HEXCEL CORP /DE/ - 10-K Annual Report

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ACCESSION NUMBER: 0001047469-99-012335
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 16
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990327

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-K
SEC ACT: SEC
FILE NUMBER: 001-08472
FILM NUMBER: 99578068

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

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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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x
- - --------------------------------------------------------------------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1999
or
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Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission File Number 1-8472
Hexcel Corporation
(Exact name of registrant as specified in its charter)
Delaware 94-1109521
(State of Incorporation) (I.R.S. Employer Identification No.)

281 Tresser Boulevard
Stamford, Connecticut 06901
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (203) 969-0666
Securities registered pursuant to Section
12(b) of the Act:

Title of each class Name of each exchange on which registered
- - ---------------------- -------------------------------------------------

COMMON STOCK NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE

Securities registered pursuant to Section 12(g) of the Act:
7% CONVERTIBLE SUBORDINATED NOTES DUE 2003
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
9 3/4% SENIOR SUBORDINATED NOTES DUE 2009

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value as of March 23, 2000 of voting stock held by
nonaffiliates of the registrant: $95,092,581

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a U.S. Bankruptcy Court. Yes X No

The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

Class Outstanding as of March 23, 2000
- - -------------------- ----------------------------------

COMMON STOCK 36,607,842

Documents Incorporated by Reference:
Proxy Statement for Annual Meeting of Stockholders (to the extent specified
herein) -- Part III.

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PART I

ITEM 1. Business.

General Development of Business

Hexcel Corporation, founded in 1946, was incorporated in California in
1948, and reincorporated in Delaware in 1983. Hexcel Corporation, together with
its subsidiaries (herein referred to as "Hexcel" or the "Company"), is a leading
producer of advanced structural materials. The Company develops, manufactures
and markets lightweight, high-performance reinforcement products, composite
materials and engineered products for use in the commercial aerospace, space and
defense, electronics, and industrial markets. The Company's products are used in
a wide variety of end products, such as commercial and military aircraft, space
launch vehicles and satellites, printed circuit boards ("PCBs"), computers,
cellular telephones, televisions, high-speed trains and ferries, cars, trucks,
windmill blades, reinforcements for bridges and other structures, window blinds,
skis and snowboards, golf clubs, fishing poles, tennis rackets and bicycles.

The Company serves international markets through manufacturing facilities
and sales offices located in the United States and Europe, and through sales
offices located in Europe, Asia, Australia and South America. The Company is
also a member of six joint ventures, four of which manufacture and market
reinforcement products and composite materials in Europe, Asia and the United
States, and two of which will manufacture composite structures and interiors in
Asia.

In December, the Company announced a review of strategic alternatives for
its Engineered Products business, including a possible sale. The review is part
of the Company's on-going efforts to optimize Hexcel's business portfolio as the
world's leading advanced structural materials company.

Recent Acquisition History

Hexcel acquired the industrial fabrics business of Clark-Schwebel, Inc. and
its subsidiaries ("Clark-Schwebel") on September 15, 1998. The business acquired
from Clark-Schwebel is engaged in the manufacture and sale of high-quality
fiberglass fabrics, which are used to make PCBs for electronic equipment such as
computers, cellular telephones, televisions and automobiles. This business also
produces high-performance specialty products for use in insulation, filtration,
wall and facade claddings, soft body armor and reinforcements for composite
materials.

The acquisition of the Clark-Schwebel business was an important strategic
transaction for Hexcel. The acquisition established Hexcel as a leading global
materials supplier to the electronics and telecommunications industries, which
the Company believes have attractive long-term growth potential. Furthermore,
the acquisition added to Hexcel's revenue base and has further diversified the
Company's business beyond the historically cyclical commercial aerospace market.

On September 30, 1997, the Company acquired from Fiberite, Inc.
("Fiberite") its satellite business consisting of intangible assets and
inventory, and certain non-exclusive worldwide rights to other composite
materials technologies. The Fiberite acquisition expanded Hexcel's existing role
as a supplier of carbon fiber, prepreg and honeycomb to launch vehicle and space
satellite programs and expanded the Company's offering of prepregs for
commercial and military aerospace applications.

Further discussion of the Company's business acquisitions is contained
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and in Notes 1 and 2 to the accompanying
consolidated financial statements included in this Annual Report on Form 10-K.

1

Business Segments and Overview

Hexcel is a vertically integrated manufacturer of products within a single
industry: Advanced Structural Materials. Hexcel's advanced structural materials
business is organized around three strategic business segments: reinforcement
products, composite materials and engineered products. The following table
identifies, by each of these segments, the Company's principal products and
examples of the primary end-uses:

- - -------------------------------- ------------------------ ------------------------------------------------------------

BUSINESS SEGMENTS PRODUCTS PRIMARY END-USE
- - -------------------------------- ------------------------ ------------------------------------------------------------

REINFORCEMENT Carbon Fibers o Raw materials for industrial fabrics and prepregs
PRODUCTS o Filament winding for various space, defense and
industrial applications

Industrial Fabrics o Printed circuit boards
o Raw materials for prepregs and honeycomb
o Various marine applications
o Window blinds
o Insulation
o Metal and fume filtration systems
o Soft body armor
o Civil engineering and construction applications

- - -------------------------------- ------------------------ -----------------------------------------------------------

COMPOSITE MATERIALS Prepregs o Raw materials for composite structures and
interiors
o Semi-finished aircraft components
o Munitions and defense systems
o Skis, snowboards, golf club shafts, fishing rods
and tennis rackets

Structural Adhesives o Bonding of structural materials and components,
including composite panels

Honeycomb, o Raw materials for composite structures and
Honeycomb interiors
Parts & Composite o Semi-finished aircraft components used in:
Panels Helicopter blades
Aircraft surfaces (flaps,wing tips, elevators and
fairings
High-speed ferries, truck and train components
Automotive components
Space shuttle doors

- - -------------------------------- ------------------------ ------------------------------------------------------------
ENGINEERED PRODUCTS Composite Structures o Aircraft structures and finished aircraft
components, including:
Wing-to-body and flap track fairings
Radomes
Engine cowls and inlet ducts
Wing panels

Interiors o OEM and retrofit aircraft interiors, including:
Overhead storage compartments
Lavatories
Sidewalls and ceilings

- - -------------------------------- ------------------------ ------------------------------------------------------------

2

Reinforcement Products

The Reinforcement Products business segment manufactures and markets carbon
fibers and industrial fabrics. Hexcel expanded this business segment in 1998
with the acquisition of the Clark-Schwebel business.

Carbon Fibers: Carbon fibers are manufactured for sale to third party
customers and for use by Hexcel in manufacturing certain industrial fabrics and
composite materials. Carbon fibers are woven into carbon fabrics, used as
reinforcement in conjunction with a resin matrix to produce prepregs, and used
in filament winding and advanced fiber placement to produce various other
composite materials. Key product applications include structural components for
commercial and military aircraft and space launch vehicles, as well as certain
other applications such as golf club shafts and tennis racquets.

Industrial Fabrics: Industrial fabrics are made from a variety of fibers,
including several types of fiberglass as well as carbon, aramid, quartz, ceramic
and other specialty reinforcements. These fabrics are sold to third-party
customers for use in a wide range of products, including PCBs, window coverings
and other architectural products, soft body armor, and a variety of structural
materials and components used in aerospace, marine and rail applications. These
fabrics are also used internally by Hexcel to manufacture prepregs and other
composite materials.

Hexcel's net sales and pro forma net sales of reinforcement products to
third party customers, after giving effect to the acquisition of the
Clark-Schwebel business as if the transaction had occurred at the beginning of
1997, were as follows:

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(In millions) 1999 1998 1997
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- - -------------------------------------------------------------------- ------- ---------- --- -------- ------ --------

Net sales $ 330.9 $ 224.8 $ 171.1
Pro forma net sales 330.9 370.6 411.3
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The decrease in pro forma net sales over the last two years was the result
of various factors, starting with a reduction in demand for PCBs in 1998, due to
a change in the electronics industry inventory cycle, reduced Asian market
demand and increased competition from Asian and other producers in western
markets. This resulted in a rapid reduction in prices for glass fabrics in early
1999. In 1999, sales of reinforcement fabrics for composite materials also
declined as The Boeing Company ("Boeing") began to reduce aircraft build rates
in the second half of the year from the record levels achieved in 1998.

Approximately 25%, 37% and 42% of the Company's production of
reinforcement products was used internally to manufacture composite materials in
1999, 1998, and 1997, respectively. The percentage of production of
reinforcement products for internal use has decreased over the last two years
due to the acquisition of the Clark-Schwebel business.

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Reinforcement Products
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KEY CUSTOMERS MANUFACTURING FACILITIES
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Cytec Fiberite Anderson, SC
Isola Decatur, AL
Nelco Decines, France
Piad Les Avenieres, France
DHB Salt Lake City, UT
Second Chance Seguin, TX
Von Roll Statesville, NC
Washington, GA

- - --------------------------------------------------------------------------------

3

Composite Materials

The Composite Materials business segment has worldwide responsibility for
manufacturing and marketing prepregs, structural adhesives, honeycomb, specially
machined honeycomb parts and composite panels.

Prepregs and Structural Adhesives: Prepregs are manufactured for sale to
third party customers and for use by Hexcel in manufacturing other composite
materials and structures, including finished components for aircraft structures
and interiors. Prepregs are manufactured by combining high performance
reinforcement fabrics or unidirectional fibers with a resin matrix to form a
composite material with exceptional structural properties not present in either
of the constituent materials. Industrial fabrics used in the manufacture of
prepregs include S-2(R) and E-type fiberglass, carbon, aramid, quartz, ceramic,
Thorstrand(R), polyethylene and other specialty reinforcements. Resin matrices
include bismaleimide, cyanate ester, epoxy, phenolic, polyester, polyimide and
other specialty resins.

Hexcel designs and markets a comprehensive range of Redux(R) film
adhesives. These structural adhesives, which bond a wide range of composite,
metallic and honeycomb surfaces, are used in a variety of product applications.

Honeycomb, Honeycomb Parts and Composite Panels: Honeycomb is a unique,
lightweight, cellular structure generally composed of hexagonal nested cells.
The product is similar in appearance to a cross-sectional slice of a beehive.
The hexagonal cell design gives honeycomb a high strength-to-weight ratio and a
uniform resistance to crushing. These basic characteristics are combined with
the physical properties of the material from which the honeycomb is made to meet
various engineering requirements.

Hexcel produces honeycomb from a number of metallic and non-metallic
materials. Most metallic honeycomb is made from aluminum and is available in a
selection of alloys, cell sizes and dimensions. Non-metallic honeycomb materials
include fiberglass, carbon, thermoplastics, non-flammable aramid papers and
other specialty materials.

Hexcel sells honeycomb core material in standard block and sheet form and
in laminated panel form. In the construction of composite panels, sheets of
aluminum, stainless steel, prepreg or other laminates are bonded with adhesives
to each side of a slice of honeycomb core, creating a "sandwich" structure.
Hexcel also possesses advanced processing capabilities which enable the Company
to design and manufacture complex fabricated honeycomb parts and bonded
assemblies to meet customer specifications. Such parts and assemblies are used
as semi-finished components in the manufacture of composite structures.

The largest market for honeycomb products is the aerospace market. Hexcel
also sells honeycomb for non-aerospace applications including high-speed trains
and mass transit vehicles, automotive parts, energy absorption products, marine
vessel compartments, portable shelters, business machine cabinets and other
industrial uses. In addition, the Company produces honeycomb for its Engineered
Products business segment for use in manufacturing finished parts for airframe
manufacturers.

Hexcel's net sales of composite materials to third party customers were
$605.9 million in 1999, $658.0 million in 1998, and $581.0 million in 1997. Net
sales for composite materials are highly dependent upon commercial aircraft
build rates as further discussed under the under the captions "Markets and
Customers" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Approximately 2% of the Company's production of
composite materials are used internally to manufacture composite structures and
interiors.

4

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Composite Materials
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KEY CUSTOMERS MANUFACTURING FACILITIES
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United States: United States:
Boeing Burlington, WA
CFAN Casa Grande, AZ
Embraer Gilbert, AZ
Hawker de Havilland Lancaster, OH
Lockheed Martin Livermore, CA
Northrop Grumman Pottsville, PA
Rohr Salt Lake City, UT
United Technologies
Europe:
Europe: Dagneux, France
Aerospatiale Duxford, England
Alenia Linz, Austria
British Aerospace Parla, Spain
CASA Swindon, England
DaimlerChrylser Aerospace Welkenraedt, Belgium
- - --------------------------------------------------------------------------------

The Company also operates sales offices in Sydney, Australia; Singapore;
Shanghai, China; Sao Paulo, Brazil; Munich, Germany; and Saronno, Italy.

Engineered Products

The Engineered Products business segment has worldwide responsibility for
manufacturing and marketing composite structures and interiors, primarily for
use in the aerospace industry. As previously discussed, in December 1999, the
Company announced its intention to explore strategic alternatives for its
Engineered Products business, including a possible sale.

Composite Structures: Composite structures and structural parts are
manufactured from a variety of composite and other materials (including
prepregs, honeycomb and structural adhesives) using such manufacturing processes
as resin transfer molding, autoclave processing, multi-axis numerically
controlled machining, press laminating, heat forming and other composite
manufacturing techniques. Composite structures include such items as
wing-to-body and flap track fairings, radomes, engine cowls, inlet ducts, wing
panels and other aircraft components.

Aircraft Interiors: The interiors operations of the Engineered Products
business segment design and produce innovative, lightweight, high-strength
composite interior systems for aircraft. Aircraft interior products, which
include overhead storage bins, lavatories, sidewalls and ceilings, are sold to
Boeing and other airframe manufacturers for production of certain aircraft and
to airlines for replacement of existing interior components. With increasing
airline traffic and the trend of increased use of rolling carry-on luggage,
airlines are increasingly requesting larger overhead storage bins. The Company
has developed a patented bin extension kit to increase the size of certain
single-aisle aircraft overhead storage bins, which increases their capacity to
accommodate these larger bags. This product is being marketed to the world's
airlines.

Hexcel's net sales of engineered products to third party customers were
$214.7 million in 1999, $206.2 million in 1998, and $184.8 million in 1997. The
improvement in engineered products net sales primarily reflects the production
of structural and interior components outsourced to Hexcel by Boeing from 1997
to 1998, and expanding sales of retrofit interior products from 1998 to 1999.

5

- - --------------------------------------------------------------------------------
Engineered Products
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KEY CUSTOMERS MANUFACTURING FACILITIES
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Boeing Bellingham, WA
Continental Airlines Kent, WA
Northrop Grumman
Qantas
United Airlines
- - --------------------------------------------------------------------------------

Further discussion of Hexcel's business operations and operating segments
are contained under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and in Note 16 to the
accompanying consolidated financial statements included in this Annual Report on
Form 10-K.

Joint Ventures

In 1999, Hexcel, Boeing and Aviation Industries of China formed a joint
venture, BHA Aero Composite Parts Co., Ltd., to manufacture composite parts for
secondary structures and interior applications for commercial aircraft. Hexcel
has a 33% equity ownership interest in this joint venture, which is located in
Tianjin, China. Also in 1999, Hexcel formed another joint venture, Asian
Composites Manufacturing Sdn. Bhd., with Boeing, Sime Link Sdn. Bhd., and
Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture
composite parts for secondary structures for commercial aircraft. Hexcel has a
25% equity ownership interest in this joint venture, which is located in Alar
Setor, Malaysia. Products manufactured by both joint ventures will be shipped to
Hexcel's customers worldwide, and it is anticipated that the first parts will be
delivered to customers in 2001.

As part of the acquired Clark-Schwebel business, the Company acquired
equity ownership interests in three joint ventures: a 43.6% share in
CS-Interglas AG ("CS-Interglas"), headquartered in Germany; a 43.3% share in
Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan; 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 industry as well as other markets for
fiberglass fabrics. CS Tech-Fab manufactures non-woven materials for roofing,
construction and other specialty applications.

In addition, Hexcel has a 45% equity interest in a joint venture in Japan
with Dainippon Ink and Chemicals ("DIC"). This joint venture, which owns and
operates a manufacturing facility in Komatsu, Japan, was formed in 1990 and
produces and sells prepregs, honeycomb, decorative laminates and bulk molding
compounds using technology licensed from Hexcel and DIC.

Business Acquisition and Consolidation Programs

Since 1996, Hexcel has implemented, or begun to implement, three business
acquisition and consolidation programs. The primary purpose of these programs is
to integrate acquired businesses by rationalizing manufacturing facilities,
creating centers of manufacturing excellence, and combining various
administrative functions with existing operations. For the years ended December
31, 1999, 1998 and 1997, Hexcel recorded business acquisition and consolidation
expenses of $20.1 million, $12.7 million and $25.3 million, respectively, in
relation to these plans as well as other costs associated with the Company's
acquisitions. Further discussion of the Company's business acquisition and
consolidation plans is contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and in Note 3 to the
accompanying consolidated financial statements included in this Annual Report on
Form 10-K.

6

Lean Enterprise

In 1998, Hexcel initiated its Lean Enterprise program, which is designed to
create a common way of managing the Company, with a focus on creating value for
the Company's customers and eliminating waste throughout the value chain. The
goals of the program are faster processing of customer orders and deliveries,
faster manufacturing cycle times, shorter equipment set-up and clean-down times,
lower manufacturing rejects and warranty claims, simplified manufacturing
procedures and improved manufacturing processes. All of these actions, if
successful, are expected to result in higher throughput and greater capacity on
existing manufacturing equipment, thereby reducing both capital expenditures and
facility requirements. Improved efficiency and quality are expected to result in
lower unit labor requirements and thereby lower product costs and lower
inventory requirements. The Lean Enterprise program is also systematically
linked with key initiatives, such as Six Sigma, to improve quality and the
effectiveness of global procurement activities. This program has been a
contributor to Hexcel's reduction in working capital and capital spending in
1999.

Electronic Commerce

Hexcel's strategy for the development and implementation of electronic
commerce ("e-commerce") in its business is focused on four critical areas:

- - - Streamlining the procurement of raw materials, supplies and certain
services, and enhancing the Company's purchasing leverage.
- - - Effectively managing the Company's interactions with the trade exchanges
being developed by some of the Company's customers.
- - - Leveraging e-commerce technologies to accelerate the development of new
market opportunities and product applications for advanced structural
materials.
- - - Using Internet-based technologies to integrate the Company's legacy
information systems in order to enhance customer service, improve
supply-chain management and reduce information processing costs.

The integration of e-commerce into the Company's business processes is
expected to be an ongoing activity.

Raw Materials and Production Activities

Due to the vertically integrated nature of Hexcel's operations, the Company
produces several materials used in the manufacture of certain industrial
fabrics, composite materials and engineered products, as well as the
polyacrylonitrile ("PAN") precursor material used in the manufacture of carbon
fibers. The Company consumed internally approximately 49% and 25% of its carbon
fiber and industrial fabric production, respectively, in 1999. However, the
Company purchases most of the raw materials used in production from third
parties. Several key materials are available from relatively few sources, and in
many cases the cost of product qualification makes it impractical to develop
multiple sources of supply. The unavailability of these materials, which the
Company does not currently anticipate, could have a material adverse effect on
operations.

Hexcel's production activities are generally based on a combination of
"make-to-order" and "make-to-forecast" production requirements. The Company
coordinates closely with key suppliers in an effort to avoid raw material
shortages and excess inventories.

7

Research and Technology; Patents and Know-How

Hexcel's Research and Technology ("R&T") departments support the Company's
core businesses worldwide. Through R&T activities, the Company maintains
expertise in chemical formulation and curatives, fabric forming and textile
architectures, advanced composite structures, process engineering, application
development analysis and testing of composite materials, computational design
and prediction, and other scientific disciplines related to the Company's
worldwide business base. Additionally, Hexcel's R&T function performs a limited
amount of contract research and development in the U.S. and Europe for
strategically important customers and government agencies in the areas of carbon
fiber ceramics, high temperature polymers, advanced textiles and composite
structures manufacturing.

Hexcel's products rely primarily on the Company's expertise in materials
science, textiles, process engineering and polymer chemistry. Consistent with
market demand, the Company has been placing more emphasis on cost effective
product design and lean manufacturing in recent years. Towards this end, the
Company has entered into formal and informal alliances, as well as licensing and
teaming arrangements, with several customers, suppliers, external agencies and
laboratories. Management believes that the Company possesses unique capabilities
to design, develop and manufacture composite materials and structures. In
addition to the rights to certain technologies obtained as part of the Fiberite
transaction, the Company owns and maintains in excess of 100 patents worldwide,
has licensed many key technologies, and has granted technology licenses and
patent rights to several third parties in connection with joint ventures and
joint development programs. It is the Company's policy to actively enforce its
proprietary rights. The Company believes that the patents and know-how rights
currently owned or licensed by the Company are adequate for the conduct of its
business.

Hexcel spent $24.8 million for research and technology in 1999,
$23.7 million in 1998 and $18.4 million in 1997. These expenditures were
expensed as incurred.

Markets and Customers

Hexcel's products are sold for a broad range of end uses. The following
tables summarize net sales to third-party customers by market and by geography
for the three years ended December 31:

- - ---------------------------------------------------------------- ----------------- ---------------- -----------------
1999 1998 1997
- - ---------------------------------------------------------------- ----------------- ---------------- -----------------

Net Sales by Market
Commercial aerospace 57% 62% 64%
Space and defense 11 13 9
Electronics 14 8 5
Industrial 18 17 22
- - ---------------------------------------------------------------- ----------------- ---------------- -----------------
Total 100% 100% 100%
- - ---------------------------------------------------------------- ----------------- ---------------- -----------------

Net Sales by Geography
United States 57% 54% 56%
U.S. exports 8 9 8
International 35 37 36
- - ---------------------------------------------------------------- ----------------- ---------------- -----------------
Total 100% 100% 100%
- - ---------------------------------------------------------------- ----------------- ---------------- -----------------

Commercial Aerospace

Historically, the commercial aerospace industry has led the development of
applications for advanced structural materials and components because it has the
strongest need for the performance properties of these materials and is well
positioned to maximize the economic benefits from their use. Accordingly, the
demand for advanced structural material products is closely correlated to the
demand for commercial aircraft.

8

Commercial aerospace activity fluctuates in relation to two principal
factors. First, the number of revenue passenger miles flown by the airlines
affects the size of the airline fleets and generally follows the level of
overall economic activity. The second factor, which is less sensitive to the
general economy, is the replacement and retrofit rates for existing aircraft.
These rates, resulting mainly from obsolescence, are determined in part by the
regulatory requirements established by various civil aviation authorities as
well as public concern regarding aircraft age, safety and noise. These rates may
also be affected by the desire of the various airlines for higher payloads and
more fuel efficient aircraft, which in turn is influenced by the price of fuel.

Reflecting the demand factors noted above, the number of commercial
aircraft delivered by Boeing, including McDonnell Douglas, and Airbus Industrie
("Airbus") declined by 48% from 1992 to 1995. At the lowest point during this
period, Boeing and Airbus reported combined deliveries of 380 aircraft.
Beginning in 1996, however, aircraft deliveries by Boeing and Airbus began to
rise, growing to a combined total of 557 in 1997, 788 in 1998, and a record 914
in 1999. Based on published projections, combined deliveries are expected to
decline to approximately 800 in 2000 and to between 700 and 800 in 2001,
following a peak in 1999.

Set forth below are historical deliveries as published by Boeing and
Airbus:

- - ---------------------------------------------------------------------------------------------------------------------

1992 1993 1994 1995 1996 1997 1998 1999
- - ----------------------------------------------------------------------------------------------------------------------

Boeing/McDonnell Douglas 573 409 311 256 271 375 559 620
Airbus 157 138 127 124 126 182 229 294
- - ---------------------------------------------------------------------------------------------------------------------
Total 730 547 438 380 397 557 788 914
- - ---------------------------------------------------------------------------------------------------------------------

Approximately 28%, 35% and 36% of Hexcel's 1999, 1998, and 1997 net sales,
respectively, were identifiable as sales to Boeing and related subcontractors.
Of the 28% of sales attributable to Boeing and its subcontractors, 25% and 3%
related to commercial aerospace and space and defense market applications,
respectively. Approximately 10%, 11% and 10% of Hexcel's 1999, 1998 and 1997 net
sales, respectively, were identifiable as sales to Airbus and related
subcontractors. 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 1997, approximately 32% and 10% of Hexcel's 1998 net sales were to
Boeing and its subcontractors and Airbus and its subcontractors, respectively.
The percentage decline in sales to Boeing in 1999 was a result of declining
commercial aircraft deliveries, as well as procurement and manufacturing
improvement initiatives of key aerospace customers. The loss of all or a
significant portion of the business with Boeing or Airbus could have a material
adverse effect on sales and earnings.

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. Based on published projections, combined deliveries for Boeing and
Airbus are expected to decline from a peak of 914 in 1999 to approximately 800
in 2000, and further to between 700 and 800 in 2001. Hexcel delivers product
into the Boeing supply chain on average about six months prior to aircraft
delivery. As the Company supplies its products ahead of the delivery of a
commercial aircraft, it began to see the impact of reduced Boeing production
rates in the second quarter of 1999. The Company's sales to regional and
business aircraft manufacturers, as well as to the aircraft aftermarket, are
expected to continue to grow.

Space and Defense

The space and defense markets have historically been innovators in and
sources of significant demand for advanced structural materials. For example,
advanced structural materials made a major contribution to the development of
"stealth" aircraft technologies. However, aggregate demand by space and defense
customers is primarily a function of military aircraft procurement by the U.S.
and certain European governments. Consequently, the space and defense market for
composite materials and structures declined significantly during the early part
of this decade as a result of substantial decreases in military aircraft
procurement that began in the late 1980s. Presently, however, there are a number
of potentially significant military aircraft programs in various stages of
development or initial production that utilize advanced structural materials.

9

The Company is currently qualified to supply materials to a broad range of
military aircraft and helicopters scheduled to enter full-scale production in
the near future. These programs include V-22 (Osprey) tilt-roter, F/A-18E/F
(Hornet), F-22 (Raptor), C-17 transport, European Fighter Aircraft (Typhoon),
RAH-66 (Comanche) and NH90 helicopter.

