HEXCEL CORP /DE/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 1-8472

HEXCEL CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-1109521
(State of Incorporation) (I.R.S. Employer Identification No.)

281 TRESSER BOULEVARD
Stamford, Connecticut 06901
(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (203) 969-0666
Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

7% CONVERTIBLE SUBORDINATED NOTES DUE 2003
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
9 3/4% SENIOR SUBORDINATED NOTES DUE 2009

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

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

The aggregate market value as of March 22, 2002 of voting stock held by
nonaffiliates of the registrant: $102,814,779

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

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 and its subsidiaries
(herein referred to as "Hexcel" or "the Company"), is the world's leading
producer of advanced structural materials. The Company develops, manufactures
and markets lightweight, high-performance reinforcement products, composite
materials and engineered products for use in the commercial aerospace, space and
defense, electronics, and industrial markets. The Company's products are used in
a wide variety of end products, such as commercial and military aircraft, space
launch vehicles and satellites, printed wiring boards, computers, cellular
telephones, televisions, soft body armor, high-speed trains and ferries, cars
and trucks, wind turbine blades, reinforcements for bridges and other
structures, window blinds and a wide variety of recreational equipment.

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

NARRATIVE DESCRIPTION OF BUSINESS AND BUSINESS SEGMENTS

Hexcel is a vertically integrated manufacturer of products within a single
industry: Advanced Structural Materials. Hexcel's advanced structural materials
business is organized around three strategic business segments: Reinforcement
Products, Composite Materials and Engineered Products.

REINFORCEMENT PRODUCTS

The Reinforcement Products business segment manufactures and markets carbon
fibers and industrial fabrics. The following table identifies the Reinforcement
Products business segment's principal products and examples of the primary
end-uses:

CARBON FIBERS: Carbon fibers are manufactured for sale to third party
customers and for use by Hexcel in manufacturing certain industrial fabrics and
composite materials. Carbon fibers are woven into carbon fabrics, used as
reinforcement in conjunction with a resin matrix to produce pre-impregnated
composite materials (referred to as "prepregs") and used in filament winding and
advanced fiber placement to produce various other composite materials. Key
product applications

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include structural components for commercial and military aircraft and space
launch vehicles, as well as certain other applications such as recreational
equipment.

INDUSTRIAL FABRICS: Industrial fabrics are made from a variety of fibers,
including several types of fiberglass as well as carbon, aramid, quartz, ceramic
and other specialty reinforcements. These reinforcement products are sold to
third-party customers for use in a wide range of applications, including printed
wiring boards, soft body armor and other security products, window screens and
other architectural products, and a variety of structural materials and
components used in aerospace, wind energy, marine and other industrial
applications. They are also used internally to manufacture prepregs and other
composite materials.

REINFORCEMENT PRODUCTS

The Reinforcement Products business segment's net sales to third party
customers were $276.8 million in 2001, $359.2 million in 2000 and
$330.9 million in 1999, which represented approximately 28%, 34% and 29% of the
Company's net sales, respectively. In addition, approximately 27%, 21% and 25%
of the Company's total production of reinforcement products was used internally
to manufacture composite materials in 2001, 2000 and 1999, respectively.

The Company also has equity ownership interests in three reinforcement
product joint ventures: a 43.6% share in Interglas Technologies AG
("Interglas"), headquartered in Germany; a 43.3% share in Asahi-Schwebel
Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn owns
interests in two joint ventures in Taiwan--a 50% interest in Nittobo Asahi Glass
and 51% interest in Asahi-Schwebel Taiwan; and a 50.0% share in Clark-Schwebel
Tech-Fab Company ("CS Tech-Fab"), headquartered in the United States. Interglas
and Asahi-Schwebel are fiberglass fabric producers serving the European and
Asian electronics and telecommunications industries. CS Tech-Fab manufactures
non-woven materials for roofing, construction and other specialty applications.

COMPOSITE MATERIALS

The Composite Materials business segment has worldwide responsibility for
manufacturing and marketing prepregs, structural adhesives, honeycomb, specially
machined honeycomb parts and composite panels, fiber reinforced thermoplastics,
sheet moulding compounds, polyurethane systems and laminates.

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The following table identifies the Composite Materials business segment's
principal products and examples of the primary end-uses:

PREPREGS: Prepregs are manufactured for sale to third party customers and
for use in manufacturing composite laminates and monolithic structures,
including finished components for aircraft structures and interiors. Prepregs
are manufactured by combining high performance reinforcement fabrics or
unidirectional fibers with a resin matrix to form a composite material with
exceptional structural properties not present in either of the constituent
materials. Industrial fabrics used in the manufacture of prepregs include glass,
carbon, aramid, quartz, ceramic, polyethylene and other specialty
reinforcements. Resin matrices include bismaleimide, cyanate ester, epoxy,
phenolic, polyester, polyimide and other specialty resins. Hexcel is a worldwide
leader in the production of prepregs and has led the development of applications
for prepregs for over thirty years.

OTHER FIBER-REINFORCED MATRIX MATERIALS: New fiber reinforced matrix
developments include HexMC-Registered Trademark-, a carbon fiber/epoxy sheet
moulding compound that enables small to medium sized composite components to be
mass produced. Hexcel's HexFIT-TM- film infusion material is a product that
combines resin films and dry fibre reinforcements to save lay-up time in
production and enables large contoured composite structures, such as wind
turbine blades, to be manufactured. Resin Film infusion and Resin Transfer
Moulding products are enabling quality aerospace components to be manufactured
using highly cost-effective processes.

STRUCTURAL ADHESIVES: Hexcel designs and markets a comprehensive range of
Redux-Registered Trademark- film adhesives. These structural adhesives, which
bond metal to metal, composites and honeycomb structures, are widely used in the
aerospace industry and for many industrial applications.

HONEYCOMB, HONEYCOMB PARTS AND COMPOSITE PANELS: Honeycomb is a unique,
lightweight, cellular structure generally composed of hexagonal nested cells.
The product is similar in appearance to a cross-sectional slice of a beehive.
Honeycomb is primarily used as a lightweight core material and is a highly
efficient energy absorber. When sandwiched between composite or metallic facing
skins, honeycomb significantly increases the stiffness of the structure, whilst
adding very little weight.

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

Hexcel sells honeycomb as standard blocks and in slices cut from a block.
Honeycomb is also supplied as sandwich panels, with facing skins bonded to
either side of the core material. Hexcel also possesses advanced processing
capabilities that enable the Company to design and manufacture complex
fabricated honeycomb parts and bonded assemblies to meet customer
specifications.

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

COMPOSITE MATERIALS

The Company operates sales offices in the United States located in Bedford,
Texas; Danbury, Connecticut; Dublin, California; Redmond, Washington; and Novi,
Michigan. In Europe, the Company operates sales offices at it manufacturing
sites as well as Pasching, Austria; Munich, Germany; and Saronno, Italy. The
Company also operates sales offices in Melbourne, Australia; Shanghai, China;
and Sao Paulo, Brazil.

As part of Hexcel's business consolidation and restructuring activities, the
Company's Gilbert, Arizona manufacturing facility was closed in the fourth
quarter of 2001. It is anticipated that the Lancaster, Ohio manufacturing
facility will be closed in the second quarter of 2002. The manufacturing output
from these facilities will be produced by the Livermore, California and Salt
Lake City, Utah facilities.

The Composite Materials business segment's net sales to third party
customers were $607.7 million in 2001, $567.0 million in 2000 and
$605.9 million in 1999, which represented approximately 60%, 54% and 52% of the
Company's net sales, respectively. Net sales for composite materials are highly
dependent upon commercial aircraft build rates as further discussed under the
captions "Markets and Customers" and "Management's Discussion and Analysis of
Financial Condition and Results of

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Operations." In addition, about 2% of the Company's total production of
composite materials is used internally to manufacture OEM composite structures
and interiors.

The Company also owns a 45% equity interest in DIC-Hexcel Limited, a joint
venture with Dainippon Ink and Chemicals, Inc. This composite materials joint
venture is located in Komatsu, Japan, and produces and sells prepregs, honeycomb
and decorative laminates using technology licensed from Hexcel and Dainippon Ink
and Chemicals, Inc.

ENGINEERED PRODUCTS

The Engineered Products business segment has worldwide responsibility for
manufacturing and marketing composite structures primarily for use in the
aerospace industry, as well as OEM aircraft interiors. Composite structures and
aircraft interior components are manufactured from a variety of composite and
other materials, including prepregs, honeycomb and structural adhesives, using
such manufacturing processes as resin transfer molding, autoclave processing,
multi-axis numerically controlled machining, press laminating, heat forming and
other composite manufacturing techniques. Composite structures include such
items as wing-to-body and flap track fairings, radomes, engine cowls, inlet
ducts, wing panels and other aircraft components. Aircraft interior components
include such items as overhead storage bins, flight deck panels and door liners.

The following table identifies the Engineered Products business segment's
principal products and examples of the primary end-uses:

In April 2000, the Company sold its Bellingham aircraft interiors business.
This business was responsible for the design, engineering and manufacture of
commercial aircraft interior components and systems for airline refurbishment
applications.

ENGINEERED PRODUCTS

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The Engineered Products business segment's net sales and pro forma net sales
to third party customers, after giving effect to the disposition of the
Bellingham aircraft interiors business as if the transaction occurred at the
beginning of 1999, were as follows:

The Engineered Products business segment's net sales to third party
customers represented approximately 12%, 12% and 19% of the Company's net sales
in 2001, 2000 and 1999, respectively.

In addition, Hexcel has equity ownership interests in two engineered product
joint ventures: BHA Aero Composite Parts Co., Ltd. ("BHA Aero") and Asian
Composites Manufacturing Sdn. Bhd. ("Asian Composites"). In 1999, Hexcel formed
BHA Aero with Boeing and Aviation Industries of China (now known as China
Aviation Industry Corporation I) to manufacture composite parts for secondary
structures and interior applications for commercial aircraft. Hexcel has a 33%
equity ownership interest in this joint venture, which is located in Tianjin,
China. Also in 1999, Hexcel formed Asian Composites with Boeing, Sime Link Sdn.
Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to
manufacture composite parts for secondary structures for commercial aircraft.
Hexcel has a 25% equity ownership interest in this joint venture, which is
located in Alor Setar, Malaysia. Asian Composites began manufacturing and
shipping products during the second half of 2001, while BHA Aero will begin
shipping engineered products in the first half of 2002.

MARKETS AND CUSTOMERS

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

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(1) Net Sales by Market have been restated in 2000 and 1999 for comparative
purposes to conform to the 2001 presentation.

(2) Net Sales by Geography were based on the location in which the sale was
manufactured.

COMMERCIAL AEROSPACE

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

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Accordingly, the demand for advanced structural material products is closely
correlated to the demand for commercial aircraft.

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

Reflecting the demand factors noted above, the number of commercial aircraft
delivered by The Boeing Company ("Boeing") and Airbus Industrie ("Airbus")
declined by 48% from 1992 to 1995. At the lowest point during this period,
Boeing and Airbus reported combined deliveries of 380 aircraft. Beginning in
1996, however, aircraft deliveries by Boeing and Airbus began to rise, growing
to a combined record peak of 914 in 1999. Combined aircraft deliveries declined
to 800 aircraft in 2000 and rebounded to 852 aircraft in 2001.

In light of the tragic events that occurred on September 11, 2001 and the
negative impact on the commercial aerospace market, Boeing and Airbus have
significantly reduced their build rate projections for 2002 and 2003 from rates
previously expected. The impact of these changes on Hexcel will be influenced by
two factors: the mix of aircraft produced and the inventory supply chain effects
of reduced aircraft production. The dollar value of Hexcel's materials varies by
aircraft type--twin aisle aircraft use more Hexcel materials and products than
narrow body aircraft and newer designed aircraft use more than older
generations. The speed by which the aircraft manufacturers reduce their
production to the new demand levels, and thereby their inventories, will impact
their requirements for Hexcel's products. On average, Hexcel delivers products
into the supply chain about six months prior to aircraft delivery. Depending on
the product, orders placed with Hexcel are received anywhere between one and
eighteen months prior to delivery of the aircraft to the customer. Hexcel
anticipates that its commercial aerospace revenues will decline approximately
25-30% in 2002 compared with 2001, and may decline further in 2003.

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

Approximately 23%, 20% and 27% of Hexcel's 2001, 2000 and 1999 net sales,
respectively, were to Boeing and related subcontractors. Of the 23% of sales to
Boeing and its subcontractors in 2001, 20% and 3% related to commercial
aerospace and space and defense market applications, respectively. Approximately
16%, 13% and 11% of Hexcel's 2001, 2000 and 1999 net sales, respectively, were
to EADS, including Airbus, and its subcontractors. Of the 16% of sales to EADS
and its subcontractors in 2001, 14% and 2% related to commercial aerospace and
space and defense market applications, respectively. The loss of all or a
significant portion of the business with Boeing or EADS would likely have a
material adverse effect on the Company's consolidated results of operations.

SPACE AND DEFENSE

The space and defense markets have historically been innovators in and
sources of significant demand for advanced structural materials. The aggregate
demand by space and defense customers is

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primarily a function of military aircraft procurement by the U.S. and certain
European governments. Presently, there are a number of potentially significant
military aircraft programs in various stages of development or initial
production that utilize advanced structural materials. The Company is currently
qualified to supply materials to a broad range of military aircraft and
helicopter programs anticipated either to enter full-scale production in the
near future or to significantly increase production rates. These programs
include the F/A-18E/F Hornet, the F-22 Raptor, and the Eurofighter/Typhoon, as
well as the C-17, the V-22 Osprey tiltrotor aircraft, and the RAH-66 Comanche
and the NH90 helicopters. The benefits that the Company obtains from these
programs will depend upon which ones are funded and the extent of such funding.

Contracts to supply materials for military and some commercial projects
contain provisions for termination at the convenience of the U.S. government or
the buyer. In the case of such a termination, Hexcel is entitled to recover
reasonable costs incurred plus a provision for profit on the incurred costs. In
addition, the Company is subject to U.S. government cost accounting standards in
accordance with applicable Federal Acquisition Regulations.

ELECTRONICS

The Company is one of the largest producers of high-quality, lightweight
fiberglass fabric substrates used in the fabrication of multilayer printed
wiring boards. In addition to its U.S. businesses, the Company has ownership
positions in the Interglas and Asahi-Schwebel joint ventures. Interglas and
Asahi-Schwebel are leading fiberglass fabric manufacturers in Europe, Japan and
Southeast Asia. Fiberglass fabric substrates are a critical component used in
the production of printed wiring boards, which are integral to most advanced
electronic products, including computers, telecommunications equipment, advanced
cable television equipment, network servers, televisions, automotive equipment
and home appliances.

The printed wiring board market experienced considerable growth in recent
years due to growth in electronic equipment markets for products such as
cellular phones, computers, and pagers. In addition, many other products such as
automobiles, home appliances and medical equipment now have ever-increasing
electronic content, which also drives growth for printed wiring boards.

During the second quarter of 2001, the industry experienced a severe
downturn, and a corresponding inventory correction began working its way through
the supply chain significantly impacting demand for fiberglass substrates. As
the downturn continued through 2001, competition intensified for the business
that remained and pricing pressure increased. Depressed conditions in this
sector have continued into the first quarter of 2002. Meanwhile, import quotas
limiting Asian imports of fiberglass fabrics into the United States expired at
the end of 2001 and the migration of lower layer count printed wiring board
production to Asia has continued. Given the length and complexity of the supply
chain and the large number of electronics devices that incorporate printed
wiring boards manufactured using the Company's products, it is difficult to
predict when the inventory correction will end, and when, and to what extent,
the industry will recover. As a result of these factors, the Company's sales to
the electronics market in 2001 decreased $104.2 million, or 57.5%, from sales in
2000.

