-----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, QGw+3AR8sZuEz5YQ6wpYHof+jZi2FH/L8LtlFwMz2KlMcmuWNV8ohFmL1KuhaC6N eknASML+rXTKdz+8zJbz8A== 0000950172-96-000162.txt : 19960403 0000950172-96-000162.hdr.sgml : 19960403 ACCESSION NUMBER: 0000950172-96-000162 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960401 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960402 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: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-08472 FILM NUMBER: 96543575 BUSINESS ADDRESS: STREET 1: 5794 W LAS POSITAS BLVD CITY: PLEASANTON STATE: CA ZIP: 94588 BUSINESS PHONE: 5108479500 MAIL ADDRESS: STREET 1: 5794 W LAS POSITAS BLVD CITY: PLEASANTON STATE: CA ZIP: 945888781 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A (Amendment No. 1) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 April 1, 1996 (February 29, 1996) ________________________________________________ Date of report (Date of earliest event reported) Hexcel Corporation ______________________________________________________ (Exact Name of Registrant as Specified in Charter) Delaware 1-8472 94-1109521 ______________ _____________________ __________________ (State of (Commission File No.) (IRS Employer Incorporation) Identification No.) 5794 West Las Positas Boulevard Pleasanton, California 94588-8781 ____________________________________________________________ (Address of Principal Executive Offices and Zip Code) (510) 847-9500 ____________________________________________________ (Registrant's telephone number, including area code) N/A _____________________________________________________________ (Former Name or Former Address, if Changed Since Last Report) Paragraphs (a) and (b) of Item 7 of the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 1996 are hereby amended to read in their entirety as set forth below. Accordingly, Item 7 of such Current Report on Form 8-K, as amended, now reads in its entirety as follows: Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Business Acquired. The following audited historical financial statements of the Ciba Composites Business are provided in Annex A hereto: Combined Balance Sheets -- December 31, 1995 and 1994 Combined Statements of Operations -- For the years ended December 31, 1995, 1994 and 1993 Combined Statements of Owner's Equity -- For the years ended December 31, 1995, 1994 and 1993 Combined Statements of Cash Flows -- For the years ended December 31, 1995, 1994 and 1993 Notes to Combined Financial Statements, December 31, 1995, 1994 and 1993 (b) Pro Forma Financial Information. The following unaudited pro forma financial information is provided in Annex B hereto: Unaudited Pro Forma Condensed Combined Balance Sheet -- December 31, 1995 Unaudited Pro Forma Condensed Combined Statement of Operations -- For the year ended December 31, 1995 Notes to Unaudited Pro Forma Condensed Combined Financial Statements (c) Exhibits. Exhibit No. Description 2.1 Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC and Hexcel (filed as Exhibit 10.1 to Hexcel's Current Report on Form 8-K dated October 12, 1995 and incorporated herein by reference). 2.1(a) Amendment dated as of December 12, 1995 to the Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC and Hexcel.* 2.1(b) Letter Agreement dated as of February 28, 1996 among Ciba, CGC and Hexcel.* 2.1(c) Distribution Agreement dated as of February 29, 1996 among Hexcel, Brochier S.A., Composite Materials Limited, Salver S.r.l. and Ciba.* 4.1 Indenture dated as of February 29, 1996 between Hexcel and First Trust of California, National Association, as trustee.* 99.1 Credit Agreement dated as of February 29, 1996 among Hexcel and certain subsidiaries of Hexcel, as borrowers, the lending institutions and issuing banks party thereto, Citibank, N.A., as administrative agent, and Credit Suisse, as syndication agent.* SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: April 1, 1996 HEXCEL CORPORATION By: /s/ Wayne C. Pensky Wayne C. Pensky Chief Accounting Officer ANNEX A CIBA COMPOSITES (a division of Ciba-Geigy Limited) FINANCIAL STATEMENTS For the years ended December 31, 1995, 1994 and 1993 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. __________________ * Previously filed with Hexcel's Current Report on Form 8-K dated as of March 15, 1996. 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. COOPERS & LYBRAND L.L.P. Stamford, Connecticut February 29, 1996 CIBA COMPOSITES (A DIVISION OF CIBA-GEIGY LIMITED) Combined Balance Sheets (in thousands of dollars) December 31, ASSETS: 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. 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. 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. 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. 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. 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. 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 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 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 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 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. 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) 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 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. 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. 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. 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. ANNEX B ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED), (in thousands, except per share data) ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 has been prepared from, and should be read in conjunction with, the historical financial statements and the related notes thereto for the applicable periods of Hexcel (included in Hexcel's 1995 Annual Report on Form 10-K for the fiscal year ended December 31, 1995) and of the Ciba Composites Business (included as Annex A to this Current Report on Form 8-K/A). 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. 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 DECEMBER 31, 1995 Historical Pro Forma Ciba Com- Adjust- Hexcel posites ments 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 The accompanying notes are an integral part of these Unaudited Pro Forma Condensed Combined Financial Statements. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS The Year Ended December 31, 1995 Historical Pro Forma Ciba Com- Adjust- Hexcel posites ments 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. The accompanying notes are an integral part of these Unaudited Pro Forma Condensed Combined Financial Statements. NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) 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 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. 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. (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. (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. 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 (see pages B-1 and B-2.) 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 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) 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. -----END PRIVACY-ENHANCED MESSAGE-----