-----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, Myf3cdB2wHxWxD9xeYFDmyN5z8Fwg9krrdzaO8q/UEfUI9S11egnqbJGCiFVFNQp H4gFIDzmoV3rKet5nhkxog== 0001047469-99-021198.txt : 19990518 0001047469-99-021198.hdr.sgml : 19990518 ACCESSION NUMBER: 0001047469-99-021198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: 10-Q SEC ACT: SEC FILE NUMBER: 001-08472 FILM NUMBER: 99627886 BUSINESS ADDRESS: STREET 1: 281 TRESSER BOULEVARD STREET 2: C/O TWO STAMFORD PLZ CITY: STAMFORD STATE: CT ZIP: 06901 BUSINESS PHONE: 2039690666 MAIL ADDRESS: STREET 1: 5794 W LAS POSITAS BLVD CITY: PLEASANTON STATE: CA ZIP: 945888781 10-Q 1 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended March 31, 1999 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File Number 1-8472 ---------------------- HEXCEL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 94-1109521 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) Two Stamford Plaza 281 Tresser Boulevard Stamford, Connecticut 06901-3238 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) Registrant's telephone number, including area code: (203) 969-0666 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No - Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan of reorganization confirmed by a US Bankruptcy Court. Yes X No - Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 12, 1999 ----- --------------------------- COMMON STOCK 36,447,730
================================================================================ HEXCEL CORPORATION AND SUBSIDIARIES INDEX
PAGE PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets -- March 31, 1999 and December 31, 1998 2 Condensed Consolidated Statements of Operations -- The Quarters Ended March 31, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows -- The Quarters Ended March 31, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements 5 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 27 SIGNATURE 28
1 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------------------------------------------- UNAUDITED ------------------------------------ MARCH 31, DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 - ----------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 2,458 $ 7,504 Accounts receivable 199,884 188,368 Inventories 204,748 213,199 Prepaid expenses and other assets 7,469 10,111 Deferred tax asset 21,249 19,844 - ----------------------------------------------------------------------------------------------------------------- Total current assets 435,808 439,026 Property, plant and equipment 623,245 628,533 Less accumulated depreciation (202,052) (195,960) - ----------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 421,193 432,573 Goodwill and other purchased intangibles, net of accumulated amortization of $14,963 in 1999 and $11,742 in 1998 421,422 425,405 Investment in affiliated companies and other assets 118,564 107,157 - ----------------------------------------------------------------------------------------------------------------- Total assets $ 1,396,987 $ 1,404,161 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of capital lease obligations $ 22,381 $ 26,867 Accounts payable 82,703 81,869 Accrued liabilities 111,094 110,708 - ----------------------------------------------------------------------------------------------------------------- Total current liabilities 216,178 219,444 Long-term notes payable and capital lease obligations 812,869 802,376 Indebtedness to a related party 23,849 35,675 Other non-current liabilities 42,969 44,267 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 1,095,865 1,101,762 Stockholders' equity: Preferred stock, no par value, 20,000 shares authorized, no shares issued or outstanding in 1999 and 1998 - - Common stock, $0.01 par value, 100,000 shares authorized, shares issued and outstanding of 37,264 in 1999 and 37,176 in 1998 373 372 Additional paid-in capital 271,991 271,469 Retained earnings 40,103 34,898 Accumulated other comprehensive income (loss) (692) 6,313 - ----------------------------------------------------------------------------------------------------------------- 311,775 313,052 Less - treasury stock, at cost, 847 shares in 1999 and 1998 (10,653) (10,653) - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 301,122 302,399 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 1,396,987 $ 1,404,161 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 2 HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------- UNAUDITED ---------------------------------- QUARTER ENDED MARCH 31, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Net sales $ 316,170 $ 256,741 Cost of sales 245,399 190,645 - ----------------------------------------------------------------------------------------------------------------- Gross margin 70,771 66,096 Selling, general and administrative expenses 34,338 27,177 Research and technology expenses 6,455 5,183 Business acquisition and consolidation expenses 2,809 - - ----------------------------------------------------------------------------------------------------------------- Operating income 27,169 33,736 Interest expense 19,106 6,967 - ----------------------------------------------------------------------------------------------------------------- Income before income taxes 8,063 26,769 Provision for income taxes 2,839 9,699 Equity in losses of affiliated companies 16 - - ----------------------------------------------------------------------------------------------------------------- Net income $ 5,208 $ 17,070 - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Net income per share: Basic $ 0.14 $ 0.46 Diluted 0.14 0.40 Weighted average shares: Basic 36,365 36,845 Diluted 36,460 46,346 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 HEXCEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------- UNAUDITED ------------------------------------- QUARTER ENDED MARCH 31, (IN THOUSANDS) 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,208 $ 17,070 Reconciliation to net cash provided (used) by operations: Depreciation and amortization 15,660 10,008 Deferred income taxes (1,189) (3,720) Accrued business acquisition and consolidation expenses 2,809 - Business acquisition and consolidation payments (2,242) (1,783) Equity in losses of affiliated companies 16 - Working capital changes and other (2,921) (26,676) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 17,341 (5,101) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (9,429) (11,546) Advances to affiliated companies - (750) - ---------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (9,429) (12,296) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (repayments of) the senior and revolving credit facilities, net (229,392) 10,114 Proceeds from (repayments of) long-term debt and capital lease obligations, net 225,719 (505) Debt issuance costs (8,990) - Activity under stock plans 249 1,375 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities (12,414) 10,984 - ---------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents (544) 553 - ---------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (5,046) (5,860) Cash and cash equivalents at beginning of year 7,504 9,033 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 2,458 $ 3,173 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 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, 1999, and the results of operations and cash flows for the quarters ended March 31, 1999 and 1998. The condensed consolidated balance sheet of the Company as of December 31, 1998 was derived from the audited 1998 consolidated balance sheet. Certain information and footnote disclosures normally included in financial statements have been omitted pursuant to rules and regulations of the Securities and Exchange Commission. Certain prior quarter amounts in the condensed consolidated financial statements have been reclassified to conform to the 1999 presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 1998 Annual Report on Form 10-K. As discussed in Note 2, Hexcel acquired from Clark-Schwebel, Inc. and its subsidiaries ("C-S") certain assets and assumed certain operating liabilities of its industrial fabrics business (the "Acquired Clark-Schwebel Business") on September 15, 1998. Accordingly, the condensed consolidated balance sheets, statements of operations and cash flows include the financial position, results of operations and cash flows of the Acquired Clark-Schwebel Business as of such date and for such periods that the business was owned by the Company. NOTE 2 -- BUSINESS ACQUISITION On September 15, 1998, the Company acquired certain assets and assumed certain operating liabilities from C-S. The Acquired Clark-Schwebel Business is engaged in the manufacture and sale of high-quality fiberglass fabrics, which are used to make printed circuit boards for electronic equipment such as computers, cellular telephones, televisions and automobiles. The Acquired Clark-Schwebel Business also produces high performance specialty products for use in insulation, filtration, wall and facade claddings, soft body armor and reinforcements for composite materials. At the date of acquisition, the Acquired Clark-Schwebel Business operated four manufacturing facilities in the southeastern U.S. and had approximately 1,300 full time employees. As part of this acquisition, Hexcel also acquired C-S's equity ownership interests in the following three joint ventures: - - a 43.6% share in CS-Interglas AG ("CS-Interglas") headquartered in Germany, together with fixed-price options to increase this equity interest to 84.0%. Hexcel's acquisition of the CS-Interglas equity interest and related options was completed on December 23, 1998; - - a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn has its own joint venture with AlliedSignal Inc. in Taiwan; and - - a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab") headquartered in the United States. 5 CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian electronics and telecommunications industries. CS Tech-Fab manufactures non-woven materials for roofing, construction and other specialty applications. The fixed-price options to increase the equity interest in CS-Interglas are, in the Company's opinion, significantly higher than their current fair market value and expire on December 31, 1999. The unconsolidated net sales in 1998 for these joint ventures were in excess of $300,000. The acquisition of the Acquired Clark-Schwebel Business was accounted for under the purchase method of accounting and was completed pursuant to an Asset Purchase Agreement dated July 25, 1998, as amended, by and among Hexcel, Stamford CS Acquisition Corp., and C-S (the "Asset Purchase Agreement"). Under the Asset Purchase Agreement, Hexcel acquired the net assets of the acquired business, other than certain excluded assets and liabilities, in exchange for approximately $473,000 in cash. As part of the acquisition, Hexcel entered into a $50,000 lease for property, plant and equipment used in the acquired business from an affiliate of C-S, pursuant to a long-term lease with purchase options. PRO FORMA FINANCIAL INFORMATION The pro forma net sales, net income and diluted net income per share of Hexcel for the quarter ended March 31, 1998, after giving effect to the acquisition of the Acquired Clark-Schwebel Business as if it had occurred on January 1, 1998, were:
- -------------------------------------------------------------------------------------------------------------------- 3/31/98 - -------------------------------------------------------------------------------------------------------------------- Pro forma net sales $ 317,159 Pro forma net income 18,151 Pro forma diluted net income per share $ 0.43 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
NOTE 3 -- INVENTORIES
- -------------------------------------------------------------------------------------------------------------------- 3/31/99 12/31/98 - -------------------------------------------------------------------------------------------------------------------- Raw materials $ 88,988 $ 90,881 Work in progress 74,439 77,769 Finished goods 41,321 44,549 - -------------------------------------------------------------------------------------------------------------------- Total inventories $ 204,748 $ 213,199 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
NOTE 4 -- NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND INDEBTEDNESS TO A RELATED PARTY
- -------------------------------------------------------------------------------------------------------------------- 3/31/99 12/31/98 - -------------------------------------------------------------------------------------------------------------------- Senior credit facility $ 394,489 $ 618,214 European credit and overdraft facilities 7,843 16,330 Convertible subordinated notes, due 2003 114,435 114,435 Convertible subordinated debentures, due 2011 25,625 25,625 Senior subordinated notes, due 2009 240,000 - Various notes payable 408 547 - -------------------------------------------------------------------------------------------------------------------- Total notes payable 782,800 775,151 Capital lease obligations 52,450 54,092 Senior subordinated note payable to related party, net of unamortized discount of $1,128 and $1,801 as of March 31, 1999 and December 31, 1998, respectively 23,849 35,675 - -------------------------------------------------------------------------------------------------------------------- Total notes payable, capital lease obligations and indebtedness to a related party $ 859,099 $ 864,918 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
6
- -------------------------------------------------------------------------------------------------------------------- 3/31/99 12/31/98 - -------------------------------------------------------------------------------------------------------------------- Notes payable and current maturities of long-term liabilities $ 22,381 $ 26,867 Long-term notes payable and capital lease obligations, less current maturities 812,869 802,376 Indebtedness to related parties 23,849 35,675 - -------------------------------------------------------------------------------------------------------------------- Total notes payable, capital lease obligations and indebtedness to a related party $ 859,099 $ 864,918 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
SENIOR CREDIT FACILITY In connection with the acquisition of the Acquired Clark-Schwebel Business on September 15, 1998, Hexcel obtained a new global credit facility (the "Senior Credit Facility") to: (a) fund the purchase of the Acquired Clark-Schwebel Business; (b) refinance the Company's existing revolving credit facility; and (c) provide for ongoing working capital and other financing requirements of the Company. Simultaneously with the January 1999 closing of the $240,000 principal amount of 9.75% senior subordinated notes due 2009 (the "Senior Subordinated Notes") offering, the Company amended the Senior Credit Facility to, among other things, reduce the available borrowing capacity from $910,000 to $672,000, modify certain financial covenants and to permit the offering. Depending on certain predetermined ratios and other conditions, interest on outstanding borrowings under the Senior Credit Facility is computed at an annual rate ranging from approximately 0.75% to 2.25% in excess of the applicable London interbank rate, or at the option of Hexcel, at 0 to 1.25% in excess of the base rate of the administrative agent for the lenders. In addition, the Senior Credit Facility is subject to a commitment fee ranging from 0.23% to 0.50% per annum of the total facility. The Senior Credit Facility is secured by a pledge of shares of certain of Hexcel's subsidiaries. The Company is subject to various financial covenants and restrictions under the Senior Credit Facility, and is generally prohibited from paying dividends or redeeming capital stock. Approximately $544,000 of the Senior Credit Facility expires in September 2004, with the balance expiring in 2005. SENIOR SUBORDINATED NOTES DUE 2009 On January 21, 1999, the Company issued $240,000 of Senior Subordinated Notes due 2009. The Senior Subordinated Notes are general unsecured obligations of Hexcel that bear interest at a rate of 9.75% per annum. Net proceeds of approximately $231,000 from this offering were used to repay amounts owed under the Senior Credit Facility. The Senior Subordinated Notes are redeemable beginning in January of 2004, in whole or in part, at the option of Hexcel. The redemption prices range from 104.9% to 100.0% of the outstanding principal amount, depending on the period in which redemption occurs. SENIOR SUBORDINATED NOTE PAYABLE TO A RELATED PARTY The senior subordinated note payable to a related party, is payable to Ciba Specialty Chemicals Inc., and is a general unsecured obligation of Hexcel. Ciba Specialty Chemicals Inc. and its affiliate, Ciba Specialty Chemicals Corporation, collectively hold approximately 49.6% of the Company's common stock. From February 28, 1996 through February 28, 1999, the senior subordinated note payable to a related party bore interest at a rate of 7.5% per annum. On February 28, 1999, the interest rate increased to 10.5% per annum, and will continue to increase by an additional 0.5% per year thereafter until they mature in 2003. On February 17, 1999, the Company redeemed $12,500 of the note payable, with such repayment financed with borrowings under the Company's Senior Credit Facility. 7 Over the past few years, the Company has announced two major business consolidation programs. The first one was announced in May 1996 and later revised in December 1996 (the "1996 program"), and primarily related to the integration of the acquired composite business of Ciba-Geigy Ltd. and the acquired carbon fibers and prepreg business of Hercules Inc. In December 1998 and March 1999, the Company announced a second program related to the integration of the Acquired Clark-Schwebel Business and the combination of the Company's U.S., European and Pacific Rim composite materials businesses into a single, global business unit (the "1998/1999 program"). More detailed discussions on each of these programs are set forth below. Total accrued business acquisition and consolidation expenses at December 31, 1998 and March 31, 1999, and activity during the quarter ended March 31, 1999 for each of these programs was as follows:
- ----------------------------------------------------------------------------------------------- 1998/1999 1996 PROGRAM PROGRAM TOTAL - ----------------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 1998 $ 5,002 $ 3,200 $ 8,202 Business acquisition and consolidation expenses 2,809 - 2,809 Cash expenditures (2,242) - (2,242) Non-cash usage, including asset write-downs and currency translation effects (1,927) (100) (2,027) - ----------------------------------------------------------------------------------------------- BALANCE AS OF MARCH 31, 1999 $ 3,642 $ 3,100 $ 6,742 - -----------------------------------------------------------------------------------------------
1998/1999 PROGRAM In December 1998, Hexcel announced business consolidation actions within its reinforcement products and composite materials businesses. These actions included the integration of Hexcel's existing fabrics business with the U.S. operations of the Acquired Clark-Schwebel Business, and the combination of the Company's U.S., European and Pacific Rim composite materials businesses into a single, global business unit. The objectives of these actions were to eliminate redundancies, improve manufacturing planning, and enhance customer service. As of March 31, 1999, the Company had substantially completed these business consolidation actions and to date, these actions have resulted in the elimination of approximately 100 operating, sales, marketing and administrative positions. On March 16, 1999, the Company expanded its actions relating to the integration of the Acquired Clark-Schwebel Business with the announcement of the closure of its Cleveland, Georgia manufacturing facility by August 1999. This facility, which was part of the Acquired Clark-Schwebel Business, employs approximately 100 people and produces fabrics used to make laminate for printed circuit boards. Certain production equipment from the Cleveland, Georgia facility will be moved to the Company's Anderson, South Carolina facility. Closure of this facility resulted from current competitive conditions in the global market for electronic fiberglass materials and was not expected at the time of the acquisition of the Acquired Clark-Schwebel Business. Accrued business acquisition and consolidation expenses at December 31, 1998 and March 31, 1999, and activity during the quarter ended March 31, 1999 for the 1998/1999 program, were as follows:
- ----------------------------------------------------------------------------------------------- EMPLOYEE FACILITY & SEVERANCE & EQUIPMENT 1998/1999 PROGRAM RELOCATION RELOCATION TOTAL - ----------------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 1998 $ 3,020 $ 1,982 $ 5,002 Business acquisition and consolidation expenses 994 1,815 2,809 Cash expenditures (1,497) (745) (2,242) Non-cash usage, including asset write-downs and currency translation effects - (1,927) (1,927) - ----------------------------------------------------------------------------------------------- BALANCE AS OF MARCH 31, 1999 $ 2,517 $ 1,125 $ 3,642 - -----------------------------------------------------------------------------------------------
8 As of December 31, 1998, accrued business consolidation and acquisition expenses for the 1998/1999 program primarily consisted of severance for employees terminated in December 1998, costs for early termination for certain leases, and equipment relocation costs incurred, but not yet paid. The Company's policy is to pay severance over a period of time rather than in a lump-sum amount. During the first quarter of 1999, the Company recorded additional business acquisition and consolidation expenses of $2,809, primarily reflecting the costs of closing the Cleveland, Georgia facility, of which $1,800 represented a non-cash write-down on equipment that will be disposed of. Cash expenditures during the quarter ended March 31, 1999 for the 1998/1999 program principally related to severance payments made to those employees terminated in December 1998. As of March 31, 1999, remaining accrued expenses for the 1998/1999 program primarily reflected severance and relocation costs for employees in the Company's Cleveland, Georgia facility and for employees terminated in December 1998, as well as costs relating to the early termination of certain leases. Remaining cash expenditures for the 1998/1999 program are expected to be funded through operating cash flows. The 1998/1999 program is expected to be substantially completed by the end of 1999. 1996 PROGRAM In 1996, Hexcel announced plans to consolidate the Company's operations over a period of three years. The objective of the program was to integrate acquired assets and operations into Hexcel, and to reorganize the Company's manufacturing and research activities around strategic centers dedicated to select product technologies. Management expected that this consolidation program would take approximately three years to complete, in part because of the aerospace industry requirements to "qualify" specific equipment and manufacturing facilities for the manufacture of certain products. These qualification requirements increase the complexity, cost and time of moving equipment and consolidating manufacturing activities. The program is near completion, and the Company expects that all activities related to this consolidation program will be finished by mid-1999. Accrued business acquisition and consolidation expenses at December 31, 1998 and March 31, 1999, and activity during the quarter ended March 31, 1999 for this business acquisition and consolidation program, were as follows:
- ----------------------------------------------------------------------------------------------- EMPLOYEE FACILITY & SEVERANCE & EQUIPMENT 1996 PROGRAM RELOCATION RELOCATION TOTAL - ----------------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 1998 $ 2,848 $ 352 $ 3,200 Non-cash usage, including asset write-downs and currency translation effects (100) - (100) - ----------------------------------------------------------------------------------------------- BALANCE AS OF MARCH 31, 1999 $ 2,748 $ 352 $ 3,100 - -----------------------------------------------------------------------------------------------
As of December 31, 1998 and March 31, 1999, accrued business acquisition and consolidation expenses for the 1996 program related to a $600 foreign government grant received by the Company that is required to be repaid over a five year period due to lower employee levels as a result of the consolidation program, $2,148 in employee retirement costs associated with terminations and $352 of environmental costs related to a closed facility. 9 NOTE 6 -- NET INCOME PER SHARE Computations of basic and diluted net income per share for the quarters ended March 31, 1999 and 1998, are as follows: - -------------------------------------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Basic net income per share: Net income $ 5,208 $ 17,070 Weighted average common shares outstanding 36,365 36,845 - -------------------------------------------------------------------------------------------------------------------- Basic net income per share $ 0.14 $ 0.46 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Diluted net income per share: Net income $ 5,208 $ 17,070 Effect of dilutive securities - Senior Subordinated Notes, due 2003 - 1,264 Senior Subordinated Debentures, due 2011 - 283 - -------------------------------------------------------------------------------------------------------------------- Adjusted net income $ 5,208 $ 18,617 - -------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 36,365 36,845 Effect of dilutive securities - Stock options 95 1,428 Senior Subordinated Notes, due 2003 - 7,239 Senior Subordinated Debentures, due 2011 - 834 - -------------------------------------------------------------------------------------------------------------------- Diluted weighted average common shares outstanding 36,460 46,346 - -------------------------------------------------------------------------------------------------------------------- Diluted net income per share $ 0.14 $ 0.40 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
The Convertible Subordinated Notes, due 2003, and the Convertible Subordinated Debentures, due 2011, were excluded from the 1999 computation of diluted net income per share, as they were antidilutive. For the quarter ended March 31, 1999, approximately 4,800 stock options, or substantially all of the Company's outstanding stock options, were excluded from the calculation of diluted net income per share. The exercise price for these stock options ranged from $8.25 to $30.68, with the weighted average price being approximately $12.55. For the quarter ended March 31, 1998, substantially all of the Company's outstanding stock options were included in the calculation of diluted net income per share. NOTE 7 -- COMPREHENSIVE INCOME (LOSS) - -------------------------------------------------------------------------------------------------------------------- QUARTER ENDED MARCH 31, 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Net income $ 5,208 $ 17,070 Currency translation adjustment (7,005) (1,573) - -------------------------------------------------------------------------------------------------------------------- Total comprehensive income (loss) $ (1,797) $ 15,497 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