INDUSTRIAL MARKETS

Hexcel has focused its participation in industrial markets in areas where
the application of advanced structural material technology offers significant
benefits to the end user. As a result, the Company has chosen to focus on select
opportunities where high performance is the key product criterion. Future
opportunities and growth depend primarily upon the success of the individual
programs and industries in which the Company has elected to participate. Within
industrial markets, key applications include surface transportation
(automobiles, mass transit and high-speed rail and

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marine applications), wind energy, civil engineering, skis, snowboards, fishing
rods, tennis rackets, bicycles and soft body armor. Hexcel's participation in
these markets is a valuable complement to its commercial and military aerospace
businesses, and the Company is committed to pursuing the utilization of advanced
structural material technology in its industrial markets.

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

FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS AND GEOGRAPHIC AREAS

Financial information and further discussion of Hexcel's business segments
and geographic areas, including external sales, long-lived assets and
significant customers, are contained throughout the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
Note 18 to the accompanying consolidated financial statements of this Annual
Report on Form 10-K.

BACKLOG

In recent years, Hexcel's customers have increasingly demanded shorter order
lead times and "just-in-time" delivery performance. While the Company has many
multi-year contracts with its major aerospace customers, most of these contracts
specify the proportion of the customers' requirements that will be supplied by
the Company and the terms under which the sales will occur, not the specific
quantities to be procured. The Company's electronic and industrial customers
have always desired to order their requirements on as short a lead-time as
possible. As a result, the Company has recognized that over the last few years
the twelve-month order backlog is no longer a meaningful trend indicator and, as
a result, ceased monitoring it in the management of the business.

RAW MATERIALS AND PRODUCTION ACTIVITIES

Due to the vertically integrated nature of Hexcel's operations, the Company
produces several materials used in the manufacture of certain industrial
fabrics, composite materials and engineered products, as well as the
polyacrylonitrile ("PAN") precursor material used in the manufacture of carbon
fibers. The Company consumed internally approximately 49% and 27% of its carbon
fiber and industrial fabric production, respectively, in 2001. However, the
Company purchases most of the raw materials used in production from third
parties. Several key materials are available from relatively few sources, and in
many cases the cost of product qualification makes it impractical to develop
multiple sources of supply. The unavailability of these materials, which the
Company does not currently anticipate, could have a material adverse effect on
the Company's consolidated results of operations.

In addition, certain raw materials and operating supplies used by Hexcel are
subject to price fluctuations caused by the volatility of underlying commodity
prices. The commodities most likely to have an impact on the Company's
consolidated results of operations in the event of significant price changes are
electricity, natural gas, aluminum and certain chemicals. The Company attempts
to minimize the impact of commodity price risk, when feasible, by entering into
supply agreements that specify raw material prices or limit price increases for
a reasonable period of time. The Company generally does not employ forward
contracts or other financial instruments to hedge commodity price risk.

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

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RESEARCH AND TECHNOLOGY; PATENTS AND KNOW-HOW

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

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

Hexcel spent $18.6 million for research and technology in 2001,
$21.2 million in 2000 and $24.8 million in 1999. These expenditures were
expensed as incurred.

ENVIRONMENTAL MATTERS

The Company is subject to federal, state and local laws and regulations
designed to protect the environment and to regulate the discharge of materials
into the environment. The Company believes that its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage and of associated financial liability. To date, environmental control
regulations have not had a significant adverse effect on the Company's overall
operations. A discussion of environmental matters is contained in Item 3, "Legal
Proceedings," and in Note 16 to the accompanying consolidated financial
statements included in this Annual Report on Form 10-K.

SALES AND MARKETING

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

COMPETITION

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

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EMPLOYEES

As of December 31, 2001, Hexcel employed 5,376 full-time employees, 3,379 in
the United States and 1,997 internationally. The number of full-time employees
has declined from 6,072 and 6,328 as of December 31, 2000 and 1999,
respectively, primarily due to Hexcel's business consolidation and restructuring
programs and the sale of the Bellingham aircraft interiors business in
April 2000. The Company's business consolidation and restructuring programs
include the right-sizing of the Company in response to the forecasted reductions
in commercial aircraft production and the continued weakness in electronics and
the closure of manufacturing facilities, such as the facilities in Gilbert,
Arizona and Lancaster, Ohio. The Company expects to further reduce the number of
employees to less than 4,500 by the end of 2002. For further discussion, refer
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and to Note 4 to the accompanying consolidated financial statements
of this Annual Report on Form 10-K.

ITEM 2. PROPERTIES

Hexcel owns and leases manufacturing facilities and sales offices located
throughout the United States and in other countries, as noted below. The
corporate offices and principal corporate support activities for the Company are
located in leased facilities in Stamford, Connecticut. The Company's research
and technology administration, and certain laboratories are located in Dublin,
California; Duxford, United Kingdom; Decines, France; and Anderson, South
Carolina.

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

MANUFACTURING FACILITIES

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Hexcel leases the facilities located in Anderson, South Carolina;
Washington, Georgia; Clearwater, Florida; Statesville, North Carolina; and the
land on which the Burlington, Washington, facility is located. The Company also
leases portions of the facilities located in Casa Grande, Arizona; Linz,
Austria; and Les Avenieres, France. The remaining facilities are owned by the
Company.

The facilities located in Casa Grande, Arizona; Decatur, Alabama; Dublin;
California; Kent, Washington; Livermore, California; Salt Lake City, Utah; and
Seguin, Texas are subject to mortgages in support of the bank syndicate that
provides the Company with its Senior Credit Facility.

As part of Hexcel's business consolidation and restructuring programs, the
Lancaster, Ohio manufacturing facility will be closed during the second quarter
of 2002. The manufacturing of products from this facility will be moved to the
Livermore, California and Salt Lake City, Utah sites.

ITEM 3. LEGAL PROCEEDINGS

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

LEGAL AND ENVIRONMENTAL CLAIMS AND PROCEEDINGS

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

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

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

12

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

Hexcel is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. It appears that Toho Tenax Co. Ltd., one
of its subsidiaries and one of its employees have been indicted for obstruction
of justice. No other indictments have been issued in the case to date. The
Company is not in a position to predict the direction or outcome of the
investigation; however, it is cooperating with the Department of Justice.

In 1999, Hexcel was joined in a purported class action lawsuit alleging
antitrust violations in the sale of carbon fiber, carbon fiber industrial
fabrics and carbon fiber prepreg (Thomas & Thomas Rodmakers, Inc. et. al. v.
Newport Adhesives and Composites, Inc., et. al., Amended and Consolidated Class
Action Complaint filed October 4, 1999, United States District Court, Central
District of California, Western Division, CV-99-07796-GHK (CTx)). The Company
was one of many manufacturers joined in the lawsuit, which was spawned from the
Department of Justice investigation. The Court has issued a tentative ruling to
certify the class, but no final ruling has been issued. If the tentative ruling
becomes final, discovery is expected to continue to proceed. The Company is not
in a position to predict the outcome of the lawsuit, but believes that the
lawsuit is without merit as to the Company.

The Company has also been joined as a party in numerous purported class
actions in California spawned by the Thomas & Thomas class action. These actions
also allege antitrust violations and are brought on behalf of purchasers located
in California who indirectly purchased carbon fiber products. The cases have
been ordered to be coordinated in the Superior Court for the County of San
Francisco and are currently referred to as Carbon Fibers Cases I, II and III,
Judicial Council Coordinator Proceeding Numbers 4212, 4216 and 4222. The cases
are Lazio v. Amoco Polymers Inc., et.al., filed August 21, 2000; Proiette v.
Newport Adhesives and Composite, Inc. et. al., filed September 12, 2001; Simon
v. Newport Adhesives and Composite, Inc. et. al., filed September 21, 2001;
Badal v. Newport Adhesives and Composite, Inc. et.al., filed September 26, 2001;
Yolles v. Newport Adhesives and Composite, Inc. et.al., filed September 26,
2001; Regier v. Newport Adhesives and Composite, Inc. et.al., filed October 2,
2001; and Connolly v. Newport Adhesives and Composite, Inc. et.al., filed
October 4, 2001; Elisa Langsam v Newport Adhesives and Composites, Inc, et al.,
filed October 4, 2001; Jubal Delong et al. v Amoco Polymers, Inc. et al., filed
October 26, 2001; and Louis V. Ambrosio v Amoco Polymers, Inc. et. al., filed
October 25, 2001.

At its Livermore, California facility, Hexcel has received a series of
notices of violation of air quality standards from the Bay Area Air Quality
Management District. Hexcel is investigating the issues and is cooperating with
the District.

On May 10, 1999, the Company filed a complaint against Hercules, Inc., in
the Supreme Court of New York, seeking recovery of certain disputed items
relating to the 1996 purchase by Hexcel of the Hercules Composite Products
Division. On June 1, 2001, Hexcel was awarded a judgment in the amount of
$7.3 million plus interest for a total of $10.2 million; interest on the
judgment continues to accrue. Hercules appealed the judgment and delivered a
bond to secure collection of the judgment. In

13

the first quarter of 2002, the judgment was upheld by the appellate division,
but the judgment has not become final. Hexcel strongly believes that the
judgment will become final.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Hexcel common stock is traded on the New York and Pacific Stock Exchanges.
The range of high and low sales prices of Hexcel common stock on the New York
Stock Exchange Composite Tape is contained in Note 22 to the accompanying
consolidated financial statements included in this Annual Report on Form 10-K
and is incorporated herein by reference.

Hexcel did not declare or pay any dividends in 2001, 2000 or 1999. The
payment of dividends is generally prohibited under the terms of certain of the
Company's debt agreements.

On March 22, 2002, there were 1,384 holders of record of Hexcel common
stock.

ITEM 6. SELECTED FINANCIAL DATA

The information required by Item 6 is contained on page 29 of this Annual
Report on Form 10-K under the caption "Selected Financial Data" and is
incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information required by Item 7 is contained on pages 30 to 57 of this
Annual Report on Form 10-K under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and is incorporated herein by
reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 7A is contained under the heading "Market
Risks" on pages 54 to 56 of this Annual Report on Form 10-K and is incorporated
herein by reference.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by Item 8 is contained on pages 58 to 94 of this
Annual Report on Form 10-K under "Consolidated Financial Statements and
Supplementary Data" and is incorporated herein by reference. The report of the
independent public accountants for the years ended December 31, 2001, 2000 and
1999 is contained on page 60 of this Annual Report on Form 10-K under the
caption "Report of Independent Accountants" and is incorporated herein by
reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

14

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

The information required by Item 10 will be contained in Hexcel's definitive
proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
the fiscal year ended December 31, 2001. Such information is incorporated herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 will be contained in Hexcel's definitive
proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
the fiscal year ended December 31, 2001. Such information is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by Item 12 will be contained in Hexcel's definitive
proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
the fiscal year ended December 31, 2001. Such information is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 will be contained in Hexcel's definitive
proxy statement for the 2002 Annual Meeting of Stockholders, which will be filed
with the Securities and Exchange Commission within 120 days after the close of
the fiscal year ended December 31, 2001. Such information is incorporated herein
by reference.

15

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

A. 1. FINANCIAL STATEMENTS

The consolidated financial statements of Hexcel, the notes thereto, and the
report of independent accountants are listed on page 58 of this Annual
Report on Form 10-K and are incorporated herein by reference.

2. FINANCIAL STATEMENT SCHEDULES

The financial statement schedule and the report of independent accountants
required by Item 14(a)(2) are listed on page 58 of this Annual Report on
Form 10-K and are incorporated herein by reference.

B. REPORTS ON FORM 8-K

Current Report on Form 8-K dated October 25, 2001, relating to third quarter
2001 financial results.

C. EXHIBITS

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

* Indicates management contract or compensatory plan or arrangement.

26

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
STAMFORD, STATE OF CONNECTICUT.

HEXCEL CORPORATION

March 26, 2002 /s/ DAVID E. BERGES
- ------------------------------------------ ------------------------------------------
(Date) David E. Berges
CHIEF EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

28

SELECTED FINANCIAL DATA

(IN MILLIONS, EXCEPT PER SHARE DATA)

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

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

(a) The comparability of the data may be affected by certain acquisitions and
the sale of the Bellingham aircraft interiors business. The Company acquired
Clark-Schwebel, a manufacturer of high-quality fiberglass fabrics used to
make printed wiring boards and high performance specialty products used in
insulation, filtration, wall and facade claddings, soft body armor and
reinforcements for composite materials in 1998 and the satellite business
and certain technologies from Fiberite in 1997. Both acquisitions were
accounted for using the purchase method of accounting.

(b) No cash dividends were declared per common stock during the five years ended
December 31, 2001.

(c) Earnings before interest, taxes, depreciation, amortization, impairment of
goodwill and other purchased intangibles, equity in earnings (losses) of and
write-downs of an investment in affiliated companies, and extraordinary loss
on early retirement of debt.

(d) Earnings before business consolidation and restructuring expenses,
impairment of goodwill and other purchased intangibles, gain on sale of
Bellingham aircraft interiors business, compensation expenses associated
with the former CEO's retirement, interest, taxes, depreciation,
amortization, equity in earnings (losses) of and write-downs of an
investment in affilitated companies, and extraordinary loss on early
retirement of debt.

29

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

BUSINESS OVERVIEW

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

(a) Pro forma results give effect to the April 26, 2000 sale of the Bellingham
aircraft interiors business as if the transaction had occurred on
January 1, 1999.

(b) Excludes business consolidation and restructuring expenses, impairment of
goodwill and other purchased intangibles, compensation expenses associated
with the former CEO's retirement, the gain from the April 2000 sale of the
Bellingham business, interest, taxes, depreciation, amortization, equity in
earnings (losses) of and write-downs of an investment in affiliated
companies, and the extraordinary loss on early retirement of debt.

(c) Excludes business consolidation and restructuring expenses, impairment of
goodwill and other purchased intangibles, and compensation expenses
associated with the former CEO's retirement.

(d) The 2001 results reflect the impact of the write-down of U.S. deferred tax
assets and the impact of ceasing to record the tax benefits from U.S.
operating losses commencing during the second quarter of 2001. The 2000
results include $24.0 million of provision for income taxes on the
April 2000 gain from the sale of the Bellingham aircraft interiors business.

During 2001, significant changes occurred in a number of the markets served
by Hexcel. These changes impacted the Company's operations and its actions. The
following is a summary of several significant developments during the year.

MARKET DEVELOPMENTS:

- ELECTRONICS. Hexcel manufactures high-quality, lightweight fiberglass
fabric substrates used in the fabrication of multilayer printed wiring
boards. In the latter part of the first quarter of 2001, sales of these
products fell sharply. In the second quarter of 2001, U.S. demand weakened
further and our European operations, together with our joint venture
interests in Europe and Asia, saw the same sharp decline in customer
demand. These reduced demand conditions persisted for the balance of 2001
with revenues down in excess of 65% for the second, third and fourth
quarters compared to the same quarters in 2000. The dramatic reductions
the Company

30

saw in its electronic revenues were part of the global downturn and supply
chain correction seen throughout the electronics industry in 2001. The
origins of this downturn have many causes including the end of the so
called "tech boom," a sharp reduction in telecommunications infrastructure
investments and declining macroeconomic trends. With significant inventory
positions existing throughout the electronics supply chain in anticipation
of continuing high growth rates, the impact of the decline in electronics
end market demand was magnified down the supply chain resulting in the
unprecedented declines in sales seen by Hexcel and other electronics
supply chain participants. As the downturn continued through 2001,
competition intensified for the business that remained and pricing
pressure increased. Depressed conditions in this sector have continued
into the first quarter of 2002. Meanwhile, import quotas limiting Asian
imports of fiberglass fabrics into the U.S. expired at the end of 2001 and
the migration of lower layer count printed wiring board production to Asia
has continued. Given the length and complexity of the supply chain and the
large number of electronics devices that incorporate printed wiring boards
manufactured using the Company's products, it is difficult to predict when
the inventory correction will end, and when, and to what extent, the
industry will recover.

