-----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, RDdYkoHswXDQi2mQw/NEboOGE9RAwklg0hacNOvNv9LoQMZ6PJjHNgNgl5nId8ed f9/VPXywPjBymw7e3HTdEg== 0000912057-96-014905.txt : 19960719 0000912057-96-014905.hdr.sgml : 19960719 ACCESSION NUMBER: 0000912057-96-014905 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960718 SROS: NASD SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEXCEL CORP /DE/ CENTRAL INDEX KEY: 0000717605 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 941109521 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-05821 FILM NUMBER: 96596144 BUSINESS ADDRESS: STREET 1: 281 TRESSER BOULEVARD STREET 2: C/O TWO STAMFORD PLZ CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 5108479500 MAIL ADDRESS: STREET 1: 5794 W LAS POSITAS BLVD CITY: PLEASANTON STATE: CA ZIP: 945888781 S-3/A 1 S-3A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1996 REGISTRATION NO. 333-05821 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HEXCEL CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 94-1109521 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
------------------------------ TWO STAMFORD PLAZA 281 TRESSER BOULEVARD STAMFORD, CONNECTICUT 06901-3238 (203) 969-0666 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) ------------------------------ STEPHEN C. FORSYTH SENIOR VICE PRESIDENT OF FINANCE AND ADMINISTRATION HEXCEL CORPORATION TWO STAMFORD PLAZA 281 TRESSER BOULEVARD STAMFORD, CONNECTICUT 06901-3238 (203) 969-0666 (Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service) COPIES TO: GREGORY A. FERNICOLA, ESQ. KRIS F. HEINZELMAN, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM CRAVATH, SWAINE & MOORE 919 THIRD AVENUE WORLDWIDE PLAZA NEW YORK, NEW YORK 10022 825 EIGHTH AVENUE (212) 735-3000 NEW YORK, NEW YORK 10019 (212) 474-1000
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------------ If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, please check the following box. / / ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 18, 1996 $100,000,000 [HEXCEL LOGO] % Convertible Subordinated Notes Due 2003 INTEREST PAYABLE AND DUE , 2003 -------------- THE % CONVERTIBLE SUBORDINATED NOTES DUE 2003 (THE "NOTES") ARE CONVERTIBLE INTO COMMON STOCK OF HEXCEL CORPORATION (THE "COMPANY") AT ANY TIME ON OR BEFORE , 2003, UNLESS PREVIOUSLY REDEEMED, AT A CONVERSION PRICE OF $ PER SHARE, SUBJECT TO ADJUSTMENT IN CERTAIN EVENTS. SEE "DESCRIPTION OF NOTES -- CONVERSION RIGHTS." ON JULY 17, 1996, THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE WAS $13 1/8 PER SHARE. THE NOTES ARE REDEEMABLE, IN WHOLE OR IN PART, AT THE OPTION OF THE COMPANY AT ANY TIME ON OR AFTER , 1999, AT THE REDEMPTION PRICES SET FORTH HEREIN PLUS ACCRUED INTEREST. UPON A CHANGE OF CONTROL (AS DEFINED), EACH HOLDER OF NOTES WILL HAVE THE RIGHT, SUBJECT TO CERTAIN CONDITIONS AND RESTRICTIONS, TO REQUIRE THE COMPANY TO REPURCHASE ANY OR ALL OUTSTANDING NOTES OWNED BY SUCH HOLDER AT 100% OF THEIR PRINCIPAL AMOUNT PLUS ACCRUED INTEREST. SEE "DESCRIPTION OF NOTES." THE NOTES ARE SUBORDINATED TO ALL PRESENT AND FUTURE SENIOR INDEBTEDNESS (AS DEFINED) OF THE COMPANY. AS OF MARCH 31, 1996, AFTER GIVING PRO FORMA EFFECT TO THE OFFERING OF THE NOTES CONTEMPLATED HEREBY AND THE APPLICATION OF THE NET PROCEEDS THEREFROM, THE COMPANY WOULD HAVE HAD OUTSTANDING APPROXIMATELY $175.7 MILLION OF SENIOR INDEBTEDNESS. APPLICATION HAS BEEN MADE TO LIST THE NOTES ON THE NEW YORK STOCK EXCHANGE AND THE UNDERLYING SHARES OF COMMON STOCK ON THE NEW YORK STOCK EXCHANGE AND THE PACIFIC STOCK EXCHANGE. IF SO APPROVED, TRADING OF THE NOTES IS EXPECTED TO COMMENCE WITHIN A 30-DAY PERIOD AFTER COMMENCEMENT OF THE OFFERING OF THE NOTES. -------------- FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE 13. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR AD- EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS COMPANY(1)(2) ----------------- ----------------- ----------------- PER NOTE.............................................. % % % TOTAL (3)............................................. $ $ $
(1) PLUS ACCRUED INTEREST, IF ANY, FROM , 1996. (2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $700,000. (3) THE COMPANY HAS GRANTED THE UNDERWRITERS AN OPTION, EXERCISABLE FOR 30 DAYS FROM THE DATE OF THE INITIAL PUBLIC OFFERING OF THE NOTES, TO PURCHASE A MAXIMUM OF $15,000,000 ADDITIONAL PRINCIPAL AMOUNT OF NOTES TO COVER OVER-ALLOTMENTS. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC WILL BE $ , UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE $ AND PROCEEDS TO COMPANY WILL BE $ . SEE "UNDERWRITING". -------------- THE NOTES ARE OFFERED BY THE SEVERAL UNDERWRITERS WHEN, AS AND IF ISSUED BY THE COMPANY, DELIVERED TO AND ACCEPTED BY THE UNDERWRITERS AND SUBJECT TO THEIR RIGHT TO REJECT ORDERS IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE NOTES, IN DEFINITIVE FULLY REGISTERED FORM, WILL BE MADE ON OR ABOUT , 1996 AGAINST PAYMENT IN IMMEDIATELY AVAILABLE FUNDS. CS First Boston Bear, Stearns & Co. Inc. THE DATE OF THIS PROSPECTUS IS , 1996. [GRAPHICAL REPRESENTATION OF HEXCEL'S PRODUCTS] Hexcel is a leading manufacturer of high performance composite materials for the aerospace, defense, recreation and general industrial markets. -------------- IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE NOTES OFFERED HEREBY AND THE COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, THE PACIFIC STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. DURING THIS OFFERING, CERTAIN PERSONS AFFILIATED WITH PERSONS PARTICIPATING IN THE DISTRIBUTION MAY ENGAGE IN TRANSACTIONS FOR THEIR OWN ACCOUNTS OR FOR THE ACCOUNTS OF OTHERS IN THE NOTES PURSUANT TO EXEMPTIONS FROM RULES 10b-6, 10b-7 AND 10b-8 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). No person has been authorized in connection with any offering made hereby to give any information or to make any representations other than those contained in this Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Company or any underwriter or agent. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or any offer to sell or the solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale hereunder or thereunder shall, under any circumstances, create any implication that the information contained herein or therein is correct as of any time subsequent to the date hereof and thereof. 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Registration Statement, including the exhibits and schedules thereto, as well as such reports, proxy statements and other information filed by the Company with the Commission, may be inspected and copied at the public reference facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, reports, proxy statements and other information concerning the Company may be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, and at the offices of the Pacific Stock Exchange Incorporated, 301 Pine Street, San Francisco, California 94104. This Prospectus constitutes part of a Registration Statement filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus omits certain of the information contained in the Registration Statement, and the exhibits and schedules thereto, in accordance with the rules and regulations of the Commission. For further information regarding the Company and the Notes offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the provisions of any contract, agreement or other document referred to herein are not necessarily complete, and in each instance, reference is made to the copy of such document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents have been filed with the Commission by the Company (Commission File No. 1-8472) pursuant to the Exchange Act and are, as of their respective dates, incorporated by reference in and made a part of this Prospectus: (1)the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995; (2)the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996; (3)the Company's Proxy Statement for the Meeting of Stockholders held on February 21, 1996; (4)the Company's Proxy Statement for the Meeting of Stockholders held on May 23, 1996; (5)the Company's Current Report on Form 8-K dated March 15, 1996, as amended on Form 8-K/A dated April 1, 1996; (6)the Company's Current Report on Form 8-K dated July 12, 1996; and (7)the description of the Company's common stock, par value $.01 per share (the "Common Stock"), contained in the Company's Registration Statement on Form 8-B, dated March 31, 1983, including any amendment or report filed for the purpose of updating such description. All documents filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Notes hereunder shall be deemed to be incorporated by reference herein and shall be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. Copies of all documents which are incorporated by reference herein (other than exhibits to such documents not specifically incorporated by reference) will be provided without charge to each person to whom this Prospectus is delivered, upon written or oral request. Such requests should be directed to Hexcel Corporation, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut 06901, Attention: Corporate Secretary, telephone number (203) 969-0666. The Company's principal executive offices are located at Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut 06901. The Company's telephone number is (203) 969-0666. 4 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, REFERENCES TO THE "COMPANY" AND "HEXCEL" REFER TO THE BUSINESS OF HEXCEL CORPORATION (INCLUDING ITS OPERATING DIVISIONS AND, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE CIBA COMPOSITES BUSINESS (AS DEFINED) ACQUIRED ON FEBRUARY 29, 1996 AND THE HERCULES COMPOSITES BUSINESS (AS DEFINED) ACQUIRED ON JUNE 27, 1996) AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, INDUSTRY DATA CONTAINED HEREIN IS DERIVED FROM PUBLICLY AVAILABLE INDUSTRY SOURCES, WHICH THE COMPANY HAS NOT INDEPENDENTLY VERIFIED. SEE "GLOSSARY OF TERMS" FOR AN EXPLANATION OF CERTAIN TERMS USED IN THIS PROSPECTUS. SUCH TERMS APPEAR HEREIN IN BOLD TYPE THE FIRST TIME THEY ARE USED. UNLESS OTHERWISE INDICATED, ALL INFORMATION INCLUDED IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS DUE TO, AMONG OTHER THINGS, CERTAIN FACTORS SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. THE COMPANY GENERAL Hexcel is a leading international manufacturer and marketer of lightweight, high performance COMPOSITE MATERIALS, parts and STRUCTURES for the aerospace, defense, recreation and general industrial markets. The Company's products include CARBON FIBER, woven synthetic fabrics, HONEYCOMB, PREPREGS, ADHESIVES, and a wide variety of lightweight, high strength semi-finished and finished structural components. With 19 manufacturing facilities in the United States and Europe, management believes that Hexcel is positioned to take advantage of opportunities for growth worldwide. The Company's manufacturing capabilities are integrated across product lines enabling it to offer a breadth of products spanning the composites industry. The Company operates through the following five core businesses, presented in order of manufacturing integration from raw materials to finished products: - FIBERS. The Company manufactures PAN based carbon fibers primarily for sale to customers and also for use in its Fabrics and Composite Materials businesses. The Company supplies high performance carbon fibers for a wide variety of applications in the commercial aerospace, space and defense, recreation and general industrial markets predominantly in the United States. The principal end uses for carbon fibers are as raw materials for prepregs and fabrics, in FILAMENT WINDING for various space and defense and industrial applications and in fiber placement to produce composite structures. - FABRICS. The Company is a leading manufacturer of woven FIBERGLASS, carbon and ARAMID fiber REINFORCEMENTS for composite materials and other applications worldwide. In the United States, the Company is a leading weaver of aramid fibers and, in Europe, the Company is a leading weaver of high performance fiberglass fabrics. The principal end uses for fabrics are in composite materials, printed circuit boards, window blinds, insulation and soft body armor such as bulletproof vests. - COMPOSITE MATERIALS. The Company is an innovative leader worldwide in the manufacture of honeycomb, prepregs, film adhesive products and SANDWICH PANEL products. Although each of these products is sold primarily to the commercial aerospace and space and defense markets, the Company has led the development of new applications for composite materials in the recreation market and is developing additional applications for use in the transit, marine and other industrial markets. The principal end uses for composite materials are components for commercial and military aircraft, munitions, high-speed and mass transit trains and recreation applications, including golf clubs, skis and snowboards. 5 - SPECIAL PROCESS. The Company engineers, manufactures and markets machined and fabricated honeycomb parts for use in commercial aerospace, space and defense, automotive and other applications to meet customers' specific design requirements. This core business provides value-added processing to standard honeycomb manufactured by the Company by contouring and machining it into complex shapes. The principal end uses for SPECIAL PROCESS products are semi-finished aerospace components and aircraft control surfaces such as flaps and wing tips. - STRUCTURES AND INTERIORS. The Company manufactures and markets lightweight, high strength structures and INTERIORS primarily for use in the aerospace industry. The principal end uses for structures and interiors are wing-to-body FAIRINGS, flap track fairings, RADOMES, engine COWLS and interior systems such as overhead stowage bins for aircraft. STRATEGIC REPOSITIONING BACKGROUND During the mid to late 1980's, composite materials companies, including Hexcel, the Ciba Composites Business and the Hercules Composites Business, invested in rapid capacity expansion to respond to the anticipated growth in both military procurement programs and the commercial aircraft industry. With the end of the Cold War in 1989 and the resulting rapid reduction in defense procurement expenditures in the United States and Europe, sales to the military aerospace and defense sectors declined rapidly. In addition, under the influence of deregulation and various other factors including a general economic downturn and the Gulf War, the commercial airline industry experienced significant losses in the early 1990's, which in turn led to reduced investment in new aircraft. These changes in the principal markets for composite materials left significant excess capacity in the industry, resulting in significant losses for industry participants, including the Company. As a result of these market circumstances, as well as debt incurred to build capacity in the late 1980's, the Company experienced a liquidity crisis in 1993 and sought protection under chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") by filing a voluntary petition for relief in December 1993. Under the leadership of John J. Lee, who joined the Company as Chairman of the Board and Co-Chief Executive Officer shortly before the Chapter 11 filing, the Company adopted and executed a plan to reposition itself by consolidating facilities, divesting non-core businesses and reducing costs in an attempt to restore profitability and positive cash flow. In connection with this repositioning, the Company successfully implemented a consolidation of its operations, restructured its balance sheet and obtained new equity and debt financing. When Hexcel emerged from Chapter 11 all creditors' claims were reinstated or paid in full, including interest. STRATEGIC ACQUISITIONS Upon emerging from Chapter 11 in February 1995, the Company began to implement a strategy to lead the consolidation of the composite materials industry by removing excess capacity and, in the process, diversifying and strengthening its existing businesses. On February 29, 1996, Hexcel acquired the Ciba Composites Business (the "Ciba Acquisition") for aggregate consideration of approximately $203.1 million, subject to post-closing adjustments, and on June 27, 1996, Hexcel acquired the Hercules Composites Business (the "Hercules Acquisition") for a cash purchase price of approximately $135 million, (excluding transaction costs) subject to post-closing adjustments. The Ciba Acquisition combined two of the world's leading and most technically advanced composite materials companies, broadening the Company's range of products and markets, enhancing its research, development and technological capabilities and balancing the geographical scope of its business. As a result of the Ciba Acquisition, Ciba-Geigy Limited ("Ciba") became the beneficial owner of approximately 49.7% of the Company's outstanding Common Stock. The Hercules Acquisition combined two leading prepreg manufacturers, with few overlapping products and QUALIFICATIONS between their product lines, and provided the Company with the capability to manufacture one of its significant raw materials, PAN based carbon fibers. 6 STRUCTURAL REORGANIZATION AND CONSOLIDATION PROGRAM In May 1996, the Company announced a program to consolidate its operations over a period of approximately three years. The total cost of this program, which excludes additional costs and expenses that may be incurred due to modifications to the program that may result from the Hercules Acquisition, is estimated to be approximately $49 million. This estimate includes $5.2 million of expenses incurred in the first quarter of 1996, an estimated $29 million charge against earnings expected to be incurred in the second quarter of 1996 and approximately $15 million to be recognized thereafter. Cash expenditures necessary to complete the program are estimated to total approximately $44 million, net of expected proceeds from asset sales. Management estimates that the program will result in annual cost savings of approximately $28 million when it is fully implemented in 1999, and that for the period 1996 through 1998, costs associated with the program (net of estimated proceeds from asset sales) are expected to equal the incremental cash savings generated by the program. The foregoing estimates of total cost of the consolidation program, cash expenditures and annual cost savings constitute forward-looking information. The failure of any of the assumptions underlying such estimates to be realized may cause the actual amounts to differ materially from the estimates set forth above. For a discussion of these assumptions and other important factors that will affect actual amounts, see "Risk Factors -- Forward-Looking Statements; Consolidation Program." COMPETITIVE ADVANTAGES The Company believes that the recent measures undertaken to reorganize its operations, reduce costs and increase geographic, market and product diversity enhance the Company's key competitive advantages: - MARKET LEADER. The Company has long been a leading international manufacturer of lightweight, high strength fabrics, composite materials and parts and structures. Management believes the Company is the largest integrated producer of diversified composite materials in the world based on pro forma net sales of approximately $771 million for the year ended December 31, 1995. See "Pro Forma Financial Information." - BROADEST RANGE OF QUALIFICATIONS IN THE AEROSPACE INDUSTRY. Management believes Hexcel has the broadest range of qualifications of any composite materials manufacturer in the aerospace industry and is QUALIFIED on several programs which have significant opportunities for growth. Such programs include the Boeing 777 and 737x, the Airbus A320 series (including A319 and A321) and A330 and the McDonnell Douglas C-17 transport. Before composite materials may be utilized in aerospace and military applications, they must be qualified, which is both expensive and time consuming. See "Business -- Markets and Customers." The Company believes its extensive qualifications position it to remain a leading supplier of composite materials to the aerospace industry. - VERTICAL INTEGRATION. Management believes the Company is the most vertically integrated composite materials manufacturer in the world. Vertical integration provides the Company with a greater ability to control the cost, quality and delivery of its products. Moreover, the Company has the unique ability to manufacture and sell products from various points in its manufacturing process, thereby providing overall materials solutions to its customers and strengthening its competitive position. See "Business -- Manufacturing Process and Raw Materials." - MARKET AND GEOGRAPHIC DIVERSITY. Approximately 53% of Hexcel's pro forma net sales for the year ended December 31, 1995 were derived from the commercial aerospace industry, 11% from space and defense, 12% from recreation products (including golf shafts, skis, snowboards, fishing rods and tennis rackets) and 24% from general industrial markets (including printed circuit boards, window blinds and high-speed and mass transit trains). Management believes that this market and product mix reduces the Company's exposure to business cycles in the commercial aerospace industry. In addition, the Ciba Acquisition enabled the Company to 7 balance the geographic scope of its business between North America and Europe, providing it with an increased presence at Airbus, and to build a presence in the rapidly growing Asia-Pacific aerospace market. See "Business -- Core Businesses" and "-- Sales and Marketing." - STRONG TECHNICAL SUPPORT. The Company has been a leader in the development of technology and commercial application for composite materials for over 50 years. The Company's technically oriented sales force works with new and existing customers to identify and engineer solutions to meet customers' needs, particularly by identifying areas where composite materials may beneficially replace traditional materials. Through both its research and technology function and its proprietary skills in resin formulation and woven reinforcement, the Company has the technical capability to provide its customers with "make to order" custom products. A recent example of the Company's ability to engineer solutions for its customers is the development of carbon core honeycomb for jet engine NACELLES. This product replaces traditional aluminum materials, that can corrode in the extreme environment of an aircraft engine, with a material that is both stronger and lighter and conducts heat away from the engine. BUSINESS STRATEGY To maintain its position as a leading worldwide manufacturer of composite materials, parts and structures, the Company has adopted the following strategies: - CAPITALIZE ON GROWTH IN THE AEROSPACE INDUSTRY. The Company believes that demand for commercial aircraft, and therefore composite materials, should be favorably influenced by the following trends that have been identified in industry reports: (i) a significant increase in air travel over the next ten years, (ii) the higher utilization of composite materials on state-of-the-art aircraft, such as the Boeing 777, (iii) the acceleration of new aircraft deliveries as a result of government noise regulations and (iv) expected increases in aircraft fleet size during the next decade. The Company expects to capitalize on these trends by continuing to produce a wide variety of composite materials for use in the manufacture of virtually every commercial aircraft in the western world. See "Business -- Markets and Customers." - CONTINUE TO CONTROL COSTS AND IMPROVE MANUFACTURING EFFICIENCIES. Management is committed to reducing costs and improving manufacturing efficiencies through consolidation and structural reorganization. Prior to giving effect to the Ciba and Hercules Acquisitions, the Company (i) consolidated operations by closing one plant, partially closing a second one and selling a third, (ii) sold its non-core resins and specialty chemicals businesses, (iii) reduced the number of its employees by approximately 30%, and (iv) reduced selling, general and administrative costs from $62 million in 1992 to $49 million in 1995. In addition, in the first half of 1996, the Company reorganized its organizational structure into five core businesses focused on key products and markets, and the Company announced a business consolidation program which is expected to result in continued cost reductions and manufacturing efficiencies. See "Business -- Strategic Repositioning." - STRATEGIC ACQUISITIONS AND ALLIANCES. In order to (i) enhance Hexcel's integrated manufacturing capabilities, (ii) expand its geographic base and (iii) optimize its portfolio of products and businesses, the Company intends to continue to complement its product lines through strategic acquisitions or alliances. As a result of the Ciba Acquisition, the Company is positioned to take advantage of the trend towards outsourcing production of structures and interiors through alliances. The Company reviews its portfolio of products and businesses regularly in connection with its efforts to identify appropriate strategic opportunities. See "Risk Factors -- Acquisition and Alliance Strategy." - ENHANCE CUSTOMER SERVICE. The Company continually seeks to strengthen and expand its relationships with customers by capitalizing on its vertically integrated manufacturing capabilities and technical support. As a highly integrated manufacturer of composite materials, Hexcel has the flexibility and capability to meet the various needs of its customers. The Company also 8 has the technical capability to assist customers in the design and manufacture of composite materials for specialty applications, thereby further strengthening customer relationships. For example, Hexcel engineers work with Reebok-Registered Trademark- to develop composite supports for athletic shoes and with a customer's engineers to design composite turbofan blades for aircraft engines. Hexcel intends to leverage its integrated capabilities to serve a customer base which is increasingly favoring suppliers who have the ability to satisfy all of their composite materials requirements. - PENETRATE NEW MARKETS. The Company strives to maintain its leadership position in the development of innovative composite materials applications in an attempt to expand its revenue base. Although commercial aerospace remains the largest market for composite materials, the Company continues to penetrate recreation and general industrial markets, providing composite materials for a variety of applications, and plans to continue developing applications for new markets. See "Business -- Competitive Advantages -- Market and Geographic Diversity." The Company also expects to take advantage of developing markets by expanding its operations in the rapidly growing Asia-Pacific region. 9 THE OFFERING Notes Offered........... $100,000,000 aggregate principal amount ($115,000,000 if the over- allotment option is exercised in full) of % Convertible Subordinated Notes Due 2003. Maturity Date........... , 2003. Interest Payment Dates.. and of each year commencing , 1997. Conversion Rights....... The Notes are convertible, at the holder's option, into shares of Common Stock, at any time at or prior to maturity unless previously redeemed, at a conversion price of $ per share, subject to adjustment in certain events as described herein. See "Description of Notes -- Conversion Rights." Optional Redemption..... The Notes are not redeemable prior to , 1999. Thereafter, the Notes are redeemable, in whole or in part, at the option of the Company, at the redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption. See "Description of Notes -- Redemption at the Option of the Company." Change of Control....... Upon a Change of Control, each holder of a Note (a "Holder" or a "Noteholder") may require the Company to repurchase the Notes held by such Holder at 100% of the principal amount thereof plus accrued interest to the date of repurchase. See "Description of Notes -- Repurchase of Notes at the Option of the Holder Upon a Change of Control." Subordination........... The Notes will constitute general unsecured obligations of the Company and will be subordinated to all Senior Indebtedness of the Company. As of March 31, 1996, after giving pro forma effect to the Offering and the application of the net proceeds therefrom, the Company would have had approximately $175.7 million of Senior Indebtedness outstanding. See "Capitalization." The Indenture (as defined) will not restrict the Company or any of its subsidiaries from incurring additional indebtedness (including Senior Indebtedness) or other obligations. See "Description of Notes -- Subordination of Notes." Sinking Fund............ None. Use of Proceeds......... The net proceeds of the Offering are estimated to be $96.6 million ($111.1 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds to repay outstanding borrowings under the Credit Facility (as defined). See "Use of Proceeds." Listing................. Application has been made to list the Notes on the New York Stock Exchange (the "NYSE") and the underlying shares of Common Stock on the NYSE and the Pacific Stock Exchange ("PSE"). Common Stock Symbol..... The Common Stock is listed on the NYSE and the PSE under the symbol "HXL."
RISK FACTORS Prospective purchasers of the Notes should consider carefully all the information set forth in this Prospectus and, in particular, should evaluate the specific factors set forth under the caption "Risk Factors" before making any investment in the Notes. 10 SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA The following tables present summary financial and other data with respect to the Company, the Ciba Composites Business and the Hercules Composites Business and have been derived from (i) the audited consolidated financial statements of the Company as of and for the four years ended December 31, 1995, and from the unaudited condensed consolidated financial statements of the Company as of and for the quarters ended March 31, 1996 and April 2, 1995, (ii) the audited combined financial statements of the Ciba Composites Business as of and for the three years ended December 31, 1995, (iii) the audited financial statements of the Hercules Composites Business as of and for the three years ended December 31, 1995 and (iv) the pro forma financial statements included elsewhere in this Prospectus which give effect to (a) the Ciba Acquisition (including the Danutec Closing (as defined)), (b) the initial borrowings under the Credit Facility, (c) the Offering and the application of the net proceeds therefrom to repay borrowings under the Credit Facility and (d) the Hercules Acquisition. The summary financial and other data for the Company as of and for the quarters ended March 31, 1996 and April 2, 1995 are derived from unaudited financial statements which, in the opinion of the Company's management, include all adjustments necessary for the fair presentation of such information. The information set forth below should be read together with the other information contained under the captions "Capitalization," "Selected Consolidated Financial Information," "Pro Forma Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and with the consolidated financial statements and the related notes thereto, included elsewhere in this Prospectus. THE COMPANY
HISTORICAL ------------------------------------------------------------------------------ FOR THE QUARTER ENDED --------------------- FOR THE YEAR ENDED DECEMBER 31, MARCH 31, APRIL 2, ------------------------------------------------------ 1996 (A) 1995 1995 1994 1993 1992 --------- --------- --------- ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............ $126,418 $ 85,155 $ 350,238 $ 313,795 $ 310,635 $ 352,987 Gross margin......... 26,783 14,795 67,090 48,428 47,545 67,899 Gross margin percentage.......... 21.2% 17.4% 19.2% 15.4% 15.3% 19.2% Business acquisition and consolidation expenses (b)........ (5,211) -- -- -- (46,600) (23,000) Other income (expense)........... 2,697 -- 791 4,861 (12,780) 2,992 Operating income (loss).............. 6,787 2,629 18,557 7,504 (64,345) (14,162) Bankruptcy reorganization expenses............ -- (2,125) (3,361) (20,152) (641) -- Income (loss) from continuing operations.......... 1,848 (2,369) 3,201 (28,080) (79,872) (15,983) Income (loss) per share from continuing operations.......... $ 0.07 $ (0.27) $ 0.20 $ (3.84) $ (10.89) $ (2.20) BALANCE SHEET DATA (AT PERIOD END): Working capital...... $137,599 $ 22,627 $ 61,570 $ (22,955) $ 61,745 $ 80,696 Total assets......... 485,725 231,626 230,602 243,457 263,242 310,660 Short-term debt (including current portion of long-term debt)............... 6,809 33,616 1,802 56,918 24,596 22,216 Long-term debt....... 138,281 54,841 88,342 52,621 92,540 95,145 Shareholders' equity (deficit)........... 195,416 36,856 48,374 (5,885) 20,753 106,149 OTHER DATA: EBITDA (c)........... $ 11,241 $ 3,312 $ 26,819 $ 1,582 $ (50,106) $ 574 Adjusted EBITDA (c)................. 13,755 5,437 29,389 16,873 9,915 20,582 Capital expenditures........ 2,285 2,090 12,144 8,362 6,264 16,220 Ratio of earnings to fixed charges (d)... 1.81x -- 1.68x -- -- -- Total debt as a percentage of total capitalization (at period end)......... 42.6% 70.6% 65.1% 105.7% 84.9% 52.5% (SEE FOOTNOTES ON FOLLOWING PAGE) PRO FORMA --------------------------- FOR THE FOR THE QUARTER YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1996 1995 ------------ ------------ STATEMENT OF OPERATIONS DATA: Net sales............ $198,923 $771,325 Gross margin......... 40,729 141,527 Gross margin percentage.......... 20.5% 18.3% Business acquisition and consolidation expenses (b)........ (5,211) (2,362) Other income (expense)........... 1,573 80 Operating income (loss).............. 10,669 24,671 Bankruptcy reorganization expenses............ -- (3,361) Income (loss) from continuing operations.......... 2,410 (7,558) Income (loss) per share from continuing operations.......... $ 0.07 $ (0.22) BALANCE SHEET DATA (AT PERIOD END): Working capital...... $175,521 Total assets......... 662,296 Short-term debt (including current portion of long-term debt)............... 11,728 Long-term debt....... 289,590 Shareholders' equity (deficit)........... 193,616 OTHER DATA: EBITDA (c)........... $ 20,470 $ 56,257 Adjusted EBITDA (c)................. 24,108 61,900 Capital expenditures........ 3,918 33,901 Ratio of earnings to fixed charges (d)... 1.60x(e) 1.04x(e) Total debt as a percentage of total capitalization (at period end)......... 60.9%
11 - ------------------------------ (a) Amounts include the March operating results of the acquired portions of the Ciba Composites Business, which did not include Danutec (as defined). (b) Business acquisition and consolidation expenses also include amounts previously reported as "Restructuring expenses." (c) "EBITDA" is defined as income from continuing operations before interest, taxes, depreciation and amortization. "Adjusted EBITDA" is defined as EBITDA plus business acquisition and consolidation expenses, other income (expense) and bankruptcy reorganization expenses. The Company believes that EBITDA and Adjusted EBITDA provide useful information regarding the Company's ability to service its indebtedness, but should not be considered in isolation or as a substitute for operating income or cash flow from operations (in each case as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance or as a measure of the Company's liquidity. (d) Earnings consist of income (loss) from continuing operations before fixed charges and income taxes. Fixed charges consist of interest expense, amortization of fees related to debt financing and rent expense deemed to be interest. For the quarter ended April 2, 1995 and years ended December 31, 1994, 1993 and 1992, earnings were insufficient to cover fixed charges by approximately $1.9 million, $24.5 million, $73.8 million and $22.4 million, respectively. (e) If pro forma earnings for the quarter ended March 31, 1996 and for the year ended December 31, 1995 were adjusted to exclude business acquisition and consolidation expenses, other income (expense) and bankruptcy reorganization expenses, the pro forma ratio of earnings to fixed charges for such periods would be 2.13x and 1.29x, respectively. THE CIBA COMPOSITES BUSINESS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales........................................................... $ 331,073 $ 292,611 $ 271,258 Gross profit........................................................ 57,076 42,894 27,011 Gross profit percentage............................................. 17.2% 14.7% 10.0% Restructuring expenses.............................................. (2,362) (1,600) (7,722) Operating loss...................................................... (11,284) (19,363) (40,399) Loss before cumulative effect of accounting changes................. (18,543) (24,290) (41,918) Net loss............................................................ (18,543) (24,290) (48,995) BALANCE SHEET DATA (AT PERIOD END): Working capital..................................................... $ 69,851 $ 73,847 Total assets........................................................ 340,294 352,420 Short-term debt (including current portion of long-term debt)....... 10,469 8,867 Long-term debt...................................................... 15,097 43,640 Minority interest................................................... 6,968 5,048 Owner's equity...................................................... 236,949 226,136 OTHER DATA: EBITDA.............................................................. $ 8,865 $ 5,833 $ (14,946) Adjusted EBITDA..................................................... 12,329 4,454 (6,983) Capital expenditures................................................ 13,214 7,685 12,280
THE HERCULES COMPOSITES BUSINESS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales........................................................... $ 100,449 $ 100,113 $ 101,448 Gross profit........................................................ 16,701 5,327 9,150 Gross profit percentage............................................. 16.6% 5.3% 9.0% Income (loss) before effect of changes in accounting principles..... 5,556 (7,759) (4,985) Net income (loss)................................................... 5,556 (7,759) (8,901) BALANCE SHEET DATA (AT PERIOD END): Working capital..................................................... $ 33,026 $ 47,680 Total assets........................................................ 140,584 158,318 Short-term debt (including current portion of long-term debt)....... -- -- Long-term debt...................................................... -- -- Minority interest................................................... -- 12,000 Division equity..................................................... 128,029 132,319 OTHER DATA: EBITDA.............................................................. $ 14,951 $ 1,693 $ 4,537 Adjusted EBITDA (a)................................................. 14,560 3,363 6,292 Capital expenditures................................................ 8,543 1,871 1,740
- ------------------------------ (a) Adjusted EBITDA excluding allocated selling, general and administrative expenses from Hercules would have been approximately $21.6 million in 1995, $9.4 million in 1994 and $12.6 million in 1993. 12 RISK FACTORS Prospective purchasers of the Notes should consider carefully all the information set forth in this Prospectus and, in particular, the following considerations before making any investment in the Notes. OPERATING LOSSES For the years ended December 31, 1994 and 1993, the Company reported losses from continuing operations of approximately $28.1 million and $79.9 million, respectively. The Company had income from continuing operations of approximately $3.2 million for the year ended December 31, 1995 and approximately $1.8 million for the quarter ended March 31, 1996. For the fiscal years ended December 31, 1995, 1994 and 1993, the Ciba Composites Business, which was acquired by the Company in February 1996, reported losses before cumulative effect of acounting changes of approximately $18.5 million, $24.3 million and $41.9 million, respectively. After giving pro forma effect to the Ciba and Hercules Acquisitions, the Company would have had a loss from continuing operations of approximately $7.6 million for the year ended December 31, 1995 and income from continuing operations of approximately $2.4 million for the quarter ended March 31, 1996. The ability of the Company to be profitable in the future will be dependent upon a number of factors, including, among others, the successful implementation of the Company's cost reduction and consolidation efforts, the Company's ability to continue to develop and market commercially viable product applications, the successful integration of the Ciba and Hercules Composites Businesses and various other factors, many of which are beyond the Company's control such as future conditions in the commercial aerospace and defense markets, potential regulatory requirements and restraints and certain activities of the Company's competitors. There can be no assurance that the Company will achieve profitability in the future or be able to generate earnings sufficient to meet its interest and principal payment obligations. See "-- Substantial Leverage; Ability to Service Debt", "-- Forward-Looking Statements; Consolidation Program" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT At March 31, 1996, after giving pro forma effect to the Offering and the application of the net proceeds therefrom to repay outstanding borrowings under the Credit Facility, the Company would have had approximately $301.3 million of outstanding indebtedness and the Company's total debt as a percentage of total capitalization would have been 60.9%. See "Capitalization." This high level of indebtedness will have important consequences to holders of the Notes, including the following: (i) the ability of the Company to obtain additional financing in the future for working capital, acquisitions, capital expenditures, repayment of debt or other purposes may be impaired; (ii) a significant amount of the Company's anticipated cash flow from operations will be required for the payment of interest and principal; (iii) the Company is required to comply with certain financial covenants and other restrictions contained in the Credit Facility and the Ciba Indenture (as defined); and (iv) the Company may be more vulnerable to downturns in general economic conditions. The ability of the Company to meet its debt service obligations will depend on the future operating performance, debt levels and financial results of the Company, which will be subject in part to factors beyond the Company's control. Although management believes that the Company's cash flows will be adequate to meet its interest and principal payment obligations in the foreseeable future, there can be no assurance that the Company will generate earnings in the future sufficient to cover its fixed charges. If the Company is unable to generate earnings in the future sufficient to cover its fixed charges and is unable to borrow sufficient funds under either the Credit Facility or from other sources, it may be required to refinance all or a portion of its existing debt (including the Notes) or to sell all or a portion of its assets. There can be no assurance that a refinancing would be possible, nor can there be any assurance as to the timing of any asset sales or the proceeds which the Company could realize therefrom. In addition, the terms of the Credit Facility and the Ciba Indenture restrict the Company's 13 ability to sell assets and the Company's use of the proceeds therefrom. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Hexcel -- Liquidity and Capital Resources." If, for any reason, the Company were unable to meet its debt service obligations, it would be in default under the terms of its indebtedness. In the event of such a default, the holders of such indebtedness could elect to declare all such indebtedness immediately due and payable, including accrued and unpaid interest, and to terminate their commitments (if any) with respect to future funding obligations. In addition, such holders could proceed against their collateral (if any) which, in the case of certain indebtedness, consists of all of the capital stock of certain domestic subsidiaries of the Company and 65% of the capital stock of certain foreign subsidiaries of the Company. Any default with respect to any of the Company's indebtedness could result in a default under other indebtedness. Such defaults could result in a default under the Indenture and could delay or preclude payment of principal of, or interest on, Notes. See "-- Subordination" and "Description of Notes -- Subordination of Notes." RISKS ASSOCIATED WITH THE CIBA AND HERCULES ACQUISITIONS The Company's future success will depend in part on its ability to integrate the Ciba and Hercules Composites Businesses (together, the "Acquired Businesses" or the "Acquisitions"), to manage the manufacturing operations of such Acquired Businesses (these Acquisitions added ten additional manufacturing facilities to the Company's nine existing manufacturing facilities), to integrate the workforces of the Acquired Businesses into Hexcel's workforce, to eliminate redundancies and excess costs and to consolidate the sales and marketing activities, research and development activities, management information systems and other activities of the Acquired Businesses. There can be no assurance that the Company can successfully integrate the operations and workforces of the Acquired Businesses into its operations or establish comparable wage and benefit programs for Acquired Business employees, and any failure or any inability to do so may have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Hexcel" and "Business -- Employees." Although the Company expects that, in the long term, it will realize certain cost savings and other business synergies as a result of the Acquisitions, such cost savings and other business synergies could be affected by various factors beyond the Company's control, such as future conditions in the commercial aerospace and defense markets, potential regulatory requirements and restraints and certain activities of the Company's competitors. Moreover, the current business and regulatory environment in Europe could impede or prevent the implementation of the Company's consolidation and other cost saving activities abroad, particularly its ability to reduce the size of its workforce. As a result, there can be no assurance that the Company will achieve expected cost savings or other business synergies. See "-- Forward-Looking Statements; Consolidation Program." VOLATILITY OF THE COMMERCIAL AEROSPACE INDUSTRY; RELIANCE ON SIGNIFICANT CUSTOMERS Approximately 53% of the Company's pro forma net sales during the fiscal year ended December 31, 1995 were derived from sales to the commercial aerospace industry, which primarily consisted of sales to a limited number of customers. The commercial aerospace industry purchases many of the Company's higher value-added products, is cyclical in nature and is subject to change based on general economic conditions and airline profitability. From 1992 through 1994, domestic airlines suffered significant operating losses. As a result of these losses, as well as the high levels of debt incurred to purchase new aircraft and the excess capacity within the commercial airline sector generally, the commercial aerospace industry experienced a reduction in new orders for commercial aircraft and related spare parts and deferrals, and in some cases, cancellations of deliveries of previously ordered aircraft. While orders for commercial aircraft increased in 1995 and the first quarter of 1996, aircraft deliveries remain below levels achieved during the past decade. Although it appears that the health of the commercial aerospace industry is improving based on increases in airline profitability and build rates, there can be no assurance that any improvement in this industry will be substantial or that improved conditions will be sustained. See "Business -- Markets and Customers." 14 The Boeing Company and Boeing subcontractors, which have been significant customers of the Company for many years, accounted for approximately 21% of the Company's net sales for the year ended December 31, 1995. In addition, the Airbus consortium and its subcontractors accounted for approximately 12% of the Company's pro forma net sales for the year ended December 31, 1995 after giving effect to the Ciba and Hercules Acquisitions. The loss of, or significant reduction in purchases by, such major customers could materially and adversely affect the Company's business, operating results, prospects or financial condition. See "Business -- Markets and Customers." REDUCTIONS IN DEFENSE SPENDING Approximately 11% of the Company's pro forma net sales during fiscal year ended December 31, 1995 were derived from the space and defense industry, an industry that also purchases some of the Company's highest margin products, and is dependent upon government defense budgets, particularly the United States' defense budget. In general, defense budgets in the United States have been declining in recent years, resulting in reduced demand for new aircraft and spare parts. Although the effect of United States defense budget reductions may be offset in part by foreign military sales, such sales are affected by United States governmental regulation, regulation by the purchasing government and political uncertainties in the United States and abroad. There can be no assurance that the United States defense budgets and the related demand for defense related equipment will not continue to decline or that sales of defense related equipment to foreign governments will continue at present levels. See "Business -- Markets and Customers." FORWARD-LOOKING STATEMENTS; CONSOLIDATION PROGRAM Certain statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this Prospectus constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; industry capacity; changes in customer preferences; demographic changes; competition; changes in methods of distribution and technology; changes in political, social and economic conditions and local regulations, particularly in Europe and Asia; the assimilation of the Ciba Composites Business; the assimilation of the Hercules Composites Business; the loss of any significant customers; changes in business strategy or development plans; the indebtedness of the Company; quality of management, business abilities and judgment of the Company's personnel; availability of qualified personnel; the availability, terms and deployment of capital; changes in, or the failure to comply with, government regulations; and various other factors referenced in this Prospectus. The forward-looking information referred to above includes, but is not limited to, the estimated total cost of the Company's consolidation program, the estimated amount of cash expenditures to complete the program and the estimated annual cost savings resulting from the consolidation program (in each case as described under "Prospectus Summary -- Strategic Repositioning -- Structural Reorganization and Consolidation Program," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Hexcel -- General" and "Business -- Strategic Repositioning -- Structural Reorganization and Consolidation Program"). In addition to the risks, uncertainties and other factors referred to above which may cause actual amounts to differ materially from estimated amounts, such estimates of total costs, cash expenditures and annual costs savings are based on various factors and were derived utilizing numerous important assumptions, including: (i) achieving estimated reductions in the number of total employees within anticipated time frames and at currently projected severance cost levels, while maintaining work flow in the business areas affected, (ii) the ability to maintain manufacturing know-how with respect to production processes conducted at facilities that will be closed or at which the number of employees will be reduced, including cooperation by employees who will be terminated, (iii) the assimilation and integration of the Ciba 15 Composites Business with the Company's operations without disruption to manufacturing, marketing and distribution activities, (iv) the assimilation of the production processes at closed facilities with production at other Company facilities without undue disruption to the manufacturing, marketing and distribution functions, including the cooperation of customers in connection with requalifying the subject products for various customer and government programs and (v) selling vacated facilities within anticipated time frames at anticipated selling prices. The failure of these assumptions to be realized may cause the actual total cost of the consolidation program, the actual amount of cash expenditures to complete the program and the actual annual cost savings resulting from the program to differ materially from the estimates. COMPETITION Most of the markets in which the Company operates are highly competitive. The Company believes that product quality, product performance, customer service and price are the principal factors considered by customers in each of the Company's business segments. In addition, other companies compete aggressively for sole source or limited source qualifications in the commercial and military aerospace markets. Some of these competitors may have lower costs, newer technology or more favorable operating conditions than the Company and could replace the Company as the holder of sole source or limited source qualifications or become an additional qualified source of materials for the commercial aerospace and space and defense markets. There can be no assurance that the Company will be able to compete successfully with either existing or new competitors or that competitive pressures faced by the Company or the loss of sole source or limited source qualifications will not materially and adversely affect its business, operating results, prospects or financial condition. See "Business -- Competition." RESTRICTIONS IMPOSED BY INDEBTEDNESS The Credit Facility and the Ciba Indenture (as defined) contain a number of significant covenants that, among other things, will restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, make certain investments or acquisitions, repurchase or redeem capital stock, engage in mergers or consolidations, or engage in certain transactions with subsidiaries and affiliates and otherwise restrict certain corporate activities. There can be no assurance that such restrictions will not adversely affect the Company's ability to finance its future operations or capital needs or engage in other business activities that may be in the best interest of the Company. In addition, the Credit Facility requires the Company to maintain compliance with certain financial ratios. The ability of the Company to comply with such ratios may be affected by events beyond the Company's control. A breach of any of these covenants or the inability of the Company to comply with the covenants regarding required financial ratios could result in an event of default under the Credit Facility or the Ciba Indenture. In the event of any such default, the lenders under the Credit Facility and the Ciba Indenture could elect to declare all borrowings outstanding thereunder, together with accrued interest and other fees, to be due and payable, to require the Company to apply all of its available cash to repay such borrowings or to prevent the Company from making debt service payments on the Notes. If the Company were unable to repay any such borrowings when due, the lenders could proceed against their collateral. If the indebtedness under the Credit Facility, the Ciba Indenture or the Notes were to be accelerated, there could be no assurance that the assets of the Company would be sufficient to repay such indebtedness in full. LIMITATION ON CHANGE OF CONTROL The Indenture requires the Company, in the event of a Change of Control, to make an offer to purchase all outstanding Notes at a price equal to 100% of the principal amount thereof, plus accrued interest to the date of repurchase. The Credit Facility includes certain restrictions on payments by the Company in respect of its subordinated indebtedness, including the Notes. The Credit Facility provides that certain change of control events with respect to the Company and/or certain of its subsidiaries would constitute a default thereunder. Any future credit agreements or other agreements relating to indebtedness to which the Company becomes a party may contain similar restrictions and provisions. In the event that a Change of Control occurs at a time when the Company is prohibited from 16 repurchasing Notes, the Company could seek the consent of the lenders to the repurchase of the Notes or could attempt to refinance the borrowings that contain such prohibitions. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from repurchasing Notes. The Company's failure to repurchase tendered Notes at a time when such repurchase is required by the Indenture would constitute an event of default thereunder which, in turn, would constitute a default under the Credit Facility. In such circumstances, the subordination provisions in the Indenture would likely restrict payments to the holders of the Notes. There can be no assurance that the Company will have the financial resources necessary to repurchase the Notes upon a Change of Control. See "Description of Notes -- Repurchase of Notes at the Option of the Holder Upon a Change of Control." INFLUENCE OF SIGNIFICANT STOCKHOLDER Ciba currently beneficially owns approximately 49.7% of the Company's outstanding common stock. Pursuant to a governance agreement between Ciba and Hexcel (the "Governance Agreement"), Ciba is entitled to designate a certain number of members of the Company's Board of Directors and a certain number of committee members on each committee of the Board of Directors, based upon Ciba's percentage ownership of the total voting power of the outstanding voting securities of the Company. In addition, the Governance Agreement provides that the Board of Directors will not authorize, approve or ratify certain actions, transactions and stock issuances without the approval of a certain number of the Ciba designees depending upon the level of Ciba's percentage ownership of the total voting power of the outstanding voting securities of the Company and the nature of the action. Consequently, Ciba will have the ability to influence certain affairs of the Company so long as it maintains ownership of certain percentages of the total voting power of the outstanding voting securities the Company. For a more complete discussion of the Governance Agreement, see the Company's Proxy Statement for the Meeting of Stockholders held on February 21, 1996, which is incorporated by reference in this Prospectus. SUBORDINATION The indebtedness evidenced by the Notes is subordinate to the prior payment in full of all Senior Indebtedness. As of March 31, 1996, after giving pro forma effect to the Offering and the application of the net proceeds therefrom to repay outstanding borrowings under the Credit Facility, the Company would have had approximately $175.7 million of Senior Indebtedness outstanding. The Indenture will not limit the amount of future indebtedness, including Senior Indebtedness, that the Company may incur, assume or guarantee. By reason of the subordination provisions of the Notes, in the event of the Company's liquidation or dissolution, holders of Senior Indebtedness may receive more, ratably, and holders of the Notes may receive less, ratably, than the other creditors of the Company. See "Description of Notes -- Subordination of Notes." The Company conducts a portion of its operations through its subsidiaries. Claims of creditors of any subsidiaries, including trade creditors, secured creditors and creditors holding indebtedness and guarantees issued by such subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries will generally have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the Notes, even if such obligations do not constitute Senior Indebtedness. As of March 31, 1996, the Company's subsidiaries had approximately $49.6 million of pro forma indebtedness outstanding. FOREIGN OPERATIONS, COUNTRY RISKS AND EXCHANGE RATE FLUCTUATIONS Approximately 50% of the Company's pro forma net sales for the fiscal year ended December 31, 1995 were derived from operations conducted outside of the United States at facilities located in Austria, Belgium, England, France, Italy and Spain, as well as through sales offices in Asia, Australia, Germany and South America. The Company is also a partner in a joint venture that manufactures and sells composite materials in Asia. The Company's international operations are subject to a number of special risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national labor strikes, political risks and risks of increases in duties, taxes and governmental royalties, as well as changes in laws and policies governing operations of foreign-based companies. In addition, 17 earnings of the Company's foreign subsidiaries and intercompany payments are subject to foreign income tax rules that may reduce cash flows available to meet required debt service and other obligations of the Company. The Company engages in limited hedging activities, including the purchase and sale of foreign currency options and forward contracts, to protect expected proceeds from transactions and minimize the ongoing exposure to foreign currency exchange risk. In addition, because the Company has manufacturing operations in foreign locations, it is hedged to some extent from foreign currency exchange risks because of its ability to purchase, borrow, manufacture and sell in the local currency of such foreign jurisdictions. There can be no assurance, however, that the Company's operations will not be materially affected by foreign currency exchange rate fluctuations. LIMITED SUPPLY OF RAW MATERIALS The Company's profitability depends largely on the price and continuity of supply of its raw materials, including carbon fiber, fiberglass, NOMEX-REGISTERED TRADEMARK- and KEVLAR-REGISTERED TRADEMARK-, which are supplied by a limited number of sources and have, from time to time, been subject to increased demand and/or limited supply in recent years. The Company's ability to pass on increases in the costs of such raw materials is, to a large extent, dependent on market conditions, including the extent to which the Company's customers would switch to alternative materials not produced by the Company in the event of an increase in the prices of the Company's products. Because the Company purchases large volumes of such raw materials, any decrease in the supply or increase in the cost of the Company's raw materials could have a material adverse effect on the Company. ABSENCE OF PUBLIC MARKET FOR THE NOTES Prior to the Offering, there has been no public market for the Notes. There can be no assurance that any active public market for the Notes will develop or as to the price at which the Notes may trade from time to time. The absence of an active trading market for the Notes would adversely affect the liquidity of the Notes and could adversely affect the price at which the Notes may trade. POSSIBLE VOLATILITY OF TRADING PRICES The trading prices of the Notes and the Company's Common Stock could be subject to significant fluctuations in response to, among other factors, variations in operating results, developments in the industries in which the Company does business, general economic conditions and changes in securities analysts' recommendations regarding the Company's securities. Such volatility may adversely affect the market price of the Notes and the Common Stock. ACQUISITION AND ALLIANCE STRATEGY In pursuit of its strategic objective to consolidate through strategic acquisitions and/or alliances, the Company recently acquired the Ciba and Hercules Composites Businesses. The Company also continually monitors each of its businesses in the context of the changing business environment and assesses conditions for acquisitions, alliances or dispositions. The Company's acquisition and alliance strategy entails the potential risks inherent in assessing the value, strengths, weaknesses, contingent or other liabilities and potential profitability of acquisition and/or alliance candidates and in integrating the operations of acquired businesses. There can be no assurance that acquisition and/or alliance opportunities will continue to be available, that the Company will have access to the capital required to finance potential acquisitions and/or alliances, that the Company will continue to acquire businesses and/or enter into alliance agreements or that any business acquired or alliance entered into will be integrated successfully or prove profitable. The Company has made and expects it will continue to make acquisitions and to obtain contracts in Europe and the Asia-Pacific region. While these activities may provide important opportunities for the Company to offer its products and services internationally, they also entail the risks associated with conducting business internationally, including the risk of currency exchange rate fluctuations and social, political and economic instability. 18 USE OF PROCEEDS The net proceeds from the sale of the Notes offered hereby are estimated to be approximately $96.6 million (approximately $111.1 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use such net proceeds to repay a portion of the borrowings outstanding under the Company's revolving credit facility (the "Credit Facility"), which provides for up to $310 million of borrowings at variable rates. Pursuant to the terms of the Credit Facility, the amount available for borrowing thereunder will be reduced by 50% of the net cash proceeds of the Notes issued upon the consummation of the Offering. Therefore, upon completion of the Offering, availability under the Credit Facility will be limited to approximately $260 million. The Credit Facility currently bears interest at a rate of 5.75% per annum and expires in February 1999. The outstanding borrowings under the Credit Facility were incurred to replace approximately $70.1 million of outstanding borrowings under the Company's $175 million revolving credit facility (the "Old Credit Facility"), which was terminated on June 27 and 28, 1996 and to finance the Hercules Acquisition. The Old Credit Facility bore interest at a weighted average interest rate of 5.41% per annum and was scheduled to expire in February 1999. Borrowings under the Old Credit Facility were used (i) to refinance $31.4 million of indebtedness under a revolving credit facility that has since been terminated; (ii) to finance $25 million of the purchase price of the Ciba Acquisition; (iii) to refinance $12.7 million of foreign borrowings; (iv) to repay $3.9 million of other indebtedness; and (v) for working capital and other general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Hexcel -- Liquidity and Capital Resources." 19 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 and as adjusted to give pro forma effect to the initial borrowings under the Credit Facility, the Hercules Acquisition, the Danutec Closing and the Offering and the application of the net proceeds therefrom, in each case as if they had occurred on March 31, 1996. See "Use of Proceeds."
AS OF MARCH 31, 1996 ------------------- ACTUAL PRO FORMA -------- --------- (DOLLARS IN THOUSANDS) Current debt: Notes payable and current maturities of long-term debt................... $ 6,809 $ 11,728 -------- --------- Long-term debt: Credit Facility.......................................................... 69,836(a) 111,736 % Convertible Subordinated Notes Due 2003............................... -- 100,000 Senior Subordinated Notes Payable to Ciba, net of discount............... 26,170(b) 30,828 7% Convertible Subordinated Debentures Due 2011.......................... 25,625(c) 25,625 IDRB variable rate demand notes due 2024................................. 11,990 11,990 Other long-term debt, net of current maturities.......................... 4,660 9,411 -------- --------- Total long-term debt................................................... 138,281 289,590 -------- --------- Total debt............................................................. 145,090 301,318 -------- --------- Shareholders' equity: Common stock ($.01 par value) and paid-in capital 100,000,000 shares authorized, 36,119,000 shares issued and outstanding........................................................... 257,563 257,563 Accumulated deficit...................................................... (68,133) (69,933) Minimum pension obligation adjustment.................................... (535) (535) Cumulative currency translation adjustment............................... 6,521 6,521 -------- --------- Total shareholders' equity............................................. 195,416 193,616 -------- --------- Total capitalization................................................... $340,506 $ 494,934 -------- --------- -------- ---------
- ------------------------ (a) Represents borrowings outstanding under the Old Credit Facility as of March 31, 1996. On June 27 and 28, 1996, the Old Credit Facility was terminated and borrowings thereunder were replaced with borrowings under the Credit Facility. See "Use of Proceeds" and "Pro Forma Financial Information." (b) Represents senior subordinated notes payable to Ciba (the "Ciba Notes") which are to be issued in connection with the Ciba Acquisition pursuant to an indenture (the "Ciba Indenture") (excluding the notes to be issued in connection with the Danutec Closing) following the determination of certain post-closing adjustments. (c) Represents convertible subordinated debentures that were reinstated pursuant to the Company's plan of reorganization under Chapter 11. Mandatory redemption is scheduled to begin in 2002 through annual sinking fund requirements. The debentures are convertible prior to maturity into Common Stock at $30.72 per share subject to adjustment under certain circumstances. 20 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is traded on the NYSE and the PSE under the symbol "HXL." The following table sets forth for the fiscal periods indicated the high and low last reported sales prices per share of the Common Stock as reported by the NYSE. No dividends on the Common Stock were declared or paid during such periods. From December 6, 1993 to February 9, 1995, Hexcel operated as a debtor-in-possession under the protection of Chapter 11.
HIGH LOW ------- ------- Fiscal year ended December 31, 1994: First Quarter............................................. $ 4 1/4 $ 2 3/4 Second Quarter............................................ 4 3 Third Quarter............................................. 6 3 Fourth Quarter............................................ 5 3/4 4 Fiscal year ended December 31, 1995: First Quarter............................................. 6 5/8 4 1/4 Second Quarter............................................ 7 1/4 4 1/2 Third Quarter............................................. 12 1/4 7 1/4 Fourth Quarter............................................ 11 1/4 8 1/4 Fiscal year ending December 31, 1996: First Quarter............................................. 13 1/8 10 5/8 Second Quarter............................................ 16 11 7/8 Third Quarter (through July 17, 1996)..................... 15 13 1/8
On July 17, 1996, the last reported sales price of the Common Stock on the NYSE was $13 1/8 per share. The Company has not declared or paid any cash dividends on the Common Stock since December 1992. The payment of cash dividends in the future will depend on the Company's earnings, financial condition, capital needs, and other factors deemed pertinent by the Company's Board of Directors, including the limitations on the payments of dividends under state law and the Credit Facility (or any other then-existing credit agreement). Currently, the Credit Facility prohibits the payment of cash dividends on the Common Stock. It is also the current policy of the Company's Board of Directors to retain earnings, if any, to finance the operations and expansion of the Company's business. 21 PRO FORMA FINANCIAL INFORMATION The following unaudited pro forma combined balance sheet for the quarter ended March 31, 1996 was prepared to illustrate the effects of (i) the acquisition of Danutec Werkstoff AG ("Danutec"), a subsidiary of Ciba, by the Company on May 30, 1996 as part of the Ciba Acquisition (the "Danutec Closing"), (ii) the initial borrowings under the Credit Facility, (iii) the Hercules Acquisition and (iv) the Offering and the use of net proceeds therefrom to repay borrowings under the Credit Facility (collectively, the "Pro Forma Transactions"), as if the Pro Forma Transactions had occurred on March 31, 1996. The following unaudited pro forma combined statements of operations for the quarter ended March 31, 1996 and the year ended December 31, 1995 were prepared to illustrate the estimated effects of the Pro Forma Transactions as if they had occurred at the beginning of the periods presented. The unaudited pro forma financial information presented below is derived from the audited financial statements of the Company, the Ciba Composites Business and the Hercules Composites Business as of and for the year ended December 31, 1995 and the unaudited financial statements of the Company, the Ciba Composites Business, Danutec and the Hercules Composites Business as of and for the quarter ended March 31, 1996. The Ciba Acquisition (including Danutec) and the Hercules Acquisition are accounted for using the purchase method of accounting. Accordingly, the total purchase price for each such acquisition has been allocated to the assets acquired and the liabilities assumed based upon their estimated relative fair market values, subject to revision when additional information concerning asset and liability valuations is obtained. The following unaudited pro forma financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of each of the Company, the Ciba Composites Business (which include for the periods presented Ciba's interest in Danutec) and the Hercules Composites Business and the notes thereto appearing elsewhere in this Prospectus. The unaudited pro forma financial information is not necessarily indicative of the results of operations or financial condition that would have been reported had the events assumed therein occurred on the dates indicated, nor is it necessarily indicative of results of operations or financial position that may be achieved in the future. On May 9, 1996, Hexcel announced that its Board of Directors had approved a plan for consolidating the Company's operations following the Ciba Acquisition. Management currently estimates that the business consolidation program will result in an increase in "excess of purchase price over net assets acquired" by approximately $11 million. The following unaudited pro forma financial information does not give effect to any of the charges or expenses expected to be incurred in the future in connection with the business consolidation program or to the operating, financial and other benefits that may be realized from the business consolidation program. See "Risk Factors -- Forward-Looking Statements; Consolidation Program" and "Business -- Strategic Repositioning -- Structural Reorganization and Consolidation Program." 22 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF MARCH 31, 1996 (DOLLARS IN THOUSANDS)
ADJUSTMENTS FOR THE OFFERING, THE PRO FORMA FOR THE DANUTEC CREDIT HISTORICAL CLOSING HISTORICAL FACILITY AND --------------------- ------------------------- HERCULES THE HERCULES DANUTEC ADJUSTMENTS COMPOSITES ACQUISITION PRO FORMA HEXCEL (NOTE 1) (NOTE 2) COMBINED BUSINESS (NOTE 3) COMBINED ---------- --------- ------------- ---------- ----------- -------------- ---------- ASSETS Current assets: Cash and equivalents......... $ 4,675 $ 3,426 $ (196)(d) $ 7,905 $ 603 $ (603)(g) $ 7,905 Accounts receivable, net..... 132,076 6,504 -- 138,580 16,061 (613)(h) 154,028 Inventories.................. 111,123 6,225 300(a) 117,648 28,614 1,425(i) 147,687 Prepaid expenses and other assets...................... 1,656 51 -- 1,707 -- -- 1,707 ---------- --------- ------------- ---------- ----------- -------------- ---------- Total current assets....... 249,530 16,206 104 265,840 45,278 209 311,327 ---------- --------- ------------- ---------- ----------- -------------- ---------- Net property, plant and equipment..................... 192,229 12,919 (314)(b) 204,834 93,061 7,173(j) 305,068 Excess of purchase price over net assets acquired........... 29,230 -- 270 29,500 -- -- 29,500 Investments and other assets... 14,736 1,071 (4,533)(c) 11,274 1,027 4,100(m) 16,401 ---------- --------- ------------- ---------- ----------- -------------- ---------- Total assets............... $ 485,725 $ 30,196 $ (4,473) $ 511,448 $ 139,366 $ 11,482 $ 662,296 ---------- --------- ------------- ---------- ----------- -------------- ---------- ---------- --------- ------------- ---------- ----------- -------------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term liabilities................. $ 6,809 $ 1,689 $ 3,230(d) $ 11,728 $ -- $ -- $ 11,728 Accounts payable............. 50,385 3,473 -- 53,858 3,979 (613)(h) 57,224 Accrued liabilities.......... 54,737 5,848 -- 60,585 6,269 -- 66,854 ---------- --------- ------------- ---------- ----------- -------------- ---------- Total current liabilities.. 111,931 11,010 3,230 126,171 10,248 (613) 135,806 ---------- --------- ------------- ---------- ----------- -------------- ---------- Credit facility................ 69,836 -- -- 69,836 -- 41,900(l) 111,736 % Convertible Subordinated Notes Due 2003................ -- -- -- -- -- 100,000(l) 100,000 Other long-term debt, less current maturities............ 68,445 4,628 4,781(e) 77,854 -- -- 77,854 Deferred liabilities........... 40,097 2,074 -- 42,171 1,113 -- 43,284 ---------- --------- ------------- ---------- ----------- -------------- ---------- Shareholders' equity: Common stock & paid-in capital..................... 257,563 12,484 (12,484)(f) 257,563 -- -- 257,563 Accumulated deficit.......... (68,133) -- -- (68,133) -- (1,800)(m) (69,933) Minimum pension obligation adjustment.................. (535) -- -- (535) -- -- (535) Cumulative currency translation adjustment...... 6,521 -- -- 6,521 -- -- 6,521 Invested capital............. -- -- -- -- 128,005 (128,005)(k) -- ---------- --------- ------------- ---------- ----------- -------------- ---------- Total shareholders' equity.................... 195,416 12,484 (12,484) 195,416 128,005 (129,805) 193,616 ---------- --------- ------------- ---------- ----------- -------------- ---------- Total liabilities and shareholders' equity...... $ 485,725 $ 30,196 $ (4,473) $ 511,448 $ 139,366 $ 11,482 $ 662,296 ---------- --------- ------------- ---------- ----------- -------------- ---------- ---------- --------- ------------- ---------- ----------- -------------- ----------
23 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET NOTE 1 -- DANUTEC CLOSING The historical unaudited condensed consolidated balance sheet of the Company excludes Danutec as of March 31, 1996 because the Danutec Closing did not occur until May 30, 1996. NOTE 2 -- DANUTEC PRO FORMA ADJUSTMENTS (a) Adjustment to record acquired inventories at estimated fair value. (b) Adjustment to record acquired property, plant and equipment at estimated fair value. (c) As of March 31, 1996, the Company recorded as an investment an advance of approximately $4.5 million towards the purchase price of Danutec. This adjustment is to eliminate the advance. (d) Adjustment to reflect the issuance of the senior demand notes payable to Ciba in an amount equal to the cash and equivalents on hand at Danutec on the date of the Danutec Closing. (e) Adjustment to reflect the issuance of the Ciba Notes attributable to the Danutec Closing, the amount of which is subject to post-closing adjustments. (f) Adjustment to eliminate Danutec's equity. NOTE 3 -- PRO FORMA ADJUSTMENTS PURCHASE PRICE ALLOCATION The total purchase price for the Hercules Composites Business is comprised of the purchase price of $135 million plus an estimated $1.0 million for related transaction costs, subject to post-closing adjustments. The purchase price for the Hercules Acquisition was financed with borrowings under the Credit Facility. The preliminary allocation of the total purchase price to the net assets of the Hercules Composites Business is based upon the estimated fair values of the net assets acquired, and is summarized as follows:
(IN THOUSANDS) Accounts receivable (1).................................................................. $ 15,448 Inventories (2).......................................................................... 30,039 Net property, plant and equipment (3).................................................... 100,234 Investments and other assets (1)......................................................... 1,027 Accounts payable (4)..................................................................... (3,366) Accrued liabilities (4).................................................................. (6,269) Deferred liabilities (4)................................................................. (1,113) ------------- Total purchase price................................................................... $ 136,000 ------------- -------------
(1) The fair value of accounts receivable, investments and other assets is estimated to equal respective net book value. (2) The fair value of inventory is estimated to equal aggregate current sales value less estimated selling costs. (3) The Company's current estimate is that the fair value of the property, plant and equipment is greater than the net book value. Accordingly, the excess of purchase price over all other net assets (estimated at $7.2 million) has been allocated to property, plant and equipment. The Company's estimate is subject to modification based on further analysis. (4) The fair value of the current and long-term liabilities is estimated to equal net book value. 24 NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (CONTINUED) NOTE 3 -- PRO FORMA ADJUSTMENTS (CONTINUED) HERCULES COMPOSITES BUSINESS PRO FORMA ADJUSTMENTS (g) Adjustment to eliminate cash and equivalents held by the Hercules Composites Business, which were not acquired in the Hercules Acquisition. (h) Adjustment to eliminate the trade accounts receivable and payable balances between the Hercules Composites Business and Hexcel. (i) Adjustment to record acquired inventories of the Hercules Composites Business at estimated fair value. (j) Adjustment to record acquired property, plant and equipment at estimated fair value. (k) Adjustment to eliminate Hercules Composites Business' equity. OFFERING AND CREDIT FACILITY PRO FORMA ADJUSTMENTS (l) Adjustment to reflect the following:
(IN THOUSANDS) Credit Facility Borrowings: Purchase price for Hercules Composites Business........................................ $ 135,000 Hercules Acquisition transaction costs................................................. 1,000 Credit Facility issuance costs......................................................... 2,500 Notes issuance costs................................................................... 3,400 Less: Gross proceeds from issuance of the Notes........................................ (100,000) ------------- $ 41,900 ------------- ------------- Issuance of the Notes.................................................................... $ 100,000 ------------- -------------
(m) Adjustment to reflect the capitalization and write-off of issuance costs:
(IN THOUSANDS) ------------- Notes issuance costs................................................................... $ 3,400 Credit Facility issuance costs......................................................... 2,500 Less: Write-off of capitalized debt issuance costs related to the Old Credit Facility................................................ (1,800) ------------- $ 4,100 ------------- -------------
25 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ADJUSTMENTS FOR THE HISTORICAL OFFERING, THE (NOTE 1) PRO FORMA FOR THE CIBA CREDIT ----------------------- ACQUISITION HISTORICAL FACILITY AND CIBA -------------------------- HERCULES THE HERCULES COMPOSITES ADJUSTMENTS COMPOSITES ACQUISITION PRO FORMA HEXCEL BUSINESS (NOTE 2) COMBINED BUSINESS (NOTE 2) COMBINED ---------- ----------- ------------- ----------- ----------- -------------- ----------- Net sales.................. $ 126,418 $ 51,668 $ (75)(a) $ 178,011 $ 22,342 $ (1,430)(i) $ 198,923 Cost of sales.............. (99,635) (42,587) 529(b) (141,693) (17,303) 802(j) (158,194) ---------- ----------- ------------- ----------- ----------- ------- ----------- Gross margin............... 26,783 9,081 454 36,318 5,039 (628) 40,729 Selling, general and administrative expenses... (17,093) (7,735) -- (24,828) (2,425) 1,351(k) (25,902) Amortization of intangible assets.................... (389) (572) 441(c) (520) -- -- (520) Business acquisition and consolidation expenses.... (5,211) -- -- (5,211) -- -- (5,211) Other income (expense), net....................... 2,697 (1,404) 500(d) 1,793 (220) -- 1,573 ---------- ----------- ------------- ----------- ----------- ------- ----------- Operating income (loss).... 6,787 (630) 1,395 7,552 2,394 723 10,669 Interest expense........... (3,633) (154) (228)(e) (4,015) -- (2,465)(l) (6,480) Minority interest.......... -- (147) 147(f) -- -- -- -- ---------- ----------- ------------- ----------- ----------- ------- ----------- Income (loss) from continuing operations before income taxes....... 3,154 (931) 1,314 3,537 2,394 (1,742) 4,189 Provision for income taxes..................... (1,306) (473) -- (g) (1,779) -- -- (g) (1,779) ---------- ----------- ------------- ----------- ----------- ------- ----------- Net income (loss)........ $ 1,848 $ (1,404) $ 1,314 $ 1,758 $ 2,394 $ (1,742) $ 2,410 ---------- ----------- ------------- ----------- ----------- ------- ----------- ---------- ----------- ------------- ----------- ----------- ------- ----------- Net income per share and equivalent share (Note 3)........................ $ 0.07 $ 0.05 $ 0.07 ---------- ----------- ----------- ---------- ----------- ----------- Weighted average shares and equivalent shares......... 24,685 36,493 36,493 ---------- ----------- ----------- ---------- ----------- ----------- Ratio of earnings to fixed charges (Note 4).......... 1.60x EBITDA (A)................. $ 20,470 ----------- ----------- Adjusted EBITDA (A)........ $ 24,108 ----------- -----------
- -------------------------- (A) See "Selected Consolidated Financial Information" for definitions of EBITDA and Adjusted EBITDA. 26 UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ADJUSTMENTS FOR THE HISTORICAL OFFERING, THE (NOTE 1) PRO FORMA FOR THE CREDIT FACILITY --------------------------- CIBA ACQUISITION HISTORICAL AND THE CIBA ---------------------------- HERCULES HERCULES COMPOSITES ADJUSTMENTS COMPOSITES ACQUISITION PRO FORMA HEXCEL BUSINESS (NOTE 2) COMBINED BUSINESS (NOTE 2) COMBINED ------------ ------------- -------------- ------------ ------------ --------------- ----------- Net sales.................. $ 350,238 $ 331,073 $ (3,207)(a) $ 678,104 $ 100,449 $ (7,228)(i) $ 771,325 Cost of sales.............. (283,148) (273,997) 5,502(b) (551,643) (83,748) 5,593(j) (629,798) ------------ ------------- -------------- ------------ ------------ --------------- ----------- Gross margin............... 67,090 57,076 2,295 126,461 16,701 (1,635) 141,527 Selling, general and administrative expenses... (49,324) (57,966) -- (107,290) (11,536) 5,727(k) (113,099) Amortization and write- downs of intangible assets.................... -- (6,930) 5,455(c) (1,475) -- -- (1,475) Business acquisition and consolidation expenses.... -- (2,362) -- (2,362) -- -- (2,362) Other income (expense), net....................... 791 (1,102) -- (311) 391 -- 80 ------------ ------------- -------------- ------------ ------------ --------------- ----------- Operating income (loss).... 18,557 (11,284) 7,750 15,023 5,556 4,092 24,671 Interest expense........... (8,682) (668) (1,367) (e) (10,717) -- (9,753)(l) (20,470) Bankruptcy reorganization expenses.................. (3,361)(h) -- -- (3,361) -- -- (3,361) Minority interest.......... -- (1,506) 1,506(f) -- -- -- -- ------------ ------------- -------------- ------------ ------------ --------------- ----------- Income (loss) from continuing operations before income taxes....... 6,514 (13,458) 7,889 945 5,556 (5,661) 840 Provision for income taxes..................... (3,313) (5,085) -- (g) (8,398) -- -- (g) (8,398) ------------ ------------- -------------- ------------ ------------ --------------- ----------- Income (loss) from continuing operations.......... 3,201 (18,543) 7,889 (7,453) 5,556 (5,661) (7,558) Loss from discontinued operations................ (468) -- -- (468) -- -- (468) ------------ ------------- -------------- ------------ ------------ --------------- ----------- Net income (loss).... $ 2,733 $ (18,543) $ 7,889 $ (7,921) $ 5,556 $ (5,661) $ (8,026) ------------ ------------- -------------- ------------ ------------ --------------- ----------- ------------ ------------- -------------- ------------ ------------ --------------- ----------- Net income (loss) per share and equivalent share (Note 3): Continuing operations............ $ 0.20 $ (0.22) $ (0.22) Discontinued operations............ (0.03) (0.01) (0.01) ------------ ------------ ----------- Net income (loss)...... $ 0.17 $ (0.23) $ (0.23) ------------ ------------ ----------- ------------ ------------ ----------- Weighted average shares and equivalent shares......... 15,742 33,764 33,764 ------------ ------------ ----------- ------------ ------------ ----------- Ratio of earnings to fixed charges (Note 4).......... 1.04 x EBITDA (A)................. $ 56,257 ----------- ----------- Adjusted EBITDA (A)........ $ 61,900 ----------- -----------
- ---------------------------------- (A) See "Selected Consolidated Financial Information" for definitions of EBITDA and Adjusted EBITDA. 27 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS NOTE 1 -- PRESENTATION OF HISTORICAL AMOUNTS The condensed consolidated financial statements of Hexcel for the quarter ended March 31, 1996 include the results of operations of the acquired portion of the Ciba Composites Business from March 1, 1996, to March 31, 1996, and exclude Danutec for the period then ended. The condensed combined financial statements of Ciba Composites Business for the quarter ended March 31, 1996 include the results of operations of Danutec for the quarter and the results of operations of the acquired portion of the Ciba Composites Business from January 1, 1996 to February 29, 1996 (the date of the Ciba Acquisition), which include sales to Ciba Composites international distribution operations as if such sales were third-party sales. Such international distribution operations may be transferred to the Company at the Company's option by February 28, 1997. The condensed combined financial statements of the Ciba Composites Business for the year ended December 31, 1995 include the results of operations of the Ciba Composites Business, including Danutec. NOTE 2 -- PRO FORMA ADJUSTMENTS CIBA COMPOSITES BUSINESS PRO FORMA ADJUSTMENTS
THE THE YEAR QUARTER ENDED ENDED 12/31/95 3/31/96 --------- ----------- (IN THOUSANDS) (a) Adjustment to eliminate net sales between the Ciba Composites Business and Hexcel....... $ (3,207) $ (75) --------- ----------- --------- ----------- (b) Adjustment to reflect the following: Elimination of cost of sales between the Ciba Composites Business and Hexcel............ $ 2,708 $ 63 Reduction in depreciation costs resulting from the restatement at fair value of the net property, plant and equipment of the Ciba Composites Business.......................... 2,794 466 --------- ----------- Net adjustment.......................................................................... $ 5,502 $ 529 --------- ----------- --------- ----------- (c) Adjustment to reflect the following: Reduction in amortization expense and write-downs of intangible assets resulting from the elimination of the intangible assets of the Ciba Composites Business in connection with the purchase price allocation..................................................... $ 6,930 $ 687 Amortization of the excess of purchase price over net assets acquired (20 year amortization period)................................................................... (1,475) (246) --------- ----------- Net adjustment.......................................................................... $ 5,455 $ 441 --------- ----------- --------- ----------- (d) Adjustment to eliminate acquisition related costs that were reimbursed by Ciba and not part of the ongoing Ciba Composites Business........................................... $ 500 ----------- ----------- (e) Adjustment to reflect the following: Elimination of interest expense on liabilities of the Ciba Composites Business which are not assumed by Hexcel.................................................................. $ 1,032 $ 172 Net reduction in interest expense resulting from the refinancing of certain credit facilities with the Old Credit Facility................................................ 992 165 Estimated interest expense on the Ciba Notes............................................ (3,391) (565) --------- ----------- Net adjustment.......................................................................... $ (1,367) $ (228) --------- ----------- --------- ----------- (f) Adjustment to eliminate the minority interest in the operating results of the Ciba Composites Business.