10 NOTE 8 -- SEGMENT INFORMATION Hexcel evaluates the performance of its operating segments based on adjusted income before business acquisition and consolidation expenses, interest, taxes and equity in earnings of affiliated companies ("Adjusted EBIT"), and generally accounts for intersegment sales based on arm's length prices. Corporate and certain other expenses are not allocated to the operating segments. Financial information on the Company's operating segments for the quarters ended March 31, 1999 and 1998, including pro forma financial information, after giving effect to the acquisition of the Acquired Clark-Schwebel Business as if it occurred on January 1, 1998, is as follows: - -------------------------------------------------------------------------------------------------------------------- REINFORCEMENT COMPOSITE ENGINEERED PRODUCTS MATERIALS PRODUCTS TOTAL - -------------------------------------------------------------------------------------------------------------------- FIRST QUARTER 1999 - -------------------------------------------------------------------------------------------------------------------- Net sales to external customers $ 85,807 $ 177,200 $ 53,163 $ 316,170 Intersegment sales 35,728 2,776 - 38,504 - -------------------------------------------------------------------------------------------------------------------- Total sales 121,535 179,976 53,163 354,674 Adjusted EBIT 10,273 26,397 2,596 39,266 Depreciation and amortization 8,902 5,037 1,005 14,944 Capital expenditures 4,189 3,492 1,666 9,347 - -------------------------------------------------------------------------------------------------------------------- PRO FORMA FIRST QUARTER 1998 - -------------------------------------------------------------------------------------------------------------------- Net sales to external customers 103,362 164,133 49,664 317,159 Intersegment sales 35,118 2,946 19 38,083 - -------------------------------------------------------------------------------------------------------------------- Total sales 138,480 167,079 49,683 355,242 Adjusted EBIT 22,344 26,075 2,910 51,329 Depreciation and amortization 9,422 4,249 774 14,445 Capital expenditures 4,772 6,474 900 12,146 - -------------------------------------------------------------------------------------------------------------------- FIRST QUARTER 1998 - -------------------------------------------------------------------------------------------------------------------- Net sales to external customers 42,944 164,133 49,664 256,741 Intersegment sales 35,118 2,946 19 38,083 - -------------------------------------------------------------------------------------------------------------------- Total sales 78,062 167,079 49,683 294,824 Adjusted EBIT 13,679 26,075 2,910 42,664 Depreciation and amortization 4,315 4,249 774 9,338 Capital expenditures $ 3,843 $ 6,474 $ 900 $ 11,217 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
Reconciliations of the totals reported for the operating segments to consolidated income before income taxes, are as follows: - -------------------------------------------------------------------------------------------------------------------- FIRST PRO FORMA FIRST QUARTER FIRST QUARTER QUARTER 1999 1998 1998 - -------------------------------------------------------------------------------------------------------------------- Total Adjusted EBIT for reportable segments $ 39,266 $ 51,329 $ 42,664 Less: Business acquisition and consolidation expenses 2,809 - - Corporate, other expenses and eliminations 9,288 8,928 8,928 Interest expense 19,106 16,431 6,967 - -------------------------------------------------------------------------------------------------------------------- Consolidated income before income taxes $ 8,063 $ 25,970 $ 26,769 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS OVERVIEW ----------------------------------------------------------------------------------------------------------------- UNAUDITED ----------------------------------------------------------------------------------------------------------------- Quarter Ended March 31, Pro Forma (IN MILLIONS, EXCEPT PER SHARE DATA) 1999 1998 (c) 1998 ----------------------------------------------------------------------------------------------------------------- Net sales $ 316.2 $ 317.2 $ 256.7 Gross margin % 22.4% 25.6% 25.7% Adjusted operating income % (a) 9.5% 13.4% 13.1% Adjusted EBITDA (b) $ 45.6 $ 57.5 $ 43.7 Business acquisition & consolidation expenses $ 2.8 $ - $ - Net income $ 5.2 $ 18.2 $ 17.1 Adjusted net income (a) $ 7.0 $ 18.2 $ 17.1 ----------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.14 $ 0.43 $ 0.40 Adjusted diluted earnings per share (a) $ 0.19 $ 0.43 $ 0.40 ----------------------------------------------------------------------------------------------------------------- -----------------------------------------------------------------------------------------------------------------
(a) Excludes business acquisition and consolidation expenses and related income taxes, as applicable. (b) Excludes business acquisition and consolidation expenses, interest, taxes, depreciation, amortization and equity in earnings of affiliated companies. (c) Pro forma results gives effect to the September 1998 acquisition of Clark Schwebel, as if the transaction had occurred at the beginning of 1998. Net income for the first quarter of 1999 was $5.2 million, or $0.14 per diluted share, compared with $17.1 million, or $0.40 per diluted share, for the first quarter of 1998. Excluding business acquisition and consolidation expenses of $2.8 million ($1.8 million after tax) incurred in the first quarter of 1999, diluted earnings per share were $0.19. During the first quarter of 1999, demand in most of the markets that Hexcel serves was in line with the Company's expectations, with net sales from commercial aerospace holding steady and lower demand for carbon fiber products. However, pricing in the global market for electronic fiberglass materials remained under intense competitive pressure from certain Asian producers who used the western markets to reduce their significant excess production capacity. The Company's gross margins reflected the impact of higher unit carbon fiber product costs due to lower production, the pricing reductions in the electronics market, and supply chain pricing pressures in the commercial aerospace market. Hexcel remains committed to improving performance by continuing to reduce material costs from suppliers, decrease its own operating costs and increase productivity through its Lean Enterprise, supply-chain and business consolidation initiatives. BUSINESS ACQUISITION On September 15, 1998, the Company acquired certain assets and assumed certain operating liabilities from Clark-Schwebel, Inc. and its subsidiaries (the "Acquired Clark-Schwebel Business"). The Acquired Clark-Schwebel Business is engaged in the manufacture and sale of high-quality fiberglass fabrics, which are used to make printed circuit boards for electronic equipment such as computers, cellular telephones, televisions and automobiles. The Acquired 12 Clark-Schwebel Business also produces high performance specialty products for use in insulation, filtration, wall and facade claddings, soft body armor and reinforcements for composite materials. At the date of acquisition, the Acquired Clark-Schwebel Business operated four manufacturing facilities in the southeastern U.S. and had approximately 1,300 full time employees. 13 As part of this acquisition, Hexcel also acquired Clark-Schwebel's equity ownership interests in the following three joint ventures: - - a 43.6% share in CS-Interglas AG ("CS-Interglas") headquartered in Germany, together with fixed-price options to increase this equity interest to 84.0%. Hexcel's acquisition of the CS-Interglas equity interest and related options was completed on December 23, 1998; - - a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn has its own joint venture with AlliedSignal Inc. in Taiwan; and - - a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"), headquartered in the United States. CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian electronics and telecommunications industries. CS Tech-Fab manufactures non-woven materials for roofing, construction and other specialty applications. The fixed-price options to increase the equity interest in CS-Interglas are, in the Company's opinion, significantly higher than their current fair market value. Accordingly, the Company does not currently anticipate exercising the options, at the stated price, before their expiration on December 31, 1999. The unconsolidated revenues in 1998 for these joint ventures were in excess of $300 million. The acquisition of the Acquired Clark-Schwebel Business was completed pursuant to an Asset Purchase Agreement dated July 25, 1998, as amended, by and among Hexcel, Stamford CS Acquisition Corp., and Clark-Schwebel (the "Asset Purchase Agreement"). Under the Asset Purchase Agreement, Hexcel acquired the net assets of the acquired business, other than certain excluded assets and liabilities, in exchange for approximately $472.8 million in cash. Hexcel also agreed to lease $50.0 million of property, plant and equipment used in the acquired business from an affiliate of Clark-Schwebel, pursuant to a long-term lease with purchase options. The acquisition of the Acquired Clark-Schwebel Business was accounted for under the purchase method of accounting. Accordingly, the consolidated balance sheets, statements of operations, and cash flows include the financial position, results of operations and cash flows of the acquired business as of such date and for such periods that the business was owned by Hexcel. Further discussions of the acquisition and its related financing are contained in Notes 2 and 4 to the accompanying condensed consolidated financial statements. RESULTS OF OPERATIONS NET SALES: Net sales for the first quarter of 1999 were $316.2 million, compared with $256.7 million for the first quarter of 1998 and $317.2 million for the first quarter of 1998 on a pro forma basis, after giving effect to the acquisition of the Acquired Clark-Schwebel Business as if the transaction had occurred at the beginning of 1998. Strong sales of composite products to the commercial aerospace and space and defense markets were offset by reduced sales of carbon fiber and sales to the electronics market. On a constant currency basis, first quarter 1999 net sales would not have been materially different than reported. 14 The following table summarizes net sales to third-party customers by product group and market segment for the quarter ended March 31, 1999 and pro forma net sales for the quarter ended March 31, 1998: - -------------------------------------------------------------------------------------------------------------------- UNAUDITED ------------------------------------------------------------------------------------ COMMERCIAL SPACE & GENERAL (IN MILLIONS) AEROSPACE DEFENSE ELECTRONICS INDUSTRIAL RECREATION TOTAL - -------------------------------------------------------------------------------------------------------------------- FIRST QUARTER 1999 NET SALES Reinforcement products $ 11.7 $ 5.5 $ 42.3 $ 21.5 $ 4.8 $ 85.8 Composite materials 122.4 27.5 - 18.3 9.0 177.2 Engineered products 48.9 3.3 - 1.0 - 53.2 - -------------------------------------------------------------------------------------------------------------------- $ 183.0 36.3 42.3 40.8 13.8 316.2 Total 58% $ 11% $ 13% $ 13% $ 5% $ 100% - -------------------------------------------------------------------------------------------------------------------- PRO FORMA FIRST QUARTER 1998 NET SALES Reinforcement products $ 11.2 $ 7.2 $ 52.2 $ 26.8 $ 6.0 $ 103.4 Composite materials 118.8 21.4 - 13.3 10.6 164.1 Engineered products 46.1 2.8 - 0.8 - 49.7 - -------------------------------------------------------------------------------------------------------------------- $ 176.1 $ 31.4 $ 52.2 $ 40.9 $ 16.6 $ 317.2 Total 56% 10% 16% 13% 5% 100% - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
Commercial aerospace net sales increased 4% to $183.0 million for the first quarter of 1999, from $176.1 million on a pro forma basis for the first quarter of 1998. The growth in sales was largely attributable to increased sales of composite materials and reflects the increase in commercial aircraft build rates by the Company's two largest customers, The Boeing Company ("Boeing") and Airbus Industrie ("Airbus"). The increase also reflects an improvement in the engineered products segment's shipments of retrofit interiors to airline customers. Approximately 44% of Hexcel's pro forma full year 1998 net sales were to Boeing, Airbus and related subcontractors. Based on published projections, combined deliveries for Boeing and Airbus were 577 and 788 in 1997 and 1998, respectively, and are expected to peak at 913 in 1999, before declining to approximately 800 in 2000. The Company sells material for every model of commercial aircraft sold by Boeing and Airbus, with sales per aircraft ranging from $0.1 million to over $1.0 million. Depending on the product, orders placed with Hexcel are received anywhere between one and eighteen months prior to delivery of the aircraft to the customer. As the Company supplies its products ahead of the delivery of a commercial aircraft, it will start to see the impact of reduced Boeing production rates by summer 1999. During 1998, the Company's commercial aerospace customers started emphasizing the need for material yield improvement and cost and inventory reduction throughout the industry's supply chain. In response to these pressures, the Company reduced the price of certain products in 1999. Further, the Company is aware that in the third quarter of 1999, one customer is planning to substitute one of Hexcel's premium products for a lower cost, lower priced alternative product, which will also be provided by Hexcel. Although these changes impact the Company's profit margins, the Company's various cost reduction and efficiency improvement programs are focused on mitigating the impact in whole or in part. Meanwhile, the Company's sales of products used to retrofit aircraft interiors continue to grow, with a strong initial reception for its kit product that extends the size of overhead stowage bins in narrow aisle aircraft. Space and defense net sales for the first quarter of 1999 increased 16% to $36.3 million, from $31.4 million on a pro forma basis for the first quarter of 1998, primarily reflecting an increase in sales of composite materials to select military and space programs. 15 In the last quarter of 1998, the Company experienced cancellations of certain carbon fiber orders. The Company believes that, in response to a significant shortage of carbon fiber supply in 1997, a number of the Company's customers, particularly those in the space and defense market, purchased and/or ordered more carbon fiber than they needed during 1997 and 1998. Now that carbon fiber supplies are more certain, customers are reducing their inventories and are therefore anticipating lower purchasing needs for 1999. These factors resulted in surplus inventories throughout the supply chain, including Hexcel, at December 31, 1998 and a significant reduction in the anticipated carbon fiber production for 1999 as compared to 1998. The increase in worldwide carbon fiber capacity limits both the Company's ability to sell its short-term excess capacity to other markets and prices at which such surplus capacity can be sold. Electronics net sales decreased 19% to $42.3 million for the first quarter of 1999, from $52.2 million on a pro forma basis for the first quarter of 1998. The reduction in sales primarily reflects the impact of price reductions combined with lower unit sales volume in the United States. During the quarter, intense competition from manufacturers located in Asia continued to place pressure on the prices of the Company's electronic fiberglass products. The Company has been successful in partially offsetting these price reductions by obtaining lower raw material prices. In addition the Company continues to seek opportunities to reduce the cost of its products and during the quarter announced the closure of its Cleveland, Georgia plant as a targeted cost reduction action. General industrial net sales for the first quarter of 1999 were comparable to pro forma first quarter 1998. Recreation net sales decreased 17% in the first quarter of 1999 compared to first quarter 1998 net sales on a pro forma basis, reflecting reduced customer demand for certain products in this market, including, one particular customer who is changing the design of many of its athletic shoes to alternative materials. BACKLOG: The backlog of commercial aerospace and space and defense orders scheduled for delivery in the next 12 months was as follows: --------------------------------------------------------------------------------------------------------------- UNAUDITED ------------------------------------------------------------- Commercial Space and (IN MILLIONS) Aerospace Defense Total --------------------------------------------------------------------------------------------------------------- AS OF MARCH 31, 1999 Reinforcement products $ 12.7 $ 15.3 $ 28.0 Composite materials 194.0 42.1 236.1 Engineered products 145.5 10.9 156.4 --------------------------------------------------------------------------------------------------------------- Total $ 352.2 $ 68.3 $ 420.5 --------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 1998 Reinforcement products $ 5.9 $ 6.5 $ 12.4 Composite materials 226.9 40.1 267.0 Engineered products 165.1 7.6 172.7 --------------------------------------------------------------------------------------------------------------- Total $ 397.9 $ 54.2 $ 452.1 --------------------------------------------------------------------------------------------------------------- AS OF MARCH 31, 1998 Reinforcement products $ 10.4 $ 20.0 $ 30.4 Composite materials 237.3 57.2 294.5 Engineered products 158.6 9.9 168.5 --------------------------------------------------------------------------------------------------------------- Total $ 406.3 $ 87.1 $ 493.4 ---------------------------------------------------------------------------------------------------------------
The decrease in the Company's backlog is attributable to commercial aerospace build rates, which are 16 expected to peak in 1999 and the continuing trend towards shorter lead times and better supply-chain management by the industry overall. Because the Company supplies its products ahead of the delivery of a commercial aircraft, it will start to see the impact of the lower anticipated deliveries of Boeing aircraft in 2000 by the second half of 1999. Backlog for the Company's other markets is not a material trend indicator and accordingly, such amounts are not presented. GROSS MARGIN: Gross margin for the first quarter of 1999 was $70.8 million, or 22.4% of net sales, compared with $66.1 million, or 25.7% of net sales, for the first quarter of 1998. The decrease is attributable to a number of factors, including a reduction in pricing, and to a lesser extent, sales volume, in the global electronics market due to the competitive conditions, lower production and sales of carbon fiber products, and supply chain pressures in the commercial aerospace market. These factors were partially offset by lower material costs. The Company is pursuing efforts to reduce its cost structure and increase its productivity through its Lean Enterprise program, which was extended to all U.S. locations in the latter part of 1998 and which will be extended to its European facilities in 1999. The expected improvements in cost and productivity will be offset by customer demand for reductions in the costs of the products that they purchase from the Company. OPERATING INCOME: Operating income was $27.2 million in the first quarter of 1999, or 8.6% of net sales, compared with $33.7 million in the first quarter of 1998, or 13.1% of net sales. Excluding business acquisition and consolidation expenses, operating income was $30.0 million, or 9.5% of net sales. The aggregate decrease in operating income, excluding business acquisition and consolidation expenses, reflects the decrease in gross margins and increased selling, general and administrative ("SG&A") and research and technology ("R&T") expenses over the first quarter 1998. SG&A expenses were $34.3 million, or 10.9% of net sales for the first quarter of 1999 compared with $27.2 million, or 10.6% of net sales for the first quarter of 1998. The aggregate dollar increase in SG&A was primarily attributable to the Acquired Clark-Schwebel Business and costs associated with the implementation of the Company's Lean Enterprise and supply-chain initiatives. R&T expenses were $6.5 million, or 2.1% of net sales for the first quarter of 1999 compared with $5.2 million, or 2.0% of net sales for the first quarter of 1998. EQUITY IN LOSSES OF AFFILIATED COMPANIES: As part of the Acquired Clark-Schwebel Business, the Company acquired interests in three joint ventures. Competitive conditions in the electronics market, resulting from the Asian economic situation, impacted the performance of two of these joint ventures during the first quarter of 1999. As a result, the Company recognized a nominal amount of equity in losses of affiliated companies in the first quarter of 1999. NET INCOME AND NET INCOME PER SHARE: Net income for the first quarter of 1999 was $5.2 million, or $0.14 per diluted share, compared with net income for the first quarter of 1998 of $17.1 million, or $0.40 per diluted share. Excluding business acquisition and consolidation expenses of $2.8 million, first quarter 1999 net income would have been $0.19 per diluted share. Pro forma first quarter 1998 diluted net income per share, after giving effect to the acquisition of the Acquired Clark-Schwebel Business as if the transaction had occurred at the beginning of 1998, was $0.43 per diluted share. There were 36.5 million diluted weighted-average shares outstanding during the first quarter of 1999, versus 46.3 million during the first quarter of 1998. The quarter-over-quarter decrease in the number of weighted average shares is primarily attributable to the exclusion of 8.1 million of potential common shares relating to the Convertible Subordinated Notes, due 2003, and the Convertible Subordinated Debentures, due 2011, which were antidilutive in the 1999 period. Refer to Note 6 to the accompanying condensed consolidated financial statements for the calculation and the number of shares used for diluted net income per share. 17 FINANCIAL CONDITION AND LIQUIDITY SENIOR CREDIT FACILITY In connection with the acquisition of the Acquired Clark-Schwebel Business on September 15, 1998, Hexcel obtained a new global credit facility (the "Senior Credit Facility") to: (a) fund the purchase of the Acquired Clark-Schwebel Business; (b) refinance the Company's existing revolving credit facility; and (c) provide for ongoing working capital and other financing requirements of the Company. Simultaneously with the January 1999 closing of the $240.0 million principal amount of 9.75% senior subordinated notes due 2009 (the "Senior Subordinated Notes") offering, the Company amended the Senior Credit Facility to, among other things, reduce the available borrowing capacity from $910.0 million to $672.0 million, modify certain financial covenants and to permit the offering. Approximately $544 million of the Senior Credit Facility expires in September 2004, with the balance expiring in 2005. The Company expects that its financial resources, including the Senior Credit Facility, will be sufficient to fund the Company's worldwide operations for the foreseeable future. Nonetheless, one of the Company's primary goals over the next few years is generating operating cash flow to reduce debt. Further discussion of the Company's financial resources is contained in Note 4 to the accompanying condensed consolidated financial statements. SENIOR SUBORDINATED NOTES DUE 2009 On January 21, 1999, the Company issued $240.0 million of Senior Subordinated Notes due 2009. The Senior Subordinated Notes are general unsecured obligations of Hexcel that bear interest at a rate of 9.75% per annum. Net proceeds of approximately $231 million from this offering were used to repay amounts owed under the Senior Credit Facility. The Senior Subordinated Notes are redeemable beginning in January of 2004, in whole or in part, at the option of Hexcel. The redemption prices range from 104.9% to 100.0% of the outstanding principal amount, depending on the period in which redemption occurs. SENIOR SUBORDINATED NOTE PAYABLE TO A RELATED PARTY The senior subordinated note payable to a related party, is payable to Ciba Specialty Chemicals Inc., and is a general unsecured obligation of Hexcel. Ciba Specialty Chemicals Inc. and its affiliate, Ciba Specialty Chemicals Corporation, collectively hold approximately 49.6% of the Company's common stock. From February 28, 1996 through February 28, 1999, the senior subordinated note payable to a related party bore interest at a rate of 7.5% per annum. On February 28, 1999, the interest rate increased to 10.5% per annum, and will continue to increase by an additional 0.5% per year thereafter until they mature in 2003. On February 17, 1999, the Company redeemed $12.5 million of the note payable, with such repayment financed with borrowings under the Company's Senior Credit Facility. CAPITAL EXPENDITURES Capital expenditures totaled $9.4 million for the first three months of 1999 compared to $11.5 million for the first three months of 1998 and $12.5 million for the first three months of 1998 on a pro forma basis. The decrease reflects reduced spending due to changing market conditions, the expected benefits from the Company's Lean Enterprise program and a commitment to reduce debt. ADJUSTED EBITDA, CASH FLOWS AND RATIO OF EARNINGS TO FIXED CHARGES FIRST QUARTER, 1999: Earnings before business acquisition and consolidation expenses, other income, interest, taxes, depreciation and amortization, and equity in earnings of affiliated companies ("Adjusted EBITDA") was $45.6 million. Net cash provided by operating activities was $17.3 million, as $5.2 18 million of net income and $15.7 million of non-cash depreciation and amortization more than offset cash used by all other operating activities. Net cash used for investing activities was $9.4 million, reflecting the Company's capital expenditures for the quarter. Net cash used for financing activities was $12.4 million, primarily reflecting $9.0 million of debt issuance costs pertaining to the issuance of the Senior Subordinated Notes. FIRST QUARTER, 1998: Adjusted EBITDA was $43.7 million. Pro forma Adjusted EBITDA, after giving effect to the acquisition of the Acquired Clark-Schwebel Business as if the transaction had occurred at the beginning of 1998, was $57.5 million. Net cash used for operating activities was $5.1 million, as increased working capital of $26.7 million and restructuring payments of $1.8 million more than offset $17.1 million of net income and $6.3 million of non-cash depreciation and amortization and deferred income taxes. The increase in working capital reflected higher levels of accounts receivable and inventory, as well as reductions in accrued liabilities from peak year-end levels, primarily due to the payment of obligations paid in 1998 for capital projects and employee incentive and benefit programs incurred during 1997. Net cash used for investing activities was $12.3 million, reflecting $11.5 million of capital expenditures. Net cash provided from financing activities, which primarily included borrowings under the Company's previous credit facility, totaled $11.0 million. Adjusted EBITDA and pro forma Adjusted EBITDA have been presented to provide a measure of Hexcel's operating performance that is commonly used by investors and financial analysts to analyze and compare companies. Adjusted EBITDA may not be comparable to similarly titled financial measures of other companies. Adjusted EBITDA and pro forma Adjusted EBITDA do not represent alternative measures of the Company's cash flows or operating income, and should not be considered in isolation or as substitutes for measures of performance presented in accordance with generally accepted accounting principles. 19 Reconciliations of net income to EBITDA and Adjusted EBITDA for the quarters ended March 31, 1999 and 1998, including pro forma first quarter 1998, after giving effect to the acquisition of the Acquired Clark-Schwebel Business as if it occurred at the beginning of 1998, are as follows: - --------------------------------------------------------------------------------------------------------------------- PRO FORMA FIRST FIRST QUARTER FIRST QUARTER QUARTER (IN MILLIONS) 1999 1998 1998 - --------------------------------------------------------------------------------------------------------------------- Net income $ 5.2 $ 18.2 $ 17.1 Provision for income taxes 2.8 9.4 9.6 Interest expense 19.1 16.4 7.0 Depreciation and amortization expense 15.7 15.1 10.0 Equity in earnings of affiliated companies - (1.6) - - --------------------------------------------------------------------------------------------------------------------- EBITDA 42.8 57.5 43.7 Business acquisition and consolidation expenses 2.8 - - - --------------------------------------------------------------------------------------------------------------------- Adjusted EBITDA $ 45.6 $ 57.5 $ 43.7 - ---------------------------------------------------------------------------------------------------------------------