- COMMERCIAL AEROSPACE. 2001 was a growth year for commercial aerospace with
revenues 4.1% higher than 2000. The industry benefited from higher
commercial aircraft production as deliveries grew and new aircraft backlog
remained strong. The tragic events of September 11, 2001 dramatically
changed the outlook for the industry and for Hexcel. The sharp reduction
in passenger traffic post September 11th in both the United States and
overseas significantly impacted airline profitability. The airlines cut
capacity and started canceling and pushing out aircraft orders. As a
result, The Boeing Company ("Boeing") plans significant reductions in
aircraft production rates in 2002 and Airbus Industrie ("Airbus")
cancelled previous plans to increase aircraft production rates in 2002.
Combined, Boeing and Airbus delivered 852 aircraft in 2001, and have
indicated that 2002 deliveries will be approximately 680 aircraft.
Additionally, public statements of Boeing and Airbus suggest that less
than 600 aircraft combined will be delivered in 2003. As a result, Hexcel
anticipates its commercial aerospace sales will be in the order of 25-30%
lower in 2002 than in 2001, and may decline further in 2003. These
declines may be exaggerated in the short term as the industry corrects
inventory levels throughout its supply chain in response to the lowered
level of output expected over the next two years.

- SPACE & DEFENSE AND INDUSTRIAL. While electronic revenues declined in 2001
and the outlook for commercial aerospace changed, revenues from space &
defense and industrial (emerging) applications grew. Revenues from fixed
wing and rotary military aircraft grew as the next generation of aircraft
started to enter full-scale production. Hexcel benefited from continued
strong sales of reinforcement fabrics used in soft body armor and other
ballistic applications. The growth came from military replacement programs
as well as continued law enforcement agency demand. The use of Hexcel's
composite materials in wind energy and automotive applications continued
to expand, resulting in double-digit revenue growth for these industrial
markets. Installed wind energy capacity continues to increase at a rapid
rate, primarily in Europe, and with it the size of the wind generators
being built. The number of automobile models that use Hexcel's products
for impact protection of structural applications continues to grow.

BUSINESS CONSOLIDATION, RESTRUCTURING AND IMPAIRMENTS:

With the changes in the electronics market during 2001 and the outlook for
commercial aerospace in 2002, Hexcel embarked upon a re-shaping of its business
to face its new realities:

- The Company's initial response to the downturn in electronics demand was
to idle plants and equipment and furlough employees. As the extent of the
industry downturn became apparent, the Company reduced employment in its
reinforcement products business and its corporate staff.

31

- The impact of the events of September 11, 2001 called for a reshaping of
the Company. On November 7, 2001, the Company announced a program to
reduce its cash fixed overhead costs by approximately $60.0 million, or
20%, compared to previous spending rates, primarily through reductions in
headcount. The majority of the fixed cost reductions were completed in the
fourth quarter of 2001 with most of the remaining actions scheduled to be
completed in the first quarter of 2002. As a result, the Company
anticipates that the benefit of this cost reduction initiative will be
evident in its second quarter 2002 financial results. With the impact of
these fixed cost reductions and the results of reducing direct production
employees as sales decline, the Company anticipates its employment will be
less than 4,500 by the end of 2002 compared to 6,188 on June 30, 2001. The
Company recorded a restructuring charge of $47.9 million with respect to
these actions, of which approximately $35.0 million will be cash
expenditures. About $3.0 million of these cash expenditures were incurred
in the fourth quarter of 2001, with the balance to be incurred throughout
2002.

- In December 2001, Hexcel announced that it had completed the previously
announced closure of its Gilbert, Arizona composites facility ahead of
schedule. It further noted that it would complete the closure of its
Lancaster, Ohio facility in the second quarter of 2002. Business
consolidation and restructuring activities are discussed more fully below
under "Business Consolidation and Restructuring Programs."

- During the second quarter of 2001, Hexcel determined that it needed to
change the tax reporting of its U.S. operating losses because of its
business outlook at that time. Previously, the Company had recorded the
benefit of these net operating losses by increasing the deferred tax asset
carried on its consolidated balance sheet. Beginning in the second quarter
of 2001, the Company established a valuation allowance against the
benefits of subsequent U.S. net operating losses until the U.S. operations
return to consistent profitability. In light of the significant events
that occurred in the second half of 2001, including the delay in the
anticipated recovery of the electronics market, anticipated reductions in
future commercial aircraft production, and a general weakening of the
economy, expectations of future operating performance of the Company have
been reduced. These lowered estimates of U.S. taxable income made it
unlikely that the Company would generate sufficient income during the
carry-forward period to utilize the U.S. deferred tax assets on its
consolidated balance sheet. Therefore, Hexcel wrote off its $32.6 million
U.S. deferred tax asset during the fourth quarter of 2001.

- In the fourth quarter of 2001, Hexcel recorded a non-cash charge of
$309.1 million related to the impairment of a substantial portion of
goodwill and other intangible assets acquired in the Clark-Schwebel
transaction of 1998 and the Fiberite transaction of 1997. These
write-downs came as a result of an extensive review of long-lived assets,
particularly goodwill and other intangible assets acquired in recent years
in light of the changes in market conditions and the current market
outlook. The announced reductions in future commercial aircraft
production, the unprecedented decline in demand for woven glass fabrics,
along with the overall weakness in the U.S. economy have led to lowered
revenue forecasts for the relevant business segments and have led Hexcel
to the conclusion that certain items of goodwill and other purchased
intangibles were not recoverable. Hexcel determined the fair value of the
impaired assets using discounted cash flow models, market valuations and
third party appraisals, where appropriate. Additionally, in light of the
aforementioned trends, the Company also recorded a $7.8 million non-cash
write-down in connection with its investment in Interglas Technologies AG
("Interglas"), a company that had also been severely impacted by the
unprecedented downturn in the electronics market.

32

OTHER EVENTS:

- In April 2001, Hexcel announced that its Chairman and Chief Executive
Officer had been diagnosed with cancer and was stepping down as Chairman
and Chief Executive Officer.

- In June 2001, Hexcel issued $100.0 million of 9.75% senior subordinated
debentures, due 2009. The debentures were issued under the same indenture
as the $240.0 million notes issued in January 1999. Hexcel used a portion
of the net proceeds to redeem $25.0 million principal amount of its
increasing rate senior subordinated note, due 2003 held by Ciba Specialty
Chemicals Holding Inc. The remaining net proceeds were used to retire
$67.5 million face value of its 7% convertible subordinated notes, due
2003.

- In July 2001, Hexcel appointed David E. Berges as its new Chairman and
Chief Executive Officer. Mr. Berges had previously held positions with
General Electric, the Barnes Group and Honeywell (Allied Signal), the
latest of which was President of Honeywell's Automotive Products Group.

RESULTS OF OPERATIONS

2001 COMPARED TO 2000

NET SALES: Consolidated net sales were $1,009.4 million in 2001, a 4.4%
decline from $1,055.7 million in 2000, and a 2.6% decline from pro forma net
sales of $1,036.8 million, which gives effect to the sale of the Bellingham
aircraft interiors business as if the transaction had occurred on January 1,
2000. The decline was due to a severe industry downturn and inventory correction
in the electronics market for the Company's Reinforcement Products' woven glass
fabrics, with net sales to that market down $104.2 million, or 57.5%, year on
year. The downturn was partially offset by modest growth in the Composite
Materials segment of $40.7 million, or 7.2%, continued expansion in other
markets for Reinforcement Products of $21.8 million, or 12.2%, and increased
revenues for Engineered Products of $14.3 million, or 12.9%, excluding the
revenues in 2000 of the Bellingham aircraft interiors business sold in
April 2000 as if the sale of the business occurred on January 1, 2000. Net sales
in 2000 generated by the Bellingham aircraft interiors business prior to its
sale were $18.9 million. Had the same U.S. dollar, British pound and Euro
exchange rates applied in 2001 as in 2000, consolidated net sales would have
been approximately $1,019.5 million in 2001.

Hexcel has three reportable segments: Reinforcement Products, Composite
Materials and Engineered Products. Although these strategic business units
provide customers with different products and services, they often overlap
within four end markets: Commercial Aerospace, Space & Defense, Electronics and
Industrial. The Company finds it meaningful to evaluate the performance of its
segments through the four end markets. Further discussion and additional
financial information about the Company's segments may be found in Note 18 to
the accompanying consolidated financial statements of this Annual Report on
10-K.

33

The following table summarizes actual and pro forma net sales to third-party
customers by segment and end market in 2001 and 2000:

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

(a) Market allocations for the Composite Materials segment have been restated
for comparative purposes to conform to the 2001 presentation.

(b) Pro forma net sales for 2000 give effect to the sale of the Bellingham
aircraft interiors business, that occurred on April 26, 2000, as if it had
occurred on January 1, 2000 and exclude $18.9 million of commercial
aerospace net sales by the Bellingham business. This business was a
component of the Company's Engineered Products segment until this business
was sold.

Commercial aerospace net sales increased 4.1% to $538.9 million in 2001
compared with $517.7 million in 2000, or 8.0%, compared with pro forma net sales
in 2000 of $498.8 million. The increase in comparable net sales reflects higher
build rates of commercial aircraft produced at Airbus, Boeing and several
regional aircraft manufacturers. Airbus and Boeing delivered a combined 852
commercial aircraft in 2001, a 6.5% improvement over the 800 delivered in 2000.

Both Airbus and Boeing have reduced their previously projected aircraft
delivery rates for 2002 due to the sharp downturn in air travel following the
tragic events of September 11, 2001 and the resulting impact on airline
profitability and their demand for new aircraft. Boeing estimates its deliveries
in 2002 to be about 380 aircraft, while Airbus anticipates 2002 deliveries to be
slightly lower than in 2001, rather than ramping up production as they had
previously indicated. Both Boeing and Airbus anticipate further reductions in
deliveries in 2003. This guidance suggests that combined Boeing and Airbus
commercial aircraft deliveries in 2002 will be about 20% lower than in 2001.
Given the timing of production and the projected reduction in 2003 aircraft
deliveries compared to 2002, commercial aircraft build rates in 2002 will be
lower than deliveries. As a result, the impact on Hexcel's 2002 commercial
aerospace revenues will be greater. In addition, both Boeing and Airbus will
initially have to consume excess supply chain inventories as production is
reduced. Industry forecasts suggest that regional aircraft production will be
less impacted. While regional aircraft manufacturers will not increase
deliveries as indicated before September 11, 2001, the aim is to deliver a
similar number of aircraft as they did in 2001. The impact of these changes on
the Company will be influenced by two

34

additional factors: (a) the mix of aircraft that are produced, as twin aisle
aircraft use more of the Company's products than narrow body aircraft and newly
designed aircraft use more than older generations, and (b) the speed by which
the aircraft manufacturers reduce their production to the new demand levels and,
thereby, the effect of reduced aircraft production on the inventory supply
chain. Reflecting the forgoing, the Company anticipates that commercial
aerospace revenues will decline approximately 25-30% in 2002 compared with 2001.

The Company delivers its products on average six months before an aircraft
is ready for airline delivery and, therefore, has already been producing to its
customer's previously anticipated 2002 delivery rates. Unlike many aerospace
suppliers, Hexcel's sales to this market are almost entirely driven by new
aircraft build rates with no material aftermarket content.

Space and defense net sales in 2001 were $143.3 million, which reflects a
$14.3 million, or 11.1%, increase from 2000. Sales associated with military
aircraft and helicopters continue to trend upwards as the new generation of
military aircraft in the United States and Europe ramp up in production.
Forecasts by both the United States and European defense departments support
this outlook of increased production of military fixed wing aircraft and
helicopters. The Company is currently qualified to supply materials to a broad
range of military aircraft and helicopters scheduled to enter either full-scale
production or significantly increase existing production rates in the near
future. These programs, which utilize significantly greater amounts of Hexcel
products than previous generations, include the F/A-18E/F (Hornet), the F-22
(Raptor), the European Fighter Aircraft (Typhoon) as well as the C-17, the V-22
(Osprey) tilt rotor aircraft, the RAH-66 (Comanche) and the NH90 helicopters.
The benefits that the Company obtains from these programs will depend upon which
ones are funded and the extent of such funding.

Electronics net sales were $77.0 million in 2001, a decrease of 57.5% from
net sales of $181.2 million in 2000. This decline reflects the impact of a
severe industry downturn and inventory correction in the global electronics
industry that impacted the demand for the Company's fiberglass fabric substrates
used in the fabrication of multilayer printed wiring boards. The origins of this
downturn have many causes including the end of the so called "tech boom," a
sharp reduction in telecommunications infrastructure investments and declining
macroeconomic trends. Lower demand resulted in finished goods producers and
their subcontractors seeking to liquidate their excess electronics inventories
by cutting back on their purchases, which has affected the entire supply chain.
The Company first saw the impact of this downturn in its U.S. operations in the
latter part of the first quarter of 2001. In the second quarter of 2001, U.S.
demand weakened further and the Company's European operations, together with its
joint venture interests in Europe and Asia, saw the same precipitative decline
in customer demand. These reduced demand conditions persisted for the balance of
2001 with sales revenues down in excess of 65% for the second, third and fourth
quarters compared to the same quarters in 2000. As the downturn continued
through 2001, competition intensified for the business that remained and pricing
pressure increased. Depressed conditions in this sector have continued into the
first quarter of 2002. Meanwhile, import quotas limiting Asian imports of
fiberglass fabrics into the U.S. expired at the end of 2001 and the migration of
lower layer count printed wiring board production to Asia has continued. Given
the length and complexity of the supply chain and the large number of
electronics devices that incorporate printed wiring boards manufactured using
the Company's products, it is difficult to predict when the inventory correction
will end, and when, and to what extent, the industry will recover. While
Hexcel's electronics revenues first quarter to date are running at a moderately
higher level than the depressed fourth quarter of 2001, there is not yet any
evidence of a general recovery in the industry.

Industrial net sales increased 9.8% to $250.2 million in 2001 from
$227.8 million in 2000. The increase reflects strong sales growth in fabrics
used in the manufacture of soft body armor (bullet-proof and puncture resistant
vests) and in materials for wind energy applications. The Company also continues
to obtain growth through new automotive applications driven by new programs that
use the

35

Company's honeycomb core to provide impact protection and lightweight structural
products. Growth in this market was negatively impacted by slightly lower net
sales to recreational markets tracking macroeconomic trends in consumer spending
and travel. The Company believes that revenues to the industrial market will
continue to exhibit growth in 2002, as demand for renewable energy, such as wind
energy, soft body armor and new automotive products remains firm.

GROSS MARGIN: Gross margin for 2001 was $190.8 million, or 18.9% of sales,
versus $231.4 million, or 21.9% of sales, in 2000. The decrease primarily
reflects the impact of the sharp decline in electronics sales in the Company's
Reinforcement Products segment where gross margin fell approximately 5.0% to
19.6% of sales. While the Company has taken actions to significantly reduce
costs in the electronics business, it has not to date been able to reduce fixed
costs pro-rata to the change in sales given the magnitude of the shortfall in
revenues and its decision to retain manufacturing capacity to meet increased
demand when the market recovers. Gross margins earned by the Company's Composite
Materials and Engineered Products segments, as a percent of sales, declined
approximately 2.0% to 3.0% below those earned in 2000 due to factors including
the impact of the company-wide focus on dramatically reducing inventories ahead
of 2002's anticipated fall-off in commercial aerospace revenues, higher utility
costs and changes in sales mix. The Company's inventories declined
$23.7 million during 2001 to $131.7 million. Utility costs in the United States
for 2001 increased by approximately $3.2 million compared to 2000.

SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: Selling, general and
administrative expenses were $120.9 million, or 12.0% of net sales, in 2001
compared with $123.9 million, or 11.7% of net sales, in 2000. SG&A expenses,
excluding the $4.7 million of compensation expenses associated with the former
CEO's retirement, were $116.2 million, or 11.5% of net sales, in 2001 compared
with $121.3 million, or 11.7% of net sales, in 2000 on a pro forma basis giving
effect to the sale of the Bellingham business as if it had occurred on
January 1, 2000. This decrease reflects lower corporate expenses of
$4.1 million, of which $2.2 million reflects costs incurred in connection with
the change in control event in 2000. SG&A expenses were lower by $2.4 million in
the Reinforcement Products segment primarily to mitigate the reduction in sales
to the electronics market but slightly higher by $0.6 million and $0.8 million
in the Composites Materials and Engineered Products segments, respectively.
Amortization expense of $12.5 million and $13.1 million was included in SG&A
expenses for 2001 and 2000, respectively.

RESEARCH AND TECHNOLOGY ("R&T") EXPENSES: Research and technology expenses
were $18.6 million, or 1.8% of net sales, in 2001 compared to $21.2 million, or
2.0% of net sales, in 2000. On a pro forma basis, giving effect to the sale of
the Bellingham aircraft interiors business as if it had occurred January 1,
2000, research and technology expenses were $19.5 million in 2000, or 1.9% of
net sales. Nearly seventy percent of R&T expenses related to developing new
applications for composite materials.

OPERATING INCOME: Operating loss for 2001 was $316.2 million compared with
operating income of $75.4 million for 2000. Excluding a $309.1 million
impairment of goodwill and other purchased intangibles and $4.7 million of
compensation expenses associated with the former CEO's retirement in 2001, along
with business consolidation and restructuring expenses of $58.4 million and
$10.9 million incurred during 2001 and 2000, respectively, adjusted operating
income was $56.0 million, or 5.5% of net sales, in 2001 compared with
$86.3 million, or 8.2% of net sales, in 2000.

Adjusted operating income in the Reinforcement Products segment declined by
$31.2 million, as compared with 2000, reflecting the electronics industry
downturn during the year. The Composite Materials and the Engineering Products
segment's operating income decreased by $0.3 million and $3.0 million,
respectively, as compared with 2000. The Company did not allocate corporate
operating expenses of $31.1 million and $36.4 million to operating segments in
2001 and 2000, respectively.

36

INTEREST EXPENSE: Interest expense for 2001 was $64.8 million compared to
$68.7 million in 2000. Although the Company slightly increased its average
borrowings during 2001 compared to 2000, interest expense declined when compared
to 2000 due to lower weighted average interest rates on the Company's Senior
Credit Facility resulting from the progressive reductions in LIBOR during the
year. Included in interest expense in 2001 are bank amendment fees of
approximately $1.0 million related to the May 2001 amendment of certain
financial covenants under the Senior Credit Facility.

EQUITY IN EARNINGS (LOSSES) OF AND WRITE-DOWNS OF AN INVESTMENT IN
AFFILIATED COMPANIES: Equity in losses of affiliated companies was
$9.5 million in 2001, including a $7.8 million write-down of the Company's
investment in Interglas. Excluding the Interglas write-down, equity in losses of
affiliated companies was $1.7 million compared with earnings of $5.5 million in
2000, reflecting the impact of the electronics industry downturn on the
operating results of the Company's Reinforcement Products joint venture in Asia
as well as start-up losses associated with the Engineered Products joint
ventures in China and Malaysia.

The $7.8 million write-down of Interglas was the result of an assessment
that an other-than-temporary decline in value in the investment had occurred due
to a severe industry downturn and the resulting impact on the financial
condition of this company. The amount of the write-down was determined based on
available market information and appropriate valuation methodologies. The
Company did not record deferred tax benefits on the write-down because of
limitations imposed by foreign tax laws and the Company's ability to realize the
tax benefits.

PROVISION FOR INCOME TAXES: The Company's tax provision of $40.5 million in
2001 reflects the impact of reduced tax benefits recorded for U.S. operating
losses resulting from a change in business outlook for the Company and the
inclusion in its tax provision of a $30.7 million valuation allowance for
previously reported U.S. deferred tax assets. In 2000, the provision for income
taxes was $26.3 million, which primarily related to a gain on the sale of the
Bellingham aircraft interiors business.

Due to a sharp decline in electronics revenues, the Company determined
during the second quarter of 2001 to increase its tax provision rate through the
establishment of a non-cash valuation allowance attributable to currently
generated U.S. net operating losses until such time as the U.S. operations
return to consistent profitability. Due to the effect of significant events that
have occurred since the end of the second quarter, including the delay in the
anticipated recovery in the electronics market, anticipated reductions in
commercial aircraft production, and a general weakening of the economy, along
with the sizable impairments to certain long-lived assets in the fourth quarter
of 2001, the Company reduced its estimates for future U.S. taxable income during
the carryforward period. As a result, the Company concluded that it was
appropriate to establish a full valuation allowance of $181.7 million on its
U.S. deferred tax assets, which resulted in a $32.6 million valuation allowance
for previously reported tax assets. For additional information, see Note 12 to
the accompanying consolidated financial statements of this Annual Report on
Form 10-K.

EXTRAORDINARY LOSS: An extraordinary loss of $2.7 million was recorded in
2001 as a result of the early retirement of $67.5 million aggregate principal
amount of the Company's outstanding 7% convertible subordinated notes, due 2003,
and the redemption of the entire principal amount of $25.0 million of the
Company's increasing rate senior subordinated notes, due 2003. There was no tax
benefit recognized on the extraordinary loss because of limitations on the
Company's ability to realize the tax benefits.

37

NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE:

The Company's convertible subordinated notes, due 2003, its convertible
subordinated debentures, due 2011 and all of its stock options were excluded
from the 2001 computation of diluted net loss per share, as they were
antidilutive. Approximately 4.5 million stock options were excluded from the
2000 calculation of diluted net income per share as their exercise price was
higher than the Company's average share price. Refer to Note 14 to the
accompanying consolidated financial statements of this Annual Report on
Form 10-K for the calculation and number of shares used for diluted net income
(loss) per share.

2000 COMPARED TO 1999

NET SALES: Consolidated net sales were $1,055.7 million in 2000, a decrease
of $95.8 million, or 8.3%, from net sales of $1,151.5 million in 1999.
Approximately $51.1 million of the decrease was attributable to the sale of the
Bellingham aircraft interiors business on April 26, 2000. An additional
$45.0 million of the decrease was due to changes in currency exchange
rates--primarily the decline of the British pound and the Euro relative to the
U.S. dollar.

On a pro forma basis, giving effect to the sale of the Bellingham business
as if it had occurred on January 1, 1999, pro forma net sales were
$1,036.8 million in 2000, compared with pro forma net sales of $1,081.5 million
in 1999. Had the same U.S. dollar, British pound and Euro exchange rates applied
in 2000 as in 1999, pro forma revenues in 2000 would have been approximately
$1,082.0 million.

38

The following table summarizes actual and pro forma net sales to third-party
customers by segment and end market in 2000 and 1999:

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

(a) Market allocations for the Composite Materials segment have been restated
for comparative purposes to conform to the 2001 presentation.

(b) Net sales in 2000 include $18.9 million of commercial aerospace net sales by
the Bellingham business, which was a component of the Company's Engineered
Products segment until this business was sold on April 26, 2000. Net sales
in 1999 include $70.0 million of commercial aerospace net sales by the
Bellingham business.

(c) Pro forma net sales in 2000 and 1999 give effect to the sale of the
Bellingham business that occurred on April 26, 2000, as if it had occurred
on January 1, 2000 and January 1, 1999, respectively.

Net sales to commercial aerospace customers in 2000 were $517.7 million,
compared with $631.9 million in 1999. The decrease of $114.2 million, or 18.1%,
is primarily attributable to:

- The sale of the Bellingham aircraft interiors business on April 26, 2000.
This business generated $70.0 million of commercial aerospace revenue
during 1999 and $18.9 million during the first four months of 2000.

- Boeing's reduction in aircraft production rates during the second half of
1999 and the first half of 2000, together with certain product
substitutions and price reductions. Boeing delivered 489 aircraft to its
customers in 2000, compared with 620 aircraft in 1999. The impact of this
reduction was most pronounced on the Company's Engineered Products
segment, which delivers its products to Boeing just prior to the aircraft
being completed and delivered to the ultimate customer.

- The impact of changes in currency exchange rates.

39

Net sales to space and defense markets totaled $129.0 million in 2000, a
decline of $15.2 million, or 10.5%, from 1999 net sales of $144.2 million. This
decline reflects the conclusion of one military contract, as well as reduced
demand for carbon fiber and pre-impregnated composites for use in satellites and
satellite launch vehicles. The satellite market continues to suffer from the
impact of a number of launch failures over the past two years, and from concerns
about the financial viability of certain commercial satellite ventures.

Electronics net sales grew to $181.2 million in 2000, an increase of
$14.8 million, or 8.9%, over 1999 net sales of $166.4 million. This sales growth
reflected an increase in demand for lightweight fiberglass fabrics used in
electronics applications, driven by improved economic conditions in Asia and
Europe and by growing worldwide demand for increasingly sophisticated electronic
devices. During 2000, Hexcel switched some of its heavyweight fabric production
capacity to meet lightweight fabric demand, and also began to install additional
lightweight fabric looms to meet the expected continuing growth in demand in
this market. Nevertheless, the Company ended the year capacity constrained. In
addition, the Company was able to raise prices on certain fiberglass fabrics,
although these price increases were accompanied by increases in the price of
fiberglass yarns used as raw materials.

Net sales to industrial markets rose to $227.8 million in 2000, up from
$209.0 million in 1999. This increase of $18.8 million, or 9.0%, was largely due
to the following:

- Increased sales of aramid fabrics used in the manufacture of soft body
armor (bullet-proof and puncture resistant vests), driven by military and
civilian demand for lighter, tougher vests.

- Increased sales of newly developed glass fabrics used in certain window
screen and architectural applications, such as screens designed to reduce
glare for computer users in commercial offices.

- Increased sales of prepreg composites products to European customers for
use in producing components for wind energy turbines.

- Increased sales of honeycomb core and machined honeycomb parts used in
certain automotive applications, such as inserts for automobile headliners
to better protect vehicle occupants in collisions.

Aggregate sales to other industrial market segments, such as surface
transportation and recreation markets, were relatively unchanged from 1999 to
2000, after adjusting for changes in currency exchange rates.

GROSS MARGIN: Gross margin was $231.4 million, or 21.9% of net sales, in
2000 compared with $242.5 million, or 21.1% of net sales, in 1999. The
improvement in gross margin, as a percentage of sales during 2000, primarily
reflects the impact of productivity improvements and cost reductions. Price
increases for certain fiberglass fabrics were offset by price decreases for
other select products, with the result that net price changes had minimal impact
on gross margin performance.

While other segments successfully obtained productivity improvements and
cost reductions, the Company's Engineered Products segment suffered from
declining sales and reduced productivity, attributable to the timing of customer
programs and to the impact of Boeing's 1999 aircraft build rate reductions. This
segment initiated a series of actions intended to align its cost structure with
its revenue base and to improve manufacturing productivity. These actions were
undertaken in anticipation of transferring the manufacture of certain Boeing
aircraft structures to the Company's joint venture affiliates in Malaysia and
China.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses were $123.9 million in 2000, or 11.7% of net sales
compared with $128.7 million, or 11.2% of net sales, in 1999. The net decline in
SG&A expenses is attributable in part to the recognition of a $5.1 non-cash
benefit resulting from the curtailment of a U.S. defined benefit retirement
plan, partially offset by $2.2 million of expenses resulting from the purchase
of Hexcel common stock by the Goldman Sachs

40

investor group. The remainder of the net decline primarily reflects the impact
of the sale of the Bellingham aircraft interiors business and changes in
currency exchange rates.

RESEARCH AND TECHNOLOGY EXPENSES: Research and technology expenses were
$21.2 million in 2000, or 2.0% of net sales compared with $24.8 million, or 2.2%
of net sales, in 1999. The aggregate dollar decrease primarily reflects the
completion of specific R&T projects, as well as changes in currency exchange
rates.

OPERATING INCOME: Operating income was $75.4 million or 7.1% of net sales
for 2000, of which $0.6 million was contributed by the Bellingham business. This
compares with operating income of $68.9 million or 6.0% of net sales for 1999,
of which $8.0 million was contributed by the Bellingham aircraft interiors
business. Excluding business consolidation expenses, operating income was
$86.3 million or 8.2% of net sales for the 2000 period, and $89.0 million or
7.7% of net sales for the 1999 period. Business consolidation and restructuring
expenses, which totaled $10.9 million and $20.1 million in 2000 and 1999,
respectively, are discussed further under "Business Consolidation and
Restructuring Programs" below.

The divestiture of the Bellingham business on April 26, 2000 reduced
operating income before business consolidation and restructuring expenses by
$7.7 million compared with 1999. This decline was partially offset by reductions
in SG&A and R&T expenses during 2000. The improvement in operating income before
business consolidation and restructuring expenses as a percentage of net sales
primarily reflects the aggregate improvement in gross margin performance noted
above.

INTEREST EXPENSE: Interest expense was $68.7 million in 2000, versus
$73.9 million in 1999. The decrease in interest expense primarily reflects the
use of proceeds from the sale of the Bellingham business to reduce outstanding
term debt under Hexcel's Senior Credit Facility, partially offset by higher
interest rates on variable-rate debt.

PROVISION FOR (BENEFIT FROM) INCOME TAXES: In 2000, the provision for
income taxes was $26.3 million, compared with a benefit from income taxes of
$1.7 million in 1999. The provision in 2000 primarily related to a gain on the
sale of the Bellingham aircraft interiors business. Hexcel's effective income
tax rate was approximately 35% in both years.

EQUITY IN EARNINGS OF AND WRITE-DOWNS OF AN INVESTMENT IN AFFILIATED
COMPANIES: Equity in earnings of affiliated companies was $5.5 million in 2000.
The primary source of these earnings was Asahi-Schwebel Co. Ltd., an electronic
fabrics joint venture in Asia that benefited from an increase in worldwide
demand for electronic devices. The earnings contributed by this Reinforcement
Products joint venture were partially offset by the Company's share of the
start-up losses from its Engineered Products joint ventures in China and
Malaysia.

In 1999, Hexcel wrote-down its investment in one of its Reinforcement
Products joint ventures, Interglas, by $20.0 million. The write-down was the
result of an assessment that an other-than-temporary decline in value of the
investment had occurred due to severe industry downturns and the resulting
impact on the financial condition of this company, and a decision to allow
fixed-price options, that would increase the Company's equity investment in
Interglas from 43.6% to 84%, to expire unexercised. The amount of the write-down
was determined based on available market information and appropriate valuation
methodologies. The Company did not record a deferred tax benefit on the
write-down because of limitations imposed by foreign tax laws and the Company's
ability to realize a tax benefit.

41

NET INCOME (LOSS) AND NET INCOME (LOSS) PER SHARE:

The Company's convertible subordinated notes, due 2003, its convertible
subordinated debentures, due 2011, and its stock options were excluded from the
1999 computation of net loss per diluted share, as they were antidilutive. Refer
to Note 14 to the accompanying consolidated financial statements of this Annual
Report on Form 10-K for the calculation and the number of shares used for
diluted net income (loss) per share.

IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLES

During the fourth quarter of 2001, the Company reviewed its long-lived
assets, particularly goodwill and other purchased intangibles acquired in recent
years, for impairment. The review was undertaken in response to changes in
market conditions and the Company's revised outlook resulting from a sharp
decline in demand for the Company's woven glass fabrics, primarily in the
electronics market, and the announced reductions in commercial airline
production due to the tragic events of September 11, 2001. The Company also
revised its forecasts of revenue growth for its acquired satellite business due
to the continuing slow down in commercial satellite launches following the
financial failures of a number of satellite based telecommunication projects and
the postponement of others. These adverse changes in market conditions have led
to the lowering of revenue forecasts associated with certain businesses in the
Reinforcement Products and Composite Materials segments.

Based on this review, the Company determined that the long-lived assets of
the fabrics business acquired from Clark-Schwebel in 1998 and the satellite
business acquired from Fiberite, Inc. in 1997 were not fully recoverable. The
Company recorded non-cash impairment charges of $292.1 million and
$17.0 million related to the goodwill and other purchased intangibles associated
with the Clark-Schwebel and Fiberite acquisitions, respectively. The amounts of
the impairment charges were calculated as the excess of the carrying value of
the assets over their fair values. Fair values were determined using discounted
future cash flows models, market valuations and third party appraisals, where
appropriate. There were no tax benefits recognized on the impairments because of
limitations on the Company's ability to realize the tax benefits.

BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS

During the fourth quarter of 2001, the Company announced a plan to
restructure its business operations in accordance with a revised business
outlook, in light of anticipated reductions in commercial aircraft production in
both 2002 and 2003, the continued depressed business conditions in the
electronics market and the weakness in the general economy. The plan targets a
20% reduction in cash fixed overhead costs, or $60.0 million, compared to
previous spending rates. The reductions in cash fixed costs are primarily being
achieved through company-wide reductions in managerial, professional, indirect
manufacturing and administrative employees along with organizational
rationalization. In addition, the Company will reduce its direct manufacturing
costs as customer orders decline. As a result, the Company has reduced the
number of employees by almost 10% from the third quarter to 5,376 employees at
December 31, 2001, and expects to further reduce that number to less than 4,500
by the end of 2002. The majority of the actions necessary to affect these cash
fixed cost

42

reductions had been taken by the end of 2001, and the Company expects most of
the remaining actions to be completed in the first quarter of 2002. The Company
recognized charges of $47.9 million in the fourth quarter of 2001 related to
this restructuring plan, and estimates that the total cash costs of this
restructuring plan will be approximately $35.0 million. Cash spending related to
this action in the fourth quarter of 2001 was approximately $3.0 million, with
the balance anticipated to be paid throughout 2002. The Company anticipates
recording approximately $5.0 million of additional restructuring expense during
2002 relating to equipment relocation and re-qualification expenses that have to
be expensed as incurred. These costs relate both to the planned closure of the
Lanacaster, Ohio facility discussed below as well as actions associated with the
program announced in the fourth quarter of 2001.

As a result of the weakness in the electronics market, the Company initiated
cost reduction actions in July 2001. These actions built upon earlier steps to
furlough employees, idle manufacturing and cut non-essential expenditures, by
effecting a reduction in the work force of approximately 275 employees in the
Reinforcement Products segment and elsewhere in the Company. These actions
resulted in business consolidation and restructuring expenses of approximately
$4.0 million in the third quarter of 2001.

As a result of four substantial business acquisitions, the Company initiated
three business consolidation programs in May 1996, December 1998 and
September 1999. The primary purpose of these programs was to integrate acquired
assets and operations into the Company, and to close or restructure
insufficiently profitable facilities and activities. Due to aerospace industry
requirements to "qualify" specific equipment and manufacturing processes for
certain products, some business consolidation actions have taken up to three
years to complete. These qualification requirements increase the complexity,
cost and time of moving equipment and rationalizing manufacturing activities. In
connection with these business consolidation programs, the Company has closed
three manufacturing facilities, vacated approximately 560 thousand square feet
of manufacturing space, and eliminated more than 700 manufacturing, marketing
and administrative positions. All of the business consolidation activities in
1996, 1998 and 1999 have been completed as of December 31, 2001.

In 2000, the Company added two further actions to the September 1999
business consolidation program. The Company decided to close the two smaller of
its four U.S. prepreg manufacturing facilities--one in Lancaster, Ohio and
another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in the
fourth quarter of 2001 and it is anticipated that the closure of the Lancaster,
Ohio facility will be completed during the second quarter of 2002. The
manufacturing output from these two plants will now be produced by the two
remaining U.S. prepreg facilities in Livermore, California and Salt Lake City,
Utah.

In 2000, the Company amended its September 1999 business consolidation
program in response to the manufacturing constraints caused by a stronger than
expected increase in sales and production for its electronic woven glass fabrics
and its ballistic protection products. Based on these improved market
conditions, which were expected to continue beyond 2000, and a manufacturing
capacity review, the Company concluded to expand its capacity by purchasing
additional looms and revising the previous decision to consolidate a number of
weaving activities at two of the Company's facilities. As a result of the
decision to not proceed to consolidate production, the Company reversed a total
of $3.4 million of business consolidation expenses that were previously
recognized in 1999, including $3.1 million in non-cash write-downs of machinery
and equipment that was to have been sold or scrapped as a result of the
consolidation.

43

Business consolidation and restructuring activities for the three years
ended December 31, 2001, consisted of the following:

As part of a business consolidation program, the Company disposed of its
operations in Brindisi, Italy (the "Italian Operations") in 1999. In accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("FAS 121"), the Company recorded a charge of $5.6 million prior to 1999 for an
asset impairment related to its Italian Operations. The estimate of fair value
used in determining the impairment charge was based on offers received from
interested buyers. The Italian Operations were disposed of for net proceeds that
approximated amounts accrued and were accounted for under the Company's
Engineered Products business segment. Financial operating results for this
business were not material to Hexcel's consolidated financial statements.

RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS

Effective December 31, 2000, the Company made certain changes to its U.S.
retirement benefit plans that were intended to improve the flexibility and
visibility of future retirement benefits for employees. These changes included
an increase in the amount that the Company will contribute to individual 401(k)
retirement savings accounts and an offsetting curtailment of the Company's U.S.
qualified defined benefit retirement plan. Beginning January 1, 2001, the
Company started to contribute an additional 2% to 3% of each eligible employee's
salary to an individual 401(k) retirement savings account, depending on the
employee's age. This increases the maximum contribution to individual employee
savings accounts to between 5% and 6% per year, before any profit sharing
contributions. Offsetting the estimated incremental cost of this additional
benefit, participants in the Company's U.S. qualified defined benefit retirement
plan no longer accrued benefits under this plan after December 31, 2000, and no
new employees will become participants. However, employees retained all benefits
earned under this plan as of that date. The 2000 results include $5.1 million of

44

non-cash pre-tax income (equivalent to $3.3 million of after-tax income)
attributable to the curtailment of this defined benefit retirement plan.

SIGNIFICANT CUSTOMERS

Approximately 23%, 20% and 27% of the Company's 2001, 2000 and 1999 net
sales, respectively, were to Boeing and its subcontractors. Of the 23% of sales
to Boeing and its subcontractors in 2001, 20% and 3% related to commercial
aerospace and space and defense market applications, respectively. Approximately
16%, 13% and 11% of the Company's 2001, 2000 and 1999 net sales, respectively,
were to EADS, including Airbus, and its subcontractors. Of the 16% of sales to
EADS and its subcontractors in 2001, 14% and 2% related to commercial aerospace
and space and defense market applications, respectively. The loss of all or a
significant portion of the business with Boeing or EADS would likely have a
material adverse effect on sales and earnings.

SIGNIFICANT TRANSACTIONS

PURCHASE OF APPROXIMATELY 14.5 MILLION SHARES OF HEXCEL COMMON STOCK BY AN
INVESTOR GROUP

On December 19, 2000, an investor group controlled by subsidiaries of The
Goldman Sachs Group, Inc. (the "Investor Group") completed the purchase of
approximately 14.5 million of the approximately 18 million shares of Hexcel
common stock owned by subsidiaries of Ciba Specialty Chemicals Holding, Inc.
(together with its subsidiaries, "Ciba"). The shares acquired by the Investor
Group represented approximately 39% of the Company's outstanding common stock.
In addition, the Company and the Investor Group have entered into a governance
agreement that became effective on December 19, 2000. Under this governance
agreement, the Investor Group has the right to, among other things, designate up
to three directors to sit on the Company's board of directors.

Hexcel incurred $2.2 million of costs in connection with this transaction,
all of which were included in "selling, general, and administrative expenses"
during the fourth quarter of 2000. These costs and expenses included legal,
consulting, and regulatory compliance expenses, as well as a non-cash charge
attributable to the accelerated vesting of certain stock-based compensation and
to certain amendments to an executive retirement plan. Under the terms of the
Company's various stock option and management incentive plans, the transaction
constituted a "change in control" event, resulting in all outstanding stock
options becoming vested and exercisable. The former Chief Executive Officer
waived the vesting of his stock options by such event. In addition, nine of the
most senior executive officers other than the former Chief Executive Officer
agreed to defer the vesting of their stock options such that any of their stock
options that would have otherwise vested immediately (or would have otherwise
vested by their terms) will vest one year after the closing with respect to half
of such options, and two years after the closing with respect to the remaining
half of such options, subject to earlier vesting in certain circumstances. As a
result, approximately 1.3 million stock options, with exercise prices ranging
from $2.41 to $29.63 per share, and a weighted average exercise price of $8.99
per share, vested and became exercisable on December 19, 2000.

In addition, due to the change in control event, shares of Hexcel's common
stock underlying a total of approximately 0.8 million restricted stock units and
performance accelerated restricted stock units (collectively, "stock units")
were distributed. However, the former Chief Executive Officer waived the vesting
of his stock units, and nine of the most senior executive officers other than
the former Chief Executive Officer agreed to defer the distribution of shares
underlying their stock units (although not the vesting of such stock units) such
that any shares of common stock that would have otherwise been distributed
immediately will be distributed one year after the closing with respect to half
of such stock units, and two years after the closing with respect to the
remaining half of such stock units, subject to earlier distribution under
certain circumstances.

45

SALE OF THE BELLINGHAM AIRCRAFT INTERIORS BUSINESS

On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business to
Britax Cabin Interiors, Inc., a wholly owned subsidiary of Britax International
plc, for cash proceeds of $113.3 million. The sale resulted in a pre-tax gain of
$68.3 million and an after-tax gain of $44.3 million, or $0.97 per diluted
share. Net proceeds from the sale were used to repay $111.6 million of
outstanding term debt under the Company's Senior Credit Facility.

The Bellingham business generated net sales of $18.9 million and
$70.0 million for the period from January 1 through April 26, 2000, and full
year 1999, respectively, and contributed $0.6 million and $8.0 million of
operating income in the corresponding periods, respectively. The Bellingham
business was engaged in the manufacture and sale of airline interior
refurbishment products and its operating results were reflected as a component
of the Company's Engineered Products business segment up to the date of
disposal.

EBITDA, ADJUSTED EBITDA, PRO FORMA ADJUSTED EBITDA AND ADJUSTED OPERATING INCOME

EBITDA, Adjusted EBITDA, Pro forma Adjusted EBITDA and Adjusted Operating
Income are not based on accounting principles generally accepted in the United
States of America, but are presented to explain the impact of certain items and
to provide a measure of the Company's operating performance in a way that is
commonly used by investors and financial analysts to analyze and compare
companies. Adjusted EBITDA and Pro forma Adjusted EBITDA are used in the
calculation of financial covenants under the Company's Senior Credit Facility.
These measures may not be comparable to similarly titled financial measures of
other companies, do not represent alternative measures of the Company's cash
flows or operating income, and should not be considered in isolation or as
substitutes for measures of performance presented in accordance with generally
accepted accounting principles.

46

A reconciliation of net income (loss) to EBITDA, Adjusted EBITDA, and Pro
forma Adjusted EBITDA and a reconciliation of operating income (loss) to
Adjusted Operating Income for the years ended December 31, 2001, 2000 and 1999
are as follows:

FINANCIAL CONDITION

LIQUIDITY: As of December 31, 2001, the Company had cash and cash
equivalents of $11.6 million and available undrawn commitments under its Senior
Credit Facility of $74.8 million, having given effect to the $15.0 million
reduction in commitments under the terms of the January 25, 2002 amendment.
Although the Company will reduce its cash fixed costs during 2002, has planned
to reduce capital expenditures, and anticipates generating cash through reduced
working capital needs, it anticipates that it may need to draw upon its Senior
Credit Facility to fund some of the costs of its restructuring program during
2002.

As of December 31, 2001, the Company's total debt, net of cash, was
$674.3 million, an increase of $5.8 million from $668.5 million as of
December 31, 2000. The increase in net debt reflects (a) the funding of capital
expenditures made for process improvements, capacity additions, and
environmental and safety initiatives; (b) business consolidation and
restructuring payments, as the Company continues to integrate acquired assets
and operations, to close insufficiently profitable facilities and activities,
and

47

to appropriately size its operations for industry downturns; and (c) the costs
associated with the issuance of senior subordinated debt.

CREDIT FACILITY: Hexcel has a global credit facility (the "Senior Credit
Facility") with a syndicate of banks to provide for ongoing working capital and
other financing requirements. The Senior Credit Facility, which consists of
revolving credit, overdraft and term loan facilities, provided Hexcel with
committed lines of approximately $353.7 million as of December 31, 2001, subject
to certain limitations. Effective January 25, 2002, and in connection with an
amendment entered into with the bank syndicate, these commitments were reduced
to $338.7 million. These commitments consisted of funded term loans of
$118.7 million and revolving credit and overdraft facilities of $220.0 million.
As of December 31, 2001, drawings under the revolving credit facility were
$115.2 million. In addition, the Company may issue letters of credit up to a
value of $30.0 million under the Senior Credit Facility. The letters of credit
facility reduces the funded debt the Company may draw under the revolving credit
and overdraft facilities. As of December 31, 2001, letters of credit issued
under the facility approximated $19.4 million, of which $11.1 million was issued
in support of a loan to the Company's BHA Aero joint venture. Undrawn
commitments under the revolving credit and overdraft facilities as of
December 31, 2001, having given effect to the provisions of the January 25, 2002
amendment, were $74.8 million. The Company is subject to various financial
covenants and restrictions under the Senior Credit Facility, including
limitations on incurring debt, granting liens, selling assets, redeeming capital
stock and paying dividends. The Senior Credit Facility is scheduled to expire in
2004, except for approximately $57.7 million of term loans that are due for
repayment in 2005.

Relating to the fourth quarter of 2001, the Company received a waiver from
compliance with the financial covenants under the Senior Credit Facility for the
period ending December 31, 2001. Effective January 25, 2002, Hexcel and the
bank syndicate entered into an amendment to the Senior Credit Facility. The
amendment provides for revised financial covenants through 2002; a 100 basis
point increase in the interest spread payable over LIBOR for advances under the
facility; an immediate decrease in the commitment of revolving credit and
overdraft facilities from a cumulative amount of $235.0 million to
$220.0 million, with a further reduction to $212.0 million on or before
September 30, 2002; and a requirement that the unused borrowing capacity
available under the Senior Credit Facility, together with all cash and cash
equivalents held by the Company, equal at least $30.0 million on June 30, 2002.
The revised covenants were derived from the Company's financial projections plus
a moderate cushion for unanticipated events. The Senior Credit Facility
financial covenants set certain maximum values for the Company's leverage (the
ratios of total and senior debt to Adjusted EBITDA), and certain minimum values
for its interest coverage (the ratio of Adjusted EBITDA to cash interest
expense) and fixed charge coverage (the ratio of Adjusted EBITDA less capital
expenditures to the sum of certain fixed expenses). In addition, during the term
of the amendment, all net proceeds generated through asset sales, and most other
liquidity events, in each case to the extent in excess of $2.5 million, and 100%
of all net proceeds generated from litigation settlements and judgements, must
be used to prepay loans under the Senior Credit Facility. Hexcel has also agreed
to limit capital expenditures to $25.0 million during 2002, with a
$10.0 million limit during any quarter in 2002.