28 NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS (CONTINUED) NOTE 2 -- PRO FORMA ADJUSTMENTS (CONTINUED) (g) The income tax consequences of the cumulative pro forma adjustments are estimated to be zero. This is due to the fact that the Company has sufficient net operating loss carryforwards and other deductions for income tax purposes to substantially eliminate any tax liabilities arising from pro forma adjustments. (h) On February 9, 1995, Hexcel emerged from bankruptcy reorganization proceedings which had begun on December 6, 1993. In connection with those proceedings, Hexcel incurred bankruptcy reorganization expenses of approximately $3.4 million during the year ended December 31, 1995. Although the resolution of certain bankruptcy-related issues, including the final settlement of disputed claims and professional fees, resulted in expenses being incurred after February 9, 1995, Hexcel has not incurred any significant bankruptcy-related expenses since October 1, 1995.
HERCULES COMPOSITES BUSINESS PRO FORMA ADJUSTMENTS (i) Adjustment to eliminate net sales between the Hercules Composites Business and Hexcel. (j) Adjustment to reflect the following:
THE THE YEAR QUARTER ENDED ENDED 12/31/95 3/31/96 --------- --------- (IN THOUSANDS) Change in accounting method from LIFO to FIFO......................................... $ (231) $ (460) Elimination of cost of sales between the Hercules Composites Business and Hexcel...... 6,283 1,411 Increase in depreciation costs resulting from the restatement at fair value of the net property, plant and equipment of the Hercules Composites Business.................... (459) (149) --------- --------- Net adjustment........................................................................ $ 5,593 $ 802 --------- --------- --------- --------- (k) Adjustment to eliminate Hercules' allocations to the Hercules Composites Business that management believes are not part of the ongoing business. (l) Adjustment to reflect the following: Interest expense on $41.9 million of borrowings under the Credit Facility at an assumed rate of 6.0% per annum....................................................... $ (2,514) $ (629) Interest expense on the Notes at an assumed rate of 6 1/4% per annum.................. (6,250) (1,562) Amortization of debt issuance costs related to the Credit Facility.................... (833) (208) Amortization of debt issuance costs related to the Notes.............................. (486) (122) Elimination of amortization of prior debt issuance costs.............................. 330 56 --------- --------- Net adjustment........................................................................ $ (9,753) $ (2,465) --------- --------- --------- --------- For every 1/4% point change in the assumed interest rate with respect to the Notes, the annual interest expense on the Notes would change by $250,000.
NOTE 3 -- PER SHARE AMOUNTS Primary and fully diluted net income (loss) per share for all periods presented were the same because the fully diluted computation was antidilutive. If the Notes were converted, pro forma income (loss) from continuing operations per share would be $0.09 for the quarter ended March 31, 1996 and ($0.03) for the year ended December 31, 1995. NOTE 4 -- RATIO OF EARNINGS TO FIXED CHARGES If pro forma earnings for the quarter ended March 31, 1996 were adjusted to exclude business consolidation and acquisition expenses, other income (expense) and bankruptcy reorganization expenses, the ratio of earnings to fixed charges for such period would be 2.13x. If pro forma earnings for the year ended December 31, 1995 were adjusted to exclude these nonrecurring items, the ratio of earnings to fixed charges for such period would be 1.29x. 29 SELECTED CONSOLIDATED FINANCIAL INFORMATION THE COMPANY The selected historical financial information of the Company set forth below has been derived from the audited consolidated financial statements of the Company as of and for the five years ended December 31, 1995 and from the unaudited condensed consolidated financial statements of the Company as of and for the quarters ended March 31, 1996 and April 2, 1995. The selected historical financial information as of and for the quarters ended March 31, 1996 and April 2, 1995 is derived from unaudited financial statements which, in the opinion of the Company's management, include all adjustments necessary for the fair presentation of such information. Results for interim periods are not necessarily indicative of results for the full year. The following selected financial information is qualified in its entirety by, and should be read in conjunction with, the Company's consolidated financial statements and the related notes thereto, included elsewhere in this Prospectus.
FOR THE QUARTER ENDED ------------------------ FOR THE YEAR ENDED DECEMBER 31, MARCH 31, APRIL 2, ------------------------------------------------------------------ 1996 1995 1995 1994 1993 1992 1991 --------- ------------ --------- ------------ ------------ ------------ --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales.............. $126,418 $ 85,155 $ 350,238 $ 313,795 $ 310,635 $ 352,987 $ 355,601 Cost of sales.......... (99,635) (70,360) (283,148) (265,367) (263,090) (285,088) (284,875) --------- ------------ --------- ------------ ------------ ------------ --------- Gross margin......... 26,783 14,795 67,090 48,428 47,545 67,899 70,726 Selling, general & administrative expenses.............. (17,482) (12,166) (49,324) (45,785) (52,510) (62,053) (54,797) Business acquisition and consolidation expenses (a).......... (5,211) -- -- -- (46,600) (23,000) -- Other income (expense), net................... 2,697 -- 791 4,861 (12,780) 2,992 -- --------- ------------ --------- ------------ ------------ ------------ --------- Operating income (loss).............. 6,787 2,629 18,557 7,504 (64,345) (14,162) 15,929 Interest expense....... (3,633) (2,363) (8,682) (11,846) (8,862) (8,196) (10,870) Bankruptcy reorganization expenses.............. -- (2,125) (3,361) (20,152) (641) -- -- --------- ------------ --------- ------------ ------------ ------------ --------- Income (loss) from continuing operations before income taxes........ 3,154 (1,859) 6,514 (24,494) (73,848) (22,358) 5,059 Benefit (provision) for income taxes.......... (1,306) (510) (3,313) (3,586) (6,024) 6,375 54 --------- ------------ --------- ------------ ------------ ------------ --------- Income (loss) from continuing operations.......... $ 1,848 $ (2,369) $ 3,201 $ (28,080) $ (79,872) $ (15,983) $ 5,113 --------- ------------ --------- ------------ ------------ ------------ --------- --------- ------------ --------- ------------ ------------ ------------ --------- Income (loss) per share from continuing operations (b)...... $ 0.07 $ (0.27) $ 0.20 $ (3.84) $ (10.89) $ (2.20) $ 0.72 BALANCE SHEET DATA (AT PERIOD END): Working capital........ $137,599 $ 22,627 $ 61,570 $ (22,955) $ 61,745 $ 80,696 $ 135,154 Property, plant and equipment, net........ 192,229 85,661 85,955 83,113 107,726 130,758 131,252 Total assets........... 485,725 231,626 230,602 243,457 263,242 310,660 359,974 Short-term debt (including current portion of long-term debt)................. 6,809 33,616 1,802 56,918 24,596 22,216 23,822 Long-term debt......... 138,281 54,841 88,342 52,621 92,540 95,145 117,841 Shareholders' equity (deficit)............. 195,416 36,856 48,374 (5,885) 20,753 106,149 144,323 OTHER DATA: EBITDA (c)............. $ 11,241 $ 3,312 $ 26,819 $ 1,582 $ (50,106) $ 574 $ 31,350 Adjusted EBITDA (c).... 13,755 5,437 29,389 16,873 9,915 20,582 31,350 Capital expenditures... 2,285 2,090 12,144 8,362 6,264 16,220 13,451 Ratio of earnings to fixed charges (d)..... 1.81x -- 1.68x -- -- -- 1.41x Percentage of total debt to total capitalization (at period end)........... 42.6% 70.6% 65.1% 105.7% 84.9% 52.5% 49.5%
- ------------------------------ (a) Business acquisition and consolidation expenses include amounts previously reported as "Restructuring expenses." (b) Primary and fully diluted net income (loss) per share from continuing operations for all periods presented were the same because the fully diluted computation was antidilutive. (c) "EBITDA" is defined as income from continuing operations before interest, taxes and depreciation and amortization. "Adjusted EBITDA" is defined as EBITDA plus business acquisition and consolidation expenses, other income (expense) and bankruptcy reorganization expenses. The Company believes that EBITDA and Adjusted EBITDA provide useful information regarding the Company's ability to service its indebtedness, but it should not be considered in isolation or as a substitute for operating income or cash flow from operations (in each case as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance or as a measure of the Company's liquidity. (d) Earnings consist of income (loss) from continuing operations before fixed charges and income taxes. Fixed charges consist of interest expense, amortization of fees related to debt financing and rent expense deemed to be interest. For the quarter ended April 2, 1995 and the years ended December 31, 1994, 1993 and 1992, earnings were insufficient to cover fixed charges by approximately $1.9 million, $24.5 million, $73.8 million and $22.4 million, respectively. 30 THE CIBA COMPOSITES BUSINESS The selected historical financial information of the Ciba Composites Business set forth below has been derived from the audited combined financial statements of the Ciba Composites Business as of and for the three years ended December 31, 1995. The following selected financial information is qualified in its entirety by, and should be read in conjunction with, the combined financial statements of the Ciba Composites Business and the related notes thereto, included elsewhere in this Prospectus.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA (A): Net sales.......................................................... $ 331,073 $ 292,611 $ 271,258 Cost of sales...................................................... (273,997) (249,717) (244,247) ------------- ------------- ------------- Gross profit..................................................... 57,076 42,894 27,011 Selling, general and administrative and research and development expenses.......................................................... (57,966) (53,417) (53,713) Amortization and write-downs of intangible assets.................. (6,930) (10,219) (5,734) Restructuring expenses............................................. (2,362) (1,600) (7,722) Other income (expense)............................................. (1,102) 2,979 (241) ------------- ------------- ------------- Operating loss................................................... (11,284) (19,363) (40,399) Interest expense................................................... (668) (1,193) (2,236) Minority interest.................................................. (1,506) (891) (245) Benefit (provision) for income taxes............................... (5,085) (2,843) 962 ------------- ------------- ------------- Loss before cumulative effect of accounting changes.............. (18,543) (24,290) (41,918) Cumulative effect of accounting changes............................ -- -- (7,077) ------------- ------------- ------------- Net loss......................................................... $ (18,543) $ (24,290) $ (48,995) ------------- ------------- ------------- ------------- ------------- ------------- BALANCE SHEET DATA (AT PERIOD END): Working capital.................................................... $ 69,851 $ 73,847 Property, plant and equipment, net................................. 156,364 161,153 Total assets....................................................... 340,294 352,420 Short-term debt (including current portion of long-term debt)...... 10,469 8,867 Long-term debt..................................................... 15,097 43,640 Minority interest.................................................. 6,968 5,048 Owner's equity..................................................... 236,949 226,136 OTHER DATA: EBITDA............................................................. $ 8,865 $ 5,833 $ (14,946) Adjusted EBITDA.................................................... 12,329 4,454 (6,983) Capital expenditures............................................... 13,214 7,685 12,280
- ------------------------ (a) The Ciba Composites Business was a combination of wholly owned divisions and subsidiaries of Ciba during all the periods for which selected historical financial information is presented. Consequently, per share data is not applicable and has not been presented. 31 THE HERCULES COMPOSITES BUSINESS The selected historical financial information of the Hercules Composites Business set forth below has been derived from the audited financial statements of the Hercules Composites Business as of and for the three years ended December 31, 1995. The following selected financial information is qualified in its entirety by, and should be read in conjunction with, the financial statements of the Hercules Composites Business and the related notes thereto, included elsewhere in this Prospectus.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA (A): Net sales................................................................ $ 100,449 $ 100,113 $ 101,448 Cost of sales............................................................ (83,748) (94,786) (92,298) ----------- ----------- ----------- Gross profit............................................................. 16,701 5,327 9,150 Selling, general and administrative expenses............................. (4,450) (5,369) (6,044) Allocated selling, general and administrative expenses (b)............... (7,086) (6,047) (6,336) Other operating income (expense), net.................................... 391 (1,670) (1,755) ----------- ----------- ----------- Income (loss) before taxes and effect of changes in accounting principles............................................................ 5,556 (7,759) (4,985) Provision for taxes on income............................................ -- -- -- ----------- ----------- ----------- Income (loss) before effect of changes in accounting principles........ 5,556 (7,759) (4,985) Effect of changes in accounting principles............................... -- -- (3,916) ----------- ----------- ----------- Net income (loss)...................................................... $ 5,556 $ (7,759) $ (8,901) ----------- ----------- ----------- ----------- ----------- ----------- BALANCE SHEET DATA (AT PERIOD END): Working capital.......................................................... $ 33,026 $ 47,680 Property, plant and equipment, net....................................... 95,015 96,780 Total assets............................................................. 140,584 158,318 Short-term debt (including current portion of long-term debt)............ -- -- Long-term debt........................................................... -- -- Minority interest........................................................ -- 12,000 Division equity.......................................................... 128,029 132,319 OTHER DATA: EBITDA................................................................... $ 14,951 $ 1,693 $ 4,537 Adjusted EBITDA (c)...................................................... 14,560 3,363 6,292 Capital expenditures..................................................... 8,543 1,871 1,740
- ------------------------ (a) The Hercules Composites Business was a combination of divisions and subsidiaries of Hercules during all of the periods for which selected historical financial information is presented. Consequently, per share data is not applicable and has not been presented. (b) Represents allocated selling, general and administrative expenses incurred by Hercules and allocated to the Hercules Composites Business. These allocations may not represent the cost of similar activities on a separate entity basis. (c) Adjusted EBITDA excluding allocated selling, general and administrative expenses from Hercules would have been approximately $21.6 million in 1995, $9.4 million in 1994 and $12.6 million in 1993. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS RELATES TO THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF (I) HEXCEL FOR THE QUARTERS ENDED MARCH 31, 1996 (INCLUDING THE FINANCIAL CONDITION AND THE RESULTS OF OPERATIONS OF THE CIBA COMPOSITES BUSINESS ACQUIRED ON FEBRUARY 29, 1996 OTHER THAN DANUTEC WHICH WAS ACQUIRED ON MAY 30, 1996) AND APRIL 2, 1995 AND THE THREE YEARS ENDED DECEMBER 31, 1995 AND (II) THE CIBA COMPOSITES BUSINESS FOR THE THREE YEARS ENDED DECEMBER 31, 1995. THE DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE SELECTED CONSOLIDATED FINANCIAL INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND THE CIBA COMPOSITES BUSINESS AND THE NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. HEXCEL GENERAL CIBA ACQUISITION AND CONSOLIDATION On February 29, 1996, the Company acquired the worldwide composites division (the "Ciba Composites Business") of Ciba and Ciba-Geigy Corporation ("CGC"). The Ciba Acquisition was consummated pursuant to a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC, and the Company, as amended (the "Strategic Alliance Agreement"). Under the Strategic Alliance Agreement, the Company acquired the Ciba Composites Business in exchange for: (i) approximately 18 million newly issued shares of Common Stock; (ii) $25 million in cash; and (iii) undertakings to deliver to Ciba and/or one or more of its subsidiaries, following completion of certain post-closing adjustment procedures contemplated by the Strategic Alliance Agreement, the Ciba Notes in an aggregate principal amount of approximately $43 million, subject to certain adjustments , and senior demand notes in a principal amount equal to the cash on hand at certain of the non-U.S. subsidiaries included in the Ciba Composites Business. On a pro forma basis as of March 31, 1996, the aggregate principal amount of the Ciba Notes, determined in accordance with the formula included in the Strategic Alliance Agreement, was estimated at approximately $33.4 million. However, the actual aggregate principal amount of the Ciba Notes is expected to exceed $33.4 million, as a result of the pending acquisition of certain other assets of the Ciba Composites Business that have not yet been transferred to the Company. In May 1996, Hexcel announced a program to consolidate its operations over a period of approximately three years. The total cost of this program, which excludes additional costs and expenses that may be incurred due to modifications to the program that may result from the Hercules Acquisition, is estimated to be approximately $49 million. This estimate includes $5.2 million of expenses incurred in the first quarter of 1996, an estimated $29 million charge against earnings expected to be incurred in the second quarter of 1996 and approximately $15 million to be recognized thereafter. Cash expenditures necessary to complete the business consolidation program are expected to total approximately $44 million, net of estimated proceeds from asset sales. Management estimates that the program will result in annual cost savings of approximately $28 million when it is fully implemented in 1999, and that for the period 1996 through 1998, costs associated with the program (estimated net of proceeds from asset sales) are expected to equal the incremental cash savings generated by the program. The foregoing estimates of total cost of the consolidation program, cash expenditures and annual cost savings constitute forward-looking information. The failure of any of these assumptions underlying such estimates to be realized may cause the actual amounts to differ materially from the estimates set forth above. For a discussion of the assumptions and other important factors that will affect actual amounts, see "Risk Factors -- Forward-Looking Statements; Consolidation Program." The objective of this program is to integrate acquired assets and operations into the Company, reorganize and rationalize the Company's research and manufacturing activities around strategic centers dedicated to select product technologies, eliminate excess manufacturing capacity and rationalize redundant sales and marketing functions. Specific actions contemplated by the consolidation program include the previously announced closure of the Anaheim, California facility acquired from 33 Ciba, the closure of a portion of the Welkenraedt, Belgium facility, the reorganization of the Company's manufacturing operations in France, the consolidation of the Company's United States Special Process manufacturing activities and the integration of sales and marketing resources. HERCULES ACQUISITION On June 27, 1996, the Company acquired the composite products division of Hercules Incorporated ("Hercules"), which includes the assets of HISPAN Corporation and Hercules' carbon fibers and prepreg business units and the stock of Hercules Aerospace Espana, S.A. ("HAESA") (collectively, the "Hercules Composites Business") for approximately $135.0 million in cash (excluding transaction costs and subject to post-closing adjustments). Hexcel and Hercules have agreed that in the event applicable Spanish antitrust authorities were to take certain adverse actions in respect of Hexcel's acquisition of HAESA, Hexcel would have the option to sell its interest in HAESA (which had sales representing approximately 19% of the total sales of the Hercules Composites Business in 1995) back to Hercules for the allocated purchase price Hexcel paid for HAESA on June 27, 1996. The Hercules Composites Business is engaged in the manufacture and marketing of prepregs and carbon fiber for aerospace and other markets. See "Business -- Strategic Repositioning -- Strategic Acquisitions." SUMMARY OF RESULTS The following table is derived from the Company's Consolidated Statements of Operations for the periods indicated and presents the historical results of operations as a percentage of net sales:
QUARTER ENDED ------------------------- YEAR ENDED DECEMBER 31, MARCH 31, APRIL 2, ------------------------------------- 1996 1995 1995 1994 1993 ------------ ----------- ----------- ----------- ----------- Net sales................................................. 100.0% 100.0% 100.0% 100.0% 100.0% Gross margin.............................................. 21.2 17.4 19.2 15.4 15.3 Selling, general and administrative expenses.............. (13.8) (14.3) (14.1) (14.6) (16.9) Business acquisition and consolidation expenses (a)....... (4.1) -- -- -- (15.0) Other income (expense).................................... 2.1 -- 0.2 1.6 (4.1) ----- ----- ----- ----- ----- Operating income (loss)................................... 5.4% 3.1% 5.3% 2.4% (20.7)% ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from continuing operations.................. 1.5% (2.8)% 0.9% (8.9)% (25.7)% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
- ------------------------ (a) Business acquisition and consolidation expenses include amounts previously reported as "Restructuring expenses." QUARTER ENDED MARCH 31, 1996 COMPARED TO QUARTER ENDED APRIL 2, 1995 NET SALES. Net sales increased from $85.2 million to $126.4 million, an increase of $41.2 million, or 48.4%. Approximately $27.6 million of the increase represents the former Ciba Composites Business sales for the period from March 1, 1996 through March 31, 1996. Net sales increased 16.0% before considering the impact of the Ciba Acquisition. The increase in net sales primarily reflects an increase in demand for certain products used in the commercial aerospace market, further penetration of selected recreation and general industrial markets (particularly printed circuit boards) and continued improvement in the overall economic environment in both the U.S. and Europe. Sales were higher in both the U.S. and Europe. Due to the highly competitive nature of most of the markets in which the Company competes, product price changes were not a significant factor in first quarter 1996 sales growth. GROSS MARGIN. Gross margin increased from $14.8 million to $26.8 million, an increase of $12.0 million, or 81.1%. Approximately $4.5 million of the increase was attributable to the Ciba Acquisition. Gross margin as a percentage of net sales also increased from 17.4% to 21.2%. Gross margins improved in the Company's reinforcement fabrics, composite materials and special process businesses. The improvement in reinforcement fabrics and special process was due to a combination of increased sales volumes and more efficient manufacturing. The improvement in gross margin on sales 34 of composite materials also reflected the benefits of higher sales volume and the benefits from completing the consolidation of selected honeycomb production activities into the Casa Grande, Arizona location. OPERATING INCOME. Operating income was $6.8 million for the first quarter of 1996, a $4.2 million increase over the same period of 1995. This increase reflects the $12.0 million improvement in gross margin and the $2.7 million of other income noted below, which was partially offset by an additional $5.3 million of selling, general and administrative expenses, and $5.2 million of business acquisition and consolidation expenses. The increase in selling, general and administrative expenses was largely attributable to the Ciba Composites Business. Business acquisition and consolidation expenses were comprised of $3.6 million in compensation expense resulting from stock options that were granted in 1995 subject to stockholder approval and stock options which vested in connection with the Ciba Acquisition, as well as $1.6 million of other acquisition-related costs. Other income was attributable to the receipt of an additional $1.6 million of cash in connection with the disposition of the Chandler, Arizona manufacturing facility and certain related assets and technology in 1994, and to the partial settlement for $1.1 million of a claim arising from the sale of certain assets in 1991. The results for the 1996 quarter also include $1.6 million of interest expense attributable to the write-off of capitalized debt financing costs as a result of the refinancing of certain credit facilities in connection with the Ciba Acquisition. The results for the 1995 quarter include bankruptcy reorganization expenses of $2.1 million. NET INCOME. Net income for the first quarter of 1996 was $1.8 million or $0.07 per share, compared with a net loss for the first quarter of 1995 of $2.5 million or $0.28 per share. The results for the 1996 quarter include the results of the Ciba Composites Business for the period from March 1, 1996 through March 31, 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SALES. Net sales increased from $313.8 million to $350.2 million, an increase of $36.4 million, or 11.6%. The improvement in sales is attributable to increased sales of prepregs and reinforcement fabrics, which were partially offset by decreased sales of honeycomb. Sales of prepregs to commercial aerospace and general industrial markets were higher, as were sales of reinforcement fabrics for use in the recreation and general industrial (primarily printed circuit boards and ballistics) markets. In addition, the Company benefited from a significant military contract for prepregs, and improved sales of honeycomb to the commercial aerospace market. The overall decrease in honeycomb sales is attributable to the divestiture of the Chandler facility and the related reduction in military aerospace sales. The Chandler facility and certain related assets and technology were sold to the Northrop Grumman Corporation in December 1994. Due to the highly competitive nature of most of the markets in which the Company competes, product price changes were not a significant factor in 1995 sales growth. U.S. sales increased from $171.5 million to $179.5 million, an increase of $8.0 million, or 4.7%. This increase is primarily attributable to a significant military contract for prepregs and improved sales of reinforcement fabrics to general industrial and other markets. The reduction in honeycomb sales attributable to the divestiture of the Chandler facility was partially offset by increased sales of honeycomb to commercial aerospace and other markets. International sales increased from $142.3 million to $170.7 million, an increase of $28.4 million, or 20.0%. This increase reflects higher sales of prepregs and reinforcement fabrics to recreation and general industrial markets (primarily printed circuit boards), as well as increased sales of prepregs to certain European commercial aerospace customers. Changes in currency exchange rates were also a factor in the increase. During 1995, the U.S. dollar declined against most of the major European currencies, including the Belgian and French francs. Accordingly, sales from Hexcel's primary international subsidiaries increased when translated into U.S. dollars. 35 Commercial Aerospace Sales -- Worldwide sales of prepregs and honeycomb to the commercial aerospace market increased from $147.5 million to $159.0 million, an increase of $11.5 million, or 7.8%. This increase is attributable to both modest improvements in the build rates for certain commercial aircraft, as well as increased sales of selected products. In addition, the Company benefited from the improved economic environment in Europe. Space and Defense Sales -- Worldwide sales increased from $34.9 million to $37.3 million, an increase of $2.4 million, or 6.9%. The increase is attributable to a significant military contract for prepregs, partially offset by a decline in honeycomb sales. The decline in honeycomb sales reflects the divestiture of the Chandler facility and the related reduction in military aerospace sales. Recreation and General Industrial Sales -- Worldwide sales increased from $131.4 million to $153.9 million, an increase of $22.5 million, or 17.1%. Sales of new products introduced within the past few years continued to grow, and the Company benefited from strong European demand for printed circuit boards. In addition, sales of lightweight, high strength materials for use in athletic shoes, golf club shafts, energy absorption products and certain automotive and mass transit components remained strong. GROSS MARGIN. Gross margin increased from $48.4 million to $67.1 million, an increase of $18.7 million, or 38.6%. Gross margin as a percentage of net sales increased from 15.4% to 19.2% primarily due to higher sales, as well as certain manufacturing cost reductions. Cost reductions included the closure of the Graham, Texas plant, the sale of the Chandler facility and the consolidation of selected honeycomb production activities into Hexcel's site at Casa Grande, Arizona. Although these measures were initially undertaken in 1993 and 1994, the transfer of certain production processes from Graham and Chandler to Casa Grande was not completed until the middle of 1995. Consequently, the beneficial impact of these facility reductions and the consolidation of honeycomb production activities began to be realized during 1995. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses increased from $45.8 million to $49.3 million, an increase of $3.5 million, or 7.6%. However, SG&A expenses as a percentage of net sales decreased from 14.6% to 14.1%. The increase in SG&A expenses is largely attributable to higher selling expenses, certain costs incurred in connection with the Ciba Acquisition and changes in currency exchange rates. SG&A expenses include research and technology expenses of $7.6 million in 1995 and $8.2 million in 1994. INTEREST EXPENSE. Interest expense decreased from $11.8 million to $8.7 million, a decrease of $3.1 million, or 26.3%. The 1994 total includes accrued interest on prepetition accounts payable and notes payable as well as $2.5 million for bankruptcy claims and working capital financing. The decline also reflects the payment of various debt obligations with proceeds from the subscription rights offering in February 1995 and the Chandler transaction. INCOME TAXES. As of December 31, 1995, the Company had net operating loss ("NOL") carryforwards for U.S. federal income tax purposes of approximately $65 million and approximately $5 million for international income tax purposes. The U.S. NOL carryforwards, which are available to offset future taxable income, expire at various dates through the year 2010. As a result of the ownership changes which occurred in connection with the emergence from Chapter 11 and the acquisition of the Ciba Composites Business, utilization of the U.S. NOL carryforwards is subject to certain annual limitations. Both the 1995 and 1994 income tax provisions of $3.3 million and $3.6 million resulted primarily from state income taxes and taxable income for certain European subsidiaries. In addition, the 1994 provision includes the impact of settling various tax audits. The Company fully reserved the income tax assets generated by the pre-tax losses of certain subsidiaries in 1995 and 1994, due to uncertainty as to the realization of those assets. NET INCOME. The Company generated income from continuing operations of $3.2 million in 1995, compared with losses from continuing operations of $28.1 million in 1994. The Company earned 36 net income of $2.7 million in 1995, compared with a net loss of $30.0 million in 1994. The 1994 results include $20.2 million of bankruptcy reorganization expenses, as well as interest expenses for bankruptcy claims and working capital financing of $2.5 million, and a provision for the settlement of various tax audits of $1.8 million. Results for 1995 include other income of $0.8 million and bankruptcy reorganization expenses of $3.4 million. Other income relates primarily to a contingent payment received in connection with the sale of the Chandler, Arizona manufacturing facility and certain related assets and technology. Losses from discontinued operations totaled $0.5 million and $1.9 million in 1995 and 1994, respectively. These losses reflect the results of the discontinued resins business, including provisions to write down the net assets of that business by $2.8 million in 1994. The divestiture of the resins business was completed in October 1995. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 NET SALES. Net sales increased from $310.6 million to $313.8 million, an increase of $3.2 million, or 1.0%. The slight improvement in sales is primarily attributable to increased sales of prepregs and reinforcement fabrics in Europe, partially offset by decreased U.S. sales of honeycomb. Sales of prepregs to commercial aerospace and general industrial markets were higher, as were sales of reinforcement fabrics for use in the recreation and general industrial (primarily electrical printed circuit boards and ballistics) markets. The overall decrease in honeycomb sales is attributable to the reduction in military aerospace sales. U.S. sales decreased from $185.2 million to $171.5 million, a decrease of $13.7 million, or 7.4%. The decrease in U.S. sales was mainly due to reduced sales of prepregs and honeycomb to commercial and military aerospace markets, which were partially offset by improved sales of prepregs to general industrial and other markets. International sales increased from $125.4 million to $142.3 million, an increase of $16.9 million, or 13.5%. The increase in international sales reflects higher sales of prepregs and reinforcement fabrics to recreation and general industrial (primarily electrical printed circuit boards) markets, as well as increased sales of prepregs to certain European aerospace customers. A portion of the increase is also attributable to changes in currency exchange rates. The U.S. dollar declined relative to the Belgian and French francs in 1994. Commercial Aerospace Sales -- Worldwide sales increased from $131.4 million to $147.5 million, an increase of $16.1 million, or 12.3%. The increase is attributable to the improved economic environment in Europe and introduction of new products. Nonetheless, while sales of individual products such as graphite honeycomb and certain prepreg products increased in 1994 in response to the production of new wide-bodied aircraft, the Company continued to face intense competition for many of the products it sells to the commercial aerospace market. Due to the highly competitive nature of most of the markets in which the Company competes, product price changes were not a significant factor in 1994 sales growth. Space and Defense Sales -- Worldwide sales decreased from $55.3 million to $34.9 million, a decrease of $20.4 million, or 36.9%. The decline is a result of reduced honeycomb sales due to the reduction in military aerospace sales. The reduction in space and defense sales reflects the Company's declining volumes associated with the B-2 program as well as the general decline in U.S. military spending. Recreation and General Industrial Sales -- Worldwide sales increased from $123.9 million to $131.4 million, an increase of $7.5 million, or 6.1%. Sales of new products introduced within the past few years continued to grow, and the Company benefited from strong European demand for printed circuit boards. In addition, sales of lightweight, high strength materials for use in athletic shoes, golf club shafts, energy absorption products and certain automotive and mass transit components remained relatively strong. 37 GROSS MARGIN. Gross margin increased from $47.5 million to $48.4 million, an increase of $0.9 million, or 1.9%. Gross margin as a percentage of net sales increased slightly from 15.3% to 15.4%. While the Company undertook several cost cutting measures in 1994 and 1993, the benefits were not significantly realized until 1995. SG&A EXPENSES. SG&A expenses decreased from $52.5 million to $45.8 million, a decrease of $6.7 million, or 12.8%. The decrease was mainly due to significant headcount reductions made during 1993 and the first quarter of 1994. These headcount reductions were achieved through a reorganization of sales, marketing and administrative functions to reduce redundancies and inefficiencies. SG&A expenses included research and technology expenses of $8.2 million and $8.0 million in 1994 and 1993, respectively. INTEREST EXPENSE. Interest expense increased from $8.9 million to $11.8 million, an increase of $2.9 million, or 32.6%. The increase reflects the accrual of interest on bankruptcy claims beginning December 6, 1993, the cost of a debtor-in-possession credit facility and higher interest rates on certain variable rate obligations. These factors were partially offset by reduced levels of borrowing by the Company's European subsidiaries. NET INCOME. The Company incurred losses from continuing operations of $28.1 million in 1994, or $3.84 per share, compared with losses from continuing operations of $79.9 million, or $10.89 per share, in 1993. The Company incurred net losses of $30.0 million and $86.0 million in 1994 and 1993, respectively. Operating results for 1994 included other income of $4.9 million, which was largely comprised of $15.9 million in income related to the Chandler transaction, less an $8.0 million provision to reflect the estimated cost of restructuring a joint venture and a $2.9 million provision for bankruptcy claim adjustments. The 1994 loss from continuing operations also included bankruptcy reorganization expenses of $20.2 million, as well as interest expenses for bankruptcy claims and working capital financing of $2.5 million and a provision for the settlement of various tax audits of $1.8 million. Operating results from 1993 included restructuring charges of $46.6 million (approximately $27 million was for non-cash items) for a major expansion of the restructuring program begun in December 1992. The 1993 loss from continuing operations also included other expenses of $12.8 million for the write-down of certain assets and increases in reserves for warranties and environmental matters on property previously owned. The impairment of assets was due primarily to the bankruptcy proceedings, changes in business conditions, and depressed real estate prices on property held for sale. In addition, the Company recorded a $10.9 million provision in 1993 to reflect the adverse impact of bankruptcy proceedings and substantial operating losses on the potential realization of deferred income tax benefits. Losses from discontinued operations totaled $1.9 million and $10.6 million in 1994 and 1993, respectively. These losses reflected the results of the discontinued resins business, including provisions to write-down the net assets of this business by $2.8 million in 1994 and $6.0 million in 1993. The divestiture of the resins business was completed in October 1995. The 1993 losses from discontinued operations also reflected the results of the discontinued specialty chemicals business, including a provision to write-down the net assets of this business by $2.8 million in 1993. The divestiture of the specialty chemicals business was completed in January 1994. In 1993, the Company recorded a one-time, cumulative benefit of $4.5 million from the adoption of a new accounting standard for income taxes. LIQUIDITY AND CAPITAL RESOURCES During the quarters ended March 31, 1996 and April 2, 1995 net cash provided by (used in) operating activities was $0.1 million and ($8.4) million, respectively. The cash provided by operating activities in the first quarter of 1996 primarily reflects increased levels of profitability which were offset by an increase in accounts receivable. The increase in accounts receivable resulted primarily 38 from strong March sales. Other components of operating cash flow included the payment of interest and a net increase in accounts payable. Changes in working capital attributable to the Ciba Acquisition are not an element of operating cash flow. During the first quarter of 1995, net cash used by operating activities was primarily attributable to the payment of interest, bankruptcy reorganization expenses, expenditures for restructuring activities, and a net increase in working capital as a result of higher sales levels. Cash flows from investing and financing activities for the first quarter of 1996 included the cash components of the Ciba Acquisition. As noted above, a substantial portion of the consideration paid for the Ciba Composites Business was comprised of Common Stock and the Ciba Notes. Cash flows from investing and financing activities for the first quarter of 1995 included the proceeds from the sale of certain assets, the proceeds from the sale of Common Stock pursuant to a subscription rights offering and standby purchase agreement, and the payment of allowed claims pursuant to the Company's reorganization plan. During the three years ended December 31, 1995, 1994 and 1993, net cash provided by (used in) operations was ($2.5) million, ($1.1) million and $11.5 million, respectively. The decline in cash provided by operating activities in 1995 is due primarily to the payment of prepetition accounts payable and accrued liabilities that had been reinstated on February 9, 1995 and the payment of accrued restructuring costs. In addition, the Company incurred $8.7 million of interest expense, $3.4 million of bankruptcy reorganization expenses, and financed a $9.9 million increase in accounts receivable and inventories resulting from higher sales levels. However, the Company benefited from a $19.4 million increase in postpetition accounts payable and accrued liabilities, reflecting both higher production levels and a return to normal credit terms with most vendors. The 1994 amount reflected the Company's loss for the year, including $20.2 million of bankruptcy reorganization expenses, which were offset by a comparable increase in accounts payable and accrued liabilities (including liabilities subject to disposition in bankruptcy reorganization). The increase in accounts payable and accrued liabilities was primarily attributable to the accrual of interest on prepetition obligations, adjustments to allowed claims and a return to payment terms with some vendors. In addition, the Company paid approximately $10.1 million in restructuring costs and financed a $7.4 million increase in accounts receivable and inventories. FINANCIAL RESOURCES In connection with the Ciba Acquisition, Hexcel entered into the Old Credit Facility which provided for up to $175 million of loans to (a) fund the cash component of the purchase price, (b) refinance outstanding indebtedness under certain U.S. and European credit facilities and (c) fund ongoing working capital and other financing requirements of the Company, including business consolidation activities. As of March 31, 1996, outstanding borrowings under the Old Credit Facility totaled $69.8 million. In connection with the Hercules Acquisition, the Company entered into the Credit Facility which provides for up to $310 million in loans. The Company's initial borrowings under the Credit Facility were incurred to replace approximately $70.1 million of outstanding borrowings under the Old Credit Facility, which has been terminated, and to finance the Hercules Acquisition. Borrowings under the Credit Facility are also available for ongoing working capital and other financing requirements of the Company, including business consolidation activities. As described under "Use of Proceeds," the net proceeds from the sale of the Notes will be used to repay outstanding borrowings under the Credit Facility. Management currently expects that cash flows from operations and borrowings under the Credit Facility will be sufficient to fund the Company's worldwide operations. 39 CAPITAL EXPENDITURES Capital expenditures in recent years have been primarily focused on essential maintenance and process improvement projects. Capital expenditures were $2.1 million in the first quarter of 1995 and $2.3 million in the first quarter of 1996. In connection with the Ciba Acquisition and the commencement of the business consolidation program, management expects that capital expenditures will increase significantly above first quarter levels in the remaining three quarters of 1996. Such expenditures will be financed with cash generated from operations and borrowings under available credit facilities. Capital expenditures increased from $8.4 million in 1994 to $12.1 million in 1995, an increase of $3.7 million, or 44.0%. The increase is due to purchases of equipment necessary to improve manufacturing processes, and to the deferral of expenditures during bankruptcy reorganization proceedings. Further increases in capital spending are expected in 1996, partially as a result of the Acquisitions. Such expenditures will be financed with cash generated from operations and borrowings under available credit facilities. Capital expenditures increased from $6.3 million in 1993 to $8.4 million in 1994, an increase of $2.1 million, or 33.3%. Cash expenditures on restructuring activities totaled approximately $10.1 million in 1994, compared with $17.2 million in 1993. THE CIBA COMPOSITES BUSINESS GENERAL The discussion and tables that follow relate to the historical statements of operations for the Ciba Composites Business on a worldwide basis for the years ended December 31, 1995, 1994 and 1993. The historical financial statements for each such period have been prepared on a basis which reflects the historical financial statements of the Ciba Composites Business as if it were a stand-alone company owning certain assets, liabilities and subsidiaries, notwithstanding that during the foregoing three year period, the Ciba Composites Business was operated as a division by each of Ciba and CGC, and in several European jurisdictions on a stand-alone basis through certain foreign subsidiaries of Ciba. SUMMARY OF RESULTS The following table is derived from the Ciba Composite Business' historical financial statements of operations for the periods indicated and presents the results of operations as a percentage of net sales:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- Net sales................................................... 100.0% 100.0% 100.0% Gross profit................................................ 17.2 14.7 10.0 SG&A (a).................................................... (17.5) (18.3) (19.8) Amortization and write-downs of purchased intangibles....... (2.1) (3.5) (2.1) Restructuring expense....................................... (0.7) (0.5) (2.9) Other, net.................................................. (0.3) 1.0 (0.1) ----- ----- ----- Operating loss.............................................. (3.4)% (6.6)% (14.9)% ----- ----- ----- ----- ----- ----- Net loss.................................................... (5.6)% (8.3)% (18.1)% ----- ----- ----- ----- ----- -----
- ------------------------ (a) Includes research and development expense. 40 YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 NET SALES. Net sales increased from $292.6 million in fiscal 1994 to $331.1 million in fiscal 1995, an increase of $38.5 million, or 13%. This sales growth reflected an increase in sales in both the aerospace, including space and defense and non-aerospace industrial markets. Sales to the aerospace market increased from $213 million in 1994 to $231 million in 1995, or 8%. This increase was due mainly to a recovery in sales to traditional customers and ongoing revenue related to the acquisition from BP Chemicals, Inc. in August 1994 of certain structures programs for the U.S. market previously conducted by BP Chemicals' Advanced Materials Division ("BPAM"). Sales to the non-aerospace industrial markets increased from $79 million for fiscal 1994 to $100 million for fiscal 1995, or 27%, with the largest growth being attributable to the sports and leisure markets in Europe and Asia. Other segments of the non-aerospace industrial market that showed improvement over this period included the fabrics, transport and energy sectors. Selling prices over the period were relatively flat. Net sales also increased due to exchange rate fluctuations. See "-- Impact of Foreign Exchange Fluctuations." NET SALES BY GEOGRAPHIC REGION.
YEAR ENDED DECEMBER 31, --------------------------------- 1995 1994 --------------- --------------- (DOLLARS IN THOUSANDS) United States.................................. $148,919 45% $139,831 48% Europe......................................... 171,235 52 143,071 49 Other Countries................................ 10,919 3 9,709 3 -------- ----- -------- ----- $331,073 100% $292,611 100% -------- ----- -------- ----- -------- ----- -------- -----
The shift in regional net sales between fiscal 1994 and fiscal 1995 resulted from a 7% improvement in the United States, a 20% improvement in Europe and a 12% improvement in other countries. The build-rate reduction in the American aerospace market affected a greater amount of net sales in the United States. The same did not happen in European and other countries, where almost 50% of net sales were in the non-aerospace industrial markets. Most of Ciba's foreign sales took place in Western Europe and other developed economies. This is consistent with the fact that a large portion of the sales were to aerospace original equipment manufacturers ("OEMs") or major subcontractors. As a result, Ciba was exposed to normal business risks associated with doing business in highly developed industrial nations. These risks were managed in the same way similar risks were managed in the United States. IMPACT OF FOREIGN EXCHANGE FLUCTUATIONS. Due to the fact that half of the Ciba Composites Business' net sales occur outside the United States, the sales trends, as noted above, were also influenced by exchange rate fluctuations over the period. In 1995, the dollar yearly average weakened against most European currencies resulting in a net positive effect in the year ended December 31, 1995 relative to 1994 of approximately $14.1 million. The Ciba Composites Business does not hedge currency risks. While Ciba does engage in certain currency hedging, the effects of such hedging are not reflected in the Ciba Composites Business financial statements because neither the costs nor benefits of such activities are allocated to the Ciba Composites Business. GROSS PROFIT. Gross profit increased from $42.9 million to $57.1 million, an increase of 33.1%. This increase was due to the combination of stronger sales and cost reductions. SG&A EXPENSES. SG&A expenses increased from $45.5 million in 1994 to $47.5 million in 1995, or 4%. As a percentage of sales, these expenses showed a positive trend over the period, decreasing from 16% of sales in 1994 to 14% in 1995. This trend reflected the improvement in sales as well as the impact of restructuring activities. 41 RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased from $7.9 million in 1994 to $10.4 million in 1995, or 32%. For these periods, expenses, as a percentage of sales, were 2.7% and 3.1%, respectively. This increase in research and development expenses was due to investments in research and development to develop products and retain new customers for new non-aerospace industrial markets, such as the transport and energy markets. AMORTIZATION AND WRITE-DOWN OF PURCHASED INTANGIBLES. Intangible assets arose from the purchase of Reliable Manufacturing Co. in 1979 and Heath Tecna Aerospace Co. in 1988. Impairment losses of $2.8 million and $5.1 million were recognized in 1995 and 1994, respectively, on contract manufacturing programs due to reductions in aircraft build rates. RESTRUCTURING EXPENSES. In 1995 and 1994, the Ciba Composites Business reduced its workforce substantially in anticipation of lower sales to aerospace customers and in an effort to reduce administrative overhead, resulting in reductions of 52 people in 1995 and 121 people in 1994. In the United States, additional business units were formed for aerospace and industrial structures and aerospace interiors, for the purpose of achieving more efficient operations better sized to serve the weaker aerospace market. Restructuring costs covered personnel expenses (including severance, relocation, etc.) of $2.4 million in 1995 and equipment and facility expenses (relocation costs and write-offs) of $1.6 million in 1994. INTEREST EXPENSE. Interest expense decreased from $1.2 million in 1994 to $0.7 million in 1995, or 41.7%. These expenses were comprised of interest on mortgage debt which matures in 1999 and interest on certain long-term debt to affiliates based on three and six month French and Italian LIBOR rates. INCOME TAXES. Income taxes have been presented in the financial statements as if the Ciba Composites Business were a separate taxable entity. The tax effect of the resulting operating loss carryforwards has been reflected as deferred tax assets with related valuation allowances, based upon management's assessment of the Ciba Composites Business' likelihood of realizing the benefit of such operating loss carryforwards through future stand-alone taxable income. In actual practice, the Ciba Composites Business has not operated as a separate taxable entity and the operating loss carryforwards of the Ciba Composites Business have generally been utilized to offset taxable income of Ciba and its respective local group companies in various countries in the year incurred. As of December 31, 1995, net operating loss carryforwards of approximately $6.2 million and $0.6 million were available to offset certain future taxable income in Italy and France, respectively. For the periods ended December 31, 1995 and December 31, 1994, the losses of the Ciba Composites Business before income taxes generated a provision for income taxes of $5.1 million and $2.8 million, respectively, due to certain profitable foreign operations. MINORITY INTEREST IN DANUTEC. Ciba owned 51% of Danutec, which has headquarters in Linz, Austria until February of 1996 when it acquired the remaining 49.0%. Ciba sold Danutec to Hexcel pursuant to the Strategic Alliance Agreement in May 1996. NET LOSS. The Ciba Composites Business incurred net losses of $24.3 million in 1994 on net sales of $292.6 million compared with losses of $18.5 million on net sales of $331.1 million in 1995. This decrease in net losses was primarily attributable to the overall increase in net sales and improved gross profits as described above and lower write-offs of intangibles, partially offset by higher selling, general and administrative expenses and research and development expenses. Additionally, net losses in 1994 reflected a $2.7 million gain on the sale by the Ciba Composites Business of its honeycomb core facility in Miami. YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993 NET SALES. Net sales increased from $271.3 million in fiscal 1993 to $292.6 million in fiscal 1994, an increase of $21.3 million, or 8%. This improvement in net sales was due primarily to the acquisition of BPAM and also to gains in the non-aerospace industrial market, such as the sports and leisure markets in Europe and Asia and the energy market in Europe. These positive factors more than offset 42 a decline in the Ciba Composites Business' net sales to the aerospace market for fiscal 1994. The decline in aerospace sales resulted from a continuing reduction in build rates for the Ciba Composites Business' largest customer (Boeing). This decline was somewhat offset by an increase in sales to some of Ciba Composites Business' other aerospace customers and non-aerospace customers. Selling prices over the period were relatively flat. Net sales for the years ended December 31, 1994 also increased from the immediately preceding year due to exchange rate fluctuations. See "-- Impact of Foreign Exchange Fluctuations." NET SALES BY GEOGRAPHIC REGION.
YEAR ENDED DECEMBER 31, --------------------------------- 1994 1993 --------------- --------------- (DOLLARS IN THOUSANDS) United States........................... $139,831 48% $136,141 50% Europe.................................. 143,071 49 127,469 47 Other Countries......................... 9,709 3 7,648 3 -------- ----- -------- ----- $292,611 100% $271,258 100% -------- ----- -------- ----- -------- ----- -------- -----
The shift in regional net sales between the year ended December 31, 1993 and the year ended December 31, 1994 resulted from a 12% improvement in net sales in Europe and 26% in other countries, against a smaller improvement of 3% in the United States. The build-rate reduction in the American aerospace market affected a greater amount of net sales in the United States. The same did not happen in European and other countries, where almost 50% of net sales were in the non-aerospace industrial markets. IMPACT OF FOREIGN EXCHANGE FLUCTUATIONS. In 1994, the dollar yearly average weakened against most European currencies. The net positive effect to net sales relative to 1993, due to the general weakening of the exchange rate, was $2.9 million. GROSS PROFIT. Gross profits increased from $27.0 million in 1993 to $42.9 million in 1994, or 59.0%. This increase was due to cost reductions and an 8% increase in sales. In 1993, gross profit was negatively affected by a low level of sales and certain production inefficiencies resulting from restructuring of personnel at manufacturing facilities. SG&A EXPENSES. SG&A expenses decreased from $47.8 million in 1993 to $45.5 million in 1994, or 5%. As a percentage of sales, these expenses showed a positive trend over the period, going from 18% of sales in 1993 down to 16% of sales in 1994. This trend reflected the improvement in sales as well as the impact of restructuring activities. RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense increased from $5.9 million in 1993 to $7.9 million in 1994, or 34%. For these periods, expense, as a percentage of sales, was 2.2% and 2.7%, respectively. This increase in research and development expenses was due to investments in research and development to develop products and retain new customers for new non-aerospace industrial markets, such as the transport and energy markets. AMORTIZATION AND WRITE DOWN OF PURCHASED INTANGIBLES. Impairment losses of $5.1 million were recognized in 1994 on the contract manufacturing programs due to reductions in aircraft build rates. RESTRUCTURING EXPENSES. In 1994 and 1993, the Ciba Composites Business reduced its workforce substantially in anticipation of lower sales to aerospace customers and in an effort to reduce administrative overhead, resulting in reductions of 121 people in 1994 and 558 people in 1993. In addition, in 1993, the Ciba Composites Business began consolidating its production facilities in Europe and formed a separate European business unit to focus on the requirements of European customers in both aerospace and non-aerospace industrial markets. In the United States, additional business units were also formed in 1994 for aerospace and industrial structures and aerospace interiors, for the purpose of achieving more efficient operations better sized to serve the weaker aerospace market. 43 Restructuring costs covered personnel expenses (involving severance, relocation, etc.) of $5.9 million in 1993 and equipment and facility expenses (relocation costs and write-offs) of $1.6 million in 1994 and $1.8 million in 1993. INTEREST EXPENSE. Interest expense decreased from $2.2 million in 1993 to $1.2 million in 1994, or 46%. These expenses were comprised of interest on mortgage debt which matures in 1999 and certain long term debt to affiliates based on three and six month French and Italian LIBOR rates. INCOME TAXES. Income taxes have been presented in the financial statements as if the Ciba Composites Business were a separate taxable entity. The tax effect of the resulting operating loss carryforwards has been reflected as deferred tax assets with related valuation allowances, based upon management's assessment of the Ciba Composites Business' likelihood of realizing the benefit of such operating loss carryforwards through future stand-alone taxable income. In actual practice, the Ciba Composites Business has not operated as a separate taxable entity and the operating loss carryforwards of the Ciba Composites Business have generally been utilized to offset taxable income of Ciba and its respective local group companies in various countries in the year incurred. For the period ended December 31, 1994, the losses of the Ciba Composites Business before income taxes generated a provision for income taxes of $2.8 million, due to certain profitable foreign operations. Losses generated for the period ended December 31, 1993 resulted in a tax benefit of $1.0 million. NET LOSS. The Ciba Composites Business' net loss for the year declined from $49.0 million in 1993 to $24.3 million in 1994, driven by a combination of higher sales, successful cost containment efforts (largely realized from earlier restructurings) and a gain of $2.7 million realized from the sale of its honeycomb core facility in Miami. There were also charges of $7.1 million related to the adoption of new accounting standards for post employment and post retirement benefits other than pensions, which affected 1993 profitability. The preceding items, which caused an improvement from 1993 to 1994, were partially offset by price increases on selected raw materials and a $5.1 million impairment write-off of intangibles relating to acquired contract manufacturing programs due to a reduction in aircraft build rates in 1994. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $15.4 million, $13.7 million and $14.7 million for the years ended December 31, 1993, 1994 and 1995, respectively. The increase in 1995 was due primarily to a decline in net losses and inventory reductions, partially offset by increases in accounts receivable. Higher accounts receivable at the end of 1995 and 1994 reflected primarily the growth in sales that occurred during these periods. The $8.2 million decrease in inventory at the end of 1995 resulted from better inventory management. Operating cash benefited from a decrease in prepaid expenses and other current assets of $2.1 million and $1.5 million, and a decrease in other long term assets of $0.7 million and $3.7 million at the end of 1995 and 1994, respectively. For the period ended December 31, 1995, although accrued liabilities and accrued compensation increased by $1.3 million, accounts payable decreased by $0.8 million. For the same period in 1994, cash was provided by accounts payable of $3.8 million, an increase in accrued liabilities and accrued compensation of $4.2 million and an increase in other long-term liabilities of $1.3 million. Cash used in investing activities in 1995 was affected by the Ciba Composites Business' use of $13.2 million in cash to purchase certain property, plant and equipment. In 1994, the Ciba Composites Business used $7.7 million in cash for investments in certain property, plant and equipment and $4.7 million in cash was expended for the BPAM acquisition. Proceeds of $8.0 million were received in 1994 on the divestiture of the Ciba Composites Business' Miami facility. Cash flow from financing activities in 1995 was affected by equity contributions from Ciba of $29.8 million and additional borrowings of $7.8 million that largely offset loan payments of $36.6 million. In 1994, equity contributions from Ciba of $4.7 million were offset by payments on borrowings of $10.4 million. The decrease in 1994 in net cash provided by operating activities was primarily due to an increase in accounts receivable during this period (reflecting both the increase in sales and initial longer 44 payment terms extended to new European customers). Lower depreciation in 1994 was more than offset by an increase in amortization during that period due to the recognition of a $5.1 million impairment loss for intangibles relating to aircraft related contract manufacturing programs. In 1994, efforts to control inventory levels resulted in a decline of $1.3 million despite an increase in sales. In 1993, similar efforts to control assets resulted in a decrease of $16.1 million in accounts receivable and $10 million in inventories. Operating cash flow also benefited from a $3.2 million decrease in prepaid expenses and other current assets in 1993 and a decrease in long term assets of $3.7 million and $3.6 million, respectively, for 1994 and 1993. With the increase in sales in 1994, accounts payable also increased by $3.8 million. In 1994 cash provided by operating activities increased due to an increase of $4.2 million for accrued liabilities and accrued compensation and $1.3 million for other long term liabilities. In 1993, a decrease of $3.5 million in other long-term liabilities was somewhat offset by an increase of $1.1 million in accrued liabilities and accrued compensation. Cash used in investing activities in 1994 reflected $7.7 million used to purchase certain property, plant and equipment and $4.7 million expended for the BPAM acquisition offset in part by the divestiture of the Ciba Composites Business' Miami facility for $8.0 million. Cash used in investing activities in 1993 reflected $12.3 million used to purchase certain property, plant and equipment. In 1994, cash used in financing activities reflected payments on borrowings of $10.4 million that significantly exceeded equity contributions from Ciba of $4.7 million. In 1993, payments on borrowings of $3.6 million and equity distributions to Ciba of $1.5 million were largely offset by proceeds from borrowings of $4.3 million. BACKLOG Historically, the backlog of orders has ranged between $50 million and $150 million based on the timing of contract awards and completion. The backlog of orders was $43 million at December 31, 1995. The Ciba Composites Business' backlog has not historically been affected significantly by seasonality. EFFECT OF INFLATION Inflation has not had a material effect on the revenues or operating results of the Ciba Composites Business during the periods ended December 31, 1995, December 31, 1994 and December 31, 1993, respectively. FINANCIAL RESOURCES The Ciba Composites Business' capital requirements have historically been funded through intercompany borrowings and contributions from Ciba and its subsidiaries. Upon consummation of the Ciba Acquisition, the Ciba Composites Business was combined with Hexcel and no longer had access to funding from Ciba and its subsidiaries. Historically, due to the seasonality of the Ciba Composites Business' sales (i.e., higher net sales in the second quarter) and corresponding increased working capital requirements to fund accounts receivable, the Ciba Composites Business has required funding support from Ciba affiliates in the form of loans or capital investments during the second and third quarter time frame. The peak business cycle occured near the end of the second quarter, particularly in Europe in anticipation of the summer slowdown. Collections in the second half of the year allowed the Ciba Composites Business to generate positive cash flows from operations for the full year period. The working capital practices of the Ciba Composites Business (and much of the composite materials industry) were tied in large part to the payment practices of the aerospace industry in general. The Ciba Composites Business' customers were, typically, large original equipment manufacturers. Goods were generally built to order based on forecasted schedules generated in advance. As a result, significant amounts of inventory were not carried to meet rapid delivery requirements. In general, the Ciba Composites Business' customers did not request extended payment terms of their vendors. The Ciba Composites Business' customers generally paid in varying periods not generally in excess of U.S. or European practice, as the case may be. Merchandise was not returnable. 45 BUSINESS GENERAL Hexcel is a leading international manufacturer and marketer of lightweight, high performance composite materials, parts and structures for the aerospace, defense, recreation and general industrial markets. The Company's products, which are described below, include carbon fiber, woven synthetic fabrics, honeycomb, prepregs, adhesives, and a wide variety of lightweight, high strength semi-finished and finished structural components. With 19 manufacturing facilities in the United States and Europe, management believes that Hexcel is positioned to take advantage of opportunities for growth worldwide. The Company's manufacturing capabilities are integrated across product lines enabling it to offer a breadth of products spanning the composites industry. The Company operates through the following five core businesses, presented in order of manufacturing integration from raw materials to finished products: - FIBERS. The Company manufactures PAN based carbon fiber primarily for sale to customers and also for use in its Fabrics and Composite Materials businesses. The Company supplies high performance carbon fibers for a wide variety of applications in the commercial aerospace, space and defense, recreation and general industrial markets predominantly in the United States. The principal end uses for carbon fibers are as raw materials for prepregs and fabrics, in filament winding for various space and defense and industrial applications and in fiber placement to produce composite structures. - FABRICS. The Company is a leading manufacturer of woven fiberglass, carbon and aramid fiber reinforcements for composite materials and other applications worldwide. In the United States, the Company is a leading weaver of aramid fibers and, in Europe, the Company is a leading weaver of high performance fiberglass fabrics. The principal end uses for fabrics are in composite materials, printed circuit boards, window blinds, insulation and soft body armor such as bulletproof vests. - COMPOSITE MATERIALS. The Company is an innovative leader worldwide in the manufacture of honeycomb, prepregs, film adhesive products and sandwich panel products. Although each of these products is sold primarily to the commercial aerospace and space and defense markets, the Company has led the development of new applications for composite materials in the recreation market and is developing additional applications for use in the transit, marine and other industrial markets. The principal end uses for composite materials are components for commercial and military aircraft, munitions, high-speed and mass transit trains and recreation applications, including golf clubs, skis and snowboards. - SPECIAL PROCESS. The Company engineers, manufactures and markets machined and fabricated honeycomb parts for use in commercial aerospace, space and defense, automotive and other applications to meet customers' specific design requirements. This core business provides value-added processing to standard honeycomb manufactured by the Company by contouring and machining it into complex shapes. The principal end uses for special process products are semi-finished aerospace components and aircraft control surfaces such as flaps and wing tips. - STRUCTURES AND INTERIORS. The Company manufactures and markets lightweight, high strength structures and interiors primarily for use in the aerospace industry. The principal end uses for structures and interiors are wing-to-body fairings, flap track fairings, radomes, engine cowls and interior systems such as overhead storage bins for aircraft. 46 STRATEGIC REPOSITIONING BACKGROUND Historically, the aerospace and defense industries have led the development of applications for composite materials and structures due to their need for the performance properties of these materials. During the mid to late 1980's, composite materials companies, including Hexcel, the Ciba Composites Business and the Hercules Composites Business invested in rapid capacity expansion to respond to the anticipated growth in both military procurement programs and the commercial aircraft industry. In particular, the Company built a new plant in Chandler, Arizona for United States military programs including the B-2 bomber. With the end of the Cold War in 1989 and the resulting rapid reduction in defense procurement expenditures in the United States and Europe, sales to the military aerospace and defense sectors declined rapidly. B-2 projected procurement fell from an original 132 aircraft to 20. In addition, under the influence of deregulation and various other factors including a general economic downturn and the Gulf War, the commercial airline industry experienced significant losses in the early 1990's, which in turn led to reduced investment in new aircraft. With diminishing cash flows, orders for commercial aircraft were canceled or delayed, resulting in a decline in deliveries by approximately 50% between 1992 and 1994. These changes in the principal markets for composite materials left significant excess capacity in the industry, resulting in significant losses for industry participants, including the Company. As a result of these market circumstances, as well as debt incurred to build capacity in the late 1980's, the Company experienced a liquidity crisis in 1993. After attempting, but being unable to achieve a consensual out-of-court restructuring with its creditors, Hexcel sought protection under Chapter 11 by filing a voluntary petition for relief in December 1993. Under the leadership of John J. Lee, who joined the Company as Chairman of the Board and Co-Chief Executive Officer shortly before the Chapter 11 filing, the Company adopted and executed a plan to reposition itself by consolidating facilities, divesting non-core businesses, and reducing costs in an attempt to restore profitability and positive cash flow. In connection with this repositioning, the Company successfully implemented a consolidation of its operations by (i) divesting itself of its non-strategic, European and United States resins businesses, (ii) selling its Chandler, Arizona plant and associated product lines, (iii) closing its Graham, Texas facility and (iv) reducing SG&A, including R&D expenditures. The Company also reduced the number of its employees from 3,050 at year end 1992 to 2,127 at year end 1995. These actions enabled the Company to restructure its balance sheet and obtain new equity and debt financing. When Hexcel emerged from Chapter 11, all creditors' claims were reinstated or paid in full, including interest. STRATEGIC ACQUISITIONS Upon emerging from Chapter 11 in February 1995, the Company began to implement a strategy to lead the consolidation of the composite materials industry by removing excess capacity and in the process diversifying and strengthening its existing businesses. On February 29, 1996, Hexcel acquired the Ciba Composites Business for aggregate consideration of approximately $203.1 million, subject to post-closing adjustments. The Ciba Acquisition combined two of the world's leading and most technically advanced composite materials companies, broadening the Company's range of products and markets, enhancing its research, development and technological capabilities and balancing the geographical scope of its business. As a result of the Ciba Acquisition, Ciba became the beneficial owner of approximately 49.7% of the Company's outstanding Common Stock. On June 27, 1996, the Company acquired the Hercules Composites Business for a cash purchase price of approximately $135 million (excluding transaction costs) subject to post-closing adjustments. The Hercules Acquisition combined two leading prepreg manufacturers, with few overlapping products and qualifications between their product lines, and provided the Company with the capability to manufacture one of its significant raw materials, PAN based carbon fibers. This acquisition further 47 enhanced Hexcel's technological and integrated capabilities and provided the Company with new products that have been qualified by customers, a financial hedge against either increases in the price of carbon fiber or decreases in its supply matching the Composite Materials core business' consumption of fibers against the sales of the Fibers core business, and additional production capacity which will aid the Company in implementing restructuring programs in the United States and Europe. STRUCTURAL REORGANIZATION AND CONSOLIDATION PROGRAM The Company has reorganized its operations into five core businesses: Fibers, Fabrics, Composite Materials, Special Process and Structures and Interiors. See "-- Core Businesses." This reorganization positioned the Company to better respond to the growing commercial aerospace, space and defense, industrial and recreation markets it serves, while focusing management on cost reduction and profitability. The new organizational structure is also expected to improve the Company's current business performance and allow it to exploit opportunities in emerging global markets. In May 1996, the Company announced a program for consolidating its operations following the Ciba Acquisition. The objective of this program, which is expected to be completed in approximately three years, is to integrate acquired assets and operations into Hexcel, reorganize and rationalize the Company's research and manufacturing activities around strategic centers dedicated to select product technologies, eliminate excess manufacturing capacity and rationalize redundant sales and marketing functions. Specific actions contemplated by the consolidation program include the previously announced closure of the Anaheim, California facility acquired from Ciba, the closure of a portion of the Welkenraedt, Belgium facility, the reorganization of the Company's manufacturing operations in France, the consolidation of the Company's United States special process manufacturing activities, and the integration of sales and marketing resources. Management estimates that the consolidation program will reduce the Company's workforce by approximately 8% worldwide. The total cost of this program, which excludes additional costs and expenses that may be incurred due to modifications to the program that may result from the Hercules Acquisition, is estimated to be approximately $49 million. This estimate includes $5.2 million of expenses incurred in the first quarter of 1996, an estimated $29 million charge against earnings expected to be incurred in the second quarter of 1996 and approximately $15 million to be recognized thereafter. Cash expenditures necessary to complete the program are estimated to total approximately $44 million, net of expected proceeds from asset sales. Management estimates that the program will result in annual cost savings of approximately $28 million when it is fully implemented in 1999, and that for the period 1996 through 1998, costs associated with the program (net of estimated proceeds from asset sales) are expected to equal the incremental cash savings generated by the program. The foregoing estimates of total cost of the consolidation program, cash expenditures and annual cost savings constitute forward-looking information. The failure of any of the assumptions underlying such estimates to be realized may cause the actual amounts to differ materially from the estimates set forth above. For a discussion of these assumptions and other important factors that will affect actual amounts, see "Risk Factors -- Forward-Looking Statements; Consolidation Program." As a result of the (i) elimination of surplus facilities and manufacturing capacity by industry participants such as the Company, (ii) exit of certain participants from the industry and (iii) consolidation of the industry led by the Company with the Ciba and Hercules Acquisitions, excess industry capacity has been reduced. As a result of the anticipated upturn in the commercial aerospace market, current industry manufacturing is beginning to move in line with demand. COMPETITIVE ADVANTAGES The Company believes that the recent measures undertaken to reorganize its operations, reduce costs and increase geographic, market and product diversity, enhance the Company's key competitive advantages: - MARKET LEADER. The Company has long been a leading international manufacturer of lightweight, high strength fabrics, composite materials and parts and structures. Management 48 believes the Company is the largest integrated producer of diversified composite materials in the world based on pro forma net sales of approximately $771 million for the year ended December 31, 1995. See "Pro Forma Financial Information." - BROADEST RANGE OF QUALIFICATIONS IN THE AEROSPACE INDUSTRY. Management believes Hexcel has the broadest range of qualifications of any composite materials manufacturer in the aerospace industry and is qualified on several programs which have significant opportunities for growth. Such programs include the Boeing 777 and 737x, the Airbus A320 series (including A319 and A321) and A330 series and the McDonnell Douglas C-17 transport. Before composite materials may be utilized in aerospace and military applications, they must be qualified, which is both expensive and time consuming. See "-- Markets and Customers." The Company believes its extensive qualifications position it to remain a leading supplier of composite materials to the aerospace industry. - VERTICAL INTEGRATION. Management believes the Company is the most vertically integrated composite materials manufacturer in the world. Vertical integration provides the Company with a greater ability to control the cost, quality and delivery of its products. Moreover, the Company has the unique ability to manufacture and sell products from various points in the manufacturing process, thereby providing overall materials solutions to its customers and strengthening its competitive position. See "-- Manufacturing Process and Raw Materials." - MARKET AND GEOGRAPHIC DIVERSITY. Approximately 53% of Hexcel's pro forma net sales for the year ended December 31, 1995 were derived from the commercial aerospace industry, 11% from space and defense, 12% from recreation products (including golf shafts, skis, snowboards, fishing rods and tennis rackets) and 24% from general industrial markets (including printed circuit boards, window blinds and high-speed mass transit trains). Management believes this market and product mix reduces the Company's exposure to business cycles in the commercial aerospace industry. In addition, the Ciba Acquisition enabled the Company to balance the geographic scope of its business between North America and Europe, providing it with an increased presence at Airbus, and to build a presence in the rapidly growing Asia-Pacific aerospace market. See "-- Core Businesses" and "-- Sales and Marketing." - STRONG TECHNICAL SUPPORT. The Company has been a leader in the development of technology and commercial applications for composite materials for over 50 years. The Company's technically oriented sales force works with new and existing customers to identify and engineer solutions to meet customers' needs, particularly by identifying areas where composite materials may beneficially replace traditional materials. Through both its research and technology function and its proprietary skills in resin formulation and woven reinforcement, the Company has the technical capability to provide its customers with "make to order" custom products. A recent example of the Company's ability to engineer solutions for its customers is the development of carbon core honeycomb for jet engine nacelles. This product replaces traditional aluminum materials that can corrode in the extreme environment of an aircraft engine, with a material that is both stronger and lighter and conducts heat away from the engine. BUSINESS STRATEGY To maintain its position as a leading worldwide manufacturer of composite materials, parts and structures, the Company has adopted the following strategies: - CAPITALIZE ON GROWTH IN THE AEROSPACE INDUSTRY. The Company believes that demand for commercial aircraft, and therefore composite materials, should be favorably influenced by the following trends that have been identified in industry reports: (i) a significant increase in air travel over the next ten years, (ii) the higher utilization of composite materials on state-of-the-art aircraft, such as the Boeing 777, (iii) the acceleration of new aircraft deliveries as a result of government noise regulations and (iv) expected increases in aircraft fleet size during the next 49 decade. The Company expects to capitalize on these trends by continuing to produce a wide variety of composite materials for use in the manufacture of virtually every commercial aircraft in the western world. See "-- Markets and Customers." - CONTINUE TO CONTROL COSTS AND IMPROVE MANUFACTURING EFFICIENCIES. Management is committed to reducing costs and improving manufacturing efficiencies through consolidation and structural reorganization. Prior to giving effect to the Ciba and Hercules Acquisitions, the Company (i) consolidated operations by closing one plant, partially closing a second one and selling a third, (ii) sold its non-core resins and specialty chemicals businesses, (iii) reduced the number of its employees by approximately 30%, and (iv) reduced selling, general and administrative costs from $62 million in 1992 to $49 million in 1995. In addition, in the first half of 1996, the Company reorganized its organizational structure into five core businesses focused on key products and markets, and the Company announced a business consolidation program which is expected to result in continued cost reductions and manufacturing efficiencies. See "-- Strategic Repositioning." - STRATEGIC ACQUISITIONS AND ALLIANCES. In order to (i) enhance Hexcel's integrated manufacturing capabilities, (ii) expand its geographic base and (iii) optimize its portfolio of products and businesses, the Company intends to continue to complement its product lines through strategic acquisitions or alliances. As a result of the Ciba Acquisition, the Company is positioned to take advantage of the trend towards outsourcing production of structures and interiors through alliances. The Company reviews its portfolio of products and businesses regularly in connection with its efforts to identify appropriate strategic opportunities. See "Risk Factors -- Acquisition and Alliance Strategy." - ENHANCE CUSTOMER SERVICE. The Company continually seeks to strengthen and expand its relationships with customers by capitalizing on its vertically integrated manufacturing capabilities and technical support. As a highly integrated manufacturer of composite materials, Hexcel has the flexibility and capability to meet the various needs of its customers. The Company also has the technical capability to assist customers in the design and manufacture of composite materials for specialty applications, thereby further strengthening customer relationships. For example, Hexcel engineers work with Reebok-Registered Trademark- to develop composite supports for athletic shoes and with a customer's engineers to design composite turbofan blades for aircraft engines. Hexcel intends to leverage its integrated capabilities to serve a customer base which is increasingly favoring suppliers who have the ability to satisfy all of their composite materials requirements. - PENETRATE NEW MARKETS. The Company strives to maintain its leadership position in the development of innovative composite materials applications in an attempt to expand its revenue base. Although commercial aerospace remains the largest market for composite materials, the Company continues to penetrate recreation and general industrial markets, providing composite materials for a variety of applications and plans to continue developing applications for new markets. See "Competitive Advantages -- Market and Geographic Diversity." The Company also expects to take advantage of developing markets by expanding its operations in the rapidly growing Asia-Pacific region. 50 CORE BUSINESSES Each of Hexcel's core businesses focuses on particular products, emphasizes customer responsiveness and strives for improved manufacturing efficiencies and lower operating costs. The following table identifies, by core business, the Company's principal products and examples of their primary end uses.
