invesment in affiliated companies 2001....................................... $ (6.5) $ -- $ (3.0) $ -- $ (9.5) 2000....................................... 5.9 -- (0.4) -- 5.5 1999....................................... (20.0) -- -- -- (20.0) ------ ------ ------ ------- -------- Business consolidation and restructuring expenses 2001....................................... $ 19.3 $ 24.0 $ 5.7 $ 9.4 $ 58.4 2000....................................... (1.4) 10.9 1.4 -- 10.9 1999....................................... 6.7 9.7 1.6 2.1 20.1 ------ ------ ------ ------- -------- Business consolidation and restructuring payments 2001....................................... $ 2.8 $ 7.5 $ 0.1 $ 1.6 $ 12.0 2000....................................... 2.2 7.2 1.9 0.5 11.8 1999....................................... 2.7 3.0 0.3 3.5 9.5 ------ ------ ------ ------- -------- Segment assets 2001....................................... $363.2 $342.4 $ 84.9 $ (1.1) $ 789.4 2000....................................... 704.6 377.7 84.2 44.9 1,211.4 1999....................................... 712.5 359.3 115.4 74.7 1,261.9 ------ ------ ------ ------- -------- Investments in affiliated companies 2001....................................... $ 47.3 $ 0.1 $ 9.5 $ -- $ 56.9 2000....................................... 59.6 -- 12.5 -- 72.1 1999....................................... 54.0 -- 4.7 -- 58.7 ------ ------ ------ ------- -------- Capital expenditures 2001....................................... $ 19.3 $ 17.9 $ 0.6 $ 1.0 $ 38.8 2000....................................... 15.6 21.2 1.1 1.7 39.6 1999....................................... 14.0 16.1 5.0 0.5 35.6 ------ ------ ------ ------- --------
91 A reconciliation of the totals reported for adjusted operating income to consolidated operating income (loss) for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 -------- -------- -------- Total adjusted operating income............................. $ 56.0 $86.3 $89.0 Consolidated business consolidation and restructuring expenses.................................................. (58.4) (10.9) (20.1) Impairment of goodwill and other purchased intangibles...... (309.1) -- -- Compensation expense associated with the former CEO's retirement................................................ (4.7) -- -- ------- ----- ----- Consolidated operating income (loss)........................ $(316.2) $75.4 $68.9 ======= ===== =====
GEOGRAPHIC DATA Sales and long-lived assets, by geographic area, consisted of the following for the three years ended December 31, 2001, 2000 and 1999:
2001 2000 1999 -------- -------- -------- Net sales to external customers: United States.......................................... $ 595.1 $ 650.7 $ 744.1 -------- -------- -------- International France............................................... 166.8 164.6 168.1 United Kingdom....................................... 71.5 75.0 76.4 Other................................................ 176.0 165.4 162.9 -------- -------- -------- Total international.................................... 414.3 405.0 407.4 -------- -------- -------- Total consolidated net sales........................... $1,009.4 $1,055.7 $1,151.5 -------- -------- -------- Long-lived assets: United States.......................................... $ 387.7 $ 746.6 $ 793.5 -------- -------- -------- International France............................................... 31.8 35.1 36.6 United Kingdom....................................... 37.0 46.0 44.0 Other................................................ 32.8 28.1 22.8 -------- -------- -------- Total international.................................... 101.6 109.2 103.4 -------- -------- -------- Total consolidated long-lived assets................... $ 489.3 $ 855.8 $ 896.9 ======== ======== ========
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 $72.6, $47.7 and $91.4, for the years ended December 31, 2001, 2000 and 1999, respectively, of which, $12.1 and $32.7 for the years ended December 31, 2000 and 1999, respectively, were sales attributable to the Bellingham aircraft interiors business. 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 its subcontractors accounted for approximately 23%, 20% and 27% of 2001, 2000 and 1999 net sales, respectively. Similarly, EADS, including Airbus and its subcontractors accounted for approximately 16%, 13% and 11% of 2001, 2000 and 1999 net sales, respectively. 92 NOTE 19--COMPREHENSIVE INCOME Comprehensive income (loss) represents net income (loss) and other gains and losses affecting shareholders' equity that that are not reflected in the Consolidated Statements of Operations. The components of accumulated other comprehensive loss as of December 31, 2001 and 2000 were as follows:
2001 2000 -------- -------- Currency translation adjustments............................ $(27.1) $(15.0) Minimum pension obligations................................. (6.7) (5.0) Net unrealized loss on financial instruments................ (5.9) -- ------ ------ Accumulated other comprehensive loss........................ $(39.7) $(20.0) ====== ======
NOTE 20--EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT An extraordinary loss of $2.7 was recorded in 2001 as a result of the early retirement of $67.5 million aggregate principal amount of the Company's outstanding 7% convertible subordinated notes, due 2003 and the redemption of the entire principal amount of $25.0 of the Company's outstanding increasing rate senior subordinated note, due 2003. There was no tax benefit recognized on the extraordinary loss because of limitations on the Company's ability to realize the tax benefits. NOTE 21--NON-RECURRING EXPENSES In connection with the retirement of the former Chief Executive Officer, the Company recorded compensation expenses of $4.7 in 2001 as a result of the early vesting of certain deferred compensation and equity compensation awards together with a contractual termination payment. These expenses are included in "selling, general and administrative expenses" in the consolidated statement of operations. 93 NOTE 22--QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended December 31, 2001 and 2000, were:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 2001 Net sales.................................................. $276.2 $253.5 $240.6 $ 239.1 Gross margin............................................... 60.1 51.7 43.8 35.2 Business consolidation and restructuring expenses.......... 1.1 1.8 4.4 51.1 Impairment of goodwill and other purchased intangibles..... -- -- -- 309.1 Operating income (loss)(a)................................. 22.6 11.4 7.2 (357.4) Income (loss) before extraordinary item.................... 5.5 (9.5) (12.8) (414.2) Extraordinary (gain) loss on early retirement of debt...... -- 3.1 -- (0.4) Net income (loss)(a)....................................... 5.5 (12.6) (12.8) (413.8) ------ ------ ------ ------- Net income (loss) per share: Basic: Income (loss) before extraordinary item................ $ 0.15 $(0.26) $(0.34) $(10.89) Extraordinary (gain) loss on early retirement of debt................................................. -- (0.08) -- 0.01 ------ ------ ------ ------- Net income (loss).................................... $ 0.15 $(0.34) $(0.34) $(10.88) ------ ------ ------ ------- Diluted: Income (loss) before extraordinary item................ $ 0.15 $(0.26) $(0.34) $(10.89) Extraordinary (gain) loss on early retirement of debt................................................. -- (0.08) -- 0.01 ------ ------ ------ ------- Net income (loss).................................... $ 0.15 $(0.34) $(0.34) $(10.88) ------ ------ ------ ------- Market price: High..................................................... $12.40 $12.99 $12.69 $ 4.06 Low...................................................... $ 8.76 $ 8.90 $ 3.96 $ 1.98 2000 Net sales.................................................. $279.8 $271.6 $247.4 $ 256.9 Gross margin............................................... 62.2 60.5 51.7 57.0 Business consolidation and restructuring expenses.......... 1.2 -- 3.3 6.4 Operating income........................................... 21.8 24.1 13.4 16.1 Gain on sale of Bellingham aircraft interiors Business(b).............................................. -- 68.3 -- -- Net income................................................. 2.6 50.4 0.2 1.0 ------ ------ ------ ------- Net income per share: Basic.................................................... $ 0.07 $ 1.38 $ 0.00 $ 0.03 Diluted.................................................. $ 0.07 $ 1.14 $ 0.00 $ 0.03 ------ ------ ------ ------- Market price: High..................................................... $ 6.25 $ 9.94 $15.44 $ 13.56 Low...................................................... $ 4.75 $ 5.00 $ 9.38 $ 8.56 ------ ------ ------ -------
- ------------------------ (a) Operating and net loss for the second quarter of 2001 include compensation expenses of $4.7 in connection with the retirement of the former Chief Executive Officer (see Note 21). (b) As discussed in Note 2, the Bellingham aircraft interiors business was sold on April 26, 2000, resulting in an after-tax gain of approximately $44.3, or $0.97 per diluted share. Hexcel has not declared or paid cash dividends per common stock during the periods presented. 94 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Hexcel Corporation: Our audits of the consolidated financial statements referred to in our report dated January 25, 2002 appearing in this Annual Report on Form 10-K to Stockholders of Hexcel Corporation also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Stamford, Connecticut January 25, 2002 95 SCHEDULE II HEXCEL CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED BALANCE BEGINNING (CREDITED) DEDUCTIONS AT END OF OF YEAR TO EXPENSE AND OTHER YEAR --------- ---------- ----------- --------- (IN MILLIONS) YEAR ENDED DECEMBER 31, 2001 Allowance for doubtful accounts.................. $7.1 $ 1.3 $(0.6) $ 7.8 Valuation allowance for deferred tax asset....... 6.2 177.0 (1.5) 181.7 YEAR ENDED DECEMBER 31, 2000 Allowance for doubtful accounts.................. $6.0 $ 0.6 $ 0.5 $ 7.1 Valuation allowance for deferred tax asset....... 6.4 (0.1) (0.1) 6.2 YEAR ENDED DECEMBER 31, 1999 Allowance for doubtful accounts.................. $6.8 $ 0.7 $(1.5) $ 6.0 Valuation allowance for deferred tax asset....... 7.3 (0.3) (0.6) 6.4
96 EX-10.3(F) 3 a2074704zex-10_3f.txt EXHIBIT 10.3(F) EXHIBIT 10.3(f) HEXCEL CORPORATION INCENTIVE STOCK PLAN AS AMENDED AND RESTATED DECEMBER 19, 2000 AND FURTHER AMENDED ON JANUARY 10, 2002 I. PURPOSE This is the Hexcel Corporation Incentive Stock Plan, as approved by the stockholders of the Corporation on May 11, 2000, as amended and restated as of December 19, 2000 as authorized by the Board on October 10, 2000, and as further amended as of January 10, 2002 as authorized by the Board on January 10, 2002 (as so amended and restated, the "Plan"). The Plan is intended to attract, retain and provide incentives to Employees, officers, Directors and consultants of the Corporation, and to thereby increase overall stockholders' value. The Plan generally provides for the granting of stock, stock options, stock appreciation rights, restricted shares, other stock-based awards or any combination of the foregoing to the eligible participants. II. DEFINITIONS (a) "Affiliate" of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person. The term "Control" shall have the meaning specified in Rule 12b-2 under the Securities Exchange Act of 1934 as in effect on December 19, 2000. (b) "Award" includes, without limitation, stock options (including Director Options and incentive stock options within the meaning of Section 422(b) of the Code) with or without stock appreciation rights, dividend equivalent rights, stock awards, restricted share awards, or other awards that are valued in whole or in part by reference to, or are otherwise based on, the Common Stock ("other Common Stock-based Awards"), all on a stand-alone, combination or tandem basis, as described in or granted under this Plan. (c) "Award Agreement" means a written agreement setting forth the terms and conditions of each Award made under this Plan. (d) "Beneficial Owner" (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act. (e) "Board" means the Board of Directors of the Corporation. (f) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" means the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board from time to time to administer this Plan. (h) "Common Stock" means the $.01 par value common stock of the Corporation. (i) "Corporation" means Hexcel Corporation, a Delaware corporation. (j) "Director" means a member of the Board. (k) "Director Option" means a stock option granted pursuant to Section VII hereof to a Director. (l) "Director Optionee" means a recipient of an Award of a Director Option. (m) "Employee" means an employee of the Corporation or a Subsidiary. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. (o) "Fair Market Value" means the closing price for the Common Stock as reported in publications of general circulation from the New York Stock Exchange Consolidated Transactions Tape on such date, or, if there were no sales on the valuation date, on the next preceding date on which such closing price was recorded; provided, however, that the Committee may specify some other definition of Fair Market Value in good faith with respect to any particular Award. (p) "Governance Agreement" shall mean the Governance Agreement dated as of December 19, 2000, by and between LXH, L.L.C., LXH II, L.L.C., Hexcel Corporation and the other parties listed on the signature pages thereto. (q) "Participant" means an Employee, officer, Director or consultant who has been granted an Award under the Plan. (r) "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. (s) "Plan Year" means a calendar year. (t) "Subsidiary" means any corporation or other entity, whether domestic or foreign, in which the Corporation has or obtains, directly or indirectly, a proprietary interest of more than 50% by reason of stock ownership or otherwise. III. ELIGIBILITY Any Employee, officer, Director or consultant of the Corporation or Subsidiary selected by the Committee is eligible to receive an Award pursuant to Section VI hereof. Additionally, Directors described in Section VII(a) hereof are eligible to receive Awards of Director Options pursuant to Section VII. IV. PLAN ADMINISTRATION (a) Except as otherwise determined by the Board, the Plan shall be administered by the Committee. The Board, or the Committee to the extent determined by the Board, shall periodically make determinations with respect to the participation of Employees, officers, 2 Directors and consultants in the Plan and, except as otherwise required by law or this Plan, the grant terms of Awards, including vesting schedules, price, restriction or option period, dividend rights, post-retirement and termination rights, payment alternatives such as cash, stock, contingent awards or other means of payment consistent with the purposes of this Plan, and such other terms and conditions as the Board or the Committee deems appropriate which shall be contained in an Award Agreement with respect to a Participant. (b) The Committee shall have authority to interpret and construe the provisions of the Plan and any Award Agreement and make determinations pursuant to any Plan provision or Award Agreement which shall be final and binding on all persons. No member of the Committee shall be liable for any action or determination made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Corporation's Certificate of Incorporation, as it may be amended from time to time. The Committee shall have the authority at the time of the grant of any Award to provide for the conditions and circumstances under which such Award shall be forfeited. The Committee shall have the authority to accelerate the vesting of any Award and the time at which any Award becomes exercisable. The Committee shall have the authority to cancel an Award (with the consent of the Participant holding such Award) on such terms and conditions as the Committee shall determine. V. CAPITAL STOCK SUBJECT TO THE PROVISIONS OF THIS PLAN (a) The capital stock subject to the provisions of this Plan shall be shares of authorized but unissued Common Stock and shares of Common Stock held as treasury stock. Subject to adjustment in accordance with the provisions of Section XI, and subject to Section V(c) below, the maximum number of shares of Common Stock that shall be available for grants of Awards under this Plan shall be 9,354,221. (b) The grant of a restricted share Award shall be deemed to be equal to the maximum number of shares which may be issued under the Award. Awards payable only in cash will not reduce the number of shares available for Awards granted under the Plan. (c) There shall be carried forward and be available for Awards under the Plan, in addition to shares available for grant under paragraph (a) of this Section V, all of the following: (i) shares represented by Awards which are cancelled, forfeited, surrendered, terminated, paid in cash or expire unexercised; and (ii) the excess amount of variable Awards which become fixed at less than their maximum limitations. VI. DISCRETIONARY AWARDS UNDER THIS PLAN As the Board or Committee may determine, the following types of Awards and other Common Stock-based Awards may be granted under this Plan on a stand-alone, combination or tandem basis: (a) STOCK OPTION. A right to buy a specified number of shares of Common Stock at a fixed exercise price during a specified time, all as the Committee may determine. (b) INCENTIVE STOCK OPTION. An Award which may be granted only to Employees in the form of a stock option which shall comply with the requirements of Code Section 422 or any 3 successor section as it may be amended from time to time. The exercise price of any incentive stock option shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant of the incentive stock option Award. Subject to adjustment in accordance with the provisions of Section XI, the aggregate number of shares which may be subject to incentive stock option Awards under this Plan shall not exceed the maximum number of shares provided in paragraph (a) of Section V above. To the extent that the aggregate Fair Market Value of Common Stock with respect to which options intended to be incentive stock options are exercisable for the first time by any individual during any calendar year exceeds $100,000, such options shall be treated as options which are not incentive stock options. (c) STOCK OPTION IN LIEU OF COMPENSATION ELECTION. A right given with respect to a year to a Director, officer or key Employee to elect to exchange annual retainers, fees or compensation for stock options. (d) STOCK APPRECIATION RIGHT. A right which may or may not be contained in the grant of a stock option or incentive stock option to receive the excess of the Fair Market Value of a share of Common Stock on the date the option is surrendered over the option exercise price or other specified amount contained in the Award Agreement. (e) RESTRICTED SHARES. A transfer of Common Stock to a Participant subject to forfeiture until such restrictions, terms and conditions as the Committee may determine are fulfilled. (f) DIVIDEND OR EQUIVALENT. A right to receive dividends or their equivalent in value in Common Stock, cash or in a combination of both with respect to any new or previously existing Award. (g) STOCK AWARD. An unrestricted transfer of ownership of Common Stock. (h) OTHER STOCK-BASED AWARDS. Other Common Stock-based Awards which are related to or serve a similar function to those Awards set forth in this Section VI. VII. FORMULA AWARDS UNDER THIS PLAN In addition to discretionary Awards (including, without limitation, options) that may be granted to Directors pursuant to Section VI hereof, Director Options shall be granted as provided below: (a) GRANTS OF DIRECTOR OPTIONS. (i) With respect to any individual who becomes a Director and who is not also a full-time employee of the Corporation or any Subsidiary (provided such individual has not previously received a grant pursuant to this Section VII(a)(i)), such individual shall be granted, as of the date of election or appointment as a Director, a Director Option to acquire 10,000 shares of Common Stock upon the terms and subject to the conditions set forth in the Plan and this Section VII. (ii) Immediately after each annual meeting of stockholders of the Corporation each Director who is not on such date also a full-time employee of the Corporation or any 4 Subsidiary shall be granted a Director Option to acquire 2,000 shares of Common Stock upon the terms and subject to the conditions set forth in the Plan and this Section VII. (iii) If on any date when Options are to be granted pursuant to Section VII(a)(i) or (ii) the total number of shares of Common Stock as to which Director Options are to be granted exceeds the number of shares of Common Stock remaining available under the Plan, there shall be a PRO RATA reduction in the number of shares of Common Stock as to which each Director Option is granted on such day. (b) TERMS OF DIRECTOR OPTIONS. The terms of each Director Option granted under this Section VII shall be determined by the Board consistent with the provisions of the Plan, including the following: (i) The purchase price of the shares of Common Stock subject to each Director Option shall be equal to the Fair Market Value of such shares on the date such option is granted. (ii) Each Director Option shall be exercisable as to one-third of the shares subject thereto immediately upon the grant of the option and as to an additional one-third of such shares on the first and second anniversaries of the date of such grant. (iii) Each Director Option shall expire ten years after the granting thereof. Each Director Option shall be subject to earlier expiration as expressly provided in Section VII(c) hereof. (c) DISABILITY, DEATH OR TERMINATION OF DIRECTOR STATUS; CHANGE IN CONTROL. (i) If a Director Optionee ceases to be a Director for any reason other than his disability or death, each Director Option held by him to the extent exercisable on the effective date of his ceasing to be a Director shall remain exercisable until the earlier to occur of (i) the first anniversary of such effective date and (ii) the expiration of the stated term of the Director Option; PROVIDED, HOWEVER, that if the Director Optionee is removed, withdraws or otherwise ceases to be a Director due to his fraud, dishonesty or intentional misrepresentation in connection with his duties as a Director or his embezzlement, misappropriation or conversion of assets or opportunities of the Corporation or any Subsidiary, all unexercised Director Options held by the Director Optionee shall expire forthwith. Each Director Option held by the Director Optionee to the extent not exercisable on the effective date of his ceasing to be a Director for any reason other than his disability or death shall expire forthwith. (ii) If a Director Optionee ceases to be a Director as a result of his disability or death, each Director Option held by him to the extent that the Director Option is exercisable on the effective date of his ceasing to be a Director shall remain exercisable by the Director Optionee or the Director Optionee's executor, administrator, legal representative or beneficiary, as the case may be, until the earlier to occur of (x) the third anniversary of such effective date and (y) the expiration of the stated term of the Director Option. Each Director Option held by the Director Optionee to the extent not exercisable on the effective date of his ceasing to be a Director as a result of his disability or death shall expire forthwith. 5 (iii) In the event of a Change in Control (as hereinafter defined) while a Director Optionee is a Director, each Director Option held by the Director Optionee to the extent not then exercisable shall thereupon become exercisable. If a Change in Control occurs on or before the effective date of a Director Optionee's ceasing to be a Director, the provisions of this subsection (iii) shall govern with respect to the exercisability of the Director Options held by him as of the date on which the Director Optionee ceases to be a Director and the provisions of subsection (i) or (ii) of this Section VII(c) shall govern with respect to the period of time during which such Director Options shall remain exercisable. For purposes of this subsection (iii), "Change in Control" shall mean any of the following events: (1) any Person is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (A) the then outstanding Common Stock of the Corporation (the "Outstanding Common Stock") or (B) 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: (I) any acquisition by the Corporation or any of its Controlled Affiliates, (II) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Controlled Affiliates and (III) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below; or (2) a change in the composition of the Board such that the individuals who, as of December 20, 2000, 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 date whose election, or nomination for election by the Corporation's stockholders, was made or approved pursuant to the Governance Agreement 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) there is consummated a merger or consolidation of the Corporation or any direct or indirect subsidiary of the Corporation or a 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 Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then 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 company 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, and (B) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without 6 limitation, a company 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); or (4) the approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation. VIII. AWARD AGREEMENTS Each Award under the Plan shall be evidenced by an Award Agreement setting forth the terms and conditions of the Award and executed by the Corporation and Participant. IX. OTHER TERMS AND CONDITIONS (a) ASSIGNABILITY. Unless provided to the contrary in any Award, no Award shall be assignable or transferable except by will, by the laws of descent and distribution and during the lifetime of a Participant, the Award shall be exercisable only by such Participant. No Award granted under the Plan shall be subject to execution, attachment or process. (b) TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP. The Committee shall determine the disposition of the grant of each Award in the event of the retirement, disability, death or other termination of a Participant's employment or other relationship with the Corporation or a Subsidiary. (c) RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to shares covered by an Award until the date the Participant is the holder of record. No adjustment will be made for dividends or other rights for which the record date is prior to such date. (d) NO OBLIGATION TO EXERCISE. The grant of an Award shall impose no obligation upon the Participant to exercise the Award. (e) PAYMENTS BY PARTICIPANTS. The Committee may determine that Awards for which a payment is due from a Participant may be payable: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Corporation, by money transfers or direct account debits; (ii) through the delivery or deemed delivery based on attestation to the ownership of shares of Common Stock with a Fair Market Value equal to the total payment due from the Participant; (iii) pursuant to a "cashless exercise" program if established by the Corporation; (iv) by a combination of the methods described in (i) through (iii) above; or (v) by such other methods as the Committee may deem appropriate. (f) WITHHOLDING. Except as otherwise provided by the Committee, (i) the deduction of withholding and any other taxes required by law will be made from all amounts paid in cash and (ii) in the case of payments of Awards in shares of Common Stock, the Participant shall be required to pay the amount of any taxes required to be withheld prior to receipt of such stock, or alternatively, a number of shares the Fair Market Value of which equals the amount required to be withheld may be deducted from the payment. (g) MAXIMUM AWARDS. The maximum number of shares of Common Stock that may be issued to any single Participant pursuant to options under this Plan is equal to the maximum number of shares provided for in paragraph (a) of Section V. 7 X. TERMINATION, MODIFICATION AND AMENDMENTS (a) The Committee may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that no amendments to the Plan which require stockholder approval under applicable law, rule or regulation shall become effective unless the same shall be approved by the requisite vote of the Corporation's stockholders. (b) No termination, modification or amendment of the Plan may adversely affect the rights conferred by an Award without the consent of the recipient thereof. XI. RECAPITALIZATION The aggregate number of shares of Common Stock as to which Awards may be granted to Participants, the number of shares thereof covered by each outstanding Award, and the per share price thereof set forth in each outstanding Award, shall all be proportionately adjusted 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; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. The Committee shall also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent it is deemed necessary or desirable to preserve the intended benefits of the Plan for the Corporation and the Participants in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction. XII. NO RIGHT TO EMPLOYMENT Except as provided