Contracts to supply materials for military and some commercial projects
contain provisions for termination at the convenience of the U.S. government or
the buyer. In the case of such a termination, Hexcel is entitled to recover
reasonable incurred cost plus a provision for profit on the incurred cost. In
addition, the Company is subject to U.S. government cost accounting standards,
which are applicable to companies with more than $25 million of government
contract or subcontract awards each year.

Electronics

The acquisition of the Clark-Schwebel business provides Hexcel with a
global platform to supply the electronics industry, which the Company believes
has attractive long-term growth potential. The Company is the largest producer
of fine, lightweight fiberglass fabrics used in the fabrication of multilayer
PCBs, with an estimated 45% market share in the U.S. and 25% market share in
Europe. In addition to its U.S. businesses, the Company has significant
ownership positions in three joint ventures: CS-Interglas, Asahi-Schwebel and CS
Tech-Fab. CS-Interglas and Asahi-Schwebel are leading fiberglass fabric
manufacturers in Europe, Japan and Southeast Asia. Fiberglass fabrics are a
critical component used in the production of PCBs, which are integral to most
advanced electronic products, including computers, telecommunications equipment,
advanced cable television equipment, network servers, televisions, automotive
equipment and home appliances.

Industrial Markets

Hexcel has focused its participation in industrial markets in areas where
the application of advanced structural material technology offers significant
benefits to the end user. As a result, the Company has chosen to focus on select
opportunities where high performance is the key product criterion. Future
opportunities and growth depend primarily upon the success of the individual
programs and industries in which the Company has elected to participate. Within
industrial markets, key applications include surface transportation
(automobiles, trucks, mass transit and high-speed rail and marine applications),
wind energy, civil engineering, skis, snowboards, golf club shafts, fishing
rods, tennis rackets and bicycles. Hexcel's participation in these markets is a
valuable complement to its commercial and military aerospace businesses, and the
Company is committed to pursuing the utilization of advanced structural material
technology in its industrial markets.

Further discussion of Hexcel's markets and customers, including certain
risks, uncertainties and other factors with respect to "forward-looking
statements" about those markets and customers, is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Sales and Marketing

A staff of salaried market managers, product managers and salespeople sell
and market Hexcel products directly to customers worldwide. The Company also
uses independent distributors and manufacturer representatives for certain
products, markets and regions.

Competition

In the production and sale of advanced structural materials, Hexcel
competes with numerous U.S. and international companies on a worldwide basis.
The broad markets for the Company's products are highly competitive, and the
Company has focused on both specific markets and specialty products within
markets to obtain market share. In addition to competing directly with companies
offering similar products, the Company competes with substitute structural
materials such as structural foam, wood, metal, and concrete. Depending upon the

10

material and markets, relevant competitive factors include price, delivery,
service, quality and product performance.

Environmental Matters

To date, environmental control regulations have not had a significant
adverse effect on overall operations. A discussion of environmental matters is
contained under the caption, "Legal Proceedings," and in Note 14 to the
accompanying consolidated financial statements included in this Annual Report on
Form 10-K.

Employees

As of December 31, 1999, Hexcel employed 6,328 full-time employees,
compared with 7,139 and 5,597 as of December 31, 1998 and 1997, respectively.
The decrease from the end of 1998 to the end of 1999 was primarily attributable
to Hexcel's business acquisition and consolidation programs, including the
closure of a facility in Cleveland, Georgia, and the disposition of a business
in Brindisi, Italy. The increase from the end of 1997 to the end of 1998 was
primarily attributable to the acquisition of the Clark-Schwebel business, which
added approximately 1,300 employees to Hexcel's workforce.

ITEM 2. Properties

Hexcel owns and leases manufacturing facilities and sales offices located
throughout the United States and in other countries as noted below. The
corporate offices and principal corporate support activities for the Company are
located in leased facilities in Stamford, Connecticut and Pleasanton,
California. The Company's corporate research and technology administration and
certain composite materials laboratories are located in Dublin, California. In
the second half of 2000, the Company will relocate all of its activities from
its Pleasanton, California, facility to the Company's nearby Dublin, California,
facility.

11

The following table lists the manufacturing facilities of Hexcel by
geographic location, approximate square footage, and principal products
manufactured. This table does not include manufacturing facilities owned by
entities in which the Company has a joint venture interest.

Manufacturing Facilities

Approximate
Facility Location Square Footage Principal Products

United States:
Anderson, South Carolina 432,000 Industrial fabrics
Bellingham, Washington 188,000 Interiors
Burlington, Washington 73,000 Honeycomb Parts
Casa Grande, Arizona 307,000 Honeycomb and Honeycomb Parts
Decatur, Alabama 159,000 PAN Precursor (used to produce Carbon Fibers)
Gilbert, Arizona 30,000 Prepregs
Kent, Washington 883,000 Composite Structures; Interiors
Lancaster, Ohio 49,000 Prepregs
Livermore, California 141,000 Prepregs
Pottsville, Pennsylvania 134,000 Honeycomb Parts
Salt Lake City, Utah 457,000 Carbon Fibers; Prepregs
Seguin, Texas 204,000 Industrial fabrics
Statesville, North Carolina 553,000 Electronic fabrics; Industrial fabrics
Washington, Georgia 160,000 Electronic fabrics

International:
Dagneux, France 130,000 Prepregs
Decines, France 90,000 Industrial fabrics
Duxford, United Kingdom 440,000 Prepregs; Honeycomb and Honeycomb Parts
Les Avenieres, France 476,000 Electronic fabrics; Industrial fabrics
Linz, Austria 163,000 Prepregs
Parla, Spain 43,000 Prepregs
Swindon, United Kingdom 20,000 Honeycomb Parts
Welkenraedt, Belgium 223,000 Honeycomb and Honeycomb Parts

Hexcel leases the facilities located in Anderson, South Carolina;
Washington, Georgia; Statesville, North Carolina; Gilbert, Arizona; and Swindon,
U.K., and the land on which the Burlington, Washington, facility is located. The
Company also leases portions of the facilities located in Casa Grande, Arizona;
Bellingham and Kent, Washington; Linz, Austria; and Les Avenieres, France.

As part of Hexcel's business consolidation programs, the Company closed a
facility in Cleveland, Georgia, and disposed of a facility in Brindisi, Italy,
in 1999.

ITEM 3. Legal Proceedings

Hexcel is involved in litigation, investigations and claims arising out of
the conduct of its business, including those relating to commercial
transactions, as well as to environmental, health and safety matters. The
Company estimates and accrues its liabilities resulting from such matters based
on a variety of factors, including outstanding legal claims and proposed
settlements; assessments by internal and external counsel of pending or
threatened litigation; and assessments by environmental engineers and
consultants of potential environmental liabilities and remediation costs. Such
estimates exclude counterclaims against other third parties. Such estimates are
not discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
Although it is impossible to determine the level of future expenditures for
legal, environmental and related matters with any degree of certainty, it is the
Company's opinion, based on available information, that it is unlikely that

12

these matters, individually or in the aggregate, will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.

Legal and Environmental Claims and Proceedings

The Company is subject to numerous federal, state, local and foreign laws
and regulations that impose strict requirements for the control and abatement of
air, water and soil pollutants and the manufacturing, storage, handling and
disposal of hazardous substances and waste. These laws and regulations include
the Federal Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA" or "Superfund"), the Clean Air Act, the Clean Water Act and the
Resource Conservation and Recovery Act, and analogous state laws and
regulations. Regulatory standards under these environmental laws and regulations
have tended to become increasingly stringent over time.

Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess, which
are included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. Because
CERCLA provides for joint and several liability, the Company could be
responsible for all remediation costs at such sites, even if it is one of many
potentially responsible parties ("PRPs"). While the Company believes, based on
the amount and the nature of its waste, and the number of other financially
viable PRPs, that its liability in connection with such matters will not be
material, the Company has nonetheless accrued an estimate of its liability with
respect to this matter.

Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act,
Hexcel signed an administrative consent order to pay for the environmental
remediation of a manufacturing facility it owns and formerly operated in Lodi,
New Jersey. The Company's estimate of the remaining cost to satisfy this consent
order is accrued in its consolidated balance sheets. The ultimate cost of
remediating the Lodi site will depend on developing circumstances.

Hexcel was party to a cost-sharing agreement regarding the operation of
certain environmental remediation systems necessary to satisfy a post-closure
care permit issued to a previous owner of the Company's Kent, Washington, site
by the U.S. Environmental Protection Agency. Under the terms of the cost-sharing
agreement, the Company was obligated to reimburse the previous owner for a
portion of the cost of the required remediation activities. Management has
determined that the cost-sharing agreement terminated on December 22, 1998;
however, the other party disputes this determination. The Company's estimate of
the remaining costs associated with the cleanup of this site is accrued in its
consolidated balance sheets.

Hexcel is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. The Company is not in a position to
predict the direction or outcome of the investigation; however, it is
cooperating with the Department of Justice.

In 1999, Hexcel was joined in a purported class action lawsuit alleging
antitrust violations in the sale of carbon fiber, carbon fiber industrial
fabrics and carbon fiber prepreg. The Company was one of many manufacturers
joined in the lawsuit, which was spawned from the Department of Justice
investigation. The lawsuit is in its preliminary stage and the Company is not in
a position to predict the outcome, but believes that the lawsuit is without
merit as to the Company.

13

ITEM 4. Submission of Matters to a Vote of Security Holders

None.

PART II

ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters

Hexcel common stock is traded on the New York and Pacific Stock Exchanges.
The range of high and low sales prices of Hexcel common stock on the New York
Stock Exchange Composite Tape is contained in Note 17 to the accompanying
consolidated financial statements included in this Annual Report on Form 10-K
and is incorporated herein by reference.

Hexcel did not declare or pay any dividends in 1999, 1998, or 1997. The
payment of dividends is generally prohibited under the terms of certain of the
Company's credit agreements.

On March 23, 2000, there were 1,684 holders of record of Hexcel common
stock.

ITEM 6. Selected Financial Data

The information required by Item 6 is contained on page 30 of this Form
10-K under the caption "Selected Financial Data" and is incorporated herein by
reference.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The information required by Item 7 is contained on pages 31 to 46 of this
Form 10-K under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and is incorporated herein by reference.

ITEM 7A. Quantitative and Qualitative Discussion Disclosures about Market Risk

The information required by Item 7A is contained under the heading "Market
Risks" on page 44 of this Form 10-K and is incorporated herein by reference.

ITEM 8. Consolidated Financial Statements and Supplementary Data

The information required by Item 8 is contained on pages 47 to 79 of this
Form 10-K under "Consolidated Financial Statements and Supplementary Data" and
is incorporated herein by reference. The report of the independent public
accountants for the years ended December 31, 1999, 1998 and 1997 is contained on
page 50 of this Form 10-K under the caption "Report of Independent Accountants"
and is incorporated herein by reference.

14

PART III

ITEM 10. Directors and Executive Officers of the Registrant:

(a) Listed below are the directors of Hexcel as of March 24, 2000, the
positions with the Company held by them and a brief description of each
director's prior business experience.

Director
Name Age Since Position(s) With Hexcel
- - ----------------------------------------------------------------------------------------------------------

John J. Lee...................... 63 1993 Chairman of the Board; Chief Executive Officer; Director
Harold E. Kinne............... 60 1998 President; Chief Operating Officer; Director
Robert S. Evans............... 55 1999 Director
Marshall S. Geller............ 60 1994 Director
Walter D. Hosp................. 42 2000 Director
John J. McGraw............... 59 1999 Director
Martin Riediker................ 47 1999 Director
Lewis Rubin.................... 62 1999 Director
Stanley Sherman............... 61 1996 Director
Martin L. Solomon............ 63 1996 Director
- - ----------------------------------------------------------------------------------------------------------

JOHN J. LEE, age 63, has served as Chairman of the Board of Directors of
Hexcel since February 1996, Chief Executive Officer since January 1994, Chairman
and Chief Executive Officer from January 1994 to February 1995, Chairman and
Co-Chief Executive Officer from July 1993 to December 1993 and a director since
May 1993. Mr. Lee also serves as Chairman of the Nominating Committee and as a
member of the Finance Committee of Hexcel. He has served as Chairman of the
Board, President and Chief Executive Officer of Lee Development Corporation, a
merchant banking company, since 1987 and an adviser to the Clipper Group, a
private investment partnership, since 1993. He is also a director of Crane Co.
and other various privately-held corporations. Mr. Lee was a director of XTRA
Corporation, a transportation equipment leasing company, from 1990 to 1996 and a
director of Hvide Marine Inc., a marine support and transportation services
company from 1994 to October 1999.

HAROLD E. KINNE, age 60, has served as President and Chief Operating
Officer of Hexcel since July 1998. Prior to joining Hexcel, he was President of
the Additives Division, corporate vice president and a member of the corporate
management committee of Ciba Specialty Chemicals Corporation ("CSC"), a wholly
owned affiliate of Ciba Specialty Chemicals Holding Inc. ("Ciba"), from 1996 to
June 1998. Mr. Kinne also held the same positions in Ciba-Geigy Corporation
("CGC") and was a director of CGC, from 1988 through 1996. Prior to that, Mr.
Kinne served as Vice President, Pigments, for the Plastics & Additives Division
of CGC from 1986 to 1988. Mr. Kinne has held various other technical and
managerial positions with CGC from 1965 to 1986.

ROBERT S. Evans, age 55, has been a director of Hexcel since November 1999.
He is Chairman and CEO and a Director of Crane Co., a New York Stock Exchange
company. Crane Co. is a diversified manufacturer of engineered industrial
products serving a number of industrial markets including aerospace and
specialty materials markets in which Hexcel does not participate. Mr. Evans has
been Chairman and CEO of Crane Co. since 1984 and a director since 1979. In
addition, Mr. Evans is also a director of Fansteel, Inc., HBD Industries Inc.,
Southdown Corporation, and Chairman of Huttig Building Products.

MARSHALL S. GELLER, age 60, served as Co-Chairman of the Board of Directors
of Hexcel from February 1995 to February 1996 and has been a director of Hexcel
since August 1994. Mr. Geller also serves as Chairman of the Audit Committee and
as a member of the Executive Compensation and Nominating Committees of Hexcel.
Mr. Geller has served as Chairman of the Board, Chief Executive Officer and
founding partner at Geller & Friend Capital Partners, Inc., a merchant banking
firm, since 1995. Mr. Geller was Senior Managing Director of Golenberg & Geller,
Inc., a merchant banking firm, from 1991 to 1995; Vice Chairman of Gruntal &

15

Company, an investment banking firm, from 1988 to 1990; and a Senior Managing
Director of Bear, Stearns & Co., Inc., an investment banking firm, from 1967 to
1988. Mr. Geller is currently a director of Ballantyne of Omaha, Inc., Players
International, Value Vision International, Inc., iMall Inc., DataLink Systems
Corp., Cabletel Communications Corp., Stroud's, Inc. and various other
privately-held corporations and charitable organizations.

WALTER D. HOSP, age 42, has been a director of Hexcel since February 2000.
Mr. Hosp also serves as a member of the Executive Compensation and Finance
Committees of Hexcel. Mr. Hosp is Vice President, Chief Financial Officer and a
member of the Board of Directors of CSC. Mr. Hosp served as Vice President and
Treasurer of CGC from 1994 to 1996, and served as Director, Corporate Finance of
CGC from 1990 to 1996. Mr. Hosp also serves on the Board of Directors and is
Treasurer of The United Way of Westchester & Putnam Counties and is on the New
York Advisory Board of The Factory Mutual Insurance Company.

JOHN J. McGRAW, age 59, has been a director of Hexcel since February 1999.
Mr. McGraw also serves as a member of the Nominating and Technology Committees
of Hexcel. Mr. McGraw is Vice President, General Counsel, Secretary and a member
of the Board of Directors of CSC. Mr. McGraw served as Vice President, General
Counsel and Secretary of CGC from 1986 to 1996 and was a member of the Board of
Directors and of the Finance Committee of CGC from 1989 to 1996. Mr. McGraw also
serves on the Board of Directors of the Westchester Legal Aid Society.

MARTIN RIEDIKER, age 47, has been a director of Hexcel since February 1999.
Mr. Riediker also serves as a member of the Nominating and Technology Committees
of Hexcel. Mr. Riediker is Global President of Ciba's Consumer Care Division and
a member of Ciba's Executive Committee. Mr. Riediker was appointed Head of
Ciba-Geigy Limited's ("CGL") Ciba Chemical Division in 1995. From 1994 to 1995
he served as head of CGC's U.S. Polymers Division and as a Management Committee
member of CGC in the U.S.

LEWIS RUBIN, age 62, has been a director of Hexcel since November 1999. He
also served on Hexcel's Board from 1993 to 1995. Mr. Rubin also serves as member
of the Audit Committee of Hexcel. Mr. Rubin is President and CEO and a Director
of XTRA Corporation, a New York Stock Exchange company, serving in those
positions since 1990. XTRA Corporation is a leading global transportation
equipment lessor with operations in highway, domestic inter-modal and marine
container markets. From 1988 to 1990, he was a consultant with Lewis Rubin
Associates, a consulting firm advising the transportation equipment industry.
From 1984 to 1988, Mr. Rubin served as President and Chief Executive Officer of
Gelco CTI Container Services, a subsidiary of Gelco Corporation, a diversified
international management services corporation, and as an Executive Vice
President of Gelco Corporation. From 1981 to 1983, Mr. Rubin was President and
Chief Executive Officer of Flexi-Van Corporation, a company engaged in the
leasing of intermodal transportation equipment.

STANLEY SHERMAN, age 61, has been a director of Hexcel since February 1996.
Mr. Sherman also serves as Chairman of the Executive Compensation Committee and
as a member of the Finance Committee of Hexcel. Mr. Sherman is President and
Chief Executive Officer of CSC and Chairman of the Board of Ciba Specialty
Chemicals (Canada). Mr. Sherman served as a director and Vice President and
Chief Financial Officer of CGC from 1991 to 1996, and was a member of the
Finance Committee and the Corporate Management Committee of CGC's Board of
Directors. From 1986 to 1991, Mr. Sherman served as Vice President-Corporate
Planning of CGC. Mr. Sherman also serves on the Board of Directors of the
Chemical Manufacturers Association and the Westchester Educational Coalition.

MARTIN L. SOLOMON, age 63, has been a director of Hexcel since May 1996.
Mr. Solomon also serves as Chairman of the Finance Committee and is a member of
the Audit and Executive Compensation Committees of Hexcel. Mr. Solomon has been
Chairman and Chief Executive Officer of American County Holdings, Inc., an
insurance holding company, since 1997 and a self-employed investor since 1990.
Mr. Solomon was a director and Vice Chairman of the Board of Directors of Great
Dane Holdings, Inc., which is engaged in the manufacture of transportation
equipment, automobile stamping, the leasing of taxis and insurance, from 1985 to

16

1996, Managing Partner of Value Equity Associates I, L.P., an investment
partnership, from 1988 to 1990, and was an investment analyst and portfolio
manager of Steinhardt Partners, an investment partnership, from 1985 to 1987.
Mr. Solomon has been a director of XTRA Corporation since 1990 and a director of
MFN Corp. since 1999. Mr. Solomon is also a director of various privately-held
corporations and civic organizations.

(b) Listed below are the executive officers and other senior management of
Hexcel as of March 24, 2000, the positions held by them and a brief
description of their business experience. For additional information
concerning Messrs. Lee and Kinne, see Item 10(a).

Executive
Officer
Name Age Since Position(s) With Hexcel
- - ---------------------------------------------------------------------------------------------------------------

John J. Lee.................. 63 1993 Chairman of the Board; Chief Executive Officer; Director
Harold E. Kinne............ 60 1998 President; Chief Operating Officer; Director
Stephen C. Forsyth....... 44 1994 Executive Vice President; Chief Financial Officer
Ira J. Krakower............ 59 1996 Senior Vice President; General Counsel; Secretary
Kirk G. Forbeck............ 39 1999 Corporate Controller; Chief Accounting Officer
Joseph H. Shaulson....... 34 1996 Vice President of Planning and Integration
Justin P.S. Taylor......... 46 1996 Vice President, Manufacturing and Environmental, Health and Safety
William D. Bennison..... 55 1998 President of the Fabrics business unit
James N. Burns............ 60 1996 President of the Fibers business unit
William Hunt.............. 57 1996 President of the Composites Materials business unit
David R. Tanonis......... 43 1999 President of Structures and Interiors business unit

STEPHEN C. FORSYTH, age 44, has served as Executive Vice President of
Hexcel since June 1998, Chief Financial Officer since November 1996, and Senior
Vice President of Finance and Administration between February 1996 and June
1998. Mr. Forsyth served as Vice President of International Operations of Hexcel
from October 1994 to February 1996 and has held other general management
positions with Hexcel from 1980 to 1994. Mr. Forsyth joined Hexcel in 1980. Mr.
Forsyth also serves as a director of CS-Interglas AG.

IRA J. KRAKOWER, age 59, has served as Senior Vice President, General
Counsel and Secretary of Hexcel since September 1996. Prior to joining Hexcel,
Mr. Krakower served as Vice President and General Counsel to Uniroyal Chemical
Corporation from 1986 to August 1996 and served on the Board of Directors of and
as Secretary of Uniroyal Chemical Company, Inc. from 1989 to 1996.

Kirk G. Forbeck, age 39, has served as the Corporate Controller and Chief
Accounting Officer since September 1999, Director of Financial Planning and
Analysis from 1997 to 1999, Assistant Corporate Controller from 1993 to 1997,
and Senior Financial Analyst from 1991 to 1992. Prior to joining Hexcel in 1991,
Mr. Forbeck worked at Coopers and Lybrand, where he was employed for six years.

JOSEPH H. SHAULSON, age 34, has served as Vice President of Planning and
Integration of Hexcel since November 1998. Mr. Shaulson served as Vice President
of Corporate Development of Hexcel from April 1996 to October 1998. In addition,
Mr. Shaulson served as Acting General Counsel and Acting Secretary of Hexcel
from April 1996 to September 1996. Prior to joining Hexcel, Mr. Shaulson was an
associate in the law firm of Skadden, Arps, Slate, Meagher & Flom LLP, where he
was employed from 1991 to 1996.

JUSTIN P. S. TAYLOR, age 46, has served as Vice President of Manufacturing
and Environmental, Health and Safety since June 1999. From April 1996 to June
1999, Mr. Taylor served as President of Hexcel's Structures and Interiors
business unit, and from July 1995 to April 1996 as a member of CGL's strategic
planning unit. Prior to July 1995, Mr. Taylor held various management positions
in the Heath Tecna Division of CGC.

17

WILLIAM D. BENNISON, age 55, has served as President of Hexcel's Fabrics
business unit since November 1998. Prior to joining Hexcel in September 1998,
Mr. Bennison was President of Clark-Schwebel, Inc. from September 1991 to August
1998. Mr. Bennison also serves as President of Clark-Schwebel Tech-Fab Company
and as a director of CS-Interglas AG and Asahi-Schwebel Co., Ltd. Mr. Bennison
was President of BGF Industries and its predecessor, Burlington Glass Fabrics
Co., from 1981 to 1989.

JAMES N. BURNS, age 60, has served as President of Hexcel's Fibers business
unit since July 1996. Prior to his employment with Hexcel, Mr. Burns served in a
number of management positions with the Composite Products Division of Hercules
Incorporated, including Business Director from March 1995 to June 1996, Business
Unit Director of Advanced Composite Materials from June 1992 to March 1995 and
Vice President of Marketing from June 1986 to June 1992.

WILLIAM HUNT, age 57, has served as President of Hexcel's Composites
Materials business unit since November 1998 and as President of the former
Hexcel EuroMaterials business unit from February 1996 to October 1998. Mr. Hunt
served as President of the EuroMaterials unit of the Ciba Composites Business
from 1991 to February 1996 and as Managing Director of Ciba-Geigy Plastics
("CGP") from 1990 to 1991. Prior to joining CGP in 1990, Mr. Hunt held various
other technical and managerial positions, including the position of Managing
Director of Illford Limited (Photographic) Co.

DAVID R. TANONIS, age 43, has served as President of Hexcel's Structures
and Interiors business unit since June 1999. Mr. Tanonis served as Vice
President of Hexcel's Structures and Interiors business unit, responsible for
the interiors business, from February 1996 to June 1999 and as the Vice
President of Interiors in the Heath Tecna Division of CGC prior to February
1996. Mr. Tanonis has held various technical and managerial positions with Heath
Tecna since 1987. Mr. Tanonis held various management positions with Polymer
Engineering, Inc. from 1978 to 1987.

(c) There are no family relationships among any of Hexcel's directors or
executive officers.

ITEM 11. Executive Compensation

The information required in Item 11 will be contained in Hexcel's
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The information required in Item 12 will be contained in Hexcel's
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.

18

ITEM 13. Certain Relationships and Related Transactions

The information required in Item 13 will be contained in Hexcel's
definitive Proxy Statement for the 2000 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

a. Financial Statements

The consolidated financial statements of Hexcel, notes thereto, and report
of independent accountants are listed on page 47 of this Annual Report on
Form 10-K and are incorporated herein by reference.

b. Financial Statement Schedules

Financial statement schedules have not been included inasmuch as the
information required has been adequately disclosed in the underlying
consolidated financial statements.

c. Reports on Form 8-K

Current Report on Form 8-K dated January 20, 2000 relating to a Press
Release issued by the Company reporting on fourth-quarter and year-end
results.

Current Report on Form 8-K dated December 8, 1999 relating to the Company's
review of strategic options for its Engineered Products business.

c. Exhibits

Exhibit No. Description

2.1 Strategic Alliance Agreement dated as of September 29, 1995
among Hexcel, Ciba-Geigy Limited and Ciba-Geigy Corporation
(incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated as of October 13,
1995).

2.1(a) Amendment dated as of December 12, 1995 to the Strategic
Alliance Agreement among Hexcel, Ciba-Geigy Limited and
Ciba- Geigy Corporation (incorporated herein by reference to
Exhibit 2.1(a) to the Company's Current Report on Form 8-K
dated as of March 15, 1996).

2.1(b) Letter Agreement dated as of February 28, 1996 among Hexcel,
Ciba-Geigy Limited and Ciba-Geigy Corporation (incorporated
herein by reference to Exhibit 2.1(b) to the Company's
Current Report on Form 8-K dated as of March 15, 1996).

2.1(c) Distribution Agreement dated as of February 29, 1996 among
the Company, Brochier S.A., Composite Materials Limited,
Salver S.r.l. and Ciba Geigy Limited (incorporated by
reference to Exhibit 2.1(c) to the Company's Current Report
on Form 8-K dated as of March 15, 1996).