The ratio of earnings to fixed charges for the quarters ended March 31, 1999 and 1998, and pro forma first quarter 1998, were 1.4x, 4.6x and 2.6x, respectively. The decrease in the ratio in the first quarter of 1999 reflects the Company's lower operating income and higher interest costs. The calculation of earnings to fixed charges assumes that one-third of the Company's rental expense is attributable to interest expense. BUSINESS CONSOLIDATION Over the past few years, the Company has announced two major business consolidation programs. The first one was announced in May 1996 and later revised in December 1996 (the "1996 program"), and primarily related to the integration of the acquired composite business of Ciba-Geigy Ltd. and the acquired carbon fibers and prepreg business of Hercules Inc. In December 1998 and March 1999, the Company announced a second program related to the integration of the Acquired Clark-Schwebel business and the combination of the Company's U.S., European and Pacific Rim composite materials businesses into a single, global business unit (the "1998/1999 program"). More detailed discussions on each of these programs are set forth below. Total accrued business acquisition and consolidation expenses at December 31, 1998 and March 31, 1999, and activity during the quarter ended March 31, 1999 for each of these programs was as follows:
- ----------------------------------------------------------------------------------------------- 1998/1999 1996 PROGRAM (IN THOUSANDS) PROGRAM TOTAL - ----------------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 1998 $ 5,002 $ 3,200 $ 8,202 Business acquisition and consolidation expenses 2,809 - 2,809 Cash expenditures (2,242) - (2,242) Non-cash usage, including asset write-downs and currency translation effects (1,927) (100) (2,027) - ----------------------------------------------------------------------------------------------- BALANCE AS OF MARCH 31, 1999 $ 3,642 $ 3,100 $ 6,742 - -----------------------------------------------------------------------------------------------
1998/1999 PROGRAM In December 1998, Hexcel announced business consolidation actions within its reinforcement products and composite materials businesses. These actions included the integration of Hexcel's existing fabrics business with the U.S. operations of the Acquired Clark-Schwebel Business, and the combination of the Company's U.S., European and Pacific Rim composite materials businesses into a single, global business unit. The objectives of these actions were to eliminate redundancies, improve manufacturing planning, and enhance customer service. As of March 31, 1999, the Company had substantially completed these business consolidation actions and to date, these actions have resulted in the elimination of approximately 100 operating, sales, marketing and administrative positions. Estimated savings from these actions, which the Company has already begun to realize, are expected to approximate $10 million per year. On March 16, 1999, the Company expanded its actions relating to the integration of the Acquired Clark-Schwebel Business with the announcement of the closure of its Cleveland, Georgia manufacturing facility by August 1999. This facility, which was part of the Acquired Clark-Schwebel Business, employs approximately 100 people and produces fabrics used to make laminate for printed circuit boards. Certain production equipment from the Cleveland, Georgia facility will be moved to the Company's Anderson, South Carolina facility. Closure of this facility resulted from current competitive conditions in the global market for electronic fiberglass materials and was not expected at the time of the acquisition of the Acquired Clark-Schwebel Business. Accrued business acquisition and consolidation expenses at December 31, 1998 and March 31, 1999, and activity during the quarter ended March 31, 1999 for the 1998/1999 program, were as follows (in thousands): 20
- ----------------------------------------------------------------------------------------------- EMPLOYEE FACILITY & SEVERANCE & EQUIPMENT 1998/1999 PROGRAM RELOCATION RELOCATION TOTAL - ----------------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 1998 $ 3,020 $ 1,982 $ 5,002 Business acquisition and consolidation expenses 994 1,815 2,809 Cash expenditures (1,497) (745) (2,242) Non-cash usage, including asset write-downs and currency translation effects - (1,927) (1,927) - ----------------------------------------------------------------------------------------------- BALANCE AS OF MARCH 31, 1999 $ 2,517 $ 1,125 $ 3,642 - -----------------------------------------------------------------------------------------------
As of December 31, 1998, accrued business consolidation and acquisition expenses for the 1998/1999 program primarily consisted of severance for employees terminated in December 1998, costs for early termination for certain leases, and equipment relocation costs incurred, but not yet paid. The Company's policy is to pay severance over a period of time rather than in a lump-sum amount. During the first quarter of 1999, the Company recorded additional business acquisition and consolidation expenses of $2.8 million, primarily reflecting the costs of closing the Cleveland, Georgia facility, of which $1.8 million represented a non-cash write-down on equipment that will be disposed of. The Company expects to record an additional charge of slightly above $1 million during the second and third quarters of 1999 relating to the relocation of certain equipment from the Cleveland, Georgia facility to the Company's Anderson, South Carolina facility. Cash expenditures during the quarter ended March 31, 1999 for the 1998/1999 program principally related to severance payments made to those employees terminated in December 1998. As of March 31, 1999, remaining accrued expenses for the 1998/1999 program primarily reflected severance and relocation costs for employees in the Company's Cleveland, Georgia facility and for employees terminated in December 1998, as well as costs relating to the early termination of certain leases. Remaining cash expenditures for the 1998/1999 program are expected to be funded through operating cash flows. The 1998/1999 program is expected to be substantially completed by the end of 1999. Anticipated cash savings from this business consolidation activity are expected to help offset competitive pricing pressures in the Company's electronics market. In addition to the Cleveland, Georgia facility closure, the Company is continuing to conduct a global capacity review. This review may result in the closing or right-sizing of additional facilities and, as a result, additional consolidation charges may be recognized in 1999. 1996 PROGRAM In 1996, Hexcel announced plans to consolidate the Company's operations over a period of three years. The objective of the program was to integrate acquired assets and operations into Hexcel, and to reorganize the Company's manufacturing and research activities around strategic centers dedicated to select product technologies. Management expected that this consolidation program would take approximately three years to complete, in part because of the aerospace industry requirements to "qualify" specific equipment and manufacturing facilities for the manufacture of certain products. These qualification requirements increase the complexity, cost and time of moving equipment and consolidating manufacturing activities. The program is near completion, and the Company expects that all activities related to this consolidation program will be finished by mid-1999. Accrued business acquisition and consolidation expenses at December 31, 1998 and March 31, 1999, and activity during the quarter ended March 31, 1999 for this business acquisition and consolidation program, were as follows (in thousands):
- ----------------------------------------------------------------------------------------------- EMPLOYEE FACILITY & SEVERANCE & EQUIPMENT 1996 PROGRAM RELOCATION RELOCATION TOTAL - ----------------------------------------------------------------------------------------------- BALANCE AS OF DECEMBER 31, 1998 $ 2,848 $ 352 $ 3,200 Non-cash usage, including asset write-downs and currency translation effects (100) - (100) - ----------------------------------------------------------------------------------------------- BALANCE AS OF MARCH 31, 1999 $ 2,748 $ 352 $ 3,100 - -----------------------------------------------------------------------------------------------
As of December 31, 1998 and March 31, 1999, accrued business acquisition and consolidation expenses for the 1996 program related to a $0.6 million foreign government grant received by the Company that is required to be repaid over a five year period due to lower employee levels as a result of the consolidation program, $2.1 million in employee retirement costs associated with terminations and $0.4 million of environmental costs related to a closed facility. The employee retirement costs are expected to be disbursed by mid-1999. The Company does not anticipate any additional expenses in relation to the 1996 program. 21 YEAR 2000 READINESS DISCLOSURE Hexcel, like most other companies, is continuing to address whether its information technology systems and non-information technology devices with embedded microprocessors (collectively "Business Systems and Devices") will recognize and process dates starting with the year 2000 and beyond (the "Year 2000"). The Year 2000 issue can arise at any point in the Company's supply, manufacturing, processing and distribution chains. The Company does not, however, manufacture or sell products that contain microprocessors or software. In early 1998, the Company established a central Year 2000 project office to coordinate and monitor progress towards achieving corporate-wide Year 2000 compliance. A discussion of the Company's Business Systems and Devices, suppliers and vendors as they pertain to the Company's Year 2000 issues, as of April 30, 1999, is detailed as follows: BUSINESS SYSTEMS & DEVICES In order to address the Year 2000 issue as it relates to the Company's Business Systems and Devices, the Company has developed, and is in the process of implementing, a six phase plan. The Company is also using external consulting services, where appropriate, as part of its efforts to address its Year 2000 issue. In implementing this plan, the Company has been, and continues to be substantially on schedule. The components of this plan and their related status, as of April 30, 1999, are detailed below and apply to both the Company's Business Systems and its Devices: (1) INVENTORY: This phase, which was completed in December 1998, consisted of compiling a detailed listing of the Company's Business Systems and Devices likely to be impacted by the Year 2000 issue. (2) RISK ASSESSMENT AND ASSIGNING PRIORITIES: This phase consisted of assessing the likelihood that a Business System or Device is not Year 2000 compliant as well as assigning a priority of importance to the particular Business System or Device as it relates to the Company's business operations. This phase was completed in December 1998. (3) ASSESSING COMPLIANCE: This phase consisted of assessing Year 2000 compliance on the Company's Business Systems or Devices which have been identified as essential to the Company's business operations. In assessing compliance, the Company performs a variety of tasks including, obtaining Year 2000 compliance statements and information from the Company's vendors and service providers. This phase was completed in March 1999. However, the Company is dependent upon 22 its suppliers and service providers to continue to inform Hexcel as to any updates or changes to the information supplied to Hexcel. (4) REPAIRING OR REPLACING: This phase consists of repairing and replacing non-Year 2000 compliant Business Systems and Devices which are essential to the Company's operations. This phase is approximately 70% complete, with substantial completion estimated by June 30, 1999. (5) TESTING: This phase consists of testing the repair or replacement of those Business Systems and Devices, which are essential to the Company's business operations. The Company also intends to test the integration of the various Business Systems and Devices within the Company's manufacturing processes. This phase is approximately 55% complete, with substantial completion estimated by June 30, 1999. The results of this phase may change the estimated timing of completion of phase four. (6) DEVELOPING CONTINGENCY PLANS: This phase consists of developing alternative plans in the event that a business interruption occurs from a Year 2000 issue. The Company is in the early stages of this phase. The Company has targeted September 30, 1999 as the date for substantial completion of its contingency plans, however, the Company believes that this phase will be on-going through to the year 2000. SUPPLIERS & CUSTOMERS The Company is also gathering information from its significant suppliers and customers concerning their Year 2000 issues as a means of assessing risks and developing alternatives. The Company has sent out surveys to all of its significant suppliers and customers to determine what steps, if any, those companies are taking to remediate their respective Year 2000 issues. The Company is, however, dependent upon its suppliers and customers with respect to the completeness and accuracy of such responses. As of April 30, 1999, the Company has received responses from nearly two-thirds of its significant suppliers and one-third of its significant customers. The responses from the Company's suppliers generally indicate that these parties are taking actions to ensure that their ability to supply products or services to the Company will not be impaired. To the extent that supplier responses to Year 2000 readiness are unsatisfactory, the Company will attempt to reduce risks of interruptions, with such options including changes in suppliers to those who have demonstrated Year 2000 readiness, and accumulation of inventory. The responses from the Company's customers also generally indicate that these parties are taking actions to ensure their ability to purchase products from the Company will not be impaired. The Company will continue to monitor the status of all of its significant suppliers' and customers' Year 2000 readiness through to the year 2000, in order to determine whether additional or alternative measures are necessary. Total estimated costs to address the Company's Year 2000 issues, including preparing the Company's Business Systems and Devices to become Year 2000 compliant, is approximately $5 million, of which approximately $1.5 million has been incurred through March 31, 1999. The total estimated costs includes approximately $2 million of capital expenditures to be used for the purchase of certain capital equipment to replace equipment which is currently not Year 2000 compliant. The estimate also includes the cost of certain internal resources fully dedicated to this project, however, the estimate does not include any costs associated with the implementation of contingency plans, which have not yet been developed. The Company has not used any external resources to independently verify these cost estimates. Due to resource constraints caused by the Year 2000 issue, the Company is deferring other information technology projects. These deferrals, however, are not expected to have a material adverse effect on the Company's results of operations or financial condition. 23 The Company is progressing with the development of its Year 2000 contingency plans. These plans are expected to be substantially completed by September 30, 1999. The Company is currently unable to assess the most reasonably likely worst case scenarios. However, if necessary remediation actions are not completed in a timely manner, or if the Company's suppliers and customers do not successfully address their Year 2000 issues, the Company estimates that a disruption in operations could occur. Such a disruption could result in, for example, delays in the receipt of raw materials and distribution of finished goods, or errors in customer orders. These consequences could have a material impact on the operations, liquidity and financial condition of the Company. The Company presently believes that by implementing its plans, including modifications to existing Business Systems and Devices and conversion to new or upgraded software and other systems, the Year 2000 issue will not pose significant operational problems for the Company. RECENTLY ISSUED ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This Statement requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 is not expected to have a material impact on Hexcel's consolidated financial statements. This Statement is effective for fiscal years beginning after June 15, 1999. Hexcel will adopt this accounting standard as required by January 1, 2000. FORWARD-LOOKING STATEMENTS AND RISK FACTORS Certain statements contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," that are not of historical fact, constitute "forward-looking statements". Such forward-looking statements include, but are not limited to: (a) estimates of commercial aerospace production and delivery rates, including those of Boeing and Airbus; (b) estimates of the change in net sales in total and by market compared to pro forma 1998 net sales; (c) expectations regarding the impact of pricing pressures from Hexcel's customers; (d) expectations regarding the ability of Hexcel to pass along price reductions to its suppliers; (e) expectations regarding future sales based on current backlog; (f) expectations regarding sales growth, sales mix, gross margins, manufacturing productivity and capital expenditures; (g) expectations regarding Hexcel's financial condition and liquidity, as well as future free cash flows and earnings; (h) estimated additional business acquisition and consolidation expenses to be incurred in 1999; (i) expectations regarding the costs and benefits of Hexcel's Lean Enterprise and business consolidation programs, including the closure of the Company's Cleveland, GA facility and implementation of a supply-chain management program; (j) expectations regarding the exercise of the CS-Interglas options at their stated price; and; (k) the impact of the Year 2000 issue, the estimated costs associated with becoming Year 2000 compliant and the estimated target date for substantial completion of remediation. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. Such factors include, but are not limited to, the following: the integration of the Acquired Clark-Schwebel Business without disruption to manufacturing, marketing and distribution activities; changes in general economic and business conditions; changes in current pricing levels; changes in political, social and economic conditions and local regulations, particularly in Asia and Europe; foreign currency fluctuations; changes in aerospace delivery rates; 24 reductions in sales to any significant customers, particularly Boeing or Airbus; changes in sales mix; changes in government defense procurement budgets; changes in military aerospace programs technology; industry capacity; competition; disruptions of established supply channels; manufacturing capacity constraints; the availability, terms and deployment of capital; and the ability of Hexcel to accurately estimate the cost of systems preparation and successfully implement required actions for Year 2000 compliance. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be materially different. Additional information regarding these factors is contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK A discussion of market risk exposures is included in Part II, Item 7A, of Hexcel's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. There has been no material change to this information during the three months ended March 31, 1999. 26 PART II. OTHER INFORMATION HEXCEL CORPORATION AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 1.1 Form of Employee Option Agreement (1999). 1.2 Form of Performance Accelerated Restricted Stock Unit Agreement (1999) 1.3 Form of Grant of Restricted Stock Unit Agreement (1999). 1.4 Split Dollar Agreement dated as of January 21, 1999 among Hexcel, John J. Lee and certain Trustees. 10.5 Executive Severance Agreement between Hexcel and John J. Lee dated as of February 3, 1999. 10.6 Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999. 10.7 Form of Executive Severance Agreement between Hexcel and certain executive officers dated as of February 3, 1999. 27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K: Report dated January 5, 1999, relating to the proposed issuance of $275 million of senior subordinated notes due 2009 pursuant to Rule 144A. Report dated January 25, 1999, relating to the Company's fourth quarter and full-year 1998 financial results. Report dated March 17, 1999, relating to the closure of the Company's Cleveland, Georgia facility. Report dated March 29, 1999, relating to the Company's first quarter 1999 outlook. Report dated April 30, 1999, relating to the Company's pro forma and actual business segment data and net sales to third-party customers by product group, for each of the quarters ended March 31, June 30, September 30 and December 31, 1998, and for the year ended December 31, 1998. 27 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, and in the capacity indicated. HEXCEL CORPORATION (Registrant) May 14, 1999 /s/ Wayne C. Pensky - ------------------------------- ------------------------------- (Date) Wayne C. Pensky, Vice President; Corporate Controller; and Chief Accounting Officer 28 EX-10.1 2 EXHIBIT 10.1 Exhibit 10.1 1999 EMPLOYEE OPTION AGREEMENT EMPLOYEE OPTION AGREEMENT, dated as of the Grant Date, by and between the Optionee and Hexcel Corporation (the "Corporation"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Corporation has adopted the Hexcel Corporation Incentive Stock Plan (the "Plan"); and WHEREAS, the Executive Compensation Committee (the "Committee") of the Board of Directors of the Corporation (the "Board") has determined that it is desirable and in the best interest of the Corporation to grant to the Optionee a stock option as an incentive for the Optionee to advance the interests of the Corporation; NOW, THEREFORE, the parties agree as follows: 1. NOTICE OF GRANT; INCORPORATION OF PLAN. A Notice of Grant is attached hereto as Annex A and incorporated by reference herein. Unless otherwise provided herein, capitalized terms used herein and set forth in such Notice of Grant shall have the meanings ascribed to them in the Notice of Grant and capitalized terms used herein and set forth in the Plan shall have the meanings ascribed to them in the Plan. The Plan is incorporated by reference and made a part of this Employee Option Agreement, and this Employee Option Agreement shall be subject to the terms of the Plan, as the Plan may be amended from time to time, provided that any such amendment of the Plan must be made in accordance with Section X of the Plan. The Option granted herein constitutes an Award within the meaning of the Plan. 2. GRANT OF OPTION. Pursuant to the Plan and subject to the terms and conditions set forth herein and therein, the Corporation hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of the Option Shares of the Corporation's common stock, $.01 par value per share (the "Common Stock"), which Option is not intended to qualify as an incentive stock option, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 3. PURCHASE PRICE. The purchase price per share of the Option Shares shall be the Purchase Price. 4. TERM OF OPTION. (a) EXPIRATION DATE; TERM. Subject to Section 4(c) below, the Option shall expire on, and shall no longer be exercisable following, the tenth anniversary of the Grant Date. The ten-year period from the Grant Date to its tenth anniversary shall constitute the "Term" of the Option. (b) VESTING PERIOD; EXERCISABILITY. Subject to Section 4(c) below, the Option shall vest and become exercisable at the rate of 33-1/3% of the Option Shares on each of the first three anniversaries of the Grant Date. (c) TERMINATION OF EMPLOYMENT; CHANGE IN CONTROL. (i) For purposes of the grant hereunder, any transfer of employment by the Optionee among the Corporation and the Subsidiaries shall not be considered a termination of employment. If the Optionee's employment with the Corporation is terminated for Cause (as defined in the last Section hereof), the Option, whether or not then vested, shall be automatically terminated as of the date of such termination of employment. If the Optionee's employment with the Corporation shall terminate other than by reason of Retirement (as defined in the last Section hereof), Disability (as defined in the last Section hereof), death or Cause, the Option (to the extent then vested) may be exercised at any time within ninety (90) days after such termination (but not beyond the Term of the Option). The Option, to the extent not then vested, shall immediately expire upon such termination. If the Optionee dies or becomes Disabled (A) while employed by the Corporation or (B) within 90 days after the termination of his or her employment other than for Cause or Retirement, the Option (to the extent then vested) may be exercised at any time within one year after the Optionee's death or Disability (but not beyond the Term of the Option). The Option, to the extent not then vested, shall immediately expire upon such death or disability. If the Optionee's employment terminates by reason of Retirement, the Option shall (A) become fully and immediately vested and exercisable and (B) remain exercisable for three years from the date of such Retirement (but not beyond the Term of the Option). (ii) In the event of a Change in Control (as defined in the last Section hereof), the Option shall immediately become fully vested and exercisable and the post-termination periods of exercisability set forth in Section 4(i) hereof shall apply, except that the post-termination period of exercisability shall be extended and the Option shall remain exercisable for a period of three years from the date of such termination of employment, if, within two years after a Change in Control, (A) the Optionee's employment is terminated by the Company other than by reason of Retirement, Cause, Disability or death or (B) the Optionee terminates the Optionee's employment for Good Reason (as defined in the last Section hereof). -2- 5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. (a) The aggregate number of Option Shares and the Purchase Price shall be appropriately adjusted by the Committee for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Corporation, or other change in corporate or capital structure. The Committee shall also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent reasonably necessary or desirable to preserve the intended benefits under this Employee Option Agreement in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction involving the Corporation. (b) Any adjustment under this Section 5 in the number of Option Shares and the Purchase Price shall apply to only the unexercised portion of the Option. If fractions of a share would result from any such adjustment, the adjustment shall be rounded down to the nearest whole number of shares. 