in Section VII with respect to Director Options, no person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or in any other relationship with, the Corporation or a Subsidiary. Further, the Corporation and each Subsidiary expressly reserve the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any Award Agreement issued hereunder or in any other agreement applicable between a Participant and the Corporation or a Subsidiary. XIII. GOVERNING LAW To the extent that federal laws do not otherwise control, the Plan shall be construed in accordance with and governed by the laws of the State of Delaware. XIV. SAVINGS CLAUSE This Plan is intended to comply in all aspects with applicable laws and regulations. In case any one more of the provisions of this Plan shall be held invalid, illegal or unenforceable in any respect under applicable law and regulation, the validity, legality and 8 enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provision shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed in compliance with all applicable laws so as to foster the intent of this Plan. XV. EFFECTIVE DATE AND TERM The Plan as amended and restated as of December 19, 2000 is hereby further amended as of January 10, 2002. THE PLAN SHALL TERMINATE ON FEBRUARY 2, 2010. NO AWARDS SHALL BE GRANTED AFTER THE TERMINATION OF THE PLAN. 9 EX-10.4(C) 4 a2074704zex-10_4c.txt EXHIBIT 10.4(C) EXHIBIT 10.4(c) HEXCEL CORPORATION 1998 BROAD BASED INCENTIVE STOCK PLAN AS AMENDED FEBRUARY 3, 2000 AND FEBRUARY 1, 2001 AND FURTHER AMENDED JANUARY 10, 2002 I. PURPOSE This is the Hexcel Corporation 1998 Broad Based Incentive Stock Plan (the "Plan"). The Plan is intended to attract, retain and provide incentives to officers, Directors and a broad base of Employees and consultants of the Corporation, and to thereby increase overall stockholders' value. The Plan generally provides for the granting of stock, stock options, stock appreciation rights, restricted shares, other stock-based awards or any combination of the foregoing to the eligible participants. II. DEFINITIONS (a) "Award" includes, without limitation, stock options with or without stock appreciation rights, dividend equivalent rights, stock awards, restricted share awards, or other awards that are valued in whole or in part by reference to, or are otherwise based on, the Common Stock ("other Common Stock-based Awards"), all on a stand-alone, combination or tandem basis, as described in or granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms and conditions of each Award made under this Plan. (c) "Board" means the Board of Directors of the Corporation. (d) "Committee" means the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board from time to time to administer this Plan. (e) "Common Stock" means the $.01 par value common stock of the Corporation. (f) "Corporation" means Hexcel Corporation, a Delaware corporation. (g) "Director" shall mean a member of the Board. (h) "Employee" means an employee of the Corporation or a Subsidiary. (i) "Fair Market Value" means the closing price for the Common Stock as reported in publications of general circulation from the New York Stock Exchange Consolidated Transactions Tape on such date, or, if there were no sales on the valuation date, on the next preceding date on which such closing price was recorded; provided, however, that the Committee may specify some other definition of Fair Market Value in good faith with respect to any particular Award. (j) "Participant" means a Director, Employee or consultant who has been granted an Award under the Plan. (k) "Subsidiary" means any corporation or other entity, whether domestic or foreign, in which the Corporation has or obtains, directly or indirectly, a proprietary interest of more than 50% by reason of stock ownership or otherwise. III. ELIGIBILITY Any Director, Employee or consultant of the Corporation or a Subsidiary selected by the Committee is eligible to receive an Award pursuant to the Plan. Notwithstanding the foregoing, no grant shall be made to an officer or Director unless, after giving effect to such grant, at least a majority of the shares of stock and shares of stock underlying options awarded under the Plan during the three year period ending on the date of such grant will have been awarded to Employees who are not officers or Directors. IV. PLAN ADMINISTRATION (a) Except as otherwise determined by the Board, the Plan shall be administered by the Committee. The Board, or the Committee to the extent determined by the Board, shall periodically make determinations with respect to the participation of Directors, eligible Employees and consultants in the Plan and, except as otherwise required by law or this Plan, the grant terms of Awards, including vesting schedules, price, restriction or option period, dividend rights, post-retirement and termination rights, payment alternatives such as cash, stock, contingent awards or other means of payment consistent with the purposes of this Plan, and such other terms and conditions as the Board or the Committee deems appropriate which shall be contained in an Award Agreement with respect to a Participant. (b) The Committee shall have authority to interpret and construe the provisions of the Plan and any Award Agreement and make determinations pursuant to any Plan provision or Award Agreement which shall be final and binding on all persons. No member of the Committee shall be liable for any action or determination made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Corporation's Certificate of Incorporation, as it may be amended from time to time. The Committee shall have - 2 - the authority at the time of the grant of any Award to provide for the conditions and circumstances under which such Award shall be forfeited. The Committee shall have the authority to accelerate the vesting of any Award and the time at which any Award becomes exercisable. The Committee shall have the authority to cancel an Award (with the consent of the Participant holding such Award) on such terms and conditions as the Committee shall determine. V. CAPITAL STOCK SUBJECT TO THE PROVISIONS OF THIS PLAN (a) The capital stock subject to the provisions of this Plan shall be shares of authorized but unissued Common Stock and shares of Common Stock held as treasury stock. Subject to adjustment in accordance with the provisions of Section X, and subject to Section V(c) below, the maximum number of shares of Common Stock that shall be available for grants of Awards under this Plan shall be 2,100,000. (b) The grant of a restricted share Award shall be deemed to be equal to the maximum number of shares which may be issued under the Award. Awards payable only in cash will not reduce the number of shares available for Awards granted under the Plan. (c) There shall be carried forward and be available for Awards under the Plan, in addition to shares available for grant under paragraph (a) of this Section V, all of the following: (i) shares represented by Awards which are cancelled, forfeited, surrendered, terminated, paid in cash or expire unexercised; and (ii) the excess amount of variable Awards which become fixed at less than their maximum limitations. VI. AWARDS UNDER THIS PLAN As the Board or Committee may determine, the following types of Awards and other Common Stock-based Awards may be granted under this Plan on a stand-alone, combination or tandem basis: (a) STOCK OPTION. A right to buy a specified number of shares of Common Stock at a fixed exercise price during a specified time, all as the Committee may determine. (b) STOCK OPTION IN LIEU OF COMPENSATION ELECTION. A right given with respect to a year to a Participant to elect to exchange compensation or fees for stock options. (c) STOCK APPRECIATION RIGHT. A right which may or may not be contained in the grant of a stock option or incentive stock option to receive the excess of the Fair - 3 - Market Value of a share of Common Stock on the date the option is surrendered over the option exercise price or other specified amount contained in the Award Agreement. (d) RESTRICTED SHARES. A transfer of Common Stock to a Participant subject to forfeiture until such restrictions, terms and conditions as the Committee may determine are fulfilled. (e) DIVIDEND OR EQUIVALENT. A right to receive dividends or their equivalent in value in Common Stock, cash or in a combination of both with respect to any new or previously existing Award. (f) STOCK AWARD. An unrestricted transfer of ownership of Common Stock. (g) OTHER STOCK-BASED AWARDS. Other Common Stock-based Awards which are related to or serve a similar function to those Awards set forth in this Section VI. VII. AWARD AGREEMENTS Each Award under the Plan shall be evidenced by an Award Agreement setting forth the terms and conditions of the Award and executed by the Corporation and Participant. VIII. OTHER TERMS AND CONDITIONS (a) ASSIGNABILITY. Unless provided to the contrary in any Award, no Award shall be assignable or transferable except by will, by the laws of descent and distribution and during the lifetime of a Participant, the Award shall be exercisable only by such Participant. No Award granted under the Plan shall be subject to execution, attachment or process. (b) TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP. The Committee shall determine the disposition of the grant of each Award in the event of the retirement, disability, death or other termination of a Participant's employment or other relationship with the Corporation or a Subsidiary. (c) RIGHTS AS A STOCKHOLDER. A Participant shall have no rights as a stockholder with respect to shares covered by an Award until the date the Participant is the holder of record. No adjustment will be made for dividends or other rights for which the record date is prior to such date. (d) NO OBLIGATION TO EXERCISE. The grant of an Award shall impose no obligation upon the Participant to exercise the Award. - 4 - (e) PAYMENTS BY PARTICIPANTS. The Committee may determine that Awards for which a payment is due from a Participant may be payable: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Corporation, by money transfers or direct account debits; (ii) through the delivery or deemed delivery based on attestation to the ownership of shares of Common Stock with a Fair Market Value equal to the total payment due from the Participant; (iii) pursuant to a "cashless exercise" program if established by the Corporation; (iv) by a combination of the methods described in (i) through (iii) above; or (v) by such other methods as the Committee may deem appropriate. (f) WITHHOLDING. Except as otherwise provided by the Committee, (i) the deduction of withholding and any other taxes required by law will be made from all amounts paid in cash and (ii) in the case of payments of Awards in shares of Common Stock, the Participant shall be required to pay the amount of any taxes required to be withheld prior to receipt of such stock, or alternatively, a number of shares the Fair Market Value of which equals the amount required to be withheld may be deducted from the payment. (g) MAXIMUM AWARDS. The maximum number of shares of Common Stock that may be issued to any single Participant pursuant to options under this Plan is equal to the maximum number of shares provided for in paragraph (a) of Section V. IX. TERMINATION, MODIFICATION AND AMENDMENTS (a) The Committee may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that no amendments to the Plan which require stockholder approval under applicable law, rule or regulation shall become effective unless the same shall be approved by the requisite vote of the Corporation's stockholders. (b) No termination, modification or amendment of the Plan may adversely affect the rights conferred by an Award without the consent of the recipient thereof. X. RECAPITALIZATION The aggregate number of shares of Common Stock as to which Awards may be granted to Participants, the number of shares thereof covered by each outstanding Award, and the per share price thereof set forth in each outstanding Award, shall all be proportionately adjusted 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 - 5 - shares, effected without receipt of consideration by the Corporation, or other change in corporate or capital structure; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. The Committee shall also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent it is deemed necessary or desirable to preserve the intended benefits of the Plan for the Corporation and the Participants in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction. XI. NO RIGHT TO EMPLOYMENT No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or in the other relationship with, the Corporation or a Subsidiary. Further, the Corporation and each Subsidiary expressly reserve the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any Award Agreement issued hereunder or in any other agreement applicable between a Participant and the Corporation or a subsidiary. XII. GOVERNING LAW To the extent that federal laws do not otherwise control, the Plan shall be construed in accordance with and governed by the laws of the State of Delaware. XIII. SAVINGS CLAUSE This Plan is intended to comply in all aspects with applicable laws and regulations. In case any one or more of the provisions of this Plan shall be held invalid, illegal or unenforceable in any respect under applicable law and regulation, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provision shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed in compliance with all applicable laws so as to foster the intent of this Plan. XIV. EFFECTIVE DATE AND TERM This 1998 Hexcel Corporation Broad Based Incentive Stock Plan as adopted on February 5, 1998 and amended on February 3, 2000 and February 1, 2001 is hereby further amended as of January 10, 2002. - 6 - THE PLAN SHALL TERMINATE ON FEBRUARY 4, 2008. NO AWARDS SHALL BE GRANTED AFTER THE TERMINATION OF THE PLAN. - 7 - EX-10.6 5 a2074704zex-10_6.txt EXHIBIT 10.6 EXHIBIT 10.6 HEXCEL CORPORATION MANAGEMENT INCENTIVE COMPENSATION PLAN AS AMENDED ON FEBRUARY 27, 2002 I. PURPOSE The purpose of the Hexcel Corporation Management Incentive Compensation Plan (the "Plan") is to advance the interests of Hexcel Corporation (the "Company") by providing an incentive for those key employees who have a direct, measurable opportunity to advance the Company's goals and promote the growth and long-range interests of the Company. In addition, it is intended that the Plan create linkage between performance and compensation, align management's interests with the interests of stockholders and encourage team management and corporate success. A further purpose of the Plan is to serve as a qualified performance-based compensation program under Section 162(m) of the Code (as defined below) in order to preserve the Company's tax deduction for compensation paid under the Plan to the Chief Executive Officer of the Company. II. DEFINITIONS (a) "Affiliate" of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person. The term "Control" shall have the meaning specified in Rule 12b-2 under the Securities Exchange Act of 1934 as in effect on December 19, 2000. (b) "Award" shall mean the amount (if any) payable to a Participant in respect of a Plan Year pursuant to the Plan. (c) "Beneficial Owner" (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. (e) "Cause" shall mean (i) the willful and continued failure by the Participant to substantially perform the Participant's duties with the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Company, which demand specifically identifies the manner in which the Company believes that the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company or its Subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's act, or failure to act, was in the best interest of the Company. (f) "CEO" shall mean the Chief Executive Officer of the Company. (g) "Change in Control" shall have the meaning given in Article XV hereof. (h) "Code" shall mean the Internal Revenue Code, as amended. (i) "Committee" shall mean the Compensation Committee of the Board or such other committee of the Board as may be designated from time to time to administer the Plan. (j) "Company" shall mean Hexcel Corporation, a Delaware corporation. (k) "Disability" shall mean that, as a result of the Participant's incapacity due to physical or mental illness or injury, the Participant shall not have performed all or substantially all of the Participant's usual duties as an employee for a period of more than one-hundred-fifty (150) days in any period of one-hundred-eighty (180) consecutive days. (l) "EBIT" shall mean the consolidated earnings before interest and taxes of the Company and its Subsidiaries. (m) "EBITDA" shall mean the consolidated earnings before interest, taxes, depreciation and amortization of the Company and its Subsidiaries. (n) "EBT" shall mean the consolidated earnings before taxes of the Company and its Subsidiaries. (o) "EPS (basic)" shall mean the consolidated net earnings of the Company and its Subsidiaries per share of issued and outstanding Stock. (p) "EPS (diluted)" shall mean the consolidated net earnings of the Company and its Subsidiaries per share of Stock on a fully diluted basis. (q) "Eligible Employee" shall mean any officer or employee of the Company or a Subsidiary. (r) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (s) "Governance Agreement" shall mean the Governance Agreement dated as of December 19, 2000, by and between LXH, L.L.C., LXH II, L.L.C., Hexcel Corporation and the other parties listed on the signature pages thereto. (t) "Management Stock Purchase Plan" shall mean the Hexcel Corporation Management Stock Purchase Plan, as amended from time to time. (u) "Participant" shall mean any Eligible Employee who is approved by the Committee, in its sole discretion, for participation in the Plan in any Plan Year. (v) "Performance Goals" shall mean any one or more criteria and objectives established by the Committee which must be met during the Plan Year as a condition of the Participant's receipt of an Award in respect of such Plan Year. Performance Goals applicable to the CEO shall be based upon the extent of attainment of a level of EBIT, EBITDA, EBT, EPS (basic), EPS (diluted), ROE, Revenue, RONA, Stock Price or SVA relating to the Company, a Subsidiary or business unit. Performance Goals applicable to any Participant other than the CEO may be any performance measurement relating to the Company, a Subsidiary or business unit 2 which the Committee deems appropriate as well as the extent of attainment by a Participant of individual performance objectives. (w) "Person", as used in Article XV hereof, 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. (x) "Plan" shall mean this Hexcel Corporation Management Incentive Compensation Plan, as amended from time to time. (y) "Plan Year" shall mean each calendar year during which the Plan is in effect. (z) "Restricted Stock Units" shall mean the units in which an Award is partially or wholly payable pursuant to Article VI hereof and which are issuable pursuant to the Management Stock Purchase Plan. (aa) "ROE" shall mean return on the equity of the Company and its Subsidiaries on a consolidated basis. (bb) "Revenue" shall mean the consolidated net sales of the Company and its Subsidiaries. (cc) "RONA" shall mean return on the consolidated net assets of the Company and its Subsidiaries. (dd) "Stock" shall mean shares of common stock of the Company, par value $.01 per share. (ee) "Stock Price" shall mean the price of the Company's Stock as reported on the New York Stock Exchange Consolidated Transactions Tape. (ff) "Subsidiary" shall mean any subsidiary corporation of the Company consolidated with the Company for financial reporting purposes. (gg) "SVA" shall mean return on the weighted average cost of capital of the Company. (hh) "Target Incentive Award" shall have the meaning given in Section V(A) hereof. III. ADMINISTRATION Administration of the Plan shall be by the Committee, which shall, in applying and interpreting the provisions of the Plan, have full power and authority to construe, interpret and carry out the provisions of the Plan. All decisions, interpretations and actions of the Committee under the Plan shall be at the Committee's sole and absolute discretion and shall be final, conclusive and binding upon all parties. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder. 3 IV. ELIGIBILITY FOR PARTICIPATION The Committee shall have full and complete discretion in determining which Eligible Employees may be Participants in the Plan in any Plan Year. Participation in the Plan in any Plan Year shall not confer any right on any Participant to participate in any subsequent Plan Year. V. DETERMINATION OF AWARDS A. ESTABLISHMENT OF TARGET INCENTIVE AWARDS AND PERFORMANCE GOALS. No later than ninety (90) days after the beginning of a Plan Year the Committee shall establish for each Participant (i) a Target Incentive Award for such Plan Year and the applicable Performance Goals in respect of such Plan Year and (ii) the amount of Award payable under the Plan as a percentage (which may exceed one hundred (100%) percent) of the Target Incentive Award, derived from the degree of achievement of the applicable Performance Goals. The Performance Goals established by the Committee may be (but need not be) different each Plan Year and different goals may be applicable to different Participants. As soon as practicable after the establishment of the Target Incentive Award and Performance Goals, each Participant shall be notified in writing of such Target Incentive Award and the corresponding Performance Goals. B. AMOUNT OF AWARD PAYABLE NORMALLY. The Committee shall determine the Award payable to each Participant from the degree of achievement of the applicable Performance Goals. The Committee may, in its sole discretion, (a) increase the amount of any Award otherwise payable to any Participant (other than the CEO) or (b) decrease or eliminate the amount payable to a Participant (including the CEO), in each case to reflect such Participant's individual performance or such other factors as the Committee deems relevant, or in recognition of changed or special circumstances. The amount of the Award payable to the CEO for any Plan Year shall not exceed $1,500,000. C. AMOUNT OF AWARD WITH CHANGE OF EMPLOYMENT STATUS. In the event of a change in employment status of a Participant (other than the CEO) during the Plan Year, the Committee may, in its sole discretion, adjust the Award determinants for the Participant based upon the Participant's new status. D. AMOUNT OF AWARD WITH TERMINATION OF EMPLOYMENT OR CHANGE IN CONTROL. Except as otherwise provided in this paragraph, payment of an Award to a Participant for a particular Plan Year shall be made only if the Participant is employed by the Company or one of its Subsidiaries on the last day of the Plan Year. Notwithstanding any other provision of the Plan, in the case of a Participant's voluntary termination of employment with the Company or a Subsidiary or upon termination of employment with the Company or a Subsidiary for Cause during a Plan Year, the Committee may, in its sole discretion, authorize the full or partial payment of an Award for such Plan Year, if the Participant was actively employed for at least six months during the Plan Year. In the case of a Participant's separation from service due to Disability or death or, in the case of a Participant's (other than the CEO) involuntary termination of employment by the Company or a Subsidiary other than for Cause, a Participant shall be entitled to receive an Award, prorated for the period of active employment with the Company or a Subsidiary during the Plan Year, payable in accordance with Article VI below. In the case of a Change in Control of the Company during a Plan Year, a Participant shall be entitled to receive an Award, prorated for the period of active employment with the Company or a Subsidiary during such Plan Year and prior to the Change in Control, computed as if applicable Performance Goals had been attained at the one hundred (100%) percent level and payable in cash no later than the fifth (5th) day following the Change in Control. 4 VI. PAYMENT OF AWARDS A. TIMING OF PAYMENT. Except as provided in the last sentence of Section V(D) hereof, an Award which becomes payable to a Participant pursuant to Article V hereof shall be paid to the Participant (or the Participant's estate in the event of the Participant's death) as soon as practicable after the close of the Plan Year and certification by the Committee of the degree of achievement of the relevant Performance Goals. No Participant shall have the unconditional right to an Award hereunder until the Plan Year has concluded and the exact amount of the Award (if any) has been determined and certified by the Committee. B. PAYMENT IN CASH AND/OR RESTRICTED STOCK UNITS. At the election of each Participant who has been designated by the Committee as a participant in the Management Stock Purchase Plan, up to fifty (50%) percent of the Participant's Award for any Plan Year shall be paid in Restricted Stock Units pursuant to, and subject to the terms and conditions of, the Management Stock Purchase Plan; provided, however, that the Participant's Award for any Plan Year in which a Change in Control occurs shall be paid totally in cash. The Committee, in its discretion, may permit a Participant in the Management Stock Purchase Plan who first becomes employed by the Company or a Subsidiary during a given Plan Year to elect to have up to one-hundred (100%) percent of the Participant's Award for such Plan Year paid in such Restricted Stock Units. The number of Restricted Stock Units to be paid to a Participant shall be calculated in accordance with the Management Stock Purchase Plan. Payment of the balance of the Participant's Award for such Plan Year (or all thereof if no election of Restricted Stock Units is made by the Participant) shall be made in cash. Payments of portions of any Awards made in Restricted Stock Units pursuant to the Management Stock Purchase Plan may be referred to therein as "purchases" of such Restricted Stock Units. VII. DEFERRAL ELECTIONS The Committee may, at its option, establish written procedures pursuant to which Participants are permitted to defer the receipt of Awards payable under the Plan. VIII. ACCOUNTING DETERMINATIONS The Committee reserves sole discretion in adopting and changing, from time to time, the accounting principles and practices reflected in audited financial statements of the Company and, in its sole and absolute judgment, to make such other adjustments in Company financial results and/or Performance Goals as may be deemed reasonable, including, without limitation, changes to reflect acquisitions, divestitures, other corporate capital reorganizations, recapitalization or extraordinary events. IX. AMENDMENT AND TERMINATION OF PLAN The Compensation Committee of the Board reserves the right, at any time including during a Plan Year, to amend, suspend or terminate the Plan, in whole or in part, in any manner, and for any reason, and without the consent of any Participant, or other person; provided, that no such amendment, suspension or termination shall adversely affect the payment of any Award for a Plan Year ending prior to the action amending, suspending or terminating the Plan or the payment of any Award payable pursuant to the last sentence of Section V(D) hereof or the rights of a Participant pursuant to any agreement with the Company or any Subsidiary. 5 X. GOVERNING LAW The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Delaware without giving effect to the choice of law principles thereof. XI. MISCELLANEOUS PROVISIONS Nothing contained in the Plan shall give any employee the right to be retained in the employment of the Company or a Subsidiary or affect the right of the Company or a Subsidiary to dismiss any employee. The Plan shall not constitute a contract between the Company or a Subsidiary and any employee. Unless approved by the Committee in respect of a particular Plan Year, no Participant shall have any right to be granted an Award hereunder. Nothing contained in the Plan shall restrict the Committee's power to grant any employee an award or bonus outside the scope of this Plan. XII. NO ALIENATION OF BENEFITS Except insofar as may otherwise be required by law, no amount payable at any time under the Plan shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind, nor in any manner be subject to the debts or liabilities of a Participant, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, shall be void. XIII. NO RIGHT, TITLE OR INTEREST IN COMPANY'S ASSETS Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create, or be construed to create, a trust of any kind, or fiduciary relationship between the Company or a Subsidiary and any Participant or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such rights shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, and no special or separate funds shall be established, and no segregation of assets shall be made, to assure payment thereof. XIV. NO STOCK SUBJECT TO THE PLAN No shares of Stock shall be reserved for, or issued under, the Plan. To the extent that Awards are paid in Restricted Stock Units, each Restricted Stock Unit shall be issued under, and subject to the terms and conditions of, the Management Stock Purchase Plan. XV. CHANGE IN CONTROL Unless otherwise specified by the Committee at the commencement of a Plan Year, for purposes of the Plan the term "Change in Control" shall mean any of the following events: (1) any Person is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (a) the then outstanding Stock of the Company (the "Outstanding Common Stock") or (b) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the "Total Voting Power"); excluding, however, the following: (i) any acquisition by the Company or any of its Controlled Affiliates, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the 6 Company or any of its Controlled Affiliates and (iii) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below; or (2) a change in the composition of the Board such that the individuals who, as of December 20, 2000, 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 date whose election, or nomination for election by the Company's stockholders, was made or approved pursuant to the Governance Agreement 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) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company or a sale or other disposition of all or substantially all of the assets of the Company ("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 Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then 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 company which as a result of such transaction owns the Company or all or substantially all of the Company'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, and (b) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries); or (4) the approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred by virtue of the consummation of the transactions contemplated by the Stock Purchase Agreement dated as of October 11, 2000 by and among LXH, L.L.C., LXH II, L.L.C., Ciba Specialty Chemicals Holding Inc., Ciba Specialty Chemicals Inc. and Ciba Specialty Chemicals Corporation. XVI. INTERPRETATION The Plan is designed and intended to comply with Section 162(m) of the Code to the extent applicable to the CEO as a "covered person" as defined therein, and the Plan shall be construed in a manner to so comply. 