In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable, inventory, property, plant,
equipment and real estate. It had also pledged some or all of the shares of
certain subsidiaries. Under the terms of the amendment, Hexcel has granted to
the banks a security interest in additional U.S. accounts receivable, inventory,
property, plant, equipment and real estate, as well as its intellectual
property. In addition, each of a group of Hexcel's European subsidiaries will
grant a security interest in its accounts receivable that will secure certain
local borrowings advanced to that subsidiary.

The Senior Credit Facility has been subject to several previous amendments
to accommodate, among other things, the planned sale of assets, the planned
investments in additional manufacturing

48

capacity for selected products, the impact of the decline of the Company's
operating results on certain financial covenants, the purchase by an investor
group of approximately 14.5 million shares of Hexcel common stock held by a
significant shareholder of the Company, a restructuring of the ownership of
certain of the Company's European subsidiaries, the issuance of additional
senior subordinated debt and the early redemption of certain term debt.

Given its financial leverage, the Company's future compliance with the
financial covenants and other terms of the Senior Credit Facility could be
compromised if its financial performance were to deteriorate as a result of
further declines in the general macroeconomic environment or in key markets
served by the Company, or by other unforeseen events. There can be no assurance
that relief from financial covenants, if necessary, will be obtained or as to
the terms under which it may be granted by the senior lenders. Under the terms
of the amendment, the financial covenants effective beginning with the quarter
ending March 31, 2003 are those that applied before the amendment. The Company
will need to substantially improve its financial performance or substantially
reduce its indebtedness in order to comply with the financial covenants in 2003,
or will need to obtain a further amendment from its Senior Credit Facility
banks. There can be no assurance that the Company will be able to effect any
such amendment on commercially reasonable terms, or at all.

OPERATING ACTIVITIES: Net cash flows provided by operating activities were
$35.0 million in 2001. Although the Company's net loss for the year was
$433.7 million, its operating earnings generated $22.8 million of cash in 2001
after excluding non-cash equity losses of $9.5 million, $309.1 million of
non-cash impairment charges for goodwill and other purchased intangibles,
$63.2 million of non-cash depreciation and amortization charges, $27.6 million
of non-cash charges in deferred tax assets, $0.7 million of non-cash
extraordinary charges and $46.4 million of non-cash and unpaid business
consolidation and restructuring expenses. During 2001, working capital
management resulted in reductions in accounts receivable and inventory balances.
These reductions along with reductions in other assets were offset in part by
increases in accounts payable and accrued expenses resulting in an increase in
cash of $12.2 million.

In 2000, net cash provided by operating activities was $33.0 million with
the major sources of cash provided by net income, excluding the after-tax gain
from the sale of the Bellingham aircraft interiors business, of $9.9 million and
non-cash depreciation and amortization of $58.7 million. However, these sources
of operating cash flow were offset by $5.5 million of non-cash income from
affiliated companies and $5.1 million of non-cash income from the curtailment of
a U.S. defined benefit retirement plan. In addition, increases in accounts
receivable and inventories used a total of $24.7 million of cash.

In 1999, net cash provided by operating activities was $133.7 million, as
$61.3 million of non-cash depreciation and amortization, a $20.0 million
non-cash write-down of an investment in an affiliated company, $78.5 million of
net working capital reductions and $20.1 million of business consolidation
expenses more than offset $23.3 million of net loss, $15.8 million of non-cash
deferred income taxes, and cash used by all other operating activities. The
decrease in net working capital reflected lower levels of receivables and
inventory due to aggressive working capital management and lower sales volumes.

INVESTING ACTIVITIES: Net cash used for investing activities was
$38.3 million in 2001, primarily reflecting capital expenditures of
$38.8 million and the receipt of $0.8 million from an investment in an
affiliated company.

Net cash provided by investing activities was $68.8 million in 2000,
reflecting net cash proceeds from the sale of the Bellingham aircraft interiors
business of $113.3 million and from the sale of other assets of $3.4 million,
partially offset by $39.6 million of capital expenditures and $8.3 million of
investments in joint venture affiliates in China and Malaysia.

49

Net cash used for investing activities during 1999 was $40.3 million,
reflecting Hexcel's capital expenditures of $35.6 million and investments in
joint venture affiliates in China and Malaysia of $4.7 million.

During the three years ended December 31, 2001, the majority of the
Company's capital expenditures have been directed toward: (a) process
improvements intended to increase productivity and reduce costs;
(b) manufacturing capacity additions for high-growth product applications, such
as electronics, automotive and wind energy; and (c) environmental, safety and
maintenance initiatives. Due to recent changes in the Company's outlook, the
Company is limiting capital expenditures to $25.0 million during 2002. The
January 25, 2002 amendment to the Senior Credit Facility incorporates this
planned level of capital expenditures in 2002 as a limit for the year, and
restricts the Company to $10.0 million of capital expenditures in any one
quarter of 2002.

FINANCING ACTIVITIES: Net cash provided by financing activities was
$8.6 million in 2001, largely due to net borrowings of $12.5 million. During
2001, the Company issued an additional $100.0 million of 9.75% senior
subordinated notes, due 2009, at a price of 98.5%. Net proceeds from the
issuance were used to redeem $67.5 million aggregate principal amount of the
Company's outstanding convertible subordinated notes, due 2003, and to pay the
entire principal amount of $25.0 million of the increasing rate senior
subordinated note, due 2003. In addition, the Company paid $3.5 million of debt
issuance costs.

Net cash used for financing activities was $95.0 million in 2000, as net
cash proceeds from the sale of the Bellingham aircraft interiors business were
used to reduce outstanding indebtedness under the Company's Senior Credit
Facility.

Net cash used for financing activities was $99.5 million in 1999, primarily
reflecting net debt reduction of $89.9 million and $11.0 million of debt
issuance costs pertaining to the issuance of the senior subordinated notes, due
2009.

FINANCIAL OBLIGATIONS AND COMMITMENTS: As of December 31, 2001, current
maturities of notes payable and capital lease obligations were $17.4 million
with no substantial debt repayments due until the maturity of $46.9 million
convertible subordinated notes in August 2003. Scheduled amortization under the
Company's Senior Credit Facility will be approximately $8.3 million in 2002.
Capital lease principal amortization in 2002 will approximate $5.6 million.
Limited credit and overdraft facilities of $3.5 million provided to certain of
the Company's European subsidiaries by lenders outside of the Senior Credit
Facility are primarily uncommitted facilities that are terminable at the
discretion of the lenders.

The Senior Credit Facility consists of revolving credit and overdraft
facilities and term loan borrowings. Revolving credit borrowings under the
facility of $115.2 million are repayable in 2004. Term loan borrowings totaling
$118.7 million at December 31, 2001 are repayable in installments of
$8.3 million in 2002, $8.8 million in 2003, $43.9 million in 2004 and
$57.7 million in 2005.

The convertible subordinated debentures due 2011 are repayable under
mandatory redemptions scheduled to begin in 2002 through annual sinking fund
requirements of $1.1 million in 2002 and $1.8 million in each year thereafter.
The Company satisfied the 2002 annual sinking fund requirement in October 2001.
The $340.0 million principal amount of senior subordinated notes is repayable in
full in 2009.

The Company entered into a $50.0 million capital lease in 1998 for property,
plant and equipment used in the acquired Clark-Schwebel business. The lease
expires in September 2006 and includes various purchase options. The last fixed
price purchase option is on September 30, 2003 for an amount of $24.9 million.
If the Company does not exercise its purchase option, on the lease expiration
date, the Company will have the option to purchase the leased assets at the
greater of $5.0 million or the fair value of the assets as of that date. The
Company has also entered into several capital leases for

50

buildings and warehouses with expirations through 2009. In addition, certain
sales and administrative offices, data processing equipment and manufacturing
facilities are leased under operating leases.

On June 29, 2001, the Company issued $100.0 million of senior subordinated
notes, due 2009, at a price of 98.5%. Net proceeds from the issuance were used
to redeem $67.5 million aggregate principal amount of the Company's outstanding
convertible subordinated notes, due 2003, and to pay the entire principal amount
of $25.0 million of the Company's increasing rate senior subordinated note, due
2003. The refinancing reduced the Company's 2003 debt maturities from
$149.5 million to $57.6 million. The net impact of the refinancing is estimated
to increase annual interest expense by approximately $2.4 million before tax.
The cash costs associated with the issuance and early retirements amounted to
approximately $6.5 million.

In 1999, the Company, Boeing and Aviation Industries of China (now known as
China Aviation Industry Corporation I) formed a joint venture, BHA Aero
Composite Parts Co., Ltd ("BHA Aero"), to manufacture composite parts for
secondary structures and interior applications for commercial aircraft. Hexcel
has a 33% equity interest in this joint venture, which is located in Tianjin,
China. In addition, in 1999, the Company formed another joint venture, Asian
Composites Manufacturing Sdn. Bhd. ("Asian Composites"), with Boeing, Sime Link
Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto),
to manufacture composite parts for secondary structures for commercial aircraft.
Hexcel has a 25% equity ownership interest in this joint venture, which is
located in Alor Setar, Malaysia. Asian Composites began shipping engineered
products to customers during the second half of 2001, while it is anticipated
that BHA Aero will begin deliveries in early 2002. During 2000 and 1999, Hexcel
made cash equity investments totaling $8.3 million and $4.7 million,
respectively, in these joint ventures. No additional cash equity investments
were made during 2001. As of December 31, 2001, the Company had an outstanding
letter of credit of $11.1 million in support of a loan to BHA Aero.

The following table summarizes the maturities of financial obligations and
expiration dates of commitments:

Total letters of credit issued and outstanding were $19.4 million as of
December 31, 2001, of which $11.1 million was issued in support of a loan to BHA
Aero. While the letters of credit issued on behalf of the Company will expire
under their terms in 2002, most, if not all, will be re-issued.

The Company's ability to make scheduled payments of principal, or to pay
interest on, or to refinance its indebtedness, including its public notes, or to
fund planned capital expenditures, will depend on its future performance and
conditions in the financial markets. The Company's future performance is subject
to economic, financial, competitive, legislative, regulatory and other factors
that are beyond its control. There can be no assurance that the Company will
generate sufficient cash flow from its operations, or that sufficient future
borrowings will be available under its Senior Credit Facility, to enable the
Company to service its indebtedness, including its public notes, or to fund its
other liquidity needs. In addition, the Company may need to refinance or amend
all or a substantial

51

portion of its indebtedness on or before maturity. Furthermore, effective with
the January 25, 2002 amendment, the Company and the bank syndicate to the Senior
Credit Facility revised its financial covenants through 2002. Under the terms of
the amendment, the financial covenants beginning with the quarter ending
March 31, 2003 are those that applied before the amendment. The Company will
need to substantially improve its financial performance or substantially reduce
its indebtedness in order to comply with the financial covenants in 2003, or
will need to obtain a further amendment from its Senior Credit Facility banks.
There can be no assurance that the Company will be able to effect any such
refinancing or amendment on commercially reasonable terms, or at all.

For further information regarding the Company's financial obligations and
commitments, see Notes 8 and 16 to the accompanying consolidated financial
statements of this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES

Hexcel's discussion and analysis of its financial condition and results of
operations are based upon Hexcel's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of the consolidated financial
statements requires Hexcel to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities, and the reported amounts of revenue and expenses. Although Hexcel
evaluates its estimates, which are based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, on
an on-going basis, actual results may differ from these estimates under
different assumptions or conditions. Hexcel believes the following items are the
Company's critical accounting policies and more significant estimates and
assumptions used in the preparation of its consolidated financial statements.

Hexcel estimates the collectibility of its accounts receivable from
customers by establishing allowances for doubtful accounts. A considerable
amount of judgment is necessary to assess the realizability of these receivables
and the credit-worthiness of each customer. If the financial condition of
Hexcel's customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances may be required.

Hexcel states inventories at the lower of cost or market. This requires
Hexcel to write-down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value to reflect assumptions about future demand and market
conditions. If actual future demand and market conditions are less favorable
than anticipated, additional inventory write-downs may be required.

Hexcel records significant reserves in connection with its business
consolidation and restructuring programs. These reserves include estimates for
employee severance costs, the settlement of contractual obligations, the fair
value of certain assets held for sale and the timing of facility closures.
Management closely monitors these actions and the related costs, and believes
such estimates to be reasonable. However, if actual results differ from these
estimates, it would have an impact on Hexcel's financial performance in the
period such revision was made. In addition, certain of the expenses associated
with the Company's business consolidation programs, including equipment moving
and relocation costs, can not be accrued under accounting principles generally
accepted in the United States of America and are recorded as incurred.
Therefore, the Company expects to record additional charges of approximately
$5.0 million in 2002 for these actions.

Hexcel has significant intangible assets, including goodwill and other
purchased intangibles. Hexcel reviews these assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. In 2001, the Company reviewed the intangible assets
arising from several acquired businesses for potential impairment as a result of
the unprecendented downturn in the electronic components market and the expected
decline in the

52

commercial aerospace market resulting from the events of September 11, 2001. The
assessment of possible impairment is based on Hexcel's ability to recover the
carrying value of the asset from the estimated undiscounted future net cash
flows, before interest and taxes, of the related operations. If these cash flows
are less than the carrying value of such assets, an impairment loss is
recognized for the difference between estimated fair value and carrying value of
the assets. The measurement of impairment requires estimates of these cash flows
and fair value, which may be determined based either on discounted cash flows or
third party appraised values depending on the nature of the asset. Events or
changes in circumstances, such as market conditions, could significantly impact
these judgments and require adjustments to the recorded asset balances in the
future. In 2001, the Company recognized an impairment of $309.1 million on
goodwill and other purchased intangibles acquired through previous acquisitions.

Hexcel records a valuation allowance to reduce its deferred tax assets to
the amount that is more likely than not to be realized. While Hexcel has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, these factors are
highly subjective and are subject to change based upon market conditions, the
Company's ability to execute its restructuring programs and other factors. In
2001, Hexcel has recorded a valuation allowance against nearly all of its
deferred tax assets. In the event Hexcel were to determine that it would be able
to realize its deferred tax assets in the future, an adjustment to the valuation
allowance on deferred tax assets would increase income in the period such
determination was made. Likewise, should Hexcel determine that it would not be
able to realize all or part of its remaining net deferred tax asset in the
future, an adjustment to the deferred tax asset would be charged to income in
the period such determination was made.

Hexcel holds equity interests in affiliated companies having operations or
technology in areas within its strategic focus, one of which is publicly traded.
Hexcel records an investment impairment charge when it believes an investment
has experienced a decline in value that is other than temporary. This judgmental
decision reflects many factors. Future adverse changes in market conditions or
poor operating results of underlying investments could result in further losses
or an inability to recover the carrying value of the investments, thereby
possibly requiring an impairment charge in the future.