CORE BUSINESS PRODUCTS PRIMARY END USE FIBERS PAN PRECURSOR Raw material for carbon fiber Carbon fibers Raw materials for prepregs and fabrics Filament winding for various space, defense and industrial applications FABRICS Woven fiberglass, Prepregs carbon and aramid Honeycomb reinforcements Printed circuit boards Window blinds Insulation Soft body armor Metal and fume filtration systems COMPOSITE MATERIALS Honeycomb Sandwich structures for: Aircraft components High-speed and mass transit train components Energy absorption components for mass transit Athletic shoe components Prepregs Aircraft components Recreation applications: Fishing rods Tennis rackets Golf clubs Skis and snowboards Munitions and defense systems Adhesives Bonding of sandwich panels - honeycomb to prepregs and aluminum SPECIAL PROCESS Machined and Semi-finished commercial and military aerospace components: fabricated Helicopter rotor blades honeycomb parts Space shuttle doors Aircraft surfaces: Flaps Wing tips Elevators Fairings Automotive carburetor components STRUCTURES AND Structures Wing-to-body fairings INTERIORS Flap track fairings Radomes Engine cowls Inlet ducts Wing panels Other aircraft components Interiors OEM and retrofit interior systems for aircraft such as: Overhead stowage compartments Lavatories Sidewalls Ceilings
51 FIBERS. The Fibers business manufactures PAN based carbon fiber for sale to customers and for use in its Fabrics and Composite Materials businesses. Carbon fibers are woven into carbon fabrics, used as reinforcement in conjunction with a RESIN MATRIX to produce prepreg and TOW-PREG, and used in filament winding and advanced fiber placement to produce composite structures. The Company sells to customers approximately 90% of the fiber it produces. The Fibers business operates two facilities in the United States. At its Decatur, Alabama facility, the Company produces the precursor fiber from which it manufactures finished carbon fiber at its Bacchus, Utah facility. The Company has the capacity to manufacture, depending on fiber type, approximately 3.5 million pounds of carbon fiber annually at its Utah facility. The Company is currently increasing the capacity of its Alabama facility so that it can produce at least 100% of its precursor requirements, and reduce the unit cost of the precursor it consumes by removing its historic dependence on supplies of precursor from Japan. The Company will expand carbon fiber capacity through process improvements and investment when, in the Company's judgement, market conditions favor such expansion. FABRICS. The Fabrics business is a leading weaver of synthetic fiber reinforcements for composite materials, fiberglass yarn for printed circuit boards, window blinds, thermal insulation and filters and aramid fibers for soft body armor. The Fabrics business operates a number of plants near Lyon, France, and a plant at Seguin, Texas. As part of the Company's business consolidation program, the Fabrics business plans to reorganize its manufacturing operations in France by eliminating four satellite facilities and consolidating similar weaving operations at single sites. In the United States the Fabrics business is expanding its fiberglass weaving and treatment capacity to enable it to produce higher performance fiberglass for composite materials. The Fabrics business also participates in a joint venture with Owens-Corning that makes stitchbonded and multi-axial fabrics. COMPOSITE MATERIALS. The Composite Materials business develops, manufactures and sells metallic and non-metallic honeycomb core; woven prepreg, uni-directional tape and tow prepregs; film adhesives; and standard and customized sandwich panels. Capturing the synergies of the Ciba Composites Business and the Hercules Composite Business, the Composite Materials business is consolidating manufacturing operations to "right size" capacity and is leveraging the process technology capabilities of the combined businesses. Redundancies are also being eliminated in sales and marketing and research and technology functions. - PREPREGS. The Composite Materials business operates nine prepreg manufacturing facilities. In the United States, it has four facilities located in Anaheim and Livermore, California; Lancaster, Ohio; and Bacchus, Utah. In Europe, it has five facilities at Duxford, England; Welkenraedt, Belgium; two facilities near Lyon, France; Madrid, Spain; and near Linz, Austria. As a result of the Company's business consolidation program, the Composite Materials business will concentrate prepreg manufacturing in seven facilities; three in the United States and four in Europe. The Fabrics business supplies the majority of the woven fabrics used in the manufacture of woven prepegs by the Composite Materials business. - HONEYCOMB. As part of its business consolidation program, the Composite Materials business will centralize its European honeycomb manufacturing operations at its Duxford, England, facility ceasing honeycomb manufacturing operations at Welkenraedt, Belgium. The Company also manufactures honeycomb in the United States at its Casa Grande, Arizona facility. For the last two years, the Ciba Composites Business has had its Nomex-Registered Trademark- and fiberglass honeycomb manufactured by third party manufacturers. Manufacturing of these items is now being transferred to the Company's Casa Grande, Arizona facility. The Composite Materials business provides all the honeycomb used by the Special Process business and some of the honeycomb used by the Company's Structures and Interiors business. 52 - ADHESIVES. The Composite Materials business manufactures adhesives at Duxford, England and in Anaheim and Livermore, California. Film adhesives are utilized in bonding honeycomb, prepregs and other materials to fabricate sandwich panels and other composite structures. - SANDWICH PANELS. The Composite Materials business manufactures standard sandwich panels at Duxford, England, engineered sandwich panels used in train, marine, and construction applications at Welkenraedt, Belgium; engineered panels at Casa Grande, Arizona; and aircraft floor panels in Anaheim, California. Sandwich panels are fabricated using honeycomb, phenolic foam and balsa core materials sandwiched between prepregs, aluminum or steel skins. Film adhesives are used to bond the skins to the core materials. The Composite Materials business participates in a joint venture with Dainippon Ink & Chemicals, Inc. (the "DIC-Hexcel" joint venture) that was formed in 1980. The joint venture operates a manufacturing facility in Japan that produces Nomex-Registered Trademark- honeycomb, prepregs and decorative laminates. The DIC-Hexcel venture distributes its own products as well as the Company's composite materials in Japan. The business also participates in a joint venture with Fyfe Associates Corporation that is developing and marketing composite materials systems used in seismic retrofitting and preventing environmental erosion. SPECIAL PROCESS. The Special Process business carves, shapes and forms honeycomb manufactured by the Composite Materials business into complex shapes ready to be used as semi-finished components in the manufacture of composite structures. Typical applications include helicopter rotor blades; components used in the assembly of aircraft landing gear doors, flight control surfaces such as flaps and wing winglets, and aircraft fairings; and airflow directionalizers used in General Motors-Registered Trademark- carburetors. At its Pottsville, Pennsylvania facility, the business operates the world's largest installed base of numerically controlled, five-axis milling machines for the milling of honeycomb. Using computer aided design tools, the Special Process business is able to receive electronically designs of components from its customers and convert them directly into computer based operating instructions for its milling machines. The business is also a leader in the heat forming of non-metallic honeycomb, producing complex shapes from flat sheets of honeycomb. The Special Process business currently has operations in Burlington and Bellingham, Washington; Pottsville, Arizona; Casa Grande, Arizona; Duxford, England; and Welkenraedt, Belgium. As part of the business consolidation program, operations will be consolidated into two United States facilities, and the Welkenraedt, Belgium facility. STRUCTURES AND INTERIORS. The Structures and Interiors businesses operate facilities in Washington state under the "Heath Tecna" tradename. The Structures business fabricates FINISHED PARTS and components manufactured from composite materials, many supplied by the Composite Materials business. Utilizing a full range of composite materials processing technologies, the business produces ready to install military and commercial aircraft components such as wing-to-body and flap-track fairings, radomes, engine cowls and wing panels together with some truck components. It also operates a small facility in Brindisi, Italy. The Interiors business manufactures OEM and retrofit interior components for commercial aircraft such as stowage bins, sidewalls, ceiling panels, lavatories, and bulkheads. The business uses composite materials to fabricate these ready-to-install components. The Interiors business is exploring the markets for interior products for trains and marine applications. The Structures and Interiors businesses are well-positioned to benefit from the industry trend of offloading production of aircraft components and interiors made from composite materials by the major aircraft manufacturers. MANUFACTURING PROCESS AND RAW MATERIALS The Company's manufacturing capabilities are integrated across all product lines. At each level of integration, Hexcel sells a significant portion of its products to outside customers, thus exposing each product line to market forces and stimulating productivity and innovation so that such product lines remain cost competitive and at the leading edge of technology. The Ciba Acquisition provided the 53 Company with additional integration opportunities between its Composite Materials and Structures and Interiors core businesses. The Hercules Acquisition additionally strengthened the Company's integrated manufacturing capabilities by providing Hexcel with a PAN-based carbon fiber business. The Company intends to continue integrating its manufacturing processes and products through internal development and selective acquisitions. See "-- Competitive Advantages -- Vertical Integration." The following table illustrates the Company's integrated manufacturing capabilities. [CHART DEPICTING THE VERTICAL INTEGRATED MANUFACTURING CAPABILITIES OF THE COMPANY] Hexcel's production activities, and in particular its Special Process and Structures and Interiors core businesses, are generally based on a combination of "make-to-order" and "make-to-forecast" production requirements. The Company coordinates closely with key suppliers in an effort to avoid raw material shortages. RESEARCH AND TECHNOLOGY Hexcel's research and technology ("R&T") function supports all the Company's core businesses worldwide. R&T maintains expertise in chemical formulation, curatives, textile architectures, advanced composites structures, process engineering, analysis and testing of composite materials, computational design and prediction, and other scientific disciplines related to the Company's worldwide business base. Additionally, R&T performs a limited amount of contract research and development in the United States and Europe for strategically important customers in the areas of ceramics, higher temperature polymers, advanced textiles and composite structures manufacturing. Each core business maintains engineering staff and facilities to support its business operations. Worldwide investment in R&T is coordinated by a committee consisting of the R&T managers within each of Hexcel's core businesses. Hexcel's products rely primarily on the Company's expertise in materials science, textiles, process engineering and polymer chemistry. Consistent with market demand, the Company has been placing more emphasis on cost effective product design and agile manufacturing in recent years. Towards this end, the Company has entered into formal and informal partnerships, as well as licensing and teaming arrangements, with several customers, suppliers, external agencies and laboratories. Management believes that the Company possesses unique capabilities to design, develop and 54 manufacture composite materials and structures, and that these capabilities should be protected. Management believes that the patents and know-how rights currently owned or licensed by the Company are adequate for the conduct of the Company's business. MARKETS AND CUSTOMERS Hexcel's materials are sold for a broad range of uses. The table below displays the historical percentage distribution of net sales by market since 1991.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1995 1994 1993 1992 1991 --------- --------- --------- --------- --------- NET SALES BY MARKET: Commercial aerospace........................................ 45% 47% 42% 46% 47% Space and defense........................................... 11 11 18 17 19 Recreation and general industrial........................... 44 42 40 37 34 --------- --------- --------- --------- --------- 100% 100% 100% 100% 100% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- INTERNATIONAL OPERATIONS: International net sales (a)................................. $ 170.7 $ 142.3 $ 125.4 $ 148.9 $ 153.2 Percentage of net sales..................................... 49% 45% 40% 42% 43%
- ------------------------ (a) Net sales of international subsidiaries and U.S. exports, in millions. AEROSPACE. Historically, the commercial aerospace industry has led the development of applications for composite materials and structures because it has the strongest need for the performance properties of these materials, and is well-positioned to maximize the economic benefits from their use. The demand for composite material products, however, is closely correlated to the demand for commercial aircraft, which is driven by, among other factors, the growth in revenue passenger miles flown by the world's airlines and the rate of replacement of existing aircraft. Industry studies indicate that air travel growth is closely correlated to economic growth, the availability of airport and air traffic control capacity, airline industry deregulation and the price of oil. The Company believes that demand for composite materials should be favorably influenced by the several trends that have been identified in industry reports: (i) a significant increase in air travel over the next ten years, (ii) the replacement of over 3,900 obsolete jets (35% of the 1995 fleet) over the next 20 years due to, among other factors, the Stage III government noise regulations and (iii) expected increases in aircraft fleet size during the next decade. Moreover, aircraft manufacturers, such as Boeing, Airbus and McDonnell Douglas, are including significantly greater quantities of composite materials per aircraft in order to reduce the weight of commercial aircraft and make them more fuel efficient. Nevertheless, despite the increasing usage of high performance composite materials in commercial aircraft, the Company must continuously demonstrate the cost benefits of its products in aerospace applications. As aircraft manufacturers seek to be more competitive, they look to their composite materials suppliers and sub-contractors to work with them to reduce the cost of overall aircraft components. SPACE AND DEFENSE. The space and defense markets have historically been innovators in and sources of significant demand for composite materials. For example, Hexcel honeycomb was used in the feet of the first lunar module to cushion its landing on the moon, and composite materials made a major contribution to the development of "stealth" technologies during the 1980's, resulting in the F-117A "stealth fighter" and B-2 "stealth bomber." Since the end of the Cold War, government expenditures on military procurement have declined sharply. Statistics of the United States government's Office of Management and Budget show that defense procurement expenditures in the United States declined from approximately $82 billion in 1989 to an estimated $55 billion in 1995 and are projected to fall to $49 billion in 1996. Nevertheless, there remain a number of significant military programs that utilize composite materials such as the F-22 tactical aircraft, C-17 cargo aircraft, Comanche helicopter and V-22 tilt-rotor aircraft. Historically, Hexcel has maintained a greater market share in the commercial rather than the military aerospace market. With the acquisition of the 55 Hercules Composites Business, the Company will supplement its sales to military customers by obtaining a number of product qualifications for use in both United States and foreign military aircraft and space programs. RECREATION. Recreation products are fast becoming the most visible markets for composite materials. One of the largest applications in the market is the manufacture of prepregs for graphite golf club shafts. Hexcel, which developed the prepreg used to make the Taylor Made-Registered Trademark- bubble shaft, is a significant supplier to golf shaft manufacturers. In addition to manufacturing composite materials for Taylor Made-Registered Trademark-, one of the market leaders for composite drivers, Hexcel also supplies materials used in Callaway-Registered Trademark- golf clubs, another industry leader. Other markets for composite materials applications include athletic shoes, skis and snowboards. Hexcel has benefited from the growing demand for athletic shoes through its position as a supplier of the thermoplastic honeycomb used in many Reebok-Registered Trademark- shoes. While demand in the ski industry has been flat during the last couple of years, the snowboard market is currently growing rapidly. Hexcel supplies more than 50% of the prepregs, honeycomb, polyurethane and pre-cured laminates used in Europe to produce skis and snowboards. Other recreation applications for composite materials include tennis rackets, fishing rods, wind surfing booms and boards, surfboards, bicycles, hockey and lacrosse sticks, in-line skates, kayaks and paddles. Management believes that the recreation market for composite materials will continue to grow through the end of the decade as the demand for high performance, lightweight recreation equipment intensifies. GENERAL INDUSTRIAL. The Company is actively developing applications for composite materials, parts and structures in automotive, marine, rail, infrastructure and other industrial markets where the performance of such materials offers economic solutions to customer needs. In the automotive market, the Company supplies airflow controllers made from microcell aluminum honeycomb that are incorporated into fuel injection systems of many automobiles. Hexcel has also been working with major automobile manufacturers on the development of honeycomb components for crash attenuation, utilizing honeycomb's energy absorption characteristics in managing crash impacts. Given the large volume of automobiles manufactured, even the incorporation of a small amount of composite materials per automobile would offer the potential for substantial revenues. Composite materials are increasingly being used in the manufacture of high speed and mass transit trains, particularly in Europe. Custom engineered honeycomb sandwich panels are now used as floors in the French TGV trains, doors on subway trains, and side walls on the shuttle trains in the Channel Tunnel. The majority of the Fabrics core business products are supplied to industrial applications. With the rapid growth in personal computing and communications in recent years, the Company has enjoyed double digit annual growth in the sales of its fabrics in Europe for printed circuit boards. The Company's fabrics are used to produce vertical blinds used in offices and exterior window blinds used in sunny climates. Fiberglass fabrics are also utilized in thermal insulation and industrial filters. The Company will continue to develop selected industrial applications for its products where the use of composite materials offers significant performance and economic advantages to a customer group. SALES AND MARKETING Each of the core businesses retains a staff of marketing managers, product managers, and sales engineers who market their products directly to customers. The Company also uses independent distributors and manufacturer representatives for certain products, markets and regions. In the Asia-Pacific region, the Company sells all its products through a single sales and marketing team. It is anticipated that 30% - 40% of all commercial aircraft sold in the next decade will be sold to the Asia-Pacific market, thereby expanding the overall demand for the Company's products. The Company's sales and marketing teams work in close association with its customers to identify their needs and develop composite materials that meet their requirements. COMPETITION In the production and sale of its materials, Hexcel competes with numerous United States and international companies on a worldwide basis. The broad markets for the Company's products are 56 highly competitive, and the Company has focused on both specific markets and specialty products within markets to obtain market share. In addition to competing directly with companies offering similar products, Hexcel materials compete with substitute structural materials such as structural foam, wood, metal, and concrete. Depending upon the material and markets, relevant competitive factors include price, delivery, service, quality and product performance. The acquisition of the Ciba and Hercules Composites Businesses enhanced the Company's competitive position by broadening the Company's product portfolio and strengthening the Company s position in certain geographic regions. ENVIRONMENTAL MATTERS The Company is subject to numerous federal, state and foreign laws and regulations that impose strict requirements for the control and abatement of air, water and soil pollutants and the manufacturing, storage, handling and disposal of hazardous substances and waste. These laws and regulations include the Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA" or "Superfund"), the Clean Air Act, the Clean Water Act and the Resource Conservation and Recovery Act. The costs of compliance, including capital costs, with such requirements in the United States and in foreign jurisdictions may be substantial. Moreover, regulatory standards under environmental laws and regulations have tended to become increasingly stringent over time. The Company is currently a party to, or otherwise involved in, legal proceedings in connection with several Superfund sites. Because CERCLA provides for joint and several liability, a government plaintiff could seek to recover all remediation costs at a waste disposal site from any one of the potentially responsible parties ("PRPs"), including the Company. Generally, where there are a number of financially viable PRPs, liability has been apportioned, or the Company believes, based on its experience with such matters, that liability will be apportioned based on the type and amount of waste disposed of by each PRP at such disposal site and the number of financially viable PRPs, although no assurance can be given as to any particular site. In addition to Superfund sites, the Company is currently investigating and remediating on-site disposal areas at certain of its current and former facilities. There can be no assurance that the Company has identified all off-site liability matters for which it may be responsible, all on-site remediation matters involving its current or former facilities or that the cost of such known or unknown remediation matters will not be material. The Company has established financial reserves in cases where the amount of environmentally related expenditures is reasonably estimable. As assessments and cleanups proceed, and as additional information becomes available, these reserves amounts are reviewed and adjusted, if necessary. EMPLOYEES As of March 31, 1996, Hexcel employed 4,077 full-time employees in its continuing operations, compared with 2,127 and 2,189 as of December 31, 1995 and 1994, respectively. Approximately 13% of these employees have union affiliations. Management believes that labor relations have been generally satisfactory. As a result of the Ciba Acquisition on February 29, 1996 and the Hercules Acquisition on June 27, 1996, Hexcel added approximately 2,150 and 450 employees, respectively, to its workforce, some of whom have union affiliations. In anticipation of the Hercules Acquisition, Hexcel made a wage and benefits proposal to the approximately 170 workers at the former Hercules Composites Business facility in Salt Lake City, Utah represented by the Oil, Chemical and Atomic Workers' Union ("OCAW"), which the OCAW workers rejected. Hexcel subsequently offered employment to virtually all the Hercules Composites Business' 450 employees, including the OCAW workers in Salt Lake City. However, the actual number of workers who will accept Hexcel's offer, the status of labor relations at the Salt Lake City facility and the resultant impact on operations at the Salt Lake City facility remain uncertain. 57 PROPERTIES Hexcel owns manufacturing facilities and leases sales offices located throughout the United States and in other countries as noted below. The corporate offices for the Company are located in leased facilities in Stamford, Connecticut and Pleasanton, California. The Company's central research and technology laboratories are located in Dublin, California. The following table lists the manufacturing facilities of Hexcel by geographic location, approximate square footage, and principal products manufactured, including the facilities acquired in connection with the Ciba and Hercules Acquisitions. The Company recently announced its decision to close the acquired Anaheim facility, restructure its manufacturing operations in France and scale down operations at its Welkenraedt, Belgium facility. Following the completion of these and certain other consolidation activities, the Company expects to have eliminated approximately 400,000 square feet (9%) of its worldwide manufacturing space; however, management believes that the Company will possess production capacity appropriate for the conduct of its business for the foreseeable future. The following table does not include the manufacturing facilities operated by the Company's joint ventures. MANUFACTURING FACILITIES
APPROXIMATE FACILITY LOCATION SQUARE FOOTAGE PRINCIPAL PRODUCTS - -------------------------------- -------------- --------------------------------------------------------------- United States: Bacchus, Utah 362,000 Carbon Fiber; Prepregs Decatur, Alabama 126,000 PAN Precursor Seguin, Texas 189,000 Reinforcement Fabrics Anaheim, California (1) 300,000 Prepregs; Honeycomb; Adhesives Casa Grande, Arizona 320,000 Honeycomb; Special Process Honeycomb Lancaster, Ohio 35,000 Prepregs Livermore, California 141,000 Prepregs Burlington, Washington 58,000 Special Process Honeycomb Pottsville, Pennsylvania 104,000 Special Process Honeycomb Bellingham, Washington 185,000 Interiors; Special Process Honeycomb Kent, Washington 910,000 Interiors; Structures International: Les Avenieres, France 462,000 Reinforcement Fabrics; Prepregs Lyon, France 230,000 Reinforcement Fabrics; Prepregs Linz, Austria 187,000 Prepregs Welkenraedt, Belgium (2) 223,000 Prepregs; Honeycomb; Special Process Honeycomb Duxford, England 380,000 Prepregs; Honeycomb; Adhesives Swindon, England 20,000 Special Process Honeycomb Brindisi, Italy 110,000 Structures Madrid, Spain 43,000 Prepregs
- ------------------------ (1) Anaheim, California facility to be closed in 1998 with surplus real estate being sold. (2) Welkenraedt, Belgium facility to be reduced by 100,000 square feet in 1999, with surplus real estate being sold. 58 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Prior to February 29, 1996, the Board of Directors of the Company (the "Board of Directors") consisted of nine directors. Effective February 29, 1996, the Board of Directors was reconstituted in accordance with the terms of the Strategic Alliance Agreement and the Governance Agreement, to consist of 10 directors, currently including four Ciba Directors (John M.D. Cheesmond, Stanley Sherman, Joseph T. Sullivan and Hermann Vodicka), the Chairman of the Board and Chief Executive Officer of the Company (John J. Lee), the President and Chief Operating Officer of the Company (Juergen Habermeier) and four additional independent Directors (Marshall S. Geller, Martin L. Solomon, George S. Springer and Franklin S. Wimer). The following table sets forth certain information regarding the directors and certain executive officers of the Company as of June 30, 1996. No family relationship exists between any director or executive officer of the Company and any other director or executive officer of the Company.
NAME AGE POSITION - --------------------------- --- -------------------------------------------------------------------- John J. Lee 59 Chairman of the Board; Chief Executive Officer; Director Juergen Habermeier 54 President; Chief Operating Officer; Director Stephen C. Forsyth 41 Senior Vice President of Finance and Administration David M. Wong 51 Vice President of Corporate Affairs William P. Meehan 60 Vice President of Finance; Chief Financial Officer; Treasurer Wayne C. Pensky 40 Corporate Controller; Chief Accounting Officer Bruce D. Herman 40 Treasurer Joseph H. Shaulson 30 Vice President of Corporate Development; Acting General Counsel; Acting Secretary John M.D. Cheesmond 46 Director Marshall S. Geller 57 Director Stanley Sherman 57 Director Martin L. Solomon 59 Director George S. Springer 62 Director Joseph T. Sullivan 55 Director Hermann Vodicka 53 Director Franklin S. Wimer 60 Director
JOHN J. LEE, age 59, has served as Chairman of the Board of Directors of the Company since February 1996, Chief Executive Officer since January 1994, Chairman and Chief Executive Officer from January 1994 to February 1995, Chairman and Co-Chief Executive Officer of the Company from July 1993 to December 1993 and a Director of the Company since May 1993. Mr. Lee also serves as Chairman of the Nominating Committee and a member of the Finance Committee of the Company. Mr. Lee served as a director of XTRA Corporation, a transportation equipment leasing company, from 1990 to January 1996, and has served as Chairman of the Board, President and Chief Executive Officer of Lee Development Corporation, a merchant banking company, since 1987. Mr. Lee has been a Trustee of Yale University and an advisor to The Clipper Group, a private investment partnership since 1993. From July 1989 through April 1993, Mr. Lee served as Chairman of the Board and Chief Executive Officer of Seminole Corporation, a manufacturer and distributor of fertilizer. From April 1988 through April 1993, Mr. Lee served as a director of Tosco Corporation, a national refiner and marketer of petroleum products, and as President and Chief Operating Officer of Tosco from 1990 59 through April 1993. From February 1994 through June 1995, Mr. Lee served as a director of Playtex Products Corporation. Mr. Lee is also a director of Aviva Petroleum Corporation, and various privately held corporations. DR. JUERGEN HABERMEIER, age 54, has served as President, Chief Operating Officer and a Director of the Company since February 1996. Dr. Habermeier also serves as a member of the Technology Committee of the Company. Prior to joining the Company, Dr. Habermeier served as the President of the Ciba Composites Business and as a Vice President of CGC since 1989. Since 1994, Dr. Habermeier has served on the Board of Directors of RHR International. He is also a member of the Advisory Committee of the Polymer Composites Laboratory of the University of Washington. STEPHEN C. FORSYTH, age 41, has served as Senior Vice President of Finance and Administration of the Company since February 1996. Mr. Forsyth served as Vice President of International Operations of the Company from October 1994 to February 1996 and General Manager of the Company's Resins Business and Export Marketing from 1989 to 1994 and held other general management positions with the Company from 1980 to 1989. Mr. Forsyth joined the Company in 1980. DAVID M. WONG, age 51, has served as Vice President of Corporate Affairs of Hexcel since February 1996. Mr. Wong served as Hexcel's Director of Special Projects from July 1993 to February 1996 and Corporate Controller and Chief Accounting Officer of Hexcel from 1983 to 1993 and held other general management positions from 1979 to 1983. Mr. Wong joined Hexcel in 1979. WILLIAM P. MEEHAN, age 60, has served as Vice President of Finance and Chief Financial Officer of the Company since September 1993 and Treasurer of the Company since April 1994. Prior to joining the Company in 1993, Mr. Meehan served as President and Chief Executive Officer of Thousand Trails and NACO, a membership campground and resort business, from 1990 through 1992. From 1986 through 1989, Mr. Meehan served as Vice President of Finance and Chief Financial Officer of Hadco Corporation. WAYNE C. PENSKY, age 40, has served as Corporate Controller and Chief Accounting Officer of the Company since July 1993. Prior to joining the Company in 1993, Mr. Pensky was a partner at Arthur Andersen & Co., an accounting firm, where he was employed from 1979. BRUCE D. HERMAN, age 40, has served as Treasurer of the Company since April 1996. Prior to joining the Company, Mr. Herman served as Vice President of Finance in the Transportation and Industrial Financing Division of USL Capital Corp. (formerly U.S. Leasing, Inc.) ("USL") from 1993 to 1996, Vice President of Finance in the Equipment Financing Group of USL from 1991 to 1993 and as Vice President of Corporate Analysis of USL from 1988 to 1991. JOSEPH H. SHAULSON, age 30, has served as Vice President of Corporate Development, Acting General Counsel and Acting Secretary of the Company since April 1996. Prior to joining the Company, Mr. Shaulson was an associate in the law firm of Skadden, Arps, Slate, Meagher & Flom, where he was employed from 1991 to 1996. JOHN M.D. CHEESMOND, age 46, has been a Director of the Company since February 1996. Mr. Cheesmond also serves as Chairman of the Executive Compensation Committee and a member of the Finance Committee of the Company. Mr. Cheesmond has served as Senior Vice President and Head of Regional Finance and Control of Ciba since 1994. From 1991 through 1993, Mr. Cheesmond served as Vice President and Head of Regional Finance and Control at Ciba Vision Corporation. MARSHALL S. GELLER, age 57, served as Co-Chairman of the Board of Directors of the Company from February 1995 to February 1996 and has been a Director of the Company since August 1994. Mr. Geller also serves as Chairman of the Audit Committee and a member of the Executive Compensation Committee and the Nominating Committee of the Company. Mr. Geller has served as Chairman of the Board, Chief Executive Officer and founding partner at Geller & Friend Capital Partners, Inc., a merchant banking firm, since November 1995. From 1990 to November 1995, Mr. Geller was Senior Managing Partner of Golenberg & Geller, Inc., a merchant banking firm. From 1988 to 1990, he was 60 Vice Chairman of Gruntal & Company, an investment banking firm. From 1967 until 1988, he was a Senior Managing Director of Bear, Stearns & Co. Inc., an investment banking firm. Mr. Geller is currently a director of Ballantyne of Omaha, Inc., Dycam, Inc., Players International, Value Vision International, Inc., Styles on Video, Inc. and various privately-held corporations and charitable organizations. STANLEY SHERMAN, age 57, has been a Director of the Company since February 1996. Mr. Sherman also serves as a member of the Finance Committee and the Executive Compensation Committee of the Company. Mr. Sherman has served as a director and Vice President -- Finance and Information Services of CGC since 1991. From 1986 through 1991, Mr. Sherman served as Vice President -- Corporate Planning of CGC. MARTIN L. SOLOMON, age 59, has been a self-employed investor since 1990. From 1988 to 1990, Mr. Solomon served as Managing Partner of Value Equity Associates I, L.P., an investment partnership. From 1985 to 1987, Mr. Solomon was an investment analyst and portfolio manager of Steinhardt Partners, an investment partnership. Mr. Solomon has also served as a director and Vice Chairman of the Board of Directors of Great Dane Holdings, Inc., which is engaged in the manufacture of transportation equipment, automobile stamping, the leasing of taxis and insurance, since 1985, a director of XTRA Corporation since 1990, and a director of DLB Oil & Gas, Inc., a company engaged in oil exploration and production, since 1995. Mr. Solomon is also a director of various privately-held corporations and civic organizations. DR. GEORGE S. SPRINGER, age 62, has been a Director of the Company since January 1993. Dr. Springer also serves as Chairman of the Technology Committee of the Company. Dr. Springer is Professor and Chairman of the Department of Aeronautics and Astronautics and Professor of Mechanical Engineering and Professor of Civil Engineering, at Stanford University. Dr. Springer joined Stanford University's faculty in 1983. DR. JOSEPH T. SULLIVAN, age 55, has been a Director of the Company since February 1996. Dr. Sullivan also serves as a member of the Nominating Committee of the Company. Dr. Sullivan has served as a director and Senior Vice President of CGC since 1986. HERMANN VODICKA, age 53, has been a Director of the Company since February 1996. Mr. Vodicka also serves as a member of the Nominating Committee and the Technology Committee of the Company. Mr. Vodicka has served as President of the Polymers Division and a member of the Executive Committee of Ciba since 1993. Mr. Vodicka is currently the Chairman of the Board of Mettler-Toledo, a leading worldwide manufacturer of scales and balances and a wholly owned subsidiary of Ciba. From 1988 to 1993, Mr. Vodicka was President and Chief Executive Officer of Mettler-Toledo. FRANKLIN S. WIMER, age 60, was a Director of the Company from February 1995 through February 1996 and has been a Director since May 1996. Mr. Wimer serves as the President and principal of UniRock Management Corporation ("UniRock"), a private merchant banking firm. Mr. Wimer has been with UniRock since January of 1987. UniRock has acted as the Company's strategic consultant since December 1993. Mr. Wimer is currently Chairman of the Board of Vista Restaurants, Inc., a 12-unit Perkins Family Restaurant and a director of RAMI, Inc., Denver Paralegal Institute, Stainless Fabrication Company, Inc. and Western Filter Company. 61 DESCRIPTION OF NOTES The Notes are to be issued under an Indenture, to be dated as of , 1996 (the "Indenture"), between the Company and First Trust of California, National Association, as trustee (the "Trustee"), a form of which is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, all the provisions of the Indenture, including the definitions of certain capitalized terms used below and not otherwise defined and those terms made a part thereof by the Trust Indenture Act of 1939, as amended. The section references appearing below are to sections in the Indenture. GENERAL The Notes will be unsecured subordinated obligations of the Company, will mature on , 2003, and will be limited to $100,000,000 aggregate principal amount, plus an additional amount not in excess of $15,000,000 as may be purchased by the Underwriters upon exercise of their over-allotment option. The Notes will bear interest at the rate per annum stated on the cover page of this Prospectus from , 1996, or from the most recent Interest Payment Date to which interest has been paid or provided for, payable semiannually on and in each year, commencing , 1997, to the person in whose name such Note (or any predecessor Note) is registered at the close of business on the or preceding such Interest Payment Date (Sections 3.01 and 3.07). Interest will be computed based on a 360 day year comprised of twelve 30 day months. Principal of and premium, if any, and interest on the Notes will be payable, Notes may be presented for conversion, and transfer of the Notes will be registrable, at the office or agency of the Company in the Borough of Manhattan, The City of New York, or at any other office or agency maintained by the Company for such purpose. In addition, payment of interest may be made, at the option of the Company, by check mailed to the address of the person entitled thereto as shown on the Security Register (Sections 3.01, 3.05, 10.02 and 12.02). The Notes are to be registered Notes, without coupons, in denominations of $1,000 or any integral multiple thereof (Section 3.02). No service charge will be made for any conversion or registration of transfer or exchange of Notes, except for any tax or other governmental charge that may be imposed in connection therewith (Section 3.05). CONVERSION RIGHTS The Notes will be convertible, in whole or from time to time in part (in denominations of $1,000 or integral multiples thereof), at the option of the Holder thereof, into Common Stock of the Company, initially at the conversion price stated on the cover page hereof, at any time prior to redemption or maturity. The right to convert Notes called for redemption will terminate at the close of business on the tenth day prior to any Redemption Date (or, if such day is not a Business Day, on the next succeeding Business Day) and will be lost if not exercised prior to that time, unless the Company defaults in making the payment due upon redemption (Section 12.01). If the Company, by dividend or otherwise, declares or makes a distribution on its Common Stock of the type referred to in clause (iv) or (v) of the next paragraph, the Holder of each Note, upon the conversion thereof subsequent to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution and prior to the effectiveness of the conversion price adjustment in respect of such distribution pursuant to clause (iv) or (v) below, will be entitled to receive for each share of Common Stock into which such Note is converted the portion of the evidences of indebtedness, shares of capital stock, cash and other assets so distributed applicable to one share of Common Stock; PROVIDED, HOWEVER, that the Company may, with respect to all Holders so converting, in lieu of distributing any portion of such distribution not consisting of cash or securities of the Company, pay such Holder cash equal to the fair market value thereof, as determined in good faith by the Board of Directors (Section 12.01). 62 The conversion price will be subject to adjustment in certain events, including: (i) the payment of dividends (and other distributions) in Common Stock on any class of capital stock of the Company; (ii) the issuance to all holders of Common Stock of rights, warrants or options entitling them to subscribe for or purchase Common Stock at less than the current market price (as defined in the Indenture); PROVIDED, HOWEVER, that if certain of such rights, warrants or options are only exercisable upon the occurrence of certain triggering events, then the conversion price will not be adjusted until such triggering events occur; (iii) subdivisions, combinations and reclassifications of Common Stock; (iv) distributions to all holders of Common Stock of evidences of indebtedness of the Company, shares of any class of capital stock, cash or other assets (including securities, but excluding those dividends, rights, warrants, options and distributions referred to in clauses (i) and (ii) above and excluding dividends and distributions paid in cash out of the current earnings of the Company); (v) distributions consisting exclusively of cash (excluding any cash distributions for which an adjustment has been made pursuant to a preceding clause of this paragraph) to all holders of Common Stock in an aggregate amount that, together with (A) other all-cash distributions made within the preceding 12 months not triggering a conversion price adjustment and (B) all Excess Tender Payments (as defined below) in respect of each tender or exchange offer by the Company or any of its subsidiaries for Common Stock concluded within the preceding 12 months not triggering a conversion price adjustment, exceeds an amount equal to 20% of the Company's market capitalization (being the product of the current market price (as defined in the Indenture) of the Common Stock times the number of shares of Common Stock then outstanding) on the date of such distribution; (vi) issuance of Common Stock to an Affiliate for a net consideration per share less than the fair value per share (other than issuances of Common Stock under certain employee benefits plans); and (vii) payment of an Excess Tender Payment in respect of a tender offer or exchange offer by the Company or any of its subsidiaries for Common Stock, if the aggregate amount of such Excess Tender Payment, together with (A) the aggregate amount of all-cash distributions made within the preceding 12 months not triggering a conversion price adjustment and (B) all Excess Tender Payments in respect of each tender or exchange offer by the Company or any of its subsidiaries for Common Stock concluded within the preceding 12 months not triggering a conversion price adjustment, exceeds an amount equal to 20% of the Company's market capitalization on the expiration of such tender offer or exchange offer (Section 12.04). "Excess Tender Payment" means the excess of (A) the aggregate of the cash and value of other consideration paid by the Company or any of its subsidiaries with respect to the shares of Common Stock acquired in the tender offer or exchange offer over (B) the market value of such acquired shares after the completion of the tender or exchange offer. In case of certain consolidations, mergers or share exchanges to which the Company is a party or the conveyance, transfer or lease of substantially all the assets of the Company, each Note then outstanding would, without the consent of any Holders of Notes, become convertible only into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, share exchange, conveyance, transfer or lease by a holder of the number of shares of Common Stock into which such Note might have been converted immediately prior to such consolidation, merger, share exchange, conveyance, transfer or lease (assuming such holder of Common Stock is not a person with which the Company consolidated or merged or to which such exchange, conveyance or transfer or lease was made ("Constituent Person") or an Affiliate of a Constituent Person and such holder failed to exercise any rights of election as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, share exchange, conveyance, transfer or lease, PROVIDED that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, share exchange, conveyance, transfer or lease is not the same for each share of Common Stock held immediately prior to such consolidation, merger, conveyance, transfer or lease by other than a Constituent Person or Affiliate thereof and in respect of which such rights of election shall not have been exercised ("nonelecting share") then for purposes of the provision described in this sentence the kind and amount of securities, cash and other property receivable upon such consolidation, merger, share exchange, conveyance, transfer or lease by each nonelecting share will be deemed to be the kind or amount so receivable per share by a plurality of nonelecting shares) (Section 12.11). 63 No adjustments in the conversion price are required for any dividend or distribution referred to above if the Holders may participate in the dividend or distribution (on a basis determined in good faith to be fair by the Board of Directors) and receive the same consideration they would have received if they had converted the Notes immediately prior to the record date with respect to such dividend or distribution (Section 12.13). No adjustment of the conversion price will be required to be made until cumulative adjustments amount to 1% or more of the conversion price as last adjusted; PROVIDED, HOWEVER, that any adjustment that would otherwise be required to be made will be carried forward and taken into account in any subsequent adjustment (Section 12.04). Notwithstanding the foregoing, no adjustment to the conversion price shall reduce the conversion price below the then par value per share of the Common Stock, if any. Certain adjustments in the conversion price in accordance with the foregoing provisions could be taxable pursuant to Section 305 of the Internal Revenue Code of 1986, as amended, as a constructive distribution of stock to Holders of the Notes at the time of such adjustments in the conversion price. In addition to the foregoing adjustments, the Company will be permitted to make such reductions in the conversion price as it considers to be advisable in order that any event treated for federal income tax purposes as a dividend of stock or stock rights will not be taxable to the recipients (Section 12.04). Fractional shares of Common Stock will not be issued upon conversion, but, in lieu thereof, the Company will pay a cash adjustment based upon the market price of the Common Stock (Section 12.03). Notes surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (except Notes or portions thereof called for redemption on a redemption date within such period between and including a Regular Record Date and a related Interest Payment Date) must be accompanied by payment of an amount equal to the interest thereon that the registered Holder is to receive. No other payment or adjustment for interest or dividends is to be made upon conversion (Sections 3.07 and 12.02). SUBORDINATION OF NOTES The payment of principal of and premium, if any, and interest on the Notes, and the payment in respect of any repurchase of Notes as described below under "Repurchase of Notes at the Option of the Holder Upon a Change of Control" are, to the extent set forth in the Indenture, subordinated in right of payment to the prior payment in full of all Senior Indebtedness (as defined below), whether now outstanding or incurred in the future (Section 13.01). Upon any payment or distribution of assets of the Company to creditors upon any dissolution, winding up, liquidation or reorganization, the holders of all Senior Indebtedness will be entitled to receive payment in full of all amounts due or to become due thereon before the Holders of the Notes will be entitled to receive any payment in respect of the principal of or premium, if any, or interest on the Notes (Section 13.02). However, the obligation of the Company to make payments of principal of or premium, if any, and interest on the Notes will not otherwise be affected (Section 13.04). No payment on account of principal of or premium, if any, or interest on the Notes may be made and no repurchase of the Notes may be made as described herein under "Repurchase of Notes at the Option of the Holder Upon a Change of Control" at any time when there is a continuing default in any payment of principal of or premium, if any, or interest or other payment obligation on any Senior Indebtedness. In addition, no payment on account of principal of or premium, if any, or interest on the Notes may be made and no repurchase of the Notes may be made as described herein under "Repurchase of Notes at the Option of the Holder Upon a Change of Control" at any time when there shall have occurred and be continuing any event of default (other than a payment default referred to in the immediately preceding sentence) with respect to any Senior Indebtedness, which default would permit immediate acceleration thereof, for the period (a "Payment Blockage Period") commencing on receipt of notice of such default by the Trustee from a holder of Designated Senior Indebtedness (or any representative thereof) and ending on the earlier of (i) the date such event of default has been 64 cured or waived and (ii) the date 180 days after receipt of such notice (Section 13.03). Any number of such notices may be given; PROVIDED, HOWEVER, that during any 360-day period, the aggregate Payment Blockage Periods shall not exceed 180 days and there shall be a period of at least 180 consecutive days when no Payment Blockage Period is in effect. The Holders of the Notes will be subrogated to the rights of the holders of Senior Indebtedness to the extent of payments made on Senior Indebtedness upon any distribution of assets in any such proceedings out of the distributive share of the Notes (Section 13.02). By reason of such subordination, in the event of insolvency of the Company, Holders of the Notes may recover less, ratably, than other creditors of the Company. Senior Indebtedness is defined in the Indenture as the principal and premium, if any, and unpaid interest on, and any reasonable fees or costs related to, (a) indebtedness of the Company (including indebtedness of others guaranteed by the Company) other than the Notes, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed or guaranteed (i) for money owing to banks or their subsidiaries or their affiliates, (ii) for money borrowed other than from banks evidenced by notes, bonds, debentures or similar instruments or (iii) arising under a lease of property, equipment or other assets, which indebtedness, pursuant to generally accepted accounting principles then in effect, is classified upon the balance sheet of the Company as a liability of the Company, unless, in each case, the instrument creating or evidencing the same or pursuant to which the same is outstanding provides that such indebtedness is not superior in right of payment to the Notes; (b) to the extent not otherwise described in clause (a) above, any obligations under the Credit Facility; and (c) renewals, extensions, modifications and refundings of any such indebtedness; PROVIDED, HOWEVER, that Senior Indebtedness shall not include (i) indebtedness to a subsidiary of the Company or (ii) the 7% Convertible Subordinated Debentures Due 2011 (Section 1.01). As of March 31, 1996, after giving pro forma effect to the Offering and the application of the net proceeds therefrom, the Company would have had outstanding approximately $175.2 million of Senior Indebtedness. The Company expects from time to time to incur additional indebtedness constituting Senior Indebtedness. The Indenture does not prohibit or limit the incurrence of Senior Indebtedness by the Company. REDEMPTION AT THE OPTION OF THE COMPANY The Notes are not subject to the provisions of any sinking fund. The Notes will be redeemable, at the Company's option, in whole or from time to time in part (in denominations of $1,000 or integral multiples thereof), on or after , 1999, and prior to maturity, upon not less than 20 nor more than 40 days' notice mailed to the registered Holders thereof at the redemption prices (expressed as a percentage of the principal amount thereof) set forth below if redeemed during the period commencing on of the years indicated:
YEAR REDEMPTION PRICE - ------------------------------------------------------------------------ ----------------- 1999.................................................................... % 2000.................................................................... % 2001.................................................................... % 2002.................................................................... %
plus, in each case, accrued interest to the redemption date (subject to the right of Holders of record on the relevant record date to receive interest due on the relevant Interest Payment Date) (Sections 2.03, 11.01, 11.05 and 11.07). REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL In the event of any Change of Control (as defined below), each Holder of Notes will have the right, at the Holder's option, to require the Company to repurchase all or any part of the Holder's Notes on the date (the "Repurchase Date") that is 75 days after the date the Company gives notice of the Change of Control as described below at a price (the "Repurchase Price") equal to 100% of the 65 principal amount thereof, together with accrued and unpaid interest to the Repurchase Date. (Section 14.01). On or prior to the Repurchase Date, the Company shall deposit with the Trustee or a Paying Agent an amount of money sufficient to pay the Repurchase Price of the Notes that are to be repaid on the Repurchase Date (Section 14.03). Failure by the Company to repurchase the Notes when required under the preceding paragraph will result in an Event of Default under the Indenture whether or not such repurchase is permitted by the subordination provisions of the Indenture (Section 5.01). On or before the 15th day after the occurrence of a Change of Control, the Company is obligated to mail to all Holders of Notes a notice of the event constituting and the date of such Change of Control, the Repurchase Date, the date by which the repurchase right must be exercised, the Repurchase Price for Notes and the procedures that the Holder must follow to exercise this right. To exercise the repurchase right, the Holder of a Note must deliver, on or before the 10th day prior to the Repurchase Date, written notice to the Company (or an agent designated by the Company for such purpose) of the Holder's exercise of such right, together with the certificates evidencing the Notes with respect to which the right is being exercised, duly endorsed for transfer (Section 14.01). A "Change of Control" shall occur when: (i) all or substantially all the Company's assets are sold as an entirety to any person or related group of persons other than a Permitted Holder; (ii) there shall be consummated any consolidation or merger of the Company other than with or into a Permitted Holder (a) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly owned subsidiary of the Company in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (b) pursuant to which the Common Stock is converted into cash, securities or other property, in each case other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger; or (iii) any person, or any persons acting together that would constitute a "group" for purposes of Section 13(d) of the Exchange Act, together with any affiliates thereof, other than one or more Permitted Holders, shall beneficially own (as defined in Rule 13d-3 under the Exchange Act) at least 50% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of directors of the Company. Notwithstanding clause (iii) of the foregoing definition, a Change of Control shall not be deemed to have occurred solely by virtue of the Company, any subsidiary of the Company, any employee stock purchase plan, stock option plan or other stock incentive plan or program, retirement plan or automatic dividend reinvestment plan or any substantially similar plan of the Company or any subsidiary of the Company or any person holding securities of the Company for or pursuant to the terms of any such employee benefit plan filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) under the Exchange Act disclosing beneficial ownership by it of shares or securities of the Company, whether in excess of 50% or otherwise (Sections 1.01 and 14.05). Permitted Holder means (i) Ciba and its successors and their affiliates, (ii) any Person formerly described in clause (i) that was spun off or otherwise distributed to the shareholders of its parent company and (iii) any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. Notwithstanding the foregoing, a Change of Control as described above shall not be deemed to have occurred if (i) the Current Market Price of the Common Stock is at least equal to 105% of the conversion price of the Notes in effect immediately preceding the time of such Change of Control, or (ii) all the consideration to the holders of Common Stock (excluding cash payments for fractional shares) in the transaction giving rise to such Change of Control consists of shares of common stock that are, or immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, and as a result of such transaction the Notes become convertible solely into such common stock, or (iii) the consideration to the holders of Common Stock in the transaction giving rise to such Change of Control consists of cash or securities that are, or immediately upon 66 issuance will be, listed on a national securities exchange or quoted on the Nasdaq National market, or a combination of cash and such securities, and the aggregate fair market value of such consideration (which, in the case of such securities, shall be equal to the average of the daily Closing Prices of such securities during the ten consecutive trading days commencing with the sixth trading day following consummation of such transaction) is at least 105% of the conversion price of the Notes in effect on the date immediately preceding the closing date of such transaction (Sections 1.01 and 14.05). The Change of Control purchase feature of the Notes may in certain circumstances make more difficult or discourage a sale or takeover of the Company, and, thus, the removal of incumbent management. The Change of Control repurchase feature is a result of negotiations between the Company and the Underwriters and is not the result of management's knowledge of any specific effort to accumulate shares of Common Stock of the Company or to obtain control of the Company by means of a merger, tender offer, solicitation or otherwise, or part of a plan by management to adopt a series of anti-takeover provisions. Management has no present intention to engage in a transaction involving a Change of Control, although it is possible that the Company would decide to do so in the future. The Credit Facility prohibits the Company from repurchasing any Notes prior to February 1999, and also provides that the occurrence of certain change of control events with respect to the Company would constitute a default thereunder. In the event a Change of Control occurs at a time when the Company is prohibited from repurchasing Notes, the Company could seek the consent of its lenders to the repurchase of Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company will remain prohibited from repurchasing Notes. In such case, the Company's failure to repurchase tendered Notes would constitute an Event to Default under the Indenture which would, in turn, constitute a default under the Credit Facility. In such circumstances, the subordination provisions in the Indenture would likely restrict payment to the Holders of Notes. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the Holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring. The Indenture also does not prohibit the Company from issuing Senior Indebtedness that may include change of control payment or repurchase obligations that must be satisfied prior to repurchase of the Notes. Future indebtedness of the Company may contain prohibitions on the occurrence of certain events that would constitute a Change of Control or require such indebtedness to be repurchased upon a Change of Control. Moreover, the exercise by the Holders of their right to require the Company to repurchase the Notes could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on the Company. Finally, the Company's ability to pay cash to Holders of Notes following the occurrence of a Change of Control may be limited by the Company's then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases. The provisions of the Indenture requiring the Company to make an offer to repurchase the Notes upon a Change of Control may be waived or modified with the consent of the Holders of a majority in principal amount of the Notes (Section 9.02). In the event a Change of Control occurs, the Indenture requires the Company to comply with applicable tender offer rules under the Exchange Act, including Rules 13e-4 and 14e-1, as then in effect, with respect to repurchase of the Notes. LIMITATIONS ON CONSOLIDATIONS, MERGERS AND SALES OF ASSETS The Company may, without the consent of the Holders of the Notes, consolidate with or merge into any other entity or convey, transfer or lease all or substantially all its assets to any person, PROVIDED, HOWEVER, that (i) the entity formed by such consolidation or into which the Company is merged or the person that acquires by conveyance or transfer, or which leases, all or substantially all its assets is a corporation, partnership or trust organized and existing under the laws of the United States, any state thereof or the District of Columbia, (ii) the successor entity shall expressly assume, by a supplemental indenture executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and premium, if any, and interest on the Notes and the performance of every covenant of the Indenture on the part of the Company to be 67 performed or observed and has provided for conversion rights in accordance with the Indenture and (iii) immediately after giving effect to such transaction, no Event of Default, and no event that, after notice or lapse of time or both, would become an Event of Default, shall have occurred and be continuing (Section 8.01). Apart from the provisions described in the foregoing paragraph, the Indenture does not contain any limitation on sales of assets by the Company. There is no definitive test concerning what transactions would constitute a transfer of "substantially all" the Company's assets. Rather, the question must be analyzed in the context of a particular transaction taking into account all relevant facts and circumstances, including the assets transferred and the assets retained. Accordingly, enforcement of this covenant by the Trustee or the Holders of the Notes could be difficult in the event of a dispute with the Company concerning whether a transaction or series of transactions constitutes a transfer of all or substantially all the Company's assets. MODIFICATION AND WAIVER The Company and the Trustee, without the consent of the Holders of the Notes, may amend the Indenture for certain specified purposes, including to cure any ambiguities, correct any inconsistencies or make any other provision with respect to matters arising under the Indenture that are not inconsistent with the Indenture and do not adversely affect the interests of the Holders in any material respect (Section 9.01). In addition, modifications and amendments of the Indenture may be made by the Company and the Trustee with the consent of the Holders of not less than a majority in principal amount of the Outstanding Notes; PROVIDED, HOWEVER, that no such modification or amendment may, without the consent of the Holder of each Outstanding Note affected thereby, (i) change the Stated Maturity of the principal of, or any installment of interest on, any Note, (ii) reduce the principal amount of, or the premium, if any, or interest on, any Note or price payable upon repurchase or redemption, (iii) change the place or currency of payment of principal of, or premium, if any, or redemption or purchase price or interest on, any Note, (iv) impair the right to institute suit for the enforcement of any payment on or with respect to any Note, (v) adversely affect the right to convert Notes, (vi) modify the subordination provisions in a manner adverse to the Holders of the Notes or (vii) reduce the percentage of aggregate principal amount of Outstanding Notes necessary for waiver or compliance with certain provisions of the Indenture or for waiver of certain defaults (Section 9.02). The Holders of a majority in aggregate principal amount of the Outstanding Notes may waive any past default under the Indenture, except that a default in the payment of principal or premium, if any, or interest on the Notes or a failure to comply with certain covenants of the Company may not be waived without the consent of the Holder of each Outstanding Note (Section 5.13). EVENTS OF DEFAULT The following will be Events of Default under the Indenture: (i) failure to pay any interest on any Notes when due and continuance of such default for a period of 30 days, whether or not such payment is prohibited by the subordination provisions of the Indenture; (ii) failure to pay principal of or premium, if any, on any Note when due, whether or not such payment is prohibited by the subordination provisions of the Indenture; (iii) failure to pay the redemption price on any redemption date and failure to repurchase the Notes as provided in the Indenture, whether or not any such payment is prohibited by the subordination provisions of the Indenture; (iv) failure to perform any other covenant of the Company in the Indenture, which failure continues for 60 days after written notice as provided in the Indenture; (v) default, beyond any applicable grace period, if any, in the payment of amounts due under any mortgage, indenture or instrument under which there is outstanding, or by which there is secured or evidenced, any indebtedness of the Company in excess of $25 million at its stated maturity for borrowed money or representing any Senior Indebtedness or default on any such indebtedness that results in the acceleration of such indebtedness prior to its express maturity; and (vi) certain events of bankruptcy, insolvency or reorganization of the Company (Section 5.01). Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default shall occur and be continuing, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders, unless such Holders shall have offered to the Trustee reasonable indemnity (Section 6.03). Subject to such 68 provisions for the indemnification of the Trustee, the Holders of a majority in principal amount of the Outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee (Section 5.12). If an Event of Default shall occur and be continuing, other than an event of bankruptcy, insolvency or reorganization of the Company, either the Trustee or the Holders of at least 25% in principal amount of the Outstanding Notes may accelerate the maturity of all Notes. If an Event of Default shall occur by reason of an event of bankruptcy, insolvency or reorganization of the Company, the Notes shall immediately become due and payable without any act on the part of the Trustee or any Holder. After any such acceleration but before a judgement or decree based on acceleration, the Holders of a majority in aggregate principal amount of Outstanding Notes may, under certain circumstances, rescind or annul acceleration if all Events of Default, other than the nonpayment of acceleration principal, have been cured or waived as provided in the Indenture (Section 5.02). For information as to waiver of defaults, see "Modification and Waiver". No Holder of any Note will have any right to institute any proceeding with respect to the Indenture or for any remedy thereunder, unless such Holder shall have previously given to the Trustee written notice of a continuing Event of Default and unless the Holders of at least 25% in principal amount of the Outstanding Notes shall have made written request, and offered reasonable indemnity, to the Trustee to institute such proceeding as trustee, and the Trustee shall not have received from the Holders of a majority in principal amount of the Outstanding Notes a direction inconsistent with such request and shall have failed to institute such proceeding within 60 days (Section 5.07). However, such limitations do not apply to a suit instituted by a Holder of a Note for the enforcement or payment of the principal or premium, if any, or interest on such Note on or after the respective due dates expressed in such Note or of the rights to convert such Note or of the rights to convert such Note in accordance with the Indenture (Section 5.08). The Company will be required to furnish to the Trustee annually a statement as to its performance of certain of its obligations under the Indenture and as to any default in such performance (Section 10.04). DISCHARGE OF INDENTURE; DEFEASANCE The Company may terminate all obligations under the Indenture at any time by delivering all outstanding Notes to the Trustee for cancellation and paying any other sums payable under the Indenture. The Indenture also provides that the Company may elect: (a) to defease and be discharged from any and all obligations with respect to the Notes and that the provisions of the Indenture will no longer be in effect with respect to the Notes, except for the obligations to register the transfer or exchange of the Notes, to replace temporary or mutilated, destroyed, lost or stolen Notes, to maintain an office or agency in respect of the Notes and to hold funds for payment in trust ("Defeasance"); or (b) to be released from its obligations with respect to the Notes under certain restrictive covenants of the Indenture, and that violation of such covenants will not constitute an "Event of Default" under the Indenture ("Covenant Defeasance"). Such Defeasance or Covenant Defeasance will have no effect on the Company's obligations under Article 12 of the Indenture, which relate to the conversion of the Notes, at the option of the Holder thereof, into Common Stock of the Company. Such Defeasance or Covenant Defeasance will take effect only upon the deposit with the Trustee, in trust for such purpose, of money and/or U.S. Government Obligations that, through the payment of principal and interest in accordance with their terms, will provide money in an amount sufficient to pay the principal of and premium, if any, and interest on the Notes on the dates such payments are due, and certain other conditions are satisfied (Section 15.04). 69 CONCERNING THE TRUSTEE First Trust of California, National Association is to be the Trustee under the Indenture and has been appointed by the Company as Registrar and Paying Agent with regard to the Notes. The Holders of a majority in principal amount of the outstanding Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that if an Event of Default occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of Notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture. GOVERNING LAW The Indenture provides that it and the Notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. 70 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 100,000,000 shares of Common Stock and 20,000,000 shares of preferred stock, no par value (the "Preferred Stock"). As of July 15, 1996, 36,274,120 shares of Common Stock were issued and outstanding and held by approximately 2,206 record holders. As of such date, no shares of Preferred Stock were outstanding. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders and to vote on all matters on which a vote of stockholders is taken, except as otherwise provided by statute. Subject to the rights of holders of outstanding shares of Preferred Stock, if any, the holders of Common stock are entitled to receive dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefore, and, upon liquidation or dissolution of the Company, are entitled to receive all assets available for distribution to shareholders. Holders of Common Stock other than Ciba have no preemptive rights or other rights to subscribe for additional shares and no conversion rights. Pursuant to the Governance Agreement, Ciba is entitled to maintain its percentage ownership of the voting power of the Company in the event that the Company issues additional equity securities under certain circumstances. The Common Stock is not subject to redemption or to any sinking fund provisions, and all outstanding shares of Common Stock are fully paid and nonassessable. Subject to the preferential rights of the holders of shares of any series of Preferred Stock, as the same may be designated and issued in the future, holders of Common Stock are entitled to their pro rata share of the assets of the Company upon liquidation. PREFERRED STOCK Preferred Stock may be issued from time to time in one or more series without further stockholder approval. The Board of Directors may designate the number of shares to be issued in such series and the rights, preferences, privileges and restrictions granted to or imposed on the holders of such shares. If issued, such shares of Preferred Stock could have dividends and liquidation preferences and may otherwise affect the rights of holders of Common Stock. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW The Company is a Delaware corporation and is subject to Section 203 of the General Corporation Law of the State of Delaware (the "GCL"). In general, Section 203 of the GCL prevents a Delaware corporation from engaging in any "business combination" (as defined below) with an "interested stockholder" (defined as a person who, together with affiliates and associates, beneficially owns (or within the preceding three years, did beneficially own) 15% or more of a corporation's outstanding voting stock) for a period of three years following the time that such person became an interested stockholder, unless (i) before such person became an interested stockholder, the board of directors of the corporation approved either the transaction in which the interested stockholder became an interested stockholder or the business combination (ii) upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding shares owned by persons who are both officers and directors of the corporation and shares held by certain employee stock plans); or (iii) on or after such time the business combination is approved by the board and authorized at an annual meeting of stockholders, and not by written consent, by the affirmative vote of the holders of at least 66 2/3% of the outstanding voting stock of the corporation which is not owned by the interested stockholder. A "business combination" generally includes mergers, stock or asset or sales involving 10% or more of the market value of the corporation's assets or stock, certain stock transactions and other transactions resulting in a financial benefit to the interested stockholders or an increase in their proportionate share of any class or series of a corporation. 71 LIMITATIONS ON DIRECTORS' LIABILITY; INDEMNIFICATION The Company's Certificate of Incorporation provides for the elimination of personal liability of the directors of the Company to the full extent permitted by the GCL as it currently exists or may hereafter be amended The GCL permits a corporation to provide in its certificate of incorporation that a director shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors' duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) in respect of certain unlawful dividend payments or stock redemptions or repurchases and (iv) for any transaction from which the director derived an improper personal benefit. The effect of the provision of the Company's Certificate of Incorporation is to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of the fiduciary duty of care as a director (including breaches resulting from negligent or grossly negligent behavior) except in the situations described in clauses (i) through (iv) above. The provision does not limit or eliminate the rights of the Company or any stockholder to seek non-monetary relief such as an injunction or rescission in the event of a breach of a directors' duty of care. In addition, the Company's Certificate of Incorporation provides that the Company shall indemnify its directors and officers to the full extent permitted by the GCL; PROVIDED, HOWEVER, that the Company shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the Board of Directors of the Company. The Certificate of Incorporation further provides that the Company may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification similar to those provided to the directors and officers of the Company to the employees and agents of the Company who are not directors or officers of the Company. The Strategic Alliance Agreement provides that the Company's Certificate of Incorporation and Bylaws will continue to contain the provisions with respect to indemnification of directors and officers in effect as of the date of the Strategic Alliance Agreement, which provisions will not be amended, repealed or otherwise modified, for a period of six years following the closing contemplated by the Strategic Alliance Agreement (the "Ciba Closing") in any manner that would adversely affect the rights of individuals who at any time prior to the Ciba Closing were directors or officers of the Company in respect of actions or omissions occurring at or prior to the Ciba Closing, except for such modifications as are required by applicable law. In addition, the Strategic Alliance Agreement generally requires the Company to indemnify its officers and directors as of the date of the Strategic Alliance Agreement against all losses (including reasonable fees and expenses of counsel) arising out of any claim based in whole or in part on the fact that such person was a director or officer of the Company at or prior to the Ciba Closing. Pursuant to the Hexcel Corporation Incentive Stock Plan (the "Incentive Stock Plan"), no member of the Executive Compensation Committee of the Board of Directors or such other committee as may be designated by the Board of Directors from time to time to administer the Incentive Stock Plan (as defined therein) shall be liable for any action or determination made in good faith, and the members of such committee shall be entitled to indemnification in the manner provided in the Company's Certificate of Incorporation. GOVERNANCE AGREEMENT In connection with the Ciba Acquisition, Hexcel and Ciba entered into the Governance Agreement, which contains various standstill, governance and other provisions that (i) impose certain limitations on Ciba's ability to acquire or dispose of the Company's voting securities, (ii) provide certain protections to the Company's stockholders in connection with any future acquisition of the Company and (iii) provide Ciba with certain preemptive rights to purchase additional voting securities of the Company in the event the Company issues additional voting securities for cash. See "Risk Factors -- Influence of Significant Stockholder." 72 In addition, the Company's Bylaws, which include certain provisions of the Governance Agreement, provide that, for so long as Ciba beneficially owns 33% or more of the total voting power of the Company, the Board of Directors shall not authorize, approve or ratify certain mergers, consolidations, acquisitions, business combinations, sales or transfers of assets, issuances of equity securities or capital expenditures without the prior approval of a majority of the directors of the Company designated by Ciba. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder Services. 73 UNDERWRITING Under the terms and subject to the conditions in an Underwriting Agreement dated , 1996 (the "Underwriting Agreement"), the Underwriters named below (the "Underwriters") have severally but not jointly agreed to purchase from the Company the following respective principal amounts of Notes:
PRINCIPAL AMOUNT OF UNDERWRITER NOTES - ---------------------------------------------------------------------------- ---------------- CS First Boston Corporation................................................. $ Bear, Stearns & Co. Inc..................................................... ---------------- Total................................................................... $ 100,000,000 ---------------- ----------------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will be obligated to purchase all the Notes offered hereby (other than those Notes covered by the over-allotment option described below) if any are purchased. The Underwriting Agreement provides that, in the event of a default by an Underwriter, in certain circumstances the purchase commitments of the non-defaulting Underwriter may be increased or the Underwriting Agreement may be terminated. The Company has granted to the Underwriters an option, expiring on the close of business on the 30th day after the date of this Prospectus, to purchase up to $15,000,000 principal amount of additional Notes (the "Option Notes") at the initial public offering price less the underwriting discounts and commissions, all as set forth on the cover page of this Prospectus. Such option may be exercised only to cover over-allotments in the sale of the Notes. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the principal amount of Option Notes as it was obligated to purchase pursuant to the Underwriting Agreement. The Company has been advised by the Underwriters that the Underwriters propose to offer the Notes to the public initially at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of % of the principal amount per Note, and the Underwriters and such dealers may allow a discount of % of such principal amount per Note on sales to certain other dealers. After the initial public offering, the public offering price and concession and discount to dealers may be changed by the Underwriters. Application has been made to list the Notes on the NYSE and the underlying shares of Common Stock on the NYSE and the PSE. The Company has agreed that, subject to certain limited exceptions, it will not offer, sell, contract to sell, announce their intention to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act, relating to any additional shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock without the prior written consent of CS First Boston Corporation for a period of 90 days after the date of this Prospectus. The Company has agreed to indemnify the Underwriters against certain liabilities, including certain civil liabilities under the Securities Act, or contribute to certain payments which the Underwriters may be required to make in respect thereof. CS First Boston Corporation was engaged by Ciba to advise it in connection with the Ciba Acquisition and was paid customary fees in connection therewith. In addition, Credit Suisse, an affiliate of CS First Boston Corporation, in its capacity as a lender and as an agent, is party to the Old Credit Facility and the Credit Facility. Bear, Stearns & Co. Inc. was engaged by the Company to advise it in connection with the Ciba Acquisition and was paid customary fees in connection therewith. 74 Under Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities Dealers, Inc. (the "NASD"), when more than 10 percent of the net proceeds of a public offering of debt securities, not including underwriting compensation, are to be paid to a member of the NASD participating in such public offering or its affiliate, the yield at which the debt securities are distributed to the public must be no lower than that recommended by a "qualified independent underwriter" meeting certain standards. CS First Boston Corporation is a member of the NASD and is an affiliate of Credit Suisse, a lender under the Credit Facility. Credit Suisse expects to receive approximately $10.9 million of the net proceeds of the Offering, which is greater than 10 percent of such proceeds and represents their proportionate share of the repayment by the Company of a portion of the borrowings under the Credit Facility with the proceeds of the Offering. See "Use of Proceeds." As a result, the Offering is being made in compliance with Rule 2720 of the Conduct Rules of the NASD. Bear, Stearns & Co. Inc. will act as a qualified independent underwriter in connection with the Offering and assume the customary responsibilities of acting as a qualified independent underwriter in pricing and conducting due diligence for the Offering. NOTICE TO CANADIAN RESIDENTS RESALE RESTRICTIONS The distribution of the Notes in Canada is being made only on a private placement basis exempt from the requirement that the Company prepare and file a prospectus with the securities regulatory authorities in each province where trades of Notes are effected. Accordingly, any resale of the Notes in Canada or the underlying shares of Common Stock issued upon conversion of the Notes, must be made in accordance with applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made in accordance with available statutory exemptions or pursuant to a discretionary or other exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the Notes or such shares of Common Stock. REPRESENTATIONS OF PURCHASERS Each purchaser of Notes in Canada who receives a purchase confirmation will be deemed to represent to the Company and the dealer from whom such purchase confirmation is received that (i) such purchaser is entitled under applicable provincial securities laws to purchase such Notes without the benefit of a prospectus qualified under such securities laws, (ii) where required by law, that such purchaser is purchasing as principal and not as agent, and (iii) such purchaser has reviewed the text above under "Resale Restrictions". RIGHTS OF ACTION AND ENFORCEMENT The securities being offered are those of a foreign issuer and Ontario purchasers will not receive the contractual right of action prescribed by section 32 of the Regulation under the SECURITIES ACT (Ontario). As a result, Ontario purchasers must rely on other remedies that may be available, including common law rights of action for damages or rescission or rights of action under the civil liability provisions of the U.S. federal securities laws. All of the issuer's directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Ontario purchasers to effect service of process within Canada upon the issuer or such persons. All or a substantial portion of the assets of the issuer and such persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against the issuer or such persons in Canada or to enforce a judgment obtained in Canadian courts against such issuer or persons outside of Canada. NOTICE TO BRITISH COLUMBIA RESIDENTS A purchaser of Notes to whom the SECURITIES ACT (British Columbia) applies is advised that such purchaser is required to file with the British Columbia Securities Commission a report within ten days of the sale of any Notes acquired by such purchaser pursuant to this offering. Such report must be in 75 the form attached to British Columbia Securities Commission Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only one such report must be filed in respect of Notes acquired on the same date and under the same prospectus exemption. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following is a discussion of certain anticipated United States federal income tax consequences of the purchase, ownership and disposition of the Notes (or Common Stock of the Company acquired upon conversion of a Note) as of the date hereof. It deals only with Notes and Common Stock held as capital assets by initial holders, and does not deal with special situations including those that may apply to a particular holder such as exempt organizations, dealers in securities, financial institutions, insurance companies and holders whose "functional currency" is not the United States dollar. The federal income tax considerations set forth below are based upon the Internal Revenue Code of 1986, as amended (the "Code") and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified (possibly retroactively) so as to result in federal income tax consequences different from those discussed below. As used herein, the term "United States Holder" means a beneficial owner of a Note (or Common Stock of the Company acquired upon conversion of a Note) that is for United States federal income tax purposes (i) a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States or of any political subdivision thereof, or (iii) a person or entity otherwise subject to United States federal income taxation on its worldwide income. As used herein, the term "Non-United States Holder" means a beneficial holder of a Note (or Common Stock of the Company acquired upon conversion of a Note) that is not a United States Holder. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF THE NOTES OR COMMON STOCK OF THE COMPANY, INCLUDING THE TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL OR FOREIGN LAWS. UNITED STATES HOLDERS A United States Holder will not recognize gain or loss upon conversion of the Notes solely into Common Stock of the Company (except with respect to cash received in lieu of fractional shares). The United States Holder's basis in the Common Stock received on conversion will be the same as the United States Holder's adjusted tax basis in the Notes at the time of conversion (including any gain recognized with respect to cash received in lieu of fractional shares), and the holding period for the Common Stock received on conversion will include the holding period of the Notes that were converted. A United States Holder will recognize gain or loss upon the sale, redemption or other taxable disposition of the Notes in an amount equal to the difference between the United States Holder's adjusted tax basis in the Note and the amount received therefor (other than amounts attributable to accrued and unpaid interest on the Notes which will be treated as interest for federal income tax purposes). Such gain or loss generally will be long-term capital gain or loss if the Notes were held for more than one year. The conversion price of the Notes is subject to adjustment under certain circumstances. Under Section 305 of the Code and the Treasury Regulations issued thereunder, adjustments or the failure to make such adjustments to the Conversion Price of the Notes may result in a taxable constructive distribution to the United States Holders of Notes, resulting in ordinary income (subject to a possible dividends received deduction in the case of corporate holders) to the extent of the Company's current and/or accumulated earnings and profits if, and to the extent that, certain adjustments in the Conversion Price that may occur in limited circumstances (particularly an adjustment to reflect a taxable dividend to holders of Common Stock of the Company) increase the proportionate interest in the earnings and profits or assets of the Company of a United States Holder of a Note convertible into fully 76 diluted Common Stock, whether or not the United States Holders ever converts the Notes. Generally, a United States Holder's tax basis in a Note will be increased by the amount of any such constructive dividend. NON-UNITED STATES HOLDERS Under present United States federal income and estate tax law, assuming certain certification requirements are met (which include identification of the beneficial owner of a Note), and subject to the discussion of backup withholding below: (a) Payments of interest on a Note to any Non-United States Holder will generally not be subject to United States federal income or withholding tax, provided that (1) the holder is not (i) a direct or indirect owner of 10% or more of the total voting power of all voting stock of the Company, (ii) a controlled foreign corporation related to the Company directly or indirectly by stock ownership, (iii) a bank receiving interest pursuant to a loan agreement entered into in the ordinary course of its trade or business or (iv) a foreign tax-exempt organization or a foreign private foundation for United States federal income tax purposes, (2) such interest payments are not effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder ("Effectively Connected") and (3) the holder of the Notes certifies, under penalties of perjury, as to its status as a Non-United States Holder and provides its name and address. (b) A Non-United States Holder will generally not be subject to United States federal income tax on gain recognized on a sale, redemption or other disposition of a Note or Common Stock (including the receipt of cash in lieu of fractional shares upon conversion of a Note into Common Stock) unless (1) the gain is Effectively Connected, (2) in the case of a Non-United States Holder who is a nonresident alien individual and holds the Note or Common Stock as a capital asset, such holder is present in the United States for 183 days or more in the taxable year of disposition and certain other requirements are met, or (3) (i) the Company was, is or becomes a "United States real property holding corporation" for United States federal income tax purposes, (ii) either the holder beneficially owns 5% or more of the Common Stock of the Company or the Common Stock is no longer regularly traded on an established securities market and (iii) certain other requirements are met. There can be no assurance either (1) that the Company has not been and will not be a United States real property holding corporation or (2) that the Common Stock will continue to be regularly traded on an established securities market. (c) If interest on a Note is exempt from withholding of United States federal income tax under the rules described in clause (a) above, the Note will not generally be included in the estate of a deceased Non-United States Holder for United States federal estate tax purposes. (d) A Non-United States Holder will generally not be subject to United States federal income tax on the conversion of a Note solely into Common Stock of the Company (except as described in clause (b) above with respect to the receipt of cash in lieu of fractional shares by certain holders upon conversion of a Note). (e) Dividends paid on Common Stock of the Company to a Non-United States Holder will generally be subject to withholding of United States federal income tax at the rate of 30% (or a lower rate prescribed by an applicable treaty) unless such dividends are Effectively Connected. (f) Common Stock of the Company owned by an individual who is neither a citizen nor a resident (as defined for United States federal estate tax purposes) of the United States at the date of death will generally be included in such individual's estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Income (including interest on a Note and dividends on Common Stock of the Company as the case may be) and capital gain on the sale or other taxable disposition of a Note or Common Stock that is Effectively Connected generally will not be subject to withholding, but may be subject to United States federal income tax at rates applicable to United States citizens, resident aliens and United States 77 corporations (and, in the case of corporate holders, such income and gain may also be subject to the United States branch profits tax which is generally imposed on a foreign corporation on the repatriation from the United States of earnings and profits that are Effectively Connected). An applicable income tax treaty may, however, change these rules. A Non-United States Holder may be required to satisfy certain certification and other requirements in order to claim treaty benefits or otherwise obtain any reduction of or exemption from United States federal income or withholding tax under the foregoing rules. BACKUP WITHHOLDING AND INFORMATION REPORTING The Company or its designated paying agent (the "payor") will, where required, report to holders of Notes or Common Stock and the Internal Revenue Service the amount of any interest paid on the Notes (or dividends paid with respect to the Common Stock or other reportable payments) in each calendar year and the amount of tax, if any, withheld with respect to such payments. The information may also be made available to the tax authorities of the country in which a Non-United States Holder resides under the provisions of an applicable tax treaty. Under current United States federal income tax law, a 31% backup withholding tax is required with respect to certain interest, dividends and principal payments made to, and to the proceeds of sales before maturity by, certain United States Holders if such persons fail to furnish their taxpayer identification numbers and other information. Interest payments on a Note to a Non-United States Holder will not be subject to information reporting requirements and backup withholding tax if either the requisite certification, as described above, has been received or an exemption has otherwise been established, provided that the payor does not have actual knowledge that the holder is a United States Holder or that the conditions of any other exemption are not in fact satisfied. Payment by or through a United States office of a broker of the proceeds on disposition of a Note or Common Stock will be subject to both backup withholding tax and information reporting requirements, unless the Non-United States Holder certifies under penalties of perjury as to its status as a Non-United States Holder or otherwise establishes an exemption. Information reporting requirements (but not backup withholding tax) will also apply to a payment of the proceeds on disposition of a Note or Common Stock by or through a foreign office of a United States broker, or foreign brokers with certain relationships to the United States, unless the broker has documentary evidence in its records that the holder is a Non-United States Holder and certain other conditions are met or the holder otherwise establishes an exemption. Information reporting requirements and backup withholding tax will generally not apply to dividends paid on Common Stock of the Company to a Non-United States Holder at an address outside the United States, unless the payor has knowledge that the holder is a United States Holder. Dividends paid to a Non-United States Holder at an address within the United States may be subject to backup withholding tax if the Non-United States Holder fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and other information to the payor. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the holder's United States federal income tax liability, provided that the required information is furnished to the Internal Revenue Service. These backup withholding and information reporting rules are under review by the United States Treasury, and their application to the Notes and the Common Stock could be changed in the future. THE PRECEDING DISCUSSION OF CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, 78 EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISER AS TO PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING, AND DISPOSING OF THE NOTES AND THE COMMON STOCK OF THE COMPANY, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS. LEGAL MATTERS The legality of the securities offered hereby will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, New York, New York. Certain legal matters will be passed upon for the Underwriters by Cravath, Swaine & Moore, New York, New York. EXPERTS Hexcel Corporation's consolidated financial statements as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 included in this Prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report contains explanatory paragraphs regarding the confirmation of Hexcel Corporation's plan of reorganization, the acquisition of the Ciba Composites Business, and a change in accounting for income taxes), and are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The combined financial statements of the Ciba Composites Business as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 included in this Prospectus have been audited by Coopers & Lybrand L.L.P., independent accountants, as stated in their report appearing herein (which report contains an explanatory paragraph regarding a change in accounting for postretirement benefits other than pensions and for postemployment benefits), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of the Hercules Composites Business as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995 included in this Prospectus have been audited by Coopers & Lybrand L.L.P., independent accountants, as stated in their report appearing herein (which report contains an explanatory paragraph regarding a change in accounting for postretirement and postemployment benefits other than pensions), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 79 GLOSSARY OF TERMS ADHESIVES -- A thermoset resin (e.g., epoxy, phenolic or BMI) in the form of a thin film or paste, cured under heat and pressure to bond a wide range of composite, metallic and honeycomb surfaces. ARAMID -- A high strength, high stiffness fiber derived from polyamide (Nylon). Kevlar-Registered Trademark- and Nomex-Registered Trademark- are examples of aramids. CARBON FIBER -- Fiber produced by heat treating precursor fibers, such as PAN (Polyacrylonitrile), rayon and pitch, to drive off non-carbon atoms. The term is often used interchangeably with graphite; however, carbon fibers and graphite fibers differ. The basic differences lie in the temperatures at which the fibers are made and heat treated, and in the resultant carbon content. COMPOSITE MATERIALS -- Product made from combining two or more materials such that the resultant product has exceptional structural properties not present in either of the constituent materials. COWLS OR COWLING -- The outside protective shell of a jet engine traditionally made out of metal. Cowls mainly provides the engine with protection from the elements and structural support. FAIRINGS -- A secondary structure of an airplane providing enhanced aerodynamics. Typically, fairings are found where the wing meets the body or at various locations on the leading or trailing edge of the wing. FIBER PLACEMENT -- Fabrication of complex shaped components using computer or numerically controlled machines to place impregnated fiber tows in a predetermined pattern. FIBERGLASS -- An individual filament made by drawing molten glass. As a composite materials reinforcement, it is a major material used to reinforce plastic. FILAMENT WINDING -- A process to manufacture composite materials components such as mirole and rocket casings and cylinders. Fiber filaments are dipped in a resin matrix and then wound in a predetermined pattern over a form of the desired component that is mounted on a mandrel. FINISHED PARTS -- Completed components that typically contain prepregs, honeycomb, adhesive and assembled hardware. These parts are ready for direct attachment to a structure (e.g., aircraft) or to sub-assemblies. HONEYCOMB -- A unique, lightweight, cellular structure made from either metallic sheet material or non-metallic materials (e.g., resin-impregnated paper or woven fabric) and formed into hexagonal nestled cells, similar in appearance to a cross-sectional slice of a beehive. INLET DUCTS -- Intake passages or tubes that confine and conduct air. They are usually located at the upstream end of an airplane engine on the engine cowling and aid in both propulsion and engine cooling. Inlet ducts are also used to improve aerodynamics of fighter planes and for this purpose are usually located on the fuselage near the wings. INTERIORS -- Finished internal aircraft components, such as overhead stowage compartments, lavatories, sidewalls, floor panels and ceilings. KEVLAR-REGISTERED TRADEMARK- -- An organic fiber from DuPont which is part of the aramid family of compounds. Woven Kevlar-Registered Trademark- fabrics are used in both ballistic and composite materials applications. MODULUS -- The physical measurement of stiffness in a material defined as the ratio of stress to strain in the range of elastic deformation. A high modulus indicates a stiff material. NACELLE -- The protective shell of a jet engine housed within the cowling usually made out of honeycomb. Provides noise absorption, insulation and additional structural support. NOMEX-REGISTERED TRADEMARK- -- DuPont's registered trademark for its high-temperature-resistant aramid papers, pressboard, staple fibers and filament yarns. Type 412 Nomex-Registered Trademark- aramid paper is used in the manufacture of honeycomb due to its unique combination of physical and thermal properties. 80 PAN (POLYACRYLONITRILE) -- A material used as a base or precursor material in the manufacture of certain carbon fibers. PRECURSOR -- For carbon or graphite, the PAN, rayon or pitch fibers from which carbon or graphite fibers are derived. PREPREGS (PRE-IMPREGNATED) -- A composite material made from combining high performance reinforcement fibers or fabrics with a thermoset or thermoplastic resin matrix. The prepreg has exceptional structural properties not present in either of the constituent materials. PRIMARY STRUCTURE -- A critical load bearing structure on an aircraft. If this structure is severely damaged, the aircraft cannot fly. PULTRUSION -- A continuous process of combining fiber and resin directly to form a cured composite part. QUALIFIED AND QUALIFICATIONS -- The testing and manufacturing protocols in aerospace and military applications by which materials, such as composite materials, are approved for production supply. To qualify a product requires the creation of a technical database which records the performance of a product against certain customer specifications, and the documentation of the manufacturing equipment and process steps for production of the product. The performance database for the product forms a basis upon which engineers can design components and against which the manufacturer must test all future production to ensure that the product performance is replicated consistently. The manufacturing process and equipment documentation ensure that the future manufacture of the product replicates product performance. Once a product is qualified, changes to the product composition, manufacturing process or manufacturing location and equipment can only be made with customer approval after further testing has demonstrated that the original product performance will be replicated. By their nature, these qualification protocols are expensive and time consuming. RADOMES -- The housing which protects the aircraft radar system from the elements while allowing transmission of radar signals. Often the radome is in the nose of an aircraft but can be found at other locations on the aircraft as well. REINFORCEMENTS -- A strong material incorporated into a matrix to improve its mechanical properties. Reinforcements are usually long continuous fibers, which may be woven. Fiberglass, aramid and carbon fibers are typical reinforcements. REINFORCEMENT FABRICS -- Woven fiberglass, carbon or aramid fabrics used in later production of prepregs and honeycomb. RESIN MATRIX -- In reinforced fiber composites, a polymeric substrate material, such as epoxy or phenolic resin, is used to bind together the reinforcement material. SANDWICH PANELS -- A stiff and lightweight structure consisting of thin sheets such as aluminum or cured prepregs bonded to and separated by a low density, rigid core material (e.g., foam or honeycomb). The face sheets of the sandwich panel provide smooth flat surfaces. SECONDARY STRUCTURE -- A non-critical structure on an aircraft. If damaged, the aircraft can still fly. Fairings, access doors and some flight control surfaces are examples of secondary structures. SEISMIC RETROFIT -- The reinforcement of an existing structure to make it earthquake proof. Until recently, the reinforcement was done with metal but now can also be done with composite materials. SPECIAL PROCESS -- The forming, shaping, machining or bonding of sheets or blocks of honeycomb into profiled and complex shapes to ready for use as semi-finished components in the fabrication of composite parts and structures. STRUCTURES -- Finished components for aircraft, truck or other vehicles constructed from composite materials. For aircraft, these may be for Primary and Secondary Structures or Interiors. Truck applications include chassis fairings and floors. TOW-PREGS -- An untwisted bundle of continuous filaments impregnated with resin used as a prepreg in the fabrication of tubes, cylinders and other shapes. 81 INDEX TO FINANCIAL STATEMENTS THE COMPANY
PAGE Independent Auditors' Report............................................................................... F-2 Consolidated Financial Statements: Consolidated Statements of Operations -- Three years ended December 31, 1995............................. F-3 Consolidated Balance Sheets -- December 31, 1995 and 1994................................................ F-4 Consolidated Statements of Cash Flows -- Three years ended December 31, 1995............................. F-5 Consolidated Statements of Shareholders' Equity (Deficit) -- Three years ended December 31, 1995......... F-6 Notes to Consolidated Financial Statements -- December 31, 1995, 1994 and 1993........................... F-7 Condensed Consolidated Statements of Operations (unaudited) -- The quarters ended March 31, 1996 and April 2, 1995................................................................................................... F-40 Condensed Consolidated Balance Sheets (unaudited) -- March 31, 1996 and December 31, 1995.................. F-41 Condensed Consolidated Statements of Cash Flows (unaudited) -- The quarters ended March 31, 1996 and April 2, 1995................................................................................................... F-42 Notes to Condensed Consolidated Financial Statements (unaudited)........................................... F-43 THE CIBA COMPOSITES BUSINESS Report of Independent Accountants.......................................................................... F-49 Combined Balance Sheets -- December 31, 1995 and 1994...................................................... F-50 Combined Statements of Operations -- For the years ended December 31, 1995, 1994 and 1993.................. F-51 Combined Statement of Owner's Equity -- For the years ended December 31, 1995, 1994 and 1993............... F-52 Combined Statements of Cash Flows -- For the years ended December 31, 1995, 1994 and 1993.................. F-53 Notes to Combined Financial Statements -- December 31, 1995, 1994 and 1993................................. F-54 THE HERCULES COMPOSITES BUSINESS Report of Independent Accountants.......................................................................... F-67 Statement of Operations -- For the years ended December 31, 1995, 1994 and 1993............................ F-68 Balance Sheet -- December 31, 1995 and 1994................................................................ F-69 Statement of Cash Flows -- For the years ended December 31, 1995, 1994 and 1993............................ F-70 Statement of Changes in Division Equity -- For the years ended December 31, 1995, 1994 and 1993............ F-71 Notes to Financial Statements -- December 31, 1995, 1994 and 1993.......................................... F-72 Statement of Operations (unaudited) -- For the three months ended March 31, 1996........................... F-78 Balance Sheet (unaudited) -- March 31, 1996................................................................ F-79 Statement of Cash Flows (unaudited) -- For the three months ended March 31, 1996........................... F-80 Statement of Changes in Division Equity (unaudited) -- For the Three Months Ended March 31, 1996........... F-81 Notes to Unaudited Financial Statements (unaudited)........................................................ F-82
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Hexcel Corporation: We have audited the accompanying consolidated balance sheets of Hexcel Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of Hexcel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Hexcel Corporation and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in Note 4 to the consolidated financial statements, on January 12, 1995, the U.S. Bankruptcy Court entered an order dated January 10, 1995 confirming Hexcel's plan of reorganization which became effective on February 9, 1995. The terms of the plan of reorganization are more fully described in Note 4. As discussed in Notes 2 and 3 to the consolidated financial statements, on February 29, 1996, Hexcel acquired the Ciba Composites Business. As discussed in Note 1 to the consolidated financial statements, Hexcel changed its method of accounting for income taxes effective January 1, 1993 to conform with Statement of Financial Accounting Standards No. 109. /s/ DELOITTE & TOUCHE LLP Oakland, California March 1, 1996 F-2 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
1995 1994 1993 ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Net sales............................................................... $ 350,238 $ 313,795 $ 310,635 Cost of sales........................................................... (283,148) (265,367) (263,090) ------------ ------------ ------------ Gross Margin............................................................ 67,090 48,428 47,545 Marketing, general and administrative expenses.......................... (49,324) (45,785) (52,510) Other income (expenses), net............................................ 791 4,861 (12,780) Restructuring expenses.................................................. -- -- (46,600) ------------ ------------ ------------ Operating income (loss)................................................. 18,557 7,504 (64,345) Interest expense........................................................ (8,682) (11,846) (8,862) Bankruptcy reorganization expenses...................................... (3,361) (20,152) (641) ------------ ------------ ------------ Income (loss) from continuing operations before income taxes............ 6,514 (24,494) (73,848) Provision for income taxes.............................................. (3,313) (3,586) (6,024) ------------ ------------ ------------ Income (loss) from continuing operations............................ 3,201 (28,080) (79,872) Discontinued operations: Income (loss) from operations, net of (provision) for income taxes of ($441) in 1994 and ($177) in 1993.................................... -- 989 (6,584) Losses during phase-out period, net of benefit (provision) for income taxes of ($136) in 1994 and $383 in 1993............................. (468) (2,879) (4,039) ------------ ------------ ------------ Income (loss) before cumulative effect of accounting change......... 2,733 (29,970) (90,495) Cumulative effect of change in accounting for income taxes.............. -- -- 4,500 ------------ ------------ ------------ Net income (loss)................................................... $ 2,733 $ (29,970) $ (85,995) ------------ ------------ ------------ ------------ ------------ ------------ Net income (loss) per share and equivalent share: Primary and fully diluted: Continued operations.................................................. $ 0.20 $ (3.84) $ (10.89) Discontinued operations............................................... (0.03) (0.26) (1.45) Cumulative effect of change in accounting for income taxes............ -- -- 0.61 ------------ ------------ ------------ Net income (loss)................................................... $ 0.17 $ (4.10) $ (11.73) ------------ ------------ ------------ ------------ ------------ ------------ Weighted average shares and equivalent shares........................... 15,742 7,310 7,330 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-3 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, DECEMBER 31, 1995 1994 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) Current assets: Cash and equivalents............................................................ $ 3,829 $ 931 Receivables from asset sales.................................................... -- 29,340 Accounts receivable............................................................. 65,888 64,136 Inventories..................................................................... 55,475 47,364 Prepaid expenses................................................................ 2,863 3,581 Net assets of discontinued operations........................................... -- 3,000 ------------ ------------ Total current assets.......................................................... 128,055 148,352 ------------ ------------ Property, plant and equipment..................................................... 203,580 186,328 Less accumulated depreciation..................................................... 117,625 103,215 ------------ ------------ Net property, plant and equipment............................................... 85,955 83,113 ------------ ------------ Investments and other assets...................................................... 16,592 11,992 ------------ ------------ Total assets.................................................................. $ 230,602 $ 243,457 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable and current maturities of long-term liabilities................... $ 1,802 $ 12,720 Accounts payable................................................................ 22,904 18,163 Accrued liabilities............................................................. 38,892 32,234 Accrued restructuring liabilities............................................... 2,887 11,165 Liabilities subject to disposition in bankruptcy reorganization................. -- 97,025 ------------ ------------ Total current liabilities..................................................... 66,485 171,307 ------------ ------------ Long-term notes payable and capital lease obligations............................. 88,342 16,004 Deferred liabilities.............................................................. 27,401 21,279 Liabilities subject to disposition in bankruptcy reorganization................... -- 40,752 ------------ ------------ Shareholders' equity (deficit): Common stock, $0.01 par value, authorized 40,000 shares, shares issued and outstanding of 18,091 in 1995 and 7,301 in 1994................................ 181 73 Additional paid-in capital...................................................... 111,259 62,626 Accumulated deficit............................................................. (69,981) (72,714) Minimum pension obligation adjustment........................................... (535) (137) Cumulative currency translation adjustment...................................... 7,450 4,267 ------------ ------------ Total shareholders' equity (deficit).......................................... 48,374 (5,885) ------------ ------------ Total liabilities and shareholders' equity (deficit).......................... $ 230,602 $ 243,457 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. F-4 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
1995 1994 1993 ---------- ---------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Income (loss) from continuing operations.................................. $ 3,201 $ (28,080) $ (79,872) Reconciliation to net cash provided (used) by continuing operations: Depreciation and amortization........................................... 11,623 14,230 14,880 Deferred provision (benefit) for income taxes........................... (329) 3,609 4,805 Other income relating to sale of the Chandler, Arizona manufacturing facility and related assets and technology............................. (600) (15,900) -- Provision for DIC-Hexcel Limited........................................ -- 8,000 -- Restructuring expenses.................................................. -- -- 46,600 Changes in assets and liabilities: (Increase) decrease in accounts receivable............................ (1,752) (1,168) 9,157 (Increase) decrease in inventories.................................... (8,111) (6,228) 3,336 (Increase) decrease in prepaid expenses............................... 718 (454) (1,775) Increase (decrease) in accounts payable and accrued liabilities....... (10,090) 30,966 3,959 Changes in other non-current assets and long-term liabilities......... 2,346 (3,876) 9,736 ---------- ---------- ---------- Net cash provided (used) by continuing operations....................... (2,994) 1,099 10,826 Net cash provided (used) by discontinued operations..................... 486 (2,206) 624 ---------- ---------- ---------- Net cash provided (used) by operating activities........................ (2,508) (1,107) 11,450 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures...................................................... (12,144) (8,362) (6,264) Proceeds from equipment sold.............................................. 17 229 764 Deferred business acquisition costs, incurred in connection with the acquisition of the Ciba Composites Business.............................. (4,150) -- -- Proceeds from sale of discontinued resins business........................ 4,648 6,125 -- Proceeds from sale of the Chandler, Arizona manufacturing facility and certain related assets and technology.................................... 27,294 2,294 -- Proceeds from sale of stitchbonded fabrics business to joint venture...... -- -- 4,500 Investments in joint ventures............................................. -- -- (1,750) Proceeds from sale of discontinued fine chemicals business................ -- -- 500 ---------- ---------- ---------- Net cash provided (used) by investing activities........................ 15,665 286 (2,250) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt.................................. 4,317 171 -- Payments of long-term debt................................................ (5,402) (11,413) (4,801) Proceeds of short-term debt, net.......................................... 20,923 1,687 6,847 Proceeds from issuance of common stock.................................... 48,741 -- 270 Payments of allowed claims pursuant to the Reorganization Plan............ (78,144) -- -- ---------- ---------- ---------- Net cash provided (used) by financing activities........................ (9,565) (9,555) 2,316 ---------- ---------- ---------- Effect of exchange rate changes on cash and equivalents..................... (694) (41) (535) ---------- ---------- ---------- Net increase (decrease) in cash and equivalents............................. 2,898 (10,417) 10,981 Cash and equivalents at beginning of year................................... 931 11,348 367 ---------- ---------- ---------- Cash and equivalents at end of year......................................... $ 3,829 $ 931 $ 11,348 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these consolidated financial statements. F-5 HEXCEL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK RETAINED MINIMUM CUMULATIVE TOTAL ------------------------ ADDITIONAL EARNINGS PENSION CURRENCY SHAREHOLDERS' OUTSTANDING PAID-IN (ACCUMULATED OBLIGATION TRANSLATION EQUITY SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENT ADJUSTMENT (DEFICIT) ----------- ----------- ----------- ------------ ----------- ----------- ------------- (IN THOUSANDS) BALANCE, JANUARY 1, 1993.............. 7,296 $ 73 $ 62,292 $ 43,251 -- $ 533 $ 106,149 Net loss............................ -- -- -- (85,995) -- -- (85,995) Activity under stock plans.......... 14 -- 270 -- -- -- 270 Pension obligation adjustment....... -- -- -- -- $ (646) -- (646) Currency translation adjustment..... -- -- -- -- -- 975 975 ----------- ----- ----------- ------------ ----------- ----------- ------------- BALANCE, DECEMBER 31, 1993............ 7,310 73 62,562 (42,744) (646) 1,508 20,753 Net loss............................ -- -- -- (29,970) -- -- (29,970) Activity under stock plans.......... (9) -- 64 -- -- -- 64 Pension obligation adjustment....... -- -- -- -- 509 -- 509 Currency translation adjustment..... -- -- -- -- -- 2,759 2,759 ----------- ----- ----------- ------------ ----------- ----------- ------------- BALANCE, DECEMBER 31, 1994............ 7,301 73 62,626 (72,714) (137) 4,267 (5,885) Net income.......................... -- -- -- 2,733 -- -- 2,733 Sale of new common stock under standby purchase commitment and subscription rights offering....... 10,800 108 48,631 -- -- -- 48,739 Activity under stock plans.......... (10) -- 2 -- -- -- 2 Pension obligation adjustment....... -- -- -- -- (398) -- (398) Currency translation adjustment..... -- -- -- -- -- 3,183 3,183 ----------- ----- ----------- ------------ ----------- ----------- ------------- BALANCE, DECEMBER 31, 1995............ 18,091 $ 181 $ 111,259 $ (69,981) $ (535) $ 7,450 $ 48,374 ----------- ----- ----------- ------------ ----------- ----------- ------------- ----------- ----- ----------- ------------ ----------- ----------- -------------
The accompanying notes are an integral part of these consolidated financial statements. F-6 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS AND BASIS OF ACCOUNTING The consolidated financial statements include the accounts of Hexcel Corporation and subsidiaries ("Hexcel" or the "Company"), after elimination of intercompany transactions and accounts. Hexcel is an international developer and manufacturer of lightweight, high-performance composite materials, parts and structures for use in the commercial aerospace, space and defense, recreation and general industrial markets. The Company serves international markets through manufacturing and marketing facilities located in the United States and Europe, as well as sales offices in Asia, Australia and South America. The Company is also a partner in three joint ventures that manufacture and sell composite materials in the U.S. and Asia. As discussed in Notes 2 and 3, Hexcel acquired the worldwide composites division of Ciba-Geigy Limited, a Swiss corporation ("Ciba"), and Ciba-Geigy Corporation, a New York corporation ("CGC"), including Ciba's and CGC's composite materials, parts and structures businesses (the "Ciba Composites Business"), on February 29, 1996. The Company acquired the Ciba Composites Business in exchange for: (a) approximately 18,022 newly issued shares of Hexcel common stock; (b) $25,000 in cash; and (c) undertakings to deliver to Ciba and/or one or more of its subsidiaries, following completion of certain post-closing adjustment procedures, various senior subordinated notes and senior demand notes. In connection with the acquisition of the Ciba Composites Business, the Company obtained a new three-year revolving credit facility of up to $175,000 (the "Senior Secured Credit Facility") to: (a) fund the cash component of the purchase price; (b) refinance outstanding indebtedness under certain U.S. and European credit facilities; and (c) provide for the ongoing working capital and other financing requirements of the Company on a worldwide basis (see Note 10). The acquisition of the Ciba Composites Business and related financing activities occurred subsequent to December 31, 1995, and have not been reflected in the historical consolidated financial statements and accompanying notes presented herein. As discussed in Note 4, Hexcel Corporation (a Delaware corporation) operated as a debtor-in-possession under the provisions of Chapter 11 of the federal bankruptcy laws from December 6, 1993 until February 9, 1995, when the First Amended Plan of Reorganization (the "Reorganization Plan") proposed by Hexcel and the Official Committee of Equity Security Holders (the "Equity Committee") became effective. Consequently, the consolidated financial statements as of December 31, 1994, and for each of the three years in the period ended December 31, 1995, have been prepared in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," issued by the American Institute of Certified Public Accountants ("SOP 90-7"). CASH AND EQUIVALENTS The Company invests excess cash in investments with original maturities of less than three months. The investments consist of Eurodollar time deposits and are stated at cost, which approximates market value. The Company considers such investments to be cash equivalents for purposes of the statements of cash flows. ACCOUNTS RECEIVABLE Accounts receivable were net of reserves for doubtful accounts of $2,603 and $1,249 as of December 31, 1995 and 1994, respectively. INVENTORIES Inventories are valued at the lower of cost or market, with cost determined on a first-in, first-out basis. F-7 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Repairs and maintenance are charged to expense as incurred; replacements and betterments are capitalized. Interest expense associated with major long-term construction projects is capitalized. No interest was capitalized in 1995 or 1994; $227 of interest was capitalized in 1993. The Company depreciates property, plant and equipment over estimated useful lives. Accelerated and straight-line methods are used for financial statement purposes. The estimated useful lives range from 10 to 40 years for buildings and improvements and 3 to 20 years for machinery and equipment. CURRENCY TRANSLATION The assets and liabilities of European subsidiaries are translated into U.S. dollars at year-end exchange rates, and revenues and expenses are translated at average exchange rates during the year. Cumulative currency translation adjustments are included in shareholders' equity. Realized gains and losses from currency exchange transactions were not material to the Company's consolidated results of operations in 1995, 1994 or 1993. RESEARCH AND TECHNOLOGY COSTS Research and technology costs of $7,618 in 1995, $8,201 in 1994 and $7,971 in 1993 were expensed as incurred, and are included in "marketing, general and administrative expenses" in the consolidated statements of operations. ACCOUNTING CHANGE Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") (see Note 16). The cumulative effect of this accounting change has been reflected in the consolidated statement of operations for the year ended December 31, 1993. EARNINGS PER SHARE Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and dilutive common share equivalents (stock options) outstanding during each year. The computation on the fully diluted basis, which considers the exercise of stock options and the conversion of the convertible subordinated debentures, was antidilutive in 1995, 1994 and 1993. RECLASSIFICATIONS Certain prior year amounts in the consolidated financial statements and notes have been reclassified to conform to the 1995 presentation. ESTIMATES AND ASSUMPTIONS The consolidated financial statements and accompanying notes reflect numerous estimates and assumptions made by the management of Hexcel. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures with respect to contingent assets and liabilities, and the reported amounts of revenues and expenses. Although management believes that the estimates and assumptions used in preparing the consolidated financial statements and accompanying notes are reasonable in light of known facts and circumstances, actual results could differ from the estimates used. F-8 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECENTLY ISSUED ACCOUNTING STANDARDS Hexcel is required to adopt Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), in 1996. SFAS 121 requires that the recoverability of long-lived assets to be held or used, including intangible assets, be assessed when events or circumstances indicate that the value of those assets may be impaired. That assessment, determined by reference to the estimated undiscounted future cash flows resulting from the use of the assets, will be based on each group of assets within each of the Company's strategic business units. Management has not yet determined the impact, if any, that the adoption of SFAS 121 will have on the Company's consolidated financial position or results of operations. Hexcel is required to adopt Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. SFAS 123 establishes accounting and disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. Under SFAS 123, the Company may either adopt the new fair value based accounting method or continue the intrinsic value based method and provide pro forma disclosures of net earnings and earnings per share as if the fair value method had been applied. The Company plans to adopt only the disclosure requirements of SFAS 123. Consequently, the adoption of SFAS 123 will have no effect on the Company's consolidated net earnings. NOTE 2 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS Hexcel acquired the Ciba Composites Business of Ciba-Geigy Limited and Ciba-Geigy Corporation on February 29, 1996. The Ciba Composites Business is engaged in the manufacture and marketing of composite materials, parts and structures for aerospace, recreation and general industrial markets. Product lines include fabrics, prepregs, adhesives, honeycomb core, sandwich panels and fabricated components, as well as structures and interiors primarily for the commercial and military aerospace markets. The acquisition of the Ciba Composites Business was consummated pursuant to a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC, and Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic Alliance Agreement, the Company acquired the assets (including the capital stock of certain of Ciba's non-U.S. subsidiaries) and assumed the liabilities of the Ciba Composites Business other than certain excluded assets and liabilities in exchange for: (a) approximately 18,022 newly issued shares of Hexcel common stock; (b) $25,000 in cash; and (c) undertakings to deliver to Ciba and/or one or more of its subsidiaries, following completion of certain post-closing adjustment procedures contemplated by the Strategic Alliance Agreement, senior subordinated notes in an aggregate principal amount of approximately $43,000, subject to certain adjustments (the "Senior Subordinated Notes"), and senior demand notes in a principal amount equal to the cash on hand at certain of Ciba's non-U.S. subsidiaries (the "Senior Demand Notes"). (The pro forma aggregate principal amount of the Senior Subordinated Notes as of December 31, 1995 was $27,400. See Note 3.) In connection with the acquisition of the Ciba Composites Business, the Company obtained the Senior Secured Credit Facility to: (a) fund the cash component of the purchase price; (b) refinance outstanding indebtedness under certain U.S. and European credit facilities; and (c) provide for the ongoing working capital and other financing requirements of the Company on a worldwide basis (see Note 10). The acquisition of the Ciba Composites Business and related financing activities occurred subsequent to December 31, 1995, and have not been reflected in the historical consolidated financial statements and accompanying notes presented herein. F-9 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma financial information combines the condensed balance sheets and statements of operations of Hexcel and the Ciba Composites Business after giving effect to the acquisition of the Ciba Composites Business by the Company. The unaudited pro forma condensed combined balance sheet as of December 31, 1995 gives effect to the acquisition as if it had occurred on December 31, 1995. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 1995 gives effect to the acquisition as if it had occurred on January 1, 1995. The pro forma adjustments account for the acquisition as a purchase of the Ciba Composites Business by the Company, and are based upon the assumptions set forth in the accompanying disclosures. The following unaudited pro forma financial information is not necessarily indicative of the financial position or operating results that would have occurred had the acquisition of the Ciba Composites Business been consummated on the dates indicated, nor is it necessarily indicative of future operating results or financial position. Management expects that significant costs will be incurred in connection with combining the operations of Hexcel and the Ciba Composites Business, including costs of eliminating excess manufacturing capacity and redundant administrative and research and development activities, as well as the various costs of consolidating the information systems and other business activities of the two companies. Some of the costs associated with combining the two businesses, including certain costs to eliminate redundant administrative and research and development activities, will be incurred during 1996. The anticipated resulting benefits are expected to be realized shortly thereafter. However, other costs, including many of the costs to eliminate excess manufacturing capacity, are expected to be incurred over a period of as much as three years. This is attributable, in part, to aerospace industry requirements to "qualify" specific equipment and manufacturing facilities for the manufacture of certain products. Based on the Company's experience with previous plant consolidations, these qualification requirements necessitate an approach to the consolidation of manufacturing facilities that will require two to three years to complete. Accordingly, the costs and anticipated future benefits of eliminating excess manufacturing capacity are long-term in nature. The Board of Directors of Hexcel has not yet approved the plan for combining the operations of Hexcel and the Ciba Composites Business, but is expected to do so in the second quarter of 1996. Subject to the approval of the consolidation plan by the Board of Directors, management currently estimates that the cash costs of combining the two businesses could range from $35,000 to $45,000, net of expected proceeds from asset sales which are expected to be received at the end of the consolidation process. (This range includes the estimated net cash cost to close the Anaheim manufacturing facility of the Ciba Composites Business. The decision to close this facility was announced in the first quarter of 1996.) Management notes, however, that the actual cash costs of combining the two businesses could vary from current estimates due to the fact that the nature, timing and extent of certain consolidation activities is dependent on numerous factors. Management expects to record one or more charges to earnings for the estimated costs of certain business consolidation activities. The estimated costs of specific consolidation activities will be accrued in accordance with generally accepted accounting principles as those activities are determined and announced. Although the aggregate amount of the resulting charges to earnings has not yet been determined, management currently estimates that the amount could range from $40,000 to $50,000, including noncash charges. However, the actual aggregate amount of such charges could vary from current estimates. F-10 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) The cash expenditures necessary to combine the Ciba Composites Business with Hexcel are expected to occur over a period of as much as three years. The nature, timing and extent of these expenditures will be determined, in part, by management's evaluation of the probable economic and competitive benefits to be gained from specific consolidation activities. Management anticipates that the benefits to be realized from planned consolidation activities will be sufficient to justify the level of associated costs. However, some of the anticipated benefits are long-term in nature, and there can be no assurance that such benefits will actually be realized. Accordingly, no effect has been given to the costs of combining the two businesses, or to the operating, financial and other benefits that may be realized from the combination, in the accompanying pro forma financial information. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF DECEMBER 31, 1995
HISTORICAL ------------------------ PRO FORMA CIBA ------------------------- HEXCEL COMPOSITES ADJUSTMENTS COMBINED ----------- ----------- ------------ ----------- ASSETS Current assets: Cash and equivalents..................................... $ 3,829 $ 8,412 $ (8,412 (a) $ 3,829 Accounts receivable...................................... 65,888 58,799 (5,805 (b) 118,882 Inventories.............................................. 55,475 60,337 (1,545 (c) 114,267 Prepaid expenses and other assets........................ 2,863 9,957 (6,019 (d) 6,801 ----------- ----------- ------------ ----------- Total current assets................................... 128,055 137,505 (21,781) 243,779 ----------- ----------- ------------ ----------- Net property, plant and equipment.......................... 85,955 156,364 (45,487 (e) 196,832 Excess of purchase price over net assets acquired.......... -- -- 44,300(f) 44,300 Investments and other assets............................... 16,592 46,425 (47,069 (g) 15,948 ----------- ----------- ------------ ----------- Total assets........................................... $ 230,602 $ 340,294 $ (70,037) $ 500,859 ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term liabilities............................................. $ 1,802 $ 10,469 $ (9,052 (h) $ 3,219 Accounts payable......................................... 22,904 29,611 (1,208 (i) 51,307 Accrued liabilities...................................... 41,779 27,574 -- 69,353 ----------- ----------- ------------ ----------- Total current liabilities.............................. 66,485 67,654 (10,260) 123,879 ----------- ----------- ------------ ----------- Senior subordinated notes, payable to Ciba-Geigy........... -- -- 26,300(j) 26,300 Other long-term liabilities, less current maturities....... 115,743 28,723 18,898(k) 163,364 Minority interest.......................................... -- 6,968 (6,968 (l) -- ----------- ----------- ------------ ----------- Shareholders' equity: Common stock & additional paid-in capital................ 111,440 -- 140,600(m) 252,040 Accumulated deficit...................................... (69,981) -- (1,658 (n) (71,639) Minimum pension obligation adjustment.................... (535) -- -- (535) Cumulative currency translation adjustment............... 7,450 -- -- 7,450 Invested capital......................................... -- 236,949 (236,949 (o) -- ----------- ----------- ------------ ----------- Total shareholders' equity............................. 48,374 236,949 (98,007) 187,316 ----------- ----------- ------------ ----------- Total liabilities and shareholders' equity............. $ 230,602 $ 340,294 $ (70,037) $ 500,859 ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
F-11 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS THE YEAR ENDED DECEMBER 31, 1995
HISTORICAL ------------------------ PRO FORMA CIBA ------------------------- HEXCEL COMPOSITES ADJUSTMENTS COMBINED ----------- ----------- ------------ ----------- Net sales................................................. $ 350,238 $ 331,073 $ (3,207)(p) $ 678,104 Cost of sales............................................. (283,148) (273,997) 6,860(q) (550,285) ----------- ------------ ----------- ------------ Gross margin.............................................. 67,090 57,076 3,653 127,819 Marketing, general and administrative expenses............ (49,324) (57,966) -- (107,290) Amortization and write-downs of intangible assets......... -- (6,930) 4,385(r) (2,545) Other income (expenses), net.............................. 791 (1,102) -- (311) Restructuring expenses.................................... -- (2,362) -- (2,362) ----------- ------------ ----------- ------------ Operating income (loss)................................... 18,557 (11,284) 8,038 15,311 Interest expense.......................................... (8,682) (668) (869)(s) (10,219) Bankruptcy reorganization expenses........................ (3,361 (t) -- -- (3,361)(t) Minority interest......................................... -- (1,506) 1,506(u) -- ----------- ------------ ----------- ------------ Income (loss) from continuing operations before income taxes.................................................... 6,514 (13,458) 8,675 1,731 Provision for income taxes................................ (3,313) (5,085) --(v) (8,398) ----------- ------------ ----------- ------------ Income (loss) from continuing operations................ 3,201 (18,543) 8,675 (6,667) Loss from discontinued operations......................... (468) -- -- (468) ----------- ------------ ----------- ------------ Net income (loss)....................................... $ 2,733 $ (18,543) $ 8,675 $ (7,135) ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------ Net income (loss) per share and equivalent share: Primary and fully diluted: Continuing operations................................... $ 0.20 $ (0.20) Discontinued operations................................. (0.03) (0.01) ----------- ------------ Net income (loss)..................................... $ 0.17 $ (0.21) ----------- ------------ ----------- ------------ Weighted average shares and equivalent shares............. 15,742 33,764 ----------- ------------ ----------- ------------
The 1995 net loss for the Ciba Composites Business of $18,543 includes a fourth quarter net loss of $9,537. The fourth quarter net loss includes approximately $6,340 of costs attributable to write-downs of certain fixed and intangible assets, severance expenses, reserves for uncollectible receivables, and acquisition-related expenses. PURCHASE PRICE SUMMARY AND RELATED ALLOCATION The purchase price paid by Hexcel for the Ciba Composites Business is comprised of the following components: 18,022 shares of Hexcel common stock, valued at $8.00 per share (1)............................................................. $ 144,200 Senior Subordinated Notes payable to Ciba in 2003 (2)............ 26,300 Cash paid to Ciba (3)............................................ 25,000 Estimated fees and expenses in connection with the acquisition (3)............................................................. 7,600 --------- Total purchase price......................................... $ 203,100 --------- ---------
F-12 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) The allocation of the total purchase price to the net assets of the Ciba Composites Business is based upon the estimated fair values of the net assets acquired, and is summarized as follows: Cash and equivalents (4)......................................... -- Accounts receivable (5).......................................... $ 53,285 Inventories (6).................................................. 58,792 Prepaid expenses (5)............................................. 3,938 Net property, plant & equipment (7).............................. 110,877 Other assets, net (8)............................................ 1,000 Investments and other assets (5)................................. 4,214 Current liabilities (9).......................................... (57,685) Other long-term liabilities, less current maturities (9)......... (19,221) Minority interest (10)........................................... -- Shareholders' equity (11)........................................ 3,600 Excess of purchase price over net assets acquired (12)........... 44,300 --------- Total purchase price......................................... $ 203,100 --------- ---------
- ------------------------ (1) The aggregate value of the Hexcel common stock issued to Ciba is determined by multiplying the discounted market price per share by the number of shares issued. The market price per share is determined by reference to the prices at which Hexcel common stock was trading on the New York Stock Exchange during a reasonable period before and after December 12, 1995, the date upon which Hexcel and Ciba amended the aggregate amount of consideration to be paid by Hexcel for the Ciba Composites Business by agreeing to reduce the initial aggregate principal amount of the senior subordinated notes by $5,000. The market price is then discounted to reflect the illiquidity of the Hexcel common stock issued to Ciba caused by the size of Ciba's holding, the contractual restrictions on transferring such shares and, accordingly, limitations on the price Ciba could realize, the contractual limitation on the price per share Ciba could realize in certain types of transactions, the fact that such shares are "restricted securities" within the meaning of the Securities Act of 1933, and various other factors. For purposes of valuing the Hexcel common stock issued to Ciba, a discounted market price of $8.00 per share is used. The discounted market price is based on a market price of $10.00 per share during a reasonable period before and after December 12, 1995, and a discount rate of 20%. The discounted market price of the shares issued is used in determining the total purchase price because the discounted market price of Hexcel common stock is more reliably measurable than the fair value of the assets acquired and the liabilities assumed. (2) Based on the formula included in the Strategic Alliance Agreement, the pro forma aggregate principal amount of the Senior Subordinated Notes as of December 31, 1995 is approximately $27,400. (Such amount is estimated as follows: $43,029 (a) increased by $9,000 for the price of acquiring a minority interest in an Austrian subsidiary of the Ciba Composites Business; (b) increased by $6,126 for the decline in the adjusted net working capital of Hexcel from July 2, 1995 to December 31, 1995; (c) decreased by $25,378 for the decline in the adjusted net working capital of the Ciba Composites Business from July 2, 1995 to December 31, 1995; and (d) decreased by $5,377 for certain net assets of the Ciba Composites Business retained by Ciba and other adjustments.) However, the actual aggregate principal amount of the Senior Subordinated Notes to be issued may be higher or lower, because the adjustments required under the Strategic Alliance Agreement to reflect changes in working capital and certain other items as of February 29, 1996 have not yet been determined. F-13 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) The fair value of the Senior Subordinated Notes as of December 31, 1995 is estimated to be $26,300, which is $1,100 lower than the pro forma aggregate principal amount. The $1,100 discount reflects the absence of certain call protection provisions from the terms of the Senior Subordinated Notes and the difference between the stated interest rate on the Senior Subordinated Notes and the estimated market rate for debt obligations of comparable quality and maturity (see Note 10). (3) The cash paid to Ciba and certain estimated fees and expenses in connection with the acquisition of the Ciba Composites Business have been financed with the proceeds from the Senior Secured Credit Facility (see Note 10). (4) Under the terms of the Strategic Alliance Agreement, the cash and cash equivalents of the Ciba Composites Business, except for cash on hand at certain of Ciba's non-U.S. subsidiaries, are retained by Ciba. The cash on hand at certain of Ciba's non-U.S. subsidiaries was acquired in exchange for the Senior Demand Notes. The amount of acquired cash and the corresponding principal amount of the Senior Demand Notes, which Hexcel expects will be presented for payment shortly after issuance, are equal and offset each other. Accordingly, the acquisition of such cash and the issuance of the Senior Demand Notes has not been reflected in the unaudited pro forma condensed combined balance sheet. (5) The fair values of accounts receivable, prepaid expenses and investments and other assets acquired in the purchase of the Ciba Composites Business are estimated to equal respective net book values. Under the terms of the Strategic Alliance Agreement, a portion of the Ciba Composites Business' accounts receivable and prepaid expenses are retained by Ciba. (6) The fair value of inventories acquired in the purchase of the Ciba Composites Business is estimated to equal aggregate current sales value less estimated selling costs. Under the terms of the Strategic Alliance Agreement, a portion of the Ciba Composites Business' inventories is retained by Ciba. (7) The fair value of the property, plant and equipment acquired in the purchase of the Ciba Composites Business is estimated to be $45,000 lower than the respective net book value. The estimated fair value, which is based on a preliminary review of the production facilities and equipment of the Ciba Composites Business, reflects the fact that certain of these assets are expected to: (a) duplicate capabilities or productive capacities already possessed by Hexcel; or (b) be in excess of the combined company's needs. This estimate is subject to modification in connection with further analysis. In addition, under the terms of the Strategic Alliance Agreement, a portion of the Ciba Composites Business' property, plant and equipment is retained by Ciba. (8) The fair value assigned to other assets reflects the capitalization of estimated fees and expenses incurred to secure the Senior Secured Credit Facility in connection with the acquisition of the Ciba Composites Business. (9) The fair values of the current and long-term liabilities assumed by Hexcel in connection with the purchase of the Ciba Composites Business are estimated to equal the respective net book values. Under the terms of the Strategic Alliance Agreement, certain of the liabilities of the Ciba Composites Business are not assumed by Hexcel. (10) Prior to Hexcel's acquisition of the Ciba Composites Business, Ciba eliminated the minority interest in an Austrian subsidiary of the Ciba Composites Business ("Danutec") by purchasing that interest, subject to certain governmental approvals which were subsequently obtained. F-14 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) Accordingly, the estimated pro forma purchase price and purchase price allocation reflect the transfer of 100% of the capital stock of Danutec to the Company, and the minority interest in Danutec has been eliminated on a pro forma basis. (11) The estimated fees and expenses incurred in connection with issuing the Hexcel common stock to Ciba are deducted from shareholders' equity. (12) The excess of purchase price over net tangible assets acquired will be allocated to identifiable intangible assets and goodwill pursuant to an analysis and valuation of those assets in accordance with the provisions of Accounting Principles Board Opinion No. 16. Such analysis and valuation has not yet been performed. Accordingly, for purposes of the unaudited pro forma financial information, the excess of purchase price over net tangible assets acquired has been treated as a single intangible asset, with a 20-year life. While the values and estimated lives of various intangible assets resulting from the final purchase allocation will vary from these pro forma assumptions, management does not expect these variances to be material to the unaudited pro forma financial information contained herein. The purchase price allocation does not reflect any liabilities for the costs of consolidating the business operations of the Ciba Composites Business and Hexcel. Those costs, as discussed above, are expected to be significant. F-15 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) PRO FORMA ADJUSTMENTS -- UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (a) Adjustment to eliminate the cash and cash equivalents of the Ciba Composites Business which are retained by Ciba............................ $ (8,412) ---------- (b) Adjustment to eliminate accounts receivable of the Ciba Composites Business which are retained by Ciba, as well as trade account balances between the Ciba Composites Business and Hexcel....................................... $ (5,805) ---------- (c) Adjustment to eliminate inventories of the Ciba Composites Business which are retained by Ciba, and to record acquired inventories at estimated fair value..................................................................... $ (1,545) ---------- (d) Adjustment to eliminate prepaid expenses and other assets of the Ciba Composites Business which are retained by Ciba............................ $ (6,019) ---------- (e) Adjustment to eliminate property, plant and equipment of the Ciba Composites Business which is retained by Ciba, and to record acquired property, plant and equipment at estimated fair value..................... $ (45,487) ---------- (f) Adjustment to record the excess of purchase price over net assets acquired.................................................................. $ 44,300 ---------- (g) Adjustment to reflect the following: Elimination of the intangible assets of the Ciba Composites Business....... $ (42,211) Capitalization and reclassification of certain fees and expenses incurred in connection with the acquisition........................................ (3,200) Write-off of capitalized debt issuance costs in connection with the extinguishment of certain existing debt obligations with proceeds from the Senior Secured Credit Facility............................................ (1,658) ---------- Net adjustment............................................................. $ (47,069) ---------- (h) Adjustment to eliminate notes payable of the Ciba Composites Business which are not assumed by Hexcel................................................. $ (9,052) ---------- (i) Adjustment to eliminate current liabilities of the Ciba Composites Business which are not assumed by Hexcel, as well as trade balances between the Ciba Composites Business and Hexcel....................................... $ (1,208) ---------- (j) Adjustment to reflect the issuance of the Senior Subordinated Notes payable to Ciba................................................................... $ 26,300 ---------- (k) Adjustment to reflect the following: Elimination of long-term liabilities of the Ciba Composites Business which are not assumed by Hexcel................................................. $ (9,502) Net borrowings under the Senior Secured Credit Facility to finance the cash payment to Ciba and certain fees and expenses incurred in connection with the acquisition........................................................... 28,400 ---------- Net adjustment............................................................. $ 18,898 ---------- (l) Adjustment to reflect the elimination of the minority interest in Danutec................................................................... $ (6,968) ---------- (m) Adjustment to reflect the issuance of Hexcel common stock to Ciba, net of certain fees and expenses incurred in connection with issuing such stock.. $ 140,600 ---------- (n) Adjustment to reflect the write-off of capitalized debt issuance costs in connection with the extinguishment of certain existing debt obligations with proceeds from the Senior Secured Credit Facility..................... $ (1,658) ---------- (o) Adjustment to eliminate Ciba's investment in the Ciba Composites Business.................................................................. $ (236,949) ----------
F-16 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) PRO FORMA ADJUSTMENTS -- UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (p) Adjustment to eliminate sales between the Ciba Composites Business and Hexcel.................................................................... $ (3,207) ---------- (q) Adjustment to reflect the following: Elimination of cost of sales between the Ciba Composites Business and Hexcel.................................................................... $ 2,708 Reduction in depreciation costs resulting from the purchase price adjustment to the net property, plant and equipment of the Ciba Composites Business.................................................................. 4,152 ---------- Net adjustment............................................................. $ 6,860 ---------- (r) Adjustment to reflect the following: Reduction in amortization expense and write-downs of intangible assets resulting from the elimination of the intangible assets of the Ciba Composites Business in connection with the purchase price allocation...... $ 6,930 Amortization of the excess of purchase price over net assets acquired (20 year amortization period)................................................. (2,215) Amortization of capitalized fees and expenses incurred in connection with securing the Senior Secured Credit Facility (3 year amortization period)................................................................... (330) ---------- Net adjustment............................................................. $ 4,385 ---------- (s) Adjustment to reflect the following: Elimination of interest expense on liabilities of the Ciba Composites Business which are not assumed by Hexcel.................................. $ 1,032 Net reduction in interest expense resulting from the refinancing of certain credit facilities with the Senior Secured Credit Facility................. 992 Estimated interest expense on the Senior Subordinated Notes payable to Ciba...................................................................... (2,893) ---------- Net adjustment............................................................. $ (869) ---------- (t) On February 9, 1995, Hexcel emerged from bankruptcy reorganization proceedings which had begun on December 6, 1993. In connection with those proceedings, Hexcel incurred bankruptcy reorganization expenses of $3,361 during the year ended December 31, 1995. Although the resolution of certain bankruptcy-related issues, including the final settlement of disputed claims and professional fees, resulted in expenses being incurred after February 9, 1995, Hexcel has not incurred any significant bankruptcy-related expenses since October 1, 1995. (u) Adjustment to eliminate the minority interest in the operating results of the Ciba Composites Business.............................................. $ 1,506 ---------- (v) The income tax consequences of the cumulative pro forma adjustments are estimated to be zero. This is due to the fact that the pro forma combined company incurred losses from continuing operations before income taxes for the year ended December 31, 1995, and no income tax benefits relating to these losses have been recognized. Furthermore, the pro forma combined company has sufficient net operating loss carryforwards for income tax purposes to substantially eliminate any tax liabilities arising from pro forma adjustments.