7 XVII. EFFECTIVE DATE AND TERM This Plan, as approved by the stockholders of the Corporation on May 21, 1998, is hereby amended and restated as authorized by the Board on October 10, 2000, effective December 19, 2000 for Awards made in respect of Plan Year 2000 and thereafter. 8 EX-10.7 6 a2074704zex-10_7.txt EXHIBIT 10.7 EXHIBIT 10.7 HEXCEL CORPORATION LONG-TERM INCENTIVE PLAN I. PURPOSE The purpose of the Hexcel Corporation Long-Term Incentive Plan (the "Plan") is to advance the interests of Hexcel Corporation (the "Company") by providing an incentive for those key employees who have a direct, measurable opportunity to advance the Company's goals and promote the growth and long-range interests of the Company. In addition, it is intended that the Plan create linkage between performance and compensation, align management's interests with the interests of stockholders and encourage team management and corporate success. A further purpose of the Plan is to serve as a qualified performance-based compensation program under Section 162(m) of the Code (as defined below) in order to preserve the Company's tax deduction for compensation paid under the Plan. II. DEFINITIONS (a) "Affiliate" of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, Controls, is Controlled by, or is under common Control with, such first Person. The term "Control" shall have the meaning specified in Rule 12b-2 under the Securities Exchange Act of 1934 as in effect on December 19, 2000. (b) "Award" shall mean the amount (if any) payable to a Participant in respect of a Performance Period pursuant to the Plan. (c) "Beneficial Owner" (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act. (d) "Board" shall mean the Board of Directors of the Company. (e) "Cause" shall mean (i) the willful and continued failure by the Participant to substantially perform the Participant's duties with the Company (other than any such failure resulting from the Participant's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Participant by the Company, which demand specifically identifies the manner in which the Company believes that the Participant has not substantially performed the Participant's duties, or (ii) the willful engaging by the Participant in conduct which is demonstrably and materially injurious to the Company or its Subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that the Participant's act, or failure to act, was in the best interest of the Company. (f) "Change in Control" shall have the meaning given in Article XV hereof. (g) "Code" shall mean the U.S. Internal Revenue Code, as amended. (h) "Committee" shall mean the Compensation Committee of the Board or such other committee of the Board as may be designated from time to time to administer the Plan. (i) "Company" shall mean Hexcel Corporation, a Delaware corporation. (j) "Disability" shall mean that, as a result of the Participant's incapacity due to physical or mental illness or injury, the Participant shall not have performed all or substantially all of the Participant's usual duties as an employee for a period of more than one-hundred-fifty (150) days in any period of one-hundred-eighty (180) consecutive days. (k) "EBIT" shall mean the consolidated earnings before interest and taxes. (l) "EBITDA" shall mean the consolidated earnings before interest, taxes, depreciation and amortization. (m) "EBT" shall mean the consolidated earnings before taxes. (n) "EPS (basic)" shall mean the consolidated net earnings of the Company and its Subsidiaries per share of issued and outstanding Stock. (o) "EPS (diluted)" shall mean the consolidated net earnings of the Company and its Subsidiaries per share of Stock on a fully diluted basis. (p) "Eligible Employee" shall mean any officer or employee of the Company or a Subsidiary. (q) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (r) "GAAP" shall mean generally accepted accounting principles as applied by the Company. (s) "Governance Agreement" shall mean the Governance Agreement dated as of December 19, 2000, as amended by and between LXH, L.L.C., LXH II, L.L.C., Hexcel Corporation and the other parties listed on the signature pages thereto. (t) "Participant" shall mean any Eligible Employee who is approved by the Committee, in its sole discretion, for participation in the Plan in any Performance Period. (u) "Performance Goals" shall mean any one or more criteria and objectives established by the Committee which must be met during the Performance Period as a condition of the Participant's receipt of an Award in respect of such Performance Period. Performance Goals may be based upon the extent of attainment of a level of debt, inventory turns, cash flow, working capital, EBIT, EBITDA, EBT, EPS (basic), EPS (diluted), ROE, Revenue, RONA, Stock Price or SVA relating to the Company, a Subsidiary or business unit. Performance Goals applicable to any Participant may also include any objective or subjective performance measurement relating to the Company, a Subsidiary or business unit which the Committee deems appropriate as well as the extent of attainment by a Participant of individual performance objectives. The Performance Goals may be based on GAAP or adjusted GAAP as the Committee shall specify at the establishment of a Performance Period. 2 (v) "Person", as used in Article XV hereof, 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. (w) "Plan" shall mean this Hexcel Corporation Long-Term Incentive Plan, as amended from time to time. (x) "Performance Period" shall mean the fiscal period of at least eight quarters specified by the Committee from time to time over which Performance Goals shall be measured for purposes of determining an Award under the Plan; provided that a Performance Period for a Participant who becomes employed by the Company following the commencement of a Performance Period may commence on the date of the commencement of such employment. (y) "Retirement" shall mean the termination of a Participant's employment (other than by reason of death or Cause) which occurs either (i) at or after age 65 or (ii) at or after age 55 after five (5) years of employment by the Corporation (or a Subsidiary thereof). (z) "ROE" shall mean return on the equity. (aa) "Revenue" shall mean the consolidated net sales. (bb) "RONA" shall mean return on the consolidated net assets. (cc) "Stock" shall mean shares of common stock of the Company, par value $.01 per share. (dd) "Stock Price" shall mean the price of the Company's Stock as reported on the New York Stock Exchange Consolidated Transactions Tape. (ee) "Subsidiary" shall mean any subsidiary corporation of the Company consolidated with the Company for financial reporting purposes. (ff) "SVA" shall mean return on the weighted average cost of capital. (gg) "Target Incentive Award" shall have the meaning given in Section V(A) hereof. III. ADMINISTRATION Administration of the Plan shall be by the Committee, which shall, in applying and interpreting the provisions of the Plan, have full power and authority to construe, interpret and carry out the provisions of the Plan. All decisions, interpretations and actions of the Committee under the Plan shall be at the Committee's sole and absolute discretion and shall be final, conclusive and binding upon all parties. No member of the Board or the Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted hereunder. IV. ELIGIBILITY FOR PARTICIPATION The Committee shall have full and complete discretion in determining which Eligible Employees may be Participants in the Plan in any Performance Period. Participation in the Plan in 3 any Performance Period shall not confer any right on any Participant to participate in any subsequent Performance Period. V. DETERMINATION OF AWARDS A. ESTABLISHMENT OF TARGET INCENTIVE AWARDS AND PERFORMANCE GOALS. No later than ninety (90) days after the beginning of a Performance Period the Committee shall establish for each Participant (i) a Target Incentive Award for such Performance Period and the applicable Performance Goals in respect of such Performance Period and (ii) the amount of Award payable under the Plan as a percentage (which may exceed one hundred (100%) percent) of the Target Incentive Award derived from the degree of achievement of the applicable Performance Goals. The Performance Goals established by the Committee may be (but need not be) different each Performance Period and different goals may be applicable to different Participants. As soon as practicable after the establishment of the Target Incentive Award and Performance Goals, each Participant shall be notified in writing of such Target Incentive Award and the corresponding Performance Goals. B. AMOUNT OF AWARD PAYABLE NORMALLY. The Committee shall determine the Award payable to each Participant from the degree of achievement of the applicable Performance Goals. The Committee may, in its sole discretion, (a) other than in respect of an Award intended to meet the requirements of Section 162(m), increase the amount of any Award otherwise payable to any Participant or (b) decrease or eliminate the amount payable to a Participant, in each case to reflect such Participant's individual performance or such other factors as the Committee deems relevant, or in recognition of changed or special circumstances. The amount of the Award payable to a Participant for any Performance Period shall not exceed $3,000,000. C. AMOUNT OF AWARD WITH CHANGE OF EMPLOYMENT STATUS. In the event of a change in employment status of a Participant during the Performance Period, the Committee may, in its sole discretion, adjust the Award determinants for the Participant based upon the Participant's new status. D. AMOUNT OF AWARD WITH TERMINATION OF EMPLOYMENT OR CHANGE IN CONTROL. Except as otherwise provided in this paragraph, payment of an Award to a Participant for a particular Performance Period shall be made only if the Participant is employed by the Company or one of its Subsidiaries on the last day of the Performance Period. In the case of a Participant's separation from service due to Disability, Retirement or death or, in the case of a Participant's involuntary termination of employment by the Company or a Subsidiary other than for Cause if actively employed for the greater of six months or twenty-five percent of the Performance Period, a Participant shall be entitled to receive an Award, prorated for the period of active employment with the Company or a Subsidiary during the Performance Period, payable in accordance with Article VI below. In the case of a Change in Control of the Company during a Performance Period, a Participant shall be entitled to receive an Award, prorated for the period of active employment with the Company or a Subsidiary during such Performance Period and prior to the Change in Control, computed as if applicable Performance Goals had been attained at the one hundred (100%) percent level and payable in cash no later than the fifth (5th) day following the Change in Control. VI. PAYMENT OF AWARDS Except as provided in the last sentence of Section V(D) hereof, an Award which becomes payable to a Participant pursuant to Article V hereof shall be paid to the Participant (or 4 the Participant's estate in the event of the Participant's death) as soon as practicable after the close of the Performance Period and certification by the Committee of the degree of achievement of the relevant Performance Goals. No Participant shall have the unconditional right to an Award hereunder until the Performance Period has concluded and the exact amount of the Award (if any) has been determined and certified by the Committee. All Awards shall be paid in cash. VII. DEFERRAL ELECTIONS The Committee may, at its option, establish written procedures pursuant to which Participants are permitted to defer the receipt of Awards payable under the Plan. VIII. ACCOUNTING DETERMINATIONS The Committee reserves sole discretion in adopting and changing, from time to time, the accounting principles and practices reflected in audited financial statements of the Company and, in its sole and absolute judgment, to make such other adjustments in Company financial results and/or Performance Goals as may be deemed reasonable, including, without limitation, changes to reflect acquisitions, divestitures, other corporate capital reorganizations, recapitalization or extraordinary events. IX. AMENDMENT AND TERMINATION OF PLAN The Compensation Committee of the Board reserves the right, at any time including during a Performance Period, to amend, suspend or terminate the Plan, in whole or in part, in any manner, and for any reason, and without the consent of any Participant, or other person; provided, that no such amendment, suspension or termination shall adversely affect the payment of any Award for a Performance Period ending prior to the action amending, suspending or terminating the Plan or the payment of any Award payable pursuant to the last sentence of Section V(D) hereof or in respect to events occurring prior to such amendment or adversely affect the rights of a Participant pursuant to any agreement with the Company or any Subsidiary. X. GOVERNING LAW The provisions of the Plan shall be governed and construed in accordance with the laws of the State of Delaware without giving effect to the choice of law principles thereof. XI. MISCELLANEOUS PROVISIONS Nothing contained in the Plan shall give any employee the right to be retained in the employment of the Company or a Subsidiary or affect the right of the Company or a Subsidiary to dismiss any employee. The Plan shall not constitute a contract between the Company or a Subsidiary and any employee. Unless approved by the Committee in respect of a particular Performance Period, no Participant shall have any right to be granted an Award hereunder. Nothing contained in the Plan shall restrict the Committee's power to grant any employee an award or bonus outside the scope of this Plan. XII. NO ALIENATION OF BENEFITS Except insofar as may otherwise be required by law, no amount payable at any time under the Plan shall be subject in any manner to alienation by anticipation, sale, transfer, assignment, bankruptcy, pledge, attachment, charge or encumbrance of any kind, nor in any 5 manner be subject to the debts or liabilities of a Participant, and any attempt to so alienate or subject any such amount, whether presently or thereafter payable, shall be void. XIII. NO RIGHT, TITLE OR INTEREST IN COMPANY'S ASSETS Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create, or be construed to create, a trust of any kind, or fiduciary relationship between the Company or a Subsidiary and any Participant or any other person. To the extent that any person acquires a right to receive payments from the Company under the Plan, such rights shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company, and no special or separate funds shall be established, and no segregation of assets shall be made, to assure payment thereof. XIV. NO STOCK SUBJECT TO THE PLAN No shares of Stock shall be reserved for, or issued under, the Plan. XV. CHANGE IN CONTROL Unless otherwise specified by the Committee at the establishment of a Performance Period, for purposes of the Plan the term "Change in Control" shall mean any of the following events: (1) any Person is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (a) the then outstanding Stock of the Company (the "Outstanding Common Stock") or (b) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the "Total Voting Power"); excluding, however, the following: (i) any acquisition by the Company or any of its Controlled Affiliates, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Controlled Affiliates and (iii) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below; or (2) a change in the composition of the Board such that the individuals who, as of December 20, 2000, 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 date whose election, or nomination for election by the Company's stockholders, was made or approved pursuant to the Governance Agreement 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) there is consummated a merger or consolidation of the Company or any direct or indirect subsidiary of the Company or a sale or other disposition of all or substantially all of the assets of the Company ("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 6 immediately prior to such Corporate Transaction will Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then 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 company which as a result of such transaction owns the Company or all or substantially all of the Company'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, and (b) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries); or (4) the approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. XVI. INTERPRETATION The Plan is designed and intended to comply with Section 162(m) of the Code to the extent applicable to a "covered person" as defined therein, and the Plan shall be construed in a manner to so comply. XVII. EFFECTIVE DATE AND TERM The Plan shall take effect on February 27, 2002 (the date of its adoption by the Board). The Plan shall be submitted to stockholders of the Company to meet the stockholder approval requirements of Section 162(m) of the Code to maximize the deductibility of Awards to "covered persons" as defined in Section 162(m) of the Code. The effectiveness of the Plan is not dependent on obtaining stockholder approval. 7 EX-10.8 7 a2074704zex-10_8.txt EXHIBIT 10.8 EXHIBIT 10.8 EMPLOYEE OPTION AGREEMENT under the Hexcel Corporation Incentive Stock Plan EMPLOYEE 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 Compensation Committee (the "Committee") of the Board of Directors of the Corporation (the "Board") has determined that it is desirable and in the best interest 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 Employee Option Agreement, and this Employee 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. 4. TERM OF OPTION. (a) EXPIRATION DATE; TERM. Subject to Section 4(c) below, the Option shall expire on, and shall no longer be exercisable following, the tenth anniversary of the Grant Date. The ten-year period from the Grant Date to its tenth anniversary shall constitute the "Term" of the Option. (b) VESTING PERIOD; EXERCISABILITY. Subject to Section 4(c) below, the Option shall vest and become exercisable at the rate of 33-1/3% of the Option Shares on each of the first three anniversaries of the Grant Date. (c) TERMINATION OF EMPLOYMENT; CHANGE IN CONTROL. (i) For purposes of the grant hereunder, any transfer of employment by the Optionee among the Corporation and its Subsidiaries shall not be considered a termination of employment. If the Optionee's employment with the Corporation is terminated for Cause (as defined in the last Section hereof), the Option, whether or not then vested, shall be automatically terminated as of the date of such termination of employment. If the Optionee's employment with the Corporation shall terminate other than by reason of Retirement (as defined in the last Section hereof), Disability (as defined in the last Section hereof), death or Cause, the Option (to the extent then vested) may be exercised at any time within ninety (90) 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. If the Optionee dies or becomes Disabled (A) while employed by the Corporation or (B) within 90 days after the termination of his or her employment other than for Cause or Retirement, the Option (to the extent then vested) 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 then vested, shall immediately expire upon such death or disability. If the Optionee's employment terminates by reason of Retirement, the Option shall (A) become fully and immediately vested and exercisable and (B) remain exercisable for three years from the date of such Retirement (but not beyond the Term of the Option). (ii) In the event of a Change in Control (as defined in the last Section hereof), the Option shall immediately become fully vested and exercisable and the post-termination periods of exercisability set forth in Section 4(c)(i) hereof shall apply, except that the post-termination period of exercisability shall be extended and the Option shall remain exercisable for a period of three years from the date of such termination of employment, if, within two years after a Change in Control, (A) the Optionee's employment is terminated by the Company other than by reason of Retirement, Cause, Disability or death or (B) the Optionee terminates the Optionee's employment for Good Reason (as defined in the last Section hereof). 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 Employee Option Agreement in the event of - 2 - any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction involving the Corporation. (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 transfer 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. 9. NO RIGHT TO EMPLOYMENT. Nothing contained herein shall be deemed to confer upon the Optionee any right to remain as an employee of the Corporation. 10. GOVERNING LAW/JURISDICTION. This Employee 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. - 3 - 11. RESOLUTION OF DISPUTES. Any disputes arising under or in connection with this Employee 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 Employee 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 employment records, 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 Employee Option Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. 14. COUNTERPARTS. This Employee 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 Employee Option Agreement cannot be changed or terminated orally. This Employee 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. 16. DEFINITIONS. For purposes of this Employee 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 "Cause" shall mean (A) the willful and continued failure by the Optionee to substantially perform the Optionee's duties with the Corporation (other than any such failure resulting from the Optionee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Optionee by the Corporation, which demand specifically identifies the manner in which the Corporation believes that the Optionee has not substantially performed the Optionee's duties, or (B) the willful engaging by the Optionee in conduct which is demonstrably and materially injurious to the Corporation or its Subsidiaries, monetarily or otherwise. For purposes of clauses (A) and (B) of this definition, no act, or failure to act, on the Optionee's part shall be deemed "willful" unless done, or omitted to be done, by the Optionee not in good faith and without the reasonable belief that the Optionee's act, or failure to act, was in the best interest of the Corporation; (III) the term "Change in Control" shall mean any of the following events: - 4 - (1) (a) any Person other than a Financial Buyer is or becomes the Beneficial Owner, directly or indirectly, of 40% 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 Controlled Affiliates, (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Controlled Affiliates and (C) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below, or (b) (i) any Financial Buyer is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (A) the Outstanding Common Stock or (B) the Total Voting Power; excluding, however, the following: (I) any acquisition by the Corporation or any of its Controlled Affiliates, (II) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Controlled Affiliates and (III) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below (any such transaction referred to hereinafter as a "Financial Buyer Investment"), AND (ii) on the date of the consummation of such Financial Buyer Investment, or at any time on or before the one year anniversary date of such Financial Buyer Investment, the Investors (as defined in the Governance Agreement) Beneficially Own less than 75% of the number of shares of Common Stock Beneficially Owned by the Investors on the date of this Employee Option Agreement (without giving effect to any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the shares of Common Stock Beneficially Owned by the Investors); 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 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) there is consummated a merger or consolidation of the Corporation or any direct or indirect Subsidiary of the Corporation or a sale or other disposition of - 5 - all or substantially all of the assets of the Corporation ("Corporate Transaction"); excluding, however, (a) a Corporate Transaction (i) 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 Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then 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 company 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, and (ii) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company 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), and (b) a Corporate Transaction with a Person which is a Financial Buyer if, and only if, at the time such Corporate Transaction is consummated and at all times on or before the one year anniversary date of such Corporate Transaction, the Investors Beneficially Own at least 75% of the number of shares of Common Stock Beneficially Owned by the Investors on the date of this Employee Option Agreement (without giving effect to any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the shares of Common Stock Beneficially Owned by the Investors); or (4) the approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation; (IV) the term "Disability (or becoming Disabled)" shall mean that, as a result of the Optionee's incapacity due to physical or mental illness or injury, he or she shall not have performed all or substantially all of his or her usual duties as an employee of the Corporation for a period of more than one-hundred-fifty (150) days in any period of one-hundred-eighty (180) consecutive days; (V) the term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time; (VI) the term "Financial Buyer" shall mean a Person which (i) is not primarily engaged in making or selling products or providing services (other than financial or investment products and services), and (ii) is not a Controlled Affiliate of any Person primarily engaged in making or selling products or providing services (other than financial or investment products and services); (VII) the term "Good Reason" for termination by the Optionee of the Optionee's employment shall mean the occurrence (without the Optionee's express written - 6 - consent) of any one of the following acts by the Corporation, or failures by the Corporation to act, unless, in the case of any act or failure to act described in paragraphs (1), (5) or (6) below, such act or failure to act is corrected prior to the date of termination of the Optionee's employment: (1) a significant adverse alteration in the nature or status of the Optionee's responsibilities, position or authority from those in effect immediately prior to the Change in Control; (2) a reduction by the Corporation in the Optionee's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (3) the relocation of the Optionee's principal place of employment to a location more than fifty (50) miles from the Optionee's principal place of employment immediately prior to the Change in Control or the Corporation's requiring the Optionee to work anywhere other than at such principal place of employment (or permitted relocation thereof) except for required travel on the Corporation's business to an extent substantially consistent with the Optionee's present business travel obligations; (4) the failure by the Corporation to pay to the Optionee any portion of the Optionee's current compensation, or to pay to the Optionee any portion of an installment of deferred compensation under any deferred compensation program of the Corporation, within seven (7) days of the date such compensation is due; (5) the failure by the Corporation to continue in effect any compensation plan in which the Optionee participates immediately prior to the Change in Control which is material to the Optionee's total compensation, or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Corporation to continue the Optionee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Optionee's participation relative to other participants, as existed immediately prior to the Change in Control; or (6) the failure by the Corporation to continue to provide the Optionee with benefits substantially similar to those enjoyed by the Optionee under any of the Corporation's pension, savings, life insurance, medical, health and accident, or disability plans in which the Optionee was participating immediately prior to the Change in Control (except for across-the-board changes similarly affecting all senior executives of the Corporation and all senior executives of any Person in control of the Corporation), the taking of any other action by the Corporation which would directly or indirectly materially reduce any of such benefits or deprive the Optionee of any material fringe benefit enjoyed by the Optionee at the time of the Change in Control, or the failure by the Corporation to provide the Optionee with the number of paid vacation days to which the Optionee is entitled on the basis of years of service - 7 - with the Corporation in accordance with the Corporation's normal vacation policy in effect at the time of the Change in Control. The Optionee's right to terminate the Optionee's employment for Good Reason shall not be affected by the Optionee's incapacity due to physical or mental illness. The Optionee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Optionee that Good Reason exists shall be presumed to be correct unless the Corporation establishes to the Board by clear and convincing evidence that Good Reason does not exist; (VIII) the term "Governance Agreement" shall mean the Governance Agreement dated December 19, 2000, among LXH, L.L.C., LXH II, L.L.C., Hexcel Corporation and the other parties listed on the signature pages thereto, as amended from time to time; (IX) 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; and (X) the term "Retirement" shall mean termination of the Optionee's employment, other than by reason of death or Cause, either (A) at or after age 65 or (B) at or after age 55 after five (5) years of employment by the Corporation (or a Subsidiary thereof). - 8 - ANNEX A NOTICE OF GRANT EMPLOYEE STOCK OPTION HEXCEL CORPORATION INCENTIVE STOCK PLAN The following employee of Hexcel Corporation, a Delaware corporation or a Subsidiary, has been granted an option to purchase shares of the Common Stock of Hexcel, $.01 par value, in accordance with the terms of this Notice of Grant and the Employee 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 Employee Option Agreement. Optionee Address of Optionee Employee Number Employee ID Number Foreign Sub Plan, if applicable Grant Date Purchase Price Aggregate Number of Shares Granted (the "Option Shares")
IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice of Grant and the Employee Option Agreement to which this Notice of Grant is attached and execute this Notice of Grant and Employee Option Agreement as of the Grant Date. HEXCEL CORPORATION - --------------------------------- Optionee By: ----------------------------- Ira J. Krakower Sr. Vice President - 9 - EX-10.23 8 a2074704zex-10_23.txt EXHIBIT 10.23 EXHIBIT 10.23 SUPPLEMENTAL COMPENSATION OPTION AGREEMENT 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. 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 tenth anniversary of the Grant Date. The ten-year period from the Grant Date to its tenth 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 on the Grant Date. (c) TERMINATION OF SERVICE AS DIRECTOR. (i) Except as provided in Section 4(c)(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 may be exercised at any time within one year after such termination (but not beyond the Term of the Option). (ii) In the event the Optionee's service as a member of the Board is terminated because of death or disability, the Option may be exercised at any time within three years after the Optionee's death or disability (but not beyond the Term of the Option). 5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) The aggregate number of Option Shares and the Purchase Price shall be appropriately adjusted by the Compensation Committee (the "Committee") of the Board 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. (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 - 2 - 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. 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 Search Committee of the Board, as a member of the office of the Chief Executive, or 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 - 3 - the subject matter hereof. The section headings herein are intended for reference only and shall not affect the interpretation hereof. - 4 - ANNEX A NOTICE OF GRANT SUPPLEMENTAL COMPENSATION 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 Supplemental Compensation 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 - -------------------------------------------------------------------------------- Address of Optionee - -------------------------------------------------------------------------------- Grant Date July 31, 2001 - -------------------------------------------------------------------------------- Purchase Price $5.25 - -------------------------------------------------------------------------------- Aggregate Number of Shares Granted (the "Option Shares") - --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice of Grant and the Supplemental Compensation Option Agreement to which this Notice of Grant is attached and execute this Notice of Grant and Supplemental Compensation Option Agreement as of the Grant Date. HEXCEL CORPORATION - ---------------------------------- Optionee By: ---------------------------- Ira J. Krakower Senior Vice President - 5 - EX-10.31 9 a2074704zex-10_31.txt EXHIBIT 10.31 EXHIBIT 10.31 RESTRICTED STOCK UNIT AGREEMENT under the Hexcel Corporation Incentive Stock Plan This Restricted Stock Unit Agreement (the "Agreement"), is entered into as of the Grant Date, by and between Hexcel Corporation, a Delaware corporation (the "Company"), and the Grantee. Pursuant to the Hexcel Corporation Incentive Stock Plan (the "Plan"), the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that the Grantee shall be granted Restricted Stock Units ("RSUs") upon the terms and subject to the conditions hereinafter contained. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Plan. 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 in this Agreement and set forth in the Notice of Grant shall have the meanings ascribed to them in the Notice of Grant and capitalized terms used in this Agreement 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 Agreement, and this 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 RSUs granted herein constitute an Award within the meaning of the Plan. 2. TERMS OF RESTRICTED STOCK. The grant of RSUs provided in Section 1 hereof shall be subject to the following terms, conditions and restrictions: (a) The Grantee shall not possess any incidents of ownership (including, without limitation, dividend and voting rights) in shares of the Company's common stock, $.01 par value per share (the "Common Stock") in respect of the RSUs until such RSUs have vested and been distributed to the Grantee in the form of shares of Common Stock. (b) Except as provided in this Section 2(b), the RSUs and any interest therein may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, prior to the distribution of the Common Stock in respect of such RSUs and subject to the conditions set forth in the Plan and this Agreement. Any attempt to transfer RSUs in contravention of this Section is void AB INITIO. RSUs shall not be subject to execution, attachment or other process. Notwithstanding the foregoing, the Grantee shall be permitted to transfer RSUs 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 RSUs and the transferee of the RSUs shall be subject to all conditions applicable to the RSUs (including all of the terms and conditions of this Agreement) prior to transfer. 3. VESTING AND CONVERSION OF RSUs. The RSUs shall vest and be converted into an equivalent number of shares of Common Stock that will be immediately distributed to the Grantee at the rate of 33-1/3% of the RSUs on each of the first three anniversaries of the Grant Date. Upon the distribution of the shares of Common Stock in respect of the RSUs, the Company shall issue to the Grantee or the Grantee's personal representative a stock certificate representing such shares of Common Stock, free of any restrictions. 4. TERMINATION OF EMPLOYMENT; CHANGE OF CONTROL. (a) For purposes of the grant hereunder, any transfer of employment by the Grantee among the Company and its Subsidiaries shall not be considered a termination of employment. Notwithstanding any other provision contained herein or in the Plan, (i) if the Grantee dies or terminates employment due to Disability (as defined in the last Section hereof), all RSUs shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee, (ii) if the Grantee's employment with the Company is involuntarily terminated other than for Cause (as defined in the last Section hereof), all RSUs shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee, and (iii) if the Grantee's employment with the Company terminates due to the Grantee's Retirement (as defined in the last Section hereof), all RSUs shall vest, be converted in shares of Common Stock and be immediately distributed to the Grantee. (b) Subject to Section 4(a) hereof, if the Grantee's employment with the Company is involuntarily terminated for Cause or the Grantee voluntarily terminates his employment with the Company, the Grantee shall forfeit all RSUs which have not yet become vested as of the date of termination of employment. (c) In the event of a Change in Control (as defined in the last Section hereof), all RSUs shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee. 5. EQUITABLE ADJUSTMENT. The aggregate number of shares of Common Stock subject to the RSUs shall be proportionately adjusted 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 the receipt of consideration by the Company, 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 Agreement in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction involving the Company. 6. TAXES. The Grantee shall pay to the Company promptly upon request any taxes the Company reasonably determines it is required to withhold under applicable tax laws with respect to the RSUs. Such payment shall be made as provided in Section IX(f) of the Plan. 7. NO GUARANTEE OF EMPLOYMENT. Nothing set forth herein or in the Plan shall confer upon the Grantee any right of continued employment for any period by the Company, or shall interfere in any way with the right of the Company to terminate such employment. 8. NOTICES. Any notice required or permitted under this Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, - 2 - postage prepaid, addressed, as appropriate, to the Grantee at the last address specified in Grantee's employment records, or such other address as the Grantee may designate in writing to the Company, or to the Company, Attention: Corporate Secretary, or such other address as the Company may designate in writing to the Grantee. 9. FAILURE TO ENFORCE NOT A WAIVER. The failure of either party hereto to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. 10. GOVERNING LAW. This Agreement shall be governed by and construed according to the laws of the State of Delaware, without regard to the conflicts of laws provisions thereof. 11. INCORPORATION OF PLAN. The Plan is hereby incorporated by reference and made a part of this Agreement, and this 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 RSUs granted herein constitute Awards within the meaning of the Plan. 12. COUNTERPARTS. This 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. 13. MISCELLANEOUS. This Agreement cannot be changed or terminated orally. This 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. 14. DEFINITIONS. For purposes of this Agreement: (a) the term "Beneficial Owner" (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act; (b) the term "Cause" shall mean (i) the willful and continued failure by the Grantee to substantially perform the Grantee's duties with the Company (other than any such failure resulting from the Grantee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Grantee by the Company, which demand specifically identifies the manner in which the Company believes that the Grantee has not substantially performed the Grantee's duties, or (ii) the willful engaging by the Grantee in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, no act, or failure to act, on the Grantee's part shall be deemed "willful" unless done, or omitted to be done, by the Grantee not in good faith and without the reasonable belief that the Grantee's act, or failure to act, was in the best interest of the Company; (c) the term "Change in Control" shall mean any of the following events: (1) (a) any Person other than a Financial Buyer is or becomes the Beneficial Owner, directly or indirectly, of 40% 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 - 3 - 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 Controlled Affiliates, (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Controlled Affiliates and (C) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below, or (b) (i) any Financial Buyer is or becomes the Beneficial Owner, directly or indirectly, of 40% or more of either (A) the Outstanding Common Stock or (B) the Total Voting Power; excluding, however, the following: (I) any acquisition by the Corporation or any of its Controlled Affiliates, (II) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its Controlled Affiliates and (III) any Person who becomes such a Beneficial Owner in connection with a transaction described in the exclusion within paragraph (3) below (any such transaction referred to hereinafter as a "Financial Buyer Investment"), AND (ii) on the date of the consummation of such Financial Buyer Investment, or at any time on or before the one year anniversary date of such Financial Buyer Investment, the Investors (as defined in the Governance Agreement) Beneficially Own less than 75% of the number of shares of Common Stock Beneficially Owned by the Investors on the date of this Employee Option Agreement (without giving effect to any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the shares of Common Stock Beneficially Owned by the Investors); 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 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) there is consummated a merger or consolidation of the Corporation or any direct or indirect Subsidiary of the Corporation or a sale or other disposition of all or substantially all of the assets of the Corporation ("Corporate Transaction"); excluding, however, (a) a Corporate Transaction (i) 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 - 4 - Corporate Transaction will Beneficially Own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then 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 company 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, and (ii) immediately following which the individuals who comprise the Board immediately prior thereto constitute at least a majority of the board of directors of the company resulting from such Corporate Transaction (including, without limitation, a company 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), and (b) a Corporate Transaction with a Person which is a Financial Buyer if, and only if, at the time such Corporate Transaction is consummated and at all times on or before the one year anniversary date of such Corporate Transaction, the Investors Beneficially Own at least 75% of the number of shares of Common Stock Beneficially Owned by the Investors on the date of this Employee Option Agreement (without giving effect to any stock split, combination, reorganization, recapitalization, reclassification or other similar event involving the shares of Common Stock Beneficially Owned by the Investors); or (4) the approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation; (d) the term "Disability" shall mean that, as a result of the Grantee's incapacity due to physical or mental illness or injury, the Grantee shall not have performed all or substantially all of the Grantee's usual duties as an employee of the Company for a period of more than one-hundred-fifty (150) days in any period of one-hundred-eighty (180) consecutive days; (e) the term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time; (f) the term "Financial Buyer" shall mean a Person which (i) is not primarily engaged in making or selling products or providing services (other than financial or investment products and services), and (ii) is not a Controlled Affiliate of any Person primarily engaged in making or selling products or providing services (other than financial or investment products and services); (g) the term "Governance Agreement" shall mean the Governance Agreement, dated December 19, 2000, among LXH, L.L.C., LXH II, L.L.C., Hexcel Corporation and the other parties listed on the signature pages thereto, as amended from time to time; (h) 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; and - 5 - (i) the term "Retirement" shall mean termination of the Grantee's employment, other than by reason of death or Cause, either (A) at or after age 65 or (B) at or after age 55 after five (5) years of employment by the Company (or a Subsidiary thereof). - 6 - ANNEX A NOTICE OF GRANT RESTRICTED STOCK UNITS HEXCEL CORPORATION INCENTIVE STOCK PLAN The following employee of Hexcel Corporation, a Delaware corporation, or a Subsidiary, has been granted performance accelerated restricted stock units in accordance with the terms of this Notice of Grant and the Agreement to which this Notice of Grant is attached. The terms below shall have the meanings ascribed to them below when used in the Agreement. - -------------------------------------------------------------------------------- Grantee - -------------------------------------------------------------------------------- Address of Grantee - -------------------------------------------------------------------------------- Employee Number - -------------------------------------------------------------------------------- Employee ID Number - -------------------------------------------------------------------------------- Foreign Sub Plan, if applicable - -------------------------------------------------------------------------------- Grant Date - -------------------------------------------------------------------------------- Aggregate Number of RSUs Granted - --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice of Grant and the Agreement to which this Notice of Grant is attached and execute this Notice of Grant and the Agreement as of the Grant Date. - ----------------------- HEXCEL CORPORATION Grantee By: ------------------------- Ira J. Krakower Senior Vice President - 7 - EX-10.39 10 a2074704zex-10_39.txt EXHIBIT 10.39 EXHIBIT 10.39 HEXCEL CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN AS AMENDED AS OF MARCH 19, 2002 1. Purpose. The Plan is intended to provide Employees (as defined herein) of the Company and its Designated Subsidiaries, with the opportunity to apply a portion of their compensation to the purchase of Common Stock of the Company in accordance with the terms of the Plan, to promote and increase the ownership of Common Stock by such employees and to better align the interests of the Company's employees and its stockholders and to thereby increase overall stockholder value. 2. Definitions. (a) "Board" means the Board of Directors of the Company. (b) "Brokerage Firm" means any brokerage firm selected by the Company, from time to time, to establish Investment Accounts for the Participants under the Plan. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means a committee formed or designated by the Board to administer the Plan. (e) "Common Stock" means the Common Stock, $0.01 par value, of the Company. (f) "Company" means Hexcel Corporation, a Delaware corporation. (g) "Compensation" means all cash compensation, to include regular straight time gross earnings, overtime, shift premium, cash bonuses and commissions. (h) "Continuous Status as an Employee" means the absence of any interruption or termination of service as an Employee other than ordinary vacation and short-term disability absences. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. (i) "Contributions" means all amounts credited to the Plan Account of a Participant pursuant to the Plan. (g) "Designated Subsidiaries" means the Subsidiaries which have been designated by the Committee from time to time in its sole discretion as eligible to participate in the Plan. (k) "Employee" means any person, excluding any officer or director or other person or group of persons excluded from the Plan as provided herein, who is a direct employee and on the payroll of the Company or one of its Designated Subsidiaries and who is employed for at least thirty (30) hours per week and more than 1,000 hours in a calendar year by the Company or one of its Designated Subsidiaries. The term Employee specifically excludes any person or group of persons who is classified by the Company or its Designated Subsidiary as a temporary employee, contract employee, reserve employee or similar non-direct or temporary designation. It is the intention of the Company that the definition of Employee in this Plan (as applied by the Committee in its sole discretion) shall be determinative for purposes of participation in the Plan, regardless of how a person may be characterized by the Company or its Designated Subsidiary for any other purpose. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Exercise Date" means the last day of each Offering Period of the Plan. (n) "Investment Account" means an Employee Stock Purchase Plan account at the Brokerage Firm that is established for each Participant and in which all shares of Common Stock purchased by the Participant pursuant to the Plan are held. (o) "Offering Date" means the first business day of each Offering Period of the Plan. (p) "Offering Period" means a period of three (3) calendar months. (q) "Participant" means any Employee who is eligible to participate in the Plan who has delivered a Subscription Agreement to the Company, whose employment has not terminated and who has not delivered to the Company a Participation Termination Notice. (r) "Participation Termination Notice" has the meaning given thereto in Section 10 hereof. (s) "Plan" means this Employee Stock Purchase Plan. (t) "Plan Account" means, with respect to each Participant, an account established by the Company to record Contributions to the Plan made by such Participant and the use of such Contributions as they are either (i) applied by the Company for the purchase of Common Stock under the Plan for the account of such Participant or (ii) repaid to such Participant pursuant to the Plan. (u) "Subsidiary" shall mean a corporation, domestic or foreign, of which more than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. Any person who has been continuously employed as an Employee for six (6) months as of the Offering Date of a given Offering Period and has reached the age of majority in the state of his or her residence shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a). 4. Offering Periods. The Plan shall be implemented by a series of Offering Periods, with a new Offering Period commencing on January 1 of each year (or at such other time or times as may be determined by the Committee), and subsequent Offering Periods will commence on the first day of each calendar quarter (i.e., April 1, July 1, October 1). The Plan shall continue until terminated in accordance with Section 22 hereof. The Committee shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings if such change is announced at least fifteen (15) calendar days prior to the scheduled beginning of the first Offering Period to be affected. 5. Participation. (a) An Employee who is eligible to participate in the Plan pursuant to Section 3 hereof may become a participant in the Plan by completing a subscription agreement in the form provided by the Company (a "Subscription Agreement") and filing it with the appropriate representative of the Company or the Designated Subsidiary that employs such Employee in accordance with the terms of the Subscription Agreement at any time during the initial Offering Period of the Plan or, for subsequent Offering Periods, not later than fifteen (15) calendar days prior to any Offering Date, unless a later time for filing Subscription Agreements is established by the Committee for all eligible Employees with respect to a given Offering Period. Each eligible Employee's Subscription Agreement shall set forth either (1) the whole percentage of the Participant's Compensation (which shall be not less than 1% and 2 not more than 10%) or (2) the whole dollar amount (that shall not be less than $5.00 and not more than an amount equal to 10% of such Participant's Compensation) to be deducted by the Company from the Participant's Compensation as Contributions to the Plan. Each Subscription Agreement shall constitute the Employee's (i) election to participate in the Plan for all subsequent Offering Periods until such time as (1) the Company has received notice of termination of participation from such Employee pursuant to Section 10, (2) a new Subscription Agreement designating a different level of participation is delivered to the Company by such Employee or (3) such Employee's termination of employment, and (ii) authorization for the Company to withhold (in the manner determined by the Company or the applicable Subsidiary) any taxes that are required to be withheld by the Company or the applicable Subsidiary due to the Employee's participation in the Plan or the exercise of any Option or purchase of any Common Stock under the Plan. (b) Payroll deductions with respect to each Participant shall commence on the first payday following the first Offering Date following the Company's receipt of the applicable Subscription Agreement and shall end on the last payday on or prior to the termination of such Employee's employment with the Company, unless sooner terminated by the Participant as provided in Section 10, provided that payroll deductions will begin on the first pay period commencing after the delivery of a Subscription Agreement for Participants who join the Plan during the initial Offering Period. To the extent that the Participant elects to have a percentage of his or her compensation deducted, payroll deductions shall automatically be increased or decreased to reflect changes in Compensation during such Offering Period, but a Participant shall not otherwise be entitled to increase or decrease his or her contribution rate during an Offering Period. 6. Method of Payment of Contributions. (a) The Participant shall elect to have payroll deductions made on each payday during the Offering Period either (1) in a whole percentage amount of between one percent (1%) and not more than ten percent (10%) of such Participant's Compensation on each such payday or (2) in a whole dollar amount (that shall be not less than $5.00 and not more than an amount equal to 10% of such Participant's Compensation) of such Participant's Compensation on each such payday, provided that the aggregate of such payroll deductions during the Offering Period shall not exceed ten percent (10%) of the Participant's aggregate Compensation during said Offering Period. All payroll deductions made with respect to a Participant shall be credited to his or her Plan Account. A Participant may not make any additional payments into his or her Plan Account or Investment Account. (b) A Participant may discontinue his or her participation in the Plan as provided in Section 10. A Participant may increase or decrease the rate of his or her Contributions for future Offering Periods by completing and filing with the Company a new Subscription Agreement no later than fifteen (15) calendar days prior to the beginning of the Offering Period for which such change will become effective. Subject to the prior sentence, the change in rate shall be effective as of the first pay period ending in the first new Offering Period following the date of filing of the new Subscription Agreement. 7. Grant of Option. On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on the Exercise Date during such Offering Period a number of shares of Common Stock determined by dividing such Employee's Contributions accumulated during such Offering Period prior to such Exercise Date and retained in the Participant's Plan Account as of the Exercise Date by eighty-five percent (85%) of the closing price of the Common Stock as determined from the New York Stock Exchange Consolidated Transaction Tape on the Exercise Date or, if there were no sales of Common Stock on such date, on the next preceding date on which such closing price was recorded. 8. Exercise of Option. Unless a Participant withdraws from the Plan as provided in Section 10, each Participant's option for the purchase of shares for a particular Offering Period will be exercised automatically on the Exercise Date of such Offering Period, and the maximum number of whole and 3 fractional shares subject to option will be purchased for the Participant at the price described in Section 7 with the Contributions which were made to the Participant's Plan Account during such Offering Period. The shares of Common Stock purchased upon exercise of an option hereunder shall be deemed to be transferred to the Participant on the Exercise Date. A Participant's option to purchase shares of Common Stock hereunder will be exercised only during the Participant's lifetime. 