6. METHOD OF EXERCISING OPTION AND WITHHOLDING. (a) The Option shall be exercised by the delivery by the Optionee to the Corporation at its principal office (or at such other address as may be established by the Committee) of written notice of the number of Option Shares with respect to which the Option is exercised, accompanied by payment in full of the aggregate Purchase Price for such Option Shares. Payment for such Option Shares shall be made (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Corporation, or by money transfers or direct account debits to an account designated by the Corporation; (ii) through the delivery of shares of Common Stock with a Fair Market Value equal to the total payment due from the Optionee; (iii) pursuant to a "cashless exercise" program if such a program is established by the Corporation; or (iv) by any combination of the methods described in (i) through (iii) above. (b) The Corporation's obligation to deliver shares of Common Stock upon the exercise of the Option shall be subject to the payment by the Optionee of applicable federal, state and local withholding tax, if any. The Corporation shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the Optionee any federal, state or local taxes required to be withheld with respect to such payment. 7. TRANSFER. Except as provided in this Section 7, the Option is not transferable otherwise than by will or the laws of descent and distribution, and the Option may be exercised during the Optionee's lifetime only by the Optionee. Any attempt to transfer 3 the Option in contravention of this Section 7 is void AB INITIO. The Option shall not be subject to execution, attachment or other process. Notwithstanding the foregoing, the Optionee shall be permitted to transfer the Option to members of his or her immediate family (I.E., children, grandchildren or spouse), trusts for the benefit of such family members, and partnerships whose only partners are such family members; provided, however, that no consideration can be paid for the transfer of the Option and the transferee of the Option shall be subject to all conditions applicable to the Option prior to its transfer. 8. NO RIGHTS IN OPTION SHARES. The Optionee shall have none of the rights of a stockholder with respect to the Option Shares unless and until shares of Common Stock are issued upon exercise of the Option. 9. NO RIGHT TO EMPLOYMENT. Nothing contained herein shall be deemed to confer upon the Optionee any right to remain as an employee of the Corporation. 10. GOVERNING LAW/JURISDICTION. This Employee Option Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws. 11. RESOLUTION OF DISPUTES. Any disputes arising under or in connection with this Employee Option Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in New York in accordance with the commercial rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each party shall bear such party's own expenses incurred in connection with any arbitration; PROVIDED, HOWEVER, that the cost of the arbitration, including without limitation, reasonable attorneys' fees of the Optionee, shall be borne by the Corporation in the event the Optionee is the prevailing party in the arbitration. Anything to the contrary notwithstanding, each party hereto has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator. 12. NOTICES. Any notice required or permitted under this Employee Option Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Optionee at the last address specified in Optionee's employment records, or such other address as the Optionee may designate in writing to the Corporation, or to the Corporation, Attention: Corporate Secretary, or such other address as the Corporation may designate in writing to the Optionee. 13. FAILURE TO ENFORCE NOT A WAIVER. The failure of either party hereto to enforce at any time any provision of this Employee Option Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. 4 14. COUNTERPARTS. This Employee Option Agreement may be executed in two or more counterparts, each of which shall be an original but all of which together shall represent one and the same agreement. 15. MISCELLANEOUS. This Employee Option Agreement cannot be changed or terminated orally. This Employee Option Agreement and the Plan contain the entire agreement between the parties relating to the subject matter hereof. The section headings herein are intended for reference only and shall not affect the interpretation hereof. 16. DEFINITIONS. For purposes of this Employee Option Agreement: (I) the term "Beneficial Owner" (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act; (II) the term "Cause" shall mean (A) the willful and continued failure by the Optionee to substantially perform the Optionee's duties with the Corporation (other than any such failure resulting from the Optionee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Optionee by the Corporation, which demand specifically identifies the manner in which the Corporation believes that the Optionee has not substantially performed the Optionee's duties, or (B) the willful engaging by the Optionee in conduct which is demonstrably and materially injurious to the Corporation or its subsidiaries, monetarily or otherwise. For purposes of clauses (A) and (B) of this definition, no act, or failure to act, on the Optionee's part shall be deemed "willful" unless done, or omitted to be done, by the Optionee not in good faith and without the reasonable belief that the Optionee's act, or failure to act, was in the best interest of the Corporation; (III) the term "Change in Control" shall mean any of the following events: (1)(a) any Person (as defined in this Section) is or becomes the Beneficial Owner of 20% or more of either (i) the then outstanding Common Stock of the Corporation (the "Outstanding Common Stock") or (ii) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Corporation (the "Total Voting Power"); excluding, however, the following: (A) any acquisition by the Corporation or any of its affiliates or (B) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any of its affiliates and (b) Ciba (as defined in this Section) beneficially owns, in the aggregate, a lesser percentage of the Total Voting Power than such Person beneficially owns; or (2) a change in the composition of the Board such that the individuals who, as of the effective date of this Employee Option Agree- 5 ment, constitute the Board (such individuals shall be hereinafter referred to as the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; PROVIDED, HOWEVER, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Corporation's stockholders, was made or approved pursuant to the Governance Agreement (as defined in this Section) or by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, PROVIDED, FURTHER, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be considered a member of the Incumbent Board; or (3) the approval by the stockholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Corporate Transaction"); excluding, however, such a Corporate Transaction (a) pursuant to which all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Corporate Transaction of the Outstanding Common Stock and Total Voting Power, as the case may be, or (b) after which no Person beneficially owns a greater percentage of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of such corporation than does Ciba; or (4) Ciba shall become the Beneficial Owner of more than 57.5% of the Total Voting Power; or (5) the approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation; 6 (IV) the term "Ciba" shall mean Ciba Specialty Chemicals Holding Inc., a Swiss corporation, together with its affiliates holding Corporation voting securities pursuant to Section 4.01(b) of the Governance Agreement; (V) the term "Disability (or becoming Disabled)" shall mean that, as a result of the Optionee's incapacity due to physical or mental illness or injury, he or she shall not have performed all or substantially all of his or her usual duties as an employee of the Corporation for a period of more than one-hundred-fifty (150) days in any period of one-hundred-eighty (180) consecutive days; (VI) the term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time; (VII) the term "Good Reason" for termination by the Optionee of the Optionee's employment shall mean the occurrence (without the Optionee's express written consent) of any one of the following acts by the Corporation, or failures by the Corporation to act, unless, in the case of any act or failure to act described in paragraphs (1), (5) or (6) below, such act or failure to act is corrected prior to the date of termination of the Optionee's employment: (1) a significant adverse alteration in the nature or status of the Optionee's responsibilities, position or authority from those in effect immediately prior to the Change in Control; (2) a reduction by the Corporation in the Optionee's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (3) the relocation of the Optionee's principal place of employment to a location more than fifty (50) miles from the Optionee's principal place of employment immediately prior to the Change in Control or the Corporation's requiring the Optionee to work anywhere other than at such principal place of employment (or permitted relocation thereof) except for required travel on the Corporation's business to an extent substantially consistent with the Optionee's present business travel obligations; (4) the failure by the Corporation to pay to the Optionee any portion of the Optionee's current compensation, or to pay to the Optionee any portion of an installment of deferred compensation under any deferred compensation program of the Corporation, within seven (7) days of the date such compensation is due; (5) the failure by the Corporation to continue in effect any compensation plan in which the Optionee participates immediately 7 prior to the Change in Control which is material to the Optionee's total compensation, or any substitute plans adopted prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Corporation to continue the Optionee's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Optionee's participation relative to other participants, as existed immediately prior to the Change in Control; or (6) the failure by the Corporation to continue to provide the Optionee with benefits substantially similar to those enjoyed by the Optionee under any of the Corporation's pension, savings, life insurance, medical, health and accident, or disability plans in which the Optionee was participating immediately prior to the Change in Control (except for across-the-board changes similarly affecting all senior executives of the Corporation and all senior executives of any Person in control of the Corporation), the taking of any other action by the Corporation which would directly or indirectly materially reduce any of such benefits or deprive the Optionee of any material fringe benefit enjoyed by the Optionee at the time of the Change in Control, or the failure by the Corporation to provide the Optionee with the number of paid vacation days to which the Optionee is entitled on the basis of years of service with the Corporation in accordance with the Corporation's normal vacation policy in effect at the time of the Change in Control. The Optionee's right to terminate the Optionee's employment for Good Reason shall not be affected by the Optionee's incapacity due to physical or mental illness. The Optionee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Optionee that Good Reason exists shall be presumed to be correct unless the Corporation establishes to the Board by clear and convincing evidence that Good Reason does not exist; (VIII) the term "Governance Agreement" shall have the meaning given in the Strategic Alliance Agreement (as defined in this Section); (IX) the term "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) of the Exchange Act, but excluding Ciba for so long as Ciba is subject to the restrictions imposed by the Governance Agreement; 8 (X) the term "Retirement" shall mean termination of the Optionee's employment, other than by reason of death or Cause, either (A) at or after age 65 or (B) at or after age 55 after five (5) years of employment by the Corporation (or a Subsidiary thereof); and (XI) the term "Strategic Alliance Agreement" shall mean the Strategic Alliance Agreement among the Corporation, Ciba-Geigy Limited and Ciba-Geigy Corporation, dated as of September 29, 1995, as amended, and any of their respective permitted successors or assigns thereunder. 9 ANNEX A NOTICE OF GRANT EMPLOYEE STOCK OPTION HEXCEL CORPORATION INCENTIVE STOCK PLAN The following employee of Hexcel Corporation, a Delaware corporation ("Hexcel") or a Subsidiary, has been granted an option to purchase shares of the Common Stock of Hexcel, $.01 par value, in accordance with the terms of this Notice of Grant and the Employee Option Agreement to which this Notice of Grant is attached. The following is a summary of the principal terms of the option which has been granted. The terms below shall have the meanings ascribed to them below when used in the Employee Option Agreement. - ------------------------------------------------------------------------------ Optionee - ------------------------------------------------------------------------------ Address of Optionee - ------------------------------------------------------------------------------ Employee Number - ------------------------------------------------------------------------------ Employee ID Number - ------------------------------------------------------------------------------ Foreign Sub Plan, if applicable - ------------------------------------------------------------------------------ Grant Date - ------------------------------------------------------------------------------ Purchase Price - ------------------------------------------------------------------------------ Aggregate Number of Shares Granted (the "Option Shares") - ------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice of Grant and the Employee Option Agreement to which this Notice of Grant is attached and execute this Notice of Grant and Employee Option Agreement as of the Grant Date. __________________________ HEXCEL CORPORATION Optionee By:_________________________ Name:_______________________ Title:________________________ EX-10.2 3 EXHIBIT 10.2 Exhibit 10.2 1999 PERFORMANCE ACCELERATED RESTRICTED STOCK UNIT AGREEMENT (February 3, 1999 Grant) This Performance Accelerated Restricted Stock Unit Agreement (the "Agreement"), is entered into as of the Grant Date, by and between Hexcel Corporation, a Delaware corporation (the "Company"), and the Grantee. Pursuant to the Hexcel Corporation Incentive Stock Plan (the "Plan"), the Executive Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board") has determined that the Grantee shall be granted Performance Accelerated Restricted Stock Units ("PARS") upon the terms and subject to the conditions hereinafter contained. Capitalized terms used but not defined herein shall have the meanings assigned to them in the Plan. 1. NOTICE OF GRANT; INCORPORATION OF PLAN. A Notice of Grant is attached hereto as Annex A and incorporated by reference herein. Unless otherwise provided herein, capitalized terms used in this Agreement and set forth in the Notice of Grant shall have the meanings ascribed to them in the Notice of Grant and capitalized terms used in this Agreement and set forth in the Plan shall have the meanings ascribed to them in the Plan. The Plan is incorporated by reference and made a part of this Agreement, and this Agreement shall be subject to the terms of the Plan, as the Plan may be amended from time to time, provided that any such amendment of the Plan must be made in accordance with Section X of the Plan. The PARS granted herein constitute an Award within the meaning of the Plan. 2. TERMS OF RESTRICTED STOCK. The grant of PARS provided in Section 1 hereof shall be subject to the following terms, conditions and restrictions: (a) The Grantee shall not possess any incidents of ownership (including, without limitation, dividend and voting rights) in shares of Common Stock in respect of the PARS until such PARS have vested and been distributed to the Grantee in the form of shares of Common Stock. (b) Except as provided in this Section 2 (b), the PARS and any interest therein may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, prior to the distribution of the Common Stock in respect of such PARS and subject to the conditions set forth in the Plan and this Agreement. Any attempt to transfer PARS in contravention of this Section is void AB INITIO. PARS shall not be subject to execution, attachment or other process. Notwithstanding the foregoing, the Grantee shall be permitted to transfer PARS to members of his or her immediate family (i.e., children, grandchildren or spouse), trusts for the benefit of such family members, and partnerships whose only partners are such family members; provided, however, that no consideration can be paid for the transfer of the PARS and the transferee of the PARS shall be subject to all conditions applicable to the PARS (including all of the terms and conditions of this Agreement) prior to transfer. -1- 3. VESTING AND CONVERSION OF PARS. The PARS shall vest on (a) January 1, 2006, or (b) on an earlier date or dates to the extent certain pre- determined performance criteria (the "PARS Goals") are achieved. The PARS Goals shall be as follows: if Company's income before income taxes (excluding business acquisition and consolidation expenses) ("EBT"), determined by reference to the Company's audited financial statements, equal or exceed $66.4 million for any fiscal year of the Company, 33-1/3% (or, if applicable, an additional 33-1/3%) of the total number of PARS shall become vested; if EBT for any fiscal year of the Company equal or exceed $75 million, 66-2/3% (or, if applicable, up to an additional 66-2/3%) of the total number of PARS shall become vested; and if EBT for any fiscal year of the Company equal or exceed $80 million, 100% of the total number of PARS shall become vested; provided, however, that no more than 100% of the total number of PARS may become vested. Upon the later to occur of (i) January 1, 2002 or (ii) the vesting of a certain number of PARS, such vested PARS shall be converted into an equivalent number of shares of Common Stock that will be immediately distributed to the Grantee; provided, however, that, to the extent that (and only to the extent that) the Company would be precluded from deducting the associated compensation expense because of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), such PARS shall be converted and distributed to the Grantee on the first business day of the first year (or years, if the first deferred distribution shall not include all of such PARS) in which the Company will not be so precluded; and provided further, that no PARS shall be converted and distributed to the Grantee unless the Grantee is an employee of the Company (or a Subsidiary) on December 31, 2001. On each dividend payment date with respect to the Common Stock subsequent to any PARS becoming fully vested but not yet converted and distributed by virtue of the immediately preceding proviso, the Company shall credit the Grantee with an additional number of fully vested whole and partial PARS (assuming each such PARS unit was a share of Common Stock) equal in value to the amount of dividends which the Grantee would have received on such dividend payment date if all such vested PARS (including PARS previously credited to the Grantee pursuant to this section) which had not yet been converted into shares had been so converted prior to the record date of such dividend. Such dividends will be credited as vested PARS as of the payment date of such dividends and such vested PARS shall thereafter be treated in the same manner as other PARS under this Agreement (the foregoing method of dividend crediting being referred to herein as being credited with the "Dividend Equivalent"). Upon the distribution of the shares of Common Stock in respect of the PARS, the Company shall issue to the Grantee or the Grantee's personal representative a stock certificate representing such shares of Common Stock, free of any restrictions. 4. TERMINATION OF EMPLOYMENT; CHANGE OF CONTROL. (a) For purposes of the grant hereunder, any transfer of employment by the Grantee among the Company and its Subsidiaries shall not be considered a termination of employment. Notwithstanding any other provision contained herein or in the Plan, (i) if the Grantee dies or terminates employment due to Disability (as defined in the last Section hereof), all PARS shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee, (ii) if the Grantee's employment with the Company is involuntarily terminated other than for Cause (as defined in the last Section hereof), all PARS shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee, (iii) if the Grantee voluntarily terminates employment with the Company, all vested PARS -2- shall be converted into shares of Common Stock and be immediately distributed to the Grantee, provided that the Grantee is an employee of the Company (or a Subsidiary) on December 31, 2001, and (iv) if the Grantee's employment with the Company terminates due to the Grantee's Retirement (as defined in the last Section hereof), all PARS shall vest, be converted in shares of Common Stock and be immediately distributed to the Grantee; provided, however, that in each case an appropriate number of such PARS shall not be converted and distributed to the Grantee until the first business day of the first year in which the Company is not precluded from deducting the associated compensation expense under Section 162(m) of the Code, but only to the extent such number of PARS would not be deductible until such time; further, provided, that the Grantee shall, if applicable, be credited with the Dividend Equivalent with respect to such PARS. If the Grantee's employment with the Company is involuntarily terminated for Cause or the Grantee voluntarily terminates his employment with the Company, the Grantee shall forfeit all PARS which have not yet become vested as of the date of termination of employment. (b) In the event of a Change in Control (as defined in the last Section hereof), all PARS shall vest, be converted into shares of Common Stock and be immediately distributed to the Grantee. 5. EQUITABLE ADJUSTMENT. The aggregate number of shares of Common Stock subject to the PARS shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without the receipt of consideration by the Company, or other change in corporate or capital structure. The Committee shall also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent reasonably necessary or desirable to preserve the intended benefits under this Agreement in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction involving the Company. 6. TAXES. The Grantee shall pay to the Company promptly upon request any taxes the Company reasonably determines it is required to withhold under applicable tax laws with respect to the PARS. Such payment shall be made as provided in Section IX(f) of the Plan. 7. NO GUARANTEE OF EMPLOYMENT. Nothing set forth herein or in the Plan shall confer upon the Grantee any right of continued employment for any period by the Company, or shall interfere in any way with the right of the Company to terminate such employment. 8. NOTICES. Any notice required or permitted under this Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Grantee at the last address specified in Grantee's employment records, or such other address as the Grantee may designate in -3- writing to the Company, or to the Company, Attention: Corporate Secretary, or such other address as the Company may designate in writing to the Grantee. 9. FAILURE TO ENFORCE NOT A WAIVER. The failure of either party hereto to enforce at any time any provision of this Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof. 10. GOVERNING LAW. This Agreement shall be governed by and construed according to the laws of the State of Delaware, without regard to the conflicts of laws provisions thereof. 11. INCORPORATION OF PLAN. The Plan is hereby incorporated by reference and made a part of this Agreement, and this Agreement shall be subject to the terms of the Plan, as the Plan may be amended from time to time, provided that any such amendment of the Plan must be made in accordance with Section X of the Plan. The PARS granted herein constitute Awards within the meaning of the Plan. 12. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be an original but all of which together shall represent one and the same agreement. 13. MISCELLANEOUS. This Agreement cannot be changed or terminated orally. This Agreement and the Plan contain the entire agreement between the parties relating to the subject matter hereof. The section headings herein are intended for reference only and shall not affect the interpretation hereof. 