19

2.1(d) Consent Letter dated February 21, 1997, between Hexcel and
Ciba Specialty Chemicals Holding Inc. (incorporated herein
by reference to Exhibit 2.1(d) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).

2.2 Sale and Purchase Agreement dated as of April 15, 1996 among
Hexcel Corporation, Hercules Incorporated, Hercules
Nederland BV and HISPAN Corporation (incorporated herein by
reference to Exhibit 2.2 to the Company's Quarterly Report
on Form 10-Q for the fiscal Quarter ended March 31, 1996).

2.2(a) Amendment Number One dated as of June 27, 1996 to the Sale
and Purchase Agreement among Hexcel Corporation, Hercules
Incorporated, Hercules Nederland BV and HISPAN Corporation
(incorporated herein by reference to Exhibit 2.2 to Hexcel's
Current Report on Form 8-K dated July 12, 1996).

2.2(b) Letter Agreement dated as of June 27, 1996 among Hexcel
Corporation, Hercules Incorporated, Hercules Nederland BV
and HISPAN Corporation (incorporated herein by reference to
Exhibit 2.3 to Hexcel's Current Report on Form 8-K dated
July 12, 1996).

2.3 Asset Purchase Agreement by and among Stamford FHI
Acquisition Corp., Fiberite, Inc.and Hexcel Corporation,
dated as of April 21, 1997 (incorporated herein by reference
to Exhibit 10.1 to Hexcel's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1997).

2.3(a) Amended and Restated Asset Purchase Agreement by and among
Stamford FHI Acquisition Corp., Fiberite, Inc. and Hexcel
Corporation, dated as of August 25, 1997 (incorporated
herein by reference to Exhibit 10.11 to Hexcel's Quarterly
Report on Form 10-Q for the Quarter ended September 30,
1997).

2.4 License of Intellectual Property agreement, by and among
Hexcel Corporation and Fiberite, Inc., dated as of August
29, 1997 (incorporated herein by reference to Exhibit 10.12
to Hexcel's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1997).

2.5 Asset Purchase Agreement by and among the Company, Stamford
CS Acquisition Corp., Clark-Schwebel Holdings, Inc. and
Clark-Schwebel Inc., dated July 25, 1998 (incorporated
herein by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K, filed on July 30, 1998).

2.5(a) Amendment No. 1 to Asset Purchase Agreement by and among the
Company, Stamford CS Acquisition Corp., Clark-Schwebel
Holdings, Inc. and Clark-Schwebel Inc., dated as of
September 15, 1998 (incorporated by reference to Exhibit 2.1
of the Company's Current Report on Form 8-K, filed on
September 24, 1998).

2.5(b) Amendment No.2 to Asset Purchase Agreement by and among the
Company and EQCSI Holding Corp., formerly known as
Clark-Schwebel, Inc., dated as of December 23, 1998
(incorporated herein by reference to Exhibit 2.5(b) to the
Company's Registration Statement on Form S-4 (No.
333-71601), filed on February 2, 1999).

2.6 First Amended Plan of Reorganization dated as of November 7,
1994 (incorporated by reference to Exhibit 2 to the
Company's Quarterly Report on Form 10-Q for the fiscal
Quarter ended October 2, 1994).

3.1 Restated Certificate of Incorporation of Hexcel Corporation
(incorporated herein by reference to Exhibit 1 to Hexcel's
Registration Statement on Form 8-A dated July 9, 1996,
Registration No. 1-08472).

20

3.2 Amended and Restated Bylaws of Hexcel Corporation
(incorporated herein by reference to Exhibit 2 to Hexcel's
Registration Statement on Form 8-A dated July 9, 1996,
Registration No. 1-08472).

4.1 Indenture dated as of January 21, 1999 between Hexcel
Corporation and The Bank of New York, as trustee, relating
to the issuance of the 93/4% Senior Subordinated Notes due
2009 (incorporated herein by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (No.
333-71601), filed on February 2, 1999).

4.2 Registration Rights Agreement dated as of January 21, 1999
by and among Hexcel Corporation, Credit Suisse First Boston
Corporation and Salomon Smith Barney Inc., relating to the
issuance of the 9 3/4% Senior Subordinated Notes due 2009
(incorporated herein by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-4 (No.
333-71601), filed on February 2, 1999).

4.3 Purchase Agreement dated as of January 15, 1999 by and among
Hexcel Corporation, Credit Suisse First Boston Corporation
and Salomon Smith Barney Inc., relating to the issuance of
the 93/4% Senior Subordinated Notes due 2009 (incorporated
herein by reference to Exhibit 4.3 to the Company's
Registration Statement on Form S-4 (No. 333-71601), filed on
February 2, 1999).

4.4 Indenture dated as of July 24, 1996 between Hexcel
Corporation and First Trust of California, National
Association, as trustee, relating to the 7% Convertible
Subordinated Notes due 2003 of the Company (incorporated
herein by reference to Exhibit 4 to Hexcel's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996).

4.5 Indenture dated as of February 29, 1996 between Hexcel and
First Trust of California, National Association, as trustee,
relating to the Increasing Rate Senior Subordinated Notes
due 2003 of the Company (incorporated herein by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K
dated as of March 15, 1996).

4.5(a) First Supplemental Indenture dated as of June 27, 1996
between Hexcel and First Trust of California, N.A., as
trustee, to the Indenture dated as of February 29, 1996
between Hexcel and First Trust of California, N.A., as
trustee (incorporated herein by reference to Exhibit 4.2(a)
to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).

4.5(b) Second Supplemental Indenture dated as of March 5, 1998
between Hexcel and First Trust of California, N.A., as
trustee, to the Indenture dated as of February 29, 1996
between Hexcel and First Trust of California, N.A., as
trustee (incorporated by reference to Exhibit 4.2(b) to
Hexcel's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).

4.5(c) Third Supplemental Indenture dated as of September 15, 1998
between Hexcel and U.S. Bank Trust National Association
(formerly known as First Trust of California, National
Association), as trustee. (incorporated herein by reference
to Exhibit 4.5(c) to the Company's Registration Statement on
Form S-4 (No. 333-71601), filed on March 12, 1999).

4.5(d) Fourth Supplemental Indenture dated as of January 21, 1999
between Hexcel and U.S. Bank Trust National Association
(formerly known as First Trust of California, National
Association), as trustee (incorporated herein by reference
to Exhibit 4.5(d) to the Company's Registration Statement on
Form S-4 (No. 333-71601), filed on March 12, 1999).

21

4.6 Indenture dated as of August 1, 1986 between Hexcel and the
Bank of California, N.A., as trustee, relating to the 7%
Convertible Subordinated Notes due 2011 of the Company
(incorporated herein by reference to Exhibit 4.3 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).

4.6(a) Instrument of Resignation, Appointment and Acceptance, dated
as of October 1, 1993 (incorporated herein by reference to
Exhibit 4.10 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993).

10.1 Credit Agreement dated as of June 27, 1996 among Hexcel and
certain of its subsidiaries as borrowers, the institutions
party thereto as lenders, the institutions party thereto as
issuing banks, Citibank, N.A. as collateral agent and Credit
Suisse as administrative agent (incorporated herein by
reference to Exhibit 99.2 to Hexcel's Current Report on Form
8-K dated July 12, 1996).

10.1(a) Consent Number 1 and First Amendment dated as of July 3,
1996 to the Credit Agreement dated as of June 27, 1996 among
Hexcel Corporation and certain of its subsidiaries as
borrowers, the institutions party thereto as lenders, the
institutions party thereto as issuing banks, Citibank, N.A.
as collateral agent and Credit Suisse as administrative
agent (incorporated herein by reference to Exhibit 10.2 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1996).

10.1(b) Modifications dated as of July 8, 1996 to the First
Amendment to the Credit Agreement among Hexcel Corporation
and certain of its subsidiaries as borrowers, the
institutions party thereto as lenders, the institutions
party thereto as issuing banks, Citibank, N.A. as collateral
agent and Credit Suisse as administrative agent
(incorporated herein by reference to Exhibit 10.3 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1996).

10.1(c) Consent Number 2 and Second Amendment dated as of November
12, 1996 to the Credit Agreement dated as of June 27, 1996
among Hexcel Corporation and certain of its subsidiaries as
borrowers, the institutions party thereto as lenders, the
institutions party thereto as issuing banks, Citibank, N.A.
as collateral agent and Credit Suisse as administrative
agent (incorporated herein by reference to Exhibit 10.4(b)
to Hexcel's Annual Report on Form 10-K for the year ended
December 31, 1996).

10.1(d) Consent Number 3 and Third Amendment dated as of February
27, 1997 to the Credit Agreement dated as of June 27, 1996
among Hexcel Corporation and certain of its subsidiaries as
borrowers, the institutions party thereto as lenders, the
institutions party thereto as issuing banks, Citibank, N.A.
as collateral agent and Credit Suisse as administrative
agent (incorporated herein by reference to Exhibit 10.4(c)
to Hexcel's Annual Report on Form 10-K for the year ended
December 31, 1996).

10.1(e) Amended and Restated Credit Agreement dated as of March 5,
1998 among Hexcel and certain subsidiaries as borrowers, the
lenders and issuing banks party thereto, Citibank, N.A., as
U.S. administrative agent, Citibank International plc, as
European administrative agent and Credit Suisse, as
syndication agent (incorporated herein by reference to
Exhibit 10.4(d) to Hexcel's Annual Report on Form 10-K for
the year ended December 31, 1997).

10.1(f) Second Amended and Restated Credit Agreement, dated as of
September 15, 1998, by and among Hexcel and certain of its
subsidiaries as borrowers, the lenders from time to time
parties thereto, Citibank, N.A. as documentation agent, and
Credit Suisse First Boston as lead arranger and as
administrative agent for the lenders (incorporated herein by
reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1998).

22

10.1(g) First Amendment dated as of December 31, 1998 to the Second
Amended and Restated Credit Agreement by and among Hexcel
Corporation and the Foreign Borrowers from time to time
party thereto, the banks and other financial institutions
from time to time parties thereto, Citibank, N.A., as
Documentation Agent, and Credit Suisse First Boston, as
Administrative Agent (incorporated herein by reference to
Exhibit 10.1(g) to the Company's Registration Statement on
Form S-4 (No. 333-71601), filed on March 12, 1999).

10.1(h) Consent Letter dated as of January 15, 1999 relating to the
First Amendment dated December 31, 1998 to the Second
Amended and Restated Credit Agreement dated September 15,
1998 (incorporated herein by reference to Exhibit 10.1(h) to
the Company's Registration Statement on Form S-4 (No.
333-71601), filed on March 12, 1999).

10.1(i) Second Amendment dated August 13, 1999 to the Second Amended
and Restated Credit Agreement by and among Hexcel
Corporation and the Foreign Borrowers from time to time
parties thereto, the banks and other financial institutions
from time to time parties thereto, Citibank, N.A., as
Documentation Agent, and Credit Suisse First Boston, as
Administrative Agent. (incorporated herein by reference to
Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1999).

10.1(j) Third Amendment dated March 7, 2000 to the Second Amended
and Restated Credit Agreement by and among Hexcel
Corporation and the Foreign Borrowers from time to time
parties thereto, the banks and other financial institutions
from time to time parties thereto, Citibank, N.A., as
Documentation Agent, and Credit Suisse First Boston, as
Administrative Agent.

10.1(k) Amended and Restated Collateral Agreement dated March 7,
2000 to the Second Amended and Restated Credit Agreement by
and among Hexcel Corporation and the Foreign Borrowers from
time to time parties thereto, the banks and other financial
institutions from time to time parties thereto, Citibank,
N.A., as Documentation Agent, and Credit Suisse First
Boston, as Administrative Agent.

10.2 Schedule to the ISDA Master Agreement between Credit
Lyonnais (New York Branch) and Hexcel Corporation, dated as
of September 15, 1998.

10.2(a) Confirmation dated October 22, 1998 relating to transaction
entered into pursuant to ISDA Master Agreement between
Credit Lyonnais (New York Branch) and Hexcel Corporation,
dated as of September 15, 1998.

10.3 Hexcel Corporation Incentive Stock Plan as amended and
restated January 30, 1997 (incorporated herein by reference
to Exhibit 4.3 to the Company's Registration Statement on
Form S-8, Registration No. 333-36163).

10.3(a) Hexcel Corporation Incentive Stock Plan as amended and
restated January 30, 1997 and further amended December 10,
1997 (incorporated herein by reference to Exhibit 10.5(a) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).

10.3(b) Hexcel Corporation Incentive Stock Plan, as amended and
restated on January 30, 1997, and further amended on
December 10, 1997 and March 25, 1999 (incorporated herein by

23

reference to Exhibit 4.3 of the Company's Registration
Statement on Form S-8 filed on July 26, 1999).

10.3(c) Hexcel Corporation Incentive Stock Plan, as amended and
restated on January 30, 1997, and further amended on
December 10, 1997, March 25, 1999 and December 2, 1999.

10.3(d) Hexcel Corporation Incentive Stock Plan, as amended and
restated on February 3, 2000 (incorporated herein by
reference to Annex A of the Company's Proxy Statement dated
March 31, 2000).

10.4 Hexcel Corporation 1998 Broad Based Incentive Stock Plan
(incorporated herein by reference to Exhibit 4.3 of the
Company's Form S-8 filed on June 19, 1998, Registration No.
333-57223).

10.5 Hexcel Corporation Management Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.9 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1997).

10.5(a) Hexcel Corporation Management Stock Purchase Plan, as
amended on March 25, 1999 (incorporated herein by reference
to Exhibit 4.3 of the Company's Registration Statement on
Form S-8 filed on July 26, 1999).

10.5(b) Hexcel Corporation Management Stock Purchase Plan, as
amended on March 25, 1999 and December 2, 1999.

10.5(c) Hexcel Corporation Management Stock Purchase Plan, as
amended and restated on February 3, 2000 (incorporated
herein by reference to Annex B of the Company's Proxy
Statement dated March 31, 2000).

10.6 Hexcel Corporation Management Incentive Compensation Plan
(incorporated herein by reference to Annex A of the
Company's Proxy Statement dated April 20, 1998).

10.7 Form of Employee Option Agreement Special Executive Grant
(1999) dated December 2, 1999.

10.8 Form of Employee Option Agreement (1999) dated December 2,
1999.

10.9 Form of Employee Option Agreement (1999) (incorporated
herein by reference to Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1999).

10.10 Form of Employee Option Agreement (1998) (incorporated
herein by reference to Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q for the Quarter ended
September 30, 1998).

10.11 Form of Employee Option Agreement (1997) (incorporated
herein by reference to Exhibit 10.4 to Hexcel's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1997).

10.12 Form of Employee Option Agreement (1996) (incorporated
herein by reference to Exhibit 10.5 to Hexcel's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1996).

10.13 Form of Employee Option Agreement (1995) (incorporated
herein by reference to Exhibit 10.6 to Hexcel's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1996).

24

10.14 Form of Retainer Fee Option Agreement for Non-Employee
Directors (1999).

10.15 Form of Retainer Fee Option Agreement for Non-Employee
Directors (1998) (incorporated herein by reference to
Exhibit 10.11 to Hexcel's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998).

10.16 Form of Retainer Fee Option Agreement for Non-Employee
Directors (1997) (incorporated herein by reference to
Exhibit 10.8 to Hexcel's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997).

10.17 Form of Option Agreement (Directors) (incorporated herein by
reference to Exhibit 10.13 to Hexcel's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).

10.18 Form of Short-Term Option Agreement (incorporated herein by
reference to Exhibit 10.8 to Hexcel's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 1996).

10.19 Form of Performance Accelerated Restricted Stock Unit
Agreement (Special Executive Grant December 2, 1999).

10.20 Form of Performance Accelerated Restricted Stock Unit
Agreement (December 2, 1999).

10.21 Form of Performance Accelerated Restricted Stock Unit
Agreement (1999) (incorporated herein by reference to
Exhibit 10.2 to Hexcel's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1999).

10.22 Form of Performance Accelerated Restricted Stock Unit
Agreement (1998) (incorporated herein by reference to
Exhibit 10.2 to Hexcel's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1998).

10.23 Form of Performance Accelerated Restricted Stock Unit
Agreement (1997) (incorporated herein by reference to
Exhibit 10.5 to Hexcel's Quarterly Report on Form 10-Q for
the Quarter ended June 30, 1997).

10.24 Form of Performance Accelerated Restricted Stock Unit
Agreement (1996) (incorporated herein by reference to
Exhibit 10.9 to Hexcel's Quarterly Report on Form 10-Q for
the Quarter ended March 31, 1996).

10.25 Form of Reload Option Agreement (1997) (incorporated herein
by reference to Exhibit 10.8 of Hexcel's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 1997).

10.26 Form of Reload Option Agreement (1996) (incorporated herein
by reference to Exhibit 10.10 to Hexcel's Quarterly Report
on Form 10-Q for the Quarter ended March 31, 1996).

10.27 Form of Exchange Performance Accelerated Stock Option
Agreement (incorporated Herein by reference to Exhibit 10.3
to Hexcel's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1998).

10.28 Form of Performance Accelerated Stock Option Agreement
(Director) (incorporated herein by reference to Exhibit 10.6

25

to Hexcel's Quarterly Report on Form 10-Q for the Quarter
ended June 30, 1997).

10.29 Form of Performance Accelerated Stock Option (Employee)
(incorporated herein by reference to Exhibit 10.7 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1997).

10.30 Form of Grant of Restricted Stock Unit Agreement
(incorporated herein by reference to Exhibit 10.3 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1999).

10.31 Form of Grant of Restricted Stock Unit Agreement
(incorporated herein by reference to Exhibit 10.10 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1997).

10.32 Hexcel Corporation 1997 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.2 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 1997).

10.33 Employment Agreement dated as of February 29, 1996 between
Hexcel and John J. Lee (incorporated herein by reference to
Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).

10.33(a) Employee Option Agreement dated as of February 29, 1996
between Hexcel and John J. Lee (incorporated herein by
reference to Exhibit 10.14(a) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).

10.33(b) Bankruptcy Court Option Agreement dated as of February 29,
1996 between Hexcel and John J. Lee (incorporated herein by
reference to Exhibit 10.14(b) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).

10.33(c) Performance Accelerated Restricted Stock Unit Agreement
dated as of February 29, 1996 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.14(c) to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).

10.33(d) Short-Term Option Agreement dated as of February 29, 1996
between Hexcel and John J. Lee (incorporated herein by
reference to Exhibit 10.14(d) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).

10.33(e) Form of Reload Option Agreement dated as of February 29,
1996 between Hexcel and John J. Lee (incorporated herein by
reference to Exhibit 10.14(e) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).

10.33(f) Supplemental Executive Retirement Agreement dated as of May
20, 1998 between Hexcel and John J. Lee (incorporated herein
by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended June 30, 1998).

10.33(g) Split Dollar Agreement dated as of January 21, 1999 among
Hexcel, John J. Lee and certain Trustees (incorporated
herein by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended March
31, 1999).

10.33(h) Executive Severance Agreement between Hexcel and John J. Lee
dated as of February 3, 1999 (incorporated herein by
reference to Exhibit 10.5 to the Company's Quarterly Report
on Form 10-Q for the Quarter ended March 31, 1999).

26

10.33(i) Letter dated December 2, 1999 from Hexcel Corporation to
John J. Lee, regarding the Company's Management Incentive
Compensation Plan for 1999.

10.34 Summary of Terms of Employment (effective as of July 15,
1998) between Hexcel and Harold E. Kinne, President and
Chief Operating Officer of Hexcel (incorporated herein by
reference to Exhibit 10.5 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1998).

10.34(a) Letter dated December 2, 1999 from Hexcel Corporation to
Harold E. Kinne, regarding the Company's Management
Incentive Compensation Plan for 1999.

10.35 Letter dated December 2, 1999 from Hexcel Corporation to
Stephen C. Forsyth, regarding the Company's Management
Incentive Compensation Plan for 1999.

10.36 Employment Agreement dated as of July 25, 1998 (effective
date September 15, 1998) between Hexcel and William D.
Bennison, President of Clark-Schwebel Corporation (a
wholly-owned subsidiary of Hexcel) (incorporated herein by
reference to Exhibit 10.8 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1998).

10.37 Form of Executive Severance Agreement between Hexcel and
certain executive officers dated as of February 3, 1999
(incorporated herein by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-Q for the Quarter
ended March 31, 1999).

10.38 Form of Executive Severance Agreement between Hexcel and
certain executive officers dated as of February 3, 1999
(incorporated herein by reference to Exhibit 10.7 to the
Company's Quarterly Report on Form 10-Q for the Quarter
ended March 31, 1999).

10.39 Governance Agreement dated as of February 29, 1996 between
Hexcel and Ciba-Geigy Limited (incorporated herein by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).

10.40 Registration Rights Agreement dated as of February 29, 1996
between Hexcel and Ciba-Geigy Limited (incorporated herein
by reference to Exhibit 10.22 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1995).

10.40(a) Amendment No.1 dated as of December 29, 1998 to the
Registration Rights Agreement by and between Ciba-Geigy
Limited (which has since assigned the Registration Rights
Agreement to Ciba Specialty Chemical Holding Inc.) and
Hexcel Corporation (incorporated herein by reference to
Exhibit 10.29(a) to the Company's Registration Statement on
Form S-4 (No. 333-71601), filed on March 12, 1999).

10.41 Amendment dated as of November 22, 1995 to the Agreement
Governing United States Employment Matters between Hexcel
and Ciba-Geigy Corporation (incorporated herein by reference
to Exhibit 10.23(a) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).

10.42 Employment Matters Agreement dated as of February 29, 1996
among Ciba-Geigy PLC, Composite Materials Limited and Hexcel
(incorporated herein by reference to Exhibit 10.24 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).

10.43 Lease Agreement, dated as of September 15, 1998, by and
among Clark-Schwebel Corporation (a wholly-owned subsidiary
of Hexcel) as lessee, CSI Leasing Trust as lessor, and
William J. Wade as co-trustee for CSI Leasing Trust
(incorporated herein by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the Quarter
ended September 30, 1998).

27

12.1 Statement regarding the computation of ratio of earnings to
fixed charges for the Company (electronic filing only).

21.1 Subsidiaries of the Company

23 Consent of Independent Accountants - PricewaterhouseCoopers
LLP.

27 Financial Data Schedule (electronic filing only).

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Stamford, State of Connecticut.

HEXCEL CORPORATION

March 24, 2000 By: /s/ JOHN J. LEE
-------------------------------------
John J. Lee, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Signature Title Date

/s/ JOHN J. LEE Chairman of the March 24, 2000
- - -------------------------------------------- Board of Directors and
(John J. Lee) Chief Executive Officer
(Principal Executive Officer)

/s/ HAROLD E. KINNE President, Chief Operating Officer March 24, 2000
- - -------------------------------------------- and Director
(Harold E. Kinne)

/s/ STEPHEN C. FORSYTH Executive Vice President and March 24, 2000
- - -------------------------------------------- Chief Financial Officer
(Stephen C. Forsyth) (Principal Financial Officer)

/s/ KIRK G. FORBECK Corporate Controller March 24, 2000
- - -------------------------------------------- (Principal Accounting Officer)
(Kirk G. Forbeck)

28

/s/ ROBERT S. EVANS Director March 24, 2000
- - --------------------------------------------
(Robert S. Evans)

/s/ MARSHALL S. GELLER Director March 24, 2000
- - --------------------------------------------
(Marshall S. Geller)

/s/ WALTER D. HOSP Director March 24, 2000
- - --------------------------------------------
(Walter D. Hosp)

/s/ JOHN J. McGRAW Director March 24, 2000
- - --------------------------------------------
(John J. McGraw)

/s/ MARTIN RIEDIKER Director March 24, 2000
- - --------------------------------------------
(Martin Riediker)

/s/ LEWIS RUBIN Director March 24, 2000
- - --------------------------------------------
(Lewis Rubin)

/s/ STANLEY SHERMAN Director March 24, 2000
- - --------------------------------------------
(Stanley Sherman)

/s/ MARTIN L. SOLOMON Director March 24, 2000
- - --------------------------------------------
(Martin L. Solomon)

29

Selected Financial Data
(In millions, except per share data)

The following table summarizes selected financial data for continuing
operations as of and for the five years ended December 31:

- - ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------

Statement of Operations Data:

Net sales $ 1,151.5 $ 1,089.0 $ 936.9 $ 695.2 $ 350.2
Cost of sales 909.0 817.7 714.3 553.9 283.1
-------------------------------------------------------------------------
Gross margin 242.5 271.3 222.6 141.3 67.1
Selling, general and administrative
expenses 128.7 117.9 102.4 79.4 41.7
Research and technology expenses 24.8 23.7 18.4 16.7 7.6
Business acquisition and
consolidation expenses 20.1 12.7 25.3 42.4 -
-------------------------------------------------------------------------
Operating income 68.9 117.0 76.5 2.8 17.8
Interest expense 73.9 38.7 25.8 21.6 8.7
Other income, net - - - (3.0) (0.8)
Bankruptcy reorganization expenses - - - - 3.4
-------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (5.0) 78.3 50.7 (15.8) 6.5
Recovery of (provision for) income taxes 1.7 (28.4) 22.9 (3.4) (3.3)
Equity in income and write-down in
investments in affiliated companies (20.0) 0.5 - - -
=========================================================================
Income (loss) from continuing
operations $ (23.3) $ 50.4 $ 73.6 $ (19.2) $ 3.2
=========================================================================

Income (loss) per share from
continuing operations:
Basic $ (0.64) $ 1.38 $ 2.00 $ (0.58) $ 0.21
Diluted $ (0.64) $ 1.24 $ 1.74 $ (0.58) $ 0.20
=========================================================================

- - ---------------------------------------------------------------------------------------------------------------------

Balance Sheet Data:

Current assets $ 327.8 $ 439.0 $ 387.1 $ 316.9 $ 128.1
Non-current assets 934.1 965.2 424.5 384.8 102.5
=========================================================================
Total assets $ 1,261.9 $ 1,404.2 $ 811.6 $ 701.7 $ 230.6
=========================================================================

Current liabilities $ 210.5 $ 219.4 $ 186.4 $ 188.8 $ 66.5
Long-term liabilities 781.3 882.4 375.3 333.6 115.7
Stockholders' equity 270.1 302.4 249.9 179.3 48.4
=========================================================================
Total liabilities and stockholders'
equity $ 1,261.9 $ 1,404.2 $ 811.6 $ 701.7 $ 230.6
=========================================================================

- - ---------------------------------------------------------------------------------------------------------------------

Other Data:

Cash dividends per share - - - - -
Shares outstanding at year-end, less
treasury stock 36.6 36.4 36.9 36.6 18.1
- - ---------------------------------------------------------------------------------------------------------------------

A discussion of the impact of business acquisitions on selected financial data is contained in Notes 1, 2 and 3 to the
accompanying consolidated financial statements.