9. Delivery. As promptly as reasonably practicable following each Exercise Date, the Company shall cause the shares purchased by each Participant to be credited to such Participant's Investment Account. The Company will deliver to the Brokerage Firm or its nominee a stock certificate or other evidence representing all of the full and fractional shares that are to be allocated to the Participant's Investment Accounts, rounded up to the nearest full share (and taking into account any excess shares or fractional shares which are then held by the Brokerage Firm from prior deliveries). Notwithstanding the prior sentence, in lieu of rounding the number of shares up to the nearest full share, the Company may round down to the nearest full share and pay to the Brokerage Firm an amount in cash equal to the value of the fractional share that would otherwise be delivered. Upon termination of the plan, the Brokerage Firm will redeliver to the Company all shares (including fractional shares) of Common Stock that are not allocated to Investment Accounts. 10. Withdrawal; Termination of Employment. (a) A Participant may withdraw all but not less than all the Contributions credited to his or her Plan Account, which have not been applied to the purchase of Common Stock, prior to the Exercise Date of the Offering Period, by giving written notice to the Company (a "Participation Termination Notice") not less than ten (10) calendar days prior to the Exercise Date of such Offering Period. Any Participation Termination Notice delivered subsequent to the tenth calendar day prior to any Exercise Date shall not be effective during the Offering Period during which it was delivered, but will be effective as of the first day of the immediately succeeding Offering Period. Upon the effectiveness of an Employee's Participation Termination Notice, all of the Participant's Contributions credited to his or her Plan Account, which have not been applied to the Purchase of Common Stock, and any taxes that the Company or a Designated Subsidiary withheld in connection therewith, will be paid promptly to the Participant, without interest, and his or her outstanding option will automatically terminate. An Employee who terminates his or her participation in the Plan will not be again eligible to participate in the Plan until the commencement of the first Offering Period following the expiration of the Offering Period during which the Participant's Participation Termination Notice becomes effective. (b) Upon termination of a Participant's Continuous Status as an Employee prior to the Exercise Date of the then current Offering Period for any reason, including retirement or death, the Contributions credited to his or her Plan Account, together with all taxes that the Company or a Designated Subsidiary has withheld in connection therewith, will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, without interest, and his or her outstanding option and future participation in the Plan will automatically terminate. (c) Other than as set forth in Section 10(a), a Participant's withdrawal from the Plan, whether voluntary or involuntary, will not affect his or her eligibility to participate in the Plan in the future should he or she again qualify for participation or in any similar plan which may hereafter be adopted by the Company. 11. Interest. No interest shall accrue on the Contributions of a Participant in the plan or any taxes withheld in connection therewith. 12. Stock. (a) The maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be 454,574 shares or such other number of shares as may, from time to time, be 4 determined in the sole discretion of the Board, subject, however, to adjustment upon changes in capitalization of the Company as provided in Section 18. Such shares shall be reserved from the Company's authorized but unissued shares and/or treasury shares that are not otherwise reserved for issuance under any other plan or with respect to any convertible security. If the total number of shares which would otherwise be subject to options granted pursuant to Section 7 hereof on the Offering Date of an Offering Period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Committee shall make a pro rata allocation of the shares remaining available for option grants in as uniform a manner as shall be practicable and as it shall determine to be equitable. Any amounts remaining in a Participant's Plan Account not applied to the purchase of Common Stock pursuant to this Section 12 shall be refunded on or promptly after the applicable Exercise Date. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each Employee affected thereby and shall cease future withholdings and Contributions under the Plan. Only the number of shares that are issued pursuant to exercised options shall reduce the number of shares available under the Plan. Shares that become subject to options which are later terminated shall again be available under the Plan. (b) Participants will have no interest (including any interest in any ordinary or special dividends) or voting right in shares of Common Stock that are subject to any option until such option has been exercised. (c) Upon the written request of the Employee delivered to the Brokerage Firm, the Brokerage Firm will (i) have a share certificate issued for any number of whole shares held in the Employees Investment Account as of the date of such notice and, (ii) if the Employee is no longer participating in the Plan, pay to the Employee in cash an amount equal to the value of any fractional shares held in the Employee's Investment Account as of the date of such notice. Upon termination of an Employee's employment with the Company for any reason, the Company will (i) cause the Brokerage Firm to have a share certificate issued for the full number of whole shares held in the Employee's Investment Account as of the date of such termination, and (ii) pay to the Employee in cash an amount equal to the value of any fractional shares held in the Employee's Investment Account as of the date of such termination. All amounts to be paid to an Employee pursuant to this Section 12(c) with respect to fractional shares shall be determined by reference to the closing price of the Common Stock determined from the New York Stock Exchange Consolidated Transaction Tape on the date of the Employee's notice to the Company or termination, as applicable, or, if there were no sales of the Common Stock on such date, on the next preceding day on which such closing price was recorded. With respect to the certification and delivery to the Employee of the shares held in the Employee's Investment Account, the Company shall pay the fee charged by the Brokerage Firm for such service for the issuance of not more than four certificates per Participant in any calendar year. 13. Administration. (a) Except as otherwise determined by the Board, the Committee shall administer the Plan. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan and the determinations of the Board, to administer the Plan and to exercise all powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to determine, from time to time, eligible Employees; to interpret and construe the Plan and the provisions of the Subscription Agreements; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Subscription Agreements (which need not be identical) and to cancel or suspend the participation of any Employee or group of Employees, and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee or the Board may make any modification or amendment to the Plan that it deems necessary or advisable in order to implement the Plan in a manner consistent with any law or regulation applicable to the Company or any Designated Subsidiary. The Committee shall inform all Participants and Employees eligible to participate in the Plan, who would be affected thereby, of any such modification or amendment. 5 (b) The Board shall fill all vacancies, however caused, in the Committee. The Board may from time to time appoint additional members to the Committee, and may at any time remove one or more Committee members and substitute others. The Committee may appoint a chairperson and a secretary and make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. The Committee shall hold its meetings at such times and places (and its telephonic meetings at such times) as it shall deem advisable. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. Except to the extent otherwise determined by the Board, all decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including, without limitation, the Company, the Participants (or any person claiming any rights under the Plan from or through any Participant) and any stockholder. (c) No member of the Board or of the Committee shall be liable for any action or determination made in good faith, and the members of the Board or of the Committee shall be entitled to indemnification and reimbursement in the manner provided in the Company's Certificate of Incorporation, as it may be amended from time to time. 14. Designation of Beneficiary. (a) A Participant may file a written designation of a beneficiary who is to receive any shares of Common Stock and cash, if any, from the Participant's Plan Account or Investment Account in the event of such Participant's death by delivering notice of such beneficiary to the Company. If a Participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) The Participant (subject to spousal consent) may change such designation of beneficiary at any time by written notice delivered to the Company. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the Participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate or as may be required by law. 15. Transferability. Neither Contributions credited to a Participant's Plan Account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. No Contribution made under this Plan or amount representing a Participant's Plan Account balance shall be subject to execution, attachment or process. 16. Use of Funds. The Participants' rights with respect to Contributions made to the Plan and the balances, from time to time, in their respective Plan Accounts shall be those of general creditors of the Company or of the applicable Designated Subsidiary. All Contributions received or held by the Company or a Designated Subsidiary under the Plan may be used for any corporate purpose, and the Company or Designated Subsidiary, as applicable, shall not be obligated to segregate such Contributions. 17. Reports and Fees of Investment Accounts. Individual Investment Accounts will be maintained for each Participant. Statements of account will be given to Participants promptly following 6 each Exercise Date, which statements will set forth the total amount of Contributions to the Plan Account during the most recently completed Offering Period, the per share purchase price and the number of shares purchased on the most recent Exercise Date, and the total number of shares and fractional shares held in such Participant's Investment Account. The Company shall pay the annual and any extraordinary maintenance fees for each Investment Account and the certification fees referenced in Section 12 above. The Participant will be responsible for paying all transaction fees and any certification fee not paid by the Company pursuant to Section 12 hereof. 18. Adjustments Upon Changes in Capitalization. (a) The number of shares of Common Stock covered by each unexercised option under the Plan and the number of shares of Common Stock which have been authorized for issuance under the Plan but which have not yet been issued and are not subject of an unexercised option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan for which the exercise price has been determined but which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustments shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) In the event of the proposed dissolution or liquidation of the Company, the then current Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Committee. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Committee determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Committee shortens the Offering Period then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Committee shall notify each participant in writing, at least ten (10) days prior to the New Exercise Date, that the Exercise Date for his or her option has been changed to the New Exercise Date and that his or her option will be exercised automatically on the New Exercise Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this Section, an option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the option confers the right to purchase, for each share of Common Stock subject to the option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each share of Common Stock held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock). (c) The Committee may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. Amendment or Termination. The Board may at any time terminate or amend the Plan. 7 Except as provided in Section 18, no such termination may affect options previously granted, nor may an amendment make any change in any option theretofore granted which adversely affects the rights of any participant. 20. Notices. All notices or other communications by a participant to the Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Conditions Upon Issuance of Shares (a) Shares shall not be issued with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. If the issuance of any shares of Common Stock pursuant to the Plan is not so registered under the Securities Act, certificates for such shares shall bear a legend reciting the fact that such shares may only be transferred pursuant to an effective registration statement under the Securities Act or an opinion of counsel to the Company that such registration is not required. The Company may also issue "stop transfer" instructions with respect to such shares while they are subject to such restrictions. (c) The Company shall use its best efforts to have the shares issued under the Plan listed on each securities exchange on which the Common Stock is then listed as promptly as possible. The Company shall not be obligated to issue or sell any shares under the Plan until they have been listed on each securities exchange on which the Common Stock is then listed. (d) The Company will promptly file with the Securities and Exchange Commission a registration statement on Form S-8 covering the issuance of the shares of Common Stock pursuant to this Plan, cause such registration statement to become effective, and keep such registration statement effective for the period that this Plan is in effect. 22. Term of Plan. The Plan became effective upon its adoption by the Board on May 22, 1997 and shall continue in effect until the earliest to occur of (i) purchase of all shares of Common Stock subject to the Plan, (ii) May 22, 2007, and (iii) the date the Plan is terminated pursuant to Section 19. 23. Governing Law. To the extent that federal laws do not otherwise control, the Plan shall be construed in accordance with and governed by the laws of the State of Delaware. 24. Savings Clause. This Plan is intended to comply in all aspects with applicable laws and regulations. In case any one or more of the provisions of this Plan shall be held invalid, illegal or unenforceable in any respect under applicable law and regulations, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provisions shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed in compliance with all applicable laws so as to foster the intent of this Plan. 8 EX-10.42 11 a2074704zex-10_42.txt EXHIBIT 10.42 EXHIBIT 10.42 SEVERANCE AND TERMINATION AGREEMENT This Severance and Termination Agreement (the "Agreement") is made and effective as of the 17th day of December, 2001 (the "Effective Date") between Hexcel Corporation (the "Company"), for itself and on behalf of its direct and indirect affiliated entities, and Harold E. Kinne (the "the Employee"). RECITALS WHEREAS, the Company and its direct and indirect affiliated entities (together, the "Consolidated Group") are engaged in the business of developing, manufacturing and marketing carbon fibers, fabrics, composite materials and parts therefrom for the commercial aerospace, space and defense, electronics, recreation and industrial markets throughout the world, and hereafter may engage in other areas of business (collectively, the "Business"); and WHEREAS, the Company employs the Employee as its President and Chief Operating Officer on the date hereof; and WHEREAS, as a result of the Employee's employment with the Company, the Employee has extensive knowledge of the Business and, in particular, technologies, customers, markets and strategic plans relating to the Business; and WHEREAS, the Employee and the Company are parties to the Agreements identified on Schedule A hereto (the "Existing Agreements"), which are identified on Schedule A as "Employment Agreements" (the "Employment Agreements") and as "Equity Agreements" (the "Equity Agreements"); and WHEREAS, the Employee and the Company desire to terminate the employment relationship on an amicable basis effective as of January 4, 2002 (the "Termination Date) and to continue to engage the Employee as a consultant through July 1, 2002; and WHEREAS, the Company is willing to provide the Employee with certain benefits in connection with the termination of the Employee's employment with the Company; and WHEREAS, the Employee, in consideration of receiving such employment termination benefits from the Company, is willing to afford certain protection to the Company in regard to the confidentiality of its information, ownership of inventions and competitive activities, and is willing to release the Company from claims relating to or arising out of the employment relationship. AGREEMENT NOW THEREFORE, in consideration of the mutual terms and conditions hereof, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Employee hereby agree as follows: 1. TERMINATION OF EMPLOYMENT a) The Company and the Employee agree that, effective as of the Termination Date, the Employee shall cease to be employed by the Company, and as of such date the Employee voluntarily and amicably resigns from his employment with the Company and from all of his officerships, directorships and other positions with the Company and its affiliated entities, and the Company accepts such resignations. The Employee further acknowledges that all files, records, electronic data, documents and notes (and all copies, if any, thereof) relating to the Consolidated Group, whether prepared by the Employee or otherwise in his possession, custody or control, together with all office or file keys and passes and all other property of any member of the Consolidated Group, are the exclusive property of the Consolidated Group and shall be delivered to the Company and not retained by the Employee following the Termination Date. b) The Company and the Employee agree that, effective as of the Termination Date, the Employee shall be engaged as an independent consultant to the Company on the terms and conditions set forth on Schedule B. 2. SEVERANCE BENEFITS. a) SEVERANCE PAYMENTS AND BENEFITS. In consideration for the obligations of Employee contained in this Agreement, including without limitation, the Basic Covenants (as defined in Section 3(c)) and the Release contained in Section 4(a), the Company shall provide the Employee with certain payments and enhancements to certain of the Existing Agreements as follows: i) SEVERANCE PAY. The Company shall pay the Employee as severance pay an amount equal to two million four hundred forty-six thousand dollars ($2,446,000) less required deductions and withholdings. Such severance will be paid (A) one million nine hundred thousand dollars ($1,900,000) on the Termination Date by wire transfer to the bank account designated, at least 5 days in advance, by the Employee and (B) the balance at ninety-one thousand dollars ($91,000) per month on or about the first day of each month from February 2002 through July 2002. ii) BENEFITS. As of the Termination Date, the Employee will be eligible to continue group health coverage (i.e. medical and dental) as permitted under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). If Employee elects COBRA continuation coverage, the Company will pay the premium for such coverage from the Termination Date through July 1, 2002. In addition, to the extent permitted by the insurance policies maintained by the Company, the Employee may elect to continue to be covered under other insured benefit plans (including vision, life and disability) at the coverage maintained for him and his family at the Termination Date and the Company will pay the premium for such coverage from the Termination Date through July 1, 2002. Except as specifically provided herein, after the Termination Date, the Employee shall not be entitled to participate in any benefit plan of the Company (including any welfare plan). 2 iii) EQUITY AGREEMENTS. As of the Termination Date, (1) Each Equity Agreement pursuant to which a Performance Accelerated Restricted Stock unit or Restricted Stock Unit has been granted is amended to provide that such units which are not vested as of the Termination Date will vest and, without being subject to the existing limitations relating to Section 162(m) of the Internal Revenue Code of 1986, as amended, the underlying shares will be distributed on the Termination Date. (2) Each Equity Agreement pursuant to which a stock option has been granted is amended to provide that (A) each such stock option that is unvested on the Termination Date will vest and become exerciseable on the Termination Date; (B) all stock options granted pursuant to such Equity Agreements (other than the Special Grant as defined on Schedule A) shall remain exerciseable, and shall not terminate, until January 4, 2003; and (C) all stock options granted pursuant to the Special Grant shall remain exerciseable, and shall not terminate, until January 4, 2005. iv) OUTPLACEMENT. Following the Termination Date, the Company shall, at its own expense, arrange for the Employee to receive outplacement services at a level that is consistent with past practices of the Company for other senior executives (but in no event shall the cost thereof exceed $20,000), provided that such outplacement services shall be provided in the Stamford, CT area. The Employee shall not be entitled to any payment should the Employee determine not to receive such services. v) EXISTING AGREEMENTS. Except as expressly provided in Section 1(a)(iii), the Equity Agreements shall remain in full force and effect in accordance with their respective terms. Except as expressly provided in this Agreement, each of the Employment Agreements shall be of no further force and effect. b) OTHER RIGHTS. The Employee hereby waives, and shall not be entitled to, any payment to which he would be entitled under the Company's Management Incentive Compensation Plan ("MICP") for 2001, and shall not be entitled to participate in the MICP nor any other profit sharing program for 2002. The Employee hereby waives, and shall not be entitled to receive any grant of any equity incentives for 2002 or thereafter. This Agreement shall not affect the Employee's vested rights (determined as of the Termination Date) in, or the Employee's obligations under, any welfare benefit or pension plan (including the Hexcel Corporation Pension Plan and the Hexcel Corporation 401(k) Plan). This Agreement shall not affect the Employee's right to reimbursement for reasonable business expenses incurred, or for current base salary and accrued vacation earned, on or before the Termination Date, except that the accrued vacation earned through the Termination Date shall be fixed at 160 hours notwithstanding actual accruals. c) SURVIVAL OF INDEMNIFICATION. Without limiting the generality of the foregoing, this Agreement does not in any way affect nor release the Employee's right to indemnification, if any, from the Consolidated Group against third party claims as provided by law, by agreement or by each member of the Consolidated Group's charter and by-laws; provided however, the Employee 3 will fully cooperate with the Company as may be requested by the Company in connection with any proceedings or legal actions in which the Company is or may become involved, and will give truthful testimony and information in any such proceedings and legal actions, but nothing in this Section shall prohibit the Employee from responding to a valid subpoena or court order provided that the Employee has given the Company sufficient notice of such subpoena or court order to allow the Company an opportunity to seek a protective order or other relief limiting or barring such disclosure. 3. CONTINUING OBLIGATIONS. a) PROPRIETARY INFORMATION. The Employee acknowledges that the Consolidated Group's trade secrets and confidential and proprietary information (collectively "Proprietary Information"), including without limitation: i) Nonpublic information concerning the Consolidated Group's: (1) Research activities and plans; (2) Marketing or sales plans; (3) Pricing or pricing strategies; (4) Manufacturing techniques; (5) Products; and (6) Strategic plans; ii) Nonpublic financial information, including information concerning revenues, profits and profit margins; and iii) Any nonpublic "material inside information" as such phrase is used for purposes of the Securities Exchange Act of 1934, as amended; constitute valuable, special and unique information of the Consolidated Group. In recognition of this fact and in consideration of the benefits provided to the Employee hereunder, the Employee agrees that he will not disclose any Proprietary Information, to any person or entity, for any reason or purpose whatsoever, nor shall the Employee make use of any Proprietary Information for the benefit of himself or any person, firm, corporation or other entity. Notwithstanding the above, Proprietary Information does not include information (i) which is or becomes publicly available without violation of this Agreement, (ii) of which the Employee, prior to disclosure by the Employee did not know and should not have known was disclosed to the Employee by a third party in violation of any other person's confidentiality or fiduciary obligation, and (iii) which is disclosed in connection with any legal process, provided that the Employee has notified the Company of such process in advance so that the Company may object or obtain a protective order and the Employee reasonably cooperates in the Company's attempt to eliminate or limit the scope of such disclosure. This Section does not, however, affect the obligations of confidentiality which the Employee otherwise may have under law or any other agreement with any member of the Consolidated Group (including without limitation, the Confidentiality Agreement defined on Schedule A and Section 8 of the Severance Agreement as defined on Schedule A) provided, however, that this Agreement shall supercede any such preexisting 4 agreement with respect to the disclosure and/or use of confidential and/or proprietary information on or after the Effective Date. Furthermore, this Agreement does not affect the obligations of the Employee pursuant to Section 7 of the Severance Agreement. b) NON-SOLICITATION; NON-COMPETE. Until two years following the Termination Date, Employee shall not, without the prior written consent of the Company, employ or solicit employment of, or suggest, encourage, or attempt to influence the hiring or termination of any person employed on the date hereof by any member of the Consolidated Group. Furthermore, Employee acknowledges that the pursuit of the activities forbidden by this Section 3(b) would necessarily involve the use or disclosure of Proprietary Information in breach of the obligations of Section 3(a), but that proof of such breach would be extremely difficult. To forestall such disclosure, use and breach, and in consideration of the benefits provided Employee under Section 2, Employee agrees that until two years after the Termination Date he will not engage, in any capacity, directly or indirectly, including without limitation as employee, agent, consultant, manager, executive, director, owner or stockholder (except as a passive investor holding less than a 5% equity interest in an enterprise) in any business entity engaged, in competition anywhere in the world with the Business conducted by the Company or contemplated to be conducted by the Company on the Termination Date; provided that the Employee may be employed by a competitor of the Company so long as the Employee's duties and responsibilities do not relate directly or indirectly to the business segment of the new employer which is actually or potentially engaged in such prohibited competition. For purposes of this Section 3(b) only, the Business conducted by the Company or contemplated to be conducted by the Company is developing, manufacturing and marketing (i) carbon fibers and composite materials (including without limitation, prepreg, adhesives and core and panels manufactured therefrom) for the commercial aerospace, space and defense, recreation and industrial markets, (ii) industrial and reinforcement fabrics for commercial aerospace, space and defense, marine, automotive and rail, printed wiring boards, architectural products, wind energy, construction and civil engineering and ballistics, and (iii) composite parts for commercial aerospace and space and defense markets. For purposes of giving legal effect to the foregoing sentences, the parties acknowledge and agree that the global nature of the business activities of the Consolidated Group as well as the global nature of Employee's responsibilities within the Consolidated Group require the geographic scope of this limitation to be worldwide. c) BREACH OF BASIC COVENANTS. The Employee acknowledges and agrees that, in the event of his breach of any of the Basic Covenants, the Company would be irreparably and immediately harmed and could not be made whole by monetary damages. It is accordingly agreed that any member of the Consolidated Group, in addition to any other remedy to which it may be entitled in law or equity, shall be entitled to an injunction to prevent breaches of any Basic Covenants and/or to compel specific performance of any Basic Covenants. In addition, in the event of any material breach of any Basic Covenants by the Employee and failure of the Employee to cure such material breach within 10 days following notice to him of such breach, the Company shall have no further obligations under this Agreement including, without limitation, any obligation to make any payment under Sections 1(b) and 2(a)(i), (ii) and (iv) or to amend any Equity Agreement under Section 2(a)(iii). Notwithstanding anything to the contrary contained in this Agreement, and in addition to other remedies provided herein or by law, in the event that the Employee is in breach of any provisions of Sections 3 and 8 of this Agreement 5 (collectively, the "Basic Covenants"), then the Company shall be entitled to recover from the Employee the value of all of the compensation, severance and benefits received by the Employee pursuant to Sections 1(b) and 2(a), including without limitation any spread between exercise price and market price of employee stock options exercised after the Termination Date, together with reasonable attorneys fees and expenses incurred by the Company in connection therewith. 