Hexcel has designated certain derivative financial instruments as hedges of
future sales transactions at certain foreign subsidiaries. Unrealized losses on
these foreign exchange contracts have not been recognized in the Company's
consolidated statement of operations based on management's determination that
the forecasted sales are probable of occurring and that the hedges have been
effective in mitigating the foreign exchange risks associated with these future
sales. The hedging contracts cover only a portion of the forecasted sales, and
therefore, management considers the likelihood of not reaching the designated
level of forecasted sales to be low. However, if the designated levels of
forecasted sales are not achieved in the timeframe that management anticipates,
Hexcel would need to report the unrealized losses on these derivative
instruments in income.

Hexcel is involved in litigation, investigations and claims arising out of
the normal conduct of its business, including those relating to commercial
transactions, as well as to environmental, health and safety matters. The
Company estimates and accrues its liabilities resulting from such matters based
on a variety of factors, including outstanding legal claims and proposed
settlements; assessments by internal and external counsel of pending or
threatened litigation; and assessments by environmental engineers and
consultants of potential environmental liabilities and remediation costs. The
Company believes it has adequately accrued for these potential liabilities;
however, facts and circumstances may change that could cause the actual
liability to exceed the estimates, or that may require adjustments to the
recorded liability balances in the future.

53

MARKET RISKS

As a result of its global operating and financing activities, Hexcel is
exposed to various market risks that may affect its consolidated results of
operations and financial position. These market risks include fluctuations in
interest rates, which impact the amount of interest the Company must pay on
certain variable-rate debt, and fluctuations in currency exchange rates, which
impact the U.S. dollar value of transactions, assets and liabilities denominated
in foreign currencies. The Company's primary currency exposures are in Europe,
where the Company has significant business activities. To a lesser extent, the
Company is also exposed to fluctuations in the prices of certain commodities,
such as electricity, natural gas, aluminum and certain chemicals.

Hexcel attempts to net individual exposures on a consolidated basis, when
feasible, to take advantage of natural offsets. In addition, the Company employs
an interest rate cap agreement and foreign currency forward exchange contracts
for the purpose of hedging certain specifically identified interest rate and net
currency exposures. The use of these financial instruments is intended to
mitigate some of the risks associated with fluctuations in interest rates and
currency exchange rates, but does not eliminate such risks. The Company does not
use financial instruments for trading or speculative purposes.

INTEREST RATE RISKS

Hexcel's long-term debt bears interest at both fixed and variable rates. As
a result, the Company's consolidated results of operations are affected by
interest rate changes on its variable rate debt. Assuming a 10% favorable and a
10% unfavorable change in the underlying weighted average interest rates of the
Company's variable rate debt, interest expense for 2001 of $64.8 million would
have been $63.2 million and $66.5 million, respectively.

In order to partially mitigate interest rate risks, Hexcel entered into a
five-year interest rate cap agreement in 1998. This agreement provides for a
maximum fixed interest rate of 5.5% on the applicable London interbank rate used
to determine the interest on $50.0 million of variable rate debt under the
Senior Credit Facility. The fair value and carrying amount of this agreement at
December 31, 2001 and 2000, along with hedge ineffectiveness for the year ended
December 31, 2001, were not material.

CURRENCY EXCHANGE RISKS

Hexcel has significant business activities in Europe. The Company operates
seven manufacturing facilities in Europe, which generated approximately 41% of
2001 consolidated net sales. The Company's European business activities
primarily involve three major currencies--the U.S. dollar, the British pound,
and the Euro. The Company also conducts business or has joint venture
investments in Japan, China, Malaysia, Australia and Brazil, and sells products
to customers throughout the world. The majority of the Company's transactions
with customers and joint venture affiliates outside of Europe are denominated in
U.S. dollars, thereby limiting the Company's exposure to short-term currency
fluctuations involving these countries. However, the value of the Company's
investments in these countries could be impacted by changes in currency exchange
rates over time, as could the Company's ability to profitably compete in
international markets.

Hexcel attempts to net individual currency positions at its various European
operations on a consolidated basis, to take advantage of natural offsets and
reduce the need to employ foreign currency forward exchange contracts. The
Company also enters into short-term foreign currency forward exchange contracts,
usually with a term of ninety days or less, to hedge net currency exposures
resulting from specifically identified transactions. Consistent with the nature
of the economic hedge provided by such contracts, any unrealized gain or loss
would be offset by corresponding decreases or increases, respectively, of the
underlying transaction being hedged.

54

During 2001, Hexcel entered into a number of foreign currency forward
exchange contracts to exchange U.S. dollars for Euros at fixed rates on
specified dates through March 2005. The aggregate notional amount of these
contracts was $83.9 million at December 31, 2001. The purpose of these contracts
is to hedge a portion of the forecasted transactions of European subsidiaries
under long-term sales contracts with certain customers which are denomintated in
U.S. dollars. These contracts are expected to provide the Company with a more
balanced matching of future cash receipts and expenditures by currency, thereby
reducing the Company's exposure to fluctuations in currency exchange rates. For
the year ended December 31, 2001, hedge ineffectiveness was immaterial and the
fair value of the foreign currency cash flow hedges recognized in "comprehensive
loss" was a net loss of $5.9 million. Approximately $1.2 million of the other
comprehensive losses are expected to be reclassified into earnings in 2002 as
the hedged tranactions are recorded.

Assuming a 10% increase in the value of the Euro relative to the U.S.
dollar, the aggregate fair value of these contracts would constitute a
$2.5 million asset of the Company. Alternatively, assuming a 10% decrease in the
value of the Euro relative to the U.S. dollar, the aggregate fair value of these
contracts would represent a $14.3 million liability of the Company.

COMMODITY PRICE RISKS

Certain raw materials and operating supplies used by Hexcel are subject to
price fluctuations caused by the volatility of underlying commodity prices. The
commodities most likely to have an impact on the Company's consolidated results
of operations in the event of significant price changes are electricity, natural
gas, aluminum and certain chemicals. The Company attempts to minimize the impact
of commodity price risk, when feasible, by entering into supply agreements that
specify raw material prices or limit price increases for a reasonable period of
time. The Company generally does not employ forward contracts or other financial
instruments to hedge commodity price risk.

UTILITY PRICE RISKS

The Company has exposure to utility price risks as a result of volatility in
the cost and supply of energy and in natural gas prices, particularly in the
western portion of the United States where Hexcel has many of its manufacturing
facilities. To minimize this risk, the Company enters into fixed price contracts
at certain of the manufacturing locations for a portion of its energy usage for
periods of up to three years. Although these contracts would reduce the risk to
the Company during the contract period, future volatility in the supply and
pricing of energy and natural gas could have an impact on the consolidated
results of operations of the Company.

OTHER RISKS

As of December 31, 2001, the aggregate fair values of the Company's senior
subordinated notes, due 2009, convertible subordinated notes, due 2003, and the
convertible subordinated debentures, due 2011, were $189.6 million,
$27.0 million and $15.5 million, respectively. The convertible debt securities
are convertible into Hexcel common stock at a price of $15.81 and $30.72 per
share, respectively. Fair values were estimated on the basis of quoted market
prices, although trading in these debt securities is limited and may not reflect
fair value. The market value of these debt securities has increased since
December 31, 2001. The fair values are subject to fluctuations based on the
Company's performance, its credit rating, and changes in interest rates for debt
securities with similar terms. Due to the conversion feature in the convertible
securities, changes in the value of the Company's stock may affect the fair
value of these convertible securities.

Assuming that all other factors remain constant, the fair values of Hexcel's
convertible subordinated notes, due 2003, and the convertible subordinated
debentures, due 2011, would not be

55

significantly impacted by a 10% change, either favorable or unfavorable, in the
market price of the Company's common stock.

Although fair value may be a proxy for the cost to repay the Company's
indebtedness, the trust indentures for the Company's senior subordinated notes,
due 2009; convertible subordinated notes, due 2003; and convertible subordinated
debebtures, due 2011 require that the Company repay the principal value of the
indebtedness at maturity.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("FAS 141"), which requires all acquisitions subsequent to June 30, 2001 to be
accounted for under the purchase method of accounting. The adoption of FAS 141
did not have a material effect on the Company's consolidated financial position
and results of operations.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 changes the
accounting for goodwill from an amortization method to an impairment only
approach. Going forward, goodwill will be tested at the reporting unit level
annually and whenever events or circumstances occur indicating that goodwill
might be impaired. Amortization of goodwill, including goodwill recorded in past
business combinations, will cease. While the Company adopted FAS 142 as of
January 1, 2002 with no impact to its consolidated financial position, future
consolidated results of operations will be impacted to the extent amortization
is no longer recorded by the Company. In 2001, 2000 and 1999, the Company's
reported results refected amortization charges of $12.5 million, $13.1 million
and $13.4 million, respectively.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 143
establishes accounting standards for recognition and measurement of a liability
for the costs of asset retirement obligations. Under FAS 143, the costs of
retiring an asset will be recorded as a liability when the obligation arises,
and will be amortized to expense over the life of the asset. The Company adopted
FAS 143 as of January 1, 2002 with no impact to its consolidated financial
position or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("FAS 144"). FAS 144 was issued to establish a single accounting model for
long-lived assets to be disposed of by sale and to resolve implementation issues
related to FAS 121. Although FAS 144 retains the requirements of FAS 121 to
recognize an impairment loss if the carrying amount of a long-lived asset is not
recoverable, the statement removes goodwill and intangible assets not being
amortized from FAS 121's scope. FAS 144 also requires long-lived assets to be
abandoned to be treated as held for use and depreciated over their remaining
expected lives and broadens the presentation of discontinued operations in the
income statement to a component of an entity rather than a segment of a
business. The Company adopted FAS 144 as of January 1, 2002 with no impact to
its consolidated financial position or results of operations.

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

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

56

and phrases, including references to assumptions. Such statements are based on
current expectations, are inherently uncertain, and are subject to changing
assumptions.

Such forward-looking statements include, but are not limited to:
(a) estimates of commercial aerospace production and delivery rates, including
those of Airbus and Boeing; (b) expectations regarding growth in sales to
regional and business aircraft manufacturers, and to the aircraft aftermarket;
(c) expectations regarding the growth in the production of military aircraft,
helicopters and launch vehicle programs in 2002 and beyond; (d) expectations
regarding the recovery of demand for electronics fabrics used in printed wiring
boards, as well as future business trends in the electronics fabrics industry;
(e) expectations regarding the demand for soft body armor made of aramid and
specialty fabrics; (f) expectations regarding growth in sales of composite
materials for wind energy, automotive and other industrial applications;
(g) estimates of changes in net sales by market compared to 2001;
(h) expectations regarding the Company's actions to reduce headcount and
eliminate $60.0 million of cash overhead expense; (i) estimates of the timing,
expenses and cash expenditures required to complete the closure of the
Lancaster, Ohio plant; (j) expectations regarding the Company's equity in the
earnings of joint ventures, as well as joint venture investments and loan
guarantees; (k) expectations regarding working capital trends and capital
expenditures; (l) the availability and sufficiency of the Senior Credit Facility
and other financial resources to fund the Company's worldwide operations in 2002
and beyond; and (m) the impact of various market risks, including fluctuations
in the interest rates underlying the Company's variable-rate debt, fluctuations
in currency exchange rates, fluctuations in commodity prices, and fluctuations
in the market price of the Company's common stock.

Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to be materially
different. Such factors include, but are not limited to, the following: changes
in general economic and business conditions; changes in current pricing and cost
levels; changes in political, social and economic conditions and local
regulations, particularly in Asia and Europe; foreign currency fluctuations;
changes in aerospace delivery rates; reductions in sales to any significant
customers, particularly Airbus or Boeing; changes in sales mix; changes in
government defense procurement budgets; changes in military aerospace programs
technology; industry capacity; competition; disruptions of established supply
channels; manufacturing capacity constraints; and the availability, terms and
deployment of capital.

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

57

CONSOLIDATED FINANCIAL STATEMENTS

58

MANAGEMENT RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

/s/ DAVID E. BERGES
- ---------------------------------
David E. Berges
CHIEF EXECUTIVE OFFICER

/s/ STEPHEN C. FORSYTH
- ---------------------------------
Stephen C. Forsyth
CHIEF FINANCIAL OFFICER

/s/ WILLIAM J. FAZIO
- ---------------------------------
William J. Fazio
CHIEF ACCOUNTING OFFICER

59

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Hexcel Corporation:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Hexcel Corporation and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
Stamford, Connecticut
January 25, 2002

60

HEXCEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

61

HEXCEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

62

HEXCEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

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

63

HEXCEL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

64

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)

NOTE 1--SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS AND BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of Hexcel
Corporation and its subsidiaries ("Hexcel" or "the Company"), after elimination
of intercompany transactions and accounts. Investments in affiliated companies
in which the Company's interests are generally between 20% and 50%, but the
Company does not control the financial and operating decisions, are accounted
for using the equity method of accounting.

Hexcel is the world's leading producer of advanced structural materials. The
Company develops, manufactures and markets lightweight, high-performance
reinforcement products, composite materials and engineered products for use in
commercial aerospace, space and defense, electronics, and industrial
applications. The Company's materials are used in a wide variety of end
products, such as commercial and military aircraft, space launch vehicles and
satellites, printed wiring boards, computers, cellular telephones, televisions,
soft body armor, high-speed trains and ferries, cars and trucks, wind turbine
blades, reinforcements for bridges and other structures, window blinds, skis and
snowboards, fishing poles, tennis rackets and bicycles.

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

As discussed in Note 2, Hexcel sold its Bellingham aircraft interiors
business on April 26, 2000. As a result of this transaction, the consolidated
balance sheets, statements of operations, stockholders' equity and comprehensive
income, and cash flows include the financial position, results of operations and
cash flows of the Bellingham aircraft interiors business as of such dates and
for such periods that the business was owned.

USE OF ESTIMATES

The preparation of the consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. Estimates are used for, but not limited to, allowances for doubtful
accounts, inventory allowances, product warranty, depreciation and amortization,
business consolidation and restructuring costs, impairment of long-lived assets,
employee benefits, taxes, and contingencies. Actual results could differ from
those estimates.

CASH AND CASH EQUIVALENTS

All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents. These investments consist primarily
of Eurodollar time deposits and are stated at cost, which approximates fair
value.

INVENTORIES

Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out and average cost methods. The Company provides
inventory allowances based on excess and obsolete inventories.

65

PROPERTY, PLANT AND EQUIPMENT

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

GOODWILL AND OTHER PURCHASED INTANGIBLES

Goodwill, representing the excess of the purchase price over the fair value
of the identifiable net assets of the businesses acquired, and other purchased
intangibles were amortized on a straight-line basis over estimated economic
lives, ranging from 15 years to 40 years.

Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("FAS 142"). Upon adoption, and in accordance with the standard, the Company
will no longer amortize its goodwill and other purchased intangibles but instead
will evaluate these assets for possible impairment at least annually and
whenever events or circumstances occur that would indicate that these assets
might be impaired.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, including goodwill and other purchased intangibles, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The assessment of
possible impairment is based on the Company's ability to recover the carrying
value of the asset from the estimated undiscounted future net cash flows, before
interest and taxes, of the related operations. If these cash flows are less than
the carring value of such asset, an impairment loss is recognized for the
difference between estimated fair value and carrying value. The measurement of
impairment requires estimates of these cash flows and fair value, which may be
determined based either on discounted cash flows or third party appraised values
depending on the nature of the asset. In 2001, the Company recognized an
impairment of $309.1 on goodwill and other purchased intangibles acquired
through previous acquisitions (see Note 3).

DEBT FINANCING COSTS

Debt financing costs are deferred and amortized to interest expense over the
life of the related debt, which ranges from 7 to 10 years. Deferred debt
financing costs were $15.5 in 2001 and $16.7 in 2000, net of accumulated
amortization of $10.7 and $8.7, respectively, and are included in "other assets"
in the consolidated balance sheets.