30

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Business Overview

-----------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------
Pro Forma
(In millions, except per share data) 1999 1998 (d) 1998 1997
-----------------------------------------------------------------------------------------------------------------

Net sales $ 1,151.5 $ 1,234.8 $ 1,089.0 $ 936.9
Gross margin % 21.1% 24.7% 24.9% 23.8%
Adjusted operating income % (a) 7.7% 11.9% 11.9% 10.9%
Adjusted EBITDA (b) $ 150.4 $ 208.4 177.2 $ 137.6
Business acquisition & consolidation expenses $ 20.1 $ 12.7 12.7 $ 25.3
Net income (loss) $ (23.3) $ 49.5 50.4 $ 73.6
Adjusted net income (c) $ 9.6 $ 57.6 59.2 $ 47.6
-----------------------------------------------------------------------------------------------------------------

Diluted net income (loss) per share $ (0.64) $ 1.22 1.24 $ 1.74
Adjusted diluted net income per share (c) $ 0.26 $ 1.40 1.43 $ 1.17
-----------------------------------------------------------------------------------------------------------------

(a) Excludes business acquisition and consolidation ("BA&C") expenses.
(b) Excludes BA&C expenses, interest, taxes, depreciation, amortization, and
equity in income and write-down in investments in affiliated companies. See
"Financial Condition and Liquidity" for a reconciliation of net income
(loss) to EBITDA and Adjusted EBITDA.
(c) Excludes BA&C expenses and other acquisition related costs, net of
applicable tax benefits, and a write-down in an investment in an affiliated
company, and assumes a U.S. effective tax provision of 36% in 1997.
(d) Pro forma results give effect to the September 1998 acquisition of Clark-
Schwebel as if the transaction had occurred at the beginning of 1998.

Hexcel's 1999 operating results were significantly below 1998, reflecting
the impact of declining aircraft production rates at The Boeing Company
("Boeing") as well as manufacturing and inventory adjustments in excess of
production rate changes by a number of aerospace customers in the U.S., Europe
and certain export markets. In addition, 1999 results were adversely affected by
price reductions, which were made early in the year for certain aerospace
products and electronics fabrics in response to market conditions, and by
significant increases in the installed capacity of the carbon fiber industry,
which made it difficult for Hexcel to sell its own excess carbon fiber capacity.
These factors were only partially offset by increased sales of aircraft interior
products and services, improved demand for fabrics used in electronics and
ballistics applications, particularly in the second half of the year, and
continued growth in the use of composite materials for wind energy and
automotive applications.

In response to these difficult conditions, Hexcel intensified its efforts
to reduce costs, improve operating cash flow and pay down debt. In September
1999, the Company announced a new business consolidation program designed to
eliminate excess capacity and overhead, improve manufacturing focus and yields,
and create additional centers of manufacturing excellence. This program is
intended to build upon the success of the Company's previous business
consolidation activities which, together with ongoing "Lean Enterprise"
initiatives aimed at continuous productivity improvement, enabled the Company to
reduce its total labor and overhead costs by approximately $25 million in 1999.
Additional cost savings of more than $20 million are expected in 2000.

Progress during the year in improving manufacturing cycle times and working
capital management enabled Hexcel to generate $86.8 million of free cash flow
(measured as the change in debt net of cash). As a result, the Company was able
to exceed its debt reduction target and preserve financial flexibility in spite
of disappointing operating results. Although Hexcel does not expect a comparable
amount of free cash flow in 2000, the Company does expect to generate ongoing
incremental improvements in the use of both working capital and capital assets.

31

Looking forward to 2000, Hexcel anticipates less volatility in customer
demand and continued benefits from business consolidation and Lean Enterprise
activities. Boeing has publicly indicated that it may be able to sustain
aircraft production at the current rate of about 480 per year, due in part to
the continued economic recovery in Asia, while Airbus Industrie ("Airbus") is
projecting a modest increase in aircraft deliveries to more than 300 per year.
At the same time, independent forecasts indicate continued growth in the
production of regional and business aircraft, as well as in a number of
significant military aerospace programs projected to begin moving into
full-scale production towards the end of the year.

Hexcel also expects moderate volume growth in the sale of lightweight
fabrics used in the manufacture of multi-layer printed circuit boards ("PCBs"),
driven by the growth of electronic infrastructure for the Internet and consumer
demand for personal electronic devices. The Company will also continue to pursue
new applications for reinforcement products and composite materials in
high-growth industrial markets. Sales of product for wind energy, automotive and
ballistics applications are all expected to grow in 2000.

In December 1999, Hexcel announced that it has begun to explore strategic
alternatives for its Engineered Products business segment, including a possible
sale. This review is being conducted in connection with an overall assessment of
the strategic opportunities and investment needs of each segment of the
Company's business. The objective of this assessment is to determine how the
Company can further prioritize its management focus and optimize its business
portfolio.

Business Acquisitions

Acquired Clark-Schwebel Business

Hexcel acquired the industrial fabrics business of Clark-Schwebel, Inc. and
its subsidiaries ("Clark-Schwebel") on September 15, 1998. The business acquired
from Clark-Schwebel is engaged in the manufacture and sale of high-quality
fiberglass fabrics, which are used to make PCBs for electronic equipment such as
computers, cellular telephones, televisions and automobiles. This 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, Clark-Schwebel 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 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 owns interests in two joint ventures in Taiwan: a
50% interest in Nittobo Norplex Oak Co., Ltd. and a 51% interest in
Asahi-Schwebel Taiwan; and
- - - a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"),
headquartered in the United States.

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 exercise price of the options to increase the Company's equity
interest in CS-Interglas was significantly higher than their fair market value,
and as a result, Hexcel allowed the options to expire unexercised on December
31, 1999.

The acquisition of the Clark-Schwebel business was an important strategic
transaction for Hexcel. The acquisition established Hexcel as a leading global
materials supplier to the electronics and telecommunications industries, which

32

the Company believes have attractive long-term growth potential. Furthermore,
the acquisition added to Hexcel's revenue base and has further diversified the
Company's business beyond the historically cyclical commercial aerospace market.

The acquisition of Clark-Schwebel's industrial fabrics 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 business, other than certain excluded assets and
liabilities, in exchange for approximately $473 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. Refer to "Financial Resources" for a discussion of
acquisition financing.

Acquired Fiberite Assets

On September 30, 1997, the Company acquired from Fiberite, Inc.
("Fiberite") its satellite business consisting of intangible assets and
inventory, and certain non-exclusive worldwide rights to other prepreg
technologies, for $37.0 million in cash. Substantially all of the $37.0 million
purchase price, less an $8.0 million write-off of acquired in-process research
and technology, was allocated to intangible assets.

The above acquisitions were accounted for under the purchase method of
accounting. Accordingly, the consolidated balance sheets, statements of
operations, stockholders' equity and comprehensive income, and cash flows
include the financial position, results of operations and cash flows of the
businesses acquired as of such dates and for such periods that these businesses
were owned by Hexcel. Further discussion and analysis of the Company's business
acquisitions is contained in Notes 1 and 2 to the accompanying consolidated
financial statements.

Results of Operations

1999 Compared to 1998

Net Sales: Net sales for 1999 were $1,151.5 million, compared with net
sales for 1998 of $1,089.0 million. The 1998 results include those of the
acquired Clark-Schwebel business from the date of acquisition, September 15,
1998, through December 31, 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, 1998 sales were $1,234.8 million. The 7%
decrease in 1999 net sales relative to 1998 pro forma net sales was primarily
due to declining aircraft production rates by Boeing, inventory adjustments in
excess of build rate changes by aerospace customers, price reductions in early
1999 for certain aerospace products and electronic fabrics, and a decrease in
carbon fiber sales due to the impact of excess installed industry capacity. On a
constant currency basis, 1999 sales would not have been materially different
than reported.

Net sales for 1999 and pro forma net sales for 1998, by product group and
market segment, were as follows:

- - ------------------------------------ --------------- ----------------- --------------- -------------- ----------------
Commercial Space &
(In millions) Aerospace Defense Electronics Industrial Total
- - ------------------------------------ --------------- ----------------- --------------- -------------- ----------------

1999 Net Sales
Reinforcement products $ 52.0 $ 18.2 $ 166.4 $ 94.3 $ 330.9
Composite materials 387.9 101.0 - 117.0 605.9
Engineered products 201.7 13.0 - - 214.7
- - ------------------------------------ --- ----------- ---- ------------ --- ----------- -- ----------- ----- ----------
Total $ 641.6 $ 132.2 $ 166.4 $ 211.3 $ 1,151.5
57% 11% 14% 18% 100%
- - ------------------------------------ --- ----------- ---- ------------ --- ----------- -- ----------- ----- ----------

Pro Forma 1998 Net Sales
Reinforcement products $ 61.6 $ 26.4 $ 179.3 $ 103.3 $ 370.6
Composite materials 450.6 104.0 - 103.4 658.0
Engineered products 195.0 11.2 - - 206.2
- - ------------------------------------ --- ----------- ---- ------------ --- ----------- -- ----------- ----- ----------
Total $ 707.2 $ 141.6 $ 179.3 $ 206.7 $ 1,234.8
57% 11% 15% 17% 100%
- - ------------------------------------ --- ----------- ---- ------------ --- ----------- -- ----------- ----- ----------

33

Commercial aerospace net sales for 1999 were $641.6 million, compared to
$707.2 million for 1998, on a pro forma basis. The 9% decline in commercial
aerospace net sales was largely attributable to:

- - - Declining aircraft production rates by Boeing in anticipation of lower
aircraft deliveries in 2000. Hexcel delivers product into the Boeing supply
chain on average about six months prior to aircraft delivery. Boeing
delivered 620 aircraft in 1999, but has publicly announced that it expects
to deliver about 480 aircraft in 2000.
- - - Inventory adjustments in excess of build rate changes by aerospace
customers in the U.S., Europe and certain export markets, in connection
with their efforts to improve working capital and reduce manufacturing
cycle times. Although Boeing and some of the Company's other customers have
indicated that they do not anticipate further inventory adjustments in
excess of build rate changes, the impact from some customers seeking to
reduce inventories as they improve production cycle times and productivity
is anticipated to continue in 2000.
- - - Price reductions in early 1999 for certain aerospace products, in response
to market conditions.

Approximately 28% and 32% of Hexcel's 1999 and 1998 pro forma net sales,
respectively, were identifiable as sales to Boeing and related subcontractors.
Of the net sales attributable to Boeing and its subcontractors in 1999, 25% and
3% related to commercial aerospace and space and defense market applications,
respectively. Approximately 10% of Hexcel's 1999 and 1998 pro forma net sales
were identifiable as sales to Airbus and related subcontractors. Reported
commercial aircraft deliveries by Boeing and Airbus improved significantly in
1999, from a combined 788 aircraft in 1998 to 914 aircraft in 1999, including
620 and 294 deliveries from Boeing and Airbus, respectively. Based on published
projections, combined deliveries for Boeing and Airbus are expected to decline
to approximately 800 in 2000, and to between 700 and 800 in 2001.

As a result of the decline in aircraft production rates that began in the
second quarter of 1999, Hexcel expects net sales to the commercial aerospace
market to be moderately lower in 2000 than in 1999. However, the revenue decline
attributable to these changes in production rates is expected to be partially
offset by improved sales to regional and business aircraft manufacturers, as
well as to the aircraft aftermarket.

Space and defense net sales for 1999 decreased 7% from pro forma net sales
for 1998, reflecting a decrease in sales of reinforcement products and composite
materials to select military and space programs. This decrease is attributable
to the conclusion of specific contracts, as well as to the impact of declining
demand for satellites and satellite launch vehicles in response to recent launch
failures and concerns about the financial viability of certain satellite
ventures.

Furthermore, Hexcel's carbon fiber manufacturing capacity utilization was
only 50% to 60% in 1999, compared to 90% or higher for much of 1998. Initially,
this reduction was due to inventory corrections by space and defense customers,
who purchased and/or ordered more carbon fiber than they needed in response to
significant carbon fiber supply shortages in 1997. However, 1999 sales were also
impacted by the changes in the commercial aerospace market as well as by the
overhang of new global production capacity added by Japanese producers. With the
high level of fixed costs in this business, reduced production output
significantly impacts the profitability of the business.

Despite these short-term impacts, Hexcel anticipates growth in carbon fiber
sales towards the end of 2000 and into 2001, as new military aircraft and launch
vehicle programs, in both the U.S. and Europe, enter full-scale production. The
military market uses a higher percentage of advanced structural materials and
higher value products than the commercial aerospace market. The Company is
currently qualified to supply materials to a broad range of military aircraft
and helicopters scheduled to enter full-scale production in the near future.
These programs include V-22 (Osprey) tilt-roter, F/A-18E/F (Hornet), F-22
(Raptor), C-17 transport, European Fighter Aircraft (Typhoon), RAH-66 (Comanche)
and NH90 helicopter. In addition, Hexcel is working to qualify the use of its
own carbon fiber in a broader range of its commercial aerospace prepreg
products.

34

1999 net sales to electronics markets decreased 7% from pro forma net sales
for 1998. In the second and third quarters of 1998, the electronics industry
experienced a worldwide reduction in sales volume, primarily resulting from
inventory adjustments across the supply chain. Towards the end of the third
quarter and into the fourth quarter of 1998, Hexcel experienced increased order
volume for woven fiberglass products used in electronic PCB applications,
suggesting an end to the inventory correction. However, intense competition from
manufacturers in Asia and Europe continued to place pressure on volumes and
prices for these products. A reduction in demand for PCBs in 1998, due both to a
change in the electronics industry inventory cycle and reduced Asian market
demand, led Asian and other producers of electronic glass fabrics and laminates
to seek western markets for their products. This resulted in a rapid reduction
in prices for glass fabrics in the fourth quarter of 1998 and the first quarter
of 1999, reducing the profitability of this market to Hexcel.

However, in the second half of 1999, Hexcel saw demand for lightweight
electronic fabrics used in multi-layer PCB applications start to grow. The
Company anticipates that this growth will continue in 2000. Market forecasts
suggest that the demand for electronic fabrics used in multi-layer boards will
grow at two to three times GDP annually over the next few years. Pricing remains
depressed, but as demand grows worldwide, particularly in Asia, and as capacity
utilization improves, prices should begin to rise.

Industrial net sales in 1999 increased 2% from pro forma net sales for
1998. The increase was primarily attributable to:

- - - Increased sales of aramid and specialty fabrics for ballistics
applications, in response to increased demand for lightweight protective
vests by police forces and the U.S. military.
- - - Growth in sales of composite materials for wind energy applications, which
nearly doubled from 1998 to 1999, and are expected to continue to grow in
2000.
- - - Increased sales of composite materials to the automotive industry,
reflecting the Company's development of new product applications for
automotive customers.

These positive factors were partially offset by reduced sales of carbon
fiber for industrial applications, due to the impact of excess industry
capacity, as well as lower sales for certain recreation applications.

Gross Margin: Gross margin for 1999 was $242.5 million, or 21.1% of net
sales, compared with $271.3 million, or 24.9% of net sales, for 1998. On a pro
forma basis, gross margin for 1998 was 24.7% of net sales. The decrease in 1999
gross margin relative to 1998 is the result of reduced sales volume and price
reductions, as discussed above, and the associated reduction in the absorption
of fixed factory costs. These factors were partially mitigated by reductions in
labor and overhead costs, as well as negotiated reductions in the prices of
certain raw materials.

Selling, General and Administrative ("SG&A") Expenses: SG&A expenses were
$128.7 million in 1999, or 11.1% of net sales. This compared to $117.9 million,
or 10.8% of net sales for 1998. The aggregate dollar increase in SG&A was
primarily attributable to the acquired Clark-Schwebel business.

Research and Technology ("R&T") Expenses: R&T expenses were $24.8 million
in 1999, or 2.2% of net sales. This compared to $23.7 million, or 2.2% of net
sales for 1998. The aggregate dollar increase in R&T was primarily attributable
to the acquired Clark-Schwebel business.

Operating Income: Operating income decreased from $117.0 million, or 10.8%
of net sales, in 1998 to $68.9 million, or 6.0% of net sales, in 1999. The
aggregate decrease in operating income includes a $7.4 million increase in
business acquisition and consolidation expenses. Excluding business acquisition
and consolidation expenses, operating income as a percentage of sales decreased
from 11.9% in 1998 to 7.7% in 1999. The decrease was primarily due to the
reduction in sales volumes and prices, and the related gross margin impact.

35

Interest Expense: Interest expense was $73.9 million, or 6.4% of net sales,
for 1999 compared to $38.7 million, or 3.6% of net sales, for 1998. The increase
in interest expense was primarily due to the increase in outstanding debt
relating to the acquisition of the Clark-Schwebel business.

Recovery of (Provision for) Income Taxes: In 1999, the recovery of income
taxes was $1.7 million, compared to a provision for income taxes of $28.4
million in 1998. The effective income tax rate was 34% and 36% for 1999 and
1998, respectively.

Equity in Income and Write-down in Investments in Affiliated Companies:
Competitive conditions in the electronics market resulting from the Asian
economic situation also impacted the performance of Hexcel's joint ventures in
1999. As a result, the Company recognized a nominal amount of equity in income
of affiliated companies in 1999.

In the third quarter of 1999, the Company wrote down its investment in one
of these joint ventures, CS-Interglas, by $20.0 million to its estimated fair
market value. The write-down was the result of management's decision to allow
its fixed-price options to increase its equity investment in CS-Interglas, from
43.6% to 84%, to expire unexercised, and an assessment that an
other-than-temporary decline in the investment occurred due to its deteriorating
financial condition. The amount of the write-down was determined based on
available market information and appropriate valuation methodologies. The
Company did not record a deferred tax benefit on the write-down because of
limitations imposed by foreign tax laws on the Company's ability to realize a
tax benefit.

Net Income (Loss) and Net Income (Loss) Per Share:

-----------------------------------------------------------------------------------------------------------------
Pro Forma
(In millions, except per share data) 1999 1998 1998
-----------------------------------------------------------------------------------------------------------------

Net income (loss) $(23.3) $ 49.5 $ 50.4
Diluted net income (loss) per share $(0.64) $ 1.22 $ 1.24
Diluted net income (loss) per share, excluding goodwill amortization $(0.40) $ 1.40 $ 1.34
Adjusted diluted net income (loss) per share, excluding BA&C expenses and
other acquisition-related costs, and a write-down in an investment in an
affiliated company $ 0.26 $ 1.40 $ 1.43
Diluted weighted average shares outstanding 36.4 45.7 45.7
-----------------------------------------------------------------------------------------------------------------

The decrease in the number of diluted weighted average shares outstanding
in 1999, relative to 1998, is attributable to the exclusion of 9.0 million
potential common shares relating to the convertible subordinated notes, due
2003, the convertible subordinated debentures, due 2011, and stock options that
were antidilutive in the 1999 period. Refer to Note 13 to the accompanying
consolidated financial statements for the calculation and the number of shares
used for diluted net income (loss) per share.

1998 Compared to 1997

Net Sales: Pro forma net sales for 1998 and 1997, after giving effect to
the acquisition of the Clark-Schwebel business as if the transaction had
occurred at the beginning of 1997, were $1,234.8 million and $1,177.1 million,
respectively. Actual net sales for 1998 were $1,089.0 million, versus $936.9
million for 1997. The actual results for 1998 include the results of the
acquired Clark-Schwebel business from the date of acquisition, September 15,
1998, through December 31, 1998. Excluding the results of the acquired
Clark-Schwebel business, 1998 sales were approximately $1,030.6 million, a 10%
increase over 1997. On a constant currency basis, 1998 sales would not have been
materially different than reported.

36

Pro forma net sales for 1998 and 1997, as well as actual net sales for 1998
and 1997, by product group and market segment were, as follows:

- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
Commercial Space &
(In millions) Aerospace Defense Electronics Industrial Total
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
1998 Pro Forma Net Sales

Reinforcement products $ 61.6 $ 26.4 $179.3 $103.3 $ 370.6
Composite materials 450.6 104.0 - 103.4 658.0
Engineered products 195.0 11.2 - - 206.2
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
Total $707.2 $141.6 $179.3 $206.7 $1,234.8
57% 11% 15% 17% 100%
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
1997 Pro Forma Net Sales
Reinforcement products $ 49.5 $ 13.9 $203.8 $144.1 $ 411.3
Composite materials 403.9 64.2 - 112.9 581.0
Engineered products 169.8 10.2 - 4.8 184.8
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
Total $623.2 $ 88.3 $203.8 $261.8 $1,177.1
53% 7% 17% 23% 100%
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------

The 13% growth in pro forma net sales to the commercial aerospace market
from 1997 to 1998 was largely attributable to increased sales of composite
materials and reflected the increase in commercial aircraft build rates by
Boeing and Airbus. The increase also reflected an improvement in the Engineered
Products segment's shipments of retrofit interiors to airline customers.

- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
Commercial Space &
(In millions) Aerospace Defense Electronics Industrial Total
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------

1998 Net Sales
- - --------------------------------------- -----------------------------------------------------------------------------

Reinforcement products $ 24.5 $ 26.4 $ 85.2 $ 88.7 $ 224.8
Composite materials 450.6 104.0 - 103.4 658.0
Engineered products 195.0 11.2 - - 206.2
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
Total $670.1 $141.6 $ 85.2 $192.1 $1,089.0
62% 13% 8% 17% 100%
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
1997 Net Sales
Reinforcement products $ 23.7 $ 13.9 $ 48.3 $ 85.2 $ 171.1
Composite materials 403.9 64.2 - 112.9 581.0
Engineered products 169.8 10.2 - 4.8 184.8
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------
Total $597.4 $ 88.3 $ 48.3 $202.9 $ 936.9
64% 9% 5% 22% 100%
- - --------------------------------------- -------------- ---------------- -------------- -------------- ---------------

Approximately 35% and 36% of Hexcel's 1998 and 1997 actual net sales,
respectively, were identifiable as sales to Boeing and related subcontractors.
Of the 35% of sales attributable to Boeing and its subcontractors, 32% and 3%
related to commercial aerospace and space and defense market applications,
respectively. Approximately 11% and 10% of Hexcel's 1998 and 1997 net sales,
respectively, were identifiable as sales to Airbus and related subcontractors.
Reported commercial aircraft deliveries by Boeing and Airbus improved
significantly in 1998, from a combined 557 aircraft in 1997 to 788 aircraft in
1998, including 559 and 229 deliveries from Boeing and Airbus, respectively.
Depending on the product, orders placed with Hexcel are received anywhere
between one and eighteen months prior to delivery of the aircraft to the
customer, with an average lead time of about six months.

Space and defense pro forma net sales increased 60% from 1997 to 1998,
reflecting an increase in sales of reinforcement products and composite
materials to select military and space programs, as well as the Company's
acquisition of Fiberite's satellite business on September 30, 1997.

Pro forma electronics net sales decreased 12% from 1997 to 1998. In the
second and third quarters of 1998, the electronics industry, including Hexcel,
experienced a worldwide reduction in sales volume, primarily resulting from
inventory adjustments across the supply chain. Towards the end of the third
quarter and into the fourth quarter of 1998, the Company experienced increased
order volume for woven fiberglass products used in electronic PCB applications,
suggesting an end to the inventory correction. However, intense competition from
manufacturers located in Asia continued to place pressure on volumes and prices

37

for these products. The Company was successful in partially offsetting these
price reductions by obtaining lower raw material prices.

Pro forma industrial net sales decreased 21% from 1997 to 1998, primarily
reflecting a reduction in the level of soft body armor sales to various
government agencies and reduced customer demand for certain products in this
market.

Gross Margin: Gross margin for 1998 was $271.3 million, or 24.9% of net
sales, compared with $222.6 million, or 23.8% of net sales, for 1997. Excluding
the acquired Clark-Schwebel business, 1998 gross margin was also 24.9%. The
improvement in 1998 gross margin relative to 1997 was the result of higher sales
volume and the benefit from the Company's 1996 business consolidation program.
While gross margin for 1998 increased over 1997, on a quarterly trend basis, the
Company's gross margin percentage leveled off as the Company's 1996 business
consolidation program approached completion and commercial aerospace growth
flattened.

SG&A Expenses: SG&A expenses were $117.9 million in 1998, or 10.8% of net
sales. This compared to $102.4 million, or 10.9% of net sales for 1997. The
aggregate dollar increase in SG&A was primarily attributable to the increased
sales volume in commercial aerospace and the acquired Clark-Schwebel business.

R&T Expenses: R&T expenses were $23.7 million in 1998, or 2.2% of net
sales. This compared to $18.4 million, or 2.0% of net sales for 1997. The
aggregate dollar increase in R&T was attributable to additional expenditures in
1998 resulting from an increased commitment to R&T activities, and to a lesser
extent, the acquired Clark-Schwebel business.

Operating Income: Operating income increased from $76.5 million, or 8.2% of
net sales, in 1997 to $117.0 million, or 10.7% of net sales, in 1998. The
aggregate increase in operating income reflected the higher sales volume,
improved gross margins, a $12.6 million decrease in business acquisition and
consolidation expenses and $7.6 million from the acquired Clark-Schwebel
business. Excluding business acquisition and consolidation expenses, operating
income as a percentage of sales increased from 10.9% in 1997 to 11.9% in 1998.

Interest Expense: Interest expense was $38.7 million, or 3.6% of net sales,
for 1998 compared to $25.8 million, or 2.7% of net sales, for 1997. The increase
in interest expense was primarily due to the additional financing required for
the acquired Clark-Schwebel business as well as working capital needs, and a
$1.6 million write-off of capitalized loan fees relating to the Company's
previous credit facilities.

Recovery of (Provision for) Income Taxes: The effective income tax rate for
1998 was 36%. For the year ended December 31, 1997, the recovery of income taxes
was $22.9 million, which included a $39.0 million reversal of a U.S. tax
valuation allowance.