4. RELEASE. a) RELEASE. In consideration of the mutual covenants and agreements contained herein, the Employee, for himself and on behalf of his heirs, executors, administrators and representatives, hereby irrevocably and unconditionally, knowingly and voluntarily, releases, acquits, and forever discharges each member of the Consolidated Group and their respective stockholders, officers, directors, employees, representatives, attorneys and agents, and each of their respective successors and assigns (referred to collectively as the "Releasees") from any and all claims and causes of action whether known to the Employee or unknown, suspected or unsuspected, which exist or may have existed or may arise in any way relating to any act or omission or other matter occurring up to and including the Termination Date, including, without limitation, the Employee's employment relationship with the Company, rights or claims which did exist or which might have been asserted pursuant to any express or implied contract of employment or any Existing Agreement (except as otherwise provided in this Agreement), or under any tort, federal, state, or local fair employment practice or civil rights law, any other statute, executive order, law, ordinance, or any other duty or obligation of any kind or description. For the avoidance of doubt and not in limitation of the foregoing, this release includes (i) all claims which have existed from the beginning of the world to the Termination Date and which may arise in the future out of any and all occurrences or omissions up to and including the Termination Date, and (ii) all claims for alleged discrimination based upon age, race, sex, religion, national origin, citizenship, or disability, and includes any claim asserted or unasserted, which could arise under Title VII of the Civil Rights Act of 1964, 42 U.S.C. Section 1981, 42 U.S.C. Section 1983, the Connecticut Human Rights and Opportunities Act, the Age Discrimination in Employment Act of 1967, 29 U.S.C. Section 621 et seq., (individually and collectively, "ADEA"), New York Fair Employment and Housing Act, the Family and Medical Leave Act, 29 U.S.C. Section 2601 et seq., the Employee Retirement Income Security Act of 1974, 29 U.S.C. Section 1001 et seq., the Americans With Disabilities Act of 1990, 42 U.S.C. Section 12101 et seq., the Older Workers Benefit Protection Act (individually and collectively, "OWBPA") and any fair employment practice, equal employment opportunity, or employee benefit statute under any federal, state, or local law, or any judicial decision or executive order now or hereafter recognized, as well as any unsuspected and unanticipated claims, liens, injuries and damages as well as those that are known. b) ALL CLAIMS RELEASED. Notwithstanding anything to the contrary contained in this Agreement, and for the purpose of implementing a full and complete release, the Employee understands and agrees that, except as otherwise provided in this Agreement, this Agreement is intended to include all claims, if any, which the Employee may have that the Employee does not now know or suspect to exist in the Employee's favor against the Company or any Releasee, and that this Agreement extinguishes those claims; provided, however, that the matters released pursuant to Section 4(a) hereof shall not include any express obligation of the 6 Company pursuant to this Agreement, nor any vested rights as described in Section 2(b) hereof nor any rights to indemnity described in Section 2(c) hereof. In furtherance of the provisions of this Section 4(b), the Employee hereby expressly consents that this Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those extending to, involving, releasing or discharging, unknown and unsuspected claims, demands or causes of action, if any. c) EMPLOYEE'S RESPONSIBILITIES. The Employee hereby irrevocably and unconditionally, knowingly and voluntarily, waives and gives up any right the Employee has, had, or might have had to commence a legal action against the Releasees with respect to the matters released in Section 4(a), to the full extent permitted by applicable law. The Employee represents and warrants to the Company that prior to the Effective Date he has not filed or permitted to be filed with any court, governmental or administrative agency, or arbitration tribunal, any complaint, lawsuit, charge or claim against any one or more of the Releasees in respect of any such matter. The Employee further agrees and covenants not to (i) seek or be entitled to any recovery in any proceeding of any nature whatsoever in connection with such matters and (ii) except as may otherwise be agreed to in writing by the Company, seek and accept employment with any member of the Consolidated Group after the Termination Date. Should any such proceeding be brought against any one or more of the Releasees, the Employee shall take all steps necessary to opt out, abandon, and disclaim interest in such proceeding. If such proceeding is brought successfully and thereby the Employee becomes entitled to a monetary award, the Employee agrees that the Releasees shall be entitled to recoup either the consideration paid under this Agreement or the proceeds received by him in such proceeding, whichever is less. Further, to the full extent permitted by applicable law, the Employee shall not testify, assist or participate (except in response to subpoena or judicial order) in any lawsuit or any judicial proceeding brought against any one or more of the Releasees in connection with such matters. Neither the existence nor terms of this Agreement nor any claims or allegations that were or could have been raised by the Employee as of the Effective Date, nor the facts and circumstances underlying such claims or allegations, shall be admissible or submitted as evidence in any litigation in any forum for any purpose other than to determine the enforceability and/or to secure enforcement of the terms and conditions of this Agreement. Notwithstanding anything to the contrary in this Section 4(c) or anywhere else in this Agreement, the Employee may bring a claim to challenge the validity of this Agreement under the ADEA and/or the OWBPA, and the Employee shall not be required to pay the attorneys fees or costs incurred by the Company in connection with such a claim, and shall not be required to repay any amounts to the Company that were paid to the Employee by the Company under this Agreement as a result of bringing such a claim. d) REVOCATION. The Employee acknowledges that he received a draft of this document on December 13, 2001; that he has been offered by the Company at least forty-five days from the date he received this Agreement within which to consider its terms; that he has been advised by the Company that during such period he should consult an attorney regarding the terms of this Agreement and that if he signs before the expiration of said forty-five days he does so of his own free will and with the full knowledge that he could have taken the full forty-five days and that he waives, in all respects, the forty-five day waiting period he is permitted to 7 review this Agreement; and he realizes and understands that this Agreement applies to and covers all claims, demands, and causes of action, including those that could be asserted under ADEA against the Consolidated Group. The Employee represents and warrants that he has, in fact, considered this Agreement and that he knowingly and voluntarily enters into this Agreement including, but not limited to, the releases and waivers set forth above. The terms of this Agreement shall become effective and enforceable upon the Effective Date. Notwithstanding the preceding sentence, the Employee shall have seven (7) days from the Effective Date to revoke his consent to the release and waiver of his rights under ADEA set forth in Section 4(a) herein by written notice to be received by the Company before 5:00 P.M. New York City time on the seventh day. If no such revocation occurs, the Employee's release and waiver of his rights under ADEA shall become effective at such time. In the event that the Employee revokes his release and waiver of rights under ADEA, the Company shall have no obligation to the Employee under either Section 1(b) or 2(a), but all other terms, provisions and agreements contained in this Agreement shall remain in full force and effect. 5. VALIDITY; INJUNCTIVE RELIEF. Notwithstanding anything to the contrary contained in this Agreement, the terms of this Agreement shall be regarded as severable. If any provision of this Agreement, or the application thereof to any circumstance, is held invalid or unenforceable for any reason whatsoever, such provision shall be severable and shall not affect any other provision hereof or the application thereof to any other circumstance which can be given effect without such invalid provision or application. If any provision or term should be interpreted to be so broad as to be unenforceable, then such terms shall be restricted as necessary to make such term enforceable to the fullest extent permitted by law. 6. NOTICE. All notices and all other communications required or permitted pursuant to this Agreement shall be in writing, and, except as specifically provided herein, shall be deemed to have been duly given when personally delivered by courier, or by fax transmission, or when received by United States certified or registered mail, postage prepaid, addressed to the respective addresses set forth below: If to the Company: Hexcel Corporation 281 Tresser Boulevard Two Stamford Plaza, 16th Floor Stamford, CT 6901-3261 Attn: General Counsel Fax: (203) 358-3972 If to the Employee: Harold E. Kinne 107 Heming Way Stamford, CT 06903 8 The foregoing addresses may be changed by a party giving a notice of such change as provided in this Section 6. 7. GOVERNING LAW; JURISDICTION; ARBITRATION. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF CONNECTICUT WITHOUT REFERENCE TO SUCH STATE'S CONFLICT OF LAW RULES. ALL DISPUTES CONCERNING THE APPLICATION OR ENFORCEMENT OF THE AGREEMENT, INCLUDING ALL CLAIMS RELATING TO EMPLOYEE'S EMPLOYMENT OR TERMINATION OF EMPLOYMENT AFTER THE COMMENCEMENT DATE, SHALL, IF NECESSARY, BE RESOLVED BY FINAL AND BINDING ARBITRATION BEFORE A SINGLE ARBITRATOR SELECTED BY MUTUAL AGREEMENT OR (FAILING AGREEMENT) SELECTED IN ACCORDANCE WITH THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN EFFECT (THE "ARBITRATOR"). THE ARBITRATION SHALL OTHERWISE BE CONDUCTED IN STAMFORD, CONNECTICUT, AND IN ACCORDANCE WITH THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION THEN IN EFFECT. THE ARBITRATOR SHALL ISSUE A WRITTEN AWARD CONTAINING FINDINGS OF FACT AND CONCLUSIONS OF LAW, AND IS EMPOWERED TO GRANT ANY LEGAL OR EQUITABLE RELIEF WHICH THE COURT COULD AWARD HAD THE MATTER BEEN BROUGHT BEFORE IT. NOTWITHSTANDING THIS AGREEMENT TO ARBITRATE, IN EXIGENT CIRCUMSTANCES, EITHER PARTY MAY REQUEST AN APPROPRIATE COURT OF LAW FOR TEMPORARY EQUITABLE RELIEF PENDING THE APPOINTMENT OF, AND AWARD BY, THE ARBITRATOR. ANY AWARD OF THE ARBITRATOR MAY INCLUDE AN AWARD OF COSTS OF ARBITRATION. THE AWARD OF THE ARBITRATOR MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. EMPLOYEE ACKNOWLEDGES AND UNDERSTANDS THAT HE IS WAIVING THE RIGHT TO ADJUDICATE EMPLOYMENT-RELATED CLAIMS, INCLUDING EMPLOYMENT DISCRIMINATION CLAIMS, IN A JUDICIAL FORUM AND IS OPTING INSTEAD TO ARBITRATE ALL SUCH CLAIMS. 8. NONDISCLOSURE; NONDISPARAGEMENT. The Employee hereby covenants and agrees that (i) after the Effective Date, he will not (except as to his personal representatives or as otherwise required by law) disclose the existence of this Agreement or the terms and conditions hereof to any other person or entity, and (ii) he will not make, or cause to be made, any statement, observation, opinion, or communication (whether oral or written) that disparages the Consolidated Group, any member thereof, or any of their respective past or present officers, directors, shareholders or employees, whether concerning his separation from employment or otherwise or that accuses or implies that any such entity or person engaged in any wrongful or improper conduct, whether or not related to the Employee's employment with the Company or the termination of such employment. Nothing herein shall prevent the Employee from disclosing to a prospective or existing employer the existence of the limitations imposed on the Employee by Section 3 hereof. Furthermore, the Company hereby covenants and agrees that none of the officers of the Company will make, or cause to be made, any statement, observation, opinion or communication (whether oral or written) that disparages the Employee, whether 9 concerning his separation from employment or otherwise or that accuses or implies that the Employee engaged in any wrongful or improper conduct, whether or not related to the Employee's employment with the Company or the termination of such employment. 9. ENTIRE AGREEMENT. This Agreement (including the Schedules) sets forth the entire understanding of the parties hereto in respect of the subject matter hereof and, except as specifically provided herein, supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto or its agent or representative; and, except as specifically provided herein, any prior agreement of the parties hereto in respect of the subject matter hereof is hereby terminated and cancelled except as specifically provided herein. No terms, conditions, amendments or modifications hereto shall be binding unless made in writing and signed by the parties hereto. 10. NO WAIVER. The failure of the Company or the Employee to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver thereof or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. 11. WITHHOLDING BY COMPANY. All payments in cash or by delivery of shares of stock payable to the Employee pursuant to this Agreement shall be made net of all applicable withholding and payroll taxes under federal, state and local laws. 12. TRANSACTIONS IN COMPANY SECURITIES. The Employee covenants and agrees to comply with all applicable securities laws and all of the Company's policies, including the Insider Information and Trading Policy, with respect to any transaction involving any securities of the Company after the date hereof. 13. NON-ADMISSION OF LIABILITY. This Agreement shall not be construed in any way as an admission by the Company that it has acted wrongfully with respect to the Employee or any other person. IN WITNESS WHEREOF, the Company and the Employee have executed this Agreement as of the date first written above. HEXCEL CORPORATION By: /s/ Ira J. Krakower /s/ Harold E. Kinne ------------------------ --------------------------- Name: Ira J. Krakower Harold E. Kinne Title: Senior Vice President, Secretary and General Counsel 10 SCHEDULE A EXISTING AGREEMENTS EMPLOYMENT AGREEMENTS a) Employee Confidentiality Agreement dated July 15, 1998 (the "Confidentiality Agreement") b) Executive Deferred Compensation and Consulting Agreement dated July 15, 1996 c) Executive Severance Agreement dated February 3, 1999 (the "Severance Agreement")* d) Supplemental Executive Retirement Agreement dated May 10, 2000, as amended by First Amendment to Supplemental Executive Retirement Agreement dated July, 2001* EQUITY AGREEMENTS a) Non-Qualified Option Agreement dated July 15, 1998* b) 1998 Performance Accelerated Restricted Stock Unit Agreement dated July 15, 1998* c) Performance Accelerated Stock Option Agreement dated July 15, 1998* d) Reload Option Agreement dated July 30, 1998* e) Non-Qualified Option Agreement dated October 13, 1998* f) 1998 Performance Accelerated Restricted Stock Unit Agreement dated October 13, 1998* g) Exchange Performance Accelerated Stock Option Agreement dated October 30, 1998* h) Non-Qualified Option Agreement dated February 3, 1999* i) 1999 Performance Accelerated Restricted Stock Unit Agreement dated February 3, 1999* j) Grant of Restricted Stock Units Under the Hexcel Corporation Management Stock Purchase Plan dated February 3, 1999* k) Performance Accelerated Restricted Stock Unit Agreement dated December 2, 1999* (2 grants) l) Employee Option Agreement dated December 2, 1999* (2 grants) m) Performance Accelerated Restricted Stock Unit Agreement dated December 20, 2000 n) Employee Option Agreement dated December 20, 2000 (50,395 shares @ $11.00) (the "Special Grant") o) Employee Option Agreement dated December 20, 2000 p) Grant of Restricted Stock Units under the Hexcel Corporation Management Stock Purchase Plan, dated February 1, 2001 *As amended by Amendment to Agreements dated October 11, 2000, which Amendment is as amended by Amendment to Amendment to Agreements dated November 21, 2000 SCHEDULE B CONSULTING TERMS AND CONDITIONS (a) CONSULTANT. During the term below, Harold E. Kinne (the "Consultant") shall be an independent consultant to (and not an employee of) the Consolidated Group on the terms below. (b) DUTIES. Duties shall be as assigned by the Chief Executive Officer of the Company. Consultant has no obligation to provide services on more than 30 working days, reasonable prior notice to Consultant required. (c) TERM. January 4, 2002 through July 1, 2002. (d) COMPENSATION. $60,000, payable $10,000 per month on or about the first day of each month from February 2002 through July 2002. Consultant shall not accrue any vacation or sick pay, nor be entitled to any other compensation or benefits in consideration for these services. (e) EXPENSES; SERVICES. Reasonable business expenses approved in advance shall be reimbursed pursuant to normal Hexcel policy. The Company will not provide the Consultant with services, support, space or materials. (f) INSURANCE. Consultant will carry insurance of the type and amount normally carried by independent consultants providing similar services to the Company and shall provide evidence of such insurance on request. (g) HEXCEL PROPERTY AND PROPRIETARY INFORMATION. The second sentence of Section 1(a) shall apply to Consolidated Group items developed or otherwise obtained by Consultant during the term. Section 3(a) shall apply to restrict disclosure or use of Proprietary Information developed, obtained or received by Consultant during the term. (h) OWNERSHIP OF INTELLECTUAL PROPERTY. All trade secrets, know-how, confidential information, inventions (whether patentable or not), copyrights, tradenames, information, ideas, devices, improvements, advice or data and all other results (whether or not evidenced in documentary form, and including notes, memoranda, reports and findings) created or developed by Consultant, in whole or in part, arising out of, or related to the duties performed during the term (collectively "Intellectual Property"), shall be deemed the sole and exclusive property of the Company created or developed for and on behalf of the Company in exchange for reasonable compensation and, where applicable, "works for hire". Consultant assigns to the Company all right, title and interest in the Intellectual Property, if any. Consultant shall promptly execute and deliver all documents and do such other acts as the Company may reasonably request, at the Company's expense, to transfer to, and to vest and evidence the vesting in, the Company of all right, title and interest in and to the Intellectual Property. (i) CONSULTANT UNDERSTANDS AND AGREES THAT THIS SCHEDULE B PROVIDES FOR THE ENTIRE COMPENSATION TO BE PAID TO CONSULTANT RESULTING FROM THE DUTIES TO BE PERFORMED BY CONSULTANT ON BEHALF OF THE COMPANY, THAT THE COMPANY'S LIABILITY FOR COMPENSATION IS LIMITED TO PAYMENT OF THE COMPENSATION PROVIDED IN THIS SCHEDULE B, AND THAT UNDER NO CIRCUMSTANCES WILL CONSULTANT BE ELIGIBLE FOR ANY BENEFITS OR RIGHTS UNDER ANY EMPLOYEE BENEFIT PLAN OF THE COMPANY WITH RESPECT TO THE PERFORMANCE OF HIS CONSULTING DUTIES, EVEN IF A GOVERNMENT AGENCY OR TAXING AUTHORITY RECHARACTERIZES THE RELATIONSHIP BETWEEN THE PARTIES AS AN EMPLOYMENT RELATIONSHIP. Consultant agrees to pay applicable taxes (including self-employment and other similar taxes) which may arise as a result of the consulting duties. EX-10.42(D) 12 a2074704zex-10_42d.txt EXHIBIT 10.42(D) EXHIBIT 10.42(d) FIRST AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT AMENDMENT made this 30th day of July 2001, between Hexcel Corporation, a Delaware corporation (the "Company"), and Harold E. Kinne (the "Executive"). WHEREAS, the Company and the Executive have entered into that certain Supplemental Executive Retirement Agreement dated May 10, 2000 (the "Agreement"), and WHEREAS, the Company and the Executive desire to amend the Agreement. NOW, THEREFORE, the parties mutually agree as follows: 1. Section 2.2.2 of the Agreement shall be amended to read in its entirety as follows: "Subject to Section 2.2.7, upon (i) termination by the Executive of his employment for Good Reason within two years following a Change in Control, (ii) termination of the Executive's employment by the Company other than for Cause within two years following a Change in Control or (iii) a termination of the Executive's employment described in Section 4(e) of the Executive Severance Agreement (whether by the Company or the Executive), the Company will pay the Executive, no later than the next business day following the date of such termination, by wire transfer to the Executive's bank account, as designated by the Executive, an amount equal to the actuarial present value of a monthly benefit starting on the first of the month after his employment terminates, computed under Section 2.2.1 using a Vesting Percentage of 100% and Continuous Service equal to the Executive's actual Continuous Service at the time his employment terminates plus 36 months, with such monthly benefit reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the first day of the month after his employment terminates precedes the Executive's attainment of age 65." 2. Section 2.2.3 of the Agreement shall be amended to read in its entirety as follows: "Subject to Section 2.2.7, and except as otherwise provided in Section 2.2.2, upon termination of the Executive's employment at any time by the Company other than for Cause or by the Executive for Good Reason, the Company will pay the Executive, as soon as practicable following such date of termination, an amount equal to the actuarial present value of a monthly benefit starting on the first of the month after his employment terminates, computed under Section 2.2.1 using a Vesting Percentage of 100% and Continuous Service equal to the Executive's actual Continuous Service at the time his employment terminates plus 12 months, with such monthly benefit reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the first day of the month after his employment terminates precedes the Executive's attainment of age 65." 3. The second sentence of Section 2.2.7 of the Agreement shall be amended to read in its entirety as follows: "In lieu of the lump sum form of benefit prescribed in Sections 2.2.2. and 2.2.3, the Executive may elect to receive his benefit hereunder as a monthly benefit, computed under Section 2.2.1 and reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the benefit commencement date precedes the Executive's attainment of age 65, starting on the first of the month after his employment terminates and ending with the payment for the month in which his death occurs or, if later, after the payment of 120 such payments." 4. This First Amendment shall be effective as of the date and year first written above. Except as otherwise expressly amended by this First Amendment, the Agreement shall remain in full force and effect. HEXCEL CORPORATION By: /s/ Ira J. Krakower -------------------------- Name: Ira J. Krakower Title: Senior Vice President /s/ Harold E. Kinne ------------------------- Harold E. Kinne 2 EX-10.43(D) 13 a2074704zex-10_43d.txt EXHIBIT 10.43(D) EXHIBIT 10.43(d) FIRST AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT AMENDMENT made this 30th day of July 2001, between Hexcel Corporation, a Delaware corporation (the "Company"), and Stephen C. Forsyth (the "Executive"). WHEREAS, the Company and the Executive have entered into that certain Supplemental Executive Retirement Agreement dated May 10, 2000 (the "Agreement"), and WHEREAS, the Company and the Executive desire to amend the Agreement. NOW, THEREFORE, the parties mutually agree as follows: 1. Section 2.2.2 of the Agreement shall be amended to read in its entirety as follows: "Subject to Section 2.2.7, upon (i) termination by the Executive of his employment for Good Reason within two years following a Change in Control, (ii) termination of the Executive's employment by the Company other than for Cause within two years following a Change in Control or (iii) a termination of the Executive's employment described in Section 4(e) of the Executive Severance Agreement (whether by the Company or the Executive), the Company will pay the Executive, no later than the next business day following the date of such termination, by wire transfer to the Executive's bank account, as designated by the Executive, an amount equal to the actuarial present value of a monthly benefit starting on the first of the month after his employment terminates, computed under Section 2.2.1 using a Vesting Percentage of 100% and Continuous Service equal to the Executive's actual Continuous Service at the time his employment terminates plus 36 months, with such monthly benefit reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the first day of the month after his employment terminates precedes the Executive's attainment of age 65." 2. Section 2.2.3 of the Agreement shall be amended to read in its entirety as follows: "Subject to Section 2.2.7, and except as otherwise provided in Section 2.2.2, upon termination of the Executive's employment at any time by the Company other than for Cause or by the Executive for Good Reason, the Company will pay the Executive, as soon as practicable following such date of termination, an amount equal to the actuarial present value of a monthly benefit starting on the first of the month after his employment terminates, computed under Section 2.2.1 using a Vesting Percentage of 100% and Continuous Service equal to the Executive's actual Continuous Service at the time his employment terminates plus 12 months, with such monthly benefit reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the first day of the month after his employment terminates precedes the Executive's attainment of age 65." 3. The second sentence of Section 2.2.7 of the Agreement shall be amended to read in its entirety as follows: "In lieu of the lump sum form of benefit prescribed in Sections 2.2.2. and 2.2.3, the Executive may elect to receive his benefit hereunder as a monthly benefit, computed under Section 2.2.1 and reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the benefit commencement date precedes the Executive's attainment of age 65, starting on the first of the month after his employment terminates and ending with the payment for the month in which his death occurs or, if later, after the payment of 120 such payments." 