F-17 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 4 -- BANKRUPTCY REORGANIZATION On January 12, 1995, the United States Bankruptcy Court for the Northern District of California (the "Bankruptcy Court") entered an order dated January 10, 1995 confirming the Reorganization Plan proposed by Hexcel and the Equity Committee. On February 9, 1995, the Reorganization Plan became effective and Hexcel emerged from the bankruptcy reorganization proceedings which had begun on December 6, 1993, when Hexcel filed a voluntary petition for relief under the provisions of Chapter 11 of the federal bankruptcy laws. The Reorganization Plan which became effective on February 9, 1995 provided for: (a) the replacement of a debtor-in-possession credit facility with a new revolving credit facility (the "Revolving Credit Facility") of up to $45,000; (b) the creation of an amended reimbursement agreement with respect to the letters of credit in support of certain industrial development revenue bonds; (c) the completion of the first closing under a standby purchase commitment whereby Mutual Series Fund Inc. ("Mutual Series") purchased 1,946 shares of new common stock for $9,000 and loaned Hexcel $41,000 as an advance against the proceeds of a subscription rights offering for additional shares of new common stock; and (d) the reinstatement or payment in full, with interest, of all allowed claims, including prepetition accounts payable and notes payable. The Revolving Credit Facility was replaced by the Senior Secured Credit Facility on February 29, 1996 (see Note 10). The subscription rights offering concluded on March 27, 1995, with the issuance of an additional 7,156 shares of new common stock. The resulting cash proceeds of $33,098 were used to reduce the outstanding balance of the loan from Mutual Series. The second closing under the standby purchase agreement was completed on April 6, 1995, with the issuance of an additional 1,590 shares of new common stock to Mutual Series, the issuance of an additional 108 shares of new common stock to John J. Lee, Hexcel's Chief Executive Officer, and the retirement of the remaining balance of the Mutual Series loan. Following the second closing under the standby purchase agreement on April 6, 1995, the Company had a total of 18,101 shares of common stock issued and outstanding. The Reorganization Plan provided for the reinstatement or payment in full, with interest, of all allowed claims, including prepetition accounts payable and notes payable. The total of all claims reinstated or paid, less the portion representing accrued interest for the period from January 1 to February 9, 1995, has been reflected as "liabilities subject to disposition in bankruptcy reorganization" in the consolidated balance sheet as of December 31, 1994. On February 9, 1995, Hexcel paid $78,144 in prepetition claims and interest, and reinstated another $60,575 in prepetition liabilities. Reinstated liabilities were reclassified from "liabilities subject to disposition in bankruptcy reorganization" to the appropriate liability captions of the consolidated balance sheet on February 9, 1995. The payment of claims and interest on February 9, 1995 was financed with: (a) cash proceeds of $26,694 received in the first quarter of 1995 from the sale of the Company's Chandler, Arizona manufacturing facility and certain related assets and technology (see Note 5); (b) cash proceeds of $2,602 received in the first quarter of 1995 from the sale of the Company's European resins business (see Note 5); (c) the $50,000 in cash received from Mutual Series in connection with the standby purchase agreement; and (d) borrowings under the Revolving Credit Facility. Professional fees and other costs directly related to bankruptcy proceedings were expensed as incurred, and have been reflected in the consolidated statements of operations as "bankruptcy reorganization expenses." Bankruptcy reorganization expenses have consisted primarily of professional fees paid to legal and financial advisors of Hexcel, the Equity Committee and the Official Committee of Unsecured Creditors. In addition, these expenses included incentives for employees to remain with the Company for the duration of bankruptcy proceedings and the write-off of previously capitalized costs related to the issuance of prepetition debt, as required by SOP 90-7. The resolution of certain bankruptcy-related issues, including the final settlement of disputed claims and professional fees, resulted in expenses being incurred after the effective date of the Reorganization Plan. However, the Company has not incurred any significant bankruptcy-related expenses since October 1, 1995. F-18 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 5 -- RECEIVABLES FROM ASSET SALES SALE OF CHANDLER, ARIZONA MANUFACTURING FACILITY AND CERTAIN RELATED ASSETS AND TECHNOLOGY Hexcel sold its Chandler, Arizona manufacturing facility and certain related assets and technology to Northrop Grumman Corporation ("Northrop") in the fourth quarter of 1994. In connection with the sale, the Company recognized other income of $15,900, which includes the effects of reversing $10,000 of a previously established restructuring reserve related to the Chandler facility and $5,900 which represents the excess of the sales price over the carrying value of the net assets sold. The transaction generated net cash proceeds of $28,988, of which $2,294 was received in 1994 and $26,694 was received in the first quarter of 1995. The net proceeds received in the first quarter of 1995 have been reflected in "receivables from asset sales" in the consolidated balance sheet as of December 31, 1994. Under the terms of the Chandler transaction, Hexcel retained a royalty-free, non-exclusive license to use the technology sold in non-military applications and will receive royalties from Northrop on certain applications of that technology. In addition, the Company may receive up to an additional $2,300 pursuant to the terms of the transaction, when certain conditions are satisfied. Of this amount, $600 was received in the third quarter of 1995 and has been reflected in "other income (expense), net" in the 1995 consolidated statement of operations. An additional $1,560 was received in February 1996; the resulting income will be recognized in the first quarter of 1996. SALE OF RESINS BUSINESS On December 29, 1994, Hexcel sold its European resins operations to Axson S.A., a French corporation, through the sale of all of the Company's shares in the capital stock of its European resins subsidiaries. The sale and related settlement transactions generated net cash proceeds of approximately $8,727, of which $6,125 was received in the fourth quarter of 1994 and $2,602 was received in the first quarter of 1995. The net proceeds received in the first quarter of 1995 have been reflected in "receivables from asset sales" in the consolidated balance sheet as of December 31, 1994. Hexcel sold its U.S. resins operations to Fiber-Resin Corporation, a wholly-owned subsidiary of H.B. Fuller Company, on October 30, 1995. The estimated net proceeds from the sale approximated the net book value of the assets sold. The sale of the Company's U.S. resins operations completed the divestiture of the resins business, which has been accounted for as a discontinued operation in the consolidated financial statements for all periods presented (see Note 23). NOTE 6 -- INVENTORIES Inventories as of December 31, 1995 and 1994 were:
1995 1994 --------- --------- Raw materials.......................................................... $ 22,257 $ 18,846 Work in progress....................................................... 13,688 12,518 Finished goods......................................................... 17,778 14,934 Supplies............................................................... 1,752 1,066 --------- --------- Inventories............................................................ $ 55,475 $ 47,364 --------- --------- --------- ---------
F-19 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 1995 and 1994 were:
1995 1994 ------------ ------------ Land.............................................................. $ 2,349 $ 2,213 Buildings......................................................... 46,560 36,913 Equipment......................................................... 154,671 147,202 ------------ ------------ Property, plant and equipment..................................... 203,580 186,328 Less accumulated depreciation..................................... (117,625) (103,215) ------------ ------------ Net property, plant and equipment................................. $ 85,955 $ 83,113 ------------ ------------ ------------ ------------
NOTE 8 -- INVESTMENTS AND OTHER ASSETS Investments and other assets as of December 31, 1995 and 1994 were:
1995 1994 ------------ ------------ Investments in joint ventures..................................... $ 6,615 $ 6,287 Deferred business acquisition costs............................... 4,150 -- Debt financing costs, net of accumulated amortization of $529 as of December 31, 1995............................................. 1,658 -- Other assets...................................................... 4,169 5,705 ------------ ------------ Investments and other assets...................................... $ 16,592 $ 11,992 ------------ ------------ ------------ ------------
Investments in joint ventures consist of a 50% equity interest in Knytex Company, L.L.C. ("Knytex"), which is jointly owned and operated with Owens-Corning Fiberglas Corporation, and a 40% equity interest in Hexcel-Fyfe, L.L.C. ("Hexcel-Fyfe"), which is jointly owned and operated with Fyfe Associates Corporation. The Company also owns an equity interest in DIC-Hexcel Limited, a joint venture with Dainippon Ink and Chemicals, Inc. ("DIC"), for which there was no recorded asset value as of December 31, 1995 or 1994 (see Note 9). Investments in joint ventures are accounted for by the equity method. Equity in the earnings of joint ventures were not material to the Company's consolidated results of operations in 1995, 1994 or 1993. Knytex was formed on June 30, 1993 when the Company sold 50% of its stitchbonded business to Owens-Corning and contributed the remaining 50% to the joint venture. The Company received proceeds of $4,500 and recognized a gain of $1,541 from the sale. Deferred business acquisition costs consists of certain transaction-related costs incurred in connection with the acquisition of the Ciba Composites Business through December 31, 1995. Such costs will be included in the allocation of the total purchase price to the net assets acquired as of the acquisition date, in accordance with the provisions of Accounting Principles Board Opinion No. 16. Debt financing costs are deferred and amortized over the life of the related debt. All debt financing costs as of December 31, 1995 relate to debt obligations that were extinguished on February 29, 1996 with proceeds from the Senior Secured Credit Facility. Accordingly, the unamortized balance of such costs will be written off by a charge to "interest expense" during the first quarter of 1996. NOTE 9 -- DIC-HEXCEL LIMITED The Company owns an equity interest in DIC-Hexcel Limited, a joint venture with Dainippon Ink and Chemicals, Inc. ("DIC"). The joint venture was formed in 1990 for the production and sale of Nomex honeycomb, advanced composites and decorative laminates for the Japanese market. The joint venture owns and operates a manufacturing facility in Komatsu, Japan. Under the terms of the original joint venture agreement, DIC agreed to guarantee all bank debt incurred by this venture. In turn, the Company provided an undertaking that in the event the joint F-20 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 9 -- DIC-HEXCEL LIMITED (CONTINUED) venture went into liquidation the Company would reimburse DIC for 50% of all guaranteed bank loans, net of any proceeds from the sale of the venture's assets. During 1994, the economic viability of this joint venture became questionable, and the cost of product qualification efforts and the attendant lack of revenues were resulting in negative cash flows. During the third quarter of 1994, DIC proposed to liquidate the joint venture. The Company responded with a proposal to restructure the joint venture, subject to various conditions, which DIC agreed to consider. Under either proposal, the Company would retain responsibility for a portion of the joint venture's guaranteed bank debt. Accordingly, the Company recorded an $8,000 provision in the third quarter of 1994 to reflect the estimated cost of restructuring or liquidating DIC-Hexcel Limited. This provision has been included in "other income (expenses), net" in the 1994 consolidated statement of operations, and the corresponding liability has been included in "liabilities subject to disposition in bankruptcy reorganization" in the consolidated balance sheet as of December 31, 1994. On February 20, 1995, Hexcel and DIC entered into an amendment to the original joint venture agreements which provided additional funding to permit DIC-Hexcel Limited to complete its product qualification efforts and limited the Company's potential liability for the venture's bank debt guaranteed by DIC to $9,000. Under the terms of the amendment, the Company and DIC each agreed to contribute $4,500 in cash to the venture, payable in installments of $1,438 in the first quarter of 1995 and $438 in each of the next seven quarters. It was agreed that such cash contributions by the Company would reduce pro-rata its potential liability of $9,000. The amendment also provided, after taking account to the transactions contemplated thereunder, for a reduction in the Company's equity interest in DIC-Hexcel Limited to approximately 42% with a corresponding increase in DIC's equity interest. After December 31, 1996, should demand be made under the loans made to DIC-Hexcel Limited guaranteed by DIC, the Company will be required to pay 50% of any amount DIC pays on account of its guarantees, up to a cumulative amount of $4,500. Furthermore, the Company and DIC agreed that they would discuss and review the prospects of the venture and its future financing during the second half of 1996. During this period both DIC and the Company each have the right to request the liquidation of DIC-Hexcel Limited. If such right is exercised, the Company will be required to make payment of the remaining contingent liability of up to $4,500. If such liquidation right is exercise by either party, it is not anticipated that payment would be required prior to January 1997. Management believes that the $8,000 provision recorded in the third quarter of 1994 remains the best estimate of the Company's total probable liability under the amended joint venture agreement, based on the terms of that agreement and the projected future operating results of DIC-Hexcel Limited. The Company contributed $2,750 of cash to the joint venture during 1995, reducing the remaining probable liability to $5,250 as of December 31, 1995. Of this amount, $1,750 has been included in "accrued liabilities" and $3,500 has been included in "deferred liabilities" in the consolidated balance sheet as of December 31, 1995 (see Note 17). F-21 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10 -- NOTES PAYABLE Notes payable and capital lease obligations as of December 31, 1995 and 1994 were:
1995 UNAUDITED PRO FORMA (SEE NOTE 3) 1995 1994 ----------- --------- ---------- Senior Secured Credit Facility.............................................. $ 74,605 -- -- Revolving Credit Facility................................................... -- $ 30,091 -- European credit facilities.................................................. 1,692 17,806 $ 18,128 Debtor-in-possession credit facility........................................ -- -- 4,189 Prepetition credit facility................................................. -- -- 12,000 Senior Subordinated Notes payable to Ciba-Geigy............................. 26,300 -- -- 10.12% senior notes, originally due 1998.................................... -- -- 30,000 7% convertible subordinated debentures, due 2011............................ 25,625 25,625 25,625 Obligations under IDRB variable rate demand notes, due through 2024, net.... 11,990 11,990 13,310 Capital lease obligations (see Note 11)..................................... 3,217 3,217 3,234 Various notes payable, due through 2007..................................... 1,715 1,715 3,053 ----------- --------- ---------- Total notes payable and capital lease obligations....................... 145,144 90,144 109,539 Less amount subject to disposition in bankruptcy reorganization............. -- -- (80,815) ----------- --------- ---------- Total notes payable and capital lease obligations, net.................. $ 145,144 $ 90,144 $ 28,724 ----------- --------- ---------- ----------- --------- ---------- Notes payable and current maturities of long-term liabilities, net.......... $ 1,802 $ 1,802 $ 12,720 Long-term notes payable and capital lease obligations, net.................. 143,342 88,342 16,004 ----------- --------- ---------- Total notes payable and capital lease obligations, net.................. $ 145,144 $ 90,144 $ 28,724 ----------- --------- ---------- ----------- --------- ----------
SENIOR SECURED CREDIT FACILITY In connection with the acquisition of the Ciba Composites Business, Hexcel obtained the Senior Secured Credit Facility on February 29, 1996. The Senior Secured Credit Facility is a three-year revolving credit facility of up to $175,000 which is available to: (a) fund the $25,000 cash component of the purchase price paid for the Ciba Composites Business; (b) refinance outstanding indebtedness under certain U.S. and European credit facilities; and (c) provide for the ongoing working capital and other financing requirements of the Company, including consolidation activities, on a worldwide basis. The Senior Secured Credit Facility replaces the Revolving Credit Facility which was obtained on February 9, 1995, in connection with Hexcel's Reorganization Plan, as well as certain European credit facilities. Interest on outstanding borrowings under the Senior Secured Credit Facility is computed at an annual rate of 0.4% in excess of the applicable London interbank rate or, at the option of Hexcel, the base rate of the administrative agent for the lenders. In addition, the Senior Secured Credit Facility is subject to a commitment fee of approximately 0.2% per annum on the unused portion of the facility and a letter of credit fee of up to 0.5% per annum on the outstanding face amount of letters of credit. The Company also paid one-time arrangement, syndication and closing fees totaling $869, as well as certain other costs and expenses related to the implementation of the Senior Secured Credit Facility. The Senior Secured Credit Facility is secured by a pledge of stock of certain of Hexcel's subsidiaries, and is also guaranteed by the Company and certain of its subsidiaries. In addition, the Company is subject to various financial covenants and restrictions under the Senior Secured Credit Facility, F-22 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10 -- NOTES PAYABLE (CONTINUED) including minimum levels of tangible net worth and fixed charge coverage, and maximum levels of debt to earnings before interest, taxes, depreciation and amortization. The Senior Secured Credit Facility also imposes certain restrictions on incurring additional indebtedness, and generally prohibits the Company from paying dividends or redeeming capital stock. In addition to providing for typical events of default, including an event of default resulting from a "change in control" (as defined) of the Company, the Senior Secured Credit Facility provides that an event of default would occur if, under certain circumstances, Ciba: (a) ceases to hold, directly or indirectly through one or more wholly-owned subsidiaries, 100% of the outstanding principal amount of the Senior Subordinated Notes, or (b) ceases to beneficially own, directly or indirectly, at least 40% of Hexcel's voting stock. In light of the foregoing, the Company and Ciba entered into a Retention Agreement, dated as of February 29, 1996, pursuant to which Ciba agreed, subject to the limitations set forth therein, to: (a) hold directly or indirectly through one or more wholly-owned subsidiaries, 100% of the outstanding principal amount of the Senior Subordinated Notes, and (b) beneficially own, directly or indirectly, at least 40% of the Company's voting stock. REVOLVING CREDIT FACILITY The Revolving Credit Facility, which replaced the Debtor-in-possession credit facility on February 9, 1995, was replaced by the Senior Secured Credit Facility on February 29, 1996. EUROPEAN CREDIT FACILITIES Certain European credit facilities were replaced by the Senior Secured Credit Facility on February 29, 1996. SENIOR SUBORDINATED NOTES PAYABLE TO CIBA-GEIGY In connection with the acquisition of the Ciba Composites Business, Hexcel has undertaken to deliver to Ciba and/or one or more of its subsidiaries the Senior Subordinated Notes. The Senior Subordinated Notes, which will be issued following the completion of certain post-closing adjustment procedures contemplated by the Strategic Alliance Agreement, will be general unsecured obligations of the Company in an aggregate principal amount of approximately $43,000, subject to certain adjustments. The actual aggregate principal amount of the Senior Subordinated Notes to be issued may be higher or lower than $43,000, because the adjustments required under the Strategic Alliance Agreement to reflect changes in working capital and certain other items as of February 29, 1996 have not yet been determined. (The pro forma aggregate principal amount of the Senior Subordinated Notes as of December 31, 1995 was $27,400, and the pro forma estimated fair value of the Senior Subordinated Notes on that date was $26,300. See Note 3.) The Senior Subordinated Notes will bear interest for three years at a rate of 7.5% per annum, payable semiannually, from February 29, 1996. The interest rate will increase to 10.5% per annum on the third anniversary of the acquisition of the Ciba Composites Business, and by an additional 0.5% per year thereafter until the Senior Subordinated Notes mature in the year 2003. The payment of principal and interest on the Senior Subordinated Notes will be subordinate to the Senior Secured Credit Facility. The Senior Subordinated Notes will be callable, in whole or in part, at the option of Hexcel at any time without penalty, and the Company will not be required to make mandatory redemption or sinking fund payments. Under certain circumstances, upon a "change of control" of the Company, as defined in the indenture governing the Senior Subordinated Notes, the holders of the Senior Subordinated Notes (except, under certain circumstances, Ciba) will have the right to cause the Company to F-23 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10 -- NOTES PAYABLE (CONTINUED) repurchase all or any part of the Senior Subordinated Notes at a price equal to 101% of the principal amount to be repurchased plus accrued interest. Under such indenture, the Company will be subject to various restrictions, including restrictions on incurring additional indebtedness, paying dividends and redeeming capital stock. 7% CONVERTIBLE SUBORDINATED DEBENTURES The 7% convertible subordinated debentures were subject to disposition in bankruptcy reorganization, and were reinstated on February 9, 1995, pursuant to the Reorganization Plan. These debentures are redeemable by the Company under certain provisions, although any such redemption is restricted by the terms of the Senior Secured Credit Facility. Mandatory redemption is scheduled to begin in 2002 through annual sinking fund requirements. The debentures are convertible prior to maturity into common stock of the Company at $30.72 per share, subject to adjustment under certain conditions. OBLIGATIONS UNDER IDRB VARIABLE RATE DEMAND NOTES Hexcel has various industrial development revenue bonds ("IDRBs") outstanding, guaranteed by bank letters of credit for fees of 0.5%. These IDRBs were subject to disposition in bankruptcy reorganization, and were reinstated on February 9, 1995, pursuant to the Reorganization Plan. The letters of credit which guarantee the IDRBs were also reinstated, in accordance with the terms of an amended reimbursement agreement (the "Reimbursement Agreement") with the issuing bank, and extended until December 31, 1998. The Reimbursement Agreement originally provided that, commencing April 1, 1995 and every three months thereafter for the duration of the agreement, the Company would either redeem $600 of the guaranteed IDRBs, obtain a $600 letter of credit in favor of the issuing bank, or deposit $600 into a sinking fund in which the issuing bank and/or the trustees for the IDRBs will hold a first priority security interest. However, these provisions were eliminated by an amendment to the Reimbursement Agreement dated February 29, 1996. This amendment, which was agreed to by the issuing bank in connection with the Company's acquisition of the Ciba Composites Business, also eliminated certain financial covenants and other restrictions previously contained in the Reimbursement Agreement. The interest rates on the IDRBs are variable and averaged 6.2% in 1995, 3.9% in 1994 and 2.5% in 1993. On November 1, 1994, Hexcel sold the property it owned in the City of Industry, California for $2,600, which approximated net book value. Under the terms of the sales agreement, the buyer paid the Company $260 in cash and assumed responsibility for $2,340 of the outstanding principal of a $4,900 IDRB related to the property. As of December 31, 1995, the outstanding balance of the IDRB had been reduced to $4,700, of which $2,160 was an assumed obligation of the buyer. The Company is contingently liable for that portion of the IDRB assumed by the buyer, in the event the buyer should default on assumed payment obligations. INSTALLMENTS DUE ON NOTES PAYABLE Excluding obligations extinguished with proceeds from the Senior Secured Credit Facility, installments due on long-term notes payable are $1,489 in 1996, $267 in 1997 and $38,966 in years after the year 2000. The Senior Secured Credit Facility, which was used to refinance long-term debt obligations totaling $46,205 as of December 31, 1995, expires in 1999. AGGREGATE FAIR VALUE OF LONG-TERM DEBT Management believes that the aggregate fair value of Hexcel's long-term debt, excluding the 7% convertible subordinated debentures, approximates the aggregate book value, as substantially all F-24 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 10 -- NOTES PAYABLE (CONTINUED) such debt is comprised of variable-rate obligations. However, there can be no assurance that the aggregate fair value of the Company's long-term debt will not materially vary from the aggregate book value. The fair value of the 7% convertible subordinated debentures is estimated on the basis of quoted market prices, although trading in the debentures is limited and may not reflect fair value. The estimated fair value of all of the outstanding debentures was $21,781 and $15,888 as of December 31, 1995 and 1994, respectively. INTEREST PAYMENTS Interest payments were $8,345 in 1995, $3,909 in 1994 and $8,802 in 1993. Hexcel was legally prohibited from paying interest on most prepetition debt obligations in 1994. NOTE 11 -- LEASING ARRANGEMENTS Assets, accumulated depreciation and related liability balances under capital leasing arrangements as of December 31, 1995 and 1994 were:
1995 1994 --------- --------- Property, plant and equipment.................................................. $ 7,205 $ 6,734 Less accumulated depreciation.................................................. (2,611) (2,246) --------- --------- Net property, plant and equipment.......................................... $ 4,594 $ 4,488 --------- --------- --------- --------- Capital lease obligations...................................................... $ 3,217 $ 3,234 Less current maturities........................................................ (313) (410) --------- --------- Long-term capital lease obligations, net................................... $ 2,904 $ 2,824 --------- --------- --------- ---------
Certain sales and administrative offices, data processing equipment, and manufacturing facilities are leased under operating leases. Rental expenses under operating leases were $2,871 in 1995, $3,675 in 1994 and $3,530 in 1993. Future minimum lease payments as of December 31, 1995 were:
TYPE OF LEASE ---------------------- PAYABLE DURING YEARS ENDING DECEMBER 31: CAPITAL OPERATING - ------------------------------------------------------------------------------- --------- ----------- 1996........................................................................... $ 675 $ 2,520 1997........................................................................... 675 1,975 1998........................................................................... 675 1,327 1999........................................................................... 675 1,078 2000........................................................................... 582 737 2001 and thereafter............................................................ 2,267 2,147 --------- ----------- Total minimum lease payments............................................... $ 5,549 $ 9,784 --------- ----------- --------- -----------
Total minimum capital lease payments include $2,332 of imputed interest. NOTE 12 -- ACCRUED RESTRUCTURING LIABILITIES In December 1992, Hexcel initiated a worldwide restructuring program designed to improve facility utilization and determine the proper workforce requirements to support projected reduced levels of business in 1993 and beyond. The Company recorded a charge for this program of $23,000 in the fourth quarter of 1992. F-25 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 12 -- ACCRUED RESTRUCTURING LIABILITIES (CONTINUED) In April 1993, Hexcel announced the closing of the Graham, Texas manufacturing facility and the consolidation of Graham operations into other plants. The estimated costs of this closure were included in the 1992 restructuring charge. The Graham closure was substantially completed in 1994. In September 1993, Hexcel announced plans to significantly expand the restructuring program in response to the expected further decline in commercial and military aerospace markets. Accordingly, the Company recorded a charge of $44,000 in the third quarter of 1993. This expansion included deeper cuts in overhead and further consolidation of facilities in the United States and Europe. During the fourth quarter of 1993, an additional charge of $2,600 was recorded in connection with the expanded restructuring program. The 1993 and 1992 restructuring charges included approximately $34,000 of non-cash write-downs related to facility closures and the impairment of certain assets due to declining sales and the changed business environment. In the fourth quarter of 1994, Hexcel sold the Chandler, Arizona manufacturing facility and certain related assets and technology (see Note 5). Together with the closure of the Graham facility, this completed the reduction in honeycomb production capacity contemplated by the expanded restructuring program. The Company transferred certain assets and production processes located at the Chandler facility, which were not included in the sale, to the Company's facility in Casa Grande, Arizona. The estimated costs associated with this transfer were included in the restructuring charge recorded in the third quarter of 1993. The total of $69,600 in restructuring charges taken in 1992 and 1993 and the remaining balances of accrued restructuring charges as of December 31, 1995 and 1994 were:
ACCRUED ACCRUED 1992 & 1993 RESTRUCTURING RESTRUCTURING RESTRUCTURING LIABILITIES LIABILITIES EXPENSES AT 12/31/95 AT 12/31/94 ------------- ------------- ------------- Estimated costs to close and relocate facilities: Asset write-downs.................................................. $ 19,500 $ 500 $ 2,230 Cash costs, net of expected sales proceeds......................... 11,000 1,190 2,835 Estimated employee severance costs (excluding severance related to the closure of facilities).......................................... 15,900 260 1,100 Asset write-downs due to changed business conditions................. 14,700 -- -- Estimated cash costs of various other restructuring actions.......... 8,500 937 5,000 ------------- ------------- ------------- $ 69,600 $ 2,887 $ 11,165 ------------- ------------- ------------- ------------- ------------- -------------
The decrease in accrued restructuring liabilities during 1995 is primarily attributable to the consolidation of honeycomb manufacturing operations in connection with the disposal of the Chandler facility, as well as severance payments and implementation of a new management information system. The consolidation of honeycomb operations reflected in the 1992 and 1993 restructuring charges is substantially complete, while implementation of the information system will continue through 1996. F-26 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 13 -- LIABILITIES SUBJECT TO DISPOSITION IN BANKRUPTCY REORGANIZATION Liabilities subject to disposition in bankruptcy reorganization as of December 31, 1994 were:
1994 ----------- Accounts payable........................................................................... $ 23,271 Accrued liabilities, including interest.................................................... 33,691 Notes payable and capital lease obligations (see Note 10).................................. 80,815 ----------- Total liabilities subject to disposition in bankruptcy reorganization.................. $ 137,777 ----------- ----------- Current liabilities subject to disposition in bankruptcy reorganization.................... $ 97,025 Long-term liabilities subject to disposition in bankruptcy reorganization.................. 40,752 ----------- Total liabilities subject to disposition in bankruptcy reorganization.................. $ 137,777 ----------- -----------
The Reorganization Plan provided for the reinstatement or payment in full, with interest, of all allowed claims, including prepetition accounts payable and notes payable. The total of all claims reinstated or paid, less the portion representing accrued interest for the period from January 1 to February 9, 1995, has been reflected as "liabilities subject to disposition in bankruptcy reorganization" in the consolidated balance sheet as of December 31, 1994. NOTE 14 -- RETIREMENT PLANS The Company has various retirement and profit sharing plans covering substantially all U.S. employees and certain European employees. The net cost of these plans was $2,768 in 1995, $2,443 in 1994 and $2,330 in 1993. In the United States, the Company maintains a defined contribution plan and a defined benefit pension plan. The defined contribution plan is available to substantially all U.S. employees, and is comprised of a 401(k) savings plan and a profit sharing plan. Under the 401(k) savings plan, the Company makes matching contributions equal to 50% of the contributions of the employees, not to exceed 3% of employee compensation. The defined benefit pension plan is a career average pension plan covering substantially all U.S. hourly employees. Effective January 1, 1996, participation in the defined benefit pension plan was extended to U.S. salaried employees as well. Benefits are based on years of service and the annual compensation of the employee, and the Company's funding policy is to contribute the minimum amount required by applicable regulations. The Company also maintains a defined benefit pension plan for employees in the United Kingdom, and defined benefit retirement plans for certain senior executives and directors. The Company's European subsidiaries, except for those in the United Kingdom, participate in government retirement plans which cover all employees of those subsidiaries. F-27 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 14 -- RETIREMENT PLANS (CONTINUED) Contributions to the 401(k) savings plan were $1,290 for 1995, $1,039 for 1994 and $1,130 for 1993. There were no contributions to the profit sharing plan for 1995, 1994 or 1993. The net cost of the Company's defined benefit pension and retirement plans for the years ended December 31, 1995, 1994 and 1993 consisted of:
1995 1994 1993 --------- --------- --------- Service cost -- benefits earned during the year........................ $ 661 $ 753 $ 749 Interest cost on projected benefit obligation.......................... 660 706 713 Return on assets -- actual............................................. (1,103) 33 (1,385) Net amortization and deferral.......................................... 1,260 (88) 1,123 --------- --------- --------- Net periodic pension cost.......................................... $ 1,478 $ 1,404 $ 1,200 --------- --------- --------- --------- --------- ---------
Assumptions used in the accounting for these defined benefit and retirement plans were:
1995 1994 1993 ----------- ----------- ----------- Discount rate.................................................................. 7.0% 8.0% 7.0% Rate of increase in compensation............................................... 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets............................... 9.5% 9.5% 9.5%
The funded status and amounts recognized for the defined benefit pension and retirement plans as of December 31, 1995 and 1994 were:
1995 1994 --------- --------- Actuarial present value of benefit obligation: Vested benefit obligation.............................................................. $ 8,047 $ 6,688 Non-vested benefit obligation.......................................................... 1,281 1,022 --------- --------- Accumulated benefit obligation....................................................... $ 9,328 $ 7,710 --------- --------- --------- --------- Projected benefit obligation for service rendered to date................................ $ 10,985 $ 8,658 Less plan assets at fair value, primarily listed stocks and insurance contracts.......... (5,117) (3,128) --------- --------- Projected benefit obligation in excess of plan assets.................................... 5,868 5,530 Unrecognized net loss.................................................................... (2,176) (814) Unrecognized prior service costs......................................................... (240) (285) Unrecognized net transition obligation being recognized over 15 years.................... (255) (298) Adjustment required to recognize minimum pension liability............................... 1,014 449 --------- --------- Defined benefit pension and retirement liability......................................... 4,211 4,582 Less current portion of pension and retirement liability................................. (1,780) (1,762) --------- --------- Deferred pension and retirement liability (see Note 17).............................. $ 2,431 $ 2,820 --------- --------- --------- ---------
NOTE 15 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS The Company provides certain postretirement health care and life insurance benefits to eligible retirees. Substantially all U.S. employees hired on or before December 31, 1995 who retire on or after age 58 after rendering at least 15 years of service are eligible for benefits. Benefits consist of coverage of up to 50% of the annual cost of certain health insurance plans, as well as annual life insurance coverage equal to 65% of the final base pay of the retiree until the age of 70. Upon reaching 70 years of age, life insurance coverage is reduced. F-28 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 15 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED) The Company funds postretirement health care and life insurance benefit costs on a pay-as-you-go basis and, for 1995, 1994 and 1993, made benefit payments of $583, $423 and $576, respectively. Net defined postretirement benefit costs for the years ended December 31, 1995, 1994 and 1993 were:
1995 1994 1993 --------- --------- --------- Service cost -- benefits earned during the year........................ $ 279 $ 389 $ 400 Interest cost on accumulated postretirement benefit obligation......... 780 915 1,100 Net amortization and deferral.......................................... (201) -- -- --------- --------- --------- Net periodic postretirement benefit cost........................... $ 858 $ 1,304 $ 1,500 --------- --------- --------- --------- --------- ---------
Defined postretirement benefit liabilities as of December 31, 1995 and 1994 were:
1995 1994 --------- --------- Accumulated postretirement benefit obligation: Retirees.................................................................... $ 6,766 $ 7,661 Fully eligible active plan participants..................................... 1,264 985 Other active plan participants.............................................. 3,726 3,211 --------- --------- 11,756 11,857 Unrecognized net gain......................................................... 2,778 2,402 --------- --------- Defined postretirement benefit liability...................................... 14,534 14,259 Less current portion of postretirement benefit liability...................... (583) (651) --------- --------- Deferred postretirement benefit liability (see Note 17)................... $ 13,951 $ 13,608 --------- --------- --------- ---------
Two health care cost trend rates were used in measuring the accumulated postretirement benefit obligation. The assumed indemnity health care cost trend in 1996 was 11.0% for participants less than 65 years of age and 7.0% for participants 65 years of age and older, gradually declining to 6.0% for both age groups in the year 2001. The assumed HMO health care cost trend in 1996 was 8.0% for participants less than 65 years of age and 5.0% for participants 65 years of age and older, gradually declining to 6.0% and 5.0%, respectively, in the year 1998. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% in 1995 and 8.0% in 1994. The rate of increase in compensation used in determining the obligation was 4.0% in both 1995 and 1994. If the health care cost trend rate assumptions were increased by 1.0%, the accumulated postretirement benefit obligation as of December 31, 1995 would be increased by 3.6%. The effect of this change on the sum of the service cost and interest cost would be an increase of 3.0%. Effective January 1, 1996, Hexcel amended its postretirement benefit program to eliminate any benefits for employees hired after December 31, 1995 (other than certain former employees of the Ciba Composites Business hired on February 29, 1996), and to limit health care benefit coverage to selected health insurance plans for the majority of active employees hired on or before December 31, 1995. These amendments are expected to reduce the Company's accumulated postretirement benefit obligation by approximately $1,600, which will be recognized as a reduction in future benefit expense on a straight line basis over 14 years. F-29 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 16 -- INCOME TAXES NET OPERATING LOSS CARRYFORWARDS As of December 31, 1995, the Company had net operating loss ("NOL") carryforwards for U.S. federal income tax purposes of approximately $65,000 and net operating loss carryforwards for international income tax purposes of approximately $5,000. The U.S. NOL carryforwards, which are available to offset future taxable income, expire at various dates through the year 2010. As a result of the ownership change which occurred in connection with the Reorganization Plan (see Note 4), a limitation on the utilization of NOL carryforwards in the U.S. was created. This utilization limitation, which applies to loss carryforwards generated prior to February 9, 1995, is estimated to be approximately $5,000 per year. As a result of the acquisition of the Ciba Composites Business (see Notes 2 and 3), a second successive limitation on the utilization of NOL carryforwards in the U.S. has been created. This utilization limitation, which applies to loss carryforwards generated between February 9, 1995 and February 29, 1996, is estimated to be approximately $12,000 per year. Under U.S. federal tax law, NOL carryforwards are utilized in the order of successive limitations. Consequently, the NOL carryforwards subject to the first annual limitation may be utilized to reduce future taxable income of up to $5,000 per year, and the NOL carryforwards subject to the second annual limitation may then be utilized to reduce future taxable income of up to $12,000 per year. The aggregate utilization of NOL carryforwards subject to both limitations may not exceed $12,000 annually. PROVISION FOR INCOME TAXES The Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," effective January 1, 1993. The cumulative effect of adopting SFAS 109 was the recognition of $4,500 of income, which was recorded in the first quarter of 1993. In connection with the adoption of SFAS 109, the Company established a valuation allowance of $4,693 against its deferred income tax assets. During 1993, substantial uncertainty developed as to the realization of Hexcel's deferred income tax assets. As a result, the Company increased the valuation allowance against its deferred income tax assets, reducing the recorded value of those assets to zero. The increase to the valuation allowance reflected the Company's assessment that the bankruptcy reorganization proceedings of Hexcel and substantial operating losses had jeopardized the realization of deferred income tax assets. In 1994 and 1995, Hexcel continued to reserve for the income tax assets generated by the pre-tax losses of certain subsidiaries. As a result of settlements of various tax audits, state income taxes and taxable income for certain European subsidiaries, the Company recorded a provision for income taxes of $3,586 in 1994. As a result of state income taxes and taxable income for certain European subsidiaries, the Company recorded a provision for income taxes of $3,313 in 1995. F-30 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 16 -- INCOME TAXES (CONTINUED) Income (loss) before income taxes and the tax provision for income taxes from continuing operations for the years ended December 31, 1995, 1994 and 1993 were:
1995 1994 1993 --------- ---------- ---------- Income (loss) before income taxes: United States..................................................... $ (1,027) $ (24,745) $ (58,554) International..................................................... 7,541 251 (15,294) --------- ---------- ---------- Total income (loss) before income taxes......................... $ 6,514 $ (24,494) $ (73,848) --------- ---------- ---------- --------- ---------- ---------- Benefit (provision) for income taxes: Current: U.S............................................................... $ (197) $ (85) $ (243) International..................................................... (3,445) 108 (976) --------- ---------- ---------- Current benefit (provision) for income taxes.................... (3,642) 23 (1,219) --------- ---------- ---------- Deferred: U.S............................................................... -- (2,226) (6,590) International..................................................... 329 (1,383) 1,785 --------- ---------- ---------- Deferred benefit (provision) for income taxes................... 329 (3,609) (4,805) --------- ---------- ---------- Total provision for income taxes................................ $ (3,313) $ (3,586) $ (6,024) --------- ---------- ---------- --------- ---------- ----------
A reconciliation of the tax provision to the U.S. federal statutory income tax rate of 34% for the years ended December 31, 1995, 1994 and 1993 was:
1995 1994 1993 --------- --------- ---------- Benefit (provision) at U.S. federal statutory rate................... $ (2,215) $ 8,328 $ 25,108 U.S. state taxes, less federal tax benefit........................... 254 (244) (104) Impact of different international tax rates, adjustments to income tax accruals and other.............................................. (492) (3,837) 5,471 Valuation allowance.................................................. (860) (7,833) (36,499) --------- --------- ---------- Total provision for income taxes................................. $ (3,313) $ (3,586) $ (6,024) --------- --------- ---------- --------- --------- ----------
The Company paid income taxes of $3,864 in 1995, $253 in 1994 and $203 in 1993. The Company has made no U.S. income tax provision for approximately $27,000 of undistributed earnings of international subsidiaries as of December 31, 1995. Such earnings are considered to be permanently reinvested. The additional U.S. income tax on these earnings, if repatriated, would be offset in part by foreign tax credits. F-31 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 16 -- INCOME TAXES (CONTINUED) DEFERRED INCOME TAXES Deferred income taxes result from temporary differences between the recognition of items for income tax purposes and financial reporting purposes. Principal temporary differences as of December 31, 1995 and 1994 were:
1995 1994 ---------- ---------- Accelerated depreciation and amortization................................... $ 10,473 $ 15,443 Accrued restructuring charges............................................... (655) (14,382) Net operating loss carryforwards............................................ (27,562) (10,880) Reserves and other, net..................................................... (30,309) (37,045) Valuation allowance......................................................... 50,006 49,146 ---------- ---------- Deferred tax liability (see Note 17).................................... $ 1,953 $ 2,282 ---------- ---------- ---------- ----------
NOTE 17 -- DEFERRED LIABILITIES Deferred liabilities as of December 31, 1995 and 1994 were:
1995 1994 --------- --------- Deferred DIC-Hexcel liability (see Note 9).................................... $ 3,500 -- Deferred pension and retirement liability (see Note 14)....................... 2,431 $ 2,820 Deferred postretirement benefit liability (see Note 15)....................... 13,951 13,608 Deferred tax liability (see Note 16).......................................... 1,953 2,282 Other......................................................................... 5,566 2,569 --------- --------- Deferred liabilities...................................................... $ 27,401 $ 21,279 --------- --------- --------- ---------
NOTE 18 -- SHAREHOLDERS' EQUITY AND INCENTIVE STOCK PLAN SHAREHOLDERS' EQUITY On February 21, 1996, Hexcel's shareholders approved an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of Hexcel common stock from 40,000 to 100,000. On February 29, 1996, the Company issued 18,022 shares of Hexcel common stock to Ciba in connection with the acquisition of the Ciba Composites Business. As a result, Ciba owned 49.9% of the total number of shares of Hexcel common stock issued and outstanding as of that date. There are 1,500 shares of Hexcel preferred stock authorized for issuance, but no such shares have been issued. Hexcel did not declare or pay any dividends in 1995, 1994 or 1993. The Board of Directors suspended dividend payments beginning in 1993, and such payments are generally prohibited by the Senior Secured Credit Facility. INCENTIVE STOCK PLAN On February 21, 1996, Hexcel's shareholders approved the Incentive Stock Plan. The Incentive Stock Plan authorizes an aggregate of 3,000 shares of Hexcel common stock for use by the Company in providing a variety of stock-based awards to eligible employees, officers, directors and consultants. The Incentive Stock Plan provides for grants of stock options, stock appreciation rights, restricted shares, and other stock-based awards. F-32 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 18 -- SHAREHOLDERS' EQUITY AND INCENTIVE STOCK PLAN (CONTINUED) Stock option data for the two years ended December 31, 1995 were:
NUMBER OF OPTION PRICE PER EXPIRATION SHARES SHARE DATES ----------- ----------------- -------------- Options outstanding at January 1, 1994.................... 534 $ 7.56 - 32.06 1998 - 2003 Options granted........................................... -- -- -- Options exercised......................................... -- -- -- Options expired or canceled............................... (66) $10.44 - 32.06 1998 - 2003 ----- ----------------- -------------- Options outstanding at December 31, 1994.................. 468 $ 7.56 - 32.06 1998 - 2003 Options granted........................................... 787 $ 4.75 - 6.38 2000 - 2005 Options exercised......................................... (1) $7.56 2000 Options expired or canceled............................... (240) $ 6.38 - 32.06 1998 - 2003 ----- ----------------- -------------- Options outstanding at December 31, 1995.................. 1,014 $ 4.75 - 32.06 1998 - 2005 ----- ----------------- -------------- Options exercisable at December 31, 1995.................. 251 $ 9.13 - 32.06 1998 - 2003 ----- ----------------- --------------
The options granted during 1995 become exercisable in increments in 1996 and 1997. An additional 1,115 options primarily at exercise prices of $12.50 per share were granted on February 29 and March 1, 1996. Included in this total are 228 short-term options which expire 90 days after the grant date. The holders of the short-term options are entitled to receive two additional "reload" options for each short-term option exercised. Consequently, as many as 456 additional options could be granted during the 90 day period beginning March 1, 1996, in connection with the exercise of short-term options. Except for the short-term options, the options granted on February 29 and March 1, 1996 become exercisable in increments through 1999, and expire between 2001 and 2006. As of December 31, 1995 and 1994, the Company had outstanding a total of 10 and 24 shares of restricted stock, respectively, which vest in increments through 1997. The holders of these shares are entitled to vote. An additional 269 shares of performance accelerated restricted stock ("PARS") were granted in March 1996. The PARS vest in increments through 2003, subject to accelerated vesting under certain circumstances. NOTE 19 -- CONTINGENCIES Hexcel is involved in litigation, investigations and claims arising out of the conduct of its business, including those relating to government contracts, commercial transactions, and environmental, health and safety matters. The Company estimates its liabilities resulting from such matters based on a variety of factors, including outstanding legal claims and proposed settlements, assessments by internal and external counsel of pending or threatened litigation, and assessments by environmental engineers and consultants of potential environmental liabilities and remediation costs. Such estimates incorporate insignificant amounts for probable recoveries under applicable insurance policies but exclude counterclaims against other third parties. Such estimates are not discounted to reflect the time value of money due to the uncertainty in estimating the timing of the expenditures, which may extend over several years. Although it is impossible to determine the level of future expenditures for legal, environmental and related matters with any degree of certainty, it is management's opinion, based on available information, that it is unlikely that these matters, individually or in the aggregate, will have a material adverse effect on the consolidated financial position or results of operations of the Company. F-33 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 19 -- CONTINGENCIES (CONTINUED) U.S. GOVERNMENT CLAIMS Hexcel, as a defense subcontractor, is subject to U.S. government audits and reviews of negotiations, performance, cost classifications, accounting and general practices relating to government contracts. The Defense Contract Audit Agency ("DCAA") reviews cost accounting and business practices of government contractors and subcontractors including the Company. The Company has been engaged in discussions on a number of cost accounting issues which could result in claims by the government. Some of these issues have already been resolved. As part of these reviews, the DCAA has alleged that Hexcel improperly included certain land lease costs in its indirect rates at the Chandler, Arizona facility (the "Chandler Land Lease") and that, as a result, the Company's subcontracts had been overpriced in an amount of approximately $1,000. The Company has formally responded to the DCAA that it strongly disagrees with these allegations. In February 1996, the Company received a letter from the United States Attorney's Office, stating that it was considering filing an action against the Company for violation of the civil False Claims Act ("FCA") based upon the inclusion in the indirect rates of the Chandler Land Lease costs. While the Company does not agree that there was any violation of the FCA, if the U.S. government elects to pursue such an action and were it to prevail, it would be entitled to three times the actual damages claimed plus penalties of between $5 and $10 for each false claim; the number of alleged false claims could be significant. LEGAL CLAIMS AND PROCEEDINGS In December 1988, Lockheed employees working with epoxy resins and composites on classified programs filed suit against Lockheed and its suppliers (including Hexcel) claiming various injuries as a result of exposure to these products. Plaintiffs have filed for punitive damages which may be uninsured. The first trial of the cases of 15 pilot plaintiffs resulted in a mistrial and a retrial resulted in the entry of judgment in favor of the plaintiffs. The Company did not participate in the trial due to the automatic stay resulting from the Chapter 11 filing. Some of these claims were discharged as a result of the plaintiffs' failure to file claims in Hexcel's Chapter 11 case. As to the claims which have not been discharged, the Company has objected to them and intends to proceed with those objections within the Bankruptcy Court. Hexcel / MCI, a business unit divested in 1991, performed brazing services in the manufacture of flexures under subcontract from Ormond which supplied the flexures to Thiokol. The flexures are used to support a rocket motor housing in a test stand during actual firing of the rocket. Several flexures cracked under the dead weight of a rocket motor prior to actual test firing, and Thiokol has sued Ormond and the Company for the costs of replacing all of the flexures purchased ($900) (THIOKOL CORPORATION V. ORMOND, HEXCEL, ET AL.). The automatic stay in bankruptcy was lifted in April 1995 and the case was resumed in the state court in Utah. Discovery is ongoing. There is no insurance coverage available for an adverse court ruling or negotiated settlement. In November 1995, Hexcel was notified that Livermore Development Corporation ("LDC") was asserting a claim for damages arising from Hexcel's recent notification of its intent to exercise its option to purchase certain land in Livermore, California. LDC contends that the lease was a disguised partnership or joint venture agreement between Hexcel and LDC to develop the property for residential use. Hexcel disputes any such agreement and seeks to enforce its option to purchase under a written agreement. The parties are in ongoing negotiations to resolve this claim. As the result of the acquisition of the Ciba Composites Business in February 1996, Hexcel assumed certain liabilities including certain legal proceedings. F-34 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 19 -- CONTINGENCIES (CONTINUED) ENVIRONMENTAL CLAIMS AND PROCEEDINGS Hexcel has been named as a potentially responsible party ("PRP") with respect to several hazardous waste disposal sites that it does not own or possess which are included on the Environmental Protection Agency's Superfund National Priority List and/or various state equivalent lists. With respect to its exposure relating to these sites, the Company believes its responsibility to be de minimis. A total of 249 claims were filed in the Chapter 11 case with a face value of over $6.7 billion. These claims were, for the most part, duplicative as a result of the joint and several liability provisions of applicable laws and have been categorized into claims involving 19 sites. Claims involving 8 of the sites have been settled within the Chapter 11 case. The Company has been named a PRP with respect to 6 sites for which no claims were filed in the Chapter 11 case; as a result, the Company believes any further claims to be barred. The balance of the sites and their related claims have been passed through the bankruptcy. The Company's estimation of its exposure at these sites is de minimis. Also, pursuant to the New Jersey Environmental Responsibility and Clean-Up Act, Hexcel signed an administrative consent order to pay for clean-up of a manufacturing facility it formerly operated in Lodi, New Jersey. Hexcel has reserved approximately $2,800 to cover such remaining costs and believes that actual costs should not exceed the amount which has been reserved. Fine Organics Corporation, the current owner of the Lodi site and Hexcel's former chemicals business operated on that site, has asserted that the clean-up costs will be significantly in excess of that amount. The ultimate cost of remediation at the Lodi site will depend on developing circumstances. Fine Organics Corporation filed a proof of claim and an adversary proceeding in the Bankruptcy Court. The court has disallowed a significant portion of the claim by denying Fine Organics claim for treble damages and certain contingent claims. The remaining claims are for prior clean-up costs incurred by Fine Organics and alleged contractual and tort damages relating to the original sale of the business and site to Fine Organics totaling approximately $3,200. This matter is proceeding in the Bankruptcy Court. In September 1995, Ciba was named as a potentially responsible party with respect to the removal of drums from a disposal site that it did not own or possess, known as the Omega Chemical Corporation ("Omega Site"). The Omega Site is a spent solvent recycling and treatment facility in Whittier, California. Ciba has previously notified the EPA that it intends to comply with the EPA's removal requirements and has paid its interim share of such removal costs to date. This responsibility was assumed by the Company as a result of its acquisition of the Ciba Composites Business, to the extent the Ciba waste delivered to the Omega site was from the operations of the Ciba Composites Business. This matter is under evaluation but is presently believed to be de minimis. PRODUCT CLAIMS In 1993, Hexcel became aware of an aluminum honeycomb sandwich panel delamination problem with panels produced by its wholly-owned Belgium subsidiary, Hexcel S.A., and installed in rail cars in France and Spain. Certain customers have alleged that Hexcel S.A. is responsible for the problem. The Company and its insurer continue to investigate these claims. The Company is also working with the customers to repair or replace panels when necessary, with certain costs to be allocated upon determination of responsibility for the delamination. While no lawsuit has been filed, two customers in France requested that a court appoint experts to investigate the claims; to date, the experts have not reported any conclusions. The Company's primary insurer for this matter has agreed to fund legal representation and to provide coverage of the claim to the extent of the policy limit for one year. The Company is F-35 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 19 -- CONTINGENCIES (CONTINUED) investigating additional insurance coverage. Even if additional insurance coverage is not available, management believes that, based on available information, it is unlikely that these claims will have a material adverse effect on the consolidated financial position or results of operations of the Company. NOTE 20 -- RAW MATERIALS; SIGNIFICANT CUSTOMERS; MARKETS Hexcel purchases most of the raw materials used in production. Several key materials are available from relatively few sources, and in many cases the cost of product qualification makes it impractical to develop multiple sources of supply. The unavailability of these materials, which the Company does not anticipate, could have a material adverse effect on sales and earnings. The Boeing Company and Boeing subcontractors accounted for approximately 21% of 1995 sales, 22% of 1994 sales and 21% of 1993 sales. The loss of all or a significant portion of this business, which Hexcel does not anticipate, could have a material adverse effect on sales and earnings. Net sales by market for the years ended December 31, 1995, 1994 and 1993 were:
1995 1994 1993 ----------- ----------- ----------- Commercial aerospace......................................................... 45% 47% 42% Space and defense............................................................ 11% 11% 18% Recreation, general industrial and other..................................... 44% 42% 40% --- --- --- Net sales................................................................ 100% 100% 100% --- --- --- --- --- ---
F-36 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 21 -- BUSINESS SEGMENT DATA The Company operates within a single business segment: composite materials, parts and structures. The following table summarizes certain financial data for continuing operations by geographic area as of December 31, 1995, 1994, and 1993 and for the years then ended:
1995 1994 1993 ----------- ----------- ----------- Net sales: United States.................................................. $ 179,573 $ 171,536 $ 185,261 International.................................................. 170,665 142,259 125,374 ----------- ----------- ----------- Consolidated................................................. $ 350,238 $ 313,795 $ 310,635 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes: United States.................................................. $ 2,912 $ (21,462) $ (55,660) International.................................................. 3,602 (3,032) (18,188) ----------- ----------- ----------- Consolidated................................................. $ 6,514 $ (24,494) $ (73,848) ----------- ----------- ----------- ----------- ----------- ----------- Identifiable assets: United States.................................................. $ 134,972 $ 149,890 $ 166,201 International.................................................. 95,630 90,567 84,954 ----------- ----------- ----------- Consolidated................................................. $ 230,602 $ 240,457 $ 251,155 ----------- ----------- ----------- ----------- ----------- ----------- Capital expenditures: United States.................................................. $ 7,729 $ 6,022 $ 4,694 International.................................................. 4,415 2,340 1,570 ----------- ----------- ----------- Consolidated................................................. $ 12,144 $ 8,362 $ 6,264 ----------- ----------- ----------- ----------- ----------- ----------- Depreciation and amortization: United States.................................................. $ 6,528 $ 8,455 $ 9,607 International.................................................. 5,095 5,775 5,273 ----------- ----------- ----------- Consolidated................................................. $ 11,623 $ 14,230 $ 14,880 ----------- ----------- ----------- ----------- ----------- -----------
International net sales consist of the net sales of international subsidiaries, sold primarily in Europe, and U.S. exports. U.S. exports were $18,902 in 1995, $14,008 in 1994 and $11,889 in 1993. To compute income (loss) before income taxes, the Company allocated administrative expenses to International of $3,939 in 1995, $3,283 in 1994 and $2,894 in 1993. NOTE 22 -- OTHER INCOME AND EXPENSES, NET The Company recognized $791 of other income in 1995, including $600 of income relating to the sale of the Chandler facility and related assets and technology (see Note 5). The Company recognized $4,861 of other income in 1994, including $15,900 of income relating to the Chandler transaction (see Note 5), partially offset by an $8,000 provision for the estimated cost of restructuring or liquidating DIC-Hexcel Limited (see Note 9) and a $2,900 provision for bankruptcy claim adjustments. The provision for bankruptcy claim adjustments resulted from the reconciliation and settlement of certain claims as well as changes in the estimate of assumed liabilities. F-37 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 22 -- OTHER INCOME AND EXPENSES, NET (CONTINUED) The Company incurred $12,780 of other expenses in 1993, primarily as a result of write-downs of certain assets and increases in reserves for warranties and environmental matters on property previously owned. The impairment of assets was attributable to bankruptcy reorganization proceedings, changes in business conditions, and depressed real estate prices on property held for sale. NOTE 23 -- DISCONTINUED OPERATIONS The divestiture of Hexcel's discontinued resins business was completed on October 30, 1995 (see Note 5). The Company recorded a $2,800 provision in 1994 to write down the net assets of the resins business to expected realizable value, following a $6,000 charge in 1993. The divestiture of Hexcel's discontinued fine chemicals business was completed in 1994. The Company recorded a $2,800 provision in 1993 to write down the net assets of the fine chemicals business to expected realizable value. Net sales of discontinued operations for the years ended December 31, 1995, 1994 and 1993 were:
1995 1994 1993 ----------- ----------- ----------- Resins business.................................................. $ 6,944 $ 30,691 $ 27,933 Fine chemicals business.......................................... -- -- 5,704 ----------- ----------- ----------- Total discontinued operations................................ $ 6,944 $ 30,691 $ 33,637 ----------- ----------- ----------- ----------- ----------- -----------
Net assets of the discontinued resins business as of December 31, 1994 were:
1994 --------- Current assets............................................................................... $ 3,970 Current liabilities.......................................................................... (4,591) Non-current assets........................................................................... 3,621 --------- Net assets............................................................................... $ 3,000 --------- ---------
F-38 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS, EXCEPT PER SHARE DATA) NOTE 24 -- QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for the years ended December 31, 1995 and 1994 were:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- ---------- --------- 1995 Net sales......................................................... $ 85,155 $ 91,023 $ 81,366 $ 92,694 Gross margin...................................................... 14,795 18,055 15,888 18,352 Income (loss) from continuing operations.......................... (2,369) 1,950 1,561 2,059 Loss from discontinued operations................................. (112) (185) (171) -- Net income (loss)................................................. (2,481) 1,765 1,390 2,059 --------- --------- ---------- --------- Net income (loss) per share and equivalent share: Primary and fully diluted: Continuing operations........................................... $ (0.27) $ 0.11 $ 0.09 $ 0.11 Discontinued operations......................................... (0.01) (0.01) (0.01) -- Net income (loss)............................................... (0.28) 0.10 0.08 0.11 --------- --------- ---------- --------- Dividends per share............................................... -- -- -- -- Market price: High............................................................ $ 6.63 $ 7.25 $ 12.25 $ 11.25 Low............................................................. 4.25 4.50 7.25 8.25 --------- --------- ---------- --------- --------- --------- ---------- --------- 1994 Net sales......................................................... $ 77,682 $ 84,964 $ 74,434 $ 76,715 Gross margin...................................................... 11,683 14,165 11,601 10,979 Loss from continuing operations................................... (5,325) (4,894) (15,319) (2,542) Income (loss) from discontinued operations........................ 301 472 (2,620) (43) Net loss.......................................................... (5,024) (4,422) (17,939) (2,585) --------- --------- ---------- --------- Net income (loss) per share and equivalent share: Primary and fully diluted: Continuing operations........................................... $ (0.73) $ (0.67) $ (2.09) $ (0.34) Discontinued operations......................................... 0.04 0.06 (0.36) (0.01) Net loss........................................................ (0.69) (0.61) (2.45) (0.35) --------- --------- ---------- --------- Dividends per share............................................... -- -- -- -- Market price: High............................................................ $ 4.25 $ 4.00 $ 6.00 $ 5.75 Low............................................................. 2.75 3.00 3.00 4.00 --------- --------- ---------- --------- --------- --------- ---------- ---------
During the third quarter of 1995, the Company recognized other income of $600 relating to the sale of the Chandler facility and related assets and technology (see Notes 5 and 22). During the third quarter of 1994, the Company recorded an $8,000 provision for the estimated cost of restructuring or liquidating DIC-Hexcel Limited (see Note 9), and a $2,800 provision to write down the net assets of the discontinued resins business to expected net realizable value (see Note 23). During the fourth quarter of 1994, the Company recognized other income of $15,900 relating to the Chandler transaction (see Notes 5 and 22). In addition, the Company recorded a total of approximately $10,800 in expenses for bankruptcy claim adjustments, additional interest on allowed claims, and the settlement of various tax audits. F-39 HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
FOR THE QUARTERS ENDED ----------------------- MARCH 31, APRIL 2, 1996 1995 ----------- ---------- Net sales................................................................................ $ 126,418 $ 85,155 Cost of sales............................................................................ (99,635) (70,360) ----------- ---------- Gross margin............................................................................. 26,783 14,795 Selling, general and administrative expenses............................................. (17,482) (12,166) Business acquisition and consolidation expenses.......................................... (5,211) -- Other income, net........................................................................ 2,697 -- ----------- ---------- Operating income......................................................................... 6,787 2,629 Interest expense......................................................................... (3,633) (2,363) Bankruptcy reorganization expenses....................................................... -- (2,125) ----------- ---------- Income (loss) from continuing operations before income taxes............................. 3,154 (1,859) Provision for income taxes............................................................... (1,306) (510) ----------- ---------- Income (loss) from continuing operations............................................... 1,848 (2,369) Discontinued operations: Loss during phase-out period.................................... -- (112) ----------- ---------- Net income (loss)...................................................................... $ 1,848 $ (2,481) ----------- ---------- ----------- ---------- Net income (loss) per share and equivalent share: Primary and fully diluted: Continuing operations.................................................................. $ 0.07 $ (0.27) Discontinued operations................................................................ -- (0.01) ----------- ---------- Net income (loss).................................................................... $ 0.07 $ (0.28) ----------- ---------- WEIGHTED AVERAGE SHARES AND EQUIVALENT SHARES............................................ 24,685 8,773 ----------- ---------- ----------- ----------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-40 HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
MARCH 31, DECEMBER 31, 1996 1995 ------------ ------------ ASSETS Current assets: Cash and equivalents................................................................ $ 4,675 $ 3,829 Accounts receivable................................................................. 132,076 65,888 Inventories......................................................................... 111,123 55,475 Prepaid expenses.................................................................... 1,656 2,863 ------------ ------------ Total current assets.............................................................. 249,530 128,055 ------------ ------------ Property, plant and equipment......................................................... 311,904 203,580 Less accumulated depreciation......................................................... (119,675) (117,625) ------------ ------------ Net property, plant and equipment................................................... 192,229 85,955 ------------ ------------ Intangible assets..................................................................... 29,230 1,832 Investments and other assets.......................................................... 14,736 14,760 ------------ ------------ Total assets........................................................................ $ 485,725 $ 230,602 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term liabilities....................... $ 6,809 $ 1,802 Accounts payable.................................................................... 50,385 22,904 Accrued liabilities................................................................. 54,737 41,779 ------------ ------------ Total current liabilities......................................................... 111,931 66,485 ------------ ------------ Notes payable and capital lease obligations, less current maturities.................. 112,111 88,342 Indebtedness to related parties, less current maturities.............................. 26,170 -- Deferred liabilities.................................................................. 40,097 27,401 ------------ ------------ Shareholders' equity.................................................................. Common stock, $0.01 par value, 100,000 shares authorized, shares issued and outstanding of 36,119 in 1996 and 18,091 in 1995................................... 361 181 Additional paid-in capital.......................................................... 257,202 111,259 Accumulated deficit................................................................. (68,133) (69,981) Minimum pension obligation adjustment............................................... (535) (535) Cumulative currency translation adjustment.......................................... 6,521 7,450 ------------ ------------ Total shareholders' equity........................................................ 195,416 48,374 ------------ ------------ Total liabilities and shareholders' equity........................................ $ 485,725 $ 230,602 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-41 HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
FOR THE QUARTERS ENDED ------------------------ MARCH 31, APRIL 2, 1996 1995 ------------ ---------- Income (loss) from continuing operations................................................ $ 1,848 $ (2,369) Reconciliation to net cash provided (used) by continuing operations: Depreciation and amortization......................................................... 4,454 2,808 Working capital changes and other..................................................... (6,213) (9,299) ------------ ---------- Net cash provided (used) by continuing operations................................... 89 (8,860) Net cash provided by discontinued operations........................................ -- 436 ------------ ---------- Net cash provided (used) by operating activities.................................... 89 (8,424) ------------ ---------- Cash flows from investing activities: Capital expenditures.................................................................. (2,285) (2,090) Proceeds from equipment sold.......................................................... -- 14 Cash paid for the Acquired Business (a)............................................... (25,000) -- Proceeds from sale of Chandler, Arizona manufacturing facility and certain related assets and technology................................................................ 1,560 26,694 Proceeds from sale of discontinued European resins business........................... -- 2,602 ------------ ---------- Net cash provided (used) by investing activities.................................... (25,725) 27,220 ------------ ---------- Cash flows from financing activities: Proceeds from issuance of long-term debt.............................................. 26,544 3,891 Payments of long-term debt............................................................ (1,092) (3,993) Proceeds of short-term debt, net...................................................... 237 18,039 Proceeds from issuance of common stock................................................ 765 41,155 Payments of allowed claims pursuant to the Reorganization Plan........................ -- (78,144) ------------ ---------- Net cash provided (used) by financing activities.................................... 26,454 (19,052) ------------ ---------- Effect of exchange rate changes on cash and equivalents................................. 28 (675) ------------ ---------- Net increase (decrease) in cash and equivalents......................................... 846 (931) Cash and equivalents at beginning of year............................................... 3,829 931 ------------ ---------- Cash and equivalents at end of period................................................... $ 4,675 $ -- ------------ ---------- ------------ ---------- (a) Cash paid for the Acquired Business: Purchase of working capital, other than cash......................................... $ (71,201) Purchase of property, plant and equipment............................................ (109,149) Purchase of other assets............................................................. (1,590) Excess of purchase price over net assets acquired.................................... (25,913) Assumption of long-term debt and deferred liabilities................................ 14,959 Obligation to issue Senior Subordinated Notes to seller.............................. 26,170 Issuance of 18,022 shares of common stock, net....................................... 141,724 ------------ Cash paid for the Acquired Business................................................... $ (25,000) ------------ ------------
The accompanying notes are an integral part of these condensed consolidated financial statements. F-42 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1 -- BASIS OF ACCOUNTING The accompanying condensed consolidated financial statements have been prepared from the unaudited records of Hexcel Corporation and subsidiaries ("Hexcel" or the "Company") in accordance with generally accepted accounting principles, and, in the opinion of management, include all adjustments necessary to present fairly the balance sheet of the Company as of March 31, 1996, and the results of operations and cash flows for the quarters ended March 31, 1996 and April 2, 1995. The condensed consolidated balance sheet of the Company as of December 31, 1995 was derived from the audited 1995 consolidated balance sheet. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Certain prior quarter amounts in the condensed consolidated financial statements and notes have been reclassified to conform to the 1996 presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1995 Annual Report on Form 10-K. As discussed in Note 2, Hexcel acquired the worldwide composites division of Ciba-Geigy Limited, a Swiss corporation ("Ciba"), and Ciba-Geigy Corporation, a New York corporation ("CGC"), including Ciba's and CGC's composite materials, parts and structures businesses (the "Acquired Business"), on February 29, 1996. Accordingly, the condensed consolidated balance sheet as of March 31, 1996 includes the financial position of the Acquired Business as of that date, and the condensed consolidated statements of operations and cash flows for the quarter ended March 31, 1996 include the results of operations and cash flows, respectively, of the Acquired Business for the period from March 1, 1996 through March 31, 1996. NOTE 2 -- BUSINESS ACQUISITION AND CONSOLIDATION BUSINESS ACQUISITION Hexcel acquired the worldwide composites division of Ciba and CGC on February 29, 1996. The Acquired Business is engaged in the manufacture and marketing of composite materials, parts and structures for aerospace, recreation and general industrial markets. Product lines include fabrics, prepregs, adhesives, honeycomb core, sandwich panels and fabricated components, as well as structures and interiors primarily for the commercial and military aerospace markets. The acquisition of the Acquired Business was consummated pursuant to a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC, and Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic Alliance Agreement, the Company acquired the assets (including the capital stock of certain non-U.S. subsidiaries) and assumed the liabilities of the Acquired Business other than certain excluded assets and liabilities in exchange for: (a) approximately 18,022 newly issued shares of Hexcel common stock; (b) $25,000 in cash; and (c) undertakings to deliver to Ciba and/or one or more of its subsidiaries, following completion of certain post-closing adjustment procedures contemplated by the Strategic Alliance Agreement, senior subordinated notes in an aggregate principal amount of approximately $43,000, subject to certain adjustments (the "Senior Subordinated Notes"), and senior demand notes in a principal amount equal to the cash on hand at certain of the non-U.S. subsidiaries included in the Acquired Business (the "Senior Demand Notes"). As of March 31, 1996, the aggregate principal amount of Senior Subordinated Notes to be issued to Ciba, determined in accordance with the formula included in the Strategic Alliance Agreement, was estimated at approximately $28,300. However, the actual aggregate principal amount of the Senior Subordinated Notes is expected to exceed $28,300, as a result of the pending acquisition from Ciba of certain assets of the Acquired Business, including an Austrian subsidiary, that have not yet been transferred to Hexcel. Pursuant to the terms of the Strategic Alliance Agreement, the aggregate F-43 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 2 -- BUSINESS ACQUISITION AND CONSOLIDATION (CONTINUED) principal amount of the Senior Subordinated Notes will be adjusted to reflect the acquisition of this Austrian subsidiary and certain other assets at such time as those acquisitions are completed. The acquisition of the Austrian subsidiary is expected to be completed in the second quarter of 1996, and would increase the aggregate principal amount of the Senior Subordinated Notes by $9,000, subject to certain working capital and other adjustments. The acquisition of the remaining assets is expected to be completed from time to time prior to February 28, 1997. In connection with the acquisition of the Acquired Business, Hexcel obtained a three-year revolving credit facility of up to $175,000 (the "Senior Secured Credit Facility") to: (a) fund the cash component of the purchase price; (b) refinance outstanding indebtedness under certain U.S. and European credit facilities; and (c) provide for the ongoing working capital and other financing requirements of the Company, including business consolidation activities, on a worldwide basis. The pro forma net sales, net income and net income per share of Hexcel for the quarter ended March 31, 1996, giving effect to the acquisition of the Acquired Business as if it had occurred on January 1, 1996, were:
3/31/96 ----------- Pro forma net sales...................................................................... $ 178,011 Pro forma net income..................................................................... 1,889 Pro forma net income per share........................................................... 0.05 ----------- -----------
Comparable pro forma financial information for the quarter ended April 2, 1995 has not been presented, because information as to the Acquired Business for this period is not available. BUSINESS CONSOLIDATION On May 9, 1996, Hexcel announced that its Board of Directors has approved a plan for consolidating the Company's operations following the acquisition of the Acquired Business. This business consolidation program, which is expected to take up to three years to complete, will result in a 1996 second quarter charge against earnings of approximately $32,000. The total expense of the business consolidation program is estimated to be approximately $49,000, including $5,211 of expenses incurred in the first quarter of 1996 and additional expenses totaling as much as $12,000 that will be recognized after the second quarter of 1996. Cash expenditures necessary to complete the business consolidation program are expected to total approximately $44,000, net of expected proceeds from asset sales. The objective of the business consolidation program is to integrate acquired assets and operations into Hexcel, and to reorganize the Company's research and manufacturing activities around strategic centers dedicated to select product technologies. The consolidation program is also intended to eliminate excess manufacturing capacity and redundant administrative functions. Specific actions contemplated by the consolidation program include the previously announced closure of the Anaheim, California facility acquired from Ciba, the closure of a portion of the Welkenraedt, Belgium facility, the reorganization of the Company's manufacturing operations in France, the consolidation of the Company's U.S. special process manufacturing activities, and the integration of sales and marketing resources. Management estimates that the business consolidation program will take up to three years to complete, in part because of aerospace industry requirements to "qualify" specific equipment and manufacturing facilities for the manufacture of certain products. Based on Hexcel's experience with F-44 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 2 -- BUSINESS ACQUISITION AND CONSOLIDATION (CONTINUED) previous plant consolidations, these qualification requirements necessitate an approach to the consolidation of manufacturing facilities that will require two to three years to complete. The consolidation program is expected to reduce the Company's workforce by approximately 8% worldwide. The $5,211 of business acquisition and consolidation expenses incurred in the first quarter of 1996 includes $3,635 of compensation expense resulting from stock options that were granted in 1995 subject to stockholder approval and stock options which vested in connection with the acquisition of the Acquired Business. This compensation expense is based on the difference between the exercise price of the stock options granted and the market price of Hexcel's common stock on February 21, 1996, the date that the Company's stockholders approved the incentive stock plan under which the options were granted. The recognition of compensation expense in connection with these stock options resulted in a corresponding $3,635 increase in the additional paid-in capital of the Company. NOTE 3 -- PROPOSED BUSINESS ACQUISITION On April 16, 1996, Hexcel announced that it has executed a definitive agreement to acquire the Composite Products Division ("CPD") of Hercules Incorporated ("Hercules"). CPD is engaged in the manufacture and marketing of prepregs and carbon fiber for aerospace and other markets. According to the provisions of the definitive agreement, the Company will pay Hercules approximately $135,000 in cash, subject to certain adjustments, in exchange for CPD. The proposed transaction is expected to be completed by the end of the second quarter of 1996, subject to certain conditions, including antitrust and other regulatory clearances. In connection with the proposed acquisition of CPD, Hexcel has entered into a commitment letter for a new bank credit facility of up to $300,000. Borrowings under this new credit facility are expected to be used to fund the purchase of CPD, to refinance certain existing indebtedness, including the Senior Secured Credit Facility, and to provide for the ongoing working capital and other financing requirements of the Company, including business consolidation activities. NOTE 4 -- INVENTORIES Inventories as of March 31, 1996 and December 31, 1995 were:
3/31/96 12/31/95 ----------- --------- Raw materials............................................................................ $ 47,850 $ 22,257 Work in progress......................................................................... 36,098 13,688 Finished goods........................................................................... 25,682 17,778 Supplies................................................................................. 1,493 1,752 ----------- --------- Total inventories...................................................................... $ 111,123 $ 55,475 ----------- --------- ----------- ---------
Inventories as of March 31, 1996 included inventories of the Acquired Business totaling approximately $54,000. NOTE 5 -- INTANGIBLE ASSETS Intangible assets as of March 31, 1996 are comprised primarily of goodwill and other intangible assets attributable to the acquisition of the Acquired Business on February 29, 1996. Substantially all such assets are subject to amortization over a period of 20 years. The gross value of intangible assets attributable to the acquisition of the Acquired Business is expected to increase subsequent to March 31, 1996, primarily as a result of the pending acquisition from Ciba of certain assets of the Acquired Business that have not yet been transferred to Hexcel and the recognition of certain costs of the business consolidation program. F-45 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 6 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO RELATED PARTIES Notes payable, capital lease obligations and indebtedness to related parties as of March 31, 1996 and December 31, 1995 were:
3/31/96 12/31/95 ----------- --------- Senior Secured Credit Facility........................................................... $ 69,836 -- U.S. revolving credit facility........................................................... -- $ 30,091 European credit facilities and notes payable............................................. 4,851 18,064 Obligation to issue Senior Subordinated Notes payable to Ciba, net of discount........... 26,170 -- Obligation to issue Senior Demand Notes payable to Ciba.................................. 2,099 -- 7% convertible subordinated debentures, due 2011......................................... 25,625 25,625 Obligations under IDRB variable rate demand notes, due through 2024, net................. 11,990 11,990 Capital lease obligations................................................................ 3,215 3,217 Various U.S. notes payable, due through 2007............................................. 1,304 1,157 ----------- --------- Total notes payable, capital lease obligations and indebtedness to related parties....... $ 145,090 $ 90,144 ----------- --------- ----------- --------- Notes payable and current maturities of long-term liabilities............................ $ 6,809 $ 1,802 Notes payable and capital lease obligations, less current maturities..................... 112,111 88,342 Indebtedness to related parties, less current maturities................................. 26,170 -- ----------- --------- Total notes payable, capital lease obligations and indebtedness to related parties....... $ 145,090 $ 90,144 ----------- --------- ----------- ---------