Prior to September 30, 1997, the Company had fully provided valuation
allowances against its U.S. net deferred tax assets, as there were uncertainties
regarding the Company's ability to generate sufficient future taxable income to
realize these net deferred tax assets. On September 30, 1997, the Company
reversed its U.S. tax valuation allowance, as it was more likely than not that
these tax assets would be realized. As a result, excluding the $39.0 million
U.S. valuation allowance reversal, no provision for U.S. federal income taxes
had been recorded for the first nine months of 1997 due to the utilization of
net operating loss carryforwards.

Equity in Income of Affiliated Companies: As part of the acquired
Clark-Schwebel business, net income for 1998 included $0.5 million of equity in
income from affiliated companies.

38

Net Income and Net Income Per Share:

------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) 1998 1997
------------------------------------------------------------------------------------------------------------------

Net income $ 50.4 $ 73.6
Diluted net income per share $ 1.24 $ 1.74
Diluted net income per share, excluding goodwill amortization $ 1.34 $ 1.77
Adjusted diluted net income per share, excluding BA&C expenses and other
acquisition-related costs, and assuming a U.S. effective tax rate of 36% in $ 1.43 $ 1.17
1997
Diluted weighted average shares outstanding 45.7 46.0
------------------------------------------------------------------------------------------------------------------

See Note 13 to the accompanying consolidated financial statements for the
calculation, including the number of shares used, of diluted net income per
share.

Financial Condition and Liquidity

Financial Resources

In connection with the acquisition of the industrial fabrics business of
Clark-Schwebel on September 15, 1998, Hexcel obtained a new global credit
facility (the "Senior Credit Facility") to: (a) fund the purchase of the
Clark-Schwebel business; (b) refinance the Company's existing revolving credit
facility; and (c) provide for ongoing working capital and other financing
requirements of the Company. The Senior Credit Facility was subsequently amended
on January 21, 1999, August 13, 1999 and March 7, 2000, to accommodate, among
other things, the issuance of $240.0 million of 9.75% senior subordinated notes
and the impact of the decline in the Company's operating results on certain
financial covenants.

Effective with the March 7, 2000, amendment, the Senior Credit Facility
provides Hexcel with approximately $516.5 million of borrowing capacity, subject
to certain limitations. Interest on outstanding borrowings ranges from 0.75% to
3.00% in excess of the applicable London interbank rate, or at the option of the
Company, from 0.0% to 2.00% 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 that ranges 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, as well as a security interest in certain U.S. accounts
receivable, inventories, and machinery and equipment. Further, under certain
defined circumstances, the Company has agreed to provide the lenders with a
security interest in certain additional U.S. accounts receivable, inventories,
machinery and equipment, and land and buildings on September 30, 2000.

For the years ended December 31, 1999, 1998 and 1997, interest on
outstanding borrowings under Hexcel's Senior Credit Facility, or previous
revolving credit facility, bore interest at approximately 0.30% to 2.75% in
excess of the applicable London interbank rate, or at the option of Hexcel, 0.0%
to 1.75% in excess of the base rate of the administrative agent for the lenders,
and was subject to a commitment fee ranging from approximately 0.20% to 0.50%
per annum of the total facility.

Hexcel believes that the Senior Credit Facility, as amended, is sufficient
to fund its worldwide operations in 2000. The Senior Credit Facility is
scheduled to expire in September 2004, except for approximately $98 million
which is due for repayment in September 2005. 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.

In February 1999, the Company redeemed $12.5 million of its increasing rate
senior subordinated notes payable to a related party. Such repayment was
financed with borrowings under the Company's Senior Credit Facility.

Further discussion of the Company's financial resources is contained in
Note 7 to the accompanying consolidated financial statements.

39

Other Financial Commitments

In 1999, Hexcel, Boeing and Aviation Industries of China formed a joint
venture, BHA Aero Composite Parts Co., Ltd., to manufacture composite parts for
secondary structures and interior applications for commercial aircraft. Hexcel
has a 33% equity ownership interest in this joint venture, which is located in
Tianjin, China. Also in 1999, Hexcel formed another joint venture, Asian
Composites Manufacturing Sdn. Bhd., with Boeing, Sime Link Sdn. Bhd., and
Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture
composite parts for secondary structures for commercial aircraft. Hexcel has a
25% equity ownership interest in this joint venture, which is located in Alar
Setor, Malaysia. Products manufactured by both joint ventures will be shipped to
Hexcel's customers worldwide, and it is anticipated that the first parts will be
delivered to customers in 2001. Hexcel has commitments to invest approximately
$10.7 million in these joint ventures, which are part of the Company's
Engineered Products business segment, and to provide additional loan guarantees
of $13.7 million. These commitments are expected to be made in increments
through 2002.

Mandatory redemption of the Company's 7.0% convertible subordinated
debentures, due 2011, is scheduled to begin in 2002 through annual sinking fund
requirements of $1.1 million in 2002 and $1.8 million in each year thereafter.

In 1998, Hexcel entered into a $50.0 million capital lease for property,
plant and equipment used in the acquired Clark-Schwebel business. The lease
expires in September 2006 and includes various purchase options.

Capital Expenditures

Capital expenditures were $35.6 million in 1999, compared with $66.5
million in 1998 and $57.4 million in 1997. Pro forma 1998 capital expenditures
were approximately $70 million. The decrease in 1999 expenditures from 1998
reflects reduced spending due to changing market conditions, the benefits from
Hexcel's Lean Enterprise program, and a commitment by the Company to reduce its
debt. The Company expects its capital spending in 2000 to approximate $35 to $40
million.

Adjusted EBITDA, Cash Flows and Ratio of Earnings to Fixed Charges

1999: Earnings before business acquisition and consolidation expenses,
interest, taxes, depreciation, amortization, and equity in income and write-down
in investments in affiliated companies ("Adjusted EBITDA") in 1999 were $150.4
million. Net cash provided by operating activities was $133.7 million, as $61.3
million of non-cash depreciation and amortization, a $20.0 million non-cash
write-down in an investment in an affiliated company, $80.9 million of working
capital reductions and $20.1 million of BA&C expenses more than offset $23.3
million of net loss, $15.8 million of non-cash deferred income taxes, and cash
used by all other operating activities. The decrease in working capital reflects
lower levels of receivables and inventory due to aggressive working capital
management, the Company's Lean Enterprise program and lower sales volumes.

Net cash used for investing activities was $40.3 million, primarily
reflecting the Company's capital expenditures and investments in affiliated
companies. Net cash used for financing activities was $99.5 million, reflecting
net debt reduction and $11.0 million of debt issuance costs primarily pertaining
to the issuance of the senior subordinated notes, due 2009.

1998: Adjusted EBITDA for 1998 was $177.2 million. Pro forma Adjusted
EBITDA, giving effect to the acquisition of the Clark-Schwebel business as if
the transaction had occurred at the beginning of the year, was approximately
$208 million. Net cash provided by operating activities was $93.8 million, as
$50.4 million of net income and $54.4 million of non-cash depreciation,
amortization and deferred income taxes were partially offset by increased
working capital of $14.5 million.

40

Net cash used for investing activities was $539.2 million, primarily
reflecting $472.8 million of net cash paid for the Clark-Schwebel business, and
$66.5 million of capital expenditures. Net cash provided by financing activities
was $440.7 million, primarily reflecting $459.7 million of net funds borrowed
under the Senior Credit Facility, including the financing of the acquisition of
the Clark-Schwebel business, offset in part by the repurchase of $10.0 million
of treasury stock and $10.3 million of debt issuance costs primarily incurred to
obtain the Senior Credit Facility.

1997: Adjusted EBITDA for 1997 was $137.6 million, and pro forma Adjusted
EBITDA was approximately $188 million. Net cash provided from operations was
$29.2 million, as $73.6 million of net income and $35.8 million of depreciation
and amortization were offset by $33.2 million of non-cash deferred income taxes
and a $46.7 million increase in working capital. Net cash used for investing
activities was $82.9 million, including $57.4 for capital expenditures and $37.0
million of cash paid for the Fiberite transaction, which were partially offset
by $13.5 million of proceeds from the sale of a facility and the sale of a 50%
interest in a joint venture. These investing activities were funded by cash from
operations and $57.2 million of borrowings under a revolving credit facility.

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.

A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA for
1999, 1998 and 1997 is as follows:

- - --------------------------------------------------------------------------------------------------------------------
(In millions) 1999 1998 1997
- - --------------------------------------------------------------------------------------------------------------------

Net income (loss) $ (23.3) $ 50.4 $ 73.6
Provision for (recovery of) income taxes (1.7) 28.4 (22.9)
Interest expense 73.9 38.7 25.8
Depreciation and amortization 61.3 47.5 35.8
Equity in income and write-down of investments in
affiliated companies 20.0 (0.5) -
Other 0.1 - -
- - --------------------------------------------------------------------------------------------------------------------
EBITDA 130.3 164.5 112.3
Business acquisition and consolidation expenses 20.1 12.7 25.3
- - --------------------------------------------------------------------------------------------------------------------
Adjusted EBITDA $ 150.4 $ 177.2 $ 137.6
- - --------------------------------------------------------------------------------------------------------------------

Ratio of earnings to fixed charges 0.7x 2.9x 2.8x
- - --------------------------------------------------------------------------------------------------------------------

The decrease in the earnings to fixed charges ratios from 1998 to 1999
reflects the Company's lower operating income, higher interest costs and
business acquisition and consolidation expenses. The ratio of earnings to fixed
charges is equal to net income (loss), excluding income taxes and interest
expense, divided by interest expense. Interest expense includes approximately
one-third of the Company's rental expense.

41

Business Acquisition and Consolidation Programs

Since 1996, Hexcel has implemented, or begun to implement, three business
acquisition and consolidation ("BA&C") programs. The primary purpose of these
programs is to integrate acquired businesses by rationalizing manufacturing
facilities, creating centers of manufacturing excellence, and combining various
administrative functions with existing operations. Activity for these programs
for the three years ending December 31, 1999, as well as a discussion on each of
the programs, are as follows:

- - ------------------------------------------------- ------------- ------------- ----------- --------------- -----------
September December Fiberite
1999 1998 1996 Transaction &
(In millions) Program Program Program Other Total
- - ------------------------------------------------- ------------- ------------- ----------- --------------- -----------

Balance as of January 1, 1997 $ - $ - $ 25.4 $ - $ 25.4
BA&C expenses - - 12.3 13.0 25.3
Cash expenditures - - (20.6) (13.0) (33.6)
Non-cash usage, including asset write-downs - - (4.9) - (4.9)
- - ------------------------------------------------- -- ---------- -- ---------- --- ------- ---- ------- ---- ---------
Balance as of December 31, 1997 - - 12.2 - 12.2
BA&C expenses - 5.6 6.4 0.7 12.7
Cash expenditures - (0.6) (7.4) (0.7) (8.7)
Non-cash usage, including asset write-downs - - (8.0) (8.0)
- - ------------------------------------------------- -- ---------- -- ---------- --- ------- ---- ------- ---- ---------
Balance as of December 31, 1998 - 5.0 3.2 - 8.2
BA&C expenses 15.4 4.7 - - 20.1
Cash expenditures (0.5) (6.5) (2.5) - (9.5)
Non-cash usage, including asset write-downs (11.8) (2.2) - - (14.0)
Reclassification of foreign government grant
payable to accrued liabilities - - (0.7) - (0.7)
- - ------------------------------------------------- -- ---------- -- ---------- --- ------- ---- ------- ---- ---------
Balance as of December 31, 1999 $ 3.1 $ 1.0 $ - $ - $ 4.1
- - ------------------------------------------------- -- ---------- -- ---------- --- ------- ---- ------- ---- ---------

September 1999 Program

On September 27, 1999, Hexcel announced a new BA&C program that entails a
further rationalization of manufacturing facilities for certain product lines.
The objectives of this program are to eliminate excess capacity and overhead,
improve manufacturing focus and yields, and create additional centers of
manufacturing excellence. Specific actions contemplated by this BA&C program
include consolidating the production of certain product lines, including
relocating equipment and requalifying the respective product lines; vacating
certain leased facilities; and consolidating the Company's Composite Materials
business segment's U.S. marketing, research and technology, and administrative
functions into one location. The consolidation program calls for the elimination
of approximately 400 positions (primarily manufacturing), and a total reduction
in occupied floor space of over 250,000 square feet. The consolidation program
impacts all of the Company's business segments and is anticipated to be
substantially complete in 2001, with annualized operating cost savings of more
than $24 million.

Total expenses and cash expenditures for this program are expected to
approximate $33 million and $27 million, respectively. Expected cash
expenditures include $6.0 million of capital expenditures. As of December 31,
1999, the Company had recorded $15.4 million of BA&C expenses for this program,
including $11.8 million of non-cash write-downs on equipment. The write-downs
have reduced the applicable equipment to their estimated net realizable value.

December 1998 Program

In December 1998, Hexcel announced consolidation actions within its
Reinforcement Products and Composite Materials business segments. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of the acquired Clark-Schwebel business, and the combination of
its 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. The
Company substantially completed these actions in the first quarter of 1999,
resulting in the elimination of approximately 100 operating, sales, marketing

42

and administrative positions. Estimated annual cash savings from these business
consolidation activities, which the Company has already begun to realize, are
approximately $10 million.

On March 16, 1999, Hexcel expanded its actions relating to the integration
of the acquired Clark-Schwebel business with the announcement of the closure of
its Cleveland, Georgia, facility, which, at that time, employed approximately
100 manufacturing positions. This facility produced fabrics for the electronics
market, and the majority of its production equipment has been relocated to the
Company's Anderson, South Carolina, facility. The closure of this facility,
which was completed on September 3, 1999, was the result of current competitive
conditions in the global market for electronic fiberglass materials and was not
expected at the time of the acquisition of the Clark-Schwebel business. The
closure of this facility is expected to generate $3.5 million in annualized
savings.

During 1999, the Company recorded $4.7 million of BA&C expenses for the
December 1998 program, including $2.2 million of non-cash write-downs of
equipment that was disposed of; costs associated with the closing and relocation
of certain equipment from the Company's Cleveland, Georgia, facility; and
employee severance for administrative positions relating to the consolidation of
the Composite Materials business segment.

1996 Program

In 1996, Hexcel announced plans to consolidate its operations over a period
of three years. The objective of the program was to integrate acquired assets
and operations into Hexcel, and to reorganize its manufacturing and research
activities around strategic centers dedicated to select product technologies.
The BA&C program was also intended to eliminate excess manufacturing capacity
and redundant administrative functions. Hexcel expected this consolidation
program to take approximately three years to complete, in part because of
aerospace industry requirements to "qualify" specific equipment and
manufacturing facilities for the manufacture of certain products. These
qualification requirements increase the complexity, cost and time of moving
equipment and rationalizing manufacturing activities. Specific actions of the
consolidation program included the elimination of approximately 245
manufacturing, marketing and administrative positions, the closure of a
facility, the consolidation of Hexcel's manufacturing operations in Europe, the
consolidation of Hexcel's U.S. special process manufacturing activities, and the
integration of sales, marketing and administrative resources. Total expenses for
the 1996 program were $61.1 million, or $6.4 million more than Hexcel's original
estimate, and total cash expenditures were $42.1 million. The additional
expenses were primarily the result of a non-cash write-down of the carrying
value of Hexcel's wholly-owned Italian subsidiary, as more fully discussed
below, which was recorded in 1998.

As part of the 1996 BA&C program, Hexcel disposed of its operations in
Brindisi, Italy (the "Italian Operations"). Since its acquisition in 1996, the
Italian Operations had immaterial revenues, incurred operating losses, and had
not been strategically important to Hexcel. Consequently, Hexcel periodically
evaluated the recoverability of its carrying value pursuant to Statement of
Financial Accounting Standard No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." In 1998, Hexcel
again evaluated the recoverability of the carrying value of its Italian
Operations in light of its continuing operating losses and certain offers
received from interested buyers. In assessing whether an impairment had
occurred, Hexcel considered the offers received, as well as the future
undiscounted cash flows related to its Italian Operations. As a result, Hexcel
recorded a charge of $5.6 million in 1998 for an asset impairment related to its
Italian Operations, which was included in BA&C expenses. The estimate of fair
value used in determining the impairment charge was based on the offers received
from the interested buyers. In 1999, the Company disposed of its Italian
Operations for net proceeds that approximated amounts accrued. The Company
accounted for its Italian Operations under its Engineered Products business
segment.

Due to the timing of the 1996 BA&C program, and the fact that the
consolidation of existing and acquired businesses occurred at the same time
Hexcel was experiencing an increase in its commercial aerospace market, the
exact amount of annual savings attributable to this program is difficult to

43

isolate. However, Hexcel believes that the cost savings achieved equaled or
exceeded the target of $32 million per year. The program was a key contributor
to the improvement in the Company's operating margins in 1998 and 1997.

Fiberite Transaction and Other BA&C Expenses

The acquisition of the Fiberite assets was substantially downsized from an
original agreement whereby the Company had, subject to certain terms and
conditions, committed to purchase selected assets and businesses of Fiberite for
approximately $300 million. As a result of the downsized transaction, the
Company wrote off $5.0 million of acquisition and financing costs to BA&C
expenses in 1997. In addition, the Company expensed $8.0 million of acquired
in-process research and technology purchased from Fiberite, which is also
included in 1997 BA&C expenses.

Further discussion and analysis of the Company's business acquisition and
consolidation programs is contained in Note 3 to the accompanying consolidated
financial statements.

Market Risks

The Company's financial position, results of operations and cash flows are
subject to market risks, which primarily include fluctuations in interest rates
and exchange rate variability.

Interest Rate Risks

Hexcel's long-term debt bears interest at both fixed and variable rates. As
a result, the Company's results of operations are affected by interest rate
changes on its variable rate debt. Assuming a 10% favorable and a 10%
unfavorable change in the underlying weighted average interest rates of the
Company's variable rate debt, the 1999 net loss of $23.3 million would have been
$22.0 million and $24.6 million, respectively.

In order to partially mitigate risks in interest rate fluctuations, in
1998, Hexcel entered into a five-year interest rate cap agreement which covers a
notional amount of $50.0 million of the Company's variable rate debt under the
Senior Credit Facility. In addition, on January 21, 1999, the Company issued
$240.0 million of 9.75% senior subordinated notes, due 2009. Net proceeds of
approximately $231 million from this offering were used to redeem variable rate
amounts owed under the Senior Credit Facility.

Foreign Currency Risks

Hexcel is subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers using non-local or
"non-functional" currencies. In general, the Company maintains a "naturally
hedged" position where it balances customer receipts and supplier payments with
similar currencies. Net exposures are hedged by purchasing foreign currency
forward contracts. Consistent with the nature of the economic hedge of such
foreign exchange contracts, any unrealized gain or loss would be offset by
corresponding decreases or increases, respectively, of the underlying
transaction being hedged. As of December 31, 1999, the Company had limited net
exposure in relation to its non-functional currencies as well as a limited
amount of outstanding foreign exchange contracts. Accordingly, the impact of a
10% appreciation and a 10% depreciation of the U.S. dollar against the Company's
net non-functional currencies and foreign exchange contracts would not represent
a material potential gain or loss in fair value, net loss or cash flows.

The primary currencies for which the Company has foreign currency
translation exchange rate exposure are the Euro and the British pound. The
Company does not participate in hedging activities to offset translation effects
of changes in foreign exchange rates on the Company's consolidated financial
position, results of operations and cash flows. The impact of a 10% appreciation
or 10% depreciation of the U.S. dollar against the Company's net underlying
foreign currency translation exposures could be significant.

44

Other Risks

As of December 31, 1999, the aggregate fair values of the Company's senior
subordinated notes, due 2009, convertible subordinated notes, due 2003, and the
convertible subordinated debentures, due 2011, were $205.2 million, $80.1
million and $18.5 million, respectively. The convertible debt securities are
convertible into Hexcel common stock at a price of $15.81 and $30.72 per share,
respectively. Fair values were estimated on the basis of quoted market prices,
although trading in these debt securities is limited and may not reflect fair
value. Due to the conversion feature in these debt securities, fair values are
subject to fluctuations based on the value of the Company's stock and the
Company's credit rating, as well as changes in interest rates for debt
securities with similar terms.

Assuming that all other factors remain constant, the fair values of the
Company's convertible subordinated notes, due 2003, and the convertible
subordinated debentures, due 2011, would be approximately $88.1 million and
$20.2 million, respectively, assuming a 10% favorable change in the market price
of the Company's stock, and $72.1 million and $16.7 million, respectively,
assuming a 10% unfavorable change in market price.

Recently Issued Accounting Standards

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue, and provides guidance for
disclosures related to revenue recognition policies. At this time, management is
still assessing the impact of SAB 101 on Hexcel's financial position and results
of operations.

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 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, which will be adopted on January 1,
2001, is not expected to have a material impact on Hexcel's consolidated
financial statements.

Year 2000 Readiness Disclosure

In 1998, Hexcel developed and began to implement a six-phase plan to
address the ability of its information technology systems and other technology
devices with embedded microprocessors (collectively "Business Systems and
Devices") to recognize and process dates starting with the year 2000 and beyond
(the "Year 2000"). The implementation of this plan was substantially completed
prior to December 31, 1999. Monitoring and testing activities continued in
January and February 2000. As of March 24, 2000, the Company has not experienced
any significant information processing errors or operational failures in its
Business Systems and Devices attributable to the Year 2000 issue. Furthermore,
the Company has not experienced any significant disruptions in the procurement
of materials and services from suppliers, in the manufacture of products by the
Company's manufacturing facilities, or in the sale and delivery of products to
customers.

The total estimated costs to address the Company's Year 2000 issues,
including the costs of ensuring that the Company's Business Systems and Devices
were Year 2000 compliant, were approximately $4.4 million, of which $4.2 million
had been incurred as of December 31, 1999. Remaining expenditures of $0.2
million are expected to be completed in the first quarter of 2000.

45

Forward-Looking Statements and Risk Factors

This annual report includes forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements relate
to analyses and other information that are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
future prospects, developments and business strategies. These forward-looking
statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "will," and similar terms and phrases, including
references to assumptions. Such statements are based on current expectations,
are inherently uncertain, and are subject to changing assumptions.

Such forward-looking statements include, but are not limited to: (a)
estimates of commercial aerospace production and delivery rates, including those
of Boeing and Airbus; (b) expectations regarding inventory adjustments in excess
of build rate changes by aerospace customers; (c) expectations regarding growth
in sales to regional and business aircraft manufacturers, and to the aircraft
aftermarket; (d) expectations regarding the growth in the production of military
aircraft, helicopters and launch vehicle programs in 2000 and beyond, as well as
the impact of such growth on carbon fibers sales; (e) expectations regarding the
growth in demand for electronics fabrics used in multi-layer PCBs, as well as
future industry capacity utilization and pricing trends in the electronics
fabrics industry; (f) expectations regarding growth in demand for lightweight
protective vests made of aramid and specialty fabrics; (g) expectations
regarding growth in sales of composite materials for wind energy, automotive and
other industrial applications; (h) estimates of changes in net sales by market
compared to 1999; (i) expectations regarding manufacturing productivity and
operating expenses, including the estimated cost reductions and other benefits
of the Company's business acquisition and consolidation programs and Lean
Enterprise initiatives; (j) estimates of the timing, expenses and cash
expenditures required to complete the September 1999 business consolidation
program; (k) expectations regarding working capital trends, capital expenditures
and investments in joint ventures; (l) the evaluation of strategic alternatives
for the Engineered Products business segment, including a possible sale; (m) the
sufficiency of the Senior Credit Facility and other financial resources to fund
the Company's worldwide operations in 2000; (n) the impact of various market
risks, including fluctuations in the interest rates underlying the Company's
variable-rate debt, fluctuations in currency exchange rates and fluctuations in
the market price of the Company's common stock; (o) expectations regarding the
remaining expenditures related to and the potential impact of the Year 2000
issue; and (p) expectations regarding the Company's electronic commerce
strategy.

Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing and cost
levels; changes in political, social and economic conditions and local
regulations, particularly in Asia and Europe; foreign currency fluctuations;
changes in aerospace delivery rates; reductions in sales to any significant
customers, particularly 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; and the availability, terms and
deployment of capital.

If one or more of these risks or uncertainties materialize, or if
underlying assumptions prove incorrect, actual results may vary materially from
those expected, estimated or projected. In addition to other factors that affect
Hexcel's operating results and financial position, neither past financial
performance nor the Company's expectations should be considered reliable
indicators of future performance. Investors should not use historical trends to
anticipate results or trends in future periods. Further, the Company's stock
price is subject to volatility. Any of the factors discussed above could have an
adverse impact on the Company's stock price. In addition, failure of sales or
income in any quarter to meet the investment community's expectations, as well
as broader market trends, can have an adverse impact on the Company's stock
price. The Company does not undertake an obligation to update its
forward-looking statements or risk factors to reflect future events or
circumstances.

46

Consolidated Financial Statements

Description Page
- - ------------------------------------------------------------------------------------------------------------ ---------

Management Responsibility for Consolidated Financial Statements 48
Report of Independent Accountants 49
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998 50
Consolidated Statements of Operations for each of the three years ended December 31, 1999 51
Consolidated Statements of Stockholders' Equity and Comprehensive Income
for each of the three years ended December 31, 1999 52
Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999 53
Notes to the Consolidated Financial Statements 54- 79

47

Management Responsibility for Consolidated Financial Statements

Hexcel management has prepared and is responsible for the consolidated
financial statements and the related financial data contained in this report.
These financial statements, which include estimates, were prepared in accordance
with generally accepted accounting principles. Management uses its best judgment
to ensure that such statements reflect fairly the consolidated financial
position, results of operations and cash flows of the Company.

Hexcel maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements, and that assets are safeguarded and
accounted for properly. Underlying this concept of reasonable assurance is the
premise that the cost of control should not exceed benefits derived from
control.

The Audit Committee of the Board of Directors reviews and monitors the
financial reports and accounting practices of Hexcel. These reports and
practices are reviewed regularly by management and by the Company's independent
accountants, PricewaterhouseCoopers LLP, in connection with the audit of the
Company's financial statements. The Audit Committee, composed solely of outside
directors, meets periodically, separately and jointly, with management and the
independent accountants.

/s/ JOHN J. LEE
John J. Lee
Chief Executive Officer

/s/ STEPHEN C. FORSYTH
Stephen C. Forsyth
Chief Financial Officer

/s/ KIRK G. FORBECK
Kirk G. Forbeck
Chief Accounting Officer

48

Report of Independent Accountants

To the Board of Directors and
Stockholders of Hexcel Corporation:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and
comprehensive income and of cash flows present fairly, in all material respects,
the financial position of Hexcel Corporation and its subsidiaries at December
3l, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
San Jose, California
January 18, 2000, except as to
Senior Credit Facility in Note 7
which is as of March 7, 2000

49

Hexcel Corporation and Subsidiaries
Consolidated Balance Sheets
As of December 31,
- - --------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) 1999 1998
- - --------------------------------------------------------------------------------------------------------------------
Assets
Current assets:

Cash and cash equivalents $ 0.2 $ 7.5
Accounts receivable 158.6 188.4
Inventories 153.7 213.2
Prepaid expenses and other assets 5.1 10.1
Deferred tax asset 10.2 19.8
- - --------------------------------------------------------------------------------------------------------------------
Total current assets 327.8 439.0

Net property, plant and equipment 392.1 432.6
Goodwill and other purchased intangibles, net of accumulated
amortization of $24.9 in 1999 and $11.7 in 1998 411.2 425.4
Investments in affiliated companies and other assets 130.8 107.2
- - --------------------------------------------------------------------------------------------------------------------

Total assets $ 1,261.9 $ 1,404.2
- - --------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Current liabilities:
Notes payable and current maturities of capital lease obligations $ 34.3 $ 26.9
Accounts payable 80.3 81.8
Accrued compensation and benefits 38.4 42.2
Other accrued liabilities 57.5 68.5
- - --------------------------------------------------------------------------------------------------------------------
Total current liabilities 210.5 219.4

Long-term notes payable and capital lease obligations 712.5 802.4
Indebtedness to related parties 24.1 35.7
Other non-current liabilities 44.7 44.3
- - --------------------------------------------------------------------------------------------------------------------
Total liabilities 991.8 1,101.8
- - --------------------------------------------------------------------------------------------------------------------

Commitments and contingent liabilities (see notes)

Stockholders' equity:
Preferred stock, no par value, 20.0 shares of stock authorized,
no stock issued or outstanding in 1999 and 1998 - -
Common stock, $0.01 par value, 100.0 shares of stock authorized,
shares of stock issued and outstanding of 37.4 in 1999 and 37.2 in 1998 0.4 0.4
Additional paid-in capital 273.6 271.5
Retained earnings 11.6 34.9
Accumulated other comprehensive income (loss) (4.8) 6.3
- - --------------------------------------------------------------------------------------------------------------------
280.8 313.1
Less- treasury stock, at cost, 0.8 shares of stock in 1999 and 1998 (10.7) (10.7)
- - --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 270.1 302.4
- - --------------------------------------------------------------------------------------------------------------------

Total liabilities and stockholders' equity $ 1,261.9 $ 1,404.2
- - --------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.

50

Hexcel Corporation and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31,
- - --------------------------------------------------------------------------------------------------------------------
(In millions, except per share data) 1999 1998 1997
- - --------------------------------------------------------------------------------------------------------------------

Net sales $ 1,151.5 $ 1,089.0 $ 936.9

Cost of sales 909.0 817.7 714.3
- - --------------------------------------------------------------------------------------------------------------------

Gross margin 242.5 271.3 222.6

Selling, general and administrative expenses 128.7 117.9 102.4
Research and technology expenses 24.8 23.7 18.4
Business acquisition and consolidation expenses 20.1 12.7 25.3
- - --------------------------------------------------------------------------------------------------------------------

Operating income 68.9 117.0 76.5

Interest expense 73.9 38.7 25.8
- - --------------------------------------------------------------------------------------------------------------------

Income (loss) before income taxes (5.0) 78.3 50.7

Recovery of (provision for) income taxes 1.7 (28.4) 22.9
Equity in income and write-down of investments in affiliated companies (20.0) 0.5 -
- - --------------------------------------------------------------------------------------------------------------------

Net income (loss) $ (23.3) $ 50.4 $ 73.6
- - --------------------------------------------------------------------------------------------------------------------

Net income (loss) per share:
Basic $ (0.64) $ 1.38 $ 2.00
Diluted $ (0.64) $ 1.24 $ 1.74

Weighted average shares:
Basic 36.4 36.7 36.7
Diluted 36.4 45.7 46.0
- - --------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.

51

Hexcel Corporation and Subsidiaries
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For the Years Ended December 31, 1999, 1998 and 1997
- - ---------------------------------------------------------------------------------------------------- -------------
Common Stock
-------------------- Retained Accumulated
Additional Earnings Other Total Comprehensive
Paid-in (Accumulated Comprehensive Treasury Stockholders' Income
(In millions) Par Capital Deficit) Income (Loss) Shares Equity (Loss)
- - ---------------------------------------------------------------------------------------------------- ------------

Balance, January 1, 1997 $ 0.4 $ 260.1 $ (89.1) $ 8.5 $ (0.6) $ 179.3

Net income 73.6 73.6 $ 73.6
Currency translation
adjustment (9.6) (9.6) (9.6)
------------
Comprehensive income 64.0
------------
Activity under stock plans 6.6 6.6
Conversion of senior
subordinated notes 0.1 0.1
Treasury stock purchased (0.1) (0.1)
- - ----------------------------------------------------------------------------------------------------

Balance, December 31, 1997 0.4 266.8 (15.5) (1.1) (0.7) 249.9

Net income 50.4 50.4 50.4
Currency translation
adjustment 7.4 7.4 7.4
------------
Comprehensive income 57.8
------------
Activity under stock plans 4.6 4.6
Conversion of senior
subordinated notes 0.1 0.1
Treasury stock purchased (10.0) (10.0)
- - ----------------------------------------------------------------------------------------------------

Balance, December 31, 1998 0.4 271.5 34.9 6.3 (10.7) 302.4

Net loss (23.3) (23.3) (23.3)
Currency translation
adjustment (11.1) (11.1) (11.1)
------------
Comprehensive loss $ (34.4)
------------
Activity under stock plans 2.1 2.1
- - ----------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 0.4 $ 273.6 $ 11.6 $ (4.8) $ (10.7) $ 270.1
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements.

52

Hexcel Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31,
- - ---------------------------------------------------------------------------------------------------------------------
(In millions) 1999 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities
Net income (loss) $ (23.3) $ 50.4 $ 73.6
Reconciliation to net cash provided (used) by:
Depreciation 47.9 37.4 33.2
Amortization 13.4 10.1 2.6
Deferred income taxes (15.8) 6.9 (33.2)
Business acquisition and consolidation expenses 20.1 12.7 25.3
Business acquisition and consolidation payments (9.5) (8.7) (33.6)
Write-off of purchased in-process technologies - - 8.0
Equity in income and write-down of investments in
affiliated companies 20.0 (0.5) -
Changes in assets and liabilities, net of effects of acquisitions:
Decrease (increase) in accounts receivable 16.1 18.2 (37.6)
Decrease (increase) in inventories 49.0 (9.3) (23.8)
Decrease (increase) in prepaid expenses and other assets 1.5 (2.9) 1.7
Increase (decrease) in accounts payable and accrued liabilities 11.9 (17.1) 23.6
Changes in other non-current assets and long-term liabilities 2.4 (3.4) (10.6)
- - ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 133.7 93.8 29.2
- - ---------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities
Capital expenditures (35.6) (66.5) (57.4)
Cash paid for business acquisitions - (472.8) (37.0)
Investments in affiliated companies (4.7) (1.3) (2.0)
Dividends received from affiliated companies - 1.4 -
Proceeds from sale of other assets - - 13.5
- - ---------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (40.3) (539.2) (82.9)
- - ---------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities
Proceeds from credit facilities 37.7 726.0 84.7
Repayments of credit facilities (349.6) (266.3) (27.5)
Proceeds from issuance of long-term debt 240.0 0.3 3.2
Repayments of long-term debt (18.0) (1.8) (9.7)
Debt issuance costs (11.0) (10.3) -
Purchase of treasury stock - (10.0) (0.1)
Activity under stock plans 1.4 2.8 3.4
- - ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (99.5) 440.7 54.0
- - ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (1.2) 3.2 0.7
- - ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7.3) (1.5) 1.0
Cash and cash equivalents at beginning of year 7.5 9.0 8.0
- - ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 0.2 $ 7.5 $ 9.0
- - ---------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial statements.

53

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data)

Note 1 - Significant Accounting Policies

Nature of Operations and Basis of Accounting

The accompanying consolidated financial statements include the accounts of
Hexcel Corporation and subsidiaries ("Hexcel" or the "Company"), after
elimination of intercompany transactions and accounts. Hexcel is a leading
international producer of advanced structural materials. The Company develops,
manufactures and markets lightweight, high-performance reinforcement products,
composite materials and engineered products for use in commercial aerospace,
space and defense, electronics, and industrial markets. The Company serves
international markets through manufacturing facilities and sales offices located
in the United States and Europe, and through sales offices located in Asia,
Australia and South America. The Company is also a member of six joint ventures,
four of which manufacture and market reinforcement products and composite
materials in Europe, Asia and the United States, and two of which will
manufacture composite structures and interiors in Asia.

As discussed in Note 2, Hexcel acquired the industrial fabrics business of
Clark-Schwebel, Inc. and its subsidiaries ("Clark-Schwebel") on September 15,
1998, including interests in three joint ventures. Hexcel also acquired the
satellite business and rights to certain technologies of Fiberite, Inc.
("Fiberite"), on September 30, 1997. These acquisitions were accounted for under
the purchase method of accounting. Accordingly, the accompanying consolidated
balance sheets, statements of operations, stockholders' equity and comprehensive
income, and cash flows include the financial position, results of operations and
cash flows of the businesses acquired as of such dates and for such periods that
these businesses were owned by Hexcel.

Use of Estimates

The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles required management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities, as well as the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.

Cash and Cash Equivalents

Hexcel invests excess cash in investments with original maturities of less
than three months. The investments consist primarily of Eurodollar time deposits
and are stated at cost, which approximates fair value. The Company considers
such investments to be cash equivalents for purposes of the consolidated
statements of cash flows.

Inventories

Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out and average cost methods.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Repairs and maintenance
are charged to expense as incurred; replacements and betterments are
capitalized. Property, plant and equipment are depreciated over estimated useful
lives, using accelerated and straight-line methods. The estimated useful lives
range from 10 to 40 years for buildings and improvements and from 3 to 20 years
for machinery and equipment.

54

Goodwill and Other Purchased Intangibles

Goodwill, representing the excess of purchase price and acquisition costs
over the fair value of the net assets of businesses acquired, and other
purchased intangibles, are amortized on a straight-line basis over estimated
economic lives, which are as follows:

Goodwill from the acquisition of the Clark-Schwebel business 40 years
Other goodwill 20 years
Other purchased intangibles 10-15 years

Investments in Affiliated Companies

Investments in affiliated companies consist of equity interests in joint
ventures, which are accounted for using the equity method of accounting.

Debt Financing Costs

Debt financing costs are deferred and amortized over the life of the
related debt, which ranges from 7 to 10 years.

Asset Recoverability

Management periodically reviews the recoverability of all long-term assets,
including the related amortization period, whenever events or changes in
circumstances indicate that the carrying amount of an asset might not be
recoverable. Management determines whether there has been an impairment by
comparing the anticipated undiscounted future net cash flows to the related
asset's carrying value. If an asset is considered impaired, the asset is written
down to fair value, which is determined based either on discounted cash flows or
appraised values, depending on the nature of the asset.

Stock-Based Compensation

Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees." Accordingly, compensation expense is not recognized when options are
granted at the fair market value at the date of grant. Hexcel also provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation."

Currency Translation

The assets and liabilities of international subsidiaries are translated
into U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at average exchange rates during the year. Cumulative currency
translation adjustments are included in "stockholders' equity." Realized gains
and losses from currency exchange transactions are recorded in "selling, general
and administrative expenses" in the accompanying consolidated statements of
operations and were not material to Hexcel's consolidated results of operations
in 1999, 1998 or 1997.

Revenue Recognition

Product sales are recognized on the date of shipment. Revenue derived from
design, installation and support services are recognized when the service is
provided or, alternatively, when the product to which the service relates is
delivered to the customer.

55

Derivative Financial Instruments

Hexcel employs an interest rate cap agreement and foreign currency forward
contracts in the management of its interest rate and currency exposures. The
Company has designated its interest rate cap agreement against a specific debt
instrument and recognizes interest differentials as adjustments to interest
expense as the differentials occur. Realized and unrealized gains and losses
arising from foreign currency forward contracts are recognized in income (loss)
as offsets to gains and losses resulting from the underlying hedged transaction.
The Company does not hold financial instruments for trading purposes.

Concentration of Credit Risk

Financial instruments that potentially subject Hexcel to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's sales to two customers and their related subcontractors accounted
for approximately 38% and 46% of the Company's 1999 and 1998 net sales,
respectively. The Company performs ongoing credit evaluations of its customers'
financial condition but generally does not require collateral or other security
to support customer receivables. The Company establishes an allowance for
doubtful accounts based on factors surrounding the credit risk of specific
customers, historical trends and other financial information. As of December 31,
1999 and 1998, the allowance for doubtful accounts was $6.0 and $6.8,
respectively. Bad debt expense was $0.7, $0.8 and $0.2 in 1999, 1998 and 1997,
respectively.

Recently Issued Accounting Standards

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation, and disclosure of revenue
in financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue, and provides guidance for
disclosures related to revenue recognition policies. At this time, management
is still assessing the impact of SAB 101 on Hexcel's financial position and
results of operations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS 133
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, which
will be adopted on January 1, 2001, is not expected to have a material impact
on Hexcel's consolidated financial statements.

Reclassifications

Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 1999
presentation.

Note 2 - Business Acquisitions

Acquired Clark-Schwebel Business

On September 15, 1998, Hexcel acquired certain assets and assumed certain
operating liabilities from Clark-Schwebel. The business acquired from
Clark-Schwebel 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. This
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,
Clark-Schwebel operated four manufacturing facilities in the southeastern U.S.
and had approximately 1,300 full-time employees.

56

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%. Hexcel's acquisition of this investment was completed on December
23, 1998;
- - - a 43.3% share in Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered
in Japan, which in turn owns interests in two joint ventures in Taiwan: a
50% interest in Nittobo Norplex Oak Co., Ltd. and a 51% interest in
Asahi-Schwebel Taiwan; and
- - - a 50.0% share in Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"),
headquartered in the United States.

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 exercise price of the options to increase the equity interest
in CS-Interglas was significantly higher than their fair market value, and as a
result, Hexcel allowed the options to expire unexercised on December 31, 1999.

The acquisition of Clark-Schwebel's industrial fabrics 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 business, other than certain excluded assets and
liabilities, in exchange for approximately $473 in cash. The assets acquired and
the liabilities assumed or incurred were:

Estimated fair value of assets acquired:

Cash $ 5.0
Accounts receivable 20.2
Inventories 35.5
Net property, plant and equipment 70.0
Investment in joint ventures, intangibles and other assets 68.4
Goodwill 365.3
- - ------------------------------------------------------------------------- ------------------------------------------
Total assets acquired 564.4
- - ------------------------------------------------------------------------- ------------------------------------------

Estimated fair value of liabilities assumed or incurred:
Accounts payable and accrued liabilities 32.5
Capital lease obligations 50.0
Other non-current liabilities 4.1
- - ------------------------------------------------------------------------- ------------------------------------------
Total liabilities assumed or incurred 86.6
- - ------------------------------------------------------------------------- ------------------------------------------
Estimated fair value of net assets acquired $ 477.8
- - ------------------------------------------------------------------------- ------------------------------------------
Less cash acquired (5.0)
- - ------------------------------------------------------------------------- ------------------------------------------
Net cash paid $ 472.8
- - ------------------------------------------------------------------------- ------------------------------------------

The allocations of the purchase price to the assets acquired and
liabilities assumed or incurred in connection with the Clark-Schwebel business
were based on estimates of fair values. As part of the acquisition, Hexcel
entered into a $50.0 lease for property, plant and equipment used in the
acquired business from an affiliate of Clark-Schwebel, pursuant to a long-term
lease that includes purchase options. Refer to Note 7 for information regarding
acquisition financing.

Acquired Fiberite Assets

On September 30, 1997, the Company acquired from Fiberite its satellite
business consisting of intangible assets and inventory, and certain
non-exclusive worldwide rights to other prepreg technologies, for $37.0 in cash.
The acquisition was accounted for using the purchase method. Under this method,
substantially all of the $37.0 purchase price, less an $8.0 write-off of
acquired in-process research and technology, was allocated to intangible assets.

57

Pro Forma Financial Information (Unaudited)

The pro forma net sales, net income and diluted net income per share of
Hexcel for the years ended December 31, 1998 and 1997, giving effect to the
acquisition of the business from Clark-Schwebel as if it had occurred at the
beginning of the periods presented, were:

- - ------------------------------------------------------------ ----------------- ------------------ -------------------
1998 1997
- - ------------------------------------------------------------ ----------------- ------------------ -------------------
- - ------------------------------------------------------------ -- -------------- --- -------------- -- ----------------

Pro forma net sales $ 1,234.8 $ 1,177.1
Pro forma net income 49.5 76.3
- - ------------------------------------------------------------ -- -------------- --- -------------- -- ----------------

Pro forma diluted net income per share $ 1.22 $ 1.79
- - ------------------------------------------------------------ -- -------------- --- -------------- -- ----------------

Pro forma adjustments giving effect to the acquired Fiberite business, as
if it had occurred at the beginning of 1997, would not have had a material
effect on the Company's consolidated financial statements.

Note 3 - Business Acquisition and Consolidation Programs

Since 1996, Hexcel has implemented, or begun to implement, three business
acquisition and consolidation ("BA&C") programs. The primary purpose of these
programs is to integrate acquired businesses by rationalizing manufacturing
facilities, creating centers of manufacturing excellence, and combining various
administrative functions with existing operations. Activity for these programs
for the three years ending December 31, 1999, as well as a detailed discussion
on each of the programs, is as follows:

- - ------------------------------------------------- ------------- ----------- ------------ --------------- ------------
September December Fiberite
1999 1998 1996 Transaction &
Program Program Program Other Total
- - ------------------------------------------------- ------------- ----------- ------------ --------------- ------------

Balance as of January 1, 1997 $ - $ - $ 25.4 $ - $ 25.4
BA&C expenses - - 12.3 13.0 25.3
Cash expenditures - - (20.6) (13.0) (33.6)
Non-cash usage, including asset write-downs - - (4.9) - (4.9)
- - ------------------------------------------------- --- --------- -- -------- ----- ------ ----- --------- -- ---------
Balance as of December 31, 1997 - - 12.2 - 12.2
BA&C expenses - 5.6 6.4 0.7 12.7
Cash expenditures - (0.6) (7.4) (0.7) (8.7)
Non-cash usage, including asset write-downs - - (8.0) - (8.0)
- - ------------------------------------------------- --- --------- -- -------- ----- ------ ----- --------- -- ---------
Balance as of December 31, 1998 - 5.0 3.2 - 8.2
BA&C expenses 15.4 4.7 - - 20.1
Cash expenditures (0.5) (6.5) (2.5) - (9.5)
Non-cash usage, including asset write-downs (11.8) (2.2) - - (14.0)
Reclassification of foreign government grant
payable to accrued liabilities - - (0.7) - (0.7)
- - ------------------------------------------------- --- --------- -- -------- ----- ------ ----- --------- -- ---------
Balance as of December 31, 1999 $ 3.1 $ 1.0 $ - $ - $ 4.1
- - ------------------------------------------------- --- --------- -- -------- ----- ------ ----- --------- -- ---------

September 1999 Program

On September 27, 1999, Hexcel announced a BA&C program that entails a
further rationalization of manufacturing facilities for certain product lines.
The objectives of this program are to eliminate excess capacity and overhead,
improve manufacturing focus and yields, and create additional centers of
manufacturing excellence. Specific actions contemplated by this BA&C program
include consolidating the production of certain product lines, including moving
equipment and requalifying the respective product lines; vacating certain leased
facilities; and consolidating the Company's Composite Materials business
segment's U.S. marketing, research and technology, and administrative functions
into one location. The consolidation program calls for the elimination of
approximately 400 positions (primarily manufacturing), and a total reduction in
occupied floor space of over 250,000 square feet. The consolidation program
impacts all of the Company's business segments and is anticipated to be
substantially complete in 2001.

58

Total expenses and cash expenditures for this program are expected to
approximate $33 and $27, respectively. Expected cash expenditures include $6.0
of capital expenditures. As of December 31, 1999, Hexcel had recorded $15.4 of
BA&C expenses for this program, including $11.8 of non-cash write-downs on
equipment. The write-downs reduced the applicable equipment to their estimated
net realizable value.

Accrued BA&C expenses as of December 31, 1999, and related activity for
this program since the date of announcement, were as follows:

- - --------------------------------------------------------------- ------------------ ---------------- ----------------
Employee Facility &
Severance & Equipment
September 1999 Program Relocation Relocation Total
- - --------------------------------------------------------------- ------------------ ---------------- ----------------

Balance as of January 1, 1999 $ - $ - $ -
BA&C expenses 3.0 12.4 15.4
Cash expenditures (0.5) - (0.5)
Non-cash usage, including asset write-downs - (11.8) (11.8)
- - --------------------------------------------------------------- ------ ---------- --- ------------ ----- -----------
Balance as of December 31, 1999 $ 2.5 $ 0.6 $ 3.1
- - --------------------------------------------------------------- ------ ---------- --- ------------ ----- -----------

As of December 31, 1999, accrued expenses for the September 1999 program
primarily reflected accrued severance and costs for early termination of certain
leases. The Company's policy is to pay severance over a period of time rather
than in a lump-sum amount.

December 1998 Program

In December 1998, Hexcel announced consolidation actions within its
Reinforcement Products and Composite Materials business segments. These actions
included the integration of the Company's existing fabrics business with the
U.S. operations of the 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. The
Company substantially completed these actions in the first quarter of 1999,
which resulted in the elimination of approximately 100 operating, sales,
marketing and administrative positions.

On March 16, 1999, Hexcel expanded its actions relating to the integration
of the acquired Clark-Schwebel business with the announcement of the closure of
its Cleveland, Georgia, facility, which at that time employed approximately 100
manufacturing positions. This facility produced fabrics for the electronics
market, and the majority of its production equipment was relocated to the
Company's Anderson, South Carolina, facility. The closure of this facility,
which was completed on September 3, 1999, was the result of current competitive
conditions in the global market for electronics fiberglass materials, and was
not expected at the time of the acquisition of the Clark-Schwebel business.

During 1999, Hexcel recorded $4.7 of BA&C expenses for the December 1998
program, primarily reflecting $2.2 of non-cash write-downs of equipment that was
disposed of; costs associated with the closing and relocation of certain
equipment from the Company's Cleveland, Georgia, facility; and employee
severance for administrative positions relating to the consolidation of the
Composite Materials business segment.

59

Accrued BA&C expenses at December 31, 1999 and 1998, and activity for this
program, were as follows:

- - --------------------------------------------------------------- ------------------ ---------------- ----------------
Employee Facility &
Severance & Equipment
December 1998 Program Relocation Relocation Total
- - --------------------------------------------------------------- ------------------ ---------------- ----------------

Balance as of January 1, 1998 $ - $ - $ -
BA&C expenses 3.3 2.3 5.6
Cash expenditures (0.3) (0.3) (0.6)
- - --------------------------------------------------------------- ------ ---------- ---- ------------ ----- ----------
Balance as of December 31, 1998 3.0 2.0 5.0
BA&C expenses 2.1 2.6 4.7
Cash expenditures (4.1) (2.4) (6.5)
Non-cash usage, including asset write-downs - (2.2) (2.2)
- - --------------------------------------------------------------- ------ ---------- ---- ------------ ----- ----------
Balance as of December 31, 1999 $ 1.0 $ - $ 1.0
- - --------------------------------------------------------------- ------ ---------- ---- ------------ ----- ----------

As of December 31, 1999, the remaining accrued expenses for this program
primarily reflected severance for former employees of the Cleveland facility as
well as for those administrative employees terminated in the second quarter of
1999. As of December 31, 1998, accrued BA&C expenses for this program primarily
consisted of severance for employees terminated in December 1998, costs for
early lease terminations, and equipment relocation costs incurred but not yet
paid.

1996 Program

In 1996, Hexcel announced plans to consolidate its operations over a period
of three years. The objective of the program was to integrate acquired assets
and operations into the Company, and to reorganize its manufacturing and
research activities around strategic centers dedicated to select product
technologies. The BA&C program was also intended to eliminate excess
manufacturing capacity and redundant administrative functions. The Company
expected this consolidation program to take approximately three years to
complete, in part because of aerospace industry requirements to "qualify"
specific equipment and manufacturing facilities for the manufacture of certain
products. These qualification requirements increase the complexity, cost and
time of moving equipment and rationalizing manufacturing activities. Specific
actions of the consolidation program included the elimination of approximately
245 manufacturing, marketing and administrative positions, the closure of a
facility, the consolidation of Hexcel's manufacturing operations in Europe, the
consolidation of Hexcel's U.S. special process manufacturing activities, and the
integration of sales, marketing and administrative resources. Total expenses
over the life of the 1996 program were $61.1, or $6.4 more than Hexcel's
original estimate, and total cash expenditures were $42.1. The additional
expenses were primarily the result of a non-cash write-down of the carrying
value of Hexcel's wholly-owned Italian subsidiary, as more fully discussed
below, which was recorded in 1998.

As part of the 1996 BA&C program, Hexcel disposed of its operations in
Brindisi, Italy (the "Italian Operations"). Since its acquisition in 1996, the
Italian Operations had immaterial revenues, incurred operating losses, and had
not been strategically important to the Company. Consequently, the Company
periodically evaluated the recoverability of its carrying value pursuant to SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." In 1998, Hexcel again evaluated the recoverability of
the carrying value of its Italian Operations in light of its continuing
operating losses and certain offers received from interested buyers. In
assessing whether an impairment had occurred, the Company considered the offers
received, as well as the future undiscounted cash flows related to its Italian
Operations. As a result, Hexcel recorded a charge of $5.6 in 1998 for an asset
impairment related to its Italian Operations, which was included in BA&C
expenses. The estimate of fair value used in determining the impairment charge
was based on the offers received from the interested buyers. In 1999, the
Company disposed of its Italian Operations for net proceeds that approximated
amounts accrued. The Company accounted for its Italian Operations under its
Engineered Products business segment.