4. This First Amendment shall be effective as of the date and year first written above. Except as otherwise expressly amended by this First Amendment, the Agreement shall remain in full force and effect. HEXCEL CORPORATION By: /s/ Ira J. Krakower ------------------------- Name: Ira J. Krakower Title: Senior Vice President /s/ Stephen C. Forsyth ----------------------------- Stephen C. Forsyth 2 EX-10.44(C) 14 a2074704zex-10_44c.txt EXHIBIT 10.44(C) EXHIBIT 10.44(c) FIRST AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT AMENDMENT made this 30th day of July 2001, between Hexcel Corporation, a Delaware corporation (the "Company"), and Ira J. Krakower (the "Executive"). WHEREAS, the Company and the Executive have entered into that certain Supplemental Executive Retirement Agreement dated May 10, 2000 (the "Agreement"), and WHEREAS, the Company and the Executive desire to amend the Agreement. NOW, THEREFORE, the parties mutually agree as follows: 1. Section 2.2.2 of the Agreement shall be amended to read in its entirety as follows: "Subject to Section 2.2.7, upon (i) termination by the Executive of his employment for Good Reason within two years following a Change in Control, (ii) termination of the Executive's employment by the Company other than for Cause within two years following a Change in Control or (iii) a termination of the Executive's employment described in Section 4(e) of the Executive Severance Agreement (whether by the Company or the Executive), the Company will pay the Executive, no later than the next business day following the date of such termination, by wire transfer to the Executive's bank account, as designated by the Executive, an amount equal to the actuarial present value of a monthly benefit starting on the first of the month after his employment terminates, computed under Section 2.2.1 using a Vesting Percentage of 100% and Continuous Service equal to the Executive's actual Continuous Service at the time his employment terminates plus 36 months, with such monthly benefit reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the first day of the month after his employment terminates precedes the Executive's attainment of age 65." 2. Section 2.2.3 of the Agreement shall be amended to read in its entirety as follows: "Subject to Section 2.2.7, and except as otherwise provided in Section 2.2.2, upon termination of the Executive's employment at any time by the Company other than for Cause or by the Executive for Good Reason, the Company will pay the Executive, as soon as practicable following such date of termination, an amount equal to the actuarial present value of a monthly benefit starting on the first of the month after his employment terminates, computed under Section 2.2.1 using a Vesting Percentage of 100% and Continuous Service equal to the Executive's actual Continuous Service at the time his employment terminates plus 12 months, with such monthly benefit reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the first day of the month after his employment terminates precedes the Executive's attainment of age 65." 3. The second sentence of Section 2.2.7 of the Agreement shall be amended to read in its entirety as follows: "In lieu of the lump sum form of benefit prescribed in Sections 2.2.2. and 2.2.3, the Executive may elect to receive his benefit hereunder as a monthly benefit, computed under Section 2.2.1 and reduced by one quarter of one percent (1/4%) per payment for each full calendar month by which the benefit commencement date precedes the Executive's attainment of age 65, starting on the first of the month after his employment terminates and ending with the payment for the month in which his death occurs or, if later, after the payment of 120 such payments." 4. This First Amendment shall be effective as of the date and year first written above. Except as otherwise expressly amended by this First Amendment, the Agreement shall remain in full force and effect. HEXCEL CORPORATION By: /s/ Stephen C. Forsyth --------------------------- Name: Stephen C. Forsyth Title: Executive Vice President /s/ Ira J. Krakower --------------------------- Ira J. Krakower 2 EX-10.56 15 a2074704zex-10_56.txt EXHIBIT 10.56 EXHIBIT 10.56 $100,000,000 HEXCEL CORPORATION 93/4% SENIOR SUBORDINATED NOTES DUE 2009 PURCHASE AGREEMENT June 15, 2001 CREDIT SUISSE FIRST BOSTON CORPORATION DEUTSCHE BANC ALEX. BROWN INC. GOLDMAN, SACHS & CO. J.P. MORGAN SECURITIES INC. c/o CREDIT SUISSE FIRST BOSTON CORPORATION Eleven Madison Avenue, New York, N.Y. 10010-3629 Dear Sirs: 1. INTRODUCTORY. Hexcel Corporation, a Delaware corporation (the "COMPANY"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several initial purchasers named in Schedule A hereto (the "INITIAL PURCHASERS") $100,000,000 principal amount of its 9 3/4% Senior Subordinated Notes Due 2009 (the "OFFERED SECURITIES"). The Offered Securities will be issued as additional securities under an indenture dated as of January 21, 1999 (the "INDENTURE"), between the Company and The Bank of New York, as trustee (the "TRUSTEE"). The Offered Securities will be offered and sold to the Initial Purchasers without being registered under the Securities Act of 1933 (the "SECURITIES ACT"), in reliance upon an exemption therefrom. Prior to the Closing Date (as defined herein), the Company will deliver to the Initial Purchasers a Preliminary Offering Circular (as defined herein) setting forth the information concerning the Company and the Offered Securities. Any references herein to the Offering Circular (as defined herein) shall be deemed to include all amendments and supplements thereto, unless otherwise noted, and all documents (the "INCORPORATED DOCUMENTS") incorporated by reference therein and filed under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"); and any references herein to the terms "amend", "amendment" or "supplement" with respect to the Offering Circular shall be deemed to refer to and include the filing of any document under the Exchange Act subsequent to the date thereof and before the Closing Date that is incorporated by reference therein. The Company hereby confirms that it has authorized the use of the Incorporated Documents and the Offering Document (as defined herein) in connection with the offering and resale of the Offered Securities by the Initial Purchasers in accordance with Section 4 hereof. Holders of the Offered Securities (including the Initial Purchasers and their direct and indirect transferees) will be entitled to the benefits of a Registration Rights Agreement to be entered into, among the Company and the Initial Purchasers (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company will agree to file with the Securities and Exchange Commission (the "COMMISSION") (i) a registration statement under the Securities Act (the "EXCHANGE OFFER REGISTRATION STATEMENT") registering an issue of senior subordinated notes of the Company (the "EXCHANGE NOTES"), which are identical in all material respects to the Offered Securities (except that the Exchange Notes will not contain terms with respect to transfer restrictions and interest rate increase) and (ii) under certain circumstances, a shelf registration statement pursuant to Rule 415 under the Securities Act. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Offering Document. The Company hereby agrees with the Initial Purchasers as follows: 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with, the Initial Purchasers that: (a) A preliminary offering circular and an offering circular relating to the Offered Securities has been prepared by the Company. Such preliminary offering circular (the "PRELIMINARY OFFERING CIRCULAR") and offering circular (the "OFFERING CIRCULAR"), as both are supplemented as of the date of this Agreement, and any other document approved by the Company for use in connection with the contemplated resale of the Offered Securities, are hereinafter collectively referred to as the "OFFERING DOCUMENT". On the date of this Agreement, the Offering Document does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from the Offering Document based upon written information furnished to the Company by any Initial Purchaser through Credit Suisse First Boston Corporation ("CSFBC") specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) hereof. Except as disclosed in the Offering Document, on the date of this Agreement, the Incorporated Documents and all subsequent reports (collectively, the "EXCHANGE ACT REPORTS") which have been filed by the Company with the Commission or sent to stockholders pursuant to the Exchange Act when they were filed with the Commission, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder. (b) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the condition (financial or other), business, properties or results of operations of the Company and its Subsidiaries (as hereinafter defined), taken as a whole (a "MATERIAL ADVERSE EFFECT"). (c) Each significant subsidiary of the Company within the meaning of Rule 1-02(w) of Regulation S-X under the Securities Act is listed in Schedule B hereto (each individually, a "SUBSIDIARY" and collectively, the "SUBSIDIARIES"). Each Subsidiary of the Company has been duly incorporated and is a validly existing corporation in good standing (where applicable) under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Offering Document; and each Subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing (where applicable) in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to be so qualified would not have a Material Adverse Effect; all of the issued and outstanding capital stock of each Subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and, except as disclosed in the Offering Document, the capital stock of each Subsidiary is owned by the Company, directly or through Subsidiaries, and is owned free from material liens, encumbrances and defects except for liens and encumbrances created by or under the Senior Credit Facility (as defined in the Offering Document). (d) The Indenture has been duly authorized by the Company; the Offered Securities have been duly authorized by the Company; and when the Offered Securities are delivered and paid for pursuant to this Agreement and the Indenture on the Closing Date, the Indenture will have been duly executed and delivered (assuming due authorization, execution and delivery by the Trustee), such Offered Securities will have been duly executed, authenticated, issued and delivered (assuming authentication by the Trustee in accordance with the provisions of the Indenture) and will conform in all material respects to the description thereof contained in the Offering Document; and the Indenture and such Offered Securities will constitute valid and legally binding obligations of the Company (and the Offered Securities will be entitled to the benefits in the Indenture), enforceable in accordance with their terms, except to the extent that enforcement 2 thereof may be limited by (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws, now or hereafter in effect, relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (e) Except as disclosed in the Offering Document, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Initial Purchaser for a brokerage commission, finder's fee or other like payment in connection with the issuance and sale of Offered Securities. (f) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement and the Registration Rights Agreement in connection with the issuance and sale of the Offered Securities by the Company except (i) those that have been obtained or made; (ii) for filings and qualifications contemplated by the Registration Rights Agreement; (iii) such as may be required under foreign or state securities or blue sky laws; or (iv) such Exchange Act Reports as may be required to be filed with the Commission after the Closing Date pursuant to the Company's periodic reporting requirements under Sections 13 and 15(d) of the Exchange Act. (g) The Registration Rights Agreement has been duly authorized by the Company and will conform in all material respects to the description thereof in the Offering Document and, when the Registration Rights Agreement has been duly executed and delivered by the Initial Purchasers, will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws, now or hereinafter in effect, relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (h) This Agreement has been duly authorized, executed and delivered by the Company. (i) The execution, delivery and performance of the Indenture, Registration Rights Agreement and this Agreement, and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any Subsidiary of the Company or any of their properties, or (ii) any agreement (except for such provisions in the Senior Credit Facility (as defined in the Offering Document)) which shall be amended or consents obtained to avoid any default thereunder) or instrument to which the Company or any such Subsidiary is a party or by which the Company or any such Subsidiary is bound or to which any of the properties of the Company or any such Subsidiary is subject, or (iii) the charter or by-laws of the Company or any such Subsidiary except, in the case of clauses (i) and (ii) above, for breaches, violations and defaults that would not have a Material Adverse Effect or prevent or negate the effectiveness of the Indenture, Registration Rights Agreement or this Agreement; and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement. (j) The Company and its Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or to be made thereof by them except, in each case, (i) as disclosed in the Offering Document; (ii) such liens and encumbrances created by or under the Senior Credit Facility (as defined in the Offering Document); or (iii) such as do not have a Material Adverse Effect; and the Company and its Subsidiaries hold any leased real or personal property under valid and enforceable leases with such exceptions as are not material to the Company and its Subsidiaries taken as a whole and would not materially interfere with the use made or proposed to be made thereof by them except (i) as disclosed in the Offering Document; or (ii) such as do not have a Material Adverse Effect. 3 (k) The Company and its Subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business in the manner presently conducted by them, subject to such qualifications as may be set forth in the Offering Document or except where the failure to so possess would not, singularly or in the aggregate, have a Material Adverse Effect and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its Subsidiaries, would have a Material Adverse Effect. (l) No labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent that might have a Material Adverse Effect. (m) The Company and its Subsidiaries own, possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "INTELLECTUAL PROPERTY RIGHTS") necessary to conduct the business now operated by them, or presently employed by them except where the failure to so own or possess would not, singularly or in the aggregate, have a Material Adverse Effect and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its Subsidiaries, would individually or in the aggregate have a Material Adverse Effect. (n) Except as disclosed in the Offering Document, neither the Company nor any of its Subsidiaries is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous or toxic substances or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances or wastes (collectively, "ENVIRONMENTAL LAWS"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any off-site disposal or contamination pursuant to any environmental laws, or, to the knowledge of the Company, is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Company is not aware of any pending investigation which might lead to such a claim. (o) Except as disclosed in the Offering Document, there are no pending actions, suits or proceedings against or affecting the Company or any of its Subsidiaries or, to the knowledge of the Company or its Subsidiaries, to which any of their respective properties are subject or that, if determined adversely to the Company or any of its Subsidiaries, would individually or in the aggregate have a Material Adverse Effect, or would materially and adversely affect the ability of the Company to perform its obligations under the Indenture or this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings are, to the Company's knowledge, threatened or contemplated. (p) The historical financial statements included in the Offering Document present fairly the financial position of the Company and its consolidated subsidiaries on the basis stated in the Offering Document as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis throughout the periods involved, except as disclosed therein; and the pro forma financial information, and the related notes thereto included in the Offering Document and the assumptions used in preparing such pro forma financial statements are a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts. (q) Except as disclosed in the Offering Document, since the date of the latest audited financial statements included in the Offering Document there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), 4 business, properties or results of operations of the Company and its Subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Offering Document, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (r) The Company is not an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the United States Investment Company Act of 1940 (the "INVESTMENT COMPANY ACT"); and the Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Offering Document, will not be an "investment company" required to be registered under the Investment Company Act. (s) No securities of the same class (within the meaning of Rule 144A(d)(3) under the Securities Act) as the Offered Securities are listed on any national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system. (t) Assuming the accuracy of the representations and warranties of the Initial Purchasers set forth in this Agreement and compliance by the Initial Purchasers with the provisions of this Agreement, it is not necessary in connection with the offer, sale and delivery of the Offered Securities to the Initial Purchasers and to each subsequent purchaser in the manner contemplated by this Agreement and the Offering Document to register the Offered Securities under the Securities Act or to qualify the Indenture under the United States Trust Indenture Act of 1939, as amended (the "TRUST INDENTURE ACT"). (u) Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf (i) has, within the six-month period prior to the date hereof, offered or sold in the United States or to any U.S. person (as such terms are defined in Regulation S under the Securities Act) the Offered Securities or any security of the same class or series as the Offered Securities or (ii) has offered or will offer or sell the Offered Securities (A) in the United States by means of any form of general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act or (B) with respect to any securities sold in reliance on Rule 903 of Regulation S, by means of any directed selling efforts within the meaning of Rule 902(c) of Regulation S. The Company has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities except for this Agreement. 3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Initial Purchasers, and the Initial Purchasers agree, severally and not jointly, to purchase from the Company, at a purchase price of 96% of the principal amount thereof plus accrued interest from June 29, 2001 to the Closing Date (as hereinafter defined), the respective principal amounts of the Offered Securities set forth opposite the names of the several Initial Purchasers in Schedule A hereto. The Company will deliver against payment of the purchase price the Offered Securities in the form of one or more permanent global Securities in definitive form (the "GLOBAL SECURITIES") deposited with the Trustee as custodian for The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as nominee for DTC. Interests in any permanent Global Securities will be held only in book-entry form through DTC, except in the limited circumstances described in the Offering Document. Payment for the Offered Securities shall be made by the Initial Purchasers in Federal (same day) funds by wire transfer to an account of the Company at a bank designated by the Company and acceptable to CSFBC or by official Federal Reserve Bank check or checks drawn to the order of the Company at the office of Cravath, Swaine & Moore at 9:00 A.M. (New York time), on June 29, 2001, or at such other time not later than seven full business days thereafter as CSFBC and the Company determine, such time being herein referred to as the "CLOSING DATE", against delivery to the Trustee as custodian for DTC of the Global Securities representing all of the Offered Securities. The Global Securities will be made available for checking at the office of Cravath, Swaine & Moore at least 24 hours prior to the Closing Date. 4. REPRESENTATIONS BY INITIAL PURCHASERS; RESALE BY INITIAL PURCHASERS. (a) Each Initial Purchaser severally represents and warrants to the Company that it is an "ACCREDITED INVESTOR" within the meaning of Regulation D under the Securities Act. 5 (b) Each Initial Purchaser severally acknowledges that the Offered Securities have not been registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the Securities Act. Each Initial Purchaser severally represents and agrees that it has offered and sold the Offered Securities and will offer and sell the Offered Securities as part of its distribution, only in accordance with Rule 144A ("RULE 144A") or Rule 903 under the Securities Act. Accordingly, neither such Initial Purchaser nor its affiliates, nor any persons acting on its or their behalf, have engaged or will engage in any directed selling efforts with respect to the Offered Securities, and such Initial Purchaser, its affiliates and all persons acting on its or their behalf have complied and will comply with the offering restrictions requirement of Regulation S. Terms used in this subsection (b) have the meanings given to them by Regulation S. (c) Each Initial Purchaser severally agrees that it and each of its affiliates has not entered and will not enter into any contractual arrangement with respect to the distribution of the Offered Securities except for any such arrangements with the other Initial Purchaser or affiliates of the other Initial Purchaser or with the prior written consent of the Company. (d) Each Initial Purchaser severally agrees that it and each of its affiliates will not offer or sell the Offered Securities by means of any form of general solicitation or general advertising, within the meaning of Rule 502(c) under the Securities Act, including, but not limited to (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, or (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising. Each Initial Purchaser severally agrees, with respect to resales made in reliance on Rule 144A of any of the Offered Securities, to deliver either with the confirmation of such resale or otherwise prior to settlement of such resale a notice to the effect that the resale of such Offered Securities has been made in reliance upon the exemption from the registration requirements of the Securities Act provided by Rule 144A. (e) Each of the Initial Purchasers severally represents and agrees that (i) it has not offered or sold and prior to the date six months after the date of issue of the Offered Securities will not offer or sell any Offered Securities to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Offered Securities in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Offered Securities to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such document may otherwise lawfully be issued or passed on. 5. CERTAIN AGREEMENTS OF THE COMPANY. The Company agrees with the several Initial Purchasers that: (a) The Company will advise CSFBC promptly of any proposal to amend or supplement the Offering Document and will not effect such amendment or supplementation without CSFBC's consent, which consent shall not be unreasonably withheld or delayed. If, at any time prior to the completion of the resale of the Offered Securities by the Initial Purchasers any event occurs as a result of which the Offering Document as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any such time to amend or supplement the Offering Document to comply with any applicable law, the Company promptly will notify CSFBC of such event and promptly will prepare, at its own expense, an amendment or supplement which will correct such statement or omission or effect such compliance. Neither CSFBC's consent to, nor the Initial 6 Purchasers' delivery to offerees or investors of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6 of this Agreement. (b) The Company will furnish to CSFBC copies of the Offering Document and all amendments and supplements to such documents, in each case as soon as available and in such quantities as CSFBC reasonably requests, and the Company will furnish to CSFBC on the date hereof three copies of the Offering Document signed by a duly authorized officer of the Company, one of which will include the independent accountants' reports therein manually signed by such independent accountants. At any time when the Company is not subject to Section 13 or 15(d) of the Exchange Act, the Company will promptly furnish or cause to be furnished to CSFBC (and, upon request, to each of the other Initial Purchasers) and, upon request of holders and prospective purchasers of the Offered Securities, to such holders and purchasers, copies of the information required to be delivered to holders and prospective purchasers of the Offered Securities pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto) in order to permit compliance with Rule 144A in connection with resales by such holders of the Offered Securities. The Company will pay the expenses of printing and distributing to the Initial Purchasers all such documents. (c) The Company will arrange with the cooperation of the Initial Purchasers for the qualification of the Offered Securities for sale and the determination of their eligibility for investment under the laws of such jurisdictions in the United States and Canada as CSFBC designates and will continue such qualifications in effect so long as required for the resale of the Offered Securities by the Initial Purchasers provided that the Company will not be required to qualify such Offered Securities if such qualification would require the Company to as a foreign corporation or to file a general consent to service of process or subject itself to taxation in any such state. (d) During the period of three years hereafter, the Company will furnish to CSFBC and, upon request, to each of the other Initial Purchasers, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company will furnish to CSFBC and, upon request, to each of the other Initial Purchasers (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Exchange Act or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as CSFBC may reasonably request. (e) During the period of two years after the Closing Date, the Company will, upon request, furnish to CSFBC, each of the other Initial Purchasers and any holder of Offered Securities a copy of the restrictions on transfer applicable to the Offered Securities. (f) During the period of two years after the Closing Date, the Company will not, and will not permit any of its affiliates (as defined in Rule 144 under the Securities Act) to, resell any of the Offered Securities that have been reacquired by any of them. (g) During the period of two years after the Closing Date, the Company will not be or become, an open-end investment company, unit investment trust or face-amount certificate company that is or is required to be registered under Section 8 of the Investment Company Act. (h) The Company will pay all expenses incidental to the performance of its obligations under this Agreement, the Registration Rights Agreement and the Indenture, including (i) the fees and expenses of the Trustee and its professional advisers; (ii) all expenses in connection with the execution, issue, authentication, packaging and initial delivery of the Offered Securities and, as applicable, the Exchange Securities (as defined in the Registration Rights Agreement), the preparation and printing of this Agreement, the Securities, the Indenture, the Offering Document and amendments and supplements thereto, and any other document relating to the issuance, offer, sale and delivery of the Offered Securities and, as applicable, the Exchange Securities; (iii) the cost of qualifying the Offered Securities for trading in The Portal(SM) Market ("PORTAL") of The Nasdaq Stock Market, Inc. and any expenses incidental thereto, (iv) the cost of any advertising approved in writing by the Company in connection with the issue of the 7 Offered Securities, (v) for any expenses (including reasonable fees and disbursements of counsel) incurred in connection with qualification of the Offered Securities or the Exchange Securities for sale under the laws of such jurisdictions as in writing by the Company CSFBC designates and the printing of memoranda relating thereto, (vi) for any fees charged by investment rating agencies for the rating of the Offered Securities or the Exchange Securities, and (vii) for expenses incurred in distributing the Offering Document (including any amendments and supplements thereto) to the Initial Purchasers. The Company will reimburse the Initial Purchasers for all reasonable travel expenses of the Initial Purchasers and the Company's officers and employees (to the extent incurred by the Initial Purchasers) and any other reasonable expenses of the Initial Purchasers and the Company (to the extent incurred by the Initial Purchasers) in connection with attending or hosting meetings with prospective purchasers of the Offered Securities. (i) In connection with the offering, until CSFBC shall have notified the Company and the other Initial Purchasers of the completion of the resale of the Offered Securities, neither the Company nor any of its affiliates has or will, either alone or with one or more other persons, bid for or purchase for any account in which it or any of its affiliates has a beneficial interest any Offered Securities or attempt to induce any person to purchase any Offered Securities; and neither it nor any of its affiliates will make bids or purchases for the purpose of creating actual, or apparent, active trading in, or of raising the price of, the Offered Securities. (j) For a period of 120 days after the date of the initial offering of the Offered Securities by the Initial Purchasers, the Company will not, without the prior written consent of CSFBC, which consent shall not be unreasonably withheld, offer, sell, contract to sell, pledge, or otherwise dispose of, directly or indirectly, any United States dollar-denominated debt securities issued or guaranteed by the Company and having a maturity of more than one year from the date of issue, except issuances of (i) Offered Securities pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date hereof, (ii) the Exchange Securities, (iii) any debt securities of another entity acquired by the Company or assured by the Company in connection with an acquisition of the assets of such entity, which debt securities were (a) existing prior to such acquisition; and (b) were not issued in connection with, or in contemplation of, such acquisition), (iv) grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, issuances of Offered Securities pursuant to the exercise of such options or issuances of Offered Securities pursuant to the Company's dividend reinvestment plan. The Company will not at any time offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any securities under circumstances where such offer, sale, pledge, contract or disposition would cause the exemption afforded by Section 4(2) of the Securities Act to cease to be applicable to the offer and sale of the Offered Securities. 