INVESTMENTS

The Company has investments in affiliated companies with equity interests
ranging from 25% to 50%. Hexcel does not control the financial and operating
decisions of these companies and, therefore, accounts for its share of their
operating performance using the equity method of accounting. Future adverse
changes in market conditions or poor operating results of the underlying
investments could result in losses and the inability to recover the carrying
value of the investments, thereby possibly requiring an impairment charge. The
Company reviews its investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investments may not be
recoverable. The Company records an investment impairment charge when the
decline in value is considered to be other than temporary. In 2001 and 1999, the
Company recorded impairments of $7.8 and $20.0, respectively, relating to its
investment in Interglas Technologies AG (see Note 7).

66

STOCK-BASED COMPENSATION

Stock-based compensation is accounted for in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). Accordingly, compensation expense is not recognized when options are
granted at the fair market value at the date of grant. Hexcel also provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("FAS 123") (see Note 13).

CURRENCY TRANSLATION

The assets and liabilities of international subsidiaries are translated into
U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at average exchange rates during the year. Cumulative currency
translation adjustments are included in "accumulated other comprehensive loss"
in the stockholders' equity section of the consolidated balance sheets. Realized
gains and losses from currency exchange transactions are recorded in "selling,
general and administrative expenses" in the consolidated statements of
operations and were not material to Hexcel's consolidated results of operations
in 2001, 2000 or 1999.

REVENUE RECOGNITION

Product sales are recognized when all significant contractual obligations
have been satisfied and collection of the resulting receivable is reasonably
assured, which is generally at the time of shipment. Revenues derived from
design, installation and support services are recognized when the service is
provided, or alternatively, when the product to which the service relates is
delivered to the customer. The Company accrues for warranty costs and other
sales allowances based on its experience at the time of sale.

RESEARCH AND TECHNOLOGY

Research and technology costs are expensed as incurred.

INCOME TAXES

The Company provides for income taxes using the liability method prescribed
by the Financial Accounting Standards Board ("FASB") in Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). Under
the liability method, deferred income tax assets and liabilities reflect tax
carryforwards and the tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and income tax
purposes. Deferred tax assets require a valuation allowance when it is more
likely than not that some portion of the deferred tax assets may not be
realized. The realization of deferred tax assets is dependent upon the timing
and magnitude of future taxable income prior to the expiration of the deferred
tax assets attributes. When events and circumstances so dictate, the Company
evaluates the realizability of its deferred tax assets and the need for a
valuation allowance by forecasting future taxable income. In 2001, the Company
established a full valuation allowance on its U.S. deferred tax assets. The
amount of the deferred tax assets considered realizable, however, could change
if estimates of future U.S. taxable income during the carry-forward period
improve (see Note 12).

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject Hexcel to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's sales to two customers and their related subcontractors accounted
for approximately 39%, 33% and 38% of the Company's 2001, 2000 and 1999 net
sales, respectively. The Company performs ongoing credit evaluations of its
customers' financial

67

condition but generally does not require collateral or other security to support
customer receivables. The Company establishes an allowance for doubtful accounts
based on factors surrounding the credit risk of specific customers, historical
trends and other financial information. As of December 31, 2001 and 2000, the
allowance for doubtful accounts was $7.8 and $7.1, respectively. Bad debt
expense was $1.3, $0.6 and $0.7 in 2001, 2000 and 1999, respectively.

DERIVATIVE FINANCIAL INSTRUMENTS

Hexcel employs an interest rate cap agreement and foreign currency forward
exchange contracts in the management of its interest rate and currency exchange
exposures. The Company has designated its interest rate cap agreement as a cash
flow hedge against a specific debt instrument and recognizes interest
differentials as adjustments to interest expense as the differentials occur. The
Company also designated its foreign currency forward exchange contracts as cash
flow hedges against forecasted foreign currency denominated transactions and
reports the effective portions of changes in fair value of the instruments in
"other comprehensive income" until the underlying hedged transactions affect
income. The Company does not use financial instruments for trading or
speculative purposes.

Hexcel adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), and
its corresponding amendments under Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
effective January 1, 2001. FAS 133 requires an entity to recognize all
derivatives as either assets or liabilities on its balance sheet and measure
those instruments at fair value. Gains or losses resulting from changes in the
fair values of those derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. FAS 133 did not have a
material effect on the Company's consolidated financial position or results of
operations as of the date of adoption.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("FAS 141"), which requires all acquisitions
subsequent to June 30, 2001 to be accounted for under the purchase method of
accounting. The adoption of FAS 141 did not have a material effect on the
Company's consolidated financial position and results of operations.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 changes the
accounting for goodwill from an amortization method to an impairment only
approach. Going forward, goodwill will be tested at the reporting unit level
annually and whenever events or circumstances occur indicating that goodwill
might be impaired. Amortization of goodwill, including goodwill recorded in past
business combinations, will cease. While the Company adopted FAS 142 as of
January 1, 2002 with no impact to its consolidated financial position, future
consolidated results of operations will be impacted to the extent amortization
is no longer recorded by the Company. In 2001, 2000 and 1999, the Company's
consolidated results of operations included amortization expenses of
$12.5 million, $13.1 million and $13.4 million, respectively.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"). FAS 143
establishes accounting standards for recognition and measurement of a liability
for the costs of asset retirement obligations. Under FAS 143, the costs of
retiring an asset will be recorded as a liability when the obligation arises,
and will be amortized to expense over the life of the asset. The Company adopted
FAS 143 as of January 1, 2002 with no impact to its consolidated financial
position or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("FAS 144"). FAS 144 was issued to establish a single accounting model for
long-lived assets to be disposed of by sale and to resolve

68

implementation issues related to FASB's Statement No. 121 ("FAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". Although FAS 144 retains the requirements of FAS 121 to
recognize an impairment loss if the carrying amount of a long-lived asset is not
recoverable, the statement removes goodwill and intangible assets not being
amortized from FAS 121's scope. FAS 144 also requires long-lived assets to be
abandoned to be treated as held for use and depreciated over their remaining
expected lives and broadens the presentation of discontinued operations in the
income statement to a component of an entity rather than a segment of a
business. The Company adopted FAS 144 as of January 1, 2002 with no impact to
its consolidated financial position or results of operations.

RECLASSIFICATIONS

Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 2001
presentation.

NOTE 2--GAIN ON SALE OF BELLINGHAM AIRCRAFT INTERIORS BUSINESS

On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business to
Britax Cabin Interiors, Inc., a wholly owned subsidiary of Britax International
plc, for cash proceeds of $113.3. The sale resulted in a pre-tax gain of $68.3
and an after-tax gain of approximately $44.3 (or $0.97 per diluted share). Net
proceeds from the sale were used to repay $111.6 of outstanding term debt under
the Company's Senior Credit Facility. The consolidated financial statements and
accompanying notes reflect Bellingham's operating results as a continuing
operation in the Engineered Products business segment up to the date of
disposal. Net sales and operating income for the Bellingham business were as
follows:

NOTE 3--IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLES

During the fourth quarter of 2001, the Company reviewed its long-lived
assets, particularly goodwill and other purchased intangibles acquired in recent
years, for impairment. The review was undertaken in response to changes in
market conditions and the Company's revised outlook resulting from a sharp
decline in demand for the Company's woven glass fabrics, primarily in the
electronics market, and the announced reductions in commercial airline
production due to the tragic events of September 11, 2001. The Company also
revised its forecasts of revenue growth for its acquired satellite business due
to the continuing slow down in commercial satellite launches following the
financial failure of a number of satellite based telecommunication projects and
the postponement of others. These adverse changes in market conditions have led
to the lowering of revenue forecasts associated with certain businesses in the
reinforcement products and composite materials segments.

Based on this review, the Company determined that the long-lived assets of
the fabrics business acquired from Clark-Schwebel in 1998 and the satellite
business acquired from Fiberite in 1997 were not fully recoverable. The Company
recorded non-cash impairment charges of $292.1 and $17.0 related to the goodwill
and other purchased intangibles associated with the Clark-Schwebel and Fiberite
acquisitions, respectively. The amounts of the impairment charges were
calculated as the excess of the carrying value of the assets over their fair
values. Fair values were determined using discounted future cash flow models,
market valuations and third party appraisals, where appropriate. There were no
tax benefits recognized on the impairments because of limitations on the
Company's ability to realize the tax benefits.

69

NOTE 4--BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS

During the fourth quarter of 2001, the Company announced a plan to
restructure its business operations in accordance with a revised business
outlook, in light of anticipated reductions in commercial aircraft production in
both 2002 and 2003, the continued depressed business conditions in the
electronics market and the weakness in the general economy. The plan includes
company-wide reductions in managerial, professional, indirect manufacturing and
administrative employees along with organizational rationalization. In addition,
the Company will reduce its direct manufacturing costs as customer orders
decline. As a result, the Company has reduced the number of employees by almost
10% from the third quarter to 5,376 employees at December 31, 2001, and expects
to further reduce that number to less than 4,500 by the end of 2002. The
majority of the actions had been taken by the end of 2001, and the Company
expects most of the remaining actions to be completed in the first quarter of
2002. The Company recognized charges of $47.9 in the fourth quarter of 2001
related to this restructuring plan, and estimates that the total cash costs of
this restructuring plan will be approximately $35.0. Cash spending related to
this action in the fourth quarter of 2001 was approximately $3.0, with the
balance to be paid throughout 2002.

As a result of the weakness in the electronics market, the Company initiated
cost reduction actions in July 2001. These actions built upon earlier steps to
furlough employees, idle manufacturing and cut non-essential expenditures, by
effecting a reduction in the work force of approximately 275 employees in the
reinforcement products segment and elsewhere in the Company. These actions
resulted in business consolidation and restructuring expenses of approximately
$4.0 in the third quarter of 2001.

As a result of four substantial business acquisitions, the Company initiated
three business consolidation programs in May 1996, December 1998 and
September 1999. The primary purpose of these programs was to integrate acquired
assets and operations into the Company, and to close or restructure
insufficiently profitable facilities and activities. Due to aerospace industry
requirements to "qualify" specific equipment and manufacturing processes for
certain products, some business consolidation actions have taken up to three
years to complete. These qualification requirements increase the complexity,
cost and time of moving equipment and rationalizing manufacturing activities. In
connection with these business consolidation programs, the Company has closed
three manufacturing facilities, vacated approximately 560 thousand square feet
of manufacturing space, and eliminated more than 700 manufacturing, marketing
and administrative positions. All of the business consolidation activities
initiated in 1996, 1998 and 1999 have been completed as of December 31, 2001.

In 2000, the Company added two further actions to the September 1999
business consolidation program. The Company decided to close the two smaller of
its four U.S. prepreg manufacturing facilities--one in Lancaster, Ohio and
another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in the
fourth quarter of 2001 and it is anticipated that the closure of the Lancaster,
Ohio facility will be completed during the second quarter of 2002. The
manufacturing output from these two plants will now be produced by the two
remaining U.S. prepreg facilities in Livermore, California and Salt Lake City,
Utah.

In 2000, Hexcel amended its September 1999 business consolidation program in
response to the manufacturing constraints caused by a stronger than expected
increase in sales and production for its electronic woven glass fabrics and its
ballistic protection products. Based on these improved market conditions, which
were expected to continue beyond 2000, and a manufacturing capacity review, the
Company concluded to expand its capacity by purchasing additional looms and
revising the previous decision to consolidate a number of weaving activities at
two of the Company's facilities. As a result of the decision to not proceed to
consolidate production, the Company reversed a total of $3.4 of business
consolidation expenses that were previously recognized in 1999, including $3.1
in non-cash write-downs of machinery and equipment that was to have been sold or
scrapped as a result of the consolidation.

70

Business consolidation and restructuring activities for the three years
ended December 31, 2001, consisted of the following:

As part of a business consolidation program, Hexcel disposed of its
operations in Brindisi, Italy (the "Italian Operations") in 1999. In accordance
with FAS 121, the Company recorded a charge of $5.6 prior to 1999 for an asset
impairment related to its Italian Operations. The estimate of fair value used in
determining the impairment charge was based on offers received from interested
buyers. The Italian Operations were disposed of for net proceeds that
approximated amounts accrued and were accounted for under the Company's
Engineered Products business segment. Financial operating results for this
business were not material to Hexcel's consolidated financial statements.

NOTE 5--INVENTORIES

71

NOTE 6--NET PROPERTY, PLANT AND EQUIPMENT

NOTE 7--INVESTMENTS IN AFFILIATED COMPANIES

In 1999, Hexcel, Boeing and Aviation Industries of China (now known as China
Aviation Industry Corporation I) formed a joint venture, BHA Aero Composite
Parts Co., Ltd. ("BHA Aero"), to manufacture composite parts for secondary
structures and interior applications for commercial aircraft. Hexcel has a 33%
equity ownership interest in this joint venture, which is located in Tianjin,
China. In addition, in 1999, Hexcel formed another joint venture, Asian
Composites Manufacturing Sdn. Bhd. ("Asian Composites"), with Boeing, Sime Link
Sdn. Bhd., and Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto),
to manufacture composite parts for secondary structures for commercial aircraft.
Hexcel has a 25% equity ownership interest in this joint venture, which is
located in Alor Setar, Malaysia. Asian Composites began shipping engineered
products to customers during the second half of 2001, while it is anticipated
that BHA Aero will begin deliveries in the first half of 2002. During 2000 and
1999, Hexcel made cash equity investments totaling $8.3 and $4.7, respectively,
in these two joint ventures. No additional cash equity investments were made
during 2001. As of December 31, 2001, the Company had an outstanding letter of
credit of $11.1 in support of a loan to BHA Aero (see Note 16).

The Company also has equity ownership interests in three reinforcement
product joint ventures: a 43.6% share in Interglas Technologies AG
("Interglas"), headquartered in Germany; a 43.3% share in Asahi-Schwebel
Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in turn owns
interests in two joint ventures in Taiwan--a 50% interest in Nittobo Asahi Glass
and a 51% interest in Asahi-Schwebel Taiwan; and a 50% share in Clark-Schwebel
Tech-Fab Company ("CS Tech-Fab"), headquartered in the United States. Interglas
and Asahi-Schwebel are fiberglass fabric producers serving the European and
Asian manufacturers of printed circuit board laminates and other reinforcement
product applications. CS Tech-Fab manufactures non-woven materials for roofing,
construction and other specialty applications.

In 2001 and 1999, the Company wrote-down its investment in Interglas by $7.8
and $20.0, respectively. The write-downs were the result of an assessment that
an other-than-temporary decline in value of the investment had occurred due to
severe industry downturns and the resulting impact on the financial condition of
this company. The amount of the write-downs were determined based on available
market information and appropriate valuation methodologies. The write-down in
1999 was also due in part to a decision to allow its fixed price options to
expire unexercised. The fixed price option would have increased the Company's
equity investment in Interglas from 43.6% to 84%. The Company did not record
deferred tax benefits on the write-downs because of limitations imposed by
foreign tax laws and the Company's ability to realize the tax benefits.

Lastly, Hexcel owns a 45% equity interest in DIC-Hexcel Limited ("DHL"), a
joint venture with Dainippon Ink and Chemicals, Inc. ("DIC"). This composite
materials joint venture is located in Komatsu, Japan, and produces and sells
prepregs, honeycomb and decorative laminates using

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technology licensed from Hexcel and DIC. Hexcel is contingently liable to pay
DIC up to $2.3 with respect to DHL's bank debt under certain defined
circumstances.

NOTE 8--NOTES PAYABLE

SENIOR CREDIT FACILITY

Hexcel has a global credit facility (the "Senior Credit Facility") with a
syndicate of banks to provide for ongoing working capital and other financing
requirements of