60

In 1998, Hexcel reversed $6.5 of accrued BA&C expenses relating to employee
severance. From 1996 through 1998, during the implementation of the 1996
consolidation program, Hexcel experienced significant increased business volume
in its commercial aerospace market, which enabled Hexcel to reassign employees
who would have otherwise been terminated. As a result, the actual number of
employees terminated was 100 fewer than in the original program, and Hexcel no
longer required the full amount of its BA&C employee severance accrual. Also in
1998, Hexcel incurred additional facility and equipment relocation expenses of
$6.7 relating to its 1996 consolidation program, which were primarily the result
of actual costs for equipment moves exceeding previous estimates.

Accrued BA&C expenses and related activity during the three years ended
December 31, 1999 for this program, were as follows:

- - ------------------------------------------------- ---------------- ----------------- ----------------- ----------------
Employee Facility &
Severance & Equipment
1996 Program Relocation Relocation Other Total
- - ------------------------------------------------- ---------------- ----------------- ----------------- ----------------

Balance as of January 1, 1997 $ 19.1 $ 5.2 $ 1.1 $ 25.4
BA&C expenses - 7.7 4.6 12.3
Cash expenditures (6.6) (8.8) (5.2) (20.6)
Non-cash usage (2.8) (2.1) - (4.9)
- - ------------------------------------------------- --- ------------ ----- ----------- ------ ---------- ----- ----------
Balance as of December 31, 1997 9.7 2.0 0.5 12.2
BA&C expenses (6.5) 7.3 5.6 6.4
Cash expenditures (0.9) (6.0) (0.5) (7.4)
Non-cash usage 0.5 (2.9) (5.6) (8.0)
- - ------------------------------------------------- --- ------------ ----- ----------- ------ ---------- ----- ----------
Balance as of December 31, 1998 2.8 0.4 - 3.2
Cash expenditures (2.1) (0.4) - (2.5)
Reclassification of foreign government
grant payable to accrued liabilities (0.7) - - (0.7)
- - ------------------------------------------------- --- ------------ ----- ----------- ------ ---------- ----- ----------
Balance as of December 31, 1999 $ - $ - $ - $ -
- - ------------------------------------------------- --- ------------ ----- ----------- ------ ---------- ----- ----------

As of December 31, 1998, accrued BA&C expenses for this program related to
the Italian Operations' employee retirement costs, as well as to a foreign
government grant received by the Company that is required to be repaid over a
period of five years due to lower employee levels as a result of the
consolidation program. Cash expenditures for the year ended December 31, 1999,
primarily represented the employee retirement costs that were disbursed in
connection with the disposal of the Italian Operations. The program's remaining
accrued expense of $0.7, consisting of the foreign government grant payable, was
transferred to accrued liabilities in the second half of 1999.

Fiberite Transaction and Other BA&C Expenses

The acquisition of the Fiberite assets was substantially downsized from an
original agreement whereby the Company had, subject to certain terms and
conditions, committed to purchase selected assets and businesses of Fiberite for
approximately $300. As a result of the downsized transaction, the Company wrote
off $5.0 of acquisition and financing costs to BA&C expenses in 1997. In
addition, the Company expensed $8.0 of acquired in-process research and
technology purchased from Fiberite, which is also included in the 1997 BA&C
expenses.

61

Note 4 - Inventories

- - ---------------------------------------------------------------------------------------------------------------------
1999 1998
- - ---------------------------------------------------------------------------------------------------------------------

Raw materials $ 55.5 $ 90.9
Work in progress 47.8 77.8
Finished goods 50.4 44.5
- - ---------------------------------------------------------------------------------------------------------------------
Inventories $ 153.7 $ 213.2
- - ---------------------------------------------------------------------------------------------------------------------

Note 5 - Net Property, Plant and Equipment

- - ---------------------------------------------------------------------------------------------------------------------
1999 1998
- - ---------------------------------------------------------------------------------------------------------------------

Land $ 21.8 $ 22.2
Buildings 152.7 167.1
Equipment 440.0 439.2
- - ---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 614.5 628.5
Less accumulated depreciation (222.4) (195.9)
- - ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 392.1 $ 432.6
- - ---------------------------------------------------------------------------------------------------------------------

Note 6 - Investments in Affiliated Companies and Other Assets

- - ---------------------------------------------------------------------------------------------------------------------
1999 1998
- - ---------------------------------------------------------------------------------------------------------------------

Investments in affiliated companies $ 58.7 $ 70.3
Deferred tax asset 37.2 10.5
Deferred debt financing costs, net of accumulated amortization of
$5.0 and $1.8 as of December 31, 1999 and 1998, respectively 19.2 11.5
Prepaid pension asset 8.4 9.5
Other assets 7.3 5.4
- - ---------------------------------------------------------------------------------------------------------------------
Investments in affiliated companies and other assets $ 130.8 $ 107.2
- - ---------------------------------------------------------------------------------------------------------------------

Investments in Affiliated Companies

As part of the acquired Clark-Schwebel business, the Company acquired
equity ownership interests in three joint ventures: a 43.6% share in
CS-Interglas; a 43.3% share in Asahi-Schwebel; and a 50.0% share in CS Tech-Fab.
In the third quarter of 1999, the Company wrote down its investment in
CS-Interglas by $20.0 to its estimated fair market value. The write-down was the
result of management's decision to allow its fixed-price options to increase its
equity investment in CS-Interglas, from 43.6% to 84%, to expire unexercised, and
an assessment that an other-than-temporary decline in the investment had
occurred due to its deteriorating financial condition. The amount of the
write-down was determined based on available market information and appropriate
valuation methodologies. The Company did not record a deferred tax benefit on
the write-down because of limitations imposed by foreign tax laws on the
Company's ability to realize the tax benefit.

In 1999, Hexcel, Boeing and Aviation Industries of China formed a joint
venture, BHA Aero Composite Parts Co., Ltd., to manufacture composite parts for
secondary structures and interior applications for commercial aircraft. Hexcel
has a 33% equity ownership interest in this joint venture, which is located in
Tianjin, China. Also in 1999, Hexcel formed another joint venture, Asian
Composites Manufacturing Sdn. Bhd., with Boeing, Sime Link Sdn. Bhd., and
Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture
composite parts for secondary structures for commercial aircraft. Hexcel has a
25% equity ownership interest in this joint venture, which is located in Alar
Setor, Malaysia. Products manufactured by both joint ventures will be shipped to
Hexcel's customers worldwide, and it is anticipated that the first parts will be
delivered to customers in 2001. For the year ended December 31, 1999, Hexcel
made cash equity investments totaling $4.7 in these two joint ventures.

62

Remaining aggregate financial commitments for these joint ventures total
approximately $24.4, of which $16.6, $6.6 and $1.2 are expected to be made in
2000, 2001 and 2002, respectively. These commitments are comprised of a
combination of future equity investments, loans and loan guarantees.

As of December 31, 1999 and 1998, Hexcel owned a 45% equity interest in
DIC-Hexcel Limited ("DHL"), a joint venture with Dainippon Ink and Chemicals,
Inc. ("DIC"). This joint venture is located in Komatsu, Japan, and produces and
sells prepregs, honeycomb, decorative laminates and bulk molding compounds using
technology licensed from Hexcel and DIC. In 1998 and 1997, the Company
contributed $1.3 and $2.0, respectively, to the joint venture, as did DIC.
Hexcel is contingently liable to pay DIC up to $4.5 with respect to DHL's bank
debt, but the possibility that such repayment will be required has diminished as
a result of the improvement in the venture's business prospects.

Note 7 - Notes Payable

- - ---------------------------------------------------------------------------------------------------------------------
1999 1998
- - ---------------------------------------------------------------------------------------------------------------------

Senior Credit Facility $ 303.0 $ 618.2
European credit and overdraft facilities 14.8 16.3
Senior subordinated notes, due 2009 240.0 -
Convertible subordinated notes, due 2003 114.4 114.4
Convertible subordinated debentures, due 2011 25.6 25.6
Various notes payable 0.4 0.7
- - ---------------------------------------------------------------------------------------------------------------------
Total notes payable 698.2 775.2
Capital lease obligations 48.6 54.1
Senior subordinated notes payable to a related party, net of unamortized
discount of $0.9 and $1.8 as of December 31, 1999 and 1998, respectively 24.1 35.7
- - ---------------------------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 770.9 $ 865.0
- - ---------------------------------------------------------------------------------------------------------------------

Notes payable and current maturities of long-term liabilities $ 34.3 $ 26.9
Long-term notes payable and capital lease obligations, less current maturities 712.5 802.4
Indebtedness to a related party 24.1 35.7
- - ---------------------------------------------------------------------------------------------------------------------
Total notes payable, capital lease obligations and
indebtedness to a related party $ 770.9 $ 865.0
- - ---------------------------------------------------------------------------------------------------------------------

Senior Credit Facility

In connection with the acquisition of the industrial fabrics business of
Clark-Schwebel on September 15, 1998, Hexcel obtained a new global credit
facility (the "Senior Credit Facility") to: (a) fund the purchase of the
Clark-Schwebel business; (b) refinance the Company's existing revolving credit
facility; and (c) provide for ongoing working capital and other financing
requirements of the Company. The Senior Credit Facility was subsequently amended
on January 21, 1999, August 13, 1999 and March 7, 2000, to accommodate, among
other things, the issuance of $240.0 of 9.75% senior subordinated notes and the
impact of the decline in the Company's operating results on certain financial
covenants.

Effective with the March 7, 2000, amendment, the Senior Credit Facility
provides Hexcel with approximately $516.5 of borrowing capacity, subject to
certain limitations. Interest on outstanding borrowings ranges from 0.75% to
3.00% in excess of the applicable London interbank rate, or at the option of the
Company, from 0.0% to 2.00% 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 that ranges 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, as well as a security interest in certain U.S. accounts
receivable, inventories, and machinery and equipment. Further, under certain
defined circumstances, the Company has agreed to provide the lenders with a
security interest in certain additional U.S. accounts receivable, inventories,

63

machinery and equipment, and land and buildings on September 30, 2000. The
Company is subject to various financial covenants and restrictions under the
Senior Credit Facility, including a limitation on the redemption of capital
stock and a general prohibition against the payment of dividends. The Senior
Credit Facility is scheduled to expire in September 2004, except for
approximately $98, which is due for repayment in September 2005.

For the years ended December 31, 1999, 1998 and 1997, interest on
outstanding borrowings under Hexcel's Senior Credit Facility, or previous
revolving credit facility, bore interest at approximately 0.30% to 2.75% in
excess of the applicable London interbank rate, or at the option of Hexcel, 0.0%
to 1.75% in excess of the base rate of the administrative agent for the lenders,
and was subject to a commitment fee ranging from approximately 0.20% to 0.50%
per annum of the total facility. As a result of obtaining the Senior Credit
Facility in 1998, the Company wrote off approximately $1.6 of capitalized debt
financing costs, which is included in "interest expense" in the accompanying
consolidated statement of operations for 1998.

As of December 31, 1999 and 1998, the Company had an interest rate cap
agreement outstanding which covered a notional amount of $50.0 of the Senior
Credit Facility, providing a maximum fixed rate of 5.5% on the applicable London
interbank rate. The cost of the interest rate cap is being amortized to interest
expense over the term of the contract, and the unamortized amount approximated
fair value as of December 31, 1999 and 1998.

European Credit and Overdraft Facilities

In addition to the Senior Credit Facility, certain of Hexcel's European
subsidiaries have access to limited credit and overdraft facilities provided by
various local lenders. These credit and overdraft facilities are primarily
uncommitted facilities that are terminable at the discretion of the lenders. The
interest rates on these credit and overdraft facilities for the years ended
December 31, 1999, 1998 and 1997 ranged from 3.0% to 6.6% per annum.

Senior Subordinated Notes, due 2009

On January 21, 1999, the Company issued $240.0 of 9.75% senior subordinated
notes, due 2009. The senior subordinated notes are general unsecured obligations
of Hexcel.

Convertible Subordinated Notes, due 2003

The convertible subordinated notes carry an annual interest rate of 7.0%,
are due in 2003 and are convertible into Hexcel common stock at a conversion
price of $15.81 per share, subject to adjustment under certain conditions. The
convertible subordinated notes are redeemable as of August 1999, in whole or in
part, at the option of Hexcel. The redemption prices range from 103.5% to 100.0%
of the outstanding principal amount, depending on the period in which redemption
occurs.

Convertible Subordinated Debentures, due 2011

The 7.0% convertible subordinated debentures, due 2011, are redeemable by
Hexcel prior to maturity. Mandatory redemption is scheduled to begin in 2002
through annual sinking fund requirements. The debentures are convertible prior
to maturity into common shares of the Company at $30.72 per share.

Senior Subordinated Notes Payable to a Related Party

The senior subordinated notes payable to a related party, are payable to a
significant shareholder and subsidiaries of the shareholder, and are general
unsecured obligations of Hexcel. Effective February 1999, these notes bear
interest at a rate of 10.5% per annum, a rate which will increase by 0.5% per
annum each February thereafter until the notes mature in 2003. Prior to February
1999, these notes bore interest at a rate of 7.5% per annum.

64

In 1999, Hexcel repaid $12.5 of its senior subordinated notes payable to a
related party. As a result of the repayment, Hexcel wrote off $0.6 of
unamortized discount, which is included in "interest expense" in the
accompanying consolidated statement of operations for 1999.

Aggregate Maturities of Notes Payable and Indebtedness to a Related Party

The table below reflects aggregate maturities of notes payable and
indebtedness to a related party:

Payable during years ending December 31:
- - ------------------------------------------------------------------------------- -----------------

2000 $ 29.2
2001 47.5
2002 57.8
2003 202.6
2004 125.2
2005 and thereafter 260.9
- - ------------------------------------------------------------------------------- ---- ------------
Total notes payable and indebtedness to a related party $ 723.2
- - ------------------------------------------------------------------------------- ---- ------------

Estimated Fair Values of Notes Payable

The Senior Credit Facility and the various European credit facilities
outstanding as of December 31, 1999 and 1998, are variable-rate debt
obligations. Accordingly, the estimated fair values of each of these debt
obligations approximate their respective book values. The aggregate fair values
of the Company's other notes payable are as follows:

- - ---------------------------------------------------------------------------------------------------------------------
1999 1998
- - ---------------------------------------------------------------------------------------------------------------------

Senior subordinated notes, due 2009 $ 205.2 $ -
Convertible subordinated notes, due 2003 80.1 96.1
Convertible subordinated debentures, due 2011 18.5 19.0
- - ---------------------------------------------------------------------------------------------------------------------

The aggregate fair values of the above notes payable were estimated on the
basis of quoted market prices; however, trading in these securities is limited
and may not reflect fair value.

Note 8 - Leasing Arrangements

Assets, accumulated depreciation, and related liability balances under
capital leasing arrangements, as of December 31, 1999 and 1998, were:

- - ---------------------------------------------------------------------------------------------------------------------
1999 1998
- - ---------------------------------------------------------------------------------------------------------------------

Property, plant and equipment $ 63.0 $ 67.2
Less accumulated depreciation (15.0) (6.6)
- - ---------------------------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 48.0 $ 60.6
- - ---------------------------------------------------------------------------------------------------------------------

Capital lease obligations $ 48.6 $ 54.1
Less current maturities (5.1) (4.9)
- - ---------------------------------------------------------------------------------------------------------------------
Long-term capital lease obligations, net $ 43.5 $ 49.2
- - ---------------------------------------------------------------------------------------------------------------------

Certain sales and administrative offices, data processing equipment and
manufacturing facilities are leased under operating leases. Rental expense under
operating leases was $9.4 in 1999, $8.2 in 1998 and $7.4 in 1997.

65

Future minimum lease payments as of December 31, 1999 were:

- - -----------------------------------------------------------------------------------------------------------------------------------
Type of Lease
---------------- -----------------
Payable during years ending December 31: Capital Operating
- - ----------------------------------------------------------------------------------
--- ------------ ---- ------------

2000 $ 9.1 $ 4.8
2001 8.9 3.2
2002 8.8 2.2
2003 8.6 1.3
2004 8.5 1.0
2005 and thereafter 19.3 4.2
- - ---------------------------------------------------------------------------------- --- ------------ ---- ------------
Total minimum lease payments $ 63.2 $ 16.7
- - ---------------------------------------------------------------------------------- --- ------------ ---- ------------

Total minimum capital lease payments include $14.6 of imputed interest.

Note 9 - Related Parties

In addition to the senior subordinated notes payable to a related party,
transactions and balances with a significant shareholder, or subsidiaries of the
significant shareholder, as of and for the years ended December 31, 1999, 1998
and 1997, were as follows:

- - ---------------------------------------------------------------- ----------------- ---------------- -----------------
1999 1998 1997
- - ---------------------------------------------------------------- ----------------- ---------------- -----------------
- - ---------------------------------------------------------------- --- ------------- --- ------------ ---- ------------

Raw material purchases $ 32.6 $ 37.7 $ 34.3
Interest expense 2.7 2.8 2.8
Net sales - - 5.6
- - ---------------------------------------------------------------- --- ------------- --- ------------ ---- ------------
Accounts payable $ 3.1 $ 3.3
Accrued interest payable 0.9 0.9
- - ---------------------------------------------------------------- --- ------------- --- ------------

Note 10 - Retirement and Other Postretirement Benefit Plans

Retirement Plans

Hexcel maintains defined benefit retirement plans covering most U.S. and
certain European employees, as well as retirement savings plans covering
eligible U.S. employees. The defined benefit retirement plans are based on years
of service and employee compensation under either a career average or final pay
benefits method. Hexcel's funding policy is to contribute the minimum amount
required by applicable regulations. In addition, the Company participates in a
union sponsored multi-employer pension plan covering certain U.S. employees with
union affiliations.

Under the retirement savings plans, eligible U.S. employees may contribute
up to 16% of their compensation to an individual retirement savings account.
Hexcel makes matching contributions equal to 50% of employee contributions, not
to exceed 3% of employee compensation. In addition, the Company makes profit
sharing contributions when the Company meets or exceeds certain annual
performance targets.

66

The net pension expense for all of these defined benefit and retirement
savings plans, for the years ended December 31, 1999, 1998 and 1997, were:

- - ----------------------------------------------------------------- ----------------- ---------------- -----------------
1999 1998 1997
- - ----------------------------------------------------------------- ----------------- ---------------- -----------------

Defined benefit retirement plans $ 6.3 $ 5.2 $ 4.0
Multi-employer pension plan 0.4 0.3 0.3
Retirement savings plans- matching contributions 3.4 3.0 2.4
Retirement savings plans- profit sharing and incentive
contributions 5.4 5.3 3.6
- - ----------------------------------------------------------------- ---- ------------ --- ------------ ---- ------------
Net pension expense $ 15.5 $ 13.8 $ 10.3
- - ----------------------------------------------------------------- ---- ------------ --- ------------ ---- ------------

Other Postretirement Benefit Plans

Hexcel provides certain postretirement health care and life insurance
benefits to eligible retirees. Substantially all U.S. employees hired on or
before December 31, 1995, as well as senior executives and other certain U.S.
employees, are eligible for benefits. Benefits are available to eligible
employees who retire on or after age 58 after rendering at least 15 years of
service to Hexcel. Benefits consist of coverage of up to 50% of the annual cost
of certain health insurance plans, as well as annual life insurance coverage
equal to 65% of the final base pay of the retiree until the age of 70. Upon
reaching 70 years of age, life insurance coverage is reduced.

As part of the acquisition of the Clark-Schwebel business, the Company
assumed a defined benefit postretirement medical plan, which covers
substantially all salaried and nonsalaried employees of this business. The plan
provides medical coverage to age 65 for employees who retire at age 62 or later,
have at least 25 years of service, and participated in the plan prior to
retirement.

The net periodic cost of Hexcel's defined benefit retirement and U.S.
postretirement plans for the years ended December 31, 1999, 1998 and 1997, were:

-----------------------------------------------------------------------------------------------------------------------
U.S. Plans European Plans
-------------------------------------------------------------------------------
Defined Benefit Retirement Plans 1999 1998 1997 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------

Service cost - benefits
earned during the year $ 3.6 $ 3.3 $ 2.3 $ 2.7 $ 2.1 $ 1.9
Interest cost on projected
benefit obligation 1.5 1.2 0.8 2.4 2.3 2.2
Expected return on plan assets (1.0) (0.8) (0.7) (14.4) (4.4) (6.8)
Net amortization and deferral 0.7 0.6 0.3 10.8 0.9 4.0
-----------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 4.8 $ 4.3 $ 2.7 $ 1.5 $ 0.9 $ 1.3
-----------------------------------------------------------------------------------------------------------------------

Postretirement Plans - U.S. Plans 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 0.2 $ 0.1 $ 0.1
Interest cost on projected benefit obligation 0.9 0.7 0.7
Net amortization and deferral (0.3) (0.3) (0.2)
-----------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 0.8 $ 0.5 $ 0.6
-----------------------------------------------------------------------------------------------------------------------

67

The benefit obligation, fair value of plan assets, funded status, and
amounts recognized in the consolidated financial statements for Hexcel's defined
benefit retirement plans and U.S. postretirement plans, as of and for the years
ended December 31, 1999 and 1998, were:

-----------------------------------------------------------------------------------------------------------------------
Defined Benefit Retirement Plans
Postretirement Plans
---------------------------------------------------------------------------------
U.S. Plans European Plans
---------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:

Benefit obligation- beginning of
year $ 21.5 $ 14.9 $ 47.1 $ 32.6 $ 13.4 $ 10.8
Service cost 3.6 3.3 2.7 2.1 0.2 0.1
Interest cost 1.5 1.2 2.4 2.3 0.9 0.7
Plan participants' contributions - - 0.5 0.5 0.1 -
Introduction of a new plan - 1.2 - - - -
Plan from the acquired Clark-
Schwebel business - - - - - 4.1
Actuarial loss (gain) (4.1) 1.8 (7.5) 9.1 (0.8) (1.9)
Benefits paid (1.0) (0.8) (0.4) (0.2) (0.9) (0.5)
Other (0.1) (0.1) 0.2 0.7 0.1 0.1
-----------------------------------------------------------------------------------------------------------------------
Benefit obligation- end of year 21.4 21.5 45.0 47.1 13.0 13.4
-----------------------------------------------------------------------------------------------------------------------

Change in plan assets:
Fair value of plan assets-
beginning of year 11.5 8.3 51.7 44.6 - -
Actual return on plan assets 1.8 1.5 13.1 4.9 - -
Employer contributions 1.2 2.5 1.2 1.2 0.7 0.5
Plan participants' contributions - - 0.5 0.5 0.1 -
Benefits paid (1.0) (0.8) (0.4) (0.2) (0.8) (0.5)
Other 0.1 - 0.1 0.7 - -
-----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets- end of year 13.6 11.5 66.2 51.7 - -
-----------------------------------------------------------------------------------------------------------------------

Funded status:
Benefit obligation in excess of
(less than) plan assets (7.8) (10.0) 21.2 4.6 (13.0) (13.4)
Unrecognized actuarial loss (gain) 0.1 2.4 (12.1) 4.9 (0.7) (0.5)
Unrecognized net liability 0.2 0.1 - - - -
Unrecognized prior service cost (2.7) 0.8 - - (5.1) (4.8)
-----------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ (10.2) $ (6.7) $ 9.1 $ 9.5 $ (18.8) $ (18.7)
-----------------------------------------------------------------------------------------------------------------------

The accumulated benefit obligation for pension plans with accumulated
benefit obligations in excess of plan assets were $18.6 and $18.9 as of December
31, 1999 and 1998, respectively. In 1998, the Company updated certain
assumptions with respect to its European plans, resulting in an actuarial loss.
Amortization of this loss and other prior service costs is calculated on a
straight-line basis over the expected future years of service of the plans'
active participants. Assets for the defined benefit pension plans generally
consist of publicly traded securities, bonds and cash investments.

As of December 31, 1999 and 1998, the prepaid benefit cost was included in
"investments in affiliated companies and other assets" in the accompanying
consolidated balance sheets. For the same periods, the accrued benefit cost was
included in "accrued compensation and benefits" and "other non-current
liabilities" in the accompanying consolidated balance sheets.

68

Assumptions used to estimate the actuarial present value of benefit
obligations, as of December 31, 1999, 1998 and 1997, were:

- - --------------------------------------------------------------- ------------------ ---------------- -----------------
1999 1998 1997
- - --------------------------------------------------------------- ------------------ ---------------- -----------------
U.S. defined benefit retirement plans:

Discount rates 8.0% 7.0% 7.0%
Rate of increase in compensation 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%

European defined benefit retirement plans:
Discount rates 5.8% - 6.0% 5.5% - 5.8% 6.5% - 7.0%
Rates of increase in compensation 2.0% - 4.0% 1.5% - 4.0% 2.0% - 5.0%
Expected long-term rates of return on plan assets 6.5% - 7.0% 6.5% - 7.0% 6.5% - 7.5%

Postretirement benefit plans:
Discount rates 7.0% - 8.0% 6.8% - 7.0% 7.0%
- - --------------------------------------------------------------- ------------------ ---------------- -----------------

For measurement purposes, the annual rate of increase in the per capita
cost of covered health care benefits were assumed at 7.0 % to 10.2% for medical,
and 5.0% for dental and vision for 1999. These rates were assumed to decrease
gradually to 5.5% to 7.8%, and remain at 5.0%, respectively, by the year 2003.

The table below presents the impact of a one-percentage-point increase and
a one-percentage-point decrease in the assumed health care cost trend on the
total of service and interest cost components, and on the postretirement benefit
obligation.