6. CONDITIONS OF THE OBLIGATION OF THE INITIAL PURCHASERS. The obligation of the several Initial Purchasers to purchase and pay for the Offered Securities will be subject to the accuracy of the representations and warranties on the part of the Company herein, to the accuracy of the statements of officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Initial Purchasers shall have received a letter, dated the date of this Agreement, of PricewaterhouseCoopers LLP confirming that they are independent public accountants within the meaning of the Securities Act and the applicable published rules and regulations thereunder ("RULES AND REGULATIONS") and to the effect that: (i) In their opinion the financial statements and schedules of the Company examined by them and included in the Offering Document comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of 8 Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements of the Company included in the Offering Document; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: (A) the unaudited financial statements included in the Offering Document do not comply as to form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet read by such accountants, or at a subsequent date, there was any change in the capital stock or any increase in short-term indebtedness or long-term debt of the Company and its consolidated Subsidiaries or, at the date of the latest available balance sheet read by such accountants, there was any decrease in consolidated (i) total current assets minus total current liabilities or (ii) total shareholders' equity (or deficit), as compared with amounts shown on the latest balance sheet included in the Offering Document; or (C) for the period from the closing date of the latest statement of operations included in the Offering Document to the closing date of the latest available statement of operations read by such accountants there were any decreases, as compared with the corresponding period of the previous year, in consolidated net sales, in consolidated income (or loss) from continuing operations, in the total amounts of consolidated net income (or loss), except in all cases set forth in clauses (B) and (C) above for changes, increases or decreases which are described in such letter; (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Offering Document, as agreed upon with the Initial Purchasers (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation), with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter; and (v) on the basis of a reading of the pro forma financial statements, carrying out certain specified procedures, reading of minutes, inquiries of certain officials of the Company who have responsibility for financial and accounting matters and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing came to their attention which caused them to believe that the pro forma financial statements do not comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X under the Securities Act or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements or on the pro forma basis described in the notes thereto. (b) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) a change in U.S. or international financial, political or economic conditions or currency exchange rates or exchange controls as would, in the judgment of CSFBC, be likely to prejudice materially the success of the proposed issue, sale or distribution of the Offered Securities, whether in the primary market or in respect of dealings in the secondary market, or (ii) any change, or any development or event involving a prospective 9 change, in the condition (financial or other), business, properties or results of operations of the Company or its Subsidiaries taken as a whole which, in the judgment of a majority in interest of the Initial Purchasers, including CSFBC, is material and adverse and makes it impractical or inadvisable to proceed with the completion of the offering or the sale of and payment for the Offered Securities; (iii) any downgrading in the rating of any debt securities of the Company by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Securities Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iv) any suspension or limitation of trading in securities generally on the New York Stock Exchange or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (v) any banking moratorium declared by U.S. Federal or New York authorities; or (vi) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Initial Purchasers, including CSFBC, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with the completion of the offering or sale of and payment for the Offered Securities. (c) The Initial Purchasers shall have received an opinion, dated the Closing Date, of Ira J. Krakower, Esq., General Counsel for the Company, to the effect that: (i) The Company has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware; (ii) The Company is duly qualified as a foreign corporation to transact business and is in good standing as a foreign corporation under the laws of each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or to be in good standing would not result in a Material Adverse Effect and except for jurisdictions not recognizing the legal concept of good standing; (iii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Circular; (iv) Clark-Schwebel Corporation, a Delaware corporation ("CLARK-SCHWEBEL") has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware; (v) Clark-Schwebel is duly qualified as a foreign corporation to transact business and is in good standing as a foreign corporation under the laws of each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or to be in good standing would not result in a Material Adverse Effect and except for jurisdictions not recognizing the legal concept of good standing; (vi) Clark-Schwebel has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Offering Circular; (vii) There is no action, suit or proceeding or, to the knowledge of such counsel, inquiry or investigation before or by any court or governmental agency or body, domestic or foreign, now pending or, to the knowledge of such counsel, threatened, against or affecting the Company or any of its subsidiaries, which would, individually or in the aggregate, have a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the transactions contemplated by this Agreement or the performance by the Company of its obligations thereunder or under the Securities or in connection with the transactions contemplated thereby; 10 (viii) The execution and delivery by the Company of the Offered Securities and of each of the Transaction Documents, and the performance by the Company of its obligations thereunder, will not (a) to the best knowledge of such counsel, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of or a default under (except for Permitted Liens) or result in the creation or imposition of any lien, charge or encumbrance (except for Permitted Liens) upon any property or assets of the Company or Clark-Schwebel pursuant to any material contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other material agreement or instrument to which the Company or Clark-Schwebel is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or Clark-Schwebel is subject (except for such conflicts, breaches or defaults, that would not have a Material Adverse Effect) and except that such counsel does not express any opinion with respect to the financial ratios or tests or any aspects of the financial condition or results of operations of the Company and Clark-Schwebel to the extent the determination of such conflict, breach or default requires quantitative determination; and (ix) Such counsel does not know of any legal or governmental proceeding required to be described in the Offering Circular which are not described as required or of any contracts or documents of a character required to be described in the Offering Document which are not described and filed as required. (d) The Initial Purchasers shall have received an opinion, dated the Closing Date, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Company to the effect, that: (i) The Company has the corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Offering Circular; (ii) The Company has the corporate power and corporate authority to execute, deliver and perform all its obligations under this Agreement, the Registration Rights Agreement, the Indenture and the Offered Securities; (iii) This Agreement has been duly authorized, executed and delivered by the Company; (iv) The Indenture has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that (a) enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity), and (b) the enforceability, under certain circumstances, of provisions imposing a payment obligation pending the ability of the Company to comply timely with its registration obligations may be limited by applicable law; (v) The Registration Rights Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except to the extent that (a) enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditor's rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity), (b) the enforceability, under certain circumstances, of provisions imposing a payment obligation pending the ability of the Company to comply timely with its registration obligations may be limited by applicable law, and (c) the enforceability of indemnification and contribution provisions may be limited by Federal and state securities laws or the public policies underlying such laws; (vi) The Offered Securities conform in all material respects to the description thereof contained in the Offering Circular. The issuance and sale of the Offered Securities have been duly authorized 11 by the Company, and the Offered Securities, when executed and authenticated in accordance with the terms of the Indenture and delivered to and paid for by the Initial Purchasers in accordance with the terms of this Agreement, will be valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that (a) enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity), and (b) the enforceability, under certain circumstances, of provisions imposing a payment obligation pending the ability of the Company to comply timely with its registration obligations may be limited by applicable law; (vii) The execution and delivery by the Company of the Offered Securities and each of the Transaction Documents to which it is a party, and the consummation by the Company of the transactions contemplated thereby, will not conflict with or result in any breach or violation of, or constitute a default under, (A)(i) the Restated Certificate of Incorporation or By-laws of the Company or (ii) the certificate of incorporation or by-laws of Clark-Schwebel or (B) any Applicable Law; (viii) No consent, approval, authorization, order, decree, registration or qualification of or filing with any court or governmental authority or agency is required under Applicable Laws for the valid authorization, issuance, sale and delivery of the Offered Securities by the Company or is required for the valid execution and delivery by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated thereby; (ix) Assuming (i) the accuracy of the representations and warranties of the Company set forth in Sections 2(s) and (u) of this Agreement and of the Initial Purchasers' representations and warranties set forth in Section 4 of this Agreement, (ii) the due performance by the Company of the covenants and agreements set forth in Sections 2(s) and (u) of this Agreement and the due performance by the Initial Purchasers of the covenants and agreements set forth in Section 4(b) and (c) of this Agreement, (iii) the Initial Purchasers' compliance with the offering and transfer procedures and restrictions described in the Offering Circular, (iv) the accuracy of the representations and warranties made in accordance with this Agreement and the Offering Circular by purchasers to whom the Initial Purchasers initially resell the Offered Securities and (v) that purchasers to whom the Initial Purchasers initially resell the Offered Securities receive a copy of the Offering Circular prior to or contemporaneously with such sale, the offer, sale and delivery of the Offered Securities to the Initial Purchasers in the manner contemplated by this Agreement and the Offering Circular, and the initial resale of the Offered Securities by the Initial Purchasers in the manner contemplated in the Offering Circular and this Agreement, do not require registration under the Securities Act and the Indenture does not require qualification under the Trust Indenture Act of 1939, as amended, it being understood that such counsel does not express any opinions to any subsequent resale of any Offered Security; and (x) The Company is not and, after giving effect to the issuance and sale of the Offered Securities and the application of the proceeds therefrom as described in the Offering Circular, will not be an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. Such counsel shall also state that such counsel has participated in conferences with directors, officers and other representatives of the Company, representatives of the independent public accountants for the Company, representatives of the Initial Purchasers and representatives of counsel for the Initial Purchasers, at which conferences the contents of the Offering Document and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Offering Document, and has made no independent check or verification thereof (except to the extent set forth in paragraph (iv) above with respect to the description of the Offered Securities) on the basis of the foregoing, no facts have come to such 12 counsel's attention which have caused such counsel to believe that the Offering Document, as of its date and as of the Closing Date, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading (it being understood that such counsel need express no view with respect to the financial statements and the notes related thereto). As used in Sections 6(c) and 6(d), the terms "TRANSACTION DOCUMENTS" shall mean the Indenture, the Registration Rights Agreement and this Agreement and "APPLICABLE LAWS" shall mean the laws of the State of New York, the Federal laws of the United States and the General Corporation Law of the State of Delaware. (e) The Initial Purchasers shall have received from Cravath, Swaine & Moore, counsel for the Initial Purchasers, such opinion or opinions, dated the Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities offered on such Closing Date, the Offering Circular, the exemption from registration for the offer and sale of the Offered Securities by the Company to the several Initial Purchasers and the resales by the several Initial Purchasers as contemplated hereby and other related matters as CSFBC may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (f) The Initial Purchasers shall have received a certificate, dated the Closing Date, of the President or any Vice President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that the representations and warranties of the Company in this Agreement are true and correct on and as of the Closing Date with the same effect as if made on the Closing Date; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; and, subsequent to the date of the most recent financial statements in the Offering Document, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its Subsidiaries taken as a whole except as set forth in or contemplated by the Offering Document or as described in such certificate. (g) The Initial Purchasers shall have received a letter, dated the Closing Date, of PricewaterhouseCoopers LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to the Closing Date for the purposes of this subsection. (h) The Senior Credit Facility shall have been amended and/or the Company shall have obtained the necessary consents from the parties thereto in order to avoid any default under the Senior Credit Facility in connection with the issuance and sale of the Offered Securities. (i) The Registration Rights Agreement shall have been duly authorized, executed and delivered by the Company. The Company shall furnish the Initial Purchasers with such conformed copies of such opinions, certificates, letters and documents as the Initial Purchasers reasonably request. Except for the condition set forth in subsection (h) of this Section which may be waived by CSFBC only with the consent of the Company, CSFBC may in its sole discretion waive compliance with any condition to the obligations of the Initial Purchasers hereunder. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company will indemnify and hold harmless each Initial Purchaser, its partners, directors and officers and each person, if any, who controls such Initial Purchaser within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Initial Purchaser may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or 13 necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, including any losses, claims, damages or liabilities arising out of or based upon the Company's failure to perform its obligations under Section 5(a) of this Agreement, and will reimburse such Initial Purchaser for any legal or other expenses reasonably incurred by such Initial Purchaser in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; PROVIDED, HOWEVER, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or actions in respect thereof arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Initial Purchaser through CSFBC specifically for use therein, it being understood and agreed that the only such information consists of the information described as such in subsection (b) below; PROVIDED FURTHER, HOWEVER, that the foregoing indemnity with respect to the Preliminary Offering Circular shall not inure to the benefit of the Initial Purchaser from whom the person asserting any such losses, claims, damages, liabilities or actions in respect thereof purchased Offered Securities to the extent that any such losses, claims, damages, liabilities or actions in respect thereof of such Initial Purchaser result from a fact that such Initial Purchaser sold Offered Securities to a person in an initial resale to whom there was not sent or given, at or prior to the written confirmation of the sale of such Offered Securities, a copy of the Offering Circular (as amended or supplemented), if the Company had previously furnished a copy of such amendments or supplements to such Initial Purchaser prior to confirmation of the sale of such Offered Securities to such person by such Initial Purchaser, and the losses, claims, damages, liabilities or actions in respect thereof of such Initial Purchaser result from an untrue statement or omission of a material fact contained in the Preliminary Offering Circular, which was corrected in the Offering Circular. (b) Each Initial Purchaser will severally and not jointly indemnify and hold harmless the Company, its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities to which the Company may become subject, under the Securities Act or the Exchange Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Offering Document, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Initial Purchaser through CSFBC specifically for use therein, and will reimburse any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Initial Purchaser consists of the following information in the Offering Document: paragraphs three, six, nine and ten, and the third sentence of paragraph eight under the caption "Plan of Distribution"; PROVIDED, HOWEVER, that the Initial Purchasers shall not be liable for any losses, claims, damages or liabilities arising out of or based upon the Company's failure to perform its obligations under Section 5(a) of this Agreement. (c) Promptly after receipt by an indemnified party under this Section of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above, except to the extent the indemnifying party is materially prejudiced by such failure. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such 14 indemnified party under this Section for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. In no event shall an indemnifying party be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Initial Purchasers on the other from the offering of the Offered Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Initial Purchaser on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Initial Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total discounts and commissions received by the Initial Purchasers from the Company under this Agreement. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), such Initial Purchaser shall not be required to contribute any amount in excess of the amount by which the total price at which the Offered Securities purchased by it were resold exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. The Initial Purchasers' obligations in this subsection (d) to contribute are several in proportion to their respective purchase obligations and not joint. (e) The obligations of the Company under this Section shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Initial Purchaser within the meaning of the Securities Act or the Exchange Act; and the obligations of the Initial Purchasers under this Section shall be in addition to any liability which the respective Initial Purchasers may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act. 8. DEFAULT OF INITIAL PURCHASERS. If any Initial Purchaser or Purchasers default in their obligations to purchase Offered Securities and the aggregate principal amount of Offered Securities that such defaulting Initial Purchaser or Purchasers agreed but failed to purchase does not exceed 10% of the total principal amount of Offered Securities, CSFBC may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Initial Purchasers, but if no such arrangements are made by the Closing Date, the non-defaulting Initial Purchasers shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Initial Purchasers agreed but failed to purchase. If any Initial Purchaser or Purchasers so default and the aggregate principal amount of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total principal amount of Offered Securities and 15 arrangements satisfactory to CSFBC and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Initial Purchaser or the Company, except as provided in Section 9. As used in this Agreement, the term "INITIAL PURCHASER" includes any person substituted for a Initial Purchaser under this Section. Nothing herein will relieve a defaulting Initial Purchaser from liability for its default. 9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers and of the several Initial Purchasers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation, or statement as to the results thereof, made by or on behalf of any Initial Purchaser, the Company or any of their respective representatives, officers or directors or any controlling person, and will survive delivery of and payment for the Securities. If for any reason the purchase of the Offered Securities by the Initial Purchasers is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Initial Purchasers pursuant to Section 7 shall remain in effect and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Initial Purchasers is not consummated for any reason other than solely because of the occurrence of any event specified in clause (iv), (v) or (vi) of Section 6(b), the Company will reimburse the Initial Purchasers for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. NOTICES. All communications hereunder will be in writing and, if sent to the Initial Purchasers will be mailed, delivered or telegraphed and confirmed to the Initial Purchasers, c/o Credit Suisse First Boston Corporation, Eleven Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department - Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at Hexcel Corporation, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, CT 06901, Attention: General Counsel; PROVIDED, HOWEVER, that any notice to an Initial Purchaser pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Initial Purchaser. 11. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7, and no other person will have any right or obligation hereunder, except that holders of Offered Securities shall be entitled to enforce the agreements for their benefit contained in the second and third sentences of Section 5(b) hereof against the Company as if such holders were parties hereto. 12. REPRESENTATION OF INITIAL PURCHASERS. CSFBC will act for the several Initial Purchasers in connection with this purchase, and any action under this Agreement taken by CSFBC will be binding upon all of the Initial Purchasers. 13. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 14. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. 16 If the foregoing is in accordance with the Initial Purchasers' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it will become a binding agreement among the Company and the Initial Purchasers in accordance with its terms. Very truly yours, HEXCEL CORPORATION, by: /s/ Ira J. Krakower ----------------------- Name: Ira J. Krakower Title: Senior Vice President The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written. CREDIT SUISSE FIRST BOSTON CORPORATION DEUTSCHE BANC ALEX. BROWN INC. GOLDMAN, SACHS & CO. J.P. MORGAN SECURITIES INC. Acting on behalf of themselves and as the Representatives of the several Initial Purchasers CREDIT SUISSE FIRST BOSTON CORPORATION by: /s/ Peter R. Matt ------------------------------- Name: Peter R. Matt Title: Managing Director 17 SCHEDULE A
PRINCIPAL AMOUNT OF INITIAL PURCHASERS OFFERED SECURITIES ------------------ ------------------ Credit Suisse First Boston Corporation................. $ 65,000,000 Deutsche Banc Alex Brown Inc........................... $ 12,500,000 Goldman, Sachs & Co.................................... $ 12,500,000 J.P. Morgan Securities Inc............................. $ 10,000,000 ------------ Total......................................... $100,000,000
18 SCHEDULE B
SUBSIDIARY PLACE OF INCORPORATION ---------- ---------------------- Clark-Schwebel Corporation Delaware Hexcel Composites Limited England
19 EX-12.1 16 a2074704zex-12_1.txt EXHIBIT 12.1 EXHIBIT 12.1 HEXCEL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
FOR THE YEAR ENDED DECEMBER, 31 ----------------------------------------------------------------- 2001 2000 1999 1998 1997 --------- -------- --------- --------- --------- Income (loss) before Taxes, Equity in Earnings, and Extraordinary Loss $ (381.0) $ 75.0 $ (5.0) $ 78.3 $ 50.7 Interest Expense, Including Amortization of Debt Issuance Costs 64.8 68.7 73.9 38.7 25.8 Interest Portion of Rentals (1) 1.8 2.3 3.1 1.6 1.5 --------- -------- ------- -------- ------- EARNINGS BEFORE PROVISION FOR TAXES AND FIXED CHARGES $ (314.4) $ 146.0 $ 72.0 $ 118.6 $ 78.0 ========= ======== ======= ======== ======= Interest Expense, Including Amortization of Debt Issuance Costs $ 64.8 $ 68.7 $ 73.9 $ 38.7 $ 25.8 Interest Portion of Rentals (1) 1.8 2.3 3.1 1.6 1.5 --------- -------- ------- -------- ------- TOTAL FIXED CHARGES $ 66.6 $ 71.0 $ 77.0 $ 40.3 $ 27.3 ========= ======== ========= ======== ======= RATIO OF EARNINGS TO FIXED CHARGES (2) N/A 2.1 N/A 2.9 2.9 ========= ======== ========= ========= =======
- ---------- (1) Calculated as one third of rentals, which is a reasonable approximation of the interest factor. (2) Earnings are inadequate to cover fixed charges for 2001 and 1999. The deficiency in earnings for the years ended December 31, 2001 and December 31, 1999 is $(381.0) and $(5.0), respectively. EX-23 17 a2074704zex-23.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-01225, No. 333-31125, No. 333-36099, No. 333-36163, No. 333-57223, No. 333-83745, No. 333-83747, No. 333-46472, No. 333-46476, No. 333-46626, No. 333-67944 and No. 333-67946) of Hexcel Corporation of our reports dated January 25, 2002 relating to the financial statements and financial statement schedule, which appear in this Form 10-K. PricewaterhouseCoopers LLP Stamford, CT March 27, 2002 -----END PRIVACY-ENHANCED MESSAGE-----