SENIOR SECURED CREDIT FACILITY In connection with the acquisition of the Acquired Business, Hexcel obtained the Senior Secured Credit Facility on February 29, 1996. The Senior Secured Credit Facility is a three-year revolving credit facility of up to $175,000 which is available to: (a) fund the $25,000 cash component of the purchase price paid for the Acquired Business; (b) refinance outstanding indebtedness under certain U.S. and European credit facilities; and (c) provide for the ongoing working capital and other financing requirements of the Company, including business consolidation activities, on a worldwide basis. The Senior Secured Credit Facility has replaced certain U.S. and European credit facilities that were available to the Company and in use as of December 31, 1995. Interest on outstanding borrowings under the Senior Secured Credit Facility is computed at an annual rate of 0.4% in excess of the applicable London interbank rate or, at the option of Hexcel, at the base rate of the administrative agent for the lenders. In addition, the Senior Secured Credit Facility is subject to a commitment fee of approximately 0.2% per annum on the unused portion of the facility and a letter of credit fee of up to 0.5% per annum on the outstanding face amount of letters of credit. The Senior Secured Credit Facility is secured by a pledge of stock of certain of Hexcel's subsidiaries. In addition, the Company is subject to various financial covenants and restrictions under the Senior Secured Credit Facility, as more fully described in the Company's 1995 Annual Report on Form 10-K. OBLIGATION TO ISSUE SENIOR SUBORDINATED NOTES PAYABLE TO CIBA-GEIGY In connection with the acquisition of the Acquired Business, Hexcel has undertaken to deliver to Ciba and/or one or more of its subsidiaries the Senior Subordinated Notes. The Senior Subordinated F-46 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 6 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO RELATED PARTIES (CONTINUED) Notes, which will be issued following the completion of certain post-closing adjustment procedures contemplated by the Strategic Alliance Agreement, will be general unsecured obligations of the Company. As discussed in Note 2, the aggregate principal amount of Senior Subordinated Notes to be issued to Ciba, determined in accordance with the Strategic Alliance Agreement, was approximately $28,300 as of March 31, 1996. However, the actual aggregate principal amount of the Senior Subordinated Notes is expected to exceed this amount as a result of the pending acquisition of certain assets of the Acquired Business that have not yet been transferred to the Company. As of March 31, 1996, the fair value of the obligation to issue the Senior Subordinated Notes was $26,170, which is $2,130 lower than the aggregate principal amount as of that date. The $2,130 discount reflects the absence of certain call protection provisions from the terms of the Senior Subordinated Notes and the difference between the stated interest rate on the Senior Subordinated Notes and the estimated market rate for debt obligations of comparable quality and maturity. The Senior Subordinated Notes are expected to bear interest for three years at a rate of 7.5% per annum, payable semiannually from February 29, 1996. The interest rate is expected to increase to 10.5% per annum on the third anniversary of the acquisition of the Acquired Business, and by an additional 0.5% per year thereafter until the Senior Subordinated Notes mature in the year 2003. The payment of principal and interest on the Senior Subordinated Notes will be subordinate to the Senior Secured Credit Facility. As of March 31, 1996, Ciba owned approximately 49.9% of Hexcel's issued and outstanding common stock, and four of the Company's ten directors were members of Ciba management. Accordingly, the Company's obligation to issue the Senior Subordinated Notes has been classified as "Indebtedness to related parties" in the accompanying condensed consolidated balance sheet as of March 31, 1996. OBLIGATION TO ISSUE SENIOR DEMAND NOTES PAYABLE TO CIBA-GEIGY Under the terms of the Strategic Alliance Agreement, the cash on hand at certain of the non-U.S. subsidiaries included in the Acquired Business was acquired by Hexcel in exchange for an undertaking to deliver to Ciba and/or one or more of its subsidiaries the Senior Demand Notes. The Senior Demand Notes, totaling $2,099, are expected to be presented for payment shortly after issuance. NOTE 7 -- DEFERRED LIABILITIES Deferred liabilities as of March 31, 1996 and December 31, 1995 were comprised primarily of various pension, retirement and post-retirement benefit liabilities, as well as deferred tax liabilities and certain other long-term obligations. NOTE 8 -- NON-CASH FINANCING ACTIVITIES In addition to a cash payment of $25,000 and the obligations to issue the Senior Subordinated Notes and the Senior Demand Notes, the consideration paid for the Acquired Business included approximately 18,022 shares of newly issued Hexcel common stock. The aggregate value of these shares has been estimated at approximately $144,200, based on a discounted market price of $8 per share multiplied by the number of shares issued. The discounted market price of $8 per share was based on a market price of $10 per share during a reasonable period before and after December 12, 1995, the date that the terms for determining the total consideration to be paid by the Company were finalized, and a discount rate of 20%. The 20% discount reflects the illiquidity of the Hexcel common stock issued to Ciba caused by the size of Ciba's holding, the contractual restrictions on transferring F-47 HEXCEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 8 -- NON-CASH FINANCING ACTIVITIES (CONTINUED) such shares and, accordingly, limitations on the price Ciba could realize, the contractual limitation on the per share price Ciba could realize in certain types of transactions, the fact that such shares are "restricted securities" within the meaning of the Securities Act of 1933, and various other factors. NOTE 9 -- OTHER INCOME, NET Other income of $2,697 in the quarter ended March 31, 1996 was largely attributable to the receipt of an additional $1,560 of cash in connection with the disposition of the Chandler, Arizona manufacturing facility and certain related assets and technology in 1994, and to the partial settlement for $1,054 of a claim arising from the sale of certain assets in 1991. NOTE 10 -- BANKRUPTCY REORGANIZATION On January 12, 1995, the United States Bankruptcy Court for the Northern District of California entered an order dated January 10, 1995 confirming the First Amended Plan of Reorganization (the "Reorganization Plan") proposed by Hexcel and the Official Committee of Equity Security Holders (the "Equity Committee"). On February 9, 1995, the Reorganization Plan became effective and Hexcel emerged from the bankruptcy reorganization proceedings which had begun on December 6, 1993, when Hexcel filed a voluntary petition for relief under the provisions of Chapter 11 of the federal bankruptcy laws. The Reorganization Plan which became effective on February 9, 1995 provided, among other things, for the reinstatement or payment in full, with interest, of all allowed claims, including prepetition accounts payable and notes payable. On February 9, 1995, Hexcel paid $78,144 in prepetition claims and interest, and reinstated another $60,575 in prepetition liabilities. The payment of claims and interest was financed with: (a) cash proceeds of $26,694 received in the first quarter of 1995 from the sale of the Company's Chandler, Arizona manufacturing facility and related assets and technology; (b) cash proceeds of $2,602 received in the first quarter of 1995 from the sale of the Company's European resins business; (c) the $50,000 in cash received from Mutual Series Fund Inc. in connection with a standby purchase agreement with respect to a subscription rights offering for additional shares of new common stock; and (d) borrowings under a U.S. revolving credit facility. The subscription rights offering for additional shares of new common stock was subsequently concluded on April 6, 1995, with a total of 10,800 shares of new common stock having been issued between February 9, 1995 and April 6, 1995. The U.S. revolving credit facility was subsequently replaced by the Senior Secured Credit Facility on February 29, 1996. Professional fees and other costs directly related to bankruptcy proceedings were expensed as incurred, and have been reflected in the condensed consolidated statement of operations for the quarter ended April 2, 1995 as "bankruptcy reorganization expenses." Bankruptcy reorganization expenses consisted primarily of professional fees paid to legal and financial advisors of Hexcel, the Equity Committee and the Official Committee of Unsecured Creditors. In addition, these expenses included incentives for employees to remain with the Company for the duration of bankruptcy proceedings and the write-off of previously capitalized costs related to the issuance of prepetition debt, as required by generally accepted accounting principles. The resolution of certain bankruptcy-related issues, including the final settlement of disputed claims and professional fees, resulted in bankruptcy reorganization expenses being incurred after the effective date of the Reorganization Plan. F-48 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Ciba-Geigy Limited We have audited the accompanying combined balance sheets of Ciba Composites (a division of Ciba-Geigy Limited) as of December 31, 1995 and 1994, and the related combined statements of operations, owner's equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Ciba Composites as of December 31, 1995 and 1994, and the combined results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 10 to the combined financial statements, in 1993, the U.S. Group Company changed its methods of accounting for postretirement benefits other than pensions and for postemployment benefits. /s/ COOPERS & LYBRAND L.L.P. Stamford, Connecticut February 29, 1996 F-49 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) COMBINED BALANCE SHEETS (IN THOUSANDS OF DOLLARS) ASSETS:
DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- Current assets: Cash............................................................................... $ 8,412 $ 7,990 Accounts receivable, net of allowance for doubtful accounts of $2,291 and $3,378 in 1995 and 1994, respectively....................................................... 58,799 53,024 Inventories........................................................................ 60,337 66,672 Prepaid expenses and other current assets.......................................... 9,957 9,327 ----------- ----------- Total current assets........................................................... 137,505 137,013 Property, plant and equipment, net................................................... 156,364 161,153 Intangibles, net..................................................................... 42,211 49,143 Other assets......................................................................... 4,214 5,111 ----------- ----------- Total assets................................................................... $ 340,294 $ 352,420 ----------- ----------- ----------- ----------- LIABILITIES AND OWNER'S EQUITY: Current liabilities: Accounts payable................................................................... $ 29,611 $ 29,249 Accrued liabilities................................................................ 20,259 17,346 Accrued compensation............................................................... 7,315 7,704 Short-term debt.................................................................... 720 2,730 Short-term debt due to affiliates.................................................. 9,052 5,302 Current portion of long-term debt.................................................. 256 487 Current portion of obligations under capital leases................................ 441 348 ----------- ----------- Total current liabilities...................................................... 67,654 63,166 Long-term debt....................................................................... 1,305 1,775 Long-term debt due to affiliates..................................................... 9,502 37,493 Long-term capital lease obligations.................................................. 4,290 4,372 Other long-term liabilities.......................................................... 13,626 14,430 ----------- ----------- Total liabilities.............................................................. 96,377 121,236 ----------- ----------- Commitments and contingencies Minority interest.................................................................... 6,968 5,048 Owner's equity: Invested capital................................................................... 236,949 226,136 ----------- ----------- Total liabilities and owner's equity........................................... $ 340,294 $ 352,420 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. F-50 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Net sales.................................................................. $ 331,073 $ 292,611 $ 271,258 Cost of sales.............................................................. 273,997 249,717 244,247 ----------- ----------- ----------- Gross profit........................................................... 57,076 42,894 27,011 ----------- ----------- ----------- Operating (income) expenses: Selling, general and administrative expenses............................. 47,540 45,515 47,804 Research and development expense......................................... 10,426 7,902 5,909 Amortization and write-downs of purchased intangibles.................... 6,930 10,219 5,734 Restructuring expense.................................................... 2,362 1,600 7,722 Gain on sale of facility................................................. -- (2,700) -- Other, net............................................................... 1,102 (279) 241 ----------- ----------- ----------- Total operating expenses............................................. 68,360 62,257 67,410 ----------- ----------- ----------- Operating loss........................................................... 11,284 19,363 40,399 Other expense: Interest expense......................................................... 668 1,193 2,236 Minority interest........................................................ 1,506 891 245 ----------- ----------- ----------- Loss before income taxes and cumulative effect of accounting changes............................................................. 13,458 21,447 42,880 Provision (benefit) for income taxes....................................... 5,085 2,843 (962) ----------- ----------- ----------- Loss before cumulative effect of accounting changes.................. 18,543 24,290 41,918 Cumulative effect of accounting changes.................................... -- -- 7,077 ----------- ----------- ----------- Net loss............................................................. $ 18,543 $ 24,290 $ 48,995 ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these combined financial statements. F-51 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) COMBINED STATEMENT OF OWNER'S EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS OF DOLLARS) Balance, December 31, 1992....................................................... $ 294,364 Capital distributions, net..................................................... (1,547) Translation adjustments........................................................ (2,731) Net loss....................................................................... (48,995) --------- Balance, December 31, 1993....................................................... 241,091 Capital contributions, net..................................................... 4,676 Translation adjustments........................................................ 4,659 Net loss....................................................................... (24,290) --------- Balance, December 31, 1994....................................................... 226,136 Capital contributions, net..................................................... 26,927 Translation adjustments........................................................ 2,429 Net loss....................................................................... (18,543) --------- Balance, December 31, 1995....................................................... $ 236,949 --------- ---------
The accompanying notes are an integral part of these combined financial statements. F-52 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Net loss.................................................................... $ (18,543) $ (24,290) $ (48,995) Adjustments to reconcile net loss to net cash provided by operating activities: Cumulative effect of accounting changes................................... -- -- 7,077 Depreciation.............................................................. 14,725 15,868 19,964 Amortization and write-downs of purchased intangibles..................... 6,930 10,219 5,734 Minority interest......................................................... 1,506 891 245 Restructuring provisions and write-downs of property, plant and equipment................................................................ 2,328 3,924 604 Gain on sale of facility.................................................. -- (2,700) -- Changes in assets and liabilities, net of effects from acquisition: (Increase) decrease in trade receivables................................ (3,787) (6,009) 16,128 Decrease in inventories................................................. 8,223 1,272 10,025 Decrease in prepaid expenses and other current assets................... 2,116 1,451 3,197 Decrease in other long-term assets...................................... 714 3,739 3,585 Increase (decrease) in accounts payable................................. (832) 3,820 178 Increase in accrued liabilities and accrued compensation................ 1,340 4,248 1,061 Increase (decrease) in other long-term liabilities...................... 13 1,265 (3,450) ---------- ---------- ---------- Net cash provided by operating activities............................. 14,733 13,698 15,353 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sale of property, plant and equipment....................... 417 8,518 576 Purchases of property, plant and equipment................................ (13,214) (7,685) (12,280) Acquisition of business................................................... -- (4,680) -- Other..................................................................... (3,049) (2,227) -- Net cash used in investing activities................................. (15,846) (6,074) (11,704) ---------- ---------- ---------- Cash flows from financing activities: Proceeds from borrowings.................................................. 7,800 56 4,288 Payments on borrowing..................................................... (36,619) (10,415) (3,636) Equity contributions (distributions)...................................... 29,822 4,676 (1,547) ---------- ---------- ---------- Net cash provided by (used in) financing activities................... 1,003 (5,683) (895) Effect of exchange rate changes on cash..................................... 532 582 (263) ---------- ---------- ---------- Net change in cash.................................................... 422 2,523 2,491 Cash at beginning of period................................................. 7,990 5,467 2,976 ---------- ---------- ---------- Cash at end of period................................................. $ 8,412 $ 7,990 $ 5,467 ---------- ---------- ---------- ---------- ---------- ---------- Cash paid (received) during the year for: Income taxes.............................................................. $ 219 $ (69) $ 517 Interest.................................................................. 1,514 1,595 2,289
The accompanying notes are an integral part of these combined financial statements. F-53 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. BASIS OF PRESENTATION The accompanying financial statements include the combined worldwide accounts of the Ciba Composites Division (the "Division") of Ciba-Geigy Limited (the "Parent" or "Owner"), a publicly-traded company based in Switzerland. The financial statements include the accounts of (1) corporate entities wholly or majority-owned indirectly by the Parent (principally in the United Kingdom, France, Austria and Italy) and (2) divisional accounts which have historically operated as business units of wholly-owned, multi-product line subsidiaries of the Parent, (the "Group Companies"), principally in the United States, South Africa and Germany. The United Kingdom operation became a corporate entity wholly-owned by the Parent effective July 1995. The minority interest represents a third party's 49.0% ownership of the Austrian corporate entity. The Division's primary business is manufacturing, marketing, and distributing composite materials, including prepregs, fabrics, adhesives, honeycomb core and fabricated structural interiors, panels, and parts for the commercial aerospace industry. Market segments served by the Division include aerospace, sports and leisure, marine, surface transportation, energy and a variety of other industrial applications. Approximately two-thirds of the Division's net sales are to the aerospace market. The Division's financial statements include the assets, liabilities, revenues and expenses which are specifically identifiable with the Division, as well as certain allocated expenses for services that have historically been performed by the corporate headquarters of the Group Companies. These expenses are allocated using various methods dependent upon the nature of the service. The Division's management believes that these allocations are based on assumptions that are reasonable under the circumstances; however, these allocations are not necessarily indicative of the costs and expenses that would have resulted if the Division had been operated as a separate entity. The net cash position of certain of the Group Companies has been managed through a centralized treasury system. Accordingly, transfers of cash within the treasury system are recorded through intercompany accounts, which are reflected as a component of Owner's equity in the accompanying Combined Balance Sheets. In addition, intercompany balances arising from purchase and sale transactions with other Parent affiliates and allocated charges for services have been treated as the equivalent of cash transactions in the accompanying financial statements and are included as a component of Owner's equity. There is no direct interest cost allocation to the Division with respect to Group Company borrowings, and accordingly, the Combined Statements of Operations do not include any allocated financing costs. Debt payable to third parties and affiliates outside of the Division, and related interest expense, is reflected in accordance with their terms. All significant transactions within the combined Division have been eliminated. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FISCAL YEAR: The U.S. Group Company's fiscal years consist of a fifty-two or fifty-three week period, ending the last Friday of December. The 1995 and 1994 fiscal years consisted of fifty-two week periods and 1993 consisted of a fifty-three week period for the U.S. Group Company. The remaining Division entities have fiscal years ending December 31. For purposes of financial statement presentation, all fiscal year-ends are referred to as December 31. F-54 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined using various methods including average cost and the first-in, first-out (FIFO) basis. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are stated at cost. Depreciation is determined using the straight-line method applied over the estimated useful lives of the respective assets, which range from 3 to 50 years. It is the Division's policy to periodically review the estimated lives of assets and, where appropriate, revise the estimated lives to reflect technological changes in the industry. Upon sale or retirement of depreciable assets, the cost and related accumulated depreciation are removed from the accounts and any resultant gain or loss is included in operations. INTANGIBLES: The excess of cost over the fair value of net assets (goodwill) and identifiable intangible assets of acquired companies are capitalized at acquisition and are amortized on a straight-line basis over their estimated useful lives, ranging from twelve to forty years. The Division evaluates the realizability of intangibles based upon the projected, undiscounted net cash flows related to the intangibles. The Division recorded impairment losses of $2,809 and $5,097 in 1995 and 1994, respectively, for certain identifiable intangibles which consisted of contracted manufacturing programs. The loss was measured using projected discounted cash flows and is included in "Amortization and write-downs of purchased intangibles" in the Combined Statements of Operations. REVENUE RECOGNITION: Revenue is recognized at the time products are shipped. TRANSLATION OF FOREIGN CURRENCIES: The functional currency in all significant foreign locations is considered to be the local currency. The translation of the applicable foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the year. Gains or losses resulting from translation are reflected in Owner's equity. Aggregate foreign currency transaction gains and losses are included in determining results from operations. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. RECLASSIFICATIONS: Certain amounts in the 1994 Combined Statement of Cash Flows have been reclassified to conform to the 1995 presentation. F-55 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 3. RESTRUCTURING EXPENSE AND GAIN ON SALE OF FACILITY In 1995, 1994 and 1993, the Division incurred approximately $2,400, $1,600 and $7,700, respectively, in restructuring charges. These charges are primarily due to the consolidation and downsizing of certain facilities and consisted principally of personnel related expenses and the costs of consolidating these facilities. In December 1994, the Division sold its Miami, Florida facility for $8,000 in cash resulting in a net gain of approximately $2,700 which is included as such in the accompanying Combined Statements of Operations. 4. ACQUISITIONS In August 1994, the Division acquired certain assets and customer contracts from a British Petroleum Chemicals Division for total consideration of approximately $4,700. The revenues and results of operations of the acquired business are not significant and are included in the Combined Statements of Operations from the date of acquisition. 5. INVENTORIES The components of inventories are as follows:
DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- Raw materials.................................................... $ 22,261 $ 20,523 Work in process.................................................. 33,317 41,492 Finished goods................................................... 4,759 4,657 ----------- ----------- Total........................................................ $ 60,337 $ 66,672 ----------- ----------- ----------- -----------
6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- Land............................................................. $ 15,436 $ 15,150 Buildings and improvements....................................... 91,872 93,020 Buildings and equipment under capital leases..................... 6,251 5,776 Machinery and equipment.......................................... 161,047 154,940 Construction in progress......................................... 3,582 1,210 ----------- ----------- 278,188 270,096 Less, Accumulated depreciation and amortization.............. (121,824) (108,943) ----------- ----------- $ 156,364 $ 161,153 ----------- ----------- ----------- -----------
F-56 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 7. INTANGIBLES Intangibles consist of the following:
DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- Contracted manufacturing programs................................ $ 11,588 $ 20,779 Customer relationships........................................... 25,237 25,237 Goodwill......................................................... 19,005 19,005 ----------- ----------- 55,830 65,021 Less, Accumulated amortization............................... (13,619) (15,878) ----------- ----------- $ 42,211 $ 49,143 ----------- ----------- ----------- -----------
Intangible assets arose principally from the acquisition of Reliable Manufacturing Co. in 1979 (goodwill of $3,285) and Heath Tecna Aerospace Co. in 1988. Changes in contracted manufacturing programs in 1995 resulted from an impairment write-down of $2,809 due to reductions in aircraft build rates and a corresponding adjustment of cost and accumulated amortization of $6,382. 8. DEBT Short-term debt includes commercial paper, bank overdrafts, loans and other short-term debt outstanding in Europe with maturities of one year or less. Interest rates for this debt ranged from approximately 5.8% - 11.5% in 1995 and 5.7% - 8.6% in 1994. Short-term debt due to affiliates consists of an overdraft facility at one of the Division's operating units of $2,419 and $5,302 in 1995 and 1994, respectively, bearing interest from July 1995 at the U.K. Bank Base Rate (6.5% at December 31, 1995) plus 1% and a short-term borrowing by another of the Division's operating units of $6,633 in 1995 bearing interest at Italian LIBOR (11.2% at December 31, 1995). Through June 1995, the overdraft facility was noninterest bearing. Long-term debt consists of the following:
DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- Mortgage payable in equal quarterly installments through 1999 at an interest rate of 6.5%........................................ $ 548 $ 684 Other............................................................ 1,013 1,578 ----------- ----------- 1,561 2,262 Less, Current portion........................................ 256 487 ----------- ----------- Long-term debt............................................. $ 1,305 $ 1,775 ----------- ----------- ----------- -----------
F-57 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 8. DEBT (CONTINUED) Long-term debt to affiliates consists of the following:
DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- Loans payable, due in 1998, at floating interest rates based on the six-month French LIBOR rate................................. $ 9,502 $ 8,697 Loan payable, with no stated maturity date or interest rate...... -- 4,317 Loan payable, with no stated maturity date, at a floating interest rate based on the three-month Italian LIBOR rate....... -- 2,175 Advances from affiliate, with no stated maturity date or interest rate............................................................ -- 22,304 ----------- ----------- Long-term debt to affiliates................................. $ 9,502 $ 37,493 ----------- ----------- ----------- -----------
The six-month French LIBOR rate at December 31, 1995 was 6.3%. Aggregate maturities of Long-term debt at December 31, 1995 are as follows:
AFFILIATES OTHER ----------- ----------- 1996............................................................. $ -- $ 256 1997............................................................. -- 546 1998............................................................. 9,502 367 1999............................................................. -- 310 2000............................................................. -- 82 ----------- ----------- $ 9,502 $ 1,561 ----------- ----------- ----------- -----------
9. EMPLOYEE BENEFITS Approximately 20 percent of the United States employees participate in a separate trusteed pension plan (the "U.S. Plan"). The U.S. Plan is a noncontributory defined benefit pension plan covering certain salaried employees. Benefits are based on employees' years of service and average of the highest consecutive five years' compensation in the ten years before retirement. The U.S. Group Company's funding policy is to make the minimum annual contribution required by applicable regulators. Net periodic pension cost for 1995, 1994 and 1993, for the U.S. Plan described above, includes the following:
1995 1994 1993 --------- --------- --------- Service cost -- benefits earned during the period........... $ 503 $ 706 $ 518 Interest cost on projected benefit obligation............... 621 561 547 Actual return on plan assets................................ (1,931) (5) (1,022) Net amortization and deferral............................... 1,238 (639) 445 --------- --------- --------- Net periodic pension cost............................... $ 431 $ 623 $ 488 --------- --------- --------- --------- --------- ---------
F-58 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 9. EMPLOYEE BENEFITS (CONTINUED) The actuarial present value of benefit obligations and funded status of the U.S. Plan as of December 31, 1995 and 1994 are as follows:
1995 1994 ----------- ----------- Benefit obligations: Vested benefits................................................ $ 6,744 $ 4,956 Nonvested benefits............................................. 394 288 ----------- ----------- 7,138 5,244 Projected compensation increases................................. 2,324 2,002 ----------- ----------- Projected benefit obligation................................... 9,462 7,246 Plan assets at fair value........................................ 8,773 7,332 ----------- ----------- Plan assets in excess of (less than) projected benefit obligations................................................... (689) 86 Unrecognized prior service cost.................................. 186 200 Unrecognized net loss............................................ (366) (724) ----------- ----------- Pension liability.......................................... $ (869) $ (438) ----------- ----------- ----------- -----------
Assumptions used in developing the projected benefit obligation were as follows:
1995 1994 --------- --------- Discount rate........................................................ 7.50% 8.50% Rate of increase in compensation..................................... 4.50% 5.50% Expected long-term rate of return on plan assets..................... 10.00% 9.00%
The majority of the remaining employees participate in various multi-employer pension plans. These plans include various pension plans sponsored by Group Companies and accounted for as multi-employer plans. Accordingly, the Combined Statements of Operations include an allocation of $3,516, $2,502 and $3,414 in 1995, 1994 and 1993, respectively, for the costs associated with the employees who participate in such plans. Included in the costs for 1995 is a curtailment gain of $650 related to certain personnel reductions. Included in the costs for 1994 is a curtailment gain of $600 related to the sale of the Miami facility. Additionally, no assets and liabilities have been reflected in the Combined Balance Sheets related to the various multi-employer pension plans since it is not practicable to segregate these amounts. The Division also has an Investment Savings Plan for U.S. employees. Division contributions to the plan were approximately $374, $450 and $477 during 1995, 1994 and 1993, respectively. 10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS The Division has various postretirement plans that provide healthcare benefits to retired salaried and hourly employees and their dependents. Certain of these plans require employee contributions at varying rates. Not all employees are eligible to receive benefits, with eligibility depending on the plan in effect at a particular location. Total postretirement benefit expense of $628, $164 and $813 is included in the Combined Statements of Operations for 1995, 1994 and 1993, respectively. Included in the expense for 1994 is a F-59 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 10. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) curtailment gain of $318 related to the sale of the Miami facility. Assets and liabilities have not been reflected in the Combined Balance Sheets relating to Group Company plans, as it is not practical to segregate these amounts. Effective January 1, 1993, the U.S. Group Company changed its method of accounting for postretirement benefits other than pensions from the pay-as-you-go method to the accrual method as required by Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106"). This standard requires the accrual of the expected costs of postretirement medical and other nonpension benefits during an employee's period of service. Similar accounting methods were adopted by other Division entities prior to 1993. The cumulative effect of adopting SFAS No. 106 as of January 1, 1993, resulted in a charge of $6,006 to 1993 earnings, with no related income tax benefit. The effect of the change on the 1993 loss before income taxes was additional expense of approximately $422. Effective January 1, 1993, the U.S. Group Company also elected to adopt Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112"). SFAS No. 112 establishes accounting standards for employers who provide certain benefits to former or inactive employees after employment but before retirement. Previously, postemployment benefits, for the U.S. Group Company, were recognized on the pay-as-you-go method. The cumulative effect of the change in accounting for postemployment benefits was $1,071, which represented the unfunded accumulated postemployment benefit obligations as of January 1, 1993. There was no related income tax benefit in connection with the election. The effect of the change on the 1993 loss before income taxes was additional expense of approximately $33. Similar accounting methods were adopted by other Division entities prior to 1993. Total postemployment benefit expense was $305, $778 and $154 for 1995, 1994 and 1993, respectively. Assets and liabilities have not been reflected in the Combined Balance Sheets relating to Group Company plans, as it is not practical to segregate these amounts. 11. INCOME TAXES For purposes of the Combined Statements of Operations, income taxes have been provided on a stand-alone basis, as if the Division was a separate taxable entity. F-60 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 11. INCOME TAXES (CONTINUED) The components of loss before income taxes and cumulative effect of accounting changes and provision (benefit) for income taxes were:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Income (loss before) income taxes and cumulative effect of accounting changes: United States......................................... $ (19,469) $ (26,215) $ (32,965) International......................................... 6,011 4,768 (9,915) ---------- ---------- ---------- $ (13,458) $ (21,447) $ (42,880) ---------- ---------- ---------- ---------- ---------- ---------- Provision (benefit) for income taxes: Current: United States....................................... $ -- $ -- $ -- International....................................... 4,529 1,383 (1,282) ---------- ---------- ---------- Total current..................................... 4,529 1,383 (1,282) ---------- ---------- ---------- Deferred: United States....................................... -- -- -- International....................................... 556 1,460 320 ---------- ---------- ---------- Total deferred.................................... 556 1,460 320 ---------- ---------- ---------- Total provision (benefit) for income taxes........ $ 5,085 $ 2,843 $ (962) ---------- ---------- ---------- ---------- ---------- ----------
The current provision for income taxes for 1995 includes a benefit recognized from utilization of operating loss carryforwards of $302. The effective income tax provision (benefit) rate on the loss before income taxes differed from the United States federal statutory rate for the following:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Benefit at the U.S. federal statutory rate.............. $ (4,710) $ (7,506) $ (15,008) Tax effect of net operating losses not recognized....... 4,225 7,016 14,546 Foreign tax (benefit)................................... 5,085 2,843 (962) Goodwill amortization................................... 442 442 442 Other................................................... 43 48 20 ---------- ---------- ---------- Provision (benefit) for income taxes.................... $ 5,085 $ 2,843 $ (962) ---------- ---------- ---------- ---------- ---------- ----------
F-61 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 11. INCOME TAXES (CONTINUED) The tax effects of temporary differences which gave rise to deferred income tax assets and liabilities consisted of the following:
DECEMBER 31, ---------------------- 1995 1994 ---------- ---------- Deferred income tax assets: Postretirement/postemployment benefits.......................... $ 3,648 $ 3,023 Environmental reserve........................................... 1,651 1,746 Intangibles..................................................... 1,845 679 Restructuring reserve........................................... 592 625 Inventory reserve............................................... 518 621 Other reserves.................................................. 1,793 2,207 Net operating losses............................................ 87,847 87,163 ---------- ---------- Total deferred income tax assets.............................. 97,894 96,064 ---------- ---------- Deferred income tax liabilities: Depreciation.................................................... (11,368) (11,560) Revenue recognition............................................. (3,153) (5,106) ---------- ---------- Total deferred income tax liabilities....................... (14,521) (16,666) ---------- ---------- Subtotal.................................................... 83,373 79,398 Valuation allowance............................................... (84,072) (79,541) ---------- ---------- Net deferred income tax liabilities......................... $ (699) $ (143) ---------- ---------- ---------- ----------
Deferred income tax assets of $1,161 and $1,391 at December 31, 1995 and 1994, respectively, are included in other assets in the Combined Balance Sheets. Deferred income tax liabilities of $1,860 and $1,534 at December 31, 1995 and 1994, respectively, are included in other long-term liabilities in the Combined Balance Sheets. Operating loss carryforwards of non-corporate Divisional entities (principally the United States of approximately $219 million) have generally been utilized to offset Group Company taxable income in the year incurred. However, for purposes of these combined financial statements, the tax effect of such operating loss carryforwards have been reflected as deferred tax assets with related valuation allowances, based upon management's assessment of the Division's likelihood of realizing the benefit of such operating loss carryforwards through future stand-alone taxable income. The Division has net operating loss carryforwards of which approximately $6,200 and $600 are available to offset certain future taxable income in Italy and France, respectively. These operating loss carryforwards expire as follows: 1996............................................................... $ 159 1997............................................................... 1,556 1998............................................................... 2,359 1999............................................................... 1,097 2000............................................................... 1,629
F-62 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 12. COMMITMENTS AND CONTINGENCIES SELF-INSURANCE: The Division is partially self-insured for workers' compensation, general liability and property insurance risks, subject to specific retention levels. Self-insurance costs are accrued based upon the aggregate of the estimated liability for reported claims and estimated liabilities for claims incurred but not reported. LITIGATION: The Division is involved in legal proceedings which are in various stages of development and involve various uncertainties which can affect the eventual outcome of the issues. While it is difficult to predict what the eventual resolution of these issues will be, the Division believes, on the basis of the facts presently known, that these actions will not have a material adverse effect on the Division's financial condition or results of operations. ENVIRONMENTAL COSTS: In connection with an acquisition of one of the Division's operating facilities, the Division entered into an agreement with the previous owner whereby the Division agreed to share in the operating cost for groundwater treatment and monitoring facilities which had been ordered by regulatory authorities prior to the date of acquisition. The Division's share of annual cost sharing is estimated at $250. While the ultimate period of treatment and monitoring required by regulatory authorities is not determinable, the Division estimated the minimum period at twenty years. The Combined Balance Sheets include reserves of approximately $4,200 and $4,500 as of December 31, 1995 and 1994, respectively, related to these costs. Charges against these reserves totaled approximately $300 and $200 in 1995 and 1994, respectively. In the normal course of its business, the Division is subject to environmental regulations in jurisdictions in which the Division has facilities and, accordingly, the Division may be required to incur either remediation or capital improvement costs in the future. Management of the Division believes that the amounts of such costs, if any, will not have a material adverse effect on the Division's financial condition or results of operations. LEASE OBLIGATIONS: The Division leases certain equipment and facilities under capital leases and noncancelable operating leases expiring at various dates through 2012. F-63 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum annual lease payments under such leases are as follows:
CAPITAL OPERATING LEASES LEASES --------- ----------- 1996................................................................. $ 725 $ 1,818 1997................................................................. 725 1,097 1998................................................................. 333 710 1999................................................................. 333 548 2000................................................................. 333 274 Thereafter........................................................... 5,863 -- --------- ----------- 8,312 $ 4,447 ----------- ----------- Amounts representing interest........................................ 3,581 --------- Present value of net minimum lease payments.......................... 4,731 Less, Current portion............................................ 441 --------- Long-term portion.................................................... $ 4,290 --------- ---------
Lease expense was $2,080, $1,883 and $1,724 in 1995, 1994 and 1993, respectively. GUARANTEES: The Italian corporate entity has guaranteed $650 of certain obligations of an unrelated third party as sole guarantor. Additionally, the entity has guaranteed $824 of obligations of the third party on a joint and several basis with sixteen other unrelated co-guarantors. CONCENTRATION OF CREDIT RISK: The Division operates in one principal industry segment. In 1995, 1994 and 1993, one customer accounted for 18%, 20% and 29%, respectively, of the net sales of the Division. EXCHANGE RATES: Certain items included on the Division's Combined Balance Sheets originating from non-U.S. transactions are subject to fluctuations in the applicable exchange rates between the transaction and settlement dates. F-64 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 13. SEGMENT INFORMATION
1995 1994 1993 ----------- ----------- ----------- Net sales: United States........................................ $ 148,919 $ 139,831 $ 136,141 Europe............................................... 171,235 143,071 127,469 Other geographic regions............................. 10,919 9,709 7,648 ----------- ----------- ----------- Total net sales.................................. $ 331,073 $ 292,611 $ 271,258 ----------- ----------- ----------- ----------- ----------- ----------- Intra-division transfers/sales between geographic areas (eliminated in combination): United States........................................ $ 4,360 $ 3,702 $ 2,077 Europe............................................... 9,748 9,702 7,782 ----------- ----------- ----------- Total intra-divisional transfers/sales........... $ 14,108 $ 13,404 $ 9,859 ----------- ----------- ----------- ----------- ----------- ----------- Operating loss (income): United States........................................ $ 19,469 $ 26,215 $ 32,966 Europe............................................... (6,057) (4,238) 8,523 Other geographic regions............................. (2,128) (2,614) (1,090) ----------- ----------- ----------- Total operating loss............................. $ 11,284 $ 19,363 $ 40,399 ----------- ----------- ----------- ----------- ----------- ----------- Identifiable assets: United States........................................ $ 179,662 $ 199,470 $ 222,874 Europe............................................... 156,182 148,476 135,658 Other geographic regions............................. 4,450 4,474 3,752 ----------- ----------- ----------- Total identifiable assets........................ $ 340,294 $ 352,420 $ 362,284 ----------- ----------- ----------- ----------- ----------- -----------
Transfers between geographic areas are recorded at amounts generally above cost. Operating (income) loss consists of total net sales less cost of sales and operating expenses. The United States' operating loss and identifiable assets include certain amounts related to the administration of worldwide Division operations. Export sales to unaffiliated customers by geographic area are as follows:
1995 1994 1993 ----------- ----------- ----------- Europe................................................. $ 18,881 $ 15,639 $ 14,225 North America.......................................... 11,824 9,946 7,461 Other.................................................. 8,582 6,746 6,123 ----------- ----------- ----------- $ 39,287 $ 32,331 $ 27,809 ----------- ----------- ----------- ----------- ----------- -----------
14. RELATED PARTY TRANSACTIONS Certain expenses reflected in the Combined Statements of Operations include allocated amounts of $2,719, $2,836 and $2,048 in 1995, 1994 and 1993, respectively. These charges are principally for legal, human resource, accounting and treasury functions performed for the Division. F-65 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS OF DOLLARS) 14. RELATED PARTY TRANSACTIONS (CONTINUED) Through the normal course of business, the Division conducts transactions with affiliates. Such transactions in 1995, 1994 and 1993 are summarized as follows:
1995 1994 1993 ----------- ----------- ----------- Purchases of products.................................. $ 11,759 $ 12,212 $ 10,816 Interest expense, net.................................. 1,032 810 1,471 Other expense (income)................................. 968 541 (147)
The Division purchases certain raw materials from affiliates at cost. For purposes of the accompanying financial statements, a mark-up above cost was added to such purchases which adjustment increased the loss from operations in 1995, 1994 and 1993 by $4,192, $4,355 and $3,573, respectively. Accounts payable in the Combined Balance Sheets includes amounts due to affiliates of $2,849 and $343 in 1995 and 1994, respectively. As discussed in Note 1, in July 1995, the Parent contributed the net assets of its United Kingdom Composites Division to a new wholly-owned corporate entity in the United Kingdom. As part of this transaction, debt of the Division owed to affiliates amounting to approximately $22,000 was repaid and approximately $3,900 of fixed assets previously carried on the Division's accounts were transferred to an affiliate of the Division. During 1995, long-term debt due to affiliates approximating $6,500 was repaid with a similar amount being borrowed from an affiliate on a short-term basis. The Division has various financing arrangements with affiliates as discussed in Note 8. 15. SUBSEQUENT EVENT On February 21, 1996, the stockholders of Hexcel Corporation approved a transaction to combine with the Division. On February 29, 1996, the transaction was consummated. According to the terms of the agreement, the Parent will receive 49.9% of the combined entity in exchange for the Division. The Parent will also receive additional consideration as part of the transaction. F-66 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and the Board of Directors of Hercules Incorporated: We have audited the accompanying balance sheets of the Composite Products Division of Hercules Incorporated as of December 31, 1995 and 1994 and the related statements of operations, division equity, and cash flow for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Composite Products Division of Hercules Incorporated as of December 31, 1995 and 1994 and the results of its operations and its cash flow for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Notes 6 and 9 to the financial statements, in 1993, the Company changed its methods of accounting for postretirement and postemployment benefits other than pensions. /s/ COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania 19103 February 26, 1996 F-67 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Net sales.................................................................. $ 100,449 $ 100,113 $ 101,448 Cost of sales.............................................................. 83,748 94,786 92,298 ----------- ----------- ----------- Gross profit............................................................... 16,701 5,327 9,150 Selling, general, and administrative expenses.............................. 2,266 2,888 3,229 Allocated selling, general, and administrative expenses.................... 7,086 6,047 6,336 Research and development................................................... 2,184 2,481 2,815 Other operating (income) expenses, net..................................... (391) 1,670 1,755 ----------- ----------- ----------- Income (loss) before taxes and effect of changes in accounting principles................................................................ 5,556 (7,759) (4,985) Provision for taxes on income.............................................. -- -- -- ----------- ----------- ----------- Income (loss) before effect of changes in accounting principles............ 5,556 (7,759) (4,985) Effect of changes in accounting principles................................. -- -- (3,916) ----------- ----------- ----------- Net income (loss).......................................................... $ 5,556 $ (7,759) $ (8,901) ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the financial statements. F-68 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED BALANCE SHEET (DOLLARS IN THOUSANDS) ASSETS
YEAR ENDED DECEMBER 31 ------------------------ 1995 1994 ----------- ----------- Current Assets Cash................................................................................. $ 2,126 $ 4,905 Trade accounts receivable............................................................ 17,510 14,923 Less allowance for doubtful accounts................................................. (401) (390) ----------- ----------- Net Accounts Receivable............................................................ 17,109 14,533 Inventories Finished products.................................................................. 11,813 13,740 Materials, supplies, and work in process........................................... 13,485 27,225 ----------- ----------- Total Inventories................................................................ 25,298 40,965 ----------- ----------- Total Current Assets................................................................. 44,533 60,403 Property, plant, and equipment Land............................................................................... 1,514 1,514 Buildings and equipment............................................................ 187,185 182,494 Construction in progress........................................................... 6,772 2,231 Accumulated depreciation........................................................... (100,456) (89,459) ----------- ----------- Net Property, Plant and Equipment.................................................. 95,015 96,780 Deferred charges and other assets.................................................... 1,036 1,135 ----------- ----------- TOTAL ASSETS..................................................................... $ 140,584 $ 158,318 ----------- ----------- ----------- ----------- LIABILITIES AND DIVISION EQUITY Current liabilities Accounts payable..................................................................... $ 2,379 $ 2,915 Accrued expenses Payroll and employee benefits...................................................... 5,996 5,177 Other.............................................................................. 3,132 4,631 ----------- ----------- Total Current Liabilities........................................................ 11,507 12,723 Other liabilities.................................................................... 1,048 1,276 Minority interest.................................................................... -- 12,000 Division Equity...................................................................... 128,029 132,319 ----------- ----------- TOTAL LIABILITIES AND DIVISION EQUITY............................................ $ 140,584 $ 158,318 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the financial statements. F-69 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED STATEMENT OF CASH FLOW (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 --------------------------------- 1995 1994 1993 ---------- --------- ---------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss)............................................................ $ 5,556 $ (7,759) $ (8,901) Adjustments to reconcile net income(loss) to cash provided from operations: Depreciation and amortization.............................................. 9,395 9,452 9,522 Gain on settlement......................................................... (1,100) -- -- Loss on disposal of property, plant, and equipment......................... 65 43 (34) Provision for inventory loss............................................... 1,300 1,561 2,642 Accruals and deferrals of cash receipts and payments: Accounts receivable, net................................................... (2,576) (2,862) (1,594) Inventories................................................................ 12,029 11,020 8,281 Accounts payable and accrued expenses...................................... (1,216) 156 3,622 Deferred charges and other assets.......................................... 99 (77) 113 Other liabilities.......................................................... (228) (33) 103 ---------- --------- ---------- Net cash provided by operations............................................ 23,324 11,501 13,754 CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures....................................................... (8,543) (1,871) (1,740) ---------- --------- ---------- Net cash used for investing activities..................................... (8,543) (1,871) (1,740) CASH FLOW FROM FINANCING ACTIVITIES Net Parent company capital withdrawals..................................... (17,560) (7,351) (9,540) ---------- --------- ---------- Net cash used for financing activities..................................... (17,560) (7,351) (9,540) Increase (Decrease) in Cash................................................ (2,779) 2,279 2,474 Cash, beginning of year.................................................... 4,905 2,626 152 ---------- --------- ---------- Cash, end of year.......................................................... $ 2,126 $ 4,905 $ 2,626 ---------- --------- ---------- ---------- --------- ----------
The accompanying notes are an integral part of the financial statements. F-70 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED STATEMENT OF CHANGES IN DIVISION EQUITY (DOLLARS IN THOUSANDS) BALANCE AT JANUARY 1, 1993........................................................ $ 163,220 Net loss.......................................................................... (8,901) Net Capital withdrawal............................................................ (11,766) --------- BALANCE AT DECEMBER 31, 1993...................................................... $ 142,553 Net loss.......................................................................... (7,759) Net Capital withdrawal............................................................ (2,475) --------- BALANCE AT DECEMBER 31, 1994...................................................... $ 132,319 Net income........................................................................ 5,556 Net Capital withdrawal............................................................ (9,846) --------- BALANCE AT DECEMBER 31, 1995...................................................... $ 128,029 --------- ---------
The accompanying notes are an integral part of the financial statements. F-71 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED NOTES TO FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) 1. SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The Composite Products Division (CPD) is a division of Hercules Incorporated (the Parent). CPD serves worldwide markets for carbon fiber materials (fiber and prepregs). These materials are used to make structural products. The division has three major operating units which include Bacchus (Magna, UT), HISPAN (Decatur, AL) and HAESA (Madrid, Spain). Currently, the division's geographic scope is primarily North America, where its largest facilities are located. CPD serves a diverse customer base which operate in several market segments. CPD sales to the U.S. Government represented approximately 22%, 41%, and 49% of total net sales during 1995, 1994, and 1993, respectively. CPD sales to Construcciones Aeronauticas S.A. (Government of Spain) represented approximately 14%, 12%, and 9% of total net sales during 1995, 1994, and 1993 respectively. CPD performs ongoing evaluations of its customers but generally does not require collateral to support customer receivables. The financial statements reflect the results of operations and financial position of CPD, including certain allocations by the parent company. All material intercompany transactions and balances have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ENVIRONMENTAL EXPENDITURES Environmental expenditures that pertain to current operations or relate to future revenues are expensed or capitalized consistent with the Parent's capitalization policy. Expenditures that result from the remediation of an existing condition caused by past operations, that do not contribute to current or future revenues, are expensed. Liabilities are recognized for remedial activities when the cleanup is probable and the cost can be reasonably estimated. INVENTORIES Inventories are stated at the lower of cost or market. Domestic inventories are valued predominantly on the last-in, first-out (LIFO) method. Spare parts, supplies and foreign inventories, representing approximately $6,130, and $6,270 in 1995 and 1994, respectively, are valued on the average cost method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. HISPAN and HAESA use the straight-line method, while Bacchus uses an accelerated depreciation method. Effective January 1, 1993, CPD changed its estimate of the useful lives for all processing equipment. CPD believes these new depreciation lives provide for a better matching of costs and revenues over the life of the assets. For income tax purposes, accelerated depreciation methods are used. Maintenance, repairs, and minor renewals are charged to income; major renewals and betterments are capitalized. Upon normal retirement or replacement, the cost of property (less proceeds of sale or salvage) is charged to income. F-72 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) INCOME TAXES CPD is not a separate tax paying entity. Accordingly, its results of operations have been included in tax returns filed by Hercules. The accompanying financial statements include tax computations assuming CPD filed separate returns and reflecting the application of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" for all periods presented. FOREIGN CURRENCY TRANSLATION Assets and liabilities of HASEA are translated at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a component of division equity. 2. SUPPLEMENTAL CASH FLOW INFORMATION: During 1995, CPD was involved in the following non-cash activities with the Parent: - $7,538 of assets relating to claims were withdrawn by the Parent - $2,000 of fixed assets were contributed by the Parent and - $10,900 of equity was contributed by the Parent pursuant to the Parent's buy out of the minority interest During 1994, $4,437 of equity was contributed by the Parent through a dividend payment to the minority shareholder. 3. INVENTORIES: If the cost of all inventories had been valued on the average cost method, which approximates current cost, inventories would have been $460 and $691 higher than as reported on the LIFO method at December 31, 1995, and 1994, respectively. During 1995 and 1994, inventory quantities were reduced, which resulted in a liquidation of LIFO inventory layers carried at higher costs which prevailed in prior years. The effect of the liquidations was to increase cost of goods sold and decrease net income (increase net loss) by approximately $6,880 and $2,570 in 1995 and 1994, respectively. 4. PENSIONS: CPD participates in various Hercules-defined benefit pension plans covering substantially all employees. Benefits are based on average final pay and years of service. CPD's allocation of amounts credited directly to Allocated Selling, General and Administrative expense, based on the relationship of CPD's total payroll to Hercules' payroll, was $1,034, $215, and $260 in 1995, 1994 and 1993, respectively. Information on the actuarial present value of benefit obligation, fair value of plan assets, and pension costs is not provided as such information is not maintained separately for employees of CPD. 5. EMPLOYEE BENEFIT PLAN: An operating unit of CPD has a noncontributory defined contribution pension plan covering substantially all employees. This operating unit contributes amounts equal to 6% of covered employee compensation up to the Social Security Wage Base and amounts equal to 5% in excess of the Social Security Wage Base. Pension expense for the years ended December 31, 1995, 1994, and 1993 was $133, $130 and $150, respectively. F-73 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 6. OTHER POSTRETIREMENT BENEFITS: CPD participates in certain defined benefit postretirement health care and life insurance programs provided to retired Hercules employees. Substantially all employees are covered and become eligible for these benefits upon satisfying the appropriate age and service requirements necessary for receipt of these benefits. Effective January 1, 1993, Hercules adopted Statement of Financial Accounting Standards (SFAS) No. 106 "Employers' Accounting for Postretirement Benefits Other than Pensions." SFAS No. 106 requires the recognition of these benefit costs on an accrual basis. Prior to January 1, 1993, the costs of retiree health care and life insurance were expensed as paid. The effect of adopting this accounting standard has been recognized immediately as the effect of a change in accounting principle and has resulted in a charge of $3,122. (No tax benefit was realized). This represents the accumulated postretirement benefit obligation existing at January 1, 1993. CPD's allocated portion of the net periodic postretirement cost was $456, $556 and $746 in 1995, 1994, and 1993, respectively. The accumulated postretirement benefit expense and the annual postretirement benefit expense were allocated based on the relationship between CPD's number of active employees to Hercules' number of active employees. The liability for such costs has not been reflected in these financial statements. 7. PURCHASE OF MINORITY INTEREST: As disclosed in Note 2, the Parent bought out the minority interest holder in HISPAN for $10,900 in 1995. In addition, included in other (income) expense in 1995 is a $1,100 gain related to the settlement of CPD's claim against the minority holder. 8. CLAIMS: During 1995, $6,840 of assets relating to a claim due to a termination for convenience by the U.S. Government were withdrawn from CPD by the Parent, who is entitled to the cash receipt of the claim value. The estimated profit relating to these claims of $1,500 is included in CPD sales in 1995. In addition, $698 of assets relating to a damaged inventory claim were withdrawn from CPD by the Parent. 9. POSTEMPLOYMENT BENEFITS: CPD participates in certain disability and workers' compensation benefits, including medical benefits, provided to former or inactive Hercules employees. Substantially all employees are covered and become eligible for these benefits upon satisfying the appropriate age and service requirements necessary for receipt of these benefits. Effective January 1, 1993, Hercules adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." This statement requires recognition of these benefit costs on an accrual basis. Prior to January 1, 1993, disability benefits and workers' compensation benefits were expensed as claims were reported. The effect of adopting SFAS No. 112 has been recognized immediately as the effect of a change in accounting principle and has resulted in a charge of $794. (No tax benefit was realized). The income statement impact of this accumulated postemployment benefit expense was allocated based on the relationship between CPD's total number of employees and Hercules' total number of employees. The periodic postemployment benefit costs, which are included in the corporate cost allocation, are impracticable to determine. The liability for such costs has not been reflected in these financial statements. F-74 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 10. RELATED PARTY TRANSACTIONS: The financial statements include allocations by Hercules for certain corporate administrative and benefit costs incurred for the benefit of all operating divisions. These costs are allocated to operating divisions on a variety of methodologies as follows: a. Specific identification -- based on estimates of time and services provided. b. Relative identification -- based on relevant criteria that establishes the division's relationship to the entire pool of beneficiaries. c. Formula driven -- nonidentifiable to division but incurred for the benefit of all. Corporate costs include executive, legal, accounting, tax, auditing, cash management, purchasing, safety, human resources, health and environmental, international, and employee benefits. Allocated costs included in selling, general, and administrative costs were $7,086, $6,047, and $6,336 during 1995, 1994, and 1993, respectively. These allocations, while reasonable under the circumstances, may not represent the cost of similar activities on a separate entity basis. 11. CASH AND CAPITAL REQUIREMENTS: Certain operating units of CPD participated in Hercules' centralized cash management system. Accordingly, cash received from CPD operations was administered centrally while Hercules financed operational and working capital requirements as well as capital expenditures. These operating units had no external sources of financing, such as available lines of credit, as may be necessary to operate as a separate entity. The statement of cash flow is prepared as though the cash received and disbursed on behalf of these CPD operating units by Hercules was transacted through CPD. The cash balance represents amounts directly held by two operating units of CPD. 12. CAPITALIZED INTEREST: As a result of cash management and funding practices within Hercules, CPD records capitalized interest on construction projects. These amounts are based on Hercules' weighted average interest rate on borrowings outstanding during the construction periods. The amortization of capitalized interest, included in other operating income and expense for 1995, 1994, and 1993, was $650, $650, and $650 while the unamortized balance included as a cost of facilities at December 31, 1995 and 1994 was $4,551 and $5,201, respectively. 13. TAXES ON INCOME: The domestic and foreign components of income (loss) before taxes on income are presented below.
1995 1994 1993 --------- --------- --------- Domestic............................................................... $ 4,604 $ (7,023) $ (4,401) Foreign................................................................ 952 (736) (584) --------- --------- --------- $ 5,556 $ (7,759) $ (4,985) --------- --------- --------- --------- --------- ---------
F-75 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 13. TAXES ON INCOME: (CONTINUED) Deferred tax liabilities (assets) at December 31, 1995 and 1994 consist of:
1995 1994 --------- --------- Depreciation..................................................................... $ 20,689 $ 21,415 --------- --------- --------- --------- Gross deferred tax liabilities................................................... 20,689 21,415 Net Operating Losses............................................................. (21,440) (22,598) Accrued expenses................................................................. (24) (24) Inventory........................................................................ (3,302) (4,792) Accounts receivable.............................................................. (153) (149) Deferred Assets.................................................................. 0 (176) --------- --------- Gross deferred tax assets........................................................ (24,919) (27,739) Valuation allowance.............................................................. 4,230 6,324 --------- --------- Net deferred tax liability....................................................... $ 0 $ 0 --------- --------- --------- ---------
A reconciliation of income taxes at the U.S. statutory rate with the income taxes recorded follows:
1995 1994 1993 --------- --------- --------- Computed at statutory income tax rate.................................. $ 1,941 $ (2,716) $ (1,745) State taxes, net of federal benefit.................................... 150 (228) (142) Valuation Allowance.................................................... (2,094) 2,942 1,886 Other.................................................................. 3 2 1 --------- --------- --------- Provision for income taxes............................................. $ 0 $ 0 $ 0 --------- --------- --------- --------- --------- ---------
14. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES CPD leases buildings, vehicles, and equipment under various operating leases with third parties. Rent expense under operating leases for the years ended December 31, 1995, 1994, and 1993 was $603, $547, and $540, respectively. SUPPLIER AGREEMENT CPD entered into an agreement with a customer to supply carbon fiber at a fixed price. The price is adjusted annually based on inflation and the agreement expires on March 15, 2000. F-76 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED NOTES TO FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS) 15. OPERATIONS BY GEOGRAPHIC AREA: The following table represents operating results and other financial data by geographic area:
UNITED STATES OTHER TOTAL ------------ --------- ----------- 1995 Net sales........................................................ $ 81,447 $ 19,002 $ 100,449 Profit from operations........................................... 3,587 1,969 5,556 Identifiable assets.............................................. 118,219 19,203 137,422 1994 Net sales........................................................ 84,161 15,952 100,113 Loss from operations............................................. (9,456) 1,697 (7,759) Identifiable assets.............................................. 133,744 18,534 152,278 1993 Net sales........................................................ 88,894 12,554 101,448 Loss from operations............................................. (5,891) 906 (4,985) Identifiable assets.............................................. 150,302 16,701 167,003
The company's foreign operations are primarily in Spain. Identifiable assets include net trade accounts receivable, inventories, and net property, plant and equipment. 16. PENDING SALE: On December 20, 1995, a letter of intent was signed by the company's Parent with a third party for the pending sale of substantially all the assets and liabilities of the company. F-77 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
UNAUDITED THREE MONTHS ENDED MARCH 31, 1996 --------------------- Net sales.................................................................................. $ 22,342 Cost of sales.............................................................................. 17,303 -------- Gross profit............................................................................... 5,039 Selling, general, and administrative expenses.............................................. 296 Allocated selling, general, and administrative expenses.................................... 1,611 Research and development................................................................... 518 Other operating (income) expenses, net..................................................... 220 -------- Income (loss) before taxes................................................................. 2,394 Provision for taxes on income.............................................................. -- -------- Net income (loss).......................................................................... $ 2,394 -------- --------
The accompanying notes are an integral part of the Financial Statements F-78 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED BALANCE SHEET (DOLLARS IN THOUSANDS)
UNAUDITED MARCH 31, 1996 -------------- ASSETS Current Assets.................................................................................... Cash.............................................................................................. $ 603 Trade accounts receivable......................................................................... 16,451 Less allowance for doubtful accounts.............................................................. (390) -------------- Net Accounts Receivable......................................................................... 16,061 Inventories Finished products............................................................................... 13,824 Materials, supplies, and work in process........................................................ 14,790 -------------- Total Inventories............................................................................. 28,614 -------------- Total Current Assets.............................................................................. 45,278 Property, plant, and equipment Land............................................................................................ 1,514 Buildings and equipment......................................................................... 188,120 Construction in progress........................................................................ 6,194 Accumulated depreciation........................................................................ (102,767) -------------- Net Property, Plant and Equipment............................................................... 93,061 Deferred charges and other assets................................................................. 1,027 -------------- TOTAL ASSETS.................................................................................. $ 139,366 -------------- -------------- LIABILITIES AND DIVISION EQUITY Current liabilities............................................................................... Accounts payable.................................................................................. $ 3,979 Accrued expenses Payroll and employee benefits................................................................... 3,581 Other........................................................................................... 2,688 -------------- Total Current Liabilities..................................................................... 10,248 Other liabilities................................................................................. 1,113 Division Equity................................................................................... 128,005 -------------- TOTAL LIABILITIES AND DIVISION EQUITY......................................................... $ 139,366 -------------- --------------
The accompanying notes are an integral part of the Financial Statements F-79 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED STATEMENT OF CASH FLOW (DOLLARS IN THOUSANDS)
UNAUDITED THREE MONTHS ENDED MARCH 31, 1996 ------------------- CASH FLOW FROM OPERATING ACTIVITIES Net income (loss)............................................................................ $ 2,394 Adjustments to reconcile net income(loss) to cash provided from operations: Depreciation and amortization.............................................................. 2,495 Accruals and deferrals of cash receipts and payments: Accounts receivable, net................................................................... 1,048 Inventories................................................................................ (3,316) Accounts payable and accrued expenses...................................................... (1,259) Deferred charges and other assets.......................................................... 9 Other liabilities.......................................................................... 65 ------- Net cash provided by operations............................................................ 1,436 CASH FLOW FROM INVESTING ACTIVITIES Capital expenditures....................................................................... (782) ------- Net cash used for investing activities..................................................... (782) CASH FLOW FROM FINANCING ACTIVITIES Net Parent company capital withdrawals..................................................... (2,177) ------- Net cash used for financing activities..................................................... (2,177) Increase (Decrease) in Cash................................................................ $ 1,523 Cash, beginning of year.................................................................... 2,126 ------- Cash, end of year.......................................................................... $ 603 ------- -------
The accompanying notes are an integral part of the Financial Statements F-80 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED STATEMENT OF CHANGES IN DIVISION EQUITY (DOLLARS IN THOUSANDS)
UNAUDITED ---------- BALANCE AT JANUARY 1, 1996............................................................................ $ 128,029 Net Income............................................................................................ 2,394 Net Capital withdrawal................................................................................ (2,418) ---------- BALANCE AT MARCH 31, 1996............................................................................. $ 128,005 ---------- ----------
The accompanying notes are an integral part of the Financial Statements F-81 COMPOSITE PRODUCTS DIVISION HERCULES INCORPORATED NOTES TO UNAUDITED FINANCIAL STATEMENTS 1. THE COMPOSITE PRODUCTS DIVISION (CPD) IS A DIVISION OF HERCULES INCORPORATED (THE PARENT). The accompanying statements are unaudited and have been prepared by CPD. The financial statements reflect the results of operations and financial position of CPD, including certain allocations by the parent company. All material intercompany transactions have been eliminated. In the opinion of management such financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. The aforementioned financial statements have been prepared substantially in conformity with the accounting principles reflected in the CPD financial statements for the year ended December 31, 1995. F-82 - ------------------------------------------- ------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. -------------- TABLE OF CONTENTS
PAGE --------- Available Information.......................... 4 Incorporation of Certain Documents by Reference..................................... 4 Prospectus Summary............................. 5 Risk Factors................................... 13 Use of Proceeds................................ 19 Capitalization................................. 20 Price Range of Common Stock and Dividend Policy........................................ 21 Pro Forma Financial Information................ 22 Selected Consolidated Financial Information.... 30 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 33 Business....................................... 46 Management..................................... 59 Description of Notes........................... 62 Description of Capital Stock................... 71 Underwriting................................... 74 Notice to Canadian Residents................... 75 Certain Federal Income Tax Considerations...... 76 Legal Matters.................................. 79 Experts........................................ 79 Glossary of Terms.............................. 80 Index to Financial Statements.................. F-1
[LOGO] $100,000,000 % Convertible Subordinated Notes Due 2003 P R O S P E C T U S CS First Boston Bear, Stearns & Co. Inc. - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Registration Fee -- Securities and Exchange Commission........... $ 39,655 National Association of Securities Dealers, Inc. Filing Fee...... 12,000 Printing and Engraving Expenses.................................. 200,000* Legal Fees and Expenses.......................................... 150,000* Trustee Fees and Expenses........................................ 10,000* Accounting Fees and Expenses..................................... 100,000* Rating Agency Fees............................................... 100,000* Blue Sky Fees and Expenses....................................... 20,000* Miscellaneous.................................................... 68,345* --------- Total........................................................ $ 700,000 --------- ---------
- ------------------------ * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Set forth below is a description of certain provisions of the General Corporation Law of the State of Delaware (the "GCL"), the Certificate of Incorporation of the Registrant, the Bylaws of the Registrant, the Strategic Alliance Agreement dated as of September 29, 1995 among Ciba-Geigy Limited, Ciba-Geigy Corporation and the Registrant, as amended (the "Strategic Alliance Agreement"), and the Hexcel Corporation Incentive Stock Plan (the "Incentive Stock Plan"), as such provisions relate to the indemnification of the directors and officers of the Registrant. This description is intended only as a summary and is qualified in its entirety by reference to the applicable provisions of the GCL, the Certificate of Incorporation of the Registrant, the Bylaws of the Registrant, the Strategic Alliance Agreement and the Plan, which are incorporated herein by reference. The Registrant is a Delaware corporation. Section 145 of the GCL provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at its request in such capacity at another corporation or business organization, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such person's conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify against the expenses that such officer or director actually and reasonably incurred. Section 102(b)(7) of the GCL permits a corporation to provide in its certificate of incorporation that a director of a corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL (Liability of Directors for Unlawful Payment of Dividend or Unlawful Stock Purchase or Redemption) or (iv) for any transaction from which the director derived an improper personal benefit. II-1 The Registrant's Certificate of Incorporation provides for the elimination of personal liability of a director for breach of fiduciary duty, to the full extent permitted by the GCL. The Registrant's Certificate of Incorporation also provides that the Registrant shall indemnify its directors and officers to the full extent permitted by the GCL; PROVIDED, HOWEVER, that the Registrant shall indemnify any such person seeking indemnification in connection with a proceeding initiated by such person only if such proceeding was authorized by the Board of Directors of the Registrant. The Certificate of Incorporation further provides that the Registratnt may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification similar to those provided to the directors and officers of the Registrant to the employees and agents of the Registrant who are not directors or officers of the Registrant. The Strategic Alliance Agreement provides that the Registrant's Certificate of Incorporation and Bylaws will continue to contain the provisions with respect to indemnification of directors and officers as of the date of the Strategic Alliance Agreement, which provisions will not be amended, repealed or otherwise modified, for a period of six years following the Closing contemplated by the Strategic Alliance Agreement (the "Ciba Closing") in any manner that would adversely affect the rights of individuals who at any time prior to the Ciba Closing were directors or officers of the Registrant in respect of actions or omissions occurring at or prior to the Ciba Closing, except for such modifications as are required by applicable law. In addition, the Strategic Alliance Agreement generally requires the Registrant to indemnify its officers and directors as of the date of the Strategic Alliance Agreement against all losses (including reasonable fees and expenses of counsel) arising out of any claim based in whole or in part on the fact that such person was a director or officer of the Registrant at or prior to the Ciba Closing. The Registrant maintains, at its expense, an insurance policy which insures the directors and officers of the Registrant, subject to certain exclusions and deductions, against certain liabilities that they may incur in their capacity as such. The Strategic Alliance Agreement provides that for six years after the Ciba Closing, the Registrant is generally required to provide directors' and officers' liability insurance for its officers and directors as of the date of the Strategic Alliance Agreement. Pursuant to the Plan, no member of the Executive Compensation Committee of the Board of Directors of the Company or such other committee of the Board of Directors as may be designated by the Board of Directors from time to time to administer the Incentive Stock Plan shall be liable for any action or determination made in good faith, and the members of such committee shall be entitled to indemnification in the manner provided in the Registrant's Certificate of Incorporation. ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION - --------- -------------------------------------------------------------------------------------------------- 1 Form of Underwriting Agreement among the Company, CS First Boston and Bear, Stearns & Co. Inc. 2.1 First Amended Plan of Reorganization dated as of November 7, 1994 (incorporated by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 1994). 2.2 Strategic Alliance Agreement dated as of September 29, 1995 among the Company, Ciba and CGC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on 8-K dated as of October 13, 1995). 2.2(a) Amendment dated as of December 12, 1995 to the Strategic Alliance Agreement (incorporated by reference to Exhibit 2.1(a) to the Company's Current Report on Form 8-K dated as of March 15, 1996). 2.2(b) Letter Agreement dated as of February 28, 1996 among the Company, Ciba and CGC (incorporated by reference to Exhibit 2.1(c) to the Company's Current Report on Form 8-K dated as of March 15, 1996).
II-2
EXHIBIT NO. DESCRIPTION - --------- -------------------------------------------------------------------------------------------------- 2.2(d) Distribution Agreement dated as of February 29, 1996 among the Company, Brochier S.A., Composite Materials Limited, Salver S.r.l. and Ciba (incorporated by reference to Exhibit 2.1(c) to the Company's Current Report on Form 8-K dated as of March 15, 1995). 2.3 Sale and Purchase Agreement dated as of April 15, 1996 among the Company, Hercules, Hercules Nederland BV and HISPAN Corporation (incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996) as amended by the amendments dated June 27, 1996 (incorporated by reference to Exhibits 2.2 and 2.3 to the Company's Current Report on Form 8-K dated as of July 12, 1996). 4 Form of Indenture between the Company and First Trust of California, National Association, as trustee, relating to the Notes. 5 Opinion of Skadden, Arps, Slate, Meagher & Flom regarding the legality of the securities covered by this Registration Statement. 12 Statement re: computation of ratio of earnings to fixed charges. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Coopers & Lybrand L.L.P. (Philadelphia, Pennsylvania) 23.3 Consent of Coopers & Lybrand L.L.P. (Stamford, Connecticut) 23.4 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit 5). +24 Power of attorney. +25 Statement of Eligibility on Form T-1 of First Trust of California, National Association, as trustee, under the Indenture relating to the Notes.
- ------------------------ + Previously filed. ITEM 17. UNDERTAKINGS (a) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (b) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (2) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon II-3 Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (3) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to the Registrant's Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Stamford and State of Connecticut, on July 18, 1996. HEXCEL CORPORATION By: /s/ JOHN J. LEE* ----------------------------------- John J. Lee CHAIRMAN OF THE BOARD OF DIRECTORS, CHIEF EXECUTIVE OFFICER AND DIRECTOR Pursuant to the requirements of the Securities Act, this Amendment No. 2 to the Registrant's Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - -------------------------------------------- ------------------------------- ------------- Chairman of the Board of /s/ JOHN J. LEE* Directors, Chief Executive - ------------------------------------------- Officer and Director July 18, 1996 John J. Lee (Principal Executive Officer) /s/ JUERGEN HABERMEIER* - ------------------------------------------- President, Chief Operating July 18, 1996 Juergen Habermeier Officer and Director /s/ WILLIAM P. MEEHAN* Vice President -- Finance and - ------------------------------------------- Chief Financial Officer July 18, 1996 William P. Meehan (Principal Financial Officer) /s/ WAYNE C. PENSKY* Corporate Controller and Chief - ------------------------------------------- Accounting Officer (Principal July 18, 1996 Wayne C. Pensky Accounting Officer) /s/ JOHN M.D. CHEESMOND* - ------------------------------------------- Director July 18, 1996 John M.D. Cheesmond /s/ MARSHALL S. GELLER* - ------------------------------------------- Director July 18, 1996 Marshall S. Geller
II-5
SIGNATURE TITLE DATE - -------------------------------------------- ------------------------------- ------------- /s/ STANLEY SHERMAN* - ------------------------------------------- Director July 18, 1996 Stanley Sherman /s/ MARTIN L. SOLOMON* - ------------------------------------------- Director July 18, 1996 Martin L. Solomon /s/ GEORGE S. SPRINGER* - ------------------------------------------- Director July 18, 1996 George S. Springer /s/ JOSEPH T. SULLIVAN* - ------------------------------------------- Director July 18, 1996 Joseph T. Sullivan /s/ FRANKLIN S. WIMER* - ------------------------------------------- Director July 18, 1996 Franklin S. Wimer *By: /s/ STEPHEN C. FORSYTH Stephen C. Forsyth Attorney-in-fact
II-6 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE - --------- ----------------------------------------------------------------------------------------- --------- 1 Form of Underwriting Agreement among the Company, CS First Boston and Bear, Stearns & Co. Inc. 2.1 First Amended Plan of Reorganization dated as of November 7, 1994 (incorporated by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended October 2, 1994). 2.2 Strategic Alliance Agreement dated as of September 29, 1995 among the Company, Ciba and CGC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on 8-K dated as of October 13, 1995). 2.2(a) Amendment dated as of December 12, 1995 to the Strategic Alliance Agreement (incorporated by reference to Exhibit 2.1(a) to the Company's Current Report on Form 8-K dated as of March 15, 1996). 2.2(b) Letter Agreement dated as of February 28, 1996 among the Company, Ciba and CGC (incorporated by reference to Exhibit 2.1(c) to the Company's Current Report on Form 8-K dated as of March 15, 1996). 2.2(d) Distribution Agreement dated as of February 29, 1996 among the Company, Brochier S.A., Composite Materials Limited, Salver S.r.l. and Ciba (incorporated by reference to Exhibit 2.1(c) to the Company's Current Report on Form 8-K dated as of March 15, 1995). 2.3 Sale and Purchase Agreement dated as of April 15, 1996 among the Company, Hercules, Hercules Nederland BV and HISPAN Corporation (incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996) as amended by the amendments dated June 27, 1996 (incorporated by reference to Exhibits 2.2 and 2.3 to the Company's Current Report on Form 8-K dated as of July 12, 1996). 4 Form of Indenture between the Company and First Trust of California, National Association, as trustee, relating to the Notes. 5 Opinion of Skadden, Arps, Slate, Meagher & Flom regarding the legality of the securities covered by this Registration Statement. 12 Statement re: computation of ratio of earnings to fixed charges. 23.1 Consent of Deloitte & Touche LLP. 23.2 Consent of Coopers & Lybrand L.L.P. (Philadelphia, Pennsylvania) 23.3 Consent of Coopers & Lybrand L.L.P. (Stamford, Connecticut) 23.4 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit 5). +24 Power of attorney. +25 Statement of Eligibility on Form T-1 of First Trust of California, National Association, as trustee, under the Indenture relating to the Notes.