14. DEFINITIONS. For purposes of this Agreement: (I) the term "Beneficial Owner" (and variants thereof) shall have the meaning given in Rule 13d-3 promulgated under the Exchange Act; (II) the term "Cause" shall mean (A) the willful and continued failure by the Grantee to substantially perform the Grantee's duties with the Company (other than any such failure resulting from the Grantee's incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the Grantee by the Company, which demand specifically identifies the manner in which the Company believes that the Grantee has not substantially performed the Grantee's duties, or (B) the willful engaging by the Grantee in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (A) and (B) of this definition, no act, or failure to act, on the Grantee's part shall be deemed "willful" unless done, or omitted to be done, by the Grantee not in good faith and without the reasonable belief that the Grantee's act, or failure to act, was in the best interest of the Company; (III) the term "Change in Control" shall mean any of the following events: (A)(i) any Person (as defined in this Section), is or becomes the Beneficial Owner of 20% or more of either (x) the then outstanding Common Stock of the Company (the "Outstanding Common Stock") or (y) the combined -4- voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the "Total Voting Power"); excluding, however, the following: (1) any acquisition by the Company or any of its affiliates or (2) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliates and (ii) Ciba (as defined in this Section) beneficially owns, in the aggregate, a lesser percentage of the Total Voting Power than such Person beneficially owns; or (B) a change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such individuals shall be hereinafter referred to as the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Company's stockholders, was made or approved pursuant to the Governance Agreement (as defined in this Section) or by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be considered a member of the Incumbent Board; or (C) the approval by the stockholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction (i) pursuant to which all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Corporate Transaction of the Outstanding Common Stock and Total Voting Power, as the case may be, or (ii) after which no Person beneficially owns a greater percentage of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of such corporation than does Ciba; or (D) Ciba shall become the Beneficial Owner of more than 57.5% of the Total Voting Power; or (E) the approval by the stockholders of the Company of a complete -5- liquidation or dissolution of the Company. -6- (IV) the term "Ciba" shall mean Ciba Specialty Chemicals Holding Inc., a Swiss corporation, together with its affiliates holding Company voting securities pursuant to Section 4.01(b) of the Governance Agreement; (V) the term "Disability" shall mean that, as a result of the Grantee's incapacity due to physical or mental illness or injury, the Grantee shall not have performed all or substantially all of the Grantee's usual duties as an employee of the Company for a period of more than one-hundred-fifty (150) days in any period of one-hundred-eighty (180) consecutive days; (VI) the term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended; (VII) the term "Governance Agreement" shall have the meaning given in the Strategic Alliance Agreement (as defined in this Section); (VIII) the term "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) of the Exchange Act, but excluding Ciba for so long as Ciba is subject to the restrictions imposed by the Governance Agreement; (IX) the term "Retirement" shall mean termination of the Grantee's employment, other than by reason of death or Cause, either (A) at or after age 65 or (B) at or after age 55 after five (5) years of employment by the Company (or a Subsidiary thereof); and (X) the term "Strategic Alliance Agreement" shall mean the Strategic Alliance Agreement among the Company, Ciba-Geigy Limited and Ciba-Geigy Corporation, dated as of September 29, 1995, as amended, and any of their respective permitted successors or assigns thereunder. -7- ANNEX A NOTICE OF GRANT PERFORMANCE ACCELERATED RESTRICTED STOCK UNITS HEXCEL CORPORATION INCENTIVE STOCK PLAN The following employee of Hexcel Corporation, a Delaware corporation ("Hexcel") or a Subsidiary, has been granted performance accelerated restricted stock units in accordance with the terms of this Notice of Grant and the Agreement to which this Notice of Grant is attached. The terms below shall have the meanings ascribed to them below when used in the Agreement. - ------------------------------------------------------------------------------ Grantee - ------------------------------------------------------------------------------ Address of Grantee - ------------------------------------------------------------------------------ Employee Number - ------------------------------------------------------------------------------ Employee ID Number - ------------------------------------------------------------------------------ Foreign Sub Plan, if applicable - ------------------------------------------------------------------------------ Grant Date February 3, 1999 - ------------------------------------------------------------------------------ Aggregate Number of PARS Granted - ------------------------------------------------------------------------------
IN WITNESS WHEREOF, the parties hereby agree to the terms of this Notice of Grant and the Agreement to which this Notice of Grant is attached and execute this Notice of Grant and the Agreement as of the Grant Date. __________________________ HEXCEL CORPORATION Grantee By:_________________________ Name:_______________________ Title:________________________ -8- EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 GRANT OF RESTRICTED STOCK UNITS UNDER THE HEXCEL CORPORATION MANAGEMENT STOCK PURCHASE PLAN Grant Date: February 3, 1999 1. GRANT SUBJECT TO PLAN. This Grant (defined below) is made and accepted pursuant to the terms and provisions of the Hexcel Corporation Management Stock Purchase Plan (the "Plan") and expressly incorporates herein all of the terms and provisions of the Plan. Notwithstanding anything in this Grant to the contrary, in the event that any inconsistency arises between any term or provision of the Plan and any term or provision of this Grant, then the applicable term or provision of the Plan shall control. By acknowledging acceptance of this Grant the Grantee (defined below) also acknowledges receipt of a copy of the Plan at the time the Grantee made the election referred to in paragraph 2 below. All capitalized terms used herein and not otherwise defined herein have the meaning ascribed thereto in the Plan. 2. GRANT. Pursuant to Plan, and in accordance with the election made by the Grantee, Hexcel Corporation (the "Company"), which term shall include its successors as provided in the Plan, in lieu of making a cash payment to the Grantee in respect of ___% of the Grantee's Annual Bonus for the 1998 fiscal year, hereby grants to ______________ (the "Grantee"), and Grantee hereby purchases from the Company, ______ Restricted Stock Units (the "Restricted Stock Units") under the Plan, subject to the terms and conditions set forth herein and in the Plan (together, the "Grant"). The Purchase Price for each Restricted Stock Unit is $7.35, which represents 80% of the Fair Market Value of such unit as of the Grant Date. 3. NORMAL VESTING; NORMAL END OF RESTRICTED PERIOD. Subject to Paragraph 4 of this Grant, one-third (1/3) of the Restricted Stock Units shall vest on each of the first three anniversaries of the Grant Date and the Restricted Period shall end on the third anniversary of the Grant Date. 4. ACCELERATION OF VESTING AND END OF RESTRICTED PERIOD. The Restricted Stock Units shall immediately become completely vested and the Restricted Period shall end upon the first to occur of (a) a Change of Control, (b) the involuntary termination of Grantee's employment without Cause, or (c) the termination of Grantee's employment by reason of Retirement or the Grantee's death or Disability. 5. PAYMENT AT END OF RESTRICTED PERIOD. Upon termination of the Restricted Period with respect to the Restricted Stock Units, the Company will pay to the Grantee or the Grantee's estate (in the event of Grantee's death) a number of shares of unrestricted Stock equal to the number of Restricted Stock Units. 6. TERMINATION DURING RESTRICTED PERIOD. (a) VESTED RESTRICTED STOCK UNITS. If Grantee's employment is terminated during the Restricted Period for any reason, Grantee or Grantee's estate (in the event of Grantee's death) will receive a number of shares of unrestricted Stock equal to the number of vested Restricted Stock Units at the time of termination (giving effect to any vesting which may occur in connection with such termination). (b) UNVESTED RESTRICTED STOCK UNITS. If Grantee's employment is terminated during the Restricted Period for any reason, Grantee or Grantee's estate (in the event of Grantee's death) will receive a cash payment equal to the Purchase Price paid for all unvested Restricted Stock Units. 7. RESTRICTIONS. During the Restricted Period, the Grantee may not sell, assign, transfer, pledge, hypothecate, or otherwise dispose of Restricted Stock Units (whether vested or unvested), except by will or laws of descent and distribution. 8. NO RIGHTS AS STOCKHOLDER. Neither the Grantee nor any permitted transferee of the Grantee, shall have any rights as a stockholder with respect to any shares of Stock issuable pursuant to the Restricted Stock Units until the date on which a stock certificate (or certificates) representing such Stock is issued. 9. EQUITABLE ADJUSTMENT OF RESTRICTED SHARES. The number of shares of unrestricted Stock available pursuant to the Plan are subject to equitable adjustment as provided in Section 7 of the Plan. 2 10. NOTICES. Notices hereunder shall be mailed or delivered to the Company at its principal place of business, Two Stamford Plaza, 281 Tresser Boulevard, Stamford, Connecticut 06901, Attention: David Wong, Vice President, Corporate Affairs, and shall be mailed or delivered to the Grantee at the Grantee's address set forth below, or in either case at such other address as one party may subsequently furnish to the other party in writing. 11. NO RIGHTS TO EMPLOYMENT. This Grant shall not confer upon the Grantee any right with respect to continuance of employment by the Company or a Subsidiary, nor shall it interfere in any way with any right of the Grantee's employer to terminate the Grantee's employment at any time. 12. PAYMENT OF WITHHOLDING TAXES. The Committee shall have discretion to permit or require the Grantee, on such terms and conditions as it determines, to pay all or a portion of any taxes arising in connection with a purchase of Restricted Stock Units hereunder or the vesting or lapse of restrictions with respect thereto by having the Company withhold shares of Stock that would otherwise be exchanged for Restricted Stock Units or by the Grantee's delivering other shares of Stock having a value equal to the amount of taxes to be withheld or to otherwise withhold amounts payable to the Grantee in accordance with applicable law. 13. GOVERNING LAW. This Grant and all matters related hereto shall be governed by the laws of the State of Delaware. HEXCEL CORPORATION By: __________________ Name: David M. Wong Title: Vice President, Corporate Affairs Receipt of the foregoing Grant is hereby acknowledged and accepted and the terms and conditions of the Grant are hereby agreed to as of the Grant Date. GRANTEE ADDRESS _______________________ __________________________ Name: __________________________ __________________________ 3 EX-10.4 5 EXHIBIT 10.4 Exhibit 10.4 SPLIT-DOLLAR AGREEMENT THIS AGREEMENT made and entered into this 21st day of January, 1999, by and among Hexcel Corporation, a Delaware Corporation, with principal offices and place of business in the State of Connecticut (hereinafter referred to as the "Corporation"), John J. Lee, an individual residing in the State of New York (hereinafter referred to as the "Employee"), and John J. Lee, III, David R. Lindskog and Stewart J. McMillan, Trustees of the John J. Lee 1998 Irrevocable Insurance Trust U/A December 23, 1998 (hereinafter referred to as the "Owner"), WITNESSETH THAT: WHEREAS, the Employee is employed by the Corporation; and WHEREAS, the Employee wishes to provide life insurance protection for his family, under a policy of life insurance (hereinafter referred to as the "Policy"), insuring his life and the life of his wife (hereinafter jointly referred to as the "Insureds"), which Policy is described in Exhibit A attached hereto and by this reference made a part hereof, and which is being issued by Pacific Life Insurance Company (hereinafter referred to as the "Insurer"); and WHEREAS, the Corporation is willing to pay a portion of the premiums due on the Policy as an additional employment benefit for the Employee, on the terms and conditions hereinafter set forth; and WHEREAS, Owner is the owner of the Policy and, as such, possesses all incidents of ownership in and to the Policy; and WHEREAS, the Corporation wishes to have the Policy collaterally assigned to it by the Owner, in order to secure the repayment of the amounts which it will pay toward the premiums on the Policy; and NOW, THEREFORE, in consideration of the premises and of the mutual promises contained herein, the parties hereto agree as follows: 1. PURCHASE OF POLICY. The Owner will contemporaneously purchase the Policy from the Insurer which has a Face Amount of Insurance (as such term is defined in the Policy) of $5,026,917 and Increasing Death Benefit Option (as such term is defined in the Policy). The parties hereto agree that they will take all necessary action to cause the Insurer to issue the Policy, and shall take any further action which may be necessary to cause the Policy to conform to the provisions of this Agreement. The parties hereto agree that the Policy shall be subject to the terms and conditions of this Agreement and of the collateral assignment filed with the Insurer relating to the Policy. 2. OWNERSHIP OF POLICY. The Owner shall be the sole and absolute owner of the Policy, and may exercise all ownership rights granted to the owner thereof by the terms of the Policy, including, but not limited to, the right to elect to change the Death Benefit Option, the Face Amount of Insurance and the investment options of the Policy, except as may otherwise be provided herein. 3. PAYMENT OF PREMIUMS. a. Thirty (30) days prior to the payment of a Policy premium, the Corporation shall notify the Employee and the Owner of the exact amount due from the Employee hereunder, which shall be an amount equal to the annual cost of current life insurance protection on the joint lives of the Insureds, measured by the U.S. Life Table 38, while both are alive and thereafter measured by the lower of the PS 58 rate, set forth in Revenue Ruling 55-747 (or the corresponding applicable provision of any future Revenue Ruling), or the Insurer's current 2 published premium rate for annually renewable term insurance for standard risks. Either the Employee or the Owner, on behalf of the Employee, shall pay such required contribution to the Corporation prior to the premium due date. If neither the Employee nor the Owner makes such timely payment, the Corporation, in its sole discretion, may elect to make the Employee's portion of the premium payment, which payment shall be recovered by the Corporation as provided herein. b. The Corporation shall pay the sum of Two Hundred Fifty-Seven Thousand Eight Hundred and Seventy Dollars ($257,870) annually, for five consecutive years beginning on the date of this Agreement to the Insurer, and shall, upon request, promptly furnish the Employee evidence of timely payment of such payment. The Corporation shall annually furnish the Employee a statement of the amount of income reportable by the Employee for federal and state income tax purposes as a result of the insurance protection provided the Owner as the Policy beneficiary. 4. COLLATERAL ASSIGNMENT. To secure the repayment to the Corporation of the amount of the premiums on the Policy paid by it hereunder, the Owner has, contemporaneously herewith, assigned the Policy to the Corporation as collateral, under the form used by the Insurer for such assignments. Notwithstanding any other provision hereof or such assignment, the Corporation shall neither have nor exercise the power to borrow against, withdraw from, nor surrender or cancel the Policy during the term of this Agreement. The collateral assignment of the Policy to the Corporation hereunder shall not be terminated, altered or amended by the Owner, without the express written consent of the Corporation. The parties hereto agree to take 3 all action necessary to cause such collateral assignment to conform to the provisions of this Agreement. 5. LIMITATIONS ON OWNER'S RIGHTS IN POLICY. a. Except as otherwise provided herein, the Owner shall not sell, assign, transfer, borrow against or withdraw from the cash surrender value of the Policy, surrender or cancel the Policy, change the beneficiary designation provision thereof, or change the Face Amount of Insurance or the Death Benefit Option of the Policy without, in any such case, the express written consent of the Corporation. b. Notwithstanding any provision hereof to the contrary, the Owner shall have the sole authority to direct the manner in which the account(s) established pursuant to the terms of the Policy shall be invested among the various investment options from time to time available pursuant to the terms of the Policy. 6. COLLECTION OF DEATH PROCEEDS. a. Upon the death of the survivor of the Insureds, the Corporation and the Owner shall cooperate with the beneficiary or beneficiaries designated by the Owner to take whatever action is necessary to collect the death benefit provided under the Policy; when such benefit has been collected and paid as provided herein, this Agreement shall thereupon terminate. b. Upon the death of the survivor of the Insureds, the Corporation shall have the unqualified right to receive a portion of such death benefit equal to the total amount of the premiums paid by it hereunder. The balance of the death benefit provided under the Policy, if any, shall be paid directly to the beneficiary or beneficiaries designated by the Owner, in the manner and in the amount or amounts provided in the beneficiary designation provision of the 4 Policy. In no event shall the amount payable to the Corporation hereunder exceed the Policy proceeds payable as a result of the maturity of the Policy as a death claim. No amount shall be paid from such death benefit to the beneficiary or beneficiaries designated by the Owner until the full amount due the Corporation hereunder has been paid. The parties hereto agree that the beneficiary designation provision of the Policy shall conform to the provisions hereof. c. Notwithstanding any provision hereof to the contrary, in the event that, for any reason whatsoever, no death benefit is payable under the Policy upon the death of the survivor of the Insureds and in lieu thereof the Insurer refunds all or any part of the premiums paid for the Policy, the Corporation and the beneficiary or beneficiaries designated by the Owner shall have the unqualified right to share such premiums based on their respective cumulative contributions thereto. 7. TERMINATION OF THE AGREEMENT DURING THE LIFETIME OF THE INSUREDS. a. This Agreement shall terminate, while either of the Insureds is alive, without notice, upon the occurrence of any of the following events: (a) total cessation of the Corporation's business; (b) bankruptcy, receivership or dissolution of the Corporation; or (c) on the sixteenth anniversary of this Agreement. b. In addition, either the Employee or the Owner may terminate this Agreement while either of the Insureds is alive and while no premium under the Policy is overdue, by written notice to the other parties hereto. Such termination shall be effective as of the date of such notice. The Corporation shall not have the right to terminate this Agreement. 5 8. DISPOSITION OF THE POLICY ON TERMINATION OF THE AGREEMENT DURING THE LIFETIME OF THE INSUREDS. a. For sixty (60) days after the date of the termination of this Agreement during the lifetime of the Insureds, the Owner shall have the option of obtaining the release of the collateral assignment of the Policy to the Corporation. To obtain such release, the Owner shall reimburse to the Corporation the lesser of the total amount of the premium payments made by the Corporation hereunder or the then cash surrender value of the Policy. Upon receipt of such amount, the Corporation shall release the collateral assignment of the Policy, by the execution and delivery of an appropriate instrument of release. b. If the Owner fails to exercise such option within such sixty (60) day period, then, at the request of the Corporation, the Owner shall execute any document or documents required by the Insurer to transfer the interest of the Owner in the Policy to the Corporation. Alternatively, the Corporation may enforce its right to be repaid the amount due it hereunder from the cash surrender value of the Policy under the collateral assignment of the Policy; provided that in the event the cash surrender value of the Policy exceeds the amount due the Corporation, such excess shall be paid to the Owner. Thereafter, neither the Owner nor the Owner's successors, assigns or beneficiaries shall have any further interest in and to the Policy, either under the terms thereof or under this Agreement. 9. INSURER NOT A PARTY. The Insurer shall be fully discharged from its obligations under the Policy by payment of the Policy death benefit to the beneficiary or beneficiaries named in the Policy, subject to the terms and conditions of the Policy. In no event shall the Insurer be considered a party to this Agreement, or any modification or amendment hereof. No provision of 6 this Agreement, nor of any modification or amendment hereof, shall in any way be construed as enlarging, changing, varying, or in any other way affecting the obligations of the Insurer as expressly provided in the Policy, except insofar as the provisions hereof are made a part of the Policy by the collateral assignment executed by the Owner and filed with the Insurer in connection herewith. 10. NAMED FIDUCIARY, DETERMINATION OF BENEFITS, CLAIMS PROCEDURE AND ADMINISTRATION. a. The Corporation is hereby designated as the named fiduciary under this Agreement. The named fiduciary shall have authority to control and manage the operation and administration of this Agreement, and it shall be responsible for establishing and carrying out a funding policy and method consistent with the objectives of this Agreement. b. (1) CLAIM. A person who believes that he or she is being denied a benefit to which he or she is entitled under this Agreement (hereinafter referred to as a "Claimant") may file a written request for such benefit with the Corporation, setting forth his or her claim. The request must be addressed to the President of the Corporation at its then principal place of business. (2) CLAIM DECISION. Upon receipt of a claim, the Corporation shall advise the Claimant that a reply will be forthcoming within ninety (90) days and shall, in fact, deliver such reply within such period. The Corporation may, however, extend the reply period for an additional ninety (90) days for reasonable cause. 7 If the claim is denied in whole or in part, the Corporation shall adopt a written opinion, using language calculated to be understood by the Claimant, setting forth: (a) the specific reason or reasons for such denial; (b) the specific reference to pertinent provisions of this Agreement on which such denial is based; (c) a description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or such information is necessary; (d) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (e) the time limits for requesting a review under subsection (3) and for review under subsection (4) hereof. (3) REQUEST FOR REVIEW. Within sixty (60) days after the receipt by the Claimant of the written opinion described above, the Claimant may request in writing that the Secretary of the Corporation review the determination of the Corporation. Such request must be addressed to the Secretary of the Corporation, at its then principal place of business. The Claimant or his or her duly authorized representative may, but need not, review the pertinent documents and submit issues and comments in writing for consideration by the Corporation. If the Claimant does not request a review of the Corporation's determination by the Secretary of the Corporation within such sixty (60) day period, he shall be barred and estopped from challenging the Corporation's determination. (4) REVIEW OF DECISION. Within sixty (60) days after the Secretary's receipt of a request for review, he or she will review the Corporation's determination. After considering all materials presented by the Claimant, the Secretary will render a written opinion, written in a manner calculated to be 8 understood by the Claimant, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based. If special circumstances require that the sixty (60) day time period be extended, the Secretary will so notify the Claimant and will render the decision as soon as possible, but no later than one hundred twenty (120) days after receipt of the request for review. 11. AMENDMENT. This Agreement may not be amended, altered or modified, except by a written instrument signed by the parties hereto, or their respective successors or assigns, and may not be otherwise terminated except as provided herein. 12. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of the Corporation and its successors and assigns, and the Employee, the Owner, and their respective successors, assigns, heirs, executors, administrators and beneficiaries. 13. NOTICE. Any notice, consent or demand required or permitted to be given under the provisions of this Agreement shall be in writing, and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed to a party hereto, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Corporation. The date of such mailing shall be deemed the date of notice, consent or demand. 9 14. GOVERNING LAW. This Agreement, and the rights of the parties hereunder, shall be governed by and construed in accordance with the laws of the State of Connecticut. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, in triplicate, as of the day and year first above written. HEXCEL CORPORATION By_______________________________________ President ATTEST: _______________________ Secretary "Corporation" __________________________________________ JOHN J. LEE, "Employee" JOHN J. LEE IRREVOCABLE INSURANCE TRUST U/A DATED DECEMBER 23, 1998 By_______________________________________ John J. Lee, III, Trustee By_______________________________________ David R. Lindskog, Trustee By_______________________________________ Stewart J. McMillan, Trustee "Owner" 10 EXHIBIT A The following life insurance policy is subject to the attached Split-Dollar Agreement: Insurer Pacific Life Insureds John J. Lee and Gayle K. Lee Policy Number VP6072977-0 Face Amount of Insurance $5,026,917 Dividend Option None Death Benefit Option: Increasing Date of Issue December 5, 1998