- - ---------------------------------------------------------------------------------- ---------------- ------------------
1999 1998
- - ---------------------------------------------------------------------------------- ---------------- ------------------
One-percentage-point increase:

Effect on total service and interest cost components $ 0.1 $ 0.1
Effect on postretirement benefit obligation 0.8 0.8

One-percentage-point decrease:
Effect on total service and interest cost components (0.1) (0.1)
Effect on postretirement benefit obligation (0.7) (0.7)
- - ---------------------------------------------------------------------------------- ----- ---------- ------- ----------

69

Note 11 - Income Taxes

Recovery of (Provision for) Income Taxes

Income (loss) before income taxes and the recovery of (provision for)
income taxes, for the years ended December 31, 1999, 1998 and 1997, were:

- - --------------------------------------------------------------- ----------------- ---------------- -----------------
1999 1998 1997
- - --------------------------------------------------------------- ----------------- ---------------- -----------------
Income (loss) before income taxes:

U.S. $ (47.5) $ 30.6 $ 24.2
International 42.5 47.7 26.5
- - --------------------------------------------------------------- --- ------------- ---- ----------- --- -------------
Total income (loss) before income taxes $ (5.0) $ 78.3 $ 50.7
- - --------------------------------------------------------------- --- ------------- ---- ----------- --- -------------

Recovery of (provision for) income taxes:
Current:
U.S. $ 0.8 $ (6.3) $ (0.8)
International (14.9) (15.2) (9.5)
- - --------------------------------------------------------------- --- ------------- ---- ----------- --- -------------
Current provision for income taxes (14.1) (21.5) (10.3)
- - --------------------------------------------------------------- --- ------------- ---- ----------- --- -------------
Deferred:
U.S. 17.1 (4.7) 33.9
International (1.3) (2.2) (0.7)
- - --------------------------------------------------------------- --- ------------- ---- ----------- --- -------------
Deferred recovery of (provision for) income taxes 15.8 (6.9) 33.2
- - --------------------------------------------------------------- --- ------------- ---- ----------- --- -------------
Total recovery of (provision for) income taxes $ 1.7 $ (28.4) $ 22.9
- - --------------------------------------------------------------- --- ------------- ---- ----------- --- -------------

A reconciliation of the recovery of (provision for) income taxes at the
U.S. federal statutory income tax rate of 35% to the effective income tax rate,
for the years ended December 31, 1999, 1998 and 1997, is as follows:

- - --------------------------------------------------------------- ---------------- ----------------- -----------------
1999 1998 1997
- - --------------------------------------------------------------- ---------------- ----------------- -----------------

Recovery (provision) at U.S. federal statutory rate $ 1.8 $ (27.4) $ (17.8)
U.S. state taxes, less federal tax benefit 1.1 (0.8) (0.5)
Impact of different international tax rates,
adjustments to income tax accruals and other (1.5) (1.4) (18.7)
Valuation allowance 0.3 1.2 59.9
- - --------------------------------------------------------------- --- ------------ ----- ----------- --- -------------
Total recovery of (provision for) income taxes $ 1.7 $ (28.4) $ 22.9
- - --------------------------------------------------------------- --- ------------ ----- ----------- --- -------------

In 1997, in accordance with SFAS No. 109, "Accounting for Income Taxes" , the
Company had fully provided valuation allowance reserves against its net deferred
tax assets primarily in the U.S. and Belgium, where there were uncertainties
concerning the Company's ability to generate sufficient future taxable income to
realize these assets. In 1997, the Company reversed $59.9 of its valuation
allowance reserve as follows: $17.0 due to current year profitable U.S.
operations; $39.0 due to the Company's assessment that the realization of the
remaining U.S. net deferred tax assets is more likely than not; and $3.9 in
Belgium due to a gain on sale of certain tangible and intangible assets to other
Hexcel subsidiaries. The Company continues to reserve the balance of the net
deferred tax asset related to its Belgian operations.

The Company has made no U.S. income tax provision for approximately $70.4
of undistributed earnings of international subsidiaries as of December 31, 1999.
Such earnings are considered to be permanently reinvested. The additional U.S.
income tax on these earnings, if repatriated, would be offset in part by foreign
tax credits.

70

Deferred Income Taxes

Deferred income taxes result from temporary differences between the
recognition of items for income tax purposes and financial reporting purposes.
Principal temporary differences as of December 31, 1999 and 1998, were:

- - ---------------------------------------------------------------------------------- ----------------- ----------------
1999 1998
- - ---------------------------------------------------------------------------------- ----------------- ----------------

Net operating loss carryforwards $ 36.3 $ 19.2
Reserves and other, net 27.8 25.1
Accrued business acquisition and consolidation expenses 1.5 3.0
Accelerated depreciation and amortization (18.5) (15.1)
Valuation allowance (6.4) (7.3)
- - ---------------------------------------------------------------------------------- --- ------------- --- ------------
Net deferred tax asset $ 40.7 $ 24.9
- - ---------------------------------------------------------------------------------- --- ------------- --- ------------

Net Operating Loss Carryforwards

As of December 31, 1999, Hexcel had net operating loss ("NOL")
carryforwards for U.S. federal and Belgium income tax purposes of approximately
$91.0 and $1.5, respectively. The U.S. NOL carryforwards, which are available to
offset future taxable income, expire at various dates through the year 2019. As
a result of a change in ownership that occurred in connection with the purchase
of a business in 1996, the Company has a limitation on the utilization of $49.0
of U.S. NOL carryforwards of approximately $12.0 per year.

Note 12 - Stockholders' Equity

Common Stock Outstanding

- - ------------------------------------------------------------ ----------------------- -------------- ----------------
(Number of shares) 1999 1998 1997
- - ------------------------------------------------------------ ----------------------- -------------- ----------------
Common stock:

Balance, beginning of year 37.2 36.9 36.6
Activity under stock plans 0.2 0.3 0.3
- - ------------------------------------------------------------ ----------------------- -------------- ----------------
Balance, end of year 37.4 37.2 36.9
- - ------------------------------------------------------------ ----------------------- -------------- ----------------

Treasury stock:
Balance, beginning of year 0.8 - -
Repurchased - 0.8 -
- - ------------------------------------------------------------ ----------------------- -------------- ----------------
Balance, end of year 0.8 0.8 -
- - ------------------------------------------------------------ ----------------------- -------------- ----------------

Common stock outstanding 36.6 36.4 36.9
- - ------------------------------------------------------------ ----------------------- -------------- ----------------

In 1998, Hexcel's Board of Directors approved plans to repurchase up to
$20.0 of the Company's common stock. During the year ended December 31, 1998,
the Company repurchased 0.8 shares of its common stock at an average cost of
$12.32 per share, for a total of $10.0. The Board of Directors may also approve
additional stock buybacks from time to time, subject to market conditions and
the terms of the Company's credit agreements and indentures.

Stock-Based Incentive Plans

Hexcel has various stock option and management incentive plans for eligible
employees, officers, directors and consultants. These plans provide for awards
in the form of stock options, stock appreciation rights, restricted stock,
restricted stock units and other stock-based awards. Options to purchase common
stock are generally granted at the fair market value on the date of grant.
Substantially all of these options have a ten-year term and generally vest over
a three-year period. In 1998, Hexcel's stockholders approved various amendments
to the Company's stock-based incentive plans, which increased the aggregate
number of shares of stock issuable under these plans by 4.5 to 7.4.

71

As of December 31, 1999, 1998 and 1997, Hexcel had outstanding a total of
0.9, 0.5 and 0.4 of performance accelerated restricted stock units ("PARS"),
respectively. PARS are convertible to an equal number of shares of Hexcel common
stock and generally vest in increments over a seven-year period, subject to
certain terms of employment and other circumstances that may accelerate the
vesting period. As of December 31, 1999, 1998 and 1997, 0.1, 0.3 and 0.3 PARS
were vested, respectively. In 1999, 0.3 PARS were converted into shares of
Hexcel common stock. Approximately $0.5, $1.7 and $3.3 of compensation expense
was recognized in 1999, 1998 and 1997, respectively, with respect to the PARS
and certain other stock-based incentive plans.

Stock option data for the three years ended December 31, 1999, 1998 and
1997, were:

- - --------------------------------------------------------------------------------- --------------- -------------------
Weighted
Average
Number of Exercise
Options Price
- - ---------------------------------------------------------------------------------- -------------- ----- -------------

Options outstanding as of January 1, 1997 2.1 $ 10.36
Options granted 3.1 $ 18.24
Options exercised (0.3) $ 9.64
- - ---------------------------------------------------------------------------------- -------------- ----- -------------
Options outstanding as of December 31, 1997 4.9 $ 15.39
Options granted 3.2 $ 12.23
Options exercised (0.2) $ 8.53
Options expired or canceled (2.8) $ 18.52
- - ---------------------------------------------------------------------------------- -------------- ----- -------------
Options outstanding as of December 31, 1998 5.1 $ 12.05
Options granted 1.0 $ 6.57
Options expired or canceled (0.2) $ 11.81
- - ---------------------------------------------------------------------------------- -------------- ----- -------------
Options outstanding as of December 31, 1999 5.9 $ 11.18
- - ---------------------------------------------------------------------------------- -------------- ----- -------------

The number of options exercisable as of December 31, 1999, 1998 and 1997
were 2.1, 1.5 and 1.2, respectively, at a weighted average exercise price per
share of $12.02, $11.54 and $9.80, respectively.

The following table summarizes information about stock options outstanding
as of December 31, 1999:

- - ---------------------------- ------------------------------------------------------ ----------------------------------
Options Outstanding Options Exercisable
- - ---------------------------- ------------------------------------------------------ ----------------------------------

Weighted Weighted Weighted
Number of Average Average Number of Average
Range of Options Remaining Exercise Options Exercise
Exercise Prices Outstanding Life (in Years) Price Exercisable Price
- - ---------------------------- ---------------- ------------------ ------------------ ---------------- -----------------

$ 4.18 - 4.75 0.2 4.9 $ 4.58 0.2 $ 4.58
$ 4.76 - 10.00 1.8 8.7 $ 7.19 0.4 $ 7.81
$ 10.01 - 15.00 3.2 7.9 $ 12.14 1.1 $ 12.45
$ 15.01 - 20.00 0.6 6.5 $ 16.80 0.4 $ 16.71
$ 20.01 - 29.63 0.1 8.0 $ 23.98 - $ 23.99
- - ----- ---------------------- ---------------- ------------------ ----- ------------ ---------------- ---- ------------
$ 4.18 - 29.63 5.9 7.9 $ 11.18 2.1 $ 12.02
- - ----- ---------------------- ---------------- ------------------ ----- ------------ ---------------- ---- ------------

Employee Stock Purchase Plan ("ESPP")

Hexcel maintains an ESPP, under which eligible employees may contribute up
to 10% of their base earnings toward the quarterly purchase of the Company's
common stock at a purchase price equal to 85% of the fair market value of the
common stock on the purchase date. The maximum number of common stock reserved
for issuance under the ESPP is 0.2. During 1999, 1998 and 1997, an aggregate
total of 0.1 shares of common stock were issued under the ESPP.

72

Pro Forma Disclosures

The Company has elected to continue to follow APB Opinion No. 25 for
accounting for its stock-based incentive plans. Had compensation expense for the
Company's stock option plans been determined as prescribed by SFAS 123, pro
forma net income (loss) and related per share amounts would have been as
follows:

- - ----------------------------------------------------------------- ---------------- --------------- ----------------
1999 1998 1997
- - ----------------------------------------------------------------- ---- ----------- --- ----------- --- ------------
Net income (loss):

As reported $ (23.3) $ 50.4 $ 73.6
Pro forma (25.8) 48.2 67.4

Basic net income (loss) per share:
As reported $ (0.64) $ 1.38 $ 2.00
Pro forma (0.71) 1.31 1.83

Diluted net income (loss) per share:
As reported $ (0.64) $ 1.24 $ 1.74
Pro forma (0.71) 1.19 1.60
- - ----------------------------------------------------------------- ---- ----------- --- ----------- --- ------------

The weighted average fair value of options granted during 1999, 1998 and
1997 was $6.57, $12.23 and $18.24, respectively. The following ranges of
assumptions were used in the Black-Scholes pricing models for options granted in
1999, 1998 and 1997: risk-free interest of 4.9% to 5.6%; estimated volatility of
40% to 50%; dividend yield of 0.0%; and an expected life of 4 to 5 years.

Note 13 - Net Income (Loss) Per Share

Computations of basic and diluted net income (loss) per share for the years
ended December 31, 1999, 1998 and 1997, are as follows:

- - ---------------------------------------------------------------- ----------------- ---------------- -----------------
1999 1998 1997
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------

Basic net income (loss) per share:
Net income (loss) $ (23.3) $ 50.4 $ 73.6
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------
Weighted average common shares outstanding 36.4 36.7 36.7
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------
Basic net income (loss) per share $ (0.64) $ 1.38 $ 2.00
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------

Diluted net income (loss) per share:
Net income (loss) $ (23.3) $ 50.4 $ 73.6
Effect of dilutive securities:
Convertible subordinated notes, due 2003 - 5.1 5.1
Convertible subordinated debentures, due 2011 - 1.1 1.1
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------
Adjusted net income (loss) $ (23.3) $ 56.6 $ 79.8
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------

Weighted average common shares outstanding 36.4 36.7 36.7
Effect of dilutive securities:
Stock options - 0.9 1.2
Convertible subordinated notes, due 2003 - 7.2 7.2
Convertible subordinated debentures, due 2011 - 0.9 0.9
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------
Diluted weighted average common shares outstanding 36.4 45.7 46.0
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------
Diluted net income (loss) per share $ (0.64) $ 1.24 $ 1.74
- - ---------------------------------------------------------------- ---- ------------ ---- ----------- ----- -----------

The convertible subordinated notes, due 2003, the convertible subordinated
debentures, due 2011, and the stock options were excluded from the 1999
computation of diluted net loss per share, as they were antidilutive.
Substantially all of the Company's stock options were included in the
calculation of the diluted net income per share for the years ended December 31,
1998 and 1997.

73

Note 14 - Contingencies

Hexcel is involved in litigation, investigations and claims arising out of
the conduct of its business, including those relating to commercial
transactions, as well as to environmental, health and safety matters. The
Company estimates and accrues its liabilities resulting from such matters based
on a variety of factors, including outstanding legal claims and proposed
settlements; assessments by internal and external counsel of pending or
threatened litigation; and assessments by environmental engineers and
consultants of potential environmental liabilities and remediation costs. Such
estimates exclude counterclaims against other third parties. Such estimates are
not discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
Although it is impossible to determine the level of future expenditures for
legal, environmental and related matters with any degree of certainty, it is the
Company's opinion, based on available information, that it is unlikely that
these matters, individually or in the aggregate, will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.

Legal and Environmental Claims and Proceedings

Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess, which
are included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. The
Company believes that it has limited or no liability for cleanup costs at these
sites, and intends to vigorously defend itself in these matters.

Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act,
Hexcel signed an administrative consent order to pay for the environmental
remediation of a manufacturing facility it owns and formerly operated in Lodi,
New Jersey. The Company's estimate of the remaining cost to satisfy this consent
order is accrued in the accompanying consolidated balance sheets. The ultimate
cost of remediating the Lodi site will depend on developing circumstances.

Hexcel was party to a cost-sharing agreement regarding the operation of
certain environmental remediation systems necessary to satisfy a post-closure
care permit issued to a previous owner of the Company's Kent, Washington, site
by the U.S. Environmental Protection Agency. Under the terms of the cost-sharing
agreement, the Company was obligated to reimburse the previous owner for a
portion of the cost of the required remediation activities. Management has
determined that the cost-sharing agreement terminated on December 22, 1998;
however, the other party disputes this determination. The Company's estimate of
the remaining costs associated with the cleanup of this site is accrued in the
accompanying consolidated balance sheets.

Other Proceedings

Hexcel is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. The Company is not in a position to
predict the direction or outcome of the investigation; however, it is
cooperating with the Department of Justice.

In 1999, Hexcel was joined in a purported class action lawsuit alleging
antitrust violations in the sale of carbon fiber, carbon fiber industrial
fabrics and carbon fiber prepreg. The Company was one of many manufacturers
joined in the lawsuit, which was spawned from the Department of Justice
investigation. The lawsuit is in its preliminary stage and the Company is not in
a position to predict the outcome, but believes that the lawsuit is without
merit as to the Company.

74

Note 15 - Supplemental Cash Flow Information

Supplemental cash flow information, including non-cash financing and
investing activities, for the years ended December 31, 1999, 1998 and 1997,
consist of the following:

- - ---------------------------------------------------------------- ----------------- ---------------- -----------------
1999 1998 1997
- - ---------------------------------------------------------------- ----------------- ---------------- -----------------

Cash paid for:
Interest $ 59.1 $ 28.8 $ 22.3
Taxes 17.7 26.4 3.9
- - ---------------------------------------------------------------- ----- ----------- ---- ----------- ----- -----------

Non-cash items:
Common stock issued under incentive plans 0.7 1.9 3.3
Conversion of senior subordinated notes, due 2003 - 0.1 0.1
Capital lease obligation in connection with the
acquisition of the Clark-Schwebel business - 50.0 -
- - ---------------------------------------------------------------- ----- ----------- ---- ----------- ----- -----------

Note 16 - Segment Information

Hexcel's business segments and related products are as follows:

Reinforcement Products: This segment manufactures and sells carbon fibers
and carbon, glass and aramid fiber fabrics. These reinforcement products
comprise the foundation of most composite materials, parts and structures. The
segment weaves electronic fiberglass fabrics that are a substrate for printed
circuit boards. All of the Company's electronics sales come from reinforcement
fabric sales. This segment also sells products for industrial applications such
as decorative blinds and soft body armor. In addition, this segment sells to the
Company's Composite Materials business segment, and to other third-party
customers in the commercial aerospace and space and defense markets. Sales from
the acquired Clark-Schwebel business are included in this business segment.

Composite Materials: This segment manufactures and sells composite
materials, including prepregs, honeycomb, structural adhesives, sandwich panels
and specially machined honeycomb parts, primarily to the commercial aerospace
and space and defense markets, as well as to industrial markets. This segment
also sells to the Company's Engineered Products business segment.

Engineered Products: This segment manufactures and sells a range of
lightweight, high-strength composite structures and interiors, primarily to the
commercial aerospace and space and defense markets. In December 1999, the
Company announced its intention to explore strategic alternatives for its
Engineered Products business segment, including a possible sale.

The financial results for Hexcel's business segments have been prepared
using a management approach, which is consistent with the basis and manner in
which Hexcel management internally segregates financial information for the
purposes of assisting in making internal operating decisions. Hexcel evaluates
performance based on adjusted income before BA&C expenses, interest and taxes
("Adjusted EBIT"), and generally accounts for intersegment sales based on
arm's-length prices. Corporate and other expenses are not allocated to the
business segments, except to the extent that the expenses can be directly
attributable to the business segments.

75

The following table presents financial information on the Company's
business segments as of December 31, 1999, 1998 and 1997, and for the years then
ended:

- - ----------------------------------------------------------------------------------------------------------------------
Reinforcement Composite Engineered
Products Materials Products Total
- - ----------------------------------------------------------------------------------------------------------------------
1999
- - ----------------------------------------------------------------------------------------------------------------------

Net sales to external customers $ 330.9 $ 605.9 $ 214.7 $ 1,151.5
Intersegment sales 111.0 9.0 - 120.0
- - ----------------------------------------------------------------------------------------------------------------------
Total sales 441.9 614.9 214.7 1,271.5

Adjusted EBIT 33.7 68.0 22.4 124.1
Depreciation and amortization 34.4 20.3 3.5 58.2
Equity in income and write-down of
investments in affiliated companies 20.0 - - 20.0
BA&C expenses 6.7 9.7 1.6 18.0
BA&C payments 2.7 3.0 0.3 6.0

Segment assets 712.5 359.3 115.4 1,187.2
Investments in affiliated companies 54.0 - 4.7 58.7
Capital expenditures 14.0 16.1 5.0 35.1
- - ----------------------------------------------------------------------------------------------------------------------
1998
- - ----------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 224.8 $ 658.0 $ 206.2 $ 1,089.0
Intersegment sales 130.3 11.8 0.1 142.2
- - ----------------------------------------------------------------------------------------------------------------------
Total sales 355.1 669.8 206.3 1,231.2

Adjusted EBIT 57.4 82.7 20.5 160.6
Depreciation and amortization 23.6 17.4 3.3 44.3
Equity in income of affiliated companies 0.5 - - 0.5
BA&C expenses 1.6 3.2 5.5 10.3
BA&C payments 0.6 7.1 - 7.7

Segment assets 788.4 428.2 140.5 1,357.1
Investments in affiliated companies 70.3 - - 70.3
Capital expenditures 21.1 33.3 9.2 63.6
- - ----------------------------------------------------------------------------------------------------------------------
1997
- - ----------------------------------------------------------------------------------------------------------------------
Net sales to external customers $ 171.1 $ 581.0 $ 184.8 $ 936.9
Intersegment sales 124.7 16.7 - 141.4
- - ----------------------------------------------------------------------------------------------------------------------
Total sales 295.8 597.7 184.8 1,078.3

Adjusted EBIT 40.4 83.0 15.9 139.3
Depreciation and amortization 13.8 17.2 2.4 33.4
BA&C expenses 1.7 9.6 - 11.3
BA&C payments 2.8 16.8 - 19.6

Segment assets 221.3 416.2 125.5 763.0
Capital expenditures 23.4 22.8 8.2 54.4
- - ----------------------------------------------------------------------------------------------------------------------

76

Reconciliation of Reportable Segments to Consolidated Totals

Reconciliations of the totals reported for the operating segments to the
applicable line items in the Consolidated Financial Statements are as follows:

- - ---------------------------------------------------------------- ----------------- ----------------- -----------------
1999 1998 1997
- - ---------------------------------------------------------------- ----------------- ----------------- -----------------

Income before income taxes:
Total Adjusted EBIT for reportable segments $ 124.1 $ 160.6 $ 139.3
Less:
Total BA&C expenses for reportable segments 18.0 10.3 11.3
Corporate BA&C expenses 2.1 2.4 14.0
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total consolidated BA&C expenses 20.1 12.7 25.3

Corporate & other expenses 35.0 30.7 33.3
Interest expense 73.9 38.7 25.8
Eliminations 0.1 0.2 4.2
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Consolidated income (loss) before income taxes (5.0) 78.3 50.7
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------

Depreciation and amortization:
Total depreciation and amortization for reportable segments 58.2 44.3 33.4
Corporate depreciation and amortization 3.1 3.2 2.4
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total consolidated depreciation and amortization 61.3 47.5 35.8
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------

Assets:
Total assets for reportable segments 1,187.2 1,357.1 763.0
Corporate assets 91.3 84.6 86.4
Eliminations (16.6) (37.5) (37.9)
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total consolidated assets 1,261.9 1,404.2 811.5
- - ---------------------------------------------------------------- ----------------- ----------------- -----------------

Capital expenditures:
Total capital expenditures for reportable segments 35.1 63.6 54.4
Corporate expenditures 0.5 2.9 3.0
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total consolidated capital expenditures 35.6 66.5 57.4
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------

BA&C payments:
Total BA&C payments for reportable segments 6.0 7.7 19.6
Corporate BA&C payments 3.5 1.0 14.0
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total consolidated BA&C payments $ 9.5 $ 8.7 $ 33.6
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------

Geographic Data

Sales and long-lived assets, by geographic area, consisted of the following
for the three years ended December 31, 1999, 1998 and 1997:

- - ---------------------------------------------------------------- ----------------- ----------------- -----------------
1999 1998 1997
- - ---------------------------------------------------------------- ----------------- ----------------- -----------------

Net sales to external customers:
United States $ 744.1 $ 687.6 $ 598.6
International
France 168.1 178.8 165.7
United Kingdom 76.4 66.0 49.4
Other 162.9 156.6 123.2
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total international 407.4 401.4 338.3
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total consolidated net sales $ 1,151.5 $ 1,089.0 $ 936.9
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------

77

- - ---------------------------------------------------------------- ----------------- ----------------- -----------------
1999 1998 1997
- - ---------------------------------------------------------------- ----------------- ----------------- -----------------

Long-lived assets:
United States $ 785.2 $ 831.4 $ 304.2
International
France 38.8 42.2 37.3
United Kingdom 50.0 46.4 43.1
Other 22.9 31.7 30.0
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total international 111.7 120.3 110.4
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------
Total consolidated long-lived assets $ 896.9 $ 951.7 $ 414.6
- - ---------------------------------------------------------------- --- ------------- --- ------------- ---- ------------

Net sales are attributed to geographic areas based on the location in which
the sale originated. U.S. net sales include U.S. exports to non-affiliates of
$91.4, $100.0 and $70.9, for the years ended December 31, 1999, 1998 and 1997,
respectively. Long-lived assets primarily consist of property, plant and
equipment, intangibles, investments in affiliated companies and other assets,
less long-term deferred tax assets.

Significant Customers

To the extent that the end application of net sales can be identified, The
Boeing Company and its subcontractors accounted for approximately 28%, 35% and
36% of 1999, 1998 and 1997 net sales, respectively. Similarly, the Airbus
Industrie consortium and its subcontractors accounted for approximately 10%, 11%
and 10% of 1999, 1998 and 1997 net sales, respectively.

Note 17 - Quarterly Financial Data (Unaudited)

Quarterly financial data for the years ended December 31, 1999 and 1998,
were:

- - ----------------------------------------------- ---------------- ----------------- ---------------- -----------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------
1999
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------

Net sales $ 316.2 $ 292.6 $ 274.1 $ 268.6
Gross margin 70.7 66.3 51.5 54.0
BA&C expenses 2.8 1.4 13.6 2.3
Operating income 27.2 24.8 2.7 14.2
Net income (loss) 5.2 4.3 (30.1) (2.7)
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------

Net income (loss) per share:
Basic $ 0.14 $ 0.12 $ (0.82) $ (0.07)
Diluted 0.14 0.12 (0.82) (0.07)
Dividends per share - - - -
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------
Market price:
High $ 9.60 $ 11.38 $ 9.06 $ 6.06
Low 6.50 6.94 5.81 5.00
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------

78

- - ----------------------------------------------- ---------------- ----------------- -- ------------- -----------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- - ----------------------------------------------- ---------------- ----------------- -- ------------- -----------------
1998
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------

Net sales $ 256.7 $ 273.5 $ 255.3 $ 303.5
Gross margin 66.1 71.3 61.8 72.1
BA&C expenses - - 0.7 12.0
Operating income 33.7 38.2 27.5 17.6
Net income 17.0 20.0 11.5 1.9
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------

Net income per share:
Basic $ 0.46 $ 0.54 $ 0.31 $ 0.05
Diluted 0.40 0.46 0.29 0.05
Dividends per share - - - -
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------
Market price:
High $ 28.13 $ 31.38 $ 24.38 $ 14.19
Low 21.25 22.63 9.69 7.06
- - ----------------------------------------------- -- ------------- --- ------------- -- ------------- --- -------------

Results for the quarters ended September 30, 1998 and December 31, 1998, as
well as each of the quarters in 1999, include the results of the acquired
Clark-Schwebel business, which was acquired on September 15, 1998.

79