- ------------------------ + Previously filed. EX-1 2 EXHIBIT 1 $100,000,000 HEXCEL CORPORATION % Convertible Subordinated Notes Due 2003 UNDERWRITING AGREEMENT July , 1996 CS FIRST BOSTON CORPORATION, BEAR, STEARNS & CO. INC. c/o CS FIRST BOSTON CORPORATION Park Avenue Plaza, New York, NY 10055 Dear Sirs: 1. INTRODUCTORY. Hexcel Corporation, a Delaware corporation (the "Company"), proposes to issue and sell $100,000,000 principal amount (the "Firm Securities") of its % Convertible Subordinated Notes Due 2003 (the "Securities") and also proposes to issue and sell to the Underwriters, at the option of the Underwriters, an aggregate of not more than $15,000,000 additional principal amount (the "Optional Securities") of Securities as set forth below, all to be issued under an indenture, dated as of July , 1996 (the "Indenture"), between the Company and First Trust of California, National Association, as trustee (the "Trustee"). The Firm Securities and the Optional Securities are herein collectively called the "Offered Securities". The Company hereby agrees with CS First Boston Corporation ("CS First Boston") and Bear, Stearns & Co. Inc. (collectively, the "Underwriters") as follows: 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to, and agrees with the Underwriters that: (a) A registration statement (No. 333-05821) relating to the Offered Securities and the shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") into which the Offered Securities are 2 convertible (the "Underlying Shares"), including a form of prospectus, has been filed with the Securities and Exchange Commission (the "Commission") and either (i) has been declared effective under the Securities Act of 1933 (the "Act") and is not proposed to be amended or (ii) is proposed to be amended by amendment or post-effective amendment. If such registration statement (the "initial registration statement") has been declared effective, either (i) one or more additional registration statements (each an "additional registration statement") relating to the Offered Securities and the Underlying Shares may have been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act and, if so filed, each of which has become effective upon filing pursuant to such Rule, and the Offered Securities and such Underlying Shares have been duly registered under the Act pursuant to the initial registration statement and, if applicable, any additional registration statement or (ii) one or more additional registration statements are proposed to be filed with the Commission pursuant to Rule 462(b) and each will become effective upon filing pursuant to such rule, and upon such filing the Offered Securities and such Underlying Shares will have been duly registered under the Act pursuant to the initial registration statement and any additional registration statement. If the Company does not propose to amend the initial registration statement or if one or more additional registration statements have been filed and the Company does not propose to amend any of them, and if any post-effective amendment to any such registration statement has been filed with the Commission prior to the execution and delivery of this Agreement, the most recent amendment (if any) to each such registration statement has been declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case of an additional registration statement, Rule 462(b). For purposes of this Agreement, "Effective Time" with respect to the initial registration statement or, if filed prior to the execution and delivery of this Agreement, an additional registration statement means (i) if the Company has advised the Underwriters that it does not propose to amend such registration statement, the date and time as of which such registration statement, or the most recent post-effective amendment thereto (if any) filed prior to the execution and delivery of this Agreement, 3 was declared effective by the Commission or has become effective upon filing pursuant to Rule 462(c), or (ii) if the Company has advised the Underwriters that it proposes to file an amendment or post-effective amendment to such registration statement, the date and time as of which such registration statement, as amended by such amendment or post-effective amendment, as the case may be, is declared effective by the Commission. If an additional registration statement has not been filed prior to the execution and delivery of this Agreement but the Company has advised the Underwriters that it proposes to do so, "Effective Time" with respect to each such additional registration statement means the date and time as of which each such additional registration statement is filed and becomes effective pursuant to Rule 462(b). "Effective Date" with respect to the initial registration statement or an additional registration statement (if any) means the date of the Effective Time thereof. The initial registration statement, as amended at its Effective Time, including all material incorporated by reference therein, including all information contained in all additional registration statements (if any) and deemed to be a part of the initial registration statement as of the Effective Time of each additional registration statement pursuant to the General Instructions of the Form on which it is filed and including all information (if any) deemed to be a part of the initial registration statement as of its Effective Time pursuant to Rule 430A(b) ("Rule 430A(b)") under the Act, is hereinafter referred to as the "Initial Registration Statement". Each additional registration statement, as amended at its Effective Time, including the contents of the initial registration statement incorporated by reference therein and including all information (if any) deemed to be a part of such additional registration statement as of its Effective Time pursuant to Rule 430A(b), is hereinafter referred to as an "Additional Registration Statement". The Initial Registration Statement and each Additional Registration Statement are herein referred to collectively as the "Registration Statements" and individually as a "Registration Statement". The form of prospectus relating to the Offered Securities, as first filed with the Commission pursuant to and in accordance with Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is required) as included in a Registration Statement, including all material 4 incorporated by reference in such prospectus, is hereinafter referred to as the "Prospectus". No document has been or will be prepared or distributed in reliance on Rule 434 under the Act; (b) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement: (i) on the Effective Date of the Initial Registration Statement, the Initial Registration Statement complied in all material respects with the requirements of the Act and the rules and regulations of the Commission (the "Rules and Regulations") and did not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) on the Effective Date of each Additional Registration Statement (if any), each Registration Statement complied, or will comply in all material respects with the requirements of the Act and the Rules and Regulations and did not include, or will not include, any untrue statement of a material fact and did not omit, or will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) on the date of this Agreement, the Initial Registration Statement and, if the Effective Time of any Additional Registration Statement is prior to the execution and delivery of this Agreement, each such Additional Registration Statement complies, and at the time of filing of the Prospectus pursuant to Rule 424(b) or (if no such filing is required) at the Effective Date of each Additional Registration Statement in which the Prospectus is included, each Registration Statement and the Prospectus will comply, in all material respects with the requirements of the Act and the Rules and Regulations, and none of such documents includes, or will include, any untrue statement of a material fact or omits, or will omit, to state any material fact required to be stated therein or necessary to make the statements therein, (in the case of the Prospectus) in light of the circumstances under which they were made, not misleading. If the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement: on the Effective Date of the Initial Registration Statement, the Initial Registration Statement and the Prospectus will comply in all respects with the requirements of the Act and 5 the Rules and Regulations, neither of such documents will include any untrue statement of a material fact or will omit to state any material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances in which they were made) not misleading, and no Additional Registration Statement has been or will be filed. The two preceding sentences do not apply to statements in or omissions from a Registration Statement or the Prospectus made in reliance upon (i) written information furnished to the Company by any Underwriter specifically for use therein, it being understood and agreed that the only such information is that described as such in Section 7(b) of this Agreement or (ii) made or omitted from the Statement of Eligibility of the Trustee on Form T-1, other than any such untrue statement or omission made therein or omitted therefrom in reliance on information furnished in writing to the Trustee by the Company for use therein; (c) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and the Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification, except where the failure to so qualify would not have a material adverse effect on the Company and its Subsidiaries (as hereinafter defined), taken as a whole; (d) Each subsidiary of the Company within the meaning of Rule 1-02 of Regulation S-X under the Act is listed in Schedule A hereto (collectively, the "Subsidiaries"). Each Subsidiary has been duly incorporated and is a validly existing corporation in good standing (where applicable) under the laws of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each Subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing (where applicable) in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification except where the failure to so qualify would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole; all the issued and outstanding capital stock of each Subsidiary of the Company has been duly authorized and validly issued and 6 is fully paid and nonassessable; and except as disclosed in Schedule A hereto, the outstanding capital stock of each Subsidiary is owned by the Company, directly or through subsidiaries, and is owned free from liens, encumbrances and defects except for those disclosed in a schedule to the Credit Agreement or as disclosed in the Registration Statement; (e) The Indenture has been duly authorized and, if the Effective Time of a Registration Statement is prior to the execution and delivery of this Agreement, has been or otherwise upon such Effective Time will be duly qualified under the Trust Indenture Act of 1939 (the "Trust Indenture Act") with respect to the Offered Securities registered thereby; the Offered Securities have been duly authorized; and when the Offered Securities are authenticated and delivered by the Trustee in accordance with the terms of the Indenture and are delivered to and paid for by the Underwriters pursuant to this Agreement on each Closing Date (as defined below), such Offered Securities will be valid and binding obligations of the Company entitled to the benefit of the Indenture and enforceable against the Company in accordance with their respective terms except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws, now or hereafter in effect, relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); the Indenture will have been duly executed and delivered by the Company and assuming due authorization, execution and delivery thereof by the Trustee, will constitute a valid and legally binding obligation of the Company, enforceable in accordance with its terms, except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws, now or hereafter in effect, relating to creditors' rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); the Offered Securities will conform in all material respects thereof to the description contained in the Prospectus; (f) When the Offered Securities are delivered in accordance with the Indenture and paid for pursuant to 7 this Agreement on each Closing Date, such Offered Securities will be convertible into the Underlying Shares in accordance with the terms of the Indenture; the Underlying Shares initially issuable upon conversion of such Offered Securities have been duly authorized and reserved for issuance upon such conversion and, when issued upon such conversion, will be validly issued, fully paid and nonassessable; the outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and conform in all material respects to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights with respect to the Offered Securities or the Underlying Shares. Ciba-Geigy Limited ("Ciba"), however, has informed the Company that, by reason of the issuance of the Securities, it believes (which belief the Company disagrees with) it has certain rights to purchase securities similar to the Securities and additional Common Stock pursuant to Section 3.02 of the Governance Agreement dated as of February 29, 1996, between Ciba and the Company (the "Governance Agreement"), but has executed a waiver of such purported rights with respect to the issuance of the Securities and of additional Common Stock upon conversion of such Securities; (g) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between the Company and any person that would give rise to a valid claim against the Company or any Underwriter for a brokerage commission, finder's fee or other like payment with respect to the issuance of the Offered Securities and of the additional Common Stock upon conversion of the Offered Securities contemplated hereby; (h) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the Registration Statement or in any other registration statement filed by the Company under the Act, except as provided in the Registration Rights Agreement dated as of February 29, 1996, between Ciba and the Company, the Registration 8 Rights Agreement dated as of February 9, 1995, between Mutual Series Fund Inc. and the Company, the agreement dated April 6, 1995 between John J. Lee, Mutual Series Fund Inc. and the Company and the Registration Rights Agreement for Affiliates dated as of February 9, 1995, among certain Eligible Holders, as defined therein, and the Company; (i) No consent, approval, authorization, or order of, or filing with, any governmental agency or body or any court is required for the consummation of the transactions contemplated by this Agreement in connection with the issuance and sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and the Trust Indenture Act and such as may be required under state securities or Blue Sky laws or regulations; (j) The execution, delivery and performance of the Indenture and this Agreement, and the issuance and sale of the Offered Securities and compliance with the terms and provisions thereof, including the issuance and delivery of Underlying Shares upon conversion (if any) of the Offered Securities, will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (A) any statute, any rule, regulation or order of any governmental agency or body or any court, domestic or foreign, having jurisdiction over the Company or any Subsidiary of the Company or any of their properties, or any agreement or instrument to which the Company or any such Subsidiary is a party or by which the Company or any such Subsidiary is bound or to which any of the properties of the Company or any such subsidiary is subject, or (B) the charter or by- laws of the Company or any such Subsidiary, except, with respect to clause (A), such breach, violation or default which would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiaries, taken as a whole; and the Company has full power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement and to issue and deliver the Underlying Shares upon conversion (if any) of the Offered Securities; (k) This Agreement has been duly authorized, executed and delivered by the Company; 9 (l) Except as disclosed in a schedule to the Credit Agreement or in the Prospectus, the Company and its Subsidiaries have good and marketable title to all real properties and all other properties and assets owned by them, in each case free from liens, encumbrances and defects that would materially affect the value thereof or materially interfere with the use made or proposed to be made thereof by them; and except as disclosed in the Prospectus, the Company and its Subsidiaries hold any leased real or personal property under valid and enforceable leases with such exceptions as are not material to the Company and its Subsidiaries, taken as a whole and would not materially interfer with the use made or proposed to be made thereof by them; (m) The Company and its Subsidiaries possess adequate certificates, authorities or permits issued by appropriate governmental agencies or bodies necessary to conduct the business in the manner presently conducted by them, subject to such qualifications as may be set forth in the Prospectus or except where the failure to so possess would not, singularly or in the aggregate, have a material adverse effect on the Company or its Subsidiaries, taken as a whole and have not received any notice of proceedings relating to the revocation or modification of any such certificate, authority or permit that, if determined adversely to the Company or any of its Subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its Subsidiaries taken as a whole; (n) No labor dispute with the employees of the Company or any Subsidiary exists or, to the knowledge of the Company, is imminent that might have a material adverse effect on the Company and its Subsidiaries taken as a whole; (o) The Company and its Subsidiaries own or possess or can acquire on reasonable terms, adequate trademarks, trade names and other rights to inventions, know-how, patents, copyrights, confidential information and other intellectual property (collectively, "intellectual property rights") necessary to conduct the business now operated by them, or presently employed by them except where the failure to so own or possess would not, singularly or in the aggregate, have a material adverse effect on the 10 Company and its Subsidiaries, taken as a whole and have not received any notice of infringement of or conflict with asserted rights of others with respect to any intellectual property rights that, if determined adversely to the Company or any of its Subsidiaries, would individually or in the aggregate have a material adverse effect on the Company and its Subsidiaries taken as a whole; (p) Except as disclosed in the Prospectus, neither the Company nor any of its Subsidiaries is in violation of any statute, rule, regulation, ordinance, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, operation, handling, transportation, disposal or release of hazardous or toxic substances or wastes or relating to the protection or restoration of the environment or human exposure to hazardous or toxic substances or wastes (collectively, "environmental laws"), owns or operates any real property contaminated with any substance that is subject to any environmental laws, is liable for any on-site or off-site disposal or contamination pursuant to any environmental laws, or, to the knowledge of the Company, is subject to any claim relating to any environmental laws, which violation, contamination, liability or claim would individually or in the aggregate have a material adverse effect on the Company and its Subsidiaries taken as a whole; and the Company is not aware of any pending investigation which might lead to such a claim; (q) Except as disclosed in the Prospectus, there are no pending actions, suits or proceedings against or affecting the Company or any of its Subsidiaries or, to the knowledge of the Company or its Subsidiaries, to which any of their respective properties are subject, or that are required to be described in the Registration Statement or the Prospectus but are not described as required that, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a material adverse effect on the condition (financial or other), business, properties, prospects or results of operations of the Company and its Subsidiaries taken as a whole, or would materially and adversely affect the ability of the Company to perform its obligations under the Indenture or this Agreement, or which are otherwise material in the context of the sale of the Offered Securities; and no such actions, suits or proceedings 11 are, to the Company's knowledge, threatened or contemplated; (r) The historical financial statements included in each Registration Statement and the Prospectus present fairly the financial position of the Company and its consolidated Subsidiaries on the basis stated in any Registration Statement and the Prospectus as of the dates shown and their results of operations and cash flows for the periods shown, and such financial statements have been prepared in conformity with the generally accepted accounting principles in the United States applied on a consistent basis throughout the periods involved, except as disclosed therein; the schedules included in each Registration Statement present fairly the information required to be stated therein; and the pro forma financial information, and the related notes thereto included in the Registration Statement and the Prospectus and the assumptions used in preparing such pro forma financial statements are a reasonable basis for presenting the significant effects directly attributable to the transactions or events described therein, the related pro forma adjustments give appropriate effect to those assumptions, and the pro forma columns therein reflect the proper application of those adjustments to the corresponding historical financial statement amounts; (s) Except as disclosed in the Prospectus, since the date of the latest audited financial statements included in the Prospectus there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its Subsidiaries taken as a whole, and, except as disclosed in or contemplated by the Prospectus, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock; and (t) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" defined in the Investment Company Act of 1940, as amended (the "Investment Act"). 12 3. PURCHASE, SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, and the Underwriters agree, severally and not jointly, to purchase from the Company, at a purchase price of % of the principal amount thereof plus accrued interest from , 1996 to the First Closing Date (as hereinafter defined) the respective principal amounts of Firm Securities set forth opposite the names of the Underwriters in Schedule B hereto. The Company will deliver the Firm Securities to the Underwriters, against payment of the purchase price in funds available on the same day by wire transfer to the account of the Company at a bank acceptable to CS First Boston or by official Federal Reserve Bank check or checks drawn to the order of the Company at the office of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019 at 10 A.M. (New York time), on July , 1996, or at such other time not later than seven full business days thereafter as CS First Boston and the Company determine, such time being herein referred to as the "First Closing Date". The Company shall reimburse the Underwriters for the additional costs of effecting payment of the purchase price of the Firm Securities in the foregoing manner as compared with the payment in New York Clearing House (next day) funds. For purposes of Rule 15c6-1 under the Securities Exchange Act of 1934 (the "Exchange Act"), the First Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Firm Securities sold pursuant to the offering. The Firm Securities so to be delivered shall be in definitive fully registered form, in such denominations and registered in such names as CS First Boston requests and shall be made available for checking and packaging at the office of the Trustee at a reasonable time in advance of the First Closing Date. In addition, upon written notice from CS First Boston given to the Company from time to time not more than 30 days subsequent to the date of the Prospectus, the Underwriters may purchase all or less than all the Optional Securities at the purchase price per principal amount of Optional Securities to be paid for the Firm Securities, plus accrued interest from , 1996 to the related Optional Closing Date (as hereinafter defined). The Company agrees to sell to the Underwriters the principal amount of 13 Optional Securities specified in such notice and the Underwriters agree, severally and not jointly, to purchase such Optional Securities. Such Optional Securities shall be purchased for the account of each Underwriter in the same proportion as the principal amount of Firm Securities set forth opposite such Underwriter's name bears to the total principal amount of Firm Securities (subject to adjustment by CS First Boston to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Securities. No Optional Securities shall be sold or delivered unless the Firm Securities previously have been, or simultaneously are, sold and delivered. The right to purchase the Optional Securities or any portion thereof may be exercised from time to time and to the extent not previously exercised may be surrendered and terminated at any time upon notice by CS First Boston to the Company. Each time for the delivery of and payment for the Optional Securities, being herein referred to as an "Optional Closing Date", which may be on the First Closing Date (the First Closing Date and each Optional Closing Date, if any, being sometimes referred to as a "Closing Date"), shall be determined by CS First Boston but shall be not later than seven full business days after written notice of election to purchase Optional Securities is given. The Company will deliver the Optional Securities being purchased on each Optional Closing Date to the Underwriters, against payment of the purchase price in funds available on the same day by wire transfer to the account of the Company at a bank acceptable to CS First Boston or by official Federal Reserve Bank check or checks drawn to the order of the Company at the office of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York 10019 at 10 A.M. (New York time), on such Optional Closing Date. For purposes of Rule 15c6-1 under the Exchange Act, each Optional Closing Date (if later than the otherwise applicable settlement date) shall be the settlement date for payment of funds and delivery of securities for all the Optional Securities being purchased on such Optional Closing Date and sold pursuant to the offering. The Company shall reimburse the Underwriters for the additional costs of effecting payment of the purchase price of the Optional Securities in the foregoing manner as compared with the payment in New York Clearing House (next day) funds. The Optional Securities being purchased on each Optional Closing Date shall be in definitive fully registered form, in such denominations and registered in such names as CS First Boston requests (which request shall 14 be delivered at least three days prior to such Optional Closing Date) and shall be made available for checking and packaging at the office of the Trustee at least 24 hours prior to such Optional Closing Date. 4. OFFERING BY UNDERWRITERS. It is understood that the several Underwriters propose to offer the Offered Securities for sale to the public as set forth in the Prospectus. 5. CERTAIN AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters that: (a) If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Company shall file the Prospectus with the Commission pursuant to and in accordance with subparagraph (1) (or, if applicable and if consented to by CS First Boston, subparagraph (4)) of Rule 424(b) not later than the earlier of (A) the second business day following the execution and delivery of this Agreement or (B) the fifteenth business day after the Effective Date of the Initial Registration Statement. The Company shall advise CS First Boston promptly of any such filing pursuant to Rule 424(b). If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement and an additional registration statement is necessary to register a portion of the Offered Securities under the Act but the Effective Time thereof has not occurred as of such execution and delivery, the Company shall file such additional registration statement or, if filed, shall file a post-effective amendment thereto with the Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date of this Agreement or, if earlier, on or prior to the time the Prospectus is printed and distributed to any Underwriter, or shall make such filing at such later date as shall have been consented to by CS First Boston; (b) The Company shall advise CS First Boston promptly of any proposal to amend or supplement the initial or any additional registration statement as filed or the related prospectus or the Initial Registration Statement, each Additional Registration 15 Statement (if any) or the Prospectus and shall not effect such amendment or supplementation without CS First Boston's consent; and the Company shall also advise CS First Boston promptly of the effectiveness of each Registration Statement (if its Effective Time is subsequent to the execution and delivery of this Agreement) and of any amendment or supplement to a Registration Statement or the Prospectus and of the institution by the Commission of any stop order proceedings in respect of a Registration Statement and shall use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible its lifting, if issued; (c) If, at any time when a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, any event occurs as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company shall promptly notify the Underwriters of such event and shall promptly prepare and file with the Commission, at its own expense, an amendment or supplement that shall correct such statement or omission or an amendment that shall effect such compliance. Neither CS First Boston's consent to, nor the Underwriters' delivery of, any such amendment or supplement shall constitute a waiver of any of the conditions set forth in Section 6 of this Agreement; (d) As soon as practicable, but not later than the Availability Date (as defined below), the Company shall make generally available to its securityholders an earning statement covering a period of at least 12 months beginning after the Effective Date of the Initial Registration Statement (or, if later, the most recent Effective Date of any Additional Registration Statement) which shall satisfy the provisions of Section 11(a) of the Act. For the purpose of the preceding sentence, "Availability Date" means the 45th day after the end of the fourth fiscal quarter following the fiscal quarter that includes such Effective Date, except that, if such fourth fiscal quarter is the last quarter of the Company's fiscal 16 year, "Availability Date" means the 90th day after the end of such fourth fiscal quarter; (e) The Company shall furnish to the Underwriters copies of each Registration Statement (three of which shall be signed and shall include all exhibits), each related preliminary prospectus, and, so long as delivery of a prospectus relating to the Offered Securities is required to be delivered under the Act in connection with sales by any Underwriter or dealer, the Prospectus and all amendments and supplements to such documents, in each case in such quantities as CS First Boston reasonably requests. The Prospectus shall be so furnished on or prior to 3:00 P.M., New York time, on the business day following the later of the execution and delivery of this Agreement or the Effective Time of the Initial Registration Statement. All other documents shall be so furnished as soon as available. The Company shall pay the expenses of printing and distributing to the Underwriters all such documents; (f) The Company shall arrange for the qualification of the Offered Securities for sale and the determination of their eligibility for investment under the laws of such jurisdictions in the United States and Canada as CS First Boston designates and shall continue such qualifications in effect so long as required for the distribution; (g) For five years hereafter, the Company shall furnish to the Underwriters, as soon as practicable after the end of each fiscal year, a copy of its annual report to stockholders for such year; and the Company shall furnish to the Underwriters (i) as soon as available, a copy of each report and any definitive proxy statement of the Company filed with the Commission under the Exchange Act or mailed to stockholders, and (ii) from time to time, such other information concerning the Company as the Underwriters may reasonably request; (h) The Company shall pay all expenses incident to the performance of its obligations under this Agreement and shall reimburse the Underwriters (if and to the extent incurred by them) for any filing fees and other expenses (including fees and disbursements of counsel) incurred by them in connection with qualification of the Offered Securities for sale and 17 determination of their eligibility for investment under the laws of such jurisdictions in the United States and Canada as CS First Boston designates and the word processing of memoranda relating thereto, for any fees charged by investment rating agencies for the rating of the Offered Securities, for the filing fee of the National Association of Securities Dealers, Inc. relating to the Offered Securities, for any travel expenses of the Company's officers and employees and any other expenses of the Company in connection with attending or hosting meetings with prospective purchasers of the Offered Securities and for expenses incurred in distributing preliminary prospectuses and the Prospectus (including any amendments and supplements thereto) to the Underwriters; and (i) For a period of 90 days after the date of the initial public offering of the Offered Securities, the Company shall not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Commission a registration statement under the Act relating to any shares of Common Stock or securities convertible into or exchangeable or exercisable for any shares of Common Stock, or publicly disclose the intention to make any such offer, sale, pledge, disposal or filing, without the prior written consent of CS First Boston, except issuances of Underlying Shares pursuant to the conversion or exchange of convertible or exchangeable securities or the exercise of warrants or options, in each case outstanding on the date hereof, grants of employee stock options pursuant to the terms of a plan in effect on the date hereof, or issuances of shares of Common Stock pursuant to the exercise of such options. 6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Firm Securities on the First Closing Date and the Optional Securities to be purchased on each Optional Closing Date shall be subject to the accuracy of the representations and warranties on the part of the Company herein, to the accuracy of the statements of Company officers made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions precedent: (a) The Underwriters shall have received a letter, dated the date of delivery thereof (which, if 18 the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of Deloitte & Touche LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations, stating that they have performed certain procedures on the unaudited financial information of the Ciba Composites Business (as defined in the Prospectus) for the three months ended March 31, 1996, from which certain unaudited amounts included in the Registration Statements were derived, as CS First Boston may specify and that they are able to report on, including a reading of the latest available interim financial statements of the Ciba Composites Business, inquiries of officials of the Ciba Composites Business who have responsibility for financial and accounting matters and other specified procedures, and stating to the effect that: (i) in their opinion the financial statements and schedules of the Company examined by them and incorporated by reference and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements of the Company incorporated by reference and included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Company, inquiries of officials of the Company who have responsibility for financial and accounting matters and other specified procedures, nothing 19 came to their attention that caused them to believe that: (A) the unaudited financial statements of the Company incorporated by reference and included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available balance sheet of the Company read by such accountants, or at a subsequent date, there was any change in the capital stock or any increase in short-term debt or long-term debt of the Company and its consolidated subsidiaries or, at the date of the latest available balance sheet of the Company read by such accountants, there was any decrease in consolidated (i) total current assets minus total current liabilities or (ii) total shareholders' equity (or deficit), as compared with amounts shown on the latest balance sheet of the Company included in the Prospectus; or (C) for the period from the closing date of the latest statements of operations of the Company included in the Prospectus to the closing date of the latest available statements of operations of the Company read by such accountants there were any decreases, as compared with the corresponding period of the previous year and with the period of corresponding length ended the date of the latest statements of operations of the Company included in the Prospectus, in consolidated net sales, in consolidated income (or loss) from continuing operations, in the total or per share amounts of consolidated net income (or loss) or in the ratio of earnings to fixed charges, except in all cases set forth in clauses (B) and (C) 20 above for changes, increases or decreases which the Prospectus discloses have occurred or may occur or which are described in such letter; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information incorporated by reference and contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Company and its subsidiaries subject to the internal controls of the Company's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter; and (v) on the basis of a reading of the unaudited pro forma financial statements of the Company incorporated by reference and included in the Registration Statements and the Prospectus (the "pro forma financial statements"), carrying out certain specified procedures, reading of minutes, inquiries of certain officials of the Company who have responsibility for financial and accounting matters and proving the arithmetic accuracy of the application of the pro forma adjustments to the historical amounts in the pro forma financial statements, nothing came to their attention which caused them to believe that the pro forma financial statements do not comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X under the Act or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such statements or on the pro forma basis described in the notes thereto. (b) The Underwriters shall have received a letter, dated the date of the delivery thereof (which, 21 if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the Amendment or post-effective Amendment to the Registration Statement to be filed shortly prior to such Effective Time), of Coopers & Lybrand LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations, and stating to the effect that: (i) in their opinion the financial statements and schedules of the Ciba Composites Business examined by them and incorporated by reference and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the related published Rules and Regulations; and (ii) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information incorporated by reference and contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Ciba Composites Business subject to the internal controls of the Ciba Composites Business's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such 22 letter and have found such dollar amounts, percentages and other financial information to be in agreement with such results, except as otherwise specified in such letter. (c) The Underwriters shall have received a letter, dated the date of delivery thereof (which, if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, shall be on or prior to the date of this Agreement or, if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, shall be prior to the filing of the amendment or post-effective amendment to the registration statement to be filed shortly prior to such Effective Time), of Coopers & Lybrand LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations and stating to the effect that: (i) in their opinion the financial statements and schedules of the Hercules Composites Business examined by them and included in the Registration Statements comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; (ii) they have performed the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information as described in Statement of Auditing Standards No. 71, Interim Financial Information, on the unaudited financial statements of the Hercules Composites Business included in the Registration Statements; (iii) on the basis of the review referred to in clause (ii) above, a reading of the latest available interim financial statements of the Hercules Composites Business, inquiries of officials of the Hercules Composites Business who have responsibility for financial and accounting matters and other specified procedures, nothing came to their attention that caused them to believe that: 23 (A) the unaudited financial statements of the Hercules Composites Business included in the Registration Statements do not comply as to form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations or any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Registration Statements and the Prospectus; or (B) at the date of the latest available balance sheet of the Hercules Composites Business read by such accountants, or at a subsequent specified date not more than three days prior to the date of this Agreement, there was any change in the capital stock or any increase in total current liabilities or other liabilities of the Hercules Composites Business or, at the date of the latest available balance sheet of the Hercules Composites Business read by such accountants, there was any decrease in (i) total current assets minus total current liabilities or (ii) division equity (or deficit), as compared with amounts shown on the latest balance sheet of the Hercules Composites Business included in the Prospectus; and (iv) they have compared specified dollar amounts (or percentages derived from such dollar amounts) and other financial information contained in the Registration Statements (in each case to the extent that such dollar amounts, percentages and other financial information are derived from the general accounting records of the Hercules Composites Business subject to the internal controls of the Hercules Composites Business's accounting system or are derived directly from such records by analysis or computation) with the results obtained from inquiries, a reading of such general accounting records and other procedures specified in such letter and have found such dollar amounts, percentages and other financial 24 information to be in agreement with such results, except as otherwise specified in such letter. For purposes of subsections (a), (b) and (c) above, (i) if the Effective Time of the Initial Registration Statement is subsequent to the execution and delivery of this Agreement, "Registration Statements" shall mean the initial registration statement as proposed to be amended by the amendment or post-effective amendment to be filed shortly prior to its Effective Time, (ii) if the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement but the Effective Time of an Additional Registration is subsequent to such execution and delivery, "Registration Statements" shall mean the Initial Registration Statement and such additional registration statement or statements as proposed to be filed or as proposed to be amended by the post-effective amendment to be filed shortly prior to its or their Effective Time, and (iii) "Prospectus" shall mean the prospectus included in the Registration Statements. All financial statements and schedules included in material incorporated by reference into the Prospectus shall be deemed included in the Registration Statements for purposes of this subsection. (d) If the Effective Time of the Initial Registration Statement is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or such later date as shall have been consented to by CS First Boston. If the Effective Time of an Additional Registration Statement (if any) is not prior to the execution and delivery of this Agreement, such Effective Time shall have occurred not later than 10:00 P.M., New York time, on the date of this Agreement or, if earlier, the time the Prospectus is printed and distributed to any Underwriter, or shall have occurred at such later date as shall have been consented to by CS First Boston. If the Effective Time of the Initial Registration Statement is prior to the execution and delivery of this Agreement, the Prospectus shall have been filed with the Commission in accordance with the Rules and Regulations and Section 5(a) of this Agreement. Prior to such Closing Date, no stop order suspending the effectiveness of a Registration Statement shall have been issued and no proceedings for that purpose shall 25 have been instituted or, to the knowledge of the Company or the Underwriters, shall be contemplated by the Commission. (e) Subsequent to the execution and delivery of this Agreement, there shall not have occurred (i) any change, or any development or event involving a prospective change, in the condition (financial or other), business, properties or results of operations of the Company or its Subsidiaries that, in the judgment of a majority in interest of the Underwriters, is material and adverse and makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities; (ii) any downgrading in the rating of any debt securities of the Company, including, without limitation, the Offered Securities, by any "nationally recognized statistical rating organization" (as defined for purposes of Rule 436(g) under the Act), or any public announcement that any such organization has under surveillance or review its rating of any debt securities of the Company, including, without limitation, the Offered Securities (other than an announcement with positive implications of a possible upgrading, and no implication of a possible downgrading, of such rating); (iii) any suspension or limitation of trading in securities generally on the New York Stock Exchange, or any setting of minimum prices for trading on such exchange, or any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market; (iv) any banking moratorium declared by U.S. Federal or New York authorities; or (v) any outbreak or escalation of major hostilities in which the United States is involved, any declaration of war by Congress or any other substantial national or international calamity or emergency if, in the judgment of a majority in interest of the Underwriters, the effect of any such outbreak, escalation, declaration, calamity or emergency makes it impractical or inadvisable to proceed with completion of the public offering or the sale of and payment for the Offered Securities. (f) The Underwriters shall have received an opinion, dated such Closing Date, of Skadden Arps, Slate, Meagher & Flom, counsel for the Company, to the effect that: 26 (i) The Initial Registration Statement was declared effective under the Act as of the date and time specified in such opinion, one or more Additional Registration Statements (if any) were filed and became effective under the Act as of the date and time (if determinable) specified in such opinion, the Prospectus either was filed with the Commission pursuant to the subparagraph of Rule 424(b) specified in such opinion on the date specified therein or was included in the Initial Registration Statement or an Additional Registration Statement (as the case may be), and, to the best of the knowledge of such counsel, no stop order suspending the effectiveness of a Registration Statement or any part thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Act, and each Registration Statement and the Prospectus, and each amendment or supplement thereto, as of their respective effective or issue dates, (except for the financial statements, the notes thereto and related schedules and other financial and statistical data included therein or excluded therefrom or the exhibits to the Registration Statement, and the Form T-1, as to which no opinion need be expressed), appeared on their face to be appropriately responsive in all material respects to the requirements of the Act; except that such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus (except to the extent set forth in paragraph (iii) below with respect to the description of the Offered Securities and in paragraph (iv) below with respect to the description of the Common Stock in the Registration Statement); (ii) The Company has been duly incorporated and is a validly existing corporation in good standing under the laws of the State of Delaware, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; (iii) The Indenture has been duly authorized, executed and delivered and has been duly qualified under the Trust Indenture Act; the issuance of the Offered Securities has been duly authorized, and when executed and authenticated in accordance with the terms of the Indenture and delivered to and 27 paid for by the Underwriters pursuant to this Agreement, will be valid and binding obligations of the Company entitled to the benefit of the Indenture and enforceable against the Company in accordance with their respective terms except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditor's rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); the Offered Securities conform in all material respects to the description thereof contained in the Prospectus; and assuming due authorization, execution and delivery thereof by the Trustee, on the Closing Date the Indenture will constitute a valid and legally binding obligation of the Company enforceable in accordance with its terms except to the extent that enforcement thereof may be limited by (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect relating to creditor's rights generally and (ii) general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); (iv) The Offered Securities delivered on such Closing Date are convertible into the Underlying Shares in accordance with the terms of the Indenture; the Underlying Shares initially issuable upon conversion of such Offered Securities have been duly authorized and reserved for issuance upon such conversion and, when issued upon such conversion, will be validly issued, fully paid and nonassessable; the outstanding Common Stock conforms in all material respects to the description thereof contained in the Prospectus; and the stockholders of the Company have no preemptive rights under the Certificate of Incorporation or Bylaws with respect to the Offered Securities or the Underlying Shares, or similar rights under any Applicable Contracts (as defined below) except that counsel need express no opinion with regard to Section 3.02 of the Governance Agreement; 28 (v) No contracts or agreements filed as an exhibit to the Registration Statement that is governed by New York or Delaware law (the "Applicable Contracts") grants to any person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in a Registration Statement or in any other registration statement filed by the Company under the Act, except as provided in the Registration Rights Agreement dated as of February 29, 1996, between Ciba-Geigy Limited and the Company, the Registration Rights Agreement dated as of February 9, 1995, between Mutual Series Fund Inc. and the Company, the agreement dated April 6, 1995 between John J. Lee, Mutual Series Fund Inc. and the Company and the Registration Rights Agreement for Affiliates dated as of February 9, 1995, among certain Eligible Holders, as defined therein, and the Company; (vi) No consent, approval, authorization, or order of, or filing (collectively, "Government Approval") with, any Delaware, New York or federal governmental agency, body or court (a "Governmental Authority") under Applicable Laws (as defined below) is required for the consummation by the Company of the transactions contemplated by this Agreement in connection with the issuance or sale of the Offered Securities by the Company, except such as have been obtained and made under the Act and the Trust Indenture Act and such as may be required under state securities laws; (vii) The execution, delivery and performance by the Company of the Indenture and the consummation by the Company of the transactions contemplated by this Agreement, and the issuance and sale of the Offered Securities and compliance by the Company with the terms and provisions thereof, including the issuance and delivery of 29 Underlying Shares upon conversion (if any) of the Offered Securities, will not (i) result in a violation of any Applicable Laws or Applicable Orders (as defined below), statute, rule or regulation; provided, however, that such counsel need express no opinion with respect to (x) any state securities or Blue Sky laws or (y) the information contained in, or the accuracy, completeness or correctness of, the Prospectus or the Registration Statement or the compliance thereof as to form with the Act or (z) the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to conversion of the Securities, (ii) constitute a breach of or default under the terms of any Applicable Contracts (except that such counsel need not express an opinion as to any covenant, restriction or provisions of any such agreement with respect to financial covenants, ratios or tests or any aspect of the financial condition or results of operations of the Company), or (iii) conflict with any provisions of the restated certificate of incorporation or restated by-laws of the Company and the Company has full corporate power and authority to authorize, issue and sell the Offered Securities as contemplated by this Agreement and to issue and deliver the Underlying Shares upon conversion (if any) of the Offered Securities; "Applicable Laws" means those laws, rules and regulations of the United States, the State of New York and the State of Delaware that, in such counsel's opinion expressed in this paragraph based on such counsel's experience, are normally applicable to transactions of the type provided for in this Agreement, but without having made any special investigation concerning any other requirements of law, and "Applicable Orders" means any order of any United States Federal, New York or Delaware Governmental Authority specifically identified to such counsel by the Company as one to which it is subject; (viii) This Agreement has been duly authorized, executed and delivered by the Company; 30 (ix) The Company is not and, after giving effect to the offering and sale of the Offered Securities and the application of the proceeds thereof as described in the Prospectus, will not be regulated or required to be registered as an "investment company" as defined in the Investment Company Act of 1940. Such counsel shall also state that such counsel has participated in conferences with directors, officers and other representatives of the Company, representatives of the independent public accountants for the Company, representatives of the Underwriters and representatives of counsel for the Underwriters, at which conferences the contents of the Registration Statement and Prospectus and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and Prospectus, and has made no independent check or verification thereof (except to the extent set forth in paragraph (iii) above with respect to the description of the Offered Securities and in paragraph (iv) above with respect to the description of the Common Stock in the Registration Statement) on the basis of the foregoing, no facts have come to such counsel's attention which have caused such counsel to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, not misleading or that the Prospectus, as of its date and as of the Closing Date, contains an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading (it being understood that such counsel need express no view with respect to the financial statements and the notes related thereto and other financial, statistical and accounting data included in, or excluded from, any Registration Statement or exhibits to the Registration Statement or the Form T-1). Such opinion may be limited to the General Corporation Law of the State of Delaware and the laws of the State of New York and the federal laws of the United States. 31 (g) The Underwriters shall have received an opinion, dated such Closing Date, of Joseph H. Shaulson, general counsel for the Company, to the effect that: (i) The Company is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification; (ii) Such counsel does not know of any legal or governmental proceeding required to be described in a Registration Statement or the Prospectus which are not described as required or of any contracts or documents of a character required to be described in a Registration Statement or the Prospectus or to be filed as exhibits to a Registration Statement which are not described and filed as required; (iii) No contracts, agreements or understandings known to such counsel between the Company and any person grants to any person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in a Registration Statement or in any other registration statement filed by the Company under the Act, except as provided in the Registration Rights Agreement dated as of February 29, 1996, between Ciba-Geigy Limited and the Company, the Registration Rights Agreement dated as of February 9, 1995, between Mutual Series Fund Inc. and the Company, the agreement dated April 6, 1995 between John J. Lee, Mutual Series Fund Inc. and the Company and the Registration Rights Agreement for Affiliates dated as of February 9, 1995, among certain Eligible Holders, as defined therein, and the Company; and (iv) The execution, delivery and performance by the Company of the Indenture and the consummation by the Company of the transactions contemplated by this Agreement, and the issuance and sale of the Offered Securities and compliance by the Company with the terms and provisions thereof, including the issuance and delivery of Underlying Shares upon conversion (if any) of the Offered Securities, will not constitute a breach of or default under the terms of any agreement or instrument known to such counsel to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary is bound or to which any of the properties of the Company or any Subsidiary is subject; (h) The Underwriters shall have received opinions, dated such Closing Date, of counsel for the Subsidiaries, to the effect that: (i) Each Subsidiary of the Company has been duly incorporated and is a validly existing corporation in good standing (where applicable) under the law of the jurisdiction of its incorporation, with power and authority (corporate and other) to own its properties and conduct its business as described in the Prospectus; and each Subsidiary of the Company is duly qualified to do business as a foreign corporation in good standing (where applicable) in all other jurisdictions in which its ownership or lease of property or the conduct of its business requires such qualification except where the failure to so own or qualify would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole; all the issued and outstanding capital stock of each Subsidiary of the Company has been duly authorized and validly issued and is fully paid and nonassessable; and except as disclosed in Schedule A hereto, the outstanding capital stock of each Subsidiary is owned by the Company, directly or through Subsidiaries, and is owned free from liens, 32 encumbrances and defects except for those created under the Credit Agreement, as disclosed in the Prospectus. (i) The Underwriters shall have received from Cravath, Swaine & Moore, counsel for the Underwriters, such opinion or opinions, dated such Closing Date, with respect to the incorporation of the Company, the validity of the Offered Securities delivered on such Closing Date, the Registration Statements, the Prospectus and other related matters as the Underwriters may require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (j) The Underwriters shall have received a certificate, dated such Closing Date, of the President or any Vice-President and a principal financial or accounting officer of the Company in which such officers, to the best of their knowledge after reasonable investigation, shall state that: the representations and warranties of the Company in this Agreement are true and correct on and as of the Closing Date with the same effect as if made on the Closing Date; the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date; no stop order suspending the effectiveness of any Registration Statement has been issued and no proceedings for that purpose have been instituted or, to the knowledge of the Company, are contemplated by the Commission; one or more Additional Registration Statements (if any) satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b) were filed pursuant to Rule 462(b), including payment of the applicable filing fees in accordance with Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed and distributed to any Underwriter; and, subsequent to the date of the most recent financial statements in the Prospectus, there has been no material adverse change, nor any development or event involving a prospective material adverse change, in the condition (financial or other), business, properties or results of operations of the Company and its Subsidiaries taken as a whole except as set forth in or contemplated by the Prospectus or as described in such certificate. 33 (k) The Underwriters shall have received a letter, dated such Closing Date, of Deloitte & Touche LLP which meets the requirements of subsection (a) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection. (l) The Underwriters shall have received a letter, dated such Closing Date, of Coopers & Lybrand LLP which meets the requirements of subsection (b) of this Section, except that the specified date referred to in such subsection will be a date not more than three days prior to such Closing Date for the purposes of this subsection. The Company shall furnish the Underwriters with such conformed copies of such opinions, certificates, letters and documents as the Underwriters reasonably request. CS First Boston may in its sole discretion waive on behalf of the Underwriters compliance with any conditions to the obligations of the Underwriters hereunder, whether in respect of an Optional Closing Date or otherwise. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company shall indemnify and hold harmless each Underwriter, its directors and officers and any person controlling (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) such Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstance in which they were made) not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in such case (x) to the extent that any such loss, claim, damage or 34 liability arises out of or is based upon an untrue statement or alleged untrue statement in or omission or alleged omission from any of such documents in reliance upon and in conformity with written information furnished to the Company by any Underwriter specifically for use therein, it being understood and agreed that the only such information furnished by any Underwriter consists of the information described as such in subsection (b) below or (y) with respect to any Underwriter from whom the person asserting such losses, claims, damages or liabilities purchased the Offered Securities, if such losses, claims, damages or liabilities arose out of an untrue statement or omission made in any preliminary prospectus or Prospectus and a copy of the Prospectus (as amended or supplemented, if the Company shall have furnished the Underwriter with such amendments or supplements thereto on a timely basis) was not delivered by or on behalf of such Underwriter if required by the Act to the person asserting such losses, claims, damages or liabilities, at or prior to the written confirmation of the sale of the Securities and the Prospectus (as so amended or supplemented) would have corrected such untrue statement or omission. (b) Each Underwriter shall severally and not jointly indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any person controlling (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company against any losses, claims, damages or liabilities to which the Company may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement, the Prospectus, or any amendment or supplement thereto, or any related preliminary prospectus, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in light of the circumstance in which they were made), in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter specifically for use therein, and shall reimburse any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, 35 damage, liability or action as such expenses are incurred, it being understood and agreed that the only such information furnished by any Underwriter consists of the following information in the Prospectus furnished on behalf of each Underwriter: the last paragraph at the bottom of the cover page concerning the terms of the offering by the Underwriters, the stabilization legend on the inside front cover page, the statements appearing in the fourth paragraph under the caption "Underwriting" and the information contained in the eighth through tenth paragraphs under the caption "Underwriting". (c) Promptly after receipt by an indemnified party under this Section or Section 10 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under subsection (a) or (b) above or Section 10, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) above or Section 10. In case any such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section or Section 10, as the case may be, for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party unless such settlement includes an unconditional release of such indemnified party from all liability on any claims that are the subject matter of such action. 36 (d) If the indemnification provided for in this Section is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other from the offering of the Offered Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the indemnifying party on the one hand and the indemnified party on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the Prospectus. The relative fault of the Company and the Underwriters shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Offered Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of 37 Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to the respective numbers of Firm Shares as forth opposite their names in Schedule B hereto (or such numbers of Firm Shares increased as set forth in Section 8 hereof) and not joint. (e) The obligations of the Company under this Section or Section 10 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter or the Independent Underwriter (as hereinafter defined) within the meaning of the Act; and the obligations of the Underwriters under this Section shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each director of the Company, to each officer of the Company who has signed a Registration Statement and to each person, if any, who controls the Company within the meaning of the Act. 8. DEFAULT OF UNDERWRITERS. If any Underwriter or Underwriters default in their obligations to purchase Offered Securities hereunder on either the First or any Optional Closing Date and the aggregate principal amount of Offered Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase does not exceed 10% of the total principal amount of Offered Securities that the Underwriters are obligated to purchase on such Closing Date, CS First Boston may make arrangements satisfactory to the Company for the purchase of such Offered Securities by other persons, including any of the Underwriters, but if no such arrangements are made by such Closing Date, the non-defaulting Underwriters shall be obligated severally, in proportion to their respective commitments hereunder, to purchase the Offered Securities that such defaulting Underwriters agreed but failed to purchase on such Closing Date. If any Underwriter or Underwriters so default and the aggregate principal amount of Offered Securities with respect to which such default or defaults occur exceeds 10% of the total principal amount of Offered Securities that the Underwriters are obligated to purchase on such Closing Date and arrangements satisfactory to CS First Boston and the Company for the purchase of such Offered Securities by other persons are not made within 36 hours after such default, this Agreement will terminate without liability on the part 38 of any non-defaulting Underwriter or the Company, except as provided in Section 9 (provided that if such default occurs with respect to Optional Securities after the First Closing Date, this Agreement will not terminate as to the Firm Securities or any Optional Securities purchased prior to such termination). As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section. Nothing herein will relieve a defaulting Underwriter from liability for its default. 9. SURVIVAL OF CERTAIN REPRESENTATIONS AND OBLIGATIONS. The respective indemnities, agreements, representations, warranties and other statements of the Company or its officers and of the several Underwriters set forth in or made pursuant to this Agreement shall remain in full force and effect, regardless of any investigation or statement as to the results thereof, made by or on behalf of any Underwriter, the Company or any of their respective representatives, officers or directors or any controlling person, and shall survive delivery of and payment for the Offered Securities. If this Agreement is terminated pursuant to Section 8 or if for any reason the purchase of the Offered Securities by the Underwriters is not consummated, the Company shall remain responsible for the expenses to be paid or reimbursed by it pursuant to Section 5 and the respective obligations of the Company and the Underwriters pursuant to Section 7 and the obligations of the Company pursuant to Section 10 shall remain in effect, and if any Offered Securities have been purchased hereunder the representations and warranties in Section 2 and all obligations under Section 5 shall also remain in effect. If the purchase of the Offered Securities by the Underwriters is not consummated for any reason other than solely because of the termination of this Agreement pursuant to Section 8 or the occurrence of any event specified in clause (iii), (iv) or (v) of Section 6(e), the Company shall reimburse the Underwriters for all out-of-pocket expenses (including fees and disbursements of counsel) reasonably incurred by them in connection with the offering of the Offered Securities. 10. QUALIFIED INDEPENDENT UNDERWRITER. (a) The Company hereby confirms its engagement of the services of Bear, Stearns & Co. Inc. (the "Independent Underwriter") as, and the Independent Underwriter hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Section 2(o) of Schedule E ("Schedule E") of the By-laws of 39 the National Association of Securities Dealers, Inc. (the "NASD") with respect to the offering and sale of the Offered Securities. (b) The Independent Underwriter hereby represents and warrants to, and agrees with, the Company and CS First Boston that with respect to the offering and sale of the Offered Securities as described in the Prospectus: (i) the Independent Underwriter constitutes a "qualified independent underwriter" within the meaning of Section 2(o) of Schedule E; (ii) the Independent Underwriter has participated in the preparation of the Registration Statements and the Prospectus and has exercised the usual standards of "due diligence" in respect thereto; (iii) the Independent Underwriter has undertaken the legal responsibilities and liabilities of an underwriter under the Act specifically including those inherent in Section 11 thereof; (iv) based upon, among other factors, the information set forth in the Prospectus and its review of such other documents and the taking of such other actions as the Independent Underwriter, in its sole discretion, has deemed necessary or appropriate for the purposes of delivering its recommendation hereunder, the Independent Underwriter recommends, as of the date of the execution and delivery of this Agreement, that the yield at which the Offered Securities are to be distributed to the public shall not be lower than that set forth on the cover page of the Prospectus, which yield should in no way be considered or relied upon as an indication of the value of the Offered Securities; and (v) the Independent Underwriter will furnish to CS First Boston on each Closing Date a letter, dated the date of delivery thereof, in form and substance satisfactory to CS First Boston, to the effect of clauses (i) through (iv) above. (c) The Company, the Independent Underwriter and CS First Boston agree to comply in all material respects with all of the requirements of Schedule E applicable to them in connection with the offering and sale of the Offered 40 Securities. The Company agrees to cooperate with the Underwriters, including the Independent Underwriter, to enable the Underwriters to comply with Schedule E and the Independent Underwriter to perform the services contemplated by this Agreement. (d) The Company agrees promptly to reimburse the Independent Underwriter for all out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with this Agreement and the services to be rendered as Independent Underwriter hereunder. (e) The Independent Underwriter hereby consents to the references to it as set forth under the caption "Underwriting" in the Prospectus. (f) The Company will indemnify and hold harmless the Independent Underwriter against any losses, claims, damages or liabilities, joint or several, to which the Independent Underwriter may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon the Independent Underwriter's acting (or alleged failing to act) as such "qualified independent underwriter" except where such acts (or alleged failures to act) constitute gross negligence or willful misconduct and will reimburse the Independent Underwriter for any legal or other expenses reasonably incurred by the Independent Underwriter in connection with investigating or defending any such loss, claim, damage, liability or action as such expenses are incurred. 11. NOTICES. All communications required hereunder to be in writing shall be delivered as follows, if sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed to the Underwriters, c/o CS First Boston at Park Avenue Plaza, New York, N.Y. 10055, Attention: Investment Banking Department----Transactions Advisory Group, or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at Hexcel Corporation, Two Stamford Plaza, 281 Tresser Blvd., Stamford, CT 06901, Attention: Joseph Shaulson, Esq.; provided, however, that any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or telegraphed and confirmed to such Underwriter. 12. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors 41 and controlling persons referred to in Section 7, and no other person shall have any right or obligation hereunder. 13. REPRESENTATION OF UNDERWRITERS. CS First Boston will act for the several Underwriters in connection with this financing, and any action under this Agreement taken by CS First Boston in such capacity shall be binding upon all the Underwriters. 14. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement. 15. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. The Company hereby submits to the non-exclusive jurisdiction of the Federal and state courts in the Borough of Manhattan in The City of New York in any suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby. If the foregoing is in accordance with the Underwriters' understanding of our agreement, kindly sign and return to the Company one of the counterparts hereof, whereupon it shall become a binding agreement between the Company and the several Underwriters in accordance with its terms. Very truly yours, HEXCEL CORPORATION By -------------------------- John J. Lee Chairman and Chief Executive Officer 42 The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. CS FIRST BOSTON CORPORATION By: ------------------------------------ Joseph D. Carrabino Director BEAR, STEARNS & CO. INC. By: ------------------------------------ Randall E. Paulson Associate Director 43 SCHEDULE A Subsidiaries ------------ 44 SCHEDULE B Principal Amount of Underwriter Firm Securities ----------- ------------------- CS First Boston Corporation . . . . . . . . . $ Bear, Stearns & Co. Inc.. . . . . . . . . . . ------------------- Total . . . . . . . . . . . . . . . . . $ 100,000,000 ------------------- EX-4 3 EXHIBIT 4 ================================================================================ HEXCEL CORPORATION, Issuer, to FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, Trustee INDENTURE Dated as of July __, 1996 $100,000,000**** % Convertible Subordinated Notes Due 2003 ================================================================================ - ---------- **** Subject to increase up to an additional $15,000,000. TABLE OF CONTENTS* Page ---- ARTICLE I Definitions and Other Provisions of General Application SECTION 1.01. Definitions ................................................ 1 SECTION 1.02. Compliance Certificates and Opinions ....................... 9 SECTION 1.03. Form of Documents Delivered to Trustee ..................... 10 SECTION 1.04. Acts of Holders ............................................ 11 SECTION 1.05. Notices, Etc., to Trustee and Company ...................... 11 SECTION 1.06. Notices to Holders; Waiver ................................. 12 SECTION 1.07. Conflict with Trust Indenture Act .......................... 12 SECTION 1.08. Effect of Headings and Table of Contents ................... 12 SECTION 1.09. Successors and Assigns ..................................... 13 SECTION 1.10. Separability Clause ........................................ 13 SECTION 1.11. Benefits of Indenture ...................................... 13 SECTION 1.12. Governing Law .............................................. 13 SECTION 1.13. Legal Holidays ............................................. 13 SECTION 1.14. Record Date for Vote or Consent of Holders ................. 13 SECTION 1.15. Incorporators, Stockholders, Officers and Directors of the Company Exempt from Individual Liability ................ 14 ARTICLE II Forms of Security SECTION 2.01. Forms Generally ............................................ 14 SECTION 2.02. Form of Face of Security ................................... 15 SECTION 2.03. Form of Reverse of Security ................................ 16 SECTION 2.04. Form of Trustee's Certificate of Authentication ............ 20 SECTION 2.05. Form of Election to Convert ................................ 21 SECTION 2.06. Form of Option of Holder to Elect Purchase ................. 23 ____________ * This Table of Contents is not part of the Indenture. Table of Contents, p. 2 ARTICLE III The Securities SECTION 3.01. Title and Terms ............................................ 23 SECTION 3.02. Denominations .............................................. 24 SECTION 3.03. Execution, Authentication, Delivery and Dating ............. 24 SECTION 3.04. Temporary Securities ....................................... 25 SECTION 3.05. Registration, Registration of Transfer and Exchange ........ 25 SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities ........... 26 SECTION 3.07. Payment of Interest; Interest Rights Preserved ............. 27 SECTION 3.08. Persons Deemed Owners ...................................... 28 SECTION 3.09. Cancellation ............................................... 28 SECTION 3.10. Computation of Interest .................................... 29 ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture .................... 29 SECTION 4.02. Application of Trust Money ................................. 30 ARTICLE V Remedies SECTION 5.01. Events of Default .......................................... 30 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment ......... 32 SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee ................................................. 33 SECTION 5.04. Trustee May File Proofs of Claim ........................... 34 SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities .............................................. 35 SECTION 5.06. Application of Money Collected ............................. 35 SECTION 5.07. Limitation on Suits ........................................ 35 SECTION 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert ..................... 36 SECTION 5.09. Restoration of Rights and Remedies ......................... 36 SECTION 5.10. Rights and Remedies Cumulative ............................. 36 Table of Contents, p. 3 SECTION 5.11. Delay or Omission Not Waiver ............................... 37 SECTION 5.12. Control by Holders ......................................... 37 SECTION 5.13. Waiver of Past Defaults .................................... 37 SECTION 5.14. Undertaking for Costs ...................................... 38 SECTION 5.15. Waiver of Stay or Extension Laws ........................... 38 ARTICLE VI The Trustee SECTION 6.01. Certain Duties and Responsibilities ........................ 38 SECTION 6.02. Notice of Defaults ......................................... 40 SECTION 6.03. Certain Rights of Trustee .................................. 40 SECTION 6.04. Not Responsible for Recitals or Issuance of Securities ..... 41 SECTION 6.05. May Hold Securities ........................................ 41 SECTION 6.06. Money Held in Trust ........................................ 41 SECTION 6.07. Compensation and Reimbursement ............................. 42 SECTION 6.08. Disqualification; Conflicting Interest ..................... 42 SECTION 6.09. Corporate Trustee Required; Eligibility .................... 42 SECTION 6.10. Resignation and Removal; Appointment of Successor .......... 43 SECTION 6.11. Acceptance of Appointment by Successor ..................... 44 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business ................................................ 45 SECTION 6.13. Preferential Collection of Claims Against Company .......... 45 SECTION 6.14. Appointment of Authenticating Agent ........................ 45 ARTICLE VII Holders' Lists and Reports by Trustee and Company SECTION 7.01. Company To Furnish Trustee Names and Addresses of Holders ................................................. 47 SECTION 7.02. Preservation of Information; Communications to Holders ..... 47 SECTION 7.03. Reports by Trustee ......................................... 48 SECTION 7.04. Reports by Company ......................................... 48 Table of Contents, p. 4 ARTICLE VIII Consolidation, Merger, Conveyance, Transfer or Lease SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms ................................................... 49 SECTION 8.02. Successor Substituted for Company .......................... 50 ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Holders ......... 50 SECTION 9.02. Supplemental Indentures With Consent of Holders ............ 51 SECTION 9.03. Execution of Supplemental Indentures ....................... 51 SECTION 9.04. Effect of Supplemental Indentures .......................... 52 SECTION 9.05. Conformity With Trust Indenture Act ........................ 52 SECTION 9.06. Reference in Securities to Supplemental Indentures ......... 52 SECTION 9.07. No Impairment of Subordinates .............................. 52 ARTICLE X Covenants SECTION 10.01. Payment of Principal, Premium and Interest ................. 52 SECTION 10.02. Maintenance of Office or Agency ............................ 53 SECTION 10.03. Money for Security Payments to be Held in Trust ............ 53 SECTION 10.04. Statements of Officers of Company as to Default ............ 55 SECTION 10.05. Existence .................................................. 55 SECTION 10.06. Maintenance of Properties .................................. 55 SECTION 10.07. Payment of Taxes and Other Claims .......................... 55 SECTION 10.08. Further Instruments and Acts ............................... 56 SECTION 10.09. Waiver of Certain Covenants ................................ 56 Table of Contents, p. 5 ARTICLE XI Redemption of Securities SECTION 11.01. Right of Redemption ........................................ 56 SECTION 11.02. Applicability of Article ................................... 56 SECTION 11.03. Election to Redeem; Notice to Trustee ...................... 57 SECTION 11.04. Selection by Trustee of Securities to be Redeemed .......... 57 SECTION 11.05. Notice of Redemption ....................................... 57 SECTION 11.06. Deposit of Redemption Price ................................ 58 SECTION 11.07. Securities Payable on Redemption Date ...................... 58 SECTION 11.08. Securities Redeemed in Part ................................ 59 SECTION 11.09. Conversion Arrangements on Call for Redemption ............. 59 ARTICLE XII Conversion of Securities SECTION 12.01. Conversion of Privilege and Conversion Price ............... 60 SECTION 12.02. Exercise of Conversion Privilege ........................... 61 SECTION 12.03. Fractions of Shares ........................................ 62 SECTION 12.04. Adjustment of Conversion Price ............................. 62 SECTION 12.05. Notice of Adjustments of Conversion Price .................. 70 SECTION 12.06. Notice of Certain Corporate Activities ..................... 70 SECTION 12.07. Company to Reserve Common Stock ............................ 71 SECTION 12.08. Taxes on Conversions ....................................... 71 SECTION 12.09. Covenant as to Common Stock ................................ 71 SECTION 12.10. Cancelation of Converted Securities ........................ 71 SECTION 12.11. Provisions in Case of Consolidation, Merger, Share Exchange or Conveyance of Assets ........................ 71 SECTION 12.12. Trustee Adjustment Disclaimer .............................. 73 SECTION 12.13. When No Adjustment Required ................................ 73 Table of Contents, p. 6 ARTICLE XIII Subordination of Securities SECTION 13.01. Agreement to Subordinate by Company ........................ 73 SECTION 13.02. Distribution on Dissolution, Liquidation and Reorganization; Subrogation ............................. 73 SECTION 13.03. No Payment in Event of Default on Senior Indebtedness ............................................ 75 SECTION 13.04. Payments Permitted ......................................... 76 SECTION 13.05. Authorization to Trustee to Effect Subordination ........... 77 SECTION 13.06. Notices to Trustee ......................................... 77 SECTION 13.07. Trustee as Holder of Senior Indebtedness ................... 77 SECTION 13.08. Modification of Terms of Senior Indebtedness ............... 78 ARTICLE XIV Right to Require Repurchase SECTION 14.01. Repurchase of Securities at Option of the Holder Upon Change of Control ....................................... 78 SECTION 14.02. Effect of Change of Control Purchase Notice ................ 80 SECTION 14.03. Deposit of Repurchase Price ................................ 81 SECTION 14.04. Securities Purchased in Part ............................... 82 SECTION 14.05. Covenant to Comply with Securities Laws Upon Purchase of Securities ........................................... 82 ARTICLE XV Defeasance and Covenant Defeasance SECTION 15.01. Company's Option to Effect Defeasance or Covenant Defeasance .............................................. 82 SECTION 15.02. Defeasance and Discharge ................................... 82 SECTION 15.03. Covenant Defeasance ........................................ 83 SECTION 15.04. Conditions to Defeasance or Covenant Defeasance ............ 83 SECTION 15.05. Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions ........... 86 SECTION 15.06. Reinstatement .............................................. 87 Table of Contents, p. 7 Reconciliation and tie between Trust Indenture Act of 1939 and Indenture dated as of July, 1996. Trust Indenture Act Section Indenture Section - --------------------------- ----------------- ss.310(a)(1)......................................... 6.09 (a)(2)......................................... 6.09 (a)(3)......................................... N.A. (a)(4)......................................... N.A. (a)(5)......................................... 6.09 (b)............................................ 6.08 (c)............................................ N.A. ss.311(a)............................................ 6.13 (b)............................................ 6.13 (b)(2)......................................... 6.13 (c)............................................ N.A. ss.312(a)............................................ 7.01; 7.02(a) (b)............................................ 7.02(b) (c)............................................ 7.02(b) ss.313(a)............................................ 7.03(a) (b)............................................ 7.03(a) (c)............................................ 7.03(a) (d)............................................ 7.03(b) ss.314(a)............................................ 7.04; 10.04 (b)............................................ N.A. (c)(1)......................................... 1.02 (c)(2)......................................... 1.02 (c)(3)......................................... N.A. (d)............................................ N.A. (e)............................................ 1.02 (f)............................................ N.A. ss.315(a)............................................ 6.01(a) (b)............................................ 6.02; 7.03 (c)............................................ 6.01(b) (d)............................................ 6.01(c) (d)(1)......................................... 6.01(c)(1) (d)(2)......................................... 6.01(c)(2) (d)(3)......................................... 6.01(c)(3) (e)............................................ 5.14 ss.316(a)(1)(A)...................................... 5.12 (a)(1)(B)...................................... 5.13 Table of Contents, p. 8 Trust Indenture Act Section Indenture Section - --------------------------- ----------------- (a)(2)......................................... N.A. (b)............................................ 5.08 (c)............................................ 1.14 ss.317(a)(1)......................................... 5.03 (a)(2)......................................... 5.04 (b)............................................ 10.03 ss.318(a)............................................ 1.07 INDENTURE dated as of July __, 1996, between HEXCEL CORPORATION, a Delaware corporation (the "Company"), and FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, as Trustee (the "Trustee"). The Company and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the Holders of the ___% Convertible Subordinated Notes Due 2003: ARTICLE I Definitions and Other Provisions of General Application SECTION 1.01. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; (d) the words "herein," "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; and (e) unless otherwise specifically stated herein, the words "Article" and "Section" refer to an Article and Section, respectively, of this Indenture. "Act", when used with respect to any Holder, has the meaning specified in Section 1.04. "Affiliate" of any specified Person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of 2 voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" means any Person authorized by the Trustee to act on behalf of the Trustee to authenticate Securities. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in the city in which the Corporate Trust Office of the Trustee is located or The City of New York, New York are authorized or obligated by law or executive order to close. "Capital Stock" means, with respect to any corporation, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. A "Change of Control" shall occur when: (i) all or substantially all the Company's assets are sold as an entirety to any person or related group of persons other than a Permitted Holder; (ii) there shall be consummated any consolidation or merger of the Company other than with or into a Permitted Holder (A) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly owned subsidiary of the Company in which all shares of Common Stock outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (B) pursuant to which the Common Stock is converted into cash, securities or other property, in each case other than a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger; or (iii) any person, or persons acting together that would constitute a "group" for purposes of Section 13(d) of the Exchange Act, together with any affiliates thereof, other than one or more Permitted Holders, shall beneficially own (as defined in Rule 13d-3 under the Exchange Act) at least 50% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of directors of the Company. Notwithstanding clause (iii) of the foregoing sentence, a Change of Control shall not be deemed to have occurred 3 solely by virtue of the Company, any subsidiary of the Company, any employee stock purchase plan, stock option plan or other stock incentive plan or program, retirement plan or automatic dividend reinvestment plan or any substantially similar plan of the Company or any subsidiary of the Company or any person holding securities of the Company for or pursuant to the terms of any such employee benefit plan filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report) under the Exchange Act disclosing beneficial ownership by it of shares or securities of the Company, whether in excess of 50% or otherwise. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred if (i) the current market price (as defined in Section 12.04(8)) of the Common Stock is at least equal to 105% of the conversion price of the Securities in effect immediately preceding the time of such Change of Control, or (ii) all the consideration to the holders of Common Stock (excluding cash payments for fractional shares) in the transaction giving rise to such Change of Control consists of shares of common stock that are, or immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, and as a result of such transaction the Securities become convertible solely into such common stock, or (iii) the consideration to the holders of Common Stock in the transaction giving rise to such Change of Control consists of cash or securities that are, or immediately upon issuance will be, listed on a national securities exchange or quoted on the Nasdaq National Market, or a combination of cash and such securities, and the aggregate fair market value of such consideration (which, in the case of such securities, shall be equal to the average of the daily Closing Prices of such securities during the ten consecutive Trading Days commencing with the sixth Trading Day following consummation of such transaction) is at least 105% of the conversion price of the Securities in effect on the date immediately preceding the closing date of such transaction. "Change of Control Notice" has the meaning specified in Section 14.01. "Ciba" means Ciba-Geigy Limited, a Swiss corporation. "Closing Price" on any Trading Day with respect to the per share price of Common Stock or any other security means the last reported sales price regular way for a share of such Common Stock or a trading unit of such other security or, in case no such reported sale takes place on such Trading Day, the average of the reported closing bid and asked prices regular way, in either case on the New York Stock Exchange or, if the Common Stock or such other security is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock or such other security is listed or admitted to trading or, if not listed or admitted to trading on any national securities exchange, on the Nasdaq National Market or, if the Common Stock or such other security is not listed or admitted to trading on any national securities exchange 4 or the Nasdaq National Market, the average of the closing bid and asked prices in the over-the-counter market as furnished by any New York Stock Exchange member firm that is selected from time to time by the Company for that purpose. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" includes any stock of any class of the Company that has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and which is not subject to redemption by the Company. However, subject to the provisions of Section 12.11, shares issuable on conversions of Securities shall include only shares of the class designated as Common Stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and that have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the Company and that are not subject to redemption by the Company; provided that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion that the total number of shares of such class resulting from all such reclassification bears to the total number of shares of all such classes resulting from all such reclassifications. "Company" means the Person named as the "Company" in the preamble of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its President or a Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be administered. "Corporation" means a corporation, association, company, joint-stock company or business trust. 5 "Covenant Defeasance" has the meaning specified in Section 15.03. "Credit Facility" means the revolving credit facility dated as of June 27, 1996 among the Company and certain subsidiaries of the Company, as borrowers, the lenders party thereto and Credit Suisse as managing agent for the lenders, as the same may be amended, modified, restated, supplemented, replaced, renewed, refunded or refinanced from time to time (including subsequent or successive refundings, refinancings, replacements or renewals). "Defaulted Interest" has the meaning specified in Section 3.07. "Defeasance" has the meaning specified in Section 15.02. "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations promulgated by the Commission thereunder. "Fair Value" means the fair value as determined in good faith by the Board of Directors of the Company after consultation with a nationally recognized investment banking firm. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof including, for all purposes of this instrument, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Non-Payment Default" means, at any time when the Company has outstanding obligations constituting Senior Indebtedness, the occurrence or existence of any event, circumstance, condition or state of facts that, by the terms of such 6 Senior Indebtedness, permits one or more holders of such obligations (or a trustee or agent on behalf of the holders thereof) to declare such obligations immediately due and payable prior to the date on which they would otherwise become due and payable, other than a Payment Default. "Obligation" of any Person means any obligation of such Person to pay principal, premium, interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company, whether or not a claim for such post-petition interest is allowed in such proceeding), penalties, reimbursement or indemnification amounts, fees, expenses or other amounts. "Officers' Certificate" means a certificate signed by the Chairman of the Board, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel reasonably acceptable to the Trustee, which may be an employee of or counsel for the Company. "Optional Closing Date" means each time the Optional Securities are delivered to and paid for by the underwriters of the Securities initially issued hereunder. "Optional Securities" means an aggregate of not more than $15,000,000 additional principal amount of Securities. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities as to which money for the payment or redemption in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and 7 (iii) Securities which have been paid pursuant to Section 3.06 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Company proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company and the Trustee shall have received notice from the Company that such Securities are Outstanding; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee actually knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. "Payment Blockage Period" has the meaning specified in Section 13.03. "Payment Default" means a default in the payment of any principal of or premium, if any, interest or sinking fund on, or other payment obligation of the Company constituting, Senior Indebtedness when due, whether at the Stated Maturity of any such payment or by declaration of acceleration, call for redemption or otherwise. "Permitted Holder" means (i) Ciba and its successors and their affiliates, (ii) any Person formerly described in clause (i) that was spun off or otherwise distributed to the shareholders of its parent company and (iii) any corporation owned, directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company. "Person" means any individual, corporation, partnership, joint venture, trust, unincorporated organization or government or agency or political subdivision thereof. 8 "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture, including as applicable without duplication, any premium or accrued interest due upon such redemption pursuant to the terms of this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the ______________ or ____________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Repurchase Date" has the meaning specified in Section 14.01. "Repurchase Price" has the meaning specified in Section 14.01. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Securities" means the ___% Convertible Subordinated Notes Due 2003 of the Company authenticated and delivered under this Indenture. "Security Register" and "Security Registrar" have the respective meanings specified in Section 3.05. "Senior Indebtedness" means the principal of and premium, if any, and unpaid interest on, and any reasonable fees or costs related to, (a) indebtedness of the 9 Company (including indebtedness of others guaranteed by the Company) other than the Securities, whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed (i) for money owing to banks or their subsidiaries or their affiliates, (ii) for money borrowed other than from banks evidenced by notes, bonds, debentures or other similar instruments or (iii) arising under a lease of property, equipment or other assets, which indebtedness, pursuant to generally accepted accounting principles then in effect, is classified upon the balance sheet of the Company as a liability of the Company, unless, in each case, the instrument creating or evidencing the same or pursuant to which the same is outstanding provides that such indebtedness is not superior in right of payment to the Securities; (b) to the extent not otherwise described in clause (a) above, any obligations under the Credit Facility; and (c) renewals, extensions, modifications and refundings of any such indebtedness; provided, however, that Senior Indebtedness shall not include (i) indebtedness to a subsidiary of the Company or (ii) the 7% Convertible Subordinated Debentures of the Company Due 2011. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee as the record date for the payment of Defaulted Interest pursuant to Section 3.07. "Stated Maturity", when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other than any day on which securities are not traded on the applicable securities exchange or in the applicable security market. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument is qualified thereunder, except as provided in Section 9.05; provided that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended. 10 "Trustee" means the Person names as the "Trustee" in the preamble of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "U.S. Government Obligations" has the meaning specified in Section 15.04. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 1.02. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each person signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such person, such condition or covenant has been complied with. 11 SECTION 1.03. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it related to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion or representations may be based, insofar as they relate to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.04. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take 12 acknowledgements of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The ownership of Securities shall be proved by the Security Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. Without limiting the foregoing, a Holder entitled to give or take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any different part of such principal amount. SECTION 1.05. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or other Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder, if made, given, furnished or filed in writing to or with the Trustee at First Trust of California, National Association, 1 California Street, Fourth Floor, San Francisco, California 94111, Corporate Trust Office, Attention: Corporate Trust Department, or (b) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, addressed to it at First Trust of California, National Association, 1 California Street, Fourth Floor, San Francisco, California 94111, or at any other address previously furnished in writing to the Trustee by the Company. 13 SECTION 1.06. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 1.07. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the provisions of the Trust Indenture Act shall be deemed to apply to this Indenture as so modified, or if excluded shall not be deemed to apply to this Indenture, as the case may be. SECTION 1.08. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction of any of the terms or provisions hereof. SECTION. 1.09. Successors and Assigns. All covenants and agreements in this Indenture by the Company and the Trustee shall bind their respective successors and assigns, whether so expressed or not. SECTION 1.10. Separability Clause. In case any provision to this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 14 SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the holders of Senior Indebtedness and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.12. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. SECTION 1.13. Legal Holidays. In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security or the last date on which a Holder has the right to convert his Securities shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal (and premium, if any) or conversion of the Securities need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity, or on such last day for conversion; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, if such payment is made or duly provided for on the next succeeding Business Day. SECTION 1.14. Record Date for Vote or Consent of Holders. The Company (or, in the event deposits have been made pursuant to Articles IV or XV or after the occurrence of an Event of Default the Trustee has called for action by the Holders, the Trustee) may set a record date for purposes of determining the identity of Holders entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture, which record date shall be the later of ten days prior to the first solicitation of such vote or consent or the date of the most recent list of Holders furnished to the Trustee pursuant to Section 7.01 hereof prior to such solicitation. If a record date is fixed, those persons who were Holders of Securities at such record date (or their duly designated proxies), and only those persons, shall be entitled to take such action by vote or consent or to revoke any vote or consent previously given, whether or not such persons continue to be Holders after such record date. SECTION 1.15. Incorporators, Stockholders, Officers and Directors of the Company Exempt from Individual Liability. No recourse under or upon any obligation, covenant or agreement of this Indenture or any indenture supplemental hereto or of any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Company or of any successor Person, either 15 directly or through the Company or any successor Person, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations, and that no such personal liability, whatever shall attach to, or is or shall be incurred by the incorporators, or past, present or future stockholders, officers or directors, as such, of the Company or of any successor Person, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom; and that any and all such personal liability of every name and nature, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer or director, as such, because of the creation of the indebtedness hereby authorized, or unless or by reason of the obligation, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Securities. ARTICLE II Forms of Securities SECTION 2.01. Forms Generally. The Securities and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof, with the consent of the Trustee. The terms and provisions of the Securities set forth herein shall constitute, and are hereby expressly made, a part of this Indenture and the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and such provisions and to be bound thereby. The definitive Securities relating thereto shall be printed, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution thereof, with the consent of the Trustee. 16 SECTION 2.02. Form of Face of Security. HEXCEL CORPORATION __% Convertible Subordinated Note Due 2003 No. _______ $_____ Hexcel Corporation, a Delaware corporation (herein called the "Company," which term includes any successor corporation under the Indenture hereinafter referenced), for value received, hereby promises to pay to ________ or registered assigns, the principal sum of _______ Dollars on _________, and to pay interest thereon from _________, 1996 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on ____ and _____ in each year, commencing _____, 1997, until the principal hereof is paid or made available for payment, at the rate per annum of __% from and including the date of issuance of this Security until maturity or earlier redemption. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the ____ and ____ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and interest on this Security will be made at the office or agency of the Company in the Borough of Manhattan, The City of New York, or at any other office or agency maintained by the Company for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. 17 Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereof has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. HEXCEL CORPORATION (seal) By:_______________________________ Attest: (Title) _____________________ (Title) SECTION 2.03. Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the Company designated as its __% Convertible Subordinated Notes Due 2003 (herein called the "Securities"), limited in aggregate principal amount of $100,000,000 (subject to increase as provided in the Indenture up to $115,000,000 aggregate principal amount), issued and to be issued under an Indenture, dated as of July __, 1996 (herein called the "Indenture"), between the Company and First Trust of California, National Association, as Trustee (herein called the "Trustee," which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee, the holders of Senior Indebtedness and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. Subject to and upon compliance with the provisions of the Indenture, the Holder of this Security is entitled, at his option, at any time on or before the close of business on ________, 2003, or in case this Security or a portion hereof is called for redemption, then in respect of this Security or such portion hereof until and including, but (unless the Company defaults in making the payment due upon redemption) not after, the close of business on the tenth day preceding the Redemption Date, to convert this Security (or any portion of the principal amount 18 hereof which is $1,000 or an integral multiple thereof), at the principal amount hereof, or of such portion, into fully paid and non-assessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company at a conversion price equal to $_________ aggregate principal amount of Securities for each share of Common Stock (or at the current adjusted conversion price if an adjustment has been made as provided in the Indenture) by surrender of this Security, duly endorsed or assigned to the Company or in blank, to the Company at its office or agency in the Borough of Manhattan, The City of New York, or at any other office or agency maintained by the Company for such purpose, accompanied by written notice to the Company that the Holder hereof elects to convert this Security, or if less than the entire principal amount hereof is to be converted, the portion hereof to be converted, and, in case such surrender shall be made during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date, also accompanied by payment in New York Clearing House or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of this Security then being converted. Subject to the aforesaid requirement for payment and, in the case of a conversion after the Regular Record Date next preceding any Interest Payment Date and on or before such Interest Payment Date, to the right of the Holder of this Security (or any Predecessor Security) of record at such Regular Record Date to receive an installment of interest (with certain exceptions provided in the Indenture), no payment or adjustment is to be made on conversion for interest accrued hereon or for dividends on the Common Stock issued on conversion. No fractions of shares or scrip representing fractions of shares will be issued on conversion, but instead of any fractional interest the Company shall pay a cash adjustment as provided in the Indenture. The conversion price is subject to adjustment as provided in the Indenture. In addition, the Indenture provides that in case of certain consolidations, mergers or share exchanges to which the Company is a party or the conveyance, transfer or lease of all or substantially all of its assets, the Indenture shall be amended, without the consent of any Holders of Securities, so that this Security, if then outstanding, will be convertible thereafter, during the period this Security shall be convertible as specified above, only into the kind and amount of securities, cash and other property receivable upon the consolidation, merger, share exchange, conveyance, transfer or lease by a holder of the number of shares of Common Stock into which this Security might have been converted immediately prior to such consolidation, merger, share exchange, conveyance, transfer or lease (assuming such holder of Common Stock failed to exercise any rights of election and received per share the kind and amount received per share by a plurality of non-electing shares). The Securities are redeemable, at the Company's option, as a whole or from time to time in part (in denominations of $1,000 or integral multiples thereof), 19 on or after _____, 1999, and prior to maturity, upon not less than 20 nor more than 40 days' notice mailed to the registered Holder thereof. The redemption price shall be equal to __% of the principal amount of the Securities redeemed during the period commencing on _____, 1999 and ending _____, 2000, ___% of the principal amount of the Securities redeemed during the period commencing _____, 2001 and ending _____, 2002 and 100% of the principal amount of the Securities redeemed thereafter, together, in each case, with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture. In the event of redemption or conversion of this Security in part only, a new Security or Securities for the unredeemed or unconverted portion thereof will be issued in the name of the Holder thereof upon the cancellation hereof. The Indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his attorney-in-fact for any and all such purposes. In the event there shall occur any Change of Control with respect to the Company, each Holder of Securities shall have the right, at such Holder's option but subject to the conditions set forth in the Indenture, to require the Company to purchase on the Repurchase Date all or any part of such Holder's Securities at a Repurchase Price equal to 100% of the principal amount thereof, together with accrued and unpaid interest to the Repurchase Date and in the manner specified in the Indenture. Failure by the Company to repurchase the Notes when required under the preceding sentence will result in an Event of Default whether or not such repurchase is permitted by the subordination provisions of the Indenture. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the 20 Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed or to convert this Security as provided in the Indenture. The Securities are issuable only in registered form without coupons in denominations of $1,000 or any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. The Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York as applied to contracts made and performed within the State of New York, without regard to principles of conflicts of laws. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. 21 ASSIGNMENT FORM To Assign this Security, fill in the form below: I or we assign and transfer this Security to ________ whose tax identification number or social security number is __________, and whose address is (print or type below, including zip code): ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ I or we irrevocably appoint ___________ agent to transfer this Security on the books of the Company. The Agent may substitute another to act for him. Date: __________ Your signature: ____________________________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee(1): _________________________ SECTION 2.04. Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture. First Trust of California, National Association, as Trustee by_________________________________ Authorized Signatory Date of Authentication: _____________ __________ (1) Participant in a recognized signature guarantee medallion program (or other signature guarantor satisfactory to the Trustee). 22 SECTION 2.05. Election to Exercise Conversion Right. The undersigned Holder of this Security hereby irrevocably exercises the option to convert this Security, or the portion (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of Hexcel Corporation in accordance with the terms of the Indenture referred to in this Security, and directs that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned registered Holder hereof, unless a different name has been indicated in the assignment below. If shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and shall cause the undersigned's signature to be guaranteed. Any amount required to be paid by the undersigned on account of interest accompanies this Security. 23 Portion of Security to be converted ($1,000 or an integral multiple thereof): $___________________ Date: _____________ Signature: _______________________________________________ (Sign exactly as your name appears on the other side of this Security) If shares of Common Stock are to be issued and registered otherwise than to the registered Holder named above, please have the above signature guaranteed and print or typewrite name and address, including zip code, and social security or other taxpayer identification number of the person in whose name such Common Stock will be registered. ____________________________________________ ____________________________________________ ____________________________________________ Signature Guarantee(2): ________________________ _________ (2) Participant in a recognized signature guarantee medallion program (or other signature guarantor satisfactory to the Trustee). 24 Election to Exercise Purchase Right. If you wish to elect to have this Security purchased by the Company pursuant to Article XIV of the Indenture, check the box: |_| If you wish to elect to have only part of this Security purchased by the Company pursuant to Article XIV of the Indenture, state the amount you elect to have purchased: $ Date: Signature: _______________________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee(3): ________________________ ARTICLE III The Securities SECTION 3.01. Title and Terms. The aggregate principal amount of Securities that may be authenticated and delivered under this Indenture is limited to (a) $100,000,000, plus (b) such aggregate principal amount (which may not exceed $15,000,000 principal amount) of Securities as shall be purchased by the Underwriters on one or more Optional Closing Dates pursuant to the Underwriting Agreement dated July __, 1996 among the Company and CS First Boston Corporation and Bear, Stearns & Co. Inc., as Underwriters, except for Securities authenticated and delivered upon registration of transfer of, or exchange for, or in lieu of, other Securities pursuant to Sections 3.04, 3.05, 3.06, 9.06, 11.08, 12.02 or 14.04. The Securities shall be known and designated as the "__% Convertible Subordinated Notes Due 2003" of the Company. Their Stated Maturity shall be ________, 2003, and they shall bear interest at the rate of __% per annum, from and __________ (3) Participant in a recognized signature guarantee medallion program (or other signature guarantor satisfactory to the Trustee). 25 including the date of issuance thereof until maturity or earlier redemption, payable semi-annually on _____________ and ____________ commencing __________, 1997, until the principal thereof is paid or made available for payment. The principal of (and premium, if any) and interest on the Securities shall be payable at the office or agency of the Company in the Borough of Manhattan, The City of New York, maintained for such purpose and at any other office or agency maintained by the Company for such purpose; provided, however, that at the option of the Company, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The Securities shall be redeemable as provided in Article XI. The Securities shall be convertible as provided in Article XII. The Securities shall be subordinated in right of payment to Senior Indebtedness as provided in Article XIII. The Securities shall be subject to repurchase by the Company, at the option of the Holders as provided in Article XIV. SECTION 3.02. Denominations. The Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 or any integral multiple thereof. SECTION 3.03. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon and attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company up to an aggregate principal amount stated in the Securities, to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and an authorized officer of the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as provided in this Indenture and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any 26 purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by an authorized officer of the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. SECTION 3.04. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions, and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities with the consent of the Trustee. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 3.05. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 10.02 for such purpose, the Company shall execute, and an authorized officer of the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the 27 Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and an authorized officer of the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration or transfer or exchange of Securities shall be the valid obligations of the Company evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument or transfer in form satisfactory to the Company and the Security Registrar duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 3.06, 9.06, 11.08, 12.02 or 14.04 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of Securities selected for redemption under Section 11.04 and ending at the close of business on the day of such mailing, or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. 28 Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.07. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date notwithstanding the fact that such Holder was a Holder on such Regular Record Date, and such Defaulted Interest may be paid by the Company at its election, as provided in Clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such 29 Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. In the case of any Security which is converted after any Regular Record Date and on or prior to the next succeeding Interest Payment Date, subject to the obligation to deliver funds pursuant to Section 12.02, interest whose Stated Maturity is on such Interest Payment Date shall be payable on such Interest Payment Date notwithstanding such conversion, and such interest (whether or not punctually paid or duly provided for) shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on such Regular Record Date. Except as otherwise expressly provided in the immediately preceding sentence, in the case of any Security which is converted, interest whose Stated Maturity is after the date of conversion of such Security shall not be payable. SECTION 3.08. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of 30 principal of (and premium, if any) and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.09. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange, conversion or repurchase shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of by the Trustee and a certificate of destruction shall be delivered to the Company. SECTION 3.10. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE IV Satisfaction and Discharge SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of conversion, registration of transfer or exchange of Securities and rights of the Trustee herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or 31 (B) all such Securities not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; (3) the Trustee has not received any notice pursuant to the terms of Section 13.06; and (4) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company in Sections 3.05, 3.06, 6.07, 7.02, 10.01, 10.02 and 10.03 and in Article XII shall survive until the Securities are no longer outstanding and the obligations of the Company in Section 6.07 shall survive termination of this Indenture. SECTION 4.02. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee. All moneys deposited with the Trustee pursuant to Section 4.01 (and held by it or any Paying Agent) for the payment of Securities subsequently converted shall be returned to the Company upon Company Request. 32 ARTICLE V Remedies SECTION 5.01. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article XIII or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security when it becomes due and payable, and continuance of such default for a period of 30 days, whether or not such payment is prohibited by Article XIIII; or (2) default in the payment of the principal of (or premium, if any, on) any Security at its Maturity, whether or not such payment is prohibited by Article XIII; or (3) default in the payment of the Redemption Price in respect of any Security on the Redemption Date therefor in accordance with the provisions of Article XI, whether or not such payment is prohibited by Article XIII; or (4) default in the payment of the Repurchase Price in respect of any Security on the Repurchase Date therefore in accordance with the provision of Article XIV, whether or not such payment is prohibited by Article XIII; or (5) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities in written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (6) default, beyond any applicable grace period, if any, in the payment of amounts due under any mortgage, indenture or instrument under which there is outstanding, or by which there is secured or evidenced, any indebtedness of the Company in excess of an aggregate of $25 million at its stated maturity either for borrowed money or representing any Senior Indebtedness or default under 33 any such indebtedness that results in the acceleration of such indebtedness prior to its express maturity; provided, however, that if such default under such mortgage, indenture or instrument shall be remedied or cured by the Company or waived by the holders of such indebtedness prior to an acceleration under this Indenture, then the Event of Default hereunder by reason thereof shall be deemed likewise to have been thereupon remedied, cured or waived without further action upon the part of either the Trustee or any of the Holders of the Securities; or (7) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or state law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (8) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated as bankrupt or insolvent, or the consent by the Company to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in clause (7) or (8) of 34 Section 5.01) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal of all the Securities to be due and payable by a notice in writing to the Company (and to the Trustee if given by a Holder), and such principal shall become immediately due and payable. If an Event of Default specified in clause (7) or (8) of Section 5.01 occurs, all unpaid principal and accrued interest on the Securities then outstanding shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made as a result of any Event of Default described in Section 5.01, and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if: (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities, (B) the principal of (and premium, if any, on) any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (C) to the extent the payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the nonpayment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if 35 (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, including payment of the Redemption Price on any Redemption Date, or (3) default is made in the payment of the Change in Control Purchase Price in respect of any Security on the Change in Control Purchase Date thereof in accordance with the provisions of Article XIV. the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal (and premium, if any) and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem appropriate to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.04. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by 36 declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable and to take any and all actions authorized under the Trust Indenture Act or any other applicable law as may be appropriate in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding; and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payment to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and any other amounts due the Trustee under Section 6.07. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 5.06. Application of Money Collected. Subject to Article XIII, any money collected by the Trustee pursuant to this Article shall be 37 applied in the following order, at the date or dates fixed by the Trustee and, in the case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.07; and SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and THIRD: To the payment of the remainder, if any, to whomsoever may be lawfully entitled thereto, or as a court of competent jurisdiction may direct. SECTION 5.07. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; 38 it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest and to Convert. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of (and premium, if any) and (subject to Section 3.07) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to convert such Security in accordance with Article XII and to institute suit for the enforcement of any such payment and right to convert, and such rights shall not be impaired without the consent of such Holder. SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 5.10. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may 39 be exercised from time to time, and as often may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 5.12. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 5.13. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of (or premium, if any) or interest on any Security, (2) in respect of a covenant or provision hereof which under Article X cannot be modified or amended without the consent of the Holder of each Outstanding Security affected, or (3) in respect of the conversion rights under Article XII. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 5.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this 40 Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of (or premium, if any) or interest on any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the Redemption Date) or for the enforcement of the right to convert any Security in accordance with Article XII. SECTION 5.15. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereinafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE VI The Trustee SECTION 6.01. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and 41 use the same degree of care and skill in their exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct, except that (1) this Subsection shall not be construed to limit the effect of Subsection (a) of this Section; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 6.02. Notice of Defaults. Within 90 days after the occurrence of any default hereunder, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, notice of such default hereunder known to the Trustee, unless such default shall have been cured or waived; provided, however, that, except in the case of a default in the payment of the principal of (or premium, if any) or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors or Responsible Officers of the Trustee in good faith determine that the withholding of such notice is in the interest of the Holders. The Trustee shall not be deemed to have knowledge of any default 42 except (i) a payment default under Section 5.01(1), (2), (3) or (4) so long as the Trustee is the Paying Agent or (ii) any default of which the Trustee shall have received written notification or a Responsible Officer charged with the administration of this Indenture shall have obtained actual knowledge, and such notification shall not be deemed to include receipt of information obtained in any report or other documents furnished under Section 7.04 of this Indenture, which reports and documents the Trustee shall have no duty to examine. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. SECTION 6.03. Certain Rights of Trustee. Subject to the provisions of Section 6.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; 43 (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit[, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the relevant books, records and premises of the Company, personally or by agent or attorney]; and (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder. SECTION 6.04. Not Responsible for Recitals or Issuance of Securities. The recitals contained in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representation as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 6.05. May Hold Securities. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.08 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not the Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 6.06. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest or any money received by it hereunder except as otherwise agreed with the Company. 44 SECTION 6.07. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advances as may be attributable to any action or failure to act by the Trustee that breaches the applicable standard of care relating thereto; and (3) to indemnify the Trustee (including its officers, directors, employees and agents) for, and to hold it harmless against, any loss, liability or expense incurred, unless incurred in connection with any action or failure to act by the Trustee that breaches the applicable standard of care relating thereto, arising out of or in connection with the acceptance or administration of the trust hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in clauses (7) and (8) of Section 5.01, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 6.08. Disqualification; Conflicting Interest. The Trustee shall be subject to the provisions of Section 3.10(b) of the Trust Indenture Act. Nothing herein shall prevent the Trustee from filing with the Commission the application referred to in the penultimate paragraph of Section 3.10(b) of the Trust Indenture Act. 45 SECTION 6.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder who satisfies the requirements of paragraphs (1), (2) and (5) of Section 3.10(a) of the Trust Indenture Act and which shall be a corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $100,000,000 and subject to supervision or examination by Federal or state authority. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 6.10. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 6.11. (b) The Trustee may resign at any time by giving written notice to the Company. If the instrument of acceptance by a successor Trustee required by Section 6.11 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) The Trustee shall fail to comply with Section 6.08 , (2) the Trustee shall cease to be eligible under Section 6.09, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, 46 then in any such case, (i) the Company may remove the Trustee or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 6.11 within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective, the retiring Trustee shall be released from all obligations for future actions under this Indenture and such successor Trustee, without any further act, deed or conveyance, shall become vested, with all the rights, powers, trusts and duties of the retiring Trustee under this Indenture; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all 47 instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee shall be the successor of the Trustee hereunder; provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 6.13. Preferential Collection of Claims Against Company. The Trustee is subject to Section 3.11(a) of the Trust Indenture Act, excluding any creditor relationship listed in Section 3.11(b) of the Trust Indenture Act. A trustee who has resigned or been removed shall be subject to Section 3.11(a) of the Trust Indenture Act to the extent indicated therein. SECTION 6.14. Appointment of Authenticating Agent. The Trustee may appoint an Authenticating Agent or Agents which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer, partial conversion or partial redemption thereof or pursuant to Section 3.06, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Whatever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $100,000,000 and subject to supervision or examination by Federal or state authority. 48 If such Authenticating Agent publishes reports of condition at least annually pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent; provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent, which shall be acceptable to the Company, and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders as their names and addresses appear in the Security Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Trustee agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section, and the Trustee shall be entitled to be reimbursed for such payments, subject to the provisions of Section 6.07. 49 If an appointment is made pursuant to this Section, the Securities may have endorsed thereon in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Securities described in the within mentioned Indenture. , as Trustee by______________________________________ As Authenticating Agent by______________________________________ As Authorized Signatory ARTICLE VII Holders Lists and Reports by Trustee and Company SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders. If the Trustee is not the Security Registrar, the Company will furnish or cause to be furnished to the Trustee (a) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 10 Business Days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished. SECTION 7.02. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 or the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee 50 may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) Holders may communicate pursuant to Section 3.12(b) of the Trust Indenture Act with other Holders with respect to their rights under this Indenture or the Securities. The Company, the Security Trustee, the Registrar and any other person shall have the protection of Section 3.12(c) of the Trust Indenture Act. SECTION 7.03. Reports by Trustee. (a) If such report is required by Section 3.13 of the Trust Indenture Act, within 60 days after each May 15, beginning with May 15 following the date of this Indenture, and so long as the Securities shall remain outstanding the Trustee shall mail to each Holder a brief report dated as of such May 15 that complies with Section 3.13(a) of the Trust Indenture Act. The Trustee also shall comply with Section 3.13(b)(2), (c) and (d) of the Trust Indenture Act. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each securities exchange upon which the Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any securities exchange. SECTION 7.04. Reports by Company. The Company shall: (1) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of said Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents, and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations including, in the case of annual reports, if required by such rules and regulations, certificates or opinions of independent public accountants, conforming to the requirements of Section 1.02, as to compliance with conditions or covenants, compliance with which is subject to verification by accountants; 51 (2) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as may be required from time to time by such rules and regulations; and (3) transmit by mail to all Holders, in the manner and to the extent provided in Section 7.03(a), such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as may be required by rules and regulations prescribed from time to time by the Commission. ARTICLE VIII Consolidation, Merger, Conveyance, Transfer or Lease SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merger into any other Person or convey, transfer or lease all or substantially all of its assets to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease all or substantially all of its assets to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, all or substantially all of the assets of the Company shall be a corporation, partnership or trust, organized or validly existing under the laws of the United States of America, any state thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee in form satisfactory to the Trustee, the due and punctual payment of the principal of (and premium, if any) and interest on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed and shall have provided for conversion rights in accordance with Section 12.11; (2) immediately after giving effect to such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; 52 (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. SECTION 8.02. Successor Substituted for Company. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of all or substantially all of the assets of the Company in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE IX Supplemental Indentures SECTION 9.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities in accordance with Article VIII; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default; or (4) to secure the Securities; or 53 (5) to make provision with respect to the conversion rights of Holders pursuant to the requirements of Section 12.11; or (6) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provision of this Indenture, provided such action pursuant to this Clause (6) shall not adversely affect the interests of the Holders in any material respect. SECTION 9.02. Supplemental Indentures With Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby: (1) change the Stated Maturity of the principal of, or any installment of interest on, any Security or, once a Repurchase Notice has been sent following a Change of Control, the date on which the Securities are subject to repurchase pursuant to Article XIV, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof or the price payable upon repurchase pursuant to Article XIV, or change the place of payment where, or the coin or currency in which, any Security or any premium or purchase price or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date or, in the case of a repurchase pursuant to Article XIV, on or after the Repurchase Date), or adversely affect the right to convert any Security as provided in Article XII (except as permitted by Section 9.01(5)) or modify the provisions of this Indenture with respect to the subordination of the Securities in a manner adverse to the Holders, or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or 54 (3) modify any of the provisions of this Section or Section 5.13 or Section 10.09, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.03. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel of the Company stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and, subject to Section 9.02, every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05. Conformity With Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Securities so modified as to conform, in the opinion of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. SECTION 9.07. No Impairment of Subordinates. No supplemental indenture which modifies the provisions of Article XIV in any manner which alters 55 the subordination of the Securities shall be effective against any holder of outstanding Senior Indebtedness without the consent of such holder. ARTICLE X Covenants SECTION 10.01. Payment of Principal, Premium and Interest. The Company shall duly and punctually pay or cause to be paid the principal of (and premium, if any) and interest on the Securities and the Redemption Price and the Repurchase Price, if any, each in accordance with the terms of the Securities and this Indenture. To the extent permitted by applicable law, the Company shall pay interest on overdue amounts at the rate set forth in paragraph 1 of the Securities, and it shall pay interest on overdue interest at the same rate compounded semi-annually (to the extent that the payment of such interest shall be legally enforceable), which interest on overdue interest shall accrue from the date such amounts became overdue. SECTION 10.02. Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, The City of New York an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange, where Securities may be surrendered for conversion or purchase pursuant to Article XIV and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company fails to maintain any such required office or agency or fails to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligations to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. 56 SECTION 10.03. Money for Security Payments to be Held in Trust. If the Company at any time acts as its own Paying Agent, it shall, on or before each due date of the principal of (and premium, if any) or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal (and premium, if any) or interest so becoming due until such sums are paid to such Persons or otherwise disposed of as herein provided and shall promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it shall, prior to each due date of the principal of (and premium, if any) or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company shall cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such paying Agent will: (1) hold all sums held by it for the payment of the principal of (and premium, if any) or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal (and premium, if any) or interest; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. 57 Any money deposited with the Trustee or any Paying Agent, or then held by the Company in trust for the payment of the principal of (and premium, if any) or interest on any Security and remaining unclaimed for two years after such principal (and premium, if any) or interest has become due and payable shall be paid to the Company on Company Request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in New York, New York notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 10.04. Statements of Officers of Company as to Default. (a) The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof (but no later than the time of filing of the annual report of the Company with the Trustee pursuant to Section 7.04), an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in compliance with all conditions and covenants hereunder, without regard to any period of grace or requirements of notice provided hereunder, and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. The Officers' Certificate need not comply with Section 1.02 hereof. (b) The Company shall file with the Trustee written notice of the occurrence of any default or Event of Default within five Business Days of its becoming aware of any such default or Event of Default. SECTION 10.05. Existence. Subject to Article VIII, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect it existence, rights (charter and statutory) and franchise; provided, however, that the Company shall not be required to preserve any such right or franchise if its Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company. SECTION 10.06. Maintenance of Properties. The Company will cause all properties material to the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and 58 supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times while any Securities are Outstanding; provided, however, that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary. SECTION 10.07. Payment of Taxes and Other Claims. The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges (including withholding taxes and any penalties, interest and additions to taxes) levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all material lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary, in each case material to the Company and its Subsidiaries taken as a whole; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which disputed amounts adequate reserves have been made. SECTION 10.08. Further Instruments and Acts. Upon reasonable request of the Trustee, the Company will execute and deliver such further instruments and perform such further acts as may be reasonably necessary or proper to carry out more effectively the purposes of this Indenture. SECTION 10.09. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in this Article X (other than Sections 10.01 through 10.05, inclusive), if before the time for such compliance the Holders of at least a majority (or such greater amount as may be specified in any such term, provision or condition) in principal amount of the Outstanding Securities shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. 59 ARTICLE XI Redemption of Securities SECTION 11.01. Right of Redemption. The Securities may be redeemed at the election of the Company, as a whole or from time to time in part, at any time on or after _______, 1999, and prior to maturity at the Redemption Prices specified in the form of Security hereinbefore set forth for redemptions, together with accrued interest to the Redemption Date (subject to the provisions of Section 11.07); provided, however, if an Event of Default shall have occurred and be continuing, the Securities may be redeemed in part only if redeemed pro rata as to all Holders thereof. SECTION 11.02. Applicability of Article. Redemption of Securities at the election of the Company, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 11.03. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 11.01 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed. SECTION 11.04. Selection by Trustee of Securities to be Redeemed. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than 40 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, pro rata or by lot or by a method that complies with the requirements of any exchange on which the Securities are listed that the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $1,000 or any integral multiple thereof) of the principal amount of Securities of a denomination larger than $1,000. If any Securities selected for partial redemption are converted in part before termination of the conversion right with respect to the portion of the Security so selected, the converted portion of such Security shall be deemed (so far as may be) to be the portion selected for redemption. Securities which have been converted during a selection of Securities to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection notwithstanding that any such Security is converted in whole or in part before the mailing of the notice of redemption. 60 The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 11.05. Notice of Redemption. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 20 nor more than 40 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Securities to be redeemed, (4) that on the Redemption Date, the Redemption Price will become due and payable upon each such Security to be redeemed and that interest thereon will cease to accrue on and after said date, (5) the conversion price, the date on which the right to convert the principal of the Securities to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion, and (6) the place or places where such Securities are to be surrendered for payment of the Redemption Price. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 11.06. Deposit of Redemption Price. Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent 61 (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date other than any Securities called for redemption on that date which have been converted prior to the date of such deposit. If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 3.07) be returned to the Company or, if then held by the Company, shall be discharged from such trust. SECTION 11.07. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.07. If any Security called for redemption shall not be so paid upon surrender thereof for redemption the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Security. SECTION 11.08. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at an office or agency of the Company designated for that purpose pursuant to Section 10.02 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. 62 SECTION 11.09. Conversion Arrangements on Call for Redemption. Notwithstanding anything to the contrary contained in this Indenture, in connection with any redemption of Securities, the Company, by an agreement with one or more investment bankers or other purchasers, may arrange for such purchasers to purchase all Securities called for redemption (the "Called Securities") which are either (i) surrendered for redemption or (ii) not duly surrendered for redemption or conversion prior to the close of business on the Redemption Date, and to convert the same into shares of Common Stock, by the purchasers' depositing with the Trustee (acting as Paying Agent with respect to the deposit of such amount and as conversion agent with respect to the conversion of such Called Securities), in trust for the Holders of the Called Securities, on or prior to the Redemption Date in the manner agreed to by the Company and such purchasers, an amount sufficient to pay the Redemption Price, payable by the Company on redemption of such Called Securities. In connection with any such arrangement for purchase and conversion, the Trustee as Paying Agent shall pay on or after the Redemption Date such amounts to deposited by the purchasers in exchange for Called Securities surrendered for redemption prior to the close of business on the Redemption Date and for all Called Securities surrendered after such Redemption Date. Notwithstanding anything to the contrary contained in this Article XI, the obligation of the Company to pay the Redemption Price of such Called Securities shall be satisfied and discharged to the extent such amount is so paid by such purchasers; provided, however, that nothing in this Section 11.09 shall in any way relieve the Company of the obligation to pay such Redemption Price on all Called Securities to the extent such amount is not so paid by said purchasers. For all purposes of this Indenture, any Called Securities surrendered by the Holders for redemption, and any Called Securities not duly surrendered for redemption or conversion prior to the close of business on the Redemption Date, shall be deemed acquired by such purchasers from such Holders and surrendered by such purchasers for conversion and shall in all respects be deemed to have been converted, all as of immediately prior to the close of business on the Redemption Date, subject to the deposit by the purchasers of the above amount as aforesaid. Nothing in this Section 11.09 shall in any way limit the right of any Holder of a Security to convert his Security pursuant to the terms of this Indenture any time prior to the close of business on the tenth day preceding the Redemption Date (or, if such day is not a Business Day, on the next succeeding Business Day). ARTICLE XII Conversion of Securities SECTION 12.01. Conversion Privilege and Conversion Price. Subject to and upon compliance with the provisions of this Article, at the option of the Holder 63 thereof, any Security or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 may be converted into fully paid and nonassessable shares (calculated as to each conversion to the nearest 1/100 of a share) of Common Stock of the Company which equals the quotient obtained by dividing such principal amount by the conversion price, determined as hereinafter provided, in effect at the time of conversion. In case a Security or portion thereof is called for redemption, such conversion right in respect of the Security or portion so called shall expire at the close of business on the tenth day preceding the Redemption Date (or, if such day is not a Business Day, on the next succeeding Business Day), unless the Company defaults in making the payment due upon redemption. The price at which shares of Common Stock shall be delivered upon conversion (herein called the "conversion price") shall be initially $__________ per share of Common Stock. The conversion price shall be adjusted in certain instances as provided in Section 12.04. In case the Company shall, by dividend or otherwise, declare or make a distribution on its Common Stock referred to in paragraph (5) of Section 12.04, the Holder of each Security, upon the conversion thereof pursuant to this Article subsequent to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution and prior to the effectiveness of the conversion price adjustment in respect of such distribution pursuant to paragraph (5) of Section 12.04, shall also be entitled to receive for each share of Common Stock into which such Security is converted, the portion of the cash so distributed applicable to one share of Common Stock. If any conversion of a Security described in the immediately preceding sentence occurs prior to the payment date for a distribution to holders of Common Stock which the Holder of the Security so converted is entitled to receive in accordance with the immediately preceding sentence, the Company may elect (such election to be evidenced by a Board Resolution) to distribute to such Holder a due bill for the cash to which such Holder is so entitled; provided that such due bill (i) meets any applicable requirements of the principal national securities exchange or other market on which the Common Stock is then traded and (ii) requires payment or delivery of such cash no later than the date of payment or delivery thereof to holders of Common Stock receiving such distribution. 64 SECTION 12.02. Exercise of Conversion Privilege. In order to exercise the conversion privilege, the Holder of any Security to be converted shall surrender such Security, duly endorsed or assigned to the Company or in blank, at any office or agency maintained by the Company pursuant to Section 10.02, accompanied by written notice to the Company at such office or agency that the Holder elects to convert such Security or, if less than the entire principal amount thereof is to be converted, the portion thereof to be converted. Securities surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business on such Interest Payment Date (except Securities or portions thereof called for redemption on a Redemption Date within such period between and including a Regular Record Date and a related Interest Payment Date) shall be accompanied by payment in New York Clearing House funds or other funds acceptable to the Company of an amount equal to the interest payable on such Interest Payment Date on the principal amount of Securities being surrendered for conversion. Except as provided in the preceding sentence and subject to the last paragraph of Section 3.07, no payment or adjustment shall be made upon any conversion on account of any interest accrued on the Securities surrendered for conversion or on account of any dividends on the Common Stock issued upon conversion. Securities shall be deemed to have been converted immediately prior to the close of business on the day of surrender of such Securities for conversion in accordance with the foregoing provisions, and at such time the rights of the Holders of such Securities as Holders shall cease, and the Person or Persons entitled to receive the Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such Common stock at such time. As promptly as practicable on or after the conversion date, the Company shall issue and shall deliver at such office or agency a certificate or certificates for the number of full shares of Common Stock issuable upon conversion, together with payment in lieu of any fraction of a share, as provided in Section 12.03. In the case of any Security which is converted in part only, upon such conversion the Company shall execute and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities, of authorized denominations in aggregate principal amount equal to the unconverted portion of the principal amount of such Security. SECTION 12.03. Fractions of Shares. No fractional shares of Common Stock shall be issued upon conversion of Securities. If more than one Security shall be surrendered for conversion at one time by the same Holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Securities (or specified 65 portions thereof) so surrendered. Instead of any fractional share of Common Stock which would otherwise be issuable upon conversion of any Security or Securities (or specified portions thereof), the Company shall pay a cash adjustment (rounded to the nearest cent) in respect of such fraction in an amount equal to the same fraction of the Closing Price per share of the Common Stock at the close of business on the day of conversion (or, if such day is not a Trading Day, on the Trading Day immediately preceding such day). SECTION 12.04. Adjustment of Conversion Price. (1) In case the Company shall pay or make a dividend or other distribution on its Common Stock exclusively in Common Stock or shall pay or make a dividend or other distribution on any other class of capital stock of the Company, which dividend or distribution includes Common Stock, the conversion price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (1), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. (2) Subject to the last sentence of paragraph (7) of this Section, in case the Company shall pay or make a dividend or other distribution on its Common Stock consisting exclusively of, or shall otherwise issue to all holders of its Common Stock, rights, warrants or options entitling the holders thereof to subscribe for or purchase shares of Common Stock at a price per share less than the current market price per share (determined as provided in paragraph (8) of this Section) of the Common Stock on the date fixed for the determination of stockholders entitled to receive such rights, warrants or options the conversion price in effect at the opening of business on the day following the date fixed for such determination shall be reduced by multiplying such conversion price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination plus the number of shares of Common Stock that the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close 66 of business on the date fixed for such determination plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. For the purposes of this paragraph (2), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company shall not issue any rights or warrants in respect of shares of Common Stock held in the treasury of the Company. If at the end of the period during which such rights or warrants are convertible into Common Stock, not all such rights or warrants have been converted into Common Stock, the conversion price shall be immediately readjusted to what the conversion price would have been based on the number of additional shares of Common Stock actually issued. (3) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock or combined into a smaller number of shares of Common Stock, the conversion price in effect at the opening of business on the date following the day upon which such subdivision or combination becomes effective shall be proportionately reduced or increased, as the case may be, such adjustment to become effective immediately after the opening of business on the day following the day upon which such subdivision or combination becomes effective. (4) Subject to the last sentence of this paragraph (4), in case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, cash or assets (including securities, but excluding (x) any rights, warrants or options referred to in paragraph (2) of this Section, (y) any dividend or distribution paid exclusively in cash out of net profits of the Company for the twelve full calendar months preceding the calendar month in which such dividend or distribution is to be made and (z) any dividend or distribution referred to in paragraph (1) of this Section), the conversion price shall be reduced so that the same shall equal the price determined by multiplying the conversion price in effect immediately prior to the effectiveness of the conversion price reduction contemplated by this paragraph (4) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section) of the Common Stock on the date of such effectiveness less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution), on the date of such effectiveness, of the portion of the evidences of indebtedness, shares of capital stock, cash and assets so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the date following the day fixed for the determination of stockholders entitled to receive such distribution (the "Reference Date") PROVIDED, HOWEVER that in the event the fair market value (as so determined) of the portion of the evidences of indebtedness, shares of capital stock, cash and assets so distributed applicable to one share of Common Stock is equal to greater than such current market price per share of Common Stock, or if the excess of such current market price per share over such fair market value is less than $1.00, then adequate provision shall be made so that the Holders shall have the right to receive upon conversion of the Securities the amount of evidences of indebtedness, shares of capital stock, cash and assets such Holder would have received had the Holder converted the Securities immediately prior to the Reference Date. If the Board of Directors determines the fair 67 market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities included in such distribution, it shall in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section. For purposes of this paragraph (4), any dividend or distribution that includes shares of Common Stock, rights, warrants or options to subscribe for or purchase shares of Common Stock or other securities convertible into or exchangeable for shares of Common Stock shall be deemed instead to be (a) a dividend or distribution of the evidences of indebtedness, cash, assets or shares of capital stock other than such shares of Common Stock, such rights, warrants or options or such other convertible or exchangeable securities (making any conversion price reduction required by this paragraph (4) immediately followed by (b) in the case of such shares of Common Stock or such rights, warrants or options, a dividend or distribution thereof (making any further conversion price reduction required by paragraph (1) or (2) of this Section, except (i) the Reference Date of such dividend or distribution as defined in this paragraph (4) shall be substituted as "the date fixed for the determination of stockholders entitled to receive such distribution" and "the date fixed for such determination" within the meaning of paragraphs (1) and (2) of this Section and (ii) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of paragraph (1) of this Section) or (c) in the case of such other convertible or exchangeable securities, a dividend or distribution of such number of shares of Common Stock as would then be issuable upon the conversion of exchange thereof, whether or not the conversion or exchange of such securities is subject to any conditions (making any further conversion price reduction required by paragraph (1) of this Section, except (i) the Reference Date of such dividend or distribution as defined in this paragraph (4) shall be substituted as "the date fixed for the determination of stockholders entitled to receive such distribution" and "the date fixed for such determination" and (ii) the shares deemed to constitute such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination," each within the meaning of paragraph (1) of this Section). (5) In case the Company shall, by dividend or otherwise, at any time distribute to all holders of its Common Stock cash (including any distribution of cash out of the retained earnings of the Company but excluding any cash that is distributed as part of a distribution requiring a conversion price adjustment pursuant to paragraph (4) of this Section) in an aggregate amount that, together with (i) the aggregate amount of any other distributions to all holders of its Common Stock made exclusively in cash within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to paragraph (4) of this Section or this paragraph (5) has been made and (ii) the portion of the aggregate of any cash plus the fair market value (as determined by the Board of 68 Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer or exchange offers by the Company or a Subsidiary of all or any portion of the Company's Common Stock concluded within the 12 months preceding the date of payment of such distribution and in respect of which no conversion price adjustment pursuant to paragraph (6) of this Section or this paragraph (5) of this Section has been made that is in excess of an amount equal to the product of (x) the number of shares of Common Stock with respect to which the aggregate tender or exchange offer or negotiated purchase consideration is payable multiplied by (y) the average of the daily Closing Prices per share of Common Stock on the five consecutive Trading Days selected by the Company out of the 10 consecutive Trading Days next succeeding the date of payment of such the negotiated purchase consideration or expiration of the tender or exchange offer, as the case may be, exceeds 20% of the product of the current market price per share (determined as provided in paragraph (8) of this Section) of the Common Stock on the date fixed for stockholders entitled to receive such distribution multiplied by the number of shares of Common Stock outstanding on such date (excluding shares held in the treasury of the Company), the conversion price shall be reduced so that the same shall equal the price determined by multiplying such conversion price in effect immediately prior to the conversion price reduction contemplated by this paragraph (5) by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section) of the Common Stock on the date of such distribution less the amount of cash so distributed applicable to one share of Common Stock and the denominator shall be such current market price per share (determined as provided in paragraph (8) of this Section) of the Common Stock on the date of such distribution, such reduction to become effective immediately prior to the opening of business on the day following the date fixed for the payment of such distribution. (6) In case a tender or exchange offer (the "Current Purchase") made by the Company or any Subsidiary for all or any portion of the Company's outstanding Common Stock shall be consummated, if the aggregate of any cash plus the fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of such tender offer or exchange offer is in excess of an amount equal to the product of (a) the number of shares of Common Stock with respect to which the aggregate tender offer or exchange offer consideration is payable multiplied by (b) the average of the daily Closing Prices per share of Common Stock on the five consecutive Trading Days selected by the Company out of the 10 consecutive Trading Days next succeeding the date of payment of the purchase consideration or expiration of the tender offer or exchange offer, as the case may be (the "Reference Price"), and the amount of such excess, together with (i) the portion of the aggregate of the cash, plus the fair market value (as determined by the Board of Directors, whose 69 determination shall be conclusive and described in a Board Resolution) of consideration payable in respect of any tender offer or exchange offer (the "Prior Purchase") by the Company or a Subsidiary for all or any portion of the Company's Common Stock concluded within the 12 months preceding the expiration of a tender offer or exchange offer or the consummation of any negotiated purchase, as the case may be, that is the subject of the Current Purchase (the "Current Purchase Expiration Time") and in respect of which no conversion price adjustment pursuant to paragraph (5) of this Section or this paragraph (6) has been made, that is in excess of an amount equal to the product of (a) the number of shares of Common Stock with respect to which the aggregate consideration for the Prior Purchase was payable multiplied by (b) the average of the daily Closing Prices per share of Common Stock on the five consecutive Trading Days selected by the Company out of the 10 consecutive Trading Days next succeeding the date of payment of the purchase consideration or expiration of the tender or exchange offer, as the case may be, with respect to the negotiated purchase, tender offer or exchange offer that was the subject of the Prior Purchase, and (ii) the aggregate amount of any distributions to all holders of the Company's Common Stock made exclusively in cash (specifically including distributions of cash out of retained or current earnings) within the 12 months preceding the expiration of the tender offer or exchange offer and as to which no adjustment pursuant to paragraph (4) or paragraph (5) of this Section 12.04 has been made, exceeds 20% of the product of the Reference Price multiplied by the number of shares of Common Stock outstanding (including any tendered shares but excluding any shares held in the Treasury of the Company) on the Current Purchase Expiration Time, the conversion price shall be reduced so that the same shall equal the price determined by multiplying such conversion price in effect immediately prior to the Current Purchase Expiration Time by a fraction of which the numerator shall be (i) the product of the Reference Price multiplied by the number of shares of Common Stock outstanding (including any tendered shares but excluding any shares held in the treasury of the Company) on the Current Purchase Expiration Time minus (ii) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender offer or other negotiated purchase) of all shares validly tendered and not withdrawn or purchased in any negotiated purchase as of the Current Purchase Expiration Time (the shares deemed so accepted, purchased or exchanged, up to any such maximum, being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such Reference Price multiplied by (ii) such number of outstanding shares (excluding any shares held in the treasury of the Company) on the Current Purchase Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Current Purchase Expiration Time. 70 (7) The reclassification of Common Stock into securities other than Common Stock (other than any reclassification upon a consolidation or merger to which Section 12.11 applies) shall be deemed to involve (a) a distribution of such securities other than Common Stock to all holders of Common Stock (and the effective date of such reclassification shall be deemed to be "the Reference Date" within the meaning of paragraph (4) of this Section), and (b) a subdivision or combination, as the case may be, of the number of shares of Common Stock outstanding immediately prior to such reclassification into the number of shares of Common Stock outstanding immediately thereafter (and the effective date of such reclassification shall be deemed to be "the day upon which such subdivision becomes effective" or "the day upon which such combination becomes effective," as the case may be, and "the day upon which such subdivision or combination becomes effective" within the meaning of paragraph (3) of this Section). Rights, warrants or options issued by the Company to all holders of its Common Stock entitling the holders thereof to subscribe for or purchase shares of Common Stock or Preferred Stock, which rights, warrants or options (i) are deemed to be transferred with such shares of Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, in each case in clauses (i) through (iii) until occurrence of a specified event or events ("Trigger Event"), shall for purposes of this Section 12.04 not be deemed issued until the occurrence of the earliest Trigger Event. (8) For the purpose of any computation under this paragraph and paragraphs (2), (4) and (5) of this Section, the current market price per share of Common Stock on any date shall be deemed to be the average of the daily Closing Prices for the five consecutive Trading Days selected by the Company commencing not more than 20 Trading Days before, and ending not later than the relevant date; provided, however, that (i) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6) above occurs on or after the 20th Trading Day prior to the day in question and prior to the "ex" date for the issuance or distribution requiring such computation, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event, (ii) if the "ex" date for any event (other than the issuance or distribution requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6) above occurs on or after the "ex" date for the issuance or distribution requiring such computation and on or prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the conversion price is so required to be adjusted as a result of such other event, and (iii) if the "ex" date for the issuance or distribution requiring such computation is on 71 or prior to the day in question, after taking into account any adjustment required pursuant to clause (ii) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value on the day in question (as determined by the Board of Directors in a manner consistent with any determination of such value for purposes of paragraph (4) or (5) of this Section, whose determination shall be conclusive and described in a Board Resolution) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For the purpose of any computation under paragraph (6) of this Section, the current market price per share of Common Stock on any date shall be deemed to be the average Closing Prices for the five consecutive Trading Days selected by the Company commencing on or after the latest (the "Commencement Date") of (i) the date 20 Trading Days before the date in question, (ii) the date of commencement of a tender offer requiring such computation and (iii) the date of the last amendment, if any, of such a tender offer involving a change in the maximum number of shares for which tenders are sought or a change in the consideration offered, and ending not later than the expiration time with respect to the tender offer or negotiated purchase, as the case may be; provided, however, that if the "ex" date for any event (other than the tender offer requiring such computation) that requires an adjustment to the conversion price pursuant to paragraph (1), (2), (3), (4), (5) or (6) above occurs on or after the Commencement Date and prior to the expiration time for the tender offer requiring such computation, the Closing Price for each Trading Day prior to the "ex" date, for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the conversion price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (i) when used with respect to any issuance or distribution, means the first day on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (ii) when used with respect to any subdivision or combination of shares of Common Stock, means the first day on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (iii) when used with respect to any tender offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the expiration time of such tender offer. (9) The Company may make such reductions in the conversion price, in addition to those required by paragraphs (1), (2), (3), (4), (5), (6), (7) and (8) of this Section, as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights shall not be taxable to the recipients. 72 (10) No adjustment in the conversion price shall be required unless such adjustment would require an increase or decrease of at least 1% in the conversion price; provided, however, that any adjustments which by reason of this paragraph (11) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All adjustments to the conversion price shall be to the nearest cent. (11) Anything herein to the contrary notwithstanding, in the event the Company shall declare any dividend or distribution requiring an adjustment in the conversion price hereunder and shall, thereafter and before the payment of such dividend or distribution to stockholders, legally abandon its plan to pay such dividend or distribution or, if such dividend or distribution was contingent on the occurrence of one or more events, not pay such dividend or distribution upon the failure of such condition, the conversion price then in effect hereunder, if changed to reflect such dividend or distribution, shall upon the legal abandonment of such plan or such nonpayment of such contingent dividend or distribution be changed (on a prospective basis for any Securities not theretofore converted) to the conversion price which would have been in effect at the time of such abandonment (after giving effect to all other adjustments not so legally abandoned pursuant to the provisions of this Article XII) had such dividend or distribution never been declared. (12) Notwithstanding any other provision of this Section 12.04, no adjustment to the conversion price shall reduce the conversion price below the then par value per share of the Common Stock, and any such purported adjustment shall instead reduce the conversion price to such par value. The Company hereby covenants not to take any action (i) to increase the par value per share of the Common Stock or (ii) that would or does result in any adjustment in the conversion price that, if made without giving effect to the previous sentence, would cause the conversion price to be less than the then par value per share of the Common Stock. SECTION 12.05. Notice of Adjustments of Conversion Price. Whenever the conversion price is adjusted as herein provided: (a) the Company shall compute the adjusted conversion price in accordance with Section 12.04 and shall prepare a certificate signed by the Treasurer of the Company setting forth the adjusted conversion price and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed (with a copy to the Trustee) at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 10.02; and (b) a notice stating that the conversion price has been adjusted and setting forth the adjusted conversion price shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the 73 Company to all Holders at their last addresses as they shall appear in the Security Register. SECTION 12.06. Notice of Certain Corporate Activities. In case: (a) the Company takes any action that would require an adjustment in the conversion price pursuant to paragraphs (1) through (7) of Section 12.04; or (b) of any consolidation, merger or share exchange to which the Company is a party and for which approval of stockholders of the Company is required or of the conveyance or transfer of all or substantially all of the assets of the Company; or (c) of the voluntary or involuntary dissolution, liquidation or winding up of the Company: then the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of Securities pursuant to Section 10.02, and shall cause to be mailed to all Holders at their last addresses as they shall appear in the Security Register, at least 20 days prior to the applicable record, effective or expiration date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution or granting of rights, warrants or options, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options are to be determined, or (y) the date on which any reclassification, consolidation, merger, share exchange, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, share exchange, conveyance, transfer, dissolution, liquidation or winding up, or (z) the date on which any tender offer commenced, the date on which such tender offer is scheduled to expire unless extended, the consideration offered and the other material terms thereof (or the material terms of any amendment thereto). SECTION 12.07. Company to Reserve Common Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock for the purpose of effecting the conversion of Securities, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Securities. 74 SECTION 12.08. Taxes on Conversions. The Company will pay any and all taxes that may be payable in respect of the issue or delivery of shares of Common Stock on conversion of Securities pursuant hereto. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of shares of Common Stock in a name other than that of the Holder of the Security or Securities to be converted, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company or Securities Registrar the amount of any such tax, or has established to the satisfaction of the Company or Securities Registrar that such tax has been paid. SECTION 12.09. Covenant as to Common Stock. The Company covenants that all shares of Common Stock which may be issued upon conversion of Securities will upon issue be fully paid and nonassessable and, except as provided in Section 12.08, the Company will pay all taxes, liens and charges with respect to the issue thereof. The Company will endeavor promptly to comply with all federal and state securities laws regulating the offer and delivery of shares of Common Stock upon conversion of Securities, if any, and will list or cause to have quoted such shares of Common Stock on each national securities exchange or in the over-the-counter market or such other market on which the Common Stock is then listed or quoted. SECTION 12.10. Cancellation of Converted Securities. All Securities delivered for conversion shall be delivered to the Trustee to be canceled by or at the direction of the Trustee, which shall dispose of the same as provided in Section 3.09. SECTION 12.11. Provisions in Case of Consolidation, Merger, Share Exchange or Conveyance of Assets. In case of any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company (other than a merger which does not result in any reclassification, conversion, exchange, or cancellation of outstanding shares of Common Stock ) any exchange of shares of Common Stock of the Company with any Person pursuant to a plan of exchange or any conveyance, transfer or lease of all or substantially all of the Company's assets, the Person formed by such consolidation or resulting from such merger or which acquires shares of Common Stock of the Company pursuant to a share exchange or which acquires or leases such assets, as the case may be, shall execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Security then outstanding shall have the right thereafter, during the period such Security shall be convertible as specified in Section 12.01, to convert such Security only into the kind and amount of securities, cash and other property receivable, if any, upon such consolidation, merger, share 75 exchange, conveyance, transfer or lease by a holder of the number of shares of Common Stock of the Company into which such Security might have been converted immediately prior to such consolidation, merger, share exchange, conveyance, transfer or lease, assuming such holder of Common Stock of the Company (i) is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or with which the Company consummated a share exchange or to which such conveyance, transfer or lease was made, as the case may be ("Constituent Person"), or an Affiliate of a Constituent Person and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such consolidation, merger, share exchange, conveyance, transfer or lease (provided that if the kind or amount of securities, cash and other property receivable upon such consolidation, merger, share exchange, conveyance, transfer or lease is not the same for each share of Common Stock of the Company held immediately prior to such consolidation, merger, conveyance, transfer or lease by other than a Constituent Person or an Affiliate thereof and in respect of which such rights of election shall not have been exercised ("non electing share"), then for the purpose of this Section the kind and amount of securities, cash and other property receivable upon such consolidation, merger, share exchange, conveyance, transfer or lease by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments which, for events subsequent to the effective date of such supplemental indenture, shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. If the issuer of any such securities is an Affiliate of the Person formed by such consolidation, resulting from such merger consummating such share exchange or acquiring such assets, such issuer shall join in such supplemental indenture for the purpose of making the provisions required by this Section. The above provisions of this Section shall similarly apply to successive consolidations, merger, share exchanges, conveyances, transfers and leases. SECTION 12.12. Trustee Adjustment Disclaimer. The Trustee has no duty to determine when an adjustment under this Article XII should be made, how it should be made or what it should be. The Trustee has no duty to determine whether a supplemental indenture under Section 12.11 need be entered into or whether any provisions of any supplemental indenture are correct. The Trustee shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon conversion of Securities. The Trustee shall not be responsible for the Company's failure to comply with this Article XII. SECTION 12.13. When No Adjustment Required. (a) Except as expressly set forth in Section 12.04, no adjustment in the conversion price shall be made because the Company issues, in exchange for cash, property or services, shares 76 of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock, or securities (including warrants, rights and options) carrying the right to subscribe for or purchase shares of Common Stock or such convertible or exchangeable securities. (b) No adjustment in the conversion price shall be made pursuant to Section 12.04 in respect of any dividend or distribution if the Holders may participate therein (on a basis determined in good faith to be fair by the Board of Directors) and receive the same consideration they would have received if they had converted the Securities immediately prior to the record date with respect to such dividend or distribution (a "Non-Adjustment Distribution"). All Non-Adjustment Distributions shall be ignored for purposes of any computation. ARTICLE XIII Subordination of Securities SECTION 13.01. Agreement to Subordinate by Company. Notwithstanding anything in this Indenture to the contrary (other than the last paragraph of Section 15.05), the Company, for itself, its successors and assigns, covenants and agrees, and each Holder of Securities, by his acceptance thereof, likewise covenants and agrees, that payment by the Company of the principal of and premium, if any, and interest on each and all of the Securities, and payment in respect of any repurchase of the Securities pursuant to Section 14.01, are hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all Senior Indebtedness. SECTION 13.02. Distribution on Dissolution, Liquidation and Reorganization; Subrogation. Upon any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company, whether in bankruptcy, insolvency, reorganization or receivership proceedings or upon an assignment for the benefit of creditors or any other marshalling of the assets and liabilities of the Company or otherwise (subject to the power of a court of competent jurisdiction to make other equitable provision reflecting the rights conferred in this Indenture upon the Senior Indebtedness and the holders thereof, with respect to the Securities and the holders thereof, by a lawful plan of reorganization under applicable bankruptcy law), (a) the holders of all Senior Indebtedness shall be entitled to receive payment in full of the Senior Indebtedness before the Holders of the Securities are entitled to receive any 77 payment upon the principal of or premium, if any, or interest on indebtedness evidenced by the Securities; and (b) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XIII shall be paid by the liquidating trustee or agent or other person making such payment or distribution, whether a trustee in bankruptcy, a receiver or liquidating trustee or otherwise, directly to the holders of Senior Indebtedness or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably according to the aggregate amounts remaining unpaid on account of the Senior Indebtedness held or represented by each, to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness; and (c) in the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, shall be received by the Holders of the Securities or by the Trustee before all Senior Indebtedness is paid in full, such payment or distribution shall be paid over to the holders of such Senior Indebtedness, or their representative or representatives or to the trustee or trustees under any indenture under which any instruments evidencing any of such Senior Indebtedness may have been issued, ratably as aforesaid, for application to the payment of all Senior Indebtedness remaining unpaid until all such Senior Indebtedness shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness, the Holders of the Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company, applicable to Senior Indebtedness until the principal of, premium, if any, and interest on the Securities shall be paid in full and no such payments or distributions to the Holders of the Securities of cash, property or securities otherwise distributable to the holders of Senior Indebtedness and the Holders of the Securities be deemed to be a payment by the Company to or on account of the Securities. It is understood that the provisions of this Article XIII are and are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand, and the holders of Senior Indebtedness on the other hand. Nothing contained in this Article XIII or elsewhere in this Indenture or in the Securities is intended to or shall impair, as 78 between the Company, its creditors other than the holders of Senior Indebtedness and the Holders of the Securities, as the case may be, the obligations of the Company, which are unconditional and absolute, to pay to the Holders of the Securities the principal of, premium, if any, and interest on the Securities as and when the same shall become due and payable in accordance with their terms, or to affect the relative rights of the Holders of the Securities and creditors of the Company other than the holders of Senior Indebtedness, nor shall anything herein or in the Securities prevent the Trustee or the Holder of any Security from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article XIII of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. Upon any payment or distribution of assets of the Company referred to in this Article XIII, the Trustee, subject to the provisions of Section 6.01, shall be entitled to rely upon a certificate of the liquidating trustee or agent or other person making any distribution to the Trustee for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XIII. The Trustee, however, shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness. In the absence of gross negligence or willful misconduct, the Trustee shall not be liable to any such holder if it shall pay over or distribute to or on behalf of Holders of Securities or the Company moneys or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article XIII. If the Trustee or any Holder of Securities does not file a proper claim or proof of debt in the form required in any proceeding referred to above prior to 30 days before the expiration of the time to file of such claim in such proceeding, then the holder of any Senior Indebtedness is hereby authorized, and has the right, to file an appropriate claim or claims for or on behalf of such Holder of Securities. SECTION 13.03. No Payment In Event Of Default On Senior Indebtedness. In the event that any Payment Default shall have occurred and be continuing, then no payment of account of any principal, premium (if any), interest, redemption or repurchase of the Securities shall be made unless and until such Payment Default shall have been cured or waived or shall have ceased to exist or all amounts then due and payable in respect of Senior Indebtedness shall have been paid in full, or provisions shall have been made for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Indebtedness. 79 In the event that any Non-Payment Default shall have occurred with respect to any Designated Senior Indebtedness and be continuing, then, upon the receipt by the Trustee of written notice of such Non-Payment Default from holders of Designated Senior Indebtedness (as defined below) or a representative thereof, no payment on account of any principal, premium (if any), interest, redemption or repurchase of the Securities shall be made during the period (the "Payment Blockage Period") commencing on the date of such receipt of such written notice and ending on the earlier of (i) the date on which the Trustee shall have received written notice of such Non-Payment Default shall have been cured or waived or shall have ceased to exist or any acceleration of the Designated Senior Indebtedness to which such Non-Payment Default relates shall have been rescinded or annulled or such Senior Indebtedness shall have been discharged and (ii) the 180th day after the date of such receipt of such written notice provided, however, during any 360-day period the aggregate of all Payment Blockage Periods shall not exceed 180 days and there shall be a period of at least 180 consecutive days in each 360-period when no Payment Blockage Period is in effect. For all purposes of this paragraph, no Non-Payment Default that existed or was continuing on the date of commencement of any Payment Blockage Period shall be, or be made, the basis for the commence of a subsequent Payment Blockage Period by Holders of Senior Indebtedness on their representatives unless such Non-Payment Default shall have been cured for a period of not less than 90 consecutive days. "Designated Senior Indebtedness" means (i) any Indebtedness under the Credit Facility and (ii) any other Senior Indebtedness of the Company which, at the date of determination, has an aggregate principal amount of, or under which, at the date of determination, the holders thereof are committed to lend up to, at least $35 million and is specifically designated by the Company in the instrument evidencing or governing such Senior Indebtedness as "Designated Senior Indebtedness" for purposes of the Indenture. In the event that, notwithstanding the foregoing, the Company shall make any payment to the Trustee or the Holder of any Security prohibited by the foregoing provisions of this Section, and if such fact shall, at or prior to the time of such payment, have been made known to the Trustee or, as the case may be, such Holder, then and in such event such payment shall be paid over and delivered forthwith to the holders of the relevant Designated Senior Indebtedness (or their respective representatives). The provisions of this Section shall not apply to any payment with respect to which Section 13.02 would be applied. SECTION 13.04. Payments Permitted. Nothing contained in this Indenture or in any of the Securities shall (a) affect the obligation of the Company to make, or prevent the Company from making, at any time except as provided in Sections 13.02 and 13.03, payments of principal of, premium, if any, or interest on the Securities or (b) prevent the application by the Trustee of any moneys deposited with it hereunder to the payment of or on account of the principal of, premium, if any, or interest on the Securities unless the Trustee shall have received at its Corporate Trust Office written notice of any event prohibiting the making of such payment more than three Business Days prior to the date fixed for such payment. 80 SECTION 13.05. Authorization to Trustee to Effect Subordination. Each Holder of Securities by his acceptance thereof authorizes and directs the Trustee in his behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article XIII and appoints the Trustee to his attorney-in-fact for any and all such purposes. SECTION 13.06. Notices to Trustee. Notwithstanding the provisions of this Article or any other provisions of this Indenture, neither the Trustee nor any Paying Agent (other than the Company) shall be charged with knowledge of the existence of any Senior Indebtedness or of any event which would prohibit the making of any payment of moneys to or by the Trustee or such Paying Agent, unless and until the Trustee or such Paying Agent shall have received (in the case of the Trustee, at its Corporate Trust Office) written notice thereof from the Company or from the holder of any Senior Indebtedness or from the trustee for any such holder, together with proof reasonably satisfactory to the Trustee of such holding of Senior Indebtedness or of the authority of such trustee; provided, however, that if at least three Business Days prior to the date upon which by the terms hereof any such moneys may become payable for any purpose (including, without limitation, the payment of either the principal of, premium, if any, or interest on any Security) the Trustee shall not have received with respect to any such moneys the notice provided for in this Section 13.06, then, anything herein contained to the contrary notwithstanding, the Trustee shall have the full power and authority to receive such moneys and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary, which may be received by it on or after such three Business Days prior to such date. The Trustee shall be entitled to rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such a notice has been given by a holder of Senior Indebtedness or a trustee on behalf of any such holder. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article XIII, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article XIII and, if such evidence is not furnished, the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment. SECTION 13.07. Trustee as Holder of Senior Indebtedness. The Trustee shall be entitled to all the rights set forth in this Article XIII in respect of any Senior Indebtedness at any time held by it to the same extent as any other holder of 81 Senior Indebtedness and nothing in Section 6.13 or elsewhere in this Indenture shall be construed to deprive the Trustee of any of its rights as such holder. SECTION 13.08. Modification of Terms of Senior Indebtedness. Any renewal or extension of the time of payment of any Senior Indebtedness or the exercise by the holders of Senior Indebtedness of any of their rights under any instrument creating or evidencing Senior Indebtedness, including, without limitation, the waiver of default thereunder, may be made or done all without notice to or assent from the Holders of the Securities or the Trustee. No compromise, alteration, amendment, modification, extension, renewal or other change of, or waiver, consent or other action in respect of, any liability or obligation under or in respect of, or of any of the terms, covenants or conditions of any indenture or other instrument under which any Senior Indebtedness is outstanding or of such Senior Indebtedness, whether or not such action is in accordance with the provisions of any applicable document, shall in any way alter or affect any of the provisions of this Article XIII or of the Securities relating to the subordination thereof. ARTICLE XIV Right to Require Repurchase SECTION 14.01. Repurchase of Securities at Option of the Holder Upon Change of Control. (a) If at any time there shall have occurred a Change of Control with respect to the Company, each Holder shall have the right, at such Holder's option, subject to the terms and conditions of this Indenture, to require the Company to repurchase all or a portion of such Holder's Securities (in denominations of $1,000 or integral multiples thereof, at the purchase price equal to 100% of the principal amount plus accrued interest (the "Repurchase Price") to the Repurchase Date (the "Repurchase Date") that is 60 days after the date the Company's Change of Control Notice (as defined below) is mailed (or such earlier or later date as is required by law, rule or regulation), subject to substantial satisfaction by or on behalf of the Holder of the requirements set forth in Section 14.01(c). Promptly, but in any event within 29 days following any such Change of Control, the Company hereby covenants, with respect to any Senior Indebtedness that would prohibit the repurchase of Securities by the Company in the event of such Change of Control, to: either (i) repay all such Senior Indebtedness in full, in cash, or (ii) obtain the requisite consents under such Senior Indebtedness or any agreement pursuant to which any such Senior Indebtedness is issued to permit the repurchase of the Securities as provided below. The foregoing shall in no way limit the occurrence of an Event of Default, 82 including an Event of Default arising from a default under the covenants of the second sentence of this Section 14.01(a), and the right to demand payment of the Securities upon acceleration thereafter. (b) Within 15 days after the Change of Control has occurred, the Company covenants that it shall mail a written notice (the "Change of Control Notice") of Change of Control by first-class mail to the Trustee and to each Holder (and to beneficial owners as required by applicable law) and shall cause a copy of such notice to be published in a daily newspaper of national circulation. The notice shall state: (i) the events causing a Change of Control (specifying such event) and the date of such Change of Control; (ii) the date by which the Change of Control Purchase Notice to this Section 14.01 must be given; (iii) the Repurchase Date; (iv) the Repurchase Price; (v) the name and address of the Paying Agent and the conversion agent; (vi) the conversion price and any adjustments thereto; (vii) that Securities as to which a Change of Control Purchase Notice has been given may be converted into Common Stock only if the Change of Control Purchase Notice has been withdrawn in accordance with the terms of this Indenture; (viii) the procedures the Holder must follow to exercise the rights under this Section 14.01 and a brief description of such rights: (ix) that brief description of the conversion rights of the Securities; and (x) the procedures for withdrawing a Change of Control Purchase Notice. The Change of Control Notice shall also state whether or not the Company has satisfied its obligations to the holders of the Senior Indebtedness of the type referred to in Section 14.01(a) as required pursuant to Section 14.01(a). If the Company is unable to satisfy such obligations, the Change of Control Notice shall also state that 83 the Company is or will be in default under Section 5.01(4) of the Indenture, that receipt by the Company of one or more Change of Control Purchase Notices by Holders of at least 25% of the outstanding Securities will constitute a Notice of Default thereunder, and that the failure of the Company to cure such default within 60 days (or the then applicable time period) shall be an Event of Default allowing the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities to declare the principal of all the Securities to be due and payable immediately. (c) A Holder may exercise its rights specified in Section 14.01(a) upon delivery of a written notice of purchase (a "Change of Control Purchase Notice") to the Company or an agent designated by the Company for such purpose on or before the third Business Day prior to the Repurchase Date, stating: (i) the certificate number or numbers of the Security or Securities which the Holder will deliver to be purchased; (ii) the portion of the principal amount of the Security or Securities which the Holder will deliver to be repurchased, which portion must be $1,000 or an integral multiple thereof; and (iii) that such Security or Securities shall be repurchased pursuant to the terms and conditions specified in this Article XIV. The delivery of such Security or Securities to the Paying Agent (together with all necessary endorsements) at the offices of the Paying Agent shall be a condition to the receipt by the Holder of the Repurchase Price therefor; provided, however, that such Repurchase Price shall be so paid pursuant to this Section 14.01 only if the Security or Securities so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Change of Control Purchase Notice. The Company shall repurchase from the Holder thereof, pursuant to this Section 14.01, a portion of a Security if the principal amount of such portion is $1,000 or an integral multiple of $1,000. Any repurchase by the Company contemplated pursuant to the provisions of this Section 14.01 shall be consummated by the delivery of the consideration to be received by the Holder promptly following the Repurchase Date. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Change of Control Purchase Notice contemplated by this Section 14.01(c) shall have the right to withdraw such Change of Control Purchase Notice at any time prior to the close of business on the Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 14.02. 84 SECTION 14.02 Effect of Change of Control Purchase Notice. Upon receipt by the Company of the Change of Control Purchase Notice specified in Section 14.01, the Holder of the Security in respect of which such notice was given shall (unless such notice is withdrawn as specified in the following paragraph) thereafter be entitled to receive solely the Repurchase Price with respect to such Security. Such price shall be paid to such Holder (provided the conditions in Section 14.01 have been satisfied) promptly following the Repurchase Date with respect to such Security delivery of such Security. Securities in respect of which a Change of Control Purchase Notice has been given by the Holder thereof may not be converted into shares of Common Stock on or after the date of the delivery of such Change of Control Purchase Notice unless such notice has first been validly withdrawn as specified in the following paragraph. A Change of Control Purchase Notice may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent at any time prior to the close of business on the Repurchase Date specifying: (i) the certificate number or numbers of the Security or Securities in respect of which such notice of withdrawal is being submitted; (ii) the portion of the principal amount of the Security or Securities with respect to which such notice of withdrawal is being submitted, which amount must be $1,000 or an integral multiple thereof; and (iii) the portion of the principal amount, if any, of such Security or Securities which remains subject to the original Change of Control Purchase Notice and which has been or will be delivered for purchase by the Company, which amount must be $1,000 or an integral multiple thereof. In addition to the requirement that the Company must first comply with the covenants set forth in Section 14.01, there shall be no repurchase of any Securities pursuant to Section 14.01 if there has occurred (prior to, on or after the giving, by the Holders of such Securities, of the required Change of Control Purchase Notice) and is continuing an Event of Default. The foregoing shall in no way limit the occurrence of an Event of Default, including an Event of Default arising from a default under the covenants in this Article XIV and the right to demand payment of the Securities upon acceleration thereafter. SECTION 14.03. Deposit of Repurchase Price. On or before the Business Day following the Repurchase Date, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary or an Affiliate of either of them is the Paying Agent, shall segregate and hold in trust as provided in 85 Section 10.03) an amount of money sufficient to pay the Securities or portions thereof which are to be purchased as of the Repurchase Date. SECTION 14.04. Securities Purchased in Part. Any Security which is to be purchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and make available for delivery to the Holder of such Security, without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the portion of the principal amount of the Security so surrendered which is not purchased. SECTION 14.05. Covenant to Comply with Securities Laws Upon Purchase of Securities. In connection with any purchase of Securities under Section 14.01 hereof, the Company shall, to the extent then applicable and required by law: (i) comply with Rule 13e-4 and Rule 14e-1 (which terms, as used herein, includes any successor provision thereto) under the Exchange Act; (ii) file the related Schedule 13E-4 (or any successor or similar schedule, form or report) under the Exchange Act; and (iii) otherwise comply with all federal and state securities laws so as to permit the rights and obligations under Section 14.01 to be exercised in the time and in the manner specified in Section 14.01. ARTICLE XV Defeasance and Covenant Defeasance SECTION 15.01. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may at its option by Board Resolution, at any time, elect to have either Section 15.02 or Section 15.03 applied to the Outstanding Securities upon compliance with the conditions set forth below in this Article XV. SECTION 15.02. Defeasance and Discharge. Upon the Company's exercise of the option provided in Section 15.01 applicable to this Section and satisfaction of the conditions set forth in Section 15.04, the Company shall be deemed to have been discharged from its obligations with respect to the Outstanding Securities (including the provision of Article XIII hereof) on the date the conditions set forth below are satisfied (hereinafter, "Defeasance"). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities and to have satisfied all its 86 other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Securities to receive, solely from the trust fund described in Section 15.04 and as more fully set forth in such Section, payments in respect of the principal of and premium, if any, and interest on such Securities when such payments are due; (B) the Company's obligations with respect to such Securities under Sections 3.05, 3.06, 6.07, 7.01, 7.04, 10.02 and 10.03; (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and the Company's obligations with respect thereto; (D) the Company's obligations under Article XII; and (E) this Article XV. Subject to compliance with this Article XV, the Company may exercise its option under this Section 15.02 notwithstanding the prior exercise of its option under Section 15.03. SECTION 15.03. Covenant Defeasance. Upon the Company's exercise of the option provided in Section 15.01 applicable to this Section and satisfaction of the conditions set forth in Section 15.04, the Company (i) shall be released from its obligations under Section 10.07, Section 10.08 and the provisions of Article XIII hereof and (ii) the occurrence of an event specified in Section 5.01(6) shall not constitute an Event of Default, and such Sections and Articles shall no longer apply with respect to or for the benefit of the Company, the Securities, the Holders of Securities and the holders of Senior Indebtedness on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"). For this purpose, such Covenant Defeasance means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Sections or Article whether directly or indirectly by reason of any reference elsewhere herein to any such Sections or Article or by reason of any reference in any such Sections or Article to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 15.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 15.02 or Section 15.03 to the Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 who shall agree to comply with the provisions of this Article XV applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the 87 benefit of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms and without further reinvestment thereof will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof in an aggregate amount, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee or other qualifying trustee to pay and discharge, the principal of and premium, if any, on and each installment of interest on the Securities on the Stated Maturity of such principal or installment of interest on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933, as amended) as custodian with respect to any such U.S. Government Obligation on a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the Trustee (or such other trustee) as holder of such depository receipt; provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (2) In the case of an election under Section 15.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date of this Indenture there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such deposit, Defeasance and discharge and will be subject to federal income tax on the same amounts, in the same manner 88 and at the same times as would have been the case if such Defeasance had not occurred. (3) In the case of an election under Section 15.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for the federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and Covenant Defeasance had not occurred. (4) The Company shall have delivered to the Trustee an Officers' Certificate to the effect that the Securities, if then listed on any securities exchange, will not be delisted as a result of such deposit, in the case of an election under Section 15.02 or 15.03. (5) At the time such Defeasance or Covenant Defeasance is effective: (A) no default in the payment of all or a portion of principal of (or premium, if any) or interest in respect of any Senior Indebtedness shall have occurred and be continuing, and no event of default with respect to any Senior Indebtedness shall have occurred and be continuing and shall have resulted in such Senior Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable and (B) (i) no other event of default with respect to any Senior Indebtedness shall have occurred and be continuing permitting the holders of such Senior Indebtedness (or a trustee on behalf of the holders thereof) to declare such Senior Indebtedness due and payable prior to the date on which it would otherwise have become due and payable, (ii) no judicial proceeding shall be pending with respect to any such event of default and (iii) the Company and the Trustee shall not have received a notice with respect to any such event of default from any holder of Senior Indebtedness (or their representative or representatives), or, in the case of either clause (A) or clause (B) above, each such default or event of default shall have been cured or waived or shall have ceased to exist. (6) No Event of Default or event which with notice or lapse of time or both would become an Event of Default shall have occurred and be continuing on the date of such deposit or, insofar as subsections 5.01(7) and (8) are concerned, at any time during the period ending on the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). 89 (7) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that after the 90th day following the deposit, such deposit (and the trust funds) will not be subject to avoidance under Section 547 of the United States Bankruptcy Code (or any successor provision thereto) and related judicial decisions. (8) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest as defined in Section 6.08 and for purposes of the Trust Indenture Act with respect to any securities of the Company. (9) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound. (10) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the Defeasance under Section 15.02 or the Covenant Defeasance under Section 15.03 (as the case may be) have been complied with. (11) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit to constitute,unless it is qualified as, a regulated investment company under the Investment Company Act of 1940, as amended. SECTION 15.05. Deposited Money and U.S. Government Obligations to be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 10.03. all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee--collectively, for purposes of this Section 15.05, the "Trustee") pursuant to Section 15.04 shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon, in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except in the event required by law. Money so held in trust, to the extent allocated for the payment of Securities, shall not be subject to the provisions of Article XIII. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations 90 deposited pursuant to Section 15.04 or the principal and interest received in respect thereof other than any such tax, fee, or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article XV to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company request any money or U.S. Government Obligations held by it as provided in Section 15.04 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount hereof which would then be required to be deposited to the effect an equivalent Defeasance or Covenant Defeasance. The provisions for subordination of the Securities set forth in Article XIII are hereby expressly made subject to the provisions for Defeasance or Covenant Defeasance in this Article XV and, anything herein to the contrary notwithstanding, upon the effectiveness of such Defeasance or Covenant Defeasance, such Securities shall thereupon cease to be so subordinated. SECTION 15.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money in accordance with Section 15.02 or 15.03 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to this Article XV until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 15.02 or 15.03; provided, however, that if the Company makes any payment of principal of (or premium, if any) or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. 91 This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. HEXCEL CORPORATION, by____________________________________ Name: Title: FIRST TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, by____________________________________ Name: Title: Attest: ________________________________ Name: Title: EX-5 4 EXHIBIT 5 Exhibit 5 [SKADDEN, ARPS, SLATE, MEAGHER & FLOM LETTERHEAD] July 18, 1996 Hexcel Corporation Two Stamford Plaza 281 Tresser Boulevard Stamford, Connecticut 06901-3238 Re: Hexcel Corporation Registration Statement on Form S-3 ---------------------------------- Ladies and Gentlemen: We have acted as special counsel to Hexcel Corporation, a Delaware corporation (the "Company"), in connection with the preparation of a registration statement on Form S-3 (the "Registration Statement") relating to the public offering of $115,000,000 aggregate principal amount of the Company's % Convertible Subordinated Notes Due 2003 (the "Notes"), including $15,000,000 aggregate principal amount of Notes subject to over-allotment options granted to the Underwriters (as defined herein), to be issued under an indenture (the "Indenture") to be entered into between the Company and First Trust of California, National Association, as trustee (the "Trustee"). This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K of the General Rules and Regulations promulgated under the Securities Act of 1933, as amended (the "Act"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement filed with the Securities and Exchange Commission (the "Commission") on June 12, 1996 under the Act, Amendment 1 thereto filed with the Commission on July 2, 1996 and Amendment No. 2 thereto filed with the Commission on Hexcel Corporation July 17, 1996 Page 2 July 18, 1996 (such Registration Statement as so amended being hereinafter referred to as the "Registration Statement"); (ii) the form of the underwriting agreement (the "Underwriting Agreement") proposed to be entered into between the Company, as issuer, and CS First Boston Corporation and Bear Stearns & Co., Inc., as representatives of the underwriters named therein (the "Underwriters"), filed as an exhibit to the Registration Statement, (iii) the form of the Indenture filed as an exhibit to the Registration Statement; (iv) the form of the Notes; (v) a specimen certificate evidencing the Common Stock; (vi) the Company's Certificate of Incorporation, as currently in effect; (vii) the Company's Bylaws, as currently in effect; and (viii) certain resolutions of the Company's Board of Directors and drafts of certain resolutions of the Finance Committee of the Board of Directors of the Company (the "Draft Resolutions"), in each case relating to the issuance and sale of the Notes and related matters. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect of such documents on such parties. As to any Hexcel Corporation July 17, 1996 Page 3 facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Members of our firm are admitted to the bar in the States of New York and Delaware, and we do not express any opinion as to the laws of any other jurisdiction. Based upon the foregoing, we are of the opinion that: 1. when (a) the Registration Statement becomes effective and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended, (b) the Draft Resolutions have been adopted by the Finance Committee, (c) the interest rate, maturity, redemption, conversion price and other terms of the Notes as well as the price at which the Notes are to be sold to the Underwriters pursuant to the Underwriting Agreement and other matters relating to the issuance and sale of the Notes have been approved by the Finance Committee of the Board of Directors in accordance with the Draft Resolutions, (d) the Indenture and the Underwriting Agreement have been duly executed and delivered and (e) Notes in the form of the specimen Notes examined by us have been duly executed and authenticated in accordance with the terms of the Indenture and delivered to and paid for by the Underwriters as contemplated by the Underwriting Agreement, the issuance and sale of the Notes will have been duly authorized, and the Notes will be valid and binding obligations of the Company entitled to the benefits of the Indenture and enforceable against the Company in accordance with their terms, except to the extent that enforcement thereof may be limited by (1) bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (2) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). 2. assuming the occurrence of items (a) through (e) in paragraph 1. above, when certificates represent- Hexcel Corporation July 17, 1996 Page 4 ing the shares of common stock, par value $.01 per share (the "Common Stock"), of the Company initially issuable upon conversion of the Notes (the "Conversion Shares") in the form of the specimen certificates examined by us have been manually signed by an authorized officer of the transfer agent and registrar for the Common Stock and issued and delivered upon conversion of the Notes in accordance with the terms thereof and of the Indenture, the Conversion Shares will be duly and validly issued and outstanding, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Very truly yours, /s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM EX-12 5 EXHIBIT 12 EXHIBIT 12 PAGE 1 OF 2 HEXCEL CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS) ------------------------------------------------------------------------------------- FOR THE QUARTER ENDED FOR THE YEAR ENDED DECEMBER 31, ------------------------------ ----------------------------------------------------- MARCH 31, 1996 APRIL 2, 1995 1995 1994 1993 1992 1991 --------------- ------------- --------- --------- --------- --------- --------- (UNAUDITED) EARNINGS AVAILABLE FOR FIXED CHARGES Income (loss) from continuing operations before income taxes........................ $ 3,154 $ (1,859) $ 6,514 $ (24,494) $ (73,848) $ (22,358) $ 5,059 Fixed charges............................... 3,872 2,669 9,639 13,071 10,039 9,783 12,340 ------- ------------- --------- --------- --------- --------- --------- $ 7,026 $ 810 $ 16,153 $ (11,423) $ (63,809) $ (12,575) $ 17,399 ------- ------------- --------- --------- --------- --------- --------- ------- ------------- --------- --------- --------- --------- --------- FIXED CHARGES Interest and expense on indebtedness........ $ 3,633 $ 2,363 $ 8,682 $ 11,846 $ 8,862 $ 8,196 $ 10,870 One-third of rental expense for operating leases..................................... 239 306 957 1,225 1,177 1,587 1,470 ------- ------------- --------- --------- --------- --------- --------- $ 3,872 $ 2,669 $ 9,639 $ 13,071 $ 10,039 $ 9,783 $ 12,340 ------- ------------- --------- --------- --------- --------- --------- ------- ------------- --------- --------- --------- --------- --------- RATIO OF EARNINGS TO FIXED CHARGES.......... 1.81x --(a) 1.68x --(a) --(a) --(a) 1.41x ------- --------- --------- ------- --------- ---------
- -------------------------- (a) For the quarter ended April 2, 1995 and the years ended December 31, 1994, 1993 and 1992, earnings were insufficient to cover fixed charges by approximately $1.9 million, $24.5 million, $73.8 million and $22.4 million, respectively. EXHIBIT 12 PAGE 2 OF 2 HEXCEL CORPORATION AND SUBSIDIARIES PRO FORMA COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(IN THOUSANDS) --------------------------------- FOR THE FOR THE YEAR QUARTER ENDED ENDED MARCH 31, 1996 DECEMBER 31, 1995 -------------- ----------------- (UNAUDITED) PRO FORMA EARNINGS AVAILABLE FOR FIXED CHARGES Income from continuing operations before income taxes......................... $ 4,189 $ 840 Fixed charges................................................................. 6,943 22,321 -------------- -------- $ 11,132 $ 23,161 -------------- -------- -------------- -------- PRO FORMA FIXED CHARGES Interest and expense on indebtedness.......................................... $ 6,480 $ 20,470 One-third of rental expense for operating leases.............................. 463 1,851 -------------- -------- $ 6,943 $ 22,321 -------------- -------- -------------- -------- PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES.................................. 1.60x 1.04x -------------- -------- -------------- --------
EX-23.1 6 CONSENT OF DELOITTE & TOUCHE EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the inclusion in this Amendment No. 2 to Registration Statement No. 333-05821 of Hexcel Corporation on Form S-3 of our report dated March 1, 1996, appearing in the Annual Report on Form 10-K of Hexcel Corporation for the year ended December 31, 1995 (which report expresses an unqualified opinion on such financial statements and includes explanatory paragraphs regarding the confirmation of plan of reorganization, acquisition of the Ciba Composites Business, and a change in accounting for income taxes) and to the reference to us under the heading "Experts" in the Prospectus, which is part of this Registration Statement. /s/ DELOITTE & TOUCHE LLP Oakland, California July 16, 1996 EX-23.2 7 CONSENT OF COOPERS & LYBRAND, PA EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-3 (File No. 333-05821) of our report dated February 26, 1996, on our audits of the financial statements of the Composite Products Division of Hercules Incorporated. We also consent to the reference to our firm under the caption "Experts." /s/ COOPERS & LYBRAND L.L.P. Philadelphia, Pennsylvania July 15, 1996 EX-23.3 8 CONSENT OF COOPERS & LYBRAND, CT EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-3 (File No. 333-05821) of our report dated February 29, 1996, on our audits of the financial statements of Ciba Composites (a division of Ciba-Geigy Limited). We also consent to the reference to our firm under the caption "Experts." /s/ COOPERS & LYBRAND L.L.P. Stamford, Connecticut July 15, 1996 -----END PRIVACY-ENHANCED MESSAGE-----