12 EX-10.5 6 EXHIBIT 10.5 EXHIBIT 10.5 [EXECUTION COPY] FOOTER B HAS BEEN ENTERED (DRAFT) EXECUTIVE SEVERANCE AGREEMENT AGREEMENT made as of the 3rd day of February, 1999, between HEXCEL CORPORATION, a Delaware corporation with offices at Stamford, Connecticut (the "Company"), and John J. Lee (the "Executive"). WHEREAS, the Company is engaged in the business of developing, manufacturing and marketing carbon fibers, fabrics, high-performance composite materials and parts therefrom for the commercial aerospace, space and defense, recreation and industrial markets throughout the world, and hereafter may engage in other areas of business (collectively, the "Business"); WHEREAS, the Executive, as a result of training, expertise and personal application over the years, has acquired and will continue to acquire considerable and unique expertise and knowledge which are of substantial value to the Company in the conduct, management and operation of the Business; WHEREAS, the Company is willing to provide the Executive with certain benefits in the event of the termination of the Executive's employment with the Company, including in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Executive, in consideration of receiving such benefits from the Company, is willing to afford certain protection to the Company in regard to the confidentiality of its information, ownership of inventions and competitive activities. NOW, THEREFORE, in consideration of the mutual covenants of the Executive and the Company and of the Executive's continued employment with the Company, the parties agree as follows: 1. POSITION AND DUTIES. The Executive shall initially serve as Chairman of the Board and Chief Executive Officer of the Company and shall have such duties, responsibilities, and authority as he may have as of the date hereof (or any position to which he may be promoted after the date hereof). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company. 2. PLACE OF PERFORMANCE. In connection with the Executive's employment by the Company, the Executive shall be based at the principal executive offices of the Company in Stamford, Connecticut, except for required travel on the Company's business. 3. TERMINATION. The Executive's employment hereunder may be terminated under the following circumstances: (a) DEATH. The Executive's employment hereunder shall automatically terminate upon his death. (b) DISABILITY. The Company may terminate the Executive's employment hereunder due to the Executive's inability to perform the customary duties of his employment by reason of any medical or psychological illness or condition that is expected to be permanent or of indefinite duration, excluding any such illness or condition that results from intentional self-inflicted injury, alcoholism or drug abuse. (c) CAUSE. The Company may terminate the Executive's employment hereunder for Cause. The following shall constitute Cause: (i) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's incapability due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (ii) the willful engaging by the Executive in misconduct that is demonstrably and materially injurious to the Company, monetarily or otherwise including, but not limited to, conduct that violates the covenant not to compete in Section 6 hereof. No act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (i) reasonable notice from the Board to the Executive setting forth the reasons for the Company's intention to terminate for Cause, (ii) delivery to the Executive of a resolution duly adopted by the affirmative vote of two-thirds or more of the Board then in office (excluding the Executive if he is then a member of the Board) at a meeting of the Board called and held for such purpose, finding that in the good faith opinion of the Board, the Executive was guilty of the conduct herein set forth and specifying the particulars thereof in detail, (iii) an opportunity for the Executive, together with his counsel, to be heard before the Board, and (iv) delivery to the Executive of a Notice of Termination from the Board specifying the particulars thereof in detail. (d) GOOD REASON. The Executive may terminate his employment hereunder for Good Reason. The following shall constitute Good Reason: 2 (i) A diminution in the Executive's position, duties, responsibilities or authority (except during periods when the Executive is unable to perform all or substantially all of his duties or responsibilities on account of illness (either physical or mental) or other incapacity); (ii) A reduction in the Executive's annual rate of base salary as in effect on the date hereof or as the same may be increased from time to time; (iii) Failure by the Company to continue in effect any compensation plan in which the Executive participates which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute plan) has been made with respect to such plan, or failure by the Company to continue the Executive's participation therein (or in such substitute plan) on a basis not materially less favorable to the Executive; (iv) Failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating (except for across-the-board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), or failure by the Company to continue to provide the Executive with the number of paid vacation days per year equal to the greater of (i) five and (ii) the number to which the Executive is entitled in accordance with the Company's vacation policy; (v) Failure to provide facilities or services which are suitable to the Executive's position; (vi) Failure of any successor (whether direct or indirect, by purchase of stock or assets, merger, consolidation or otherwise) to the Company to assume the Company's obligations hereunder or failure by the Company to remain liable to the Executive hereunder after such assumption; (vii) Any termination by the Company of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination contained in this Agreement; (viii) The relocation of the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment as at the date hereof; or (ix) Failure to pay the Executive any portion of current or deferred compensation within seven (7) days of the date such compensation is due. 3 The Executive's continued employment shall not constitute consent to, or waiver of rights with respect to, any circumstance constituting Good Reason hereunder; provided, however, that the Executive shall be deemed to have waived his rights pursuant to circumstances constituting Good Reason hereunder if he shall not have provided the Company a Notice of Termination within ninety (90) days following his knowledge of the occurrence of circumstances constituting Good Reason. (e) OTHER THAN DEATH, DISABILITY, CAUSE OR GOOD REASON. (i) The Company may terminate the Executive's employment, other than as provided in Sections (3)(a), (b) or (c) hereof, upon written notice to the Executive and (ii) the Executive may terminate his employment with the Company, other than as provided in Section 3(d) hereof, upon written notice to the Company. (f) NOTICE OF TERMINATION; DATE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than a termination pursuant to Section 3(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10. For purposes of this Agreement, (i) "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (ii) "Date of Termination" shall mean (A) if the Executive's employment is terminated pursuant to Section 3(a), the date of his death, (B) if the Executive's employment is terminated pursuant to Section 3(b), thirty days after Notice of Termination is given (provided that the Executive shall not have returned substantially to full-time performance of the Executive's duties during such thirty day period), (C) if the Executive's employment is terminated pursuant to Sections 3(c), (d) or (e), the date specified in the Notice of Termination (provided that such date shall not be more than thirty days from the date Notice of Termination is given and, in the case of a termination for Cause, shall not be less than fifteen days from the date Notice of Termination is given), or (D) if the Executive terminates his employment and fails to provide written notice to the Company of such termination, the date of such termination. 4. COMPENSATION UPON DEATH, DISABILITY OR TERMINATION. Subject to section 15(b) hereof: (a) If the Executive's employment is terminated by his death, the Company shall pay the Executive's legal representative (i) at the time such payments are due, the Executive's full base salary through the Date of Termination at the rate in effect at the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the 4 Bonus Plan) and (ii) within ten days following the date of the Executive's death, a lump sum payment in an amount equal to the sum of (A) the Executive's annual base salary in effect as of the Date of Termination and (B) the Executive's Average Annual Bonus (the term "Average Annual Bonus" shall mean the average of the last three annual bonus amounts awarded to the Executive under the Company's Management Incentive Compensation Plan, or any successor, alternate or supplemental plan (the "Bonus Plan") or, if the Executive has not participated in the Bonus Plan for three completed annual award periods, the average of the annual bonus amounts awarded, provided that any award made in respect of an annual award period in which the Executive did not participate for the full period (the "Pro-Rata Award") shall be annualized for purposes of computing the Average Bonus Amount by multiplying the Pro-Rata Award by a fraction, of which the numerator is 365 and the denominator is the number of days during which the Executive participated in such annual award period). (b) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness the Executive shall continue to receive his full base salary at the rate then in effect for such period (offset by any payments to the Executive received pursuant to disability benefit plans maintained by the Company) until his employment is terminated pursuant to Section 3(b) hereof; and within ten days following such termination, the Company shall pay the Executive (i) all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan) and (ii) a lump sum payment in an amount equal to the sum of (A) the Executive's annual base salary in effect as of the Date of Termination and (B) the Executive's Average Annual Bonus. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall at the time such payments are due pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan), and the Company shall, thereafter, have no further obligations to the Executive under this Agreement. (d) If (1) the Company shall terminate the Executive's employment other than for Disability and other than for Cause or (2) the Executive shall terminate his employment for Good Reason, then (i) the Company shall pay the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, the Executive's full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business 5 expenses and amounts earned under any compensation plan or program (including the Bonus Plan); (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, an amount equal to the product of (A) the sum of (1) the Executive's annual base salary in effect at the time the Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and (2) the Executive's Average Annual Bonus, and (B) (x) if the Executive terminates his employment or the Company terminates the Executive's employment, in either case within two years after the occurrence of a Change in Control, the number three or (y) in any other case, the number one; and (iii) the Company shall continue the participation of the Executive for a period of one year (except, if the Executive terminates his employment or the Company terminates the Executive's employment, in either case within two years after the occurrence of a Change in Control, such period shall be three years), in all medical, health, life and other employee "welfare" plans and programs in which the Executive participated immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall by other means provide the Executive with benefits equivalent to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. (e) If the Company shall terminate the Executive's employment other than for Cause, or the Executive shall terminate his employment for Good Reason, during the period of a Potential Change in Control or at the request of a person who, directly or indirectly, takes any action designed to cause a Change in Control, then the Company shall make payments and provide benefits to the Executive under this Agreement as though a Change in Control had occurred immediately prior to such termination. A "Potential Change in Control" shall exist during the period commencing at the time the Company enters into any agreement or arrangement which, if consummated, would result in a Change in Control and ending at the time such agreement or arrangement either (i) results in a Change in Control or (ii) terminates, expires or otherwise becomes of no further force or effect. (f) For purposes of this Agreement, a "Change in Control" shall mean the first to occur of the following events: (1) (i) Any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d) of the Exchange Act, but excluding Ciba for so long as Ciba is subject to the restrictions imposed by the Governance Agreement) (a "Person") 6 is or becomes the Beneficial Owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding Common Stock of the Company (the "Outstanding Common Stock") or (B) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the "Total Voting Power"); excluding, however, the following: (x) any acquisition by the Company or any of its affiliates or (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliates and (ii) Ciba Beneficially Owns, in the aggregate, a lesser percentage of the Total Voting Power than such Person Beneficially Owns; (2) A change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such individuals shall be hereinafter referred to as the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Company's stockholders, was made or approved pursuant to the Governance Agreement or by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be so considered a member of the Incumbent Board; (3) The effective date of a reorganization, merger or consolidation by the Company, or the approval by the stockholders of the Company of a sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction (1) pursuant to which all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and Total Voting Power, as the case may be, or (2) after which no Person beneficially owns a greater percentage of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of such corporation than does Ciba; 7 (4) Ciba shall become the Beneficial Owner of more than 57.5% of the Total Voting Power; or (5) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. For purposes of this Section 4(f), the term "Ciba" shall mean Ciba Specialty Chemicals Holding Inc., a Swiss corporation, together with it affiliates holding Company voting securities pursuant to Section 4.01(b) of the Governance Agreement, and the term "Governance Agreement" shall have the meaning given in that certain Strategic Alliance Agreement among the Company, Ciba-Geigy Limited and Ciba Geigy Corporation, dated as of September 29, 1995, as amended, and any of their respective permitted successors or assigns thereunder. (g) Notwithstanding any other provisions of this Agreement, in the event that any payment, benefit, property or right received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments, benefits, properties and rights being hereinafter referred to as the "Total Payments") would be subject (in whole or part) to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any successor provision (the "Code"), then the payments and benefits provided under Section 4(d) or 4(e) hereof ("Severance Payments") which are cash shall first be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax, but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments); provided, however, that the Executive may elect (by waiving the receipt or enjoyment of all or any portion of the noncash Severance Payments at such time and in such manner that the Severance Payments so waived shall not constitute a "payment" within the meaning of section 280G(b) of the Code) to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the written opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm (the "Auditor") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of 8 section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the written opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and all such opinions or advice shall be in writing, shall be attached to the statement and shall expressly state that the Executive may rely thereon). If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the proper application of the first sentence of this Section 4(g). The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 5. NO MITIGATION. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 6. COVENANT NOT TO COMPETE. The Executive acknowledges that, as a senior management employee, the Executive will be involved, on a high level, in the development, implementation and management of the Company's global business plans, including those which involve the Company's finances, research, marketing, planning, operations, and acquisition strategies. By virtue of the Executive's position and knowledge of the Company, the Executive acknowledges that his employment by a competitor of the Company represents a serious competitive danger to the Company, and that the use of the Executive's experience and knowledge about the Company's business, strategies and plans by a competitor can and would constitute a valuable competitive advantage over the Company. In view of the foregoing, and in consideration of the payments made to the Executive under this Agreement, the Executive covenants and agrees that, if the Executive's employment is terminated and the Company has fulfilled its obligations under this Agreement, for a period of one year (or three years if the Executive receives the payments under clause (B)(x) of Section 4(d)(ii) hereof) after the Date of Termination the Executive will not engage, in any capacity, directly or indirectly, including but not limited as employee, agent, consultant, manager, executive, owner or stockholder (except as a passive investor holding less than a 5% equity interest in any enterprise) in any business entity engaged in competition with the 9 Business conducted by the Company on the Date of Termination anywhere in the world; provided, that the Executive may be employed by a competitor of the Company so long as the Executive's duties and responsibilities do not relate directly or indirectly to the business segment of the new employer which is actually or potentially competitive with the Business. 7. ASSIGNMENT OF INVENTIONS. The Executive agrees that all processes, technologies, designs and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not (collectively "Inventions"), conceived, developed, invented or made by the Executive prior to the Date of Termination shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. At the request of the Company, the Executive shall (i) promptly disclose such Inventions to the Company, (ii) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign countries, (iii) sign all papers necessary to carry out the foregoing, and (iv) give testimony or otherwise take action in support of the Executive's status as the inventor of such Inventions, in each case at the Company's expense. 8. CONFIDENTIALITY. In addition to any obligation regarding Inventions, the Executive acknowledges that the trade secrets and confidential and proprietary information of the Company, its subsidiaries and affiliates, including without limitation: (a) unpublished information concerning: (i) research activities and plans, (ii) marketing or sales plans, (iii) pricing or pricing strategies, (iv) operational techniques, and (v) strategic plans; (b) unpublished financial information, including information concerning revenues, profits and profit margins; (c) internal confidential manuals; and (d) any "material inside information" as such phrase is used for purposes of the Securities Exchange Act of 1934, as amended; all constitute valuable, special and unique information of the Company, its subsidiaries and affiliates. In recognition of this fact, the Executive agrees that the Executive will not disclose any such trade secrets or confidential or proprietary information (except (i) information which becomes publicly available without violation of this Agreement, (ii) information of which the Executive, prior to disclosure by the Executive, did not know and should not have known was disclosed to the Executive by a third party in violation of any other person's 10 confidentiality or fiduciary obligation, (iii) disclosure required in connection with any legal process (provided the Executive promptly gives the Company written notice of any legal process seeking to compel such disclosure and reasonably cooperates in the Company's attempt to eliminate or limit the scope of such disclosure) and (iv) disclosure while employed by the Company which the Executive reasonably and in good faith believes to be in or not opposed to the interests of the Company) to any person, firm, corporation, association or other entity, for any reason or purpose whatsoever, nor shall the Executive make use of any such information for the benefit of any person, firm, corporation or other entity except on behalf of the Company, its subsidiaries and affiliates. 9. BINDING AGREEMENT. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided in this Agreement, shall be paid to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 10. NOTICE. Notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered, if delivered personally, or mailed by United States certified or registered mail, return receipt requested, postage prepaid, and when received if delivered otherwise, addressed as follows: If to the Executive: John J. Lee 18 Walnut Avenue Larchmont, NY 10538 If to the Company: Hexcel Corporation 281 Tresser Blvd. Stamford, CT 06901-3238 Attn: General Counsel or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. GENERAL PROVISIONS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive (or, if applicable, his legal representative) and the 11 Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Connecticut without regard to its conflicts of law principles. 12. VALIDITY AND ENFORCEABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. It is the desire and intent of the parties that the provisions of Sections 6, 7 and 8 hereof shall be enforceable to the fullest extent permitted by applicable law or public policy. If any such provision or the application thereof to any person or circumstance shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such provision shall be construed in a manner so as to permit its enforceability to the fullest extent permitted by applicable law or public policy. In any case, the remaining provisions or the application thereof to any person or circumstance other than those to which they have been held invalid or unenforceable, shall remain in full force and effect. 13. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of Connecticut, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of the provisions of Sections 6, 7 or 8 hereof. 15. EXISTING EMPLOYMENT AGREEMENT. The Company and the Executive have previously entered into an Employment Agreement dated February 29, 1996 (the "Employment Agreement"). The Company and the Executive intend that the Executive's entitlement to severance payments in lieu of salary and bonus upon a Change in Control shall be governed solely by this Agreement, and that payments under this Agreement in respect of other benefits shall be reduced by any amounts received by the Executive under the Employment Agreement for similar benefits. Accordingly, the Company and the Executive agree as follows: (a) In Clause B of Section 8(d) of the Employment Agreement, the phrase 12 "(B) the Executive shall terminate his employment for Good Reason, then" 13 shall be amended to read "(B) the Executive shall terminate his employment for Good Reason (but for the purpose of this Section 8(d), the term Good Reason shall not include any reference to change in control as set forth in Section 7(d)(ii)(C) hereof), then". Except as expressly amended by this Section 15(a), the Employment Agreement shall remain in full force and effect as originally written. (b) Payments in respect of the following benefits under this Agreement shall be reduced (but to not less than zero) as follows: (A) Payments under Section 4(a) hereof shall be reduced by payments received under Section 8(b) of the Employment Agreement; (B) Payments under Section 4(b) hereof shall be reduced by payments received under Section 8(a) of the Employment Agreement; (C) Payments under Section 4(c) hereof shall be reduced by payments received under Section 8(c) of the Employment Agreement; and (D) Payments under Sections 4(d)(i) and (ii) hereof shall be reduced by payments received under Sections 8(d)(i) and (ii) of the Employment Agreement. 16. REMEDIES. The Executive agrees that in addition to any other remedy provided at law or in equity or in this Agreement, the Company shall be entitled to a temporary restraining order and both preliminary and permanent injunctions restraining Executive from violating any provision of Sections 6, 7 and 8 hereof. In the event the Company fails to make any payment to the Executive when due, the Executive, in addition to any other remedy available at law or in equity, shall be entitled to interest on such unpaid amounts from the date such payment was due to the date actual payment is received by the Executive, at the legal rate applicable to unpaid judgments. The Company shall pay to the Executive all legal, audit, and actuarial fees and expenses as a result of the termination of employment, including all such fees and expenses incurred in contesting, arbitrating or disputing any action or failure to act by the Company or in seeking to obtain or enforce any right under this Agreement or any other plan, arrangement or agreement with the Company, provided that the Executive has obtained a final determination supporting at least part of his claim and there has been no determination that the balance of his claim was made in bad faith. 14 17. CONSENT TO JURISDICTION AND FORUM. The Executive hereby expressly and irrevocably agrees that any action, whether at law or in equity, permitted to be brought by the Company under this Agreement may be brought in the State of Connecticut or in any federal court therein. The Executive hereby irrevocably consents to personal jurisdiction in such court and to accept service of process in accordance with the provisions of the laws of the State of Connecticut. In the event the Company commences any such action in the State of Connecticut or in any Federal court therein, the Company shall reimburse the Executive for the reasonable expenses incurred by the Executive in his appearance in such forum which are in addition to the expenses the Executive would have incurred by appearing in the forum of the Executive's residence at that time, including but not limited to additional legal fees. HEXCEL CORPORATION By: __________________________________ Name: Title: __________________________________ John J. Lee 15 EX-10.6 7 EXHIBIT 10.6 EXHIBIT 10.6 EXECUTIVE SEVERANCE AGREEMENT AGREEMENT made as of the 3rd day of February, 1999, between HEXCEL CORPORATION, a Delaware corporation with offices at Stamford, Connecticut (the "Company"), and _________________________ (the "Executive"). WHEREAS, the Company is engaged in the business of developing, manufacturing and marketing carbon fibers, fabrics, high-performance composite materials and parts therefrom for the commercial aerospace, space and defense, recreation and industrial markets throughout the world, and hereafter may engage in other areas of business (collectively, the "Business"); WHEREAS, the Executive, as a result of training, expertise and personal application over the years, has acquired and will continue to acquire considerable and unique expertise and knowledge which are of substantial value to the Company in the conduct, management and operation of the Business; WHEREAS, the Company is willing to provide the Executive with certain benefits in the event of the termination of the Executive's employment with the Company, including in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Executive, in consideration of receiving such benefits from the Company, is willing to afford certain protection to the Company in regard to the confidentiality of its information, ownership of inventions and competitive activities. NOW, THEREFORE, in consideration of the mutual covenants of the Executive and the Company and of the Executive's continued employment with the Company, the parties agree as follows: 1. POSITION AND DUTIES. The Executive shall initially serve as _________ of the Company and shall have such duties, responsibilities, and authority as he may have as of the date hereof (or any position to which he may be promoted after the date hereof). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company. 2. PLACE OF PERFORMANCE. In connection with the Executive's employment by the Company, the Executive shall be based at the principal executive offices of the Company in [Stamford, Connecticut], except for required travel on the Company's business. 3. TERMINATION. The Executive's employment hereunder may be terminated under the following circumstances: (a) DEATH. The Executive's employment hereunder shall automatically terminate upon his death. (b) DISABILITY. The Company may terminate the Executive's employment hereunder due to the Executive's inability to perform the customary duties of his employment by reason of any medical or psychological illness or condition that is expected to be permanent or of indefinite duration, excluding any such illness or condition that results from intentional self-inflicted injury, alcoholism or drug abuse. (c) CAUSE. The Company may terminate the Executive's employment hereunder for Cause. The following shall constitute Cause: (i) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's incapability due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (ii) the willful engaging by the Executive in misconduct that is demonstrably and materially injurious to the Company, monetarily or otherwise including, but not limited to, conduct that violates the covenant not to compete in Section 6 hereof. No act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (i) reasonable notice from the Board to the Executive setting forth the reasons for the Company's intention to terminate for Cause, (ii) delivery to the Executive of a resolution duly adopted by the affirmative vote of two-thirds or more of the Board then in office (excluding the Executive if he is then a member of the Board) at a meeting of the Board called and held for such purpose, finding that in the good faith opinion of the Board, the Executive was guilty of the conduct herein set forth and specifying the particulars thereof in detail, (iii) an opportunity for the Executive, together with his counsel, to be heard before the Board, and (iv) delivery to the Executive of a Notice of Termination from the Board specifying the particulars thereof in detail. 2 (d) GOOD REASON. The Executive may terminate his employment hereunder for Good Reason. The following shall constitute Good Reason: (i) A diminution in the Executive's position, duties, responsibilities or authority (except during periods when the Executive is unable to perform all or substantially all of his duties or responsibilities on account of illness (either physical or mental) or other incapacity); (ii) A reduction in the Executive's annual rate of base salary as in effect on the date hereof or as the same may be increased from time to time; (iii) Failure by the Company to continue in effect any compensation plan in which the Executive participates which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute plan) has been made with respect to such plan, or failure by the Company to continue the Executive's participation therein (or in such substitute plan) on a basis not materially less favorable to the Executive; (iv) Failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating (except for across-the-board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), or failure by the Company to continue to provide the Executive with the number of paid vacation days per year equal to the greater of (i) _____ and (ii) the number to which the Executive is entitled in accordance with the Company's vacation policy; (v) Failure to provide facilities or services which are suitable to the Executive's position; (vi) Failure of any successor (whether direct or indirect, by purchase of stock or assets, merger, consolidation or otherwise) to the Company to assume the Company's obligations hereunder or failure by the Company to remain liable to the Executive hereunder after such assumption; (vii) Any termination by the Company of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination contained in this Agreement; 3 (viii) The relocation of the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment as at the date hereof; or (ix) Failure to pay the Executive any portion of current or deferred compensation within seven (7) days of the date such compensation is due. The Executive's continued employment shall not constitute consent to, or waiver of rights with respect to, any circumstance constituting Good Reason hereunder; provided, however, that the Executive shall be deemed to have waived his rights pursuant to circumstances constituting Good Reason hereunder if he shall not have provided the Company a Notice of Termination within ninety (90) days following his knowledge of the occurrence of circumstances constituting Good Reason. (e) OTHER THAN DEATH, DISABILITY, CAUSE OR GOOD REASON. (i) The Company may terminate the Executive's employment, other than as provided in Sections (3)(a), (b) or (c) hereof, upon written notice to the Executive and (ii) the Executive may terminate his employment with the Company, other than as provided in Section 3(d) hereof, upon written notice to the Company. (f) NOTICE OF TERMINATION; DATE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than a termination pursuant to Section 3(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10. For purposes of this Agreement, (i) "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (ii) "Date of Termination" shall mean (A) if the Executive's employment is terminated pursuant to Section 3(a), the date of his death, (B) if the Executive's employment is terminated pursuant to Section 3(b), thirty days after Notice of Termination is given (provided that the Executive shall not have returned substantially to full-time performance of the Executive's duties during such thirty day period), (C) if the Executive's employment is terminated pursuant to Sections 3(c), (d) or (e), the date specified in the Notice of Termination (provided that such date shall not be more than thirty days from the date Notice of Termination is given and, in the case of a termination for Cause, shall not be less than fifteen days from the date Notice of Termination is given), or (D) if the Executive terminates his employment and fails to provide written notice to the Company of such termination, the date of such termination. 4 4. COMPENSATION UPON DEATH, DISABILITY OR TERMINATION. (a) If the Executive's employment is terminated by his death, the Company shall pay the Executive's legal representative (i) at the time such payments are due, the Executive's full base salary through the Date of Termination at the rate in effect at the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan) and (ii) within ten days following the date of the Executive's death, a lump sum payment in an amount equal to the sum of (A) the Executive's annual base salary in effect as of the Date of Termination and (B) the Executive's Average Annual Bonus (the term "Average Annual Bonus" shall mean the average of the last three annual bonus amounts awarded to the Executive under the Company's Management Incentive Compensation Plan, or any successor, alternate or supplemental plan (the "Bonus Plan") or, if the Executive has not participated in the Bonus Plan for three completed annual award periods, the average of the annual bonus amounts awarded, provided that any award made in respect of an annual award period in which the Executive did not participate for the full period (the "Pro- Rata Award") shall be annualized for purposes of computing the Average Bonus Amount by multiplying the Pro-Rata Award by a fraction, of which the numerator is 365 and the denominator is the number of days during which the Executive participated in such annual award period). (b) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness the Executive shall continue to receive his full base salary at the rate then in effect for such period (offset by any payments to the Executive received pursuant to disability benefit plans maintained by the Company) until his employment is terminated pursuant to Section 3(b) hereof; and within ten days following such termination, the Company shall pay the Executive (i) all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan) and (ii) a lump sum payment in an amount equal to the sum of (A) the Executive's annual base salary in effect as of the Date of Termination and (B) the Executive's Average Annual Bonus. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall at the time such payments are due pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus 5 Plan), and the Company shall, thereafter, have no further obligations to the Executive under this Agreement. (d) If (1) the Company shall terminate the Executive's employment other than for Disability and other than for Cause or (2) the Executive shall terminate his employment for Good Reason, then (i) the Company shall pay the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, the Executive's full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan); (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, an amount equal to the product of (A) the sum of (1) the Executive's annual base salary in effect at the time the Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and (2) the Executive's Average Annual Bonus, and (B) (x) if the Executive terminates his employment or the Company terminates the Executive's employment, in either case within two years after the occurrence of a Change in Control, the number two or (y) in any other case, the number one; and (iii) the Company shall continue the participation of the Executive for a period of one year (except, if the Executive terminates his employment or the Company terminates the Executive's employment, in either case within two years after the occurrence of a Change in Control, such period shall be two years), in all medical, health, life and other employee "welfare" plans and programs in which the Executive participated immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall by other means provide the Executive with benefits equivalent to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. (e) If the Company shall terminate the Executive's employment other than for Cause, or the Executive shall terminate his employment for Good Reason, during the period of a Potential Change in Control or at the request of a person who, directly or indirectly, takes any action designed to cause a Change in 6 Control, then the Company shall make payments and provide benefits to the Executive under this Agreement as though a Change in Control had occurred immediately prior to such termination. A "Potential Change in Control" shall exist during the period commencing at the time the Company enters into any agreement or arrangement which, if consummated, would result in a Change in Control and ending at the time such agreement or arrangement either (i) results in a Change in Control or (ii) terminates, expires or otherwise becomes of no further force or effect. (f) For purposes of this Agreement, a "Change in Control" shall mean the first to occur of the following events: (1) (i) Any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d) of the Exchange Act, but excluding Ciba for so long as Ciba is subject to the restrictions imposed by the Governance Agreement) (a "Person") is or becomes the Beneficial Owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding Common Stock of the Company (the "Outstanding Common Stock") or (B) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the "Total Voting Power"); excluding, however, the following: (x) any acquisition by the Company or any of its affiliates or (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliates and (ii) Ciba Beneficially Owns, in the aggregate, a lesser percentage of the Total Voting Power than such Person Beneficially Owns; (2) A change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such individuals shall be hereinafter referred to as the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Company's stockholders, was made or approved pursuant to the Governance Agreement or by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be so considered a member of the Incumbent Board; (3) The effective date of a reorganization, merger or consolidation by the Company, or the approval by the stockholders of the Company 7 of a sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction (1) pursuant to which all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and Total Voting Power, as the case may be, or (2) after which no Person beneficially owns a greater percentage of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of such corporation than does Ciba; (4) Ciba shall become the Beneficial Owner of more than 57.5% of the Total Voting Power; or (5) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. For purposes of this Section 4(f), (x) the term "Ciba" shall mean Ciba Specialty Chemicals Holding Inc., a Swiss corporation, together with it affiliates holding Company voting securities pursuant to Section 4.01(b) of the Governance Agreement, (y) the term "Governance Agreement" shall have the meaning given in that certain Strategic Alliance Agreement among the Company, Ciba-Geigy Limited and Ciba Geigy Corporation, dated as of September 29, 1995, as amended, and any of their respective permitted successors or assigns thereunder, and (z) the consolidation between Ciba and Clariant shall be deemed not to be a "Change in Control." (g) Notwithstanding any other provisions of this Agreement, in the event that any payment, benefit, property or right received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments, benefits, properties and rights being hereinafter referred to as the "Total Payments") would be subject (in whole or part) to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any successor provision (the "Code"), then the payments and benefits provided under Section 4(d) or 4(e) hereof ("Severance Payments") which are cash shall first 8 be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax, but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments); provided, however, that the Executive may elect (by waiving the receipt or enjoyment of all or any portion of the noncash Severance Payments at such time and in such manner that the Severance Payments so waived shall not constitute a "payment" within the meaning of section 280G(b) of the Code) to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the written opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm (the "Auditor") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the written opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and all such opinions or advice shall be in writing, shall be attached to the statement and shall expressly state that the Executive may rely thereon). If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the proper application of the first sentence of this Section 4(g). The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 9 5. NO MITIGATION. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 6. COVENANT NOT TO COMPETE. The Executive acknowledges that, as a senior management employee, the Executive will be involved, on a high level, in the development, implementation and management of the Company's global business plans, including those which involve the Company's finances, research, marketing, planning, operations, and acquisition strategies. By virtue of the Executive's position and knowledge of the Company, the Executive acknowledges that his employment by a competitor of the Company represents a serious competitive danger to the Company, and that the use of the Executive's experience and knowledge about the Company's business, strategies and plans by a competitor can and would constitute a valuable competitive advantage over the Company. In view of the foregoing, and in consideration of the payments made to the Executive under this Agreement, the Executive covenants and agrees that, if the Executive's employment is terminated and the Company has fulfilled its obligations under this Agreement, for a period of two years after the Date of Termination the Executive will not engage, in any capacity, directly or indirectly, including but not limited as employee, agent, consultant, manager, executive, owner or stockholder (except as a passive investor holding less than a 5% equity interest in any enterprise) in any business entity engaged in competition with the Business conducted by the Company on the Date of Termination anywhere in the world; provided, that the Executive may be employed by a competitor of the Company so long as the Executive's duties and responsibilities do not relate directly or indirectly to the business segment of the new employer which is actually or potentially competitive with the Business. 7. ASSIGNMENT OF INVENTIONS. The Executive agrees that all processes, technologies, designs and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not (collectively "Inventions"), conceived, developed, invented or made by the Executive prior to the Date of Termination shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. At the request of the Company, the Executive shall (i) promptly disclose such Inventions to the Company, (ii) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign 10 countries, (iii) sign all papers necessary to carry out the foregoing, and (iv) give testimony or otherwise take action in support of the Executive's status as the inventor of such Inventions, in each case at the Company's expense. 8. CONFIDENTIALITY. In addition to any obligation regarding Inventions, the Executive acknowledges that the trade secrets and confidential and proprietary information of the Company, its subsidiaries and affiliates, including without limitation: (a) unpublished information concerning: (i) research activities and plans, (ii) marketing or sales plans, (iii) pricing or pricing strategies, (iv) operational techniques, and (v) strategic plans; (b) unpublished financial information, including information concerning revenues, profits and profit margins; (c) internal confidential manuals; and (d) any "material inside information" as such phrase is used for purposes of the Securities Exchange Act of 1934, as amended; all constitute valuable, special and unique information of the Company, its subsidiaries and affiliates. In recognition of this fact, the Executive agrees that the Executive will not disclose any such trade secrets or confidential or proprietary information (except (i) information which becomes publicly available without violation of this Agreement, (ii) information of which the Executive, prior to disclosure by the Executive, did not know and should not have known was disclosed to the Executive by a third party in violation of any other person's confidentiality or fiduciary obligation, (iii) disclosure required in connection with any legal process (provided the Executive promptly gives the Company written notice of any legal process seeking to compel such disclosure and reasonably cooperates in the Company's attempt to eliminate or limit the scope of such disclosure) and (iv) disclosure while employed by the Company which the Executive reasonably and in good faith believes to be in or not opposed to the interests of the Company) to any person, firm, corporation, association or other entity, for any reason or purpose whatsoever, nor shall the Executive make use of any such information for the benefit of any person, firm, corporation or other entity except on behalf of the Company, its subsidiaries and affiliates. 9. BINDING AGREEMENT. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, 11 successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided in this Agreement, shall be paid to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 10. NOTICE. Notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered, if delivered personally, or mailed by United States certified or registered mail, return receipt requested, postage prepaid, and when received if delivered otherwise, addressed as follows: If to the Executive: If to the Company: Hexcel Corporation 281 Tresser Blvd. Stamford, CT 06901-3238 Attn: General Counsel or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. GENERAL PROVISIONS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive (or, if applicable, his legal representative) and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of [Connecticut] without regard to its conflicts of law principles. 12. VALIDITY AND ENFORCEABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. It is the 12 desire and intent of the parties that the provisions of Sections 6, 7 and 8 hereof shall be enforceable to the fullest extent permitted by applicable law or public policy. If any such provision or the application thereof to any person or circumstance shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such provision shall be construed in a manner so as to permit its enforceability to the fullest extent permitted by applicable law or public policy. In any case, the remaining provisions or the application thereof to any person or circumstance other than those to which they have been held invalid or unenforceable, shall remain in full force and effect. 13. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of [Connecticut], in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of the provisions of Sections 6, 7 or 8 hereof. 15. ENTIRE AGREEMENT. This Agreement supercedes that certain agreement between the Company and the Executive dated _______, which hereby is terminated 16. REMEDIES. The Executive agrees that in addition to any other remedy provided at law or in equity or in this Agreement, the Company shall be entitled to a temporary restraining order and both preliminary and permanent injunctions restraining Executive from violating any provision of Sections 6, 7 and 8 hereof. In the event the Company fails to make any payment to the Executive when due, the Executive, in addition to any other remedy available at law or in equity, shall be entitled to interest on such unpaid amounts from the date such payment was due to the date actual payment is received by the Executive, at the legal rate applicable to unpaid judgments. The Company shall pay to the Executive all legal, audit, and actuarial fees and expenses as a result of the termination of employment, including all such fees and expenses incurred in contesting, arbitrating or disputing any action or failure to act by the Company or in seeking to obtain or enforce any right under this Agreement or any other plan, arrangement or agreement with the Company, provided that the Executive has obtained a final determination supporting at least part of his claim and there has been no determination that the balance of his claim was made in bad faith. 13 17. CONSENT TO JURISDICTION AND FORUM. The Executive hereby expressly and irrevocably agrees that any action, whether at law or in equity, permitted to be brought by the Company under this Agreement may be brought in the State of [Connecticut] or in any federal court therein. The Executive hereby irrevocably consents to personal jurisdiction in such court and to accept service of process in accordance with the provisions of the laws of the State of [Connecticut]. In the event the Company commences any such action in the State of [Connecticut] or in any Federal court therein, the Company shall reimburse the Executive for the reasonable expenses incurred by the Executive in his appearance in such forum which are in addition to the expenses the Executive would have incurred by appearing in the forum of the Executive's residence at that time, including but not limited to additional legal fees. HEXCEL CORPORATION By: __________________________________ Name: Title: ______________________________________ Executive 14 SCHEDULE TO FORM OF EXECUTIVE SEVERANCE AGREEMENT LIST OF EACH EXECUTIVE OFFICER THAT IS A PARTY TO THIS FORM OF AGREEMENT WITH HEXCEL: Wayne Pensky David Wong 15 EX-10.7 8 EXHIBIT 10.7 EXHIBIT 10.7 EXECUTIVE SEVERANCE AGREEMENT AGREEMENT made as of the 3rd day of February, 1999, between HEXCEL CORPORATION, a Delaware corporation with offices at Stamford, Connecticut (the "Company"), and _________________________ (the "Executive"). WHEREAS, the Company is engaged in the business of developing, manufacturing and marketing carbon fibers, fabrics, high-performance composite materials and parts therefrom for the commercial aerospace, space and defense, recreation and industrial markets throughout the world, and hereafter may engage in other areas of business (collectively, the "Business"); WHEREAS, the Executive, as a result of training, expertise and personal application over the years, has acquired and will continue to acquire considerable and unique expertise and knowledge which are of substantial value to the Company in the conduct, management and operation of the Business; WHEREAS, the Company is willing to provide the Executive with certain benefits in the event of the termination of the Executive's employment with the Company, including in the event of a Change in Control (as hereinafter defined); and WHEREAS, the Executive, in consideration of receiving such benefits from the Company, is willing to afford certain protection to the Company in regard to the confidentiality of its information, ownership of inventions and competitive activities. NOW, THEREFORE, in consideration of the mutual covenants of the Executive and the Company and of the Executive's continued employment with the Company, the parties agree as follows: 1. POSITION AND DUTIES. The Executive shall initially serve as _________ of the Company and shall have such duties, responsibilities, and authority as he may have as of the date hereof (or any position to which he may be promoted after the date hereof). The Executive shall devote substantially all his working time and efforts to the business and affairs of the Company. 2. PLACE OF PERFORMANCE. In connection with the Executive's employment by the Company, the Executive shall be based at the principal executive offices of the Company in [Stamford, Connecticut], except for required travel on the Company's business. 3. TERMINATION. The Executive's employment hereunder may be terminated under the following circumstances: (a) DEATH. The Executive's employment hereunder shall automatically terminate upon his death. (b) DISABILITY. The Company may terminate the Executive's employment hereunder due to the Executive's inability to perform the customary duties of his employment by reason of any medical or psychological illness or condition that is expected to be permanent or of indefinite duration, excluding any such illness or condition that results from intentional self-inflicted injury, alcoholism or drug abuse. (c) CAUSE. The Company may terminate the Executive's employment hereunder for Cause. The following shall constitute Cause: (i) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's incapability due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination by the Executive for Good Reason) after demand for substantial performance is delivered by the Company that specifically identifies the manner in which the Company believes the Executive has not substantially performed his duties; or (ii) the willful engaging by the Executive in misconduct that is demonstrably and materially injurious to the Company, monetarily or otherwise including, but not limited to, conduct that violates the covenant not to compete in Section 6 hereof. No act, or failure to act, on the Executive's part shall be considered "willful" unless done, or omitted to be done, by him not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause without (i) reasonable notice from the Board to the Executive setting forth the reasons for the Company's intention to terminate for Cause, (ii) delivery to the Executive of a resolution duly adopted by the affirmative vote of two-thirds or more of the Board then in office (excluding the Executive if he is then a member of the Board) at a meeting of the Board called and held for such purpose, finding that in the good faith opinion of the Board, the Executive was guilty of the conduct herein set forth and specifying the particulars thereof in detail, (iii) an opportunity for the Executive, together with his counsel, to be heard before the Board, and (iv) delivery to the Executive of a Notice of Termination from the Board specifying the particulars thereof in detail. 2 (d) GOOD REASON. The Executive may terminate his employment hereunder for Good Reason. The following shall constitute Good Reason: (i) A diminution in the Executive's position, duties, responsibilities or authority (except during periods when the Executive is unable to perform all or substantially all of his duties or responsibilities on account of illness (either physical or mental) or other incapacity); (ii) A reduction in the Executive's annual rate of base salary as in effect on the date hereof or as the same may be increased from time to time; (iii) Failure by the Company to continue in effect any compensation plan in which the Executive participates which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute plan) has been made with respect to such plan, or failure by the Company to continue the Executive's participation therein (or in such substitute plan) on a basis not materially less favorable to the Executive; (iv) Failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating (except for across-the-board changes similarly affecting all senior executives of the Company and all senior executives of any Person in control of the Company), or failure by the Company to continue to provide the Executive with the number of paid vacation days per year equal to the greater of (i) _____ and (ii) the number to which the Executive is entitled in accordance with the Company's vacation policy; (v) Failure to provide facilities or services which are suitable to the Executive's position; (vi) Failure of any successor (whether direct or indirect, by purchase of stock or assets, merger, consolidation or otherwise) to the Company to assume the Company's obligations hereunder or failure by the Company to remain liable to the Executive hereunder after such assumption; (vii) Any termination by the Company of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of a Notice of Termination contained in this Agreement; 3 (viii) The relocation of the Executive's principal place of employment to a location more than fifty (50) miles from the Executive's principal place of employment as at the date hereof; or (ix) Failure to pay the Executive any portion of current or deferred compensation within seven (7) days of the date such compensation is due. The Executive's continued employment shall not constitute consent to, or waiver of rights with respect to, any circumstance constituting Good Reason hereunder; provided, however, that the Executive shall be deemed to have waived his rights pursuant to circumstances constituting Good Reason hereunder if he shall not have provided the Company a Notice of Termination within ninety (90) days following his knowledge of the occurrence of circumstances constituting Good Reason. (e) OTHER THAN DEATH, DISABILITY, CAUSE OR GOOD REASON. (i) The Company may terminate the Executive's employment, other than as provided in Sections (3)(a), (b) or (c) hereof, upon written notice to the Executive and (ii) the Executive may terminate his employment with the Company, other than as provided in Section 3(d) hereof, upon written notice to the Company. (f) NOTICE OF TERMINATION; DATE OF TERMINATION. Any termination of the Executive's employment by the Company or by the Executive (other than a termination pursuant to Section 3(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 10. For purposes of this Agreement, (i) "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (ii) "Date of Termination" shall mean (A) if the Executive's employment is terminated pursuant to Section 3(a), the date of his death, (B) if the Executive's employment is terminated pursuant to Section 3(b), thirty days after Notice of Termination is given (provided that the Executive shall not have returned substantially to full-time performance of the Executive's duties during such thirty day period), (C) if the Executive's employment is terminated pursuant to Sections 3(c), (d) or (e), the date specified in the Notice of Termination (provided that such date shall not be more than thirty days from the date Notice of Termination is given and, in the case of a termination for Cause, shall not be less than fifteen days from the date Notice of Termination is given), or (D) if the Executive terminates his employment and fails to provide written notice to the Company of such termination, the date of such termination. 4 4. COMPENSATION UPON DEATH, DISABILITY OR TERMINATION. (a) If the Executive's employment is terminated by his death, the Company shall pay the Executive's legal representative (i) at the time such payments are due, the Executive's full base salary through the Date of Termination at the rate in effect at the Date of Termination and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan) and (ii) within ten days following the date of the Executive's death, a lump sum payment in an amount equal to the sum of (A) the Executive's annual base salary in effect as of the Date of Termination and (B) the Executive's Average Annual Bonus (the term "Average Annual Bonus" shall mean the average of the last three annual bonus amounts awarded to the Executive under the Company's Management Incentive Compensation Plan, or any successor, alternate or supplemental plan (the "Bonus Plan") or, if the Executive has not participated in the Bonus Plan for three completed annual award periods, the average of the annual bonus amounts awarded, provided that any award made in respect of an annual award period in which the Executive did not participate for the full period (the "Pro- Rata Award") shall be annualized for purposes of computing the Average Bonus Amount by multiplying the Pro-Rata Award by a fraction, of which the numerator is 365 and the denominator is the number of days during which the Executive participated in such annual award period). (b) During any period that the Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness the Executive shall continue to receive his full base salary at the rate then in effect for such period (offset by any payments to the Executive received pursuant to disability benefit plans maintained by the Company) until his employment is terminated pursuant to Section 3(b) hereof; and within ten days following such termination, the Company shall pay the Executive (i) all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan) and (ii) a lump sum payment in an amount equal to the sum of (A) the Executive's annual base salary in effect as of the Date of Termination and (B) the Executive's Average Annual Bonus. (c) If the Executive's employment is terminated by the Company for Cause or by the Executive for other than Good Reason, the Company shall at the time such payments are due pay the Executive his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus 5 Plan), and the Company shall, thereafter, have no further obligations to the Executive under this Agreement. (d) If (1) the Company shall terminate the Executive's employment other than for Disability and other than for Cause or (2) the Executive shall terminate his employment for Good Reason, then (i) the Company shall pay the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, the Executive's full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and all other unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination including any reimbursable business expenses and amounts earned under any compensation plan or program (including the Bonus Plan); (ii) in lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive on the Date of Termination, by wire transfer to the bank account designated by the Executive, an amount equal to the product of (A) the sum of (1) the Executive's annual base salary in effect at the time the Notice of Termination is given (disregarding any reduction in salary rate which would constitute a Good Reason) and (2) the Executive's Average Annual Bonus, and (B) (x) if the Executive terminates his employment or the Company terminates the Executive's employment, in either case within two years after the occurrence of a Change in Control, the number three or (y) in any other case, the number one; and (iii) the Company shall continue the participation of the Executive for a period of one year (except, if the Executive terminates his employment or the Company terminates the Executive's employment, in either case within two years after the occurrence of a Change in Control, such period shall be three years), in all medical, health, life and other employee "welfare" plans and programs in which the Executive participated immediately prior to the Date of Termination, provided that the Executive's continued participation is possible under the general terms and provisions of such plans and programs. In the event that the Executive's participation in any such plan or program is barred, the Company shall by other means provide the Executive with benefits equivalent to those which the Executive would otherwise have been entitled to receive under such plans and programs from which his continued participation is barred. (e) If the Company shall terminate the Executive's employment other than for Cause, or the Executive shall terminate his employment for Good Reason, during the period of a Potential Change in Control or at the request of a person who, directly or indirectly, takes any action designed to cause a Change in 6 Control, then the Company shall make payments and provide benefits to the Executive under this Agreement as though a Change in Control had occurred immediately prior to such termination. A "Potential Change in Control" shall exist during the period commencing at the time the Company enters into any agreement or arrangement which, if consummated, would result in a Change in Control and ending at the time such agreement or arrangement either (i) results in a Change in Control or (ii) terminates, expires or otherwise becomes of no further force or effect. (f) For purposes of this Agreement, a "Change in Control" shall mean the first to occur of the following events: (1) (i) Any person (as defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as modified and used in Sections 13(d) and 14(d) of the Exchange Act, but excluding Ciba for so long as Ciba is subject to the restrictions imposed by the Governance Agreement) (a "Person") is or becomes the Beneficial Owner (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding Common Stock of the Company (the "Outstanding Common Stock") or (B) the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the Company (the "Total Voting Power"); excluding, however, the following: (x) any acquisition by the Company or any of its affiliates or (y) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliates and (ii) Ciba Beneficially Owns, in the aggregate, a lesser percentage of the Total Voting Power than such Person Beneficially Owns; (2) A change in the composition of the Board such that the individuals who, as of the effective date of this Agreement, constitute the Board (such individuals shall be hereinafter referred to as the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this definition, that any individual who becomes a director subsequent to such effective date, whose election, or nomination for election by the Company's stockholders, was made or approved pursuant to the Governance Agreement or by a vote of at least a majority of the Incumbent Directors (or directors whose election or nomination for election was previously so approved) shall be considered a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person or legal entity other than the Board shall not be so considered a member of the Incumbent Board; (3) The effective date of a reorganization, merger or consolidation by the Company, or the approval by the stockholders of the Company 7 of a sale or other disposition of all or substantially all of the assets of the Company ("Corporate Transaction"); excluding, however, such a Corporate Transaction (1) pursuant to which all or substantially all of the individuals and entities who are the beneficial owners, respectively, of the Outstanding Common Stock and Total Voting Power immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50%, respectively, of the outstanding common stock and the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Common Stock and Total Voting Power, as the case may be, or (2) after which no Person beneficially owns a greater percentage of the combined voting power of the then outstanding securities entitled to vote generally in the election of directors of such corporation than does Ciba; (4) Ciba shall become the Beneficial Owner of more than 57.5% of the Total Voting Power; or (5) The approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. For purposes of this Section 4(f), (x) the term "Ciba" shall mean Ciba Specialty Chemicals Holding Inc., a Swiss corporation, together with it affiliates holding Company voting securities pursuant to Section 4.01(b) of the Governance Agreement, (y) the term "Governance Agreement" shall have the meaning given in that certain Strategic Alliance Agreement among the Company, Ciba-Geigy Limited and Ciba Geigy Corporation, dated as of September 29, 1995, as amended, and any of their respective permitted successors or assigns thereunder, and (z) the consolidation between Ciba and Clariant shall be deemed not to be a "Change in Control." (g) Notwithstanding any other provisions of this Agreement, in the event that any payment, benefit, property or right received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or any Person affiliated with the Company or such Person) (all such payments, benefits, properties and rights being hereinafter referred to as the "Total Payments") would be subject (in whole or part) to the tax (the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any successor provision (the "Code"), then the payments and benefits provided under Section 4(d) or 4(e) hereof ("Severance Payments") which are cash shall first 8 be reduced, and the noncash Severance Payments shall thereafter be reduced, to the extent necessary so that no portion of the Total Payments is subject to the Excise Tax, but only if (A) the net amount of such Total Payments, as so reduced (and after subtracting the net amount of federal, state and local income taxes on such reduced Total Payments) is greater than or equal to (B) the net amount of such Total Payments without such reduction (but after subtracting the net amount of federal, state and local income taxes on such Total Payments and the amount of Excise Tax to which the Executive would be subject in respect of such unreduced Total Payments); provided, however, that the Executive may elect (by waiving the receipt or enjoyment of all or any portion of the noncash Severance Payments at such time and in such manner that the Severance Payments so waived shall not constitute a "payment" within the meaning of section 280G(b) of the Code) to have the noncash Severance Payments reduced (or eliminated) prior to any reduction of the cash Severance Payments. For purposes of determining whether and the extent to which the Total Payments will be subject to the Excise Tax (i) no portion of the Total Payments the receipt or enjoyment of which the Executive shall have waived at such time and in such manner as not to constitute a "payment" within the meaning of section 280G(b) of the Code shall be taken into account, (ii) no portion of the Total Payments shall be taken into account which, in the written opinion of tax counsel ("Tax Counsel") reasonably acceptable to the Executive and selected by the accounting firm (the "Auditor") which was, immediately prior to the Change in Control, the Company's independent auditor, does not constitute a "parachute payment" within the meaning of section 280G(b)(2) of the Code (including by reason of section 280G(b)(4)(A) of the Code) and, in calculating the Excise Tax, no portion of such Total Payments shall be taken into account which, in the written opinion of Tax Counsel, constitutes reasonable compensation for services actually rendered, within the meaning of section 280G(b)(4)(B) of the Code, in excess of the Base Amount allocable to such reasonable compensation, and (iii) the value of any noncash benefit or any deferred payment or benefit included in the Total Payments shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. At the time that payments are made under this Agreement, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and all such opinions or advice shall be in writing, shall be attached to the statement and shall expressly state that the Executive may rely thereon). If the Executive objects to the Company's calculations, the Company shall pay to the Executive such portion of the Severance Payments (up to 100% thereof) as the Executive determines is necessary to result in the proper application of the first sentence of this Section 4(g). The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 9 5. NO MITIGATION. The Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 6. COVENANT NOT TO COMPETE. The Executive acknowledges that, as a senior management employee, the Executive will be involved, on a high level, in the development, implementation and management of the Company's global business plans, including those which involve the Company's finances, research, marketing, planning, operations, and acquisition strategies. By virtue of the Executive's position and knowledge of the Company, the Executive acknowledges that his employment by a competitor of the Company represents a serious competitive danger to the Company, and that the use of the Executive's experience and knowledge about the Company's business, strategies and plans by a competitor can and would constitute a valuable competitive advantage over the Company. In view of the foregoing, and in consideration of the payments made to the Executive under this Agreement, the Executive covenants and agrees that, if the Executive's employment is terminated and the Company has fulfilled its obligations under this Agreement, for a period of three years after the Date of Termination the Executive will not engage, in any capacity, directly or indirectly, including but not limited as employee, agent, consultant, manager, executive, owner or stockholder (except as a passive investor holding less than a 5% equity interest in any enterprise) in any business entity engaged in competition with the Business conducted by the Company on the Date of Termination anywhere in the world; provided, that the Executive may be employed by a competitor of the Company so long as the Executive's duties and responsibilities do not relate directly or indirectly to the business segment of the new employer which is actually or potentially competitive with the Business. 7. ASSIGNMENT OF INVENTIONS. The Executive agrees that all processes, technologies, designs and inventions, including new contributions, improvements, ideas and discoveries, whether patentable or not (collectively "Inventions"), conceived, developed, invented or made by the Executive prior to the Date of Termination shall belong to the Company, provided that such Inventions grew out of the Executive's work with the Company or any of its subsidiaries or affiliates, are related in any manner to the business (commercial or experimental) of the Company or any of its subsidiaries or affiliates or are conceived or made on the Company's time or with the use of the Company's facilities or materials. At the request of the Company, the Executive shall (i) promptly disclose such Inventions to the Company, (ii) assign to the Company, without additional compensation, all patent and other rights to such Inventions for the United States and foreign 10 countries, (iii) sign all papers necessary to carry out the foregoing, and (iv) give testimony or otherwise take action in support of the Executive's status as the inventor of such Inventions, in each case at the Company's expense. 8. CONFIDENTIALITY. In addition to any obligation regarding Inventions, the Executive acknowledges that the trade secrets and confidential and proprietary information of the Company, its subsidiaries and affiliates, including without limitation: (a) unpublished information concerning: (i) research activities and plans, (ii) marketing or sales plans, (iii) pricing or pricing strategies, (iv) operational techniques, and (v) strategic plans; (b) unpublished financial information, including information concerning revenues, profits and profit margins; (c) internal confidential manuals; and (d) any "material inside information" as such phrase is used for purposes of the Securities Exchange Act of 1934, as amended; all constitute valuable, special and unique information of the Company, its subsidiaries and affiliates. In recognition of this fact, the Executive agrees that the Executive will not disclose any such trade secrets or confidential or proprietary information (except (i) information which becomes publicly available without violation of this Agreement, (ii) information of which the Executive, prior to disclosure by the Executive, did not know and should not have known was disclosed to the Executive by a third party in violation of any other person's confidentiality or fiduciary obligation, (iii) disclosure required in connection with any legal process (provided the Executive promptly gives the Company written notice of any legal process seeking to compel such disclosure and reasonably cooperates in the Company's attempt to eliminate or limit the scope of such disclosure) and (iv) disclosure while employed by the Company which the Executive reasonably and in good faith believes to be in or not opposed to the interests of the Company) to any person, firm, corporation, association or other entity, for any reason or purpose whatsoever, nor shall the Executive make use of any such information for the benefit of any person, firm, corporation or other entity except on behalf of the Company, its subsidiaries and affiliates. 9. BINDING AGREEMENT. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, 11 successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided in this Agreement, shall be paid to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 10. NOTICE. Notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered, if delivered personally, or mailed by United States certified or registered mail, return receipt requested, postage prepaid, and when received if delivered otherwise, addressed as follows: If to the Executive: If to the Company: Hexcel Corporation 281 Tresser Blvd. Stamford, CT 06901-3238 Attn: General Counsel or to such other address as any party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 11. GENERAL PROVISIONS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive (or, if applicable, his legal representative) and the Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of [Connecticut] without regard to its conflicts of law principles. 12. VALIDITY AND ENFORCEABILITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. It is the 12 desire and intent of the parties that the provisions of Sections 6, 7 and 8 hereof shall be enforceable to the fullest extent permitted by applicable law or public policy. If any such provision or the application thereof to any person or circumstance shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such provision shall be construed in a manner so as to permit its enforceability to the fullest extent permitted by applicable law or public policy. In any case, the remaining provisions or the application thereof to any person or circumstance other than those to which they have been held invalid or unenforceable, shall remain in full force and effect. 13. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in the State of [Connecticut], in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Company shall be entitled to seek a restraining order or injunction in any court of competent jurisdiction to prevent any continuation of any violation of the provisions of Sections 6, 7 or 8 hereof. 15. ENTIRE AGREEMENT. This Agreement supercedes that certain agreement between the Company and the Executive dated _______, which hereby is terminated 16. REMEDIES. The Executive agrees that in addition to any other remedy provided at law or in equity or in this Agreement, the Company shall be entitled to a temporary restraining order and both preliminary and permanent injunctions restraining Executive from violating any provision of Sections 6, 7 and 8 hereof. In the event the Company fails to make any payment to the Executive when due, the Executive, in addition to any other remedy available at law or in equity, shall be entitled to interest on such unpaid amounts from the date such payment was due to the date actual payment is received by the Executive, at the legal rate applicable to unpaid judgments. The Company shall pay to the Executive all legal, audit, and actuarial fees and expenses as a result of the termination of employment, including all such fees and expenses incurred in contesting, arbitrating or disputing any action or failure to act by the Company or in seeking to obtain or enforce any right under this Agreement or any other plan, arrangement or agreement with the Company, provided that the Executive has obtained a final determination supporting at least part of his claim and there has been no determination that the balance of his claim was made in bad faith. 13 17. CONSENT TO JURISDICTION AND FORUM. The Executive hereby expressly and irrevocably agrees that any action, whether at law or in equity, permitted to be brought by the Company under this Agreement may be brought in the State of [Connecticut] or in any federal court therein. The Executive hereby irrevocably consents to personal jurisdiction in such court and to accept service of process in accordance with the provisions of the laws of the State of [Connecticut]. In the event the Company commences any such action in the State of [Connecticut] or in any Federal court therein, the Company shall reimburse the Executive for the reasonable expenses incurred by the Executive in his appearance in such forum which are in addition to the expenses the Executive would have incurred by appearing in the forum of the Executive's residence at that time, including but not limited to additional legal fees. HEXCEL CORPORATION By: __________________________________ Name: Title: ______________________________________ Executive SCHEDULE TO FORM OF 14 EXECUTIVE SEVERANCE AGREEMENT LIST OF EACH EXECUTIVE OFFICER THAT IS A PARTY TO THIS FORM OF AGREEMENT WITH HEXCEL: Harold E. Kinne Stephen C. Forsyth Ira J. Krakower Joseph H. Shaulson 15 EX-27 9 EXHIBIT 27
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 2,458 0 207,481 7,597 204,748 435,808 623,245 202,052 1,396,987 216,178 836,718 0 0 373 300,749 1,396,987 316,170 316,170 245,399 245,399 0 0 19,106 8,063 2,839 5,208 0 0 0 5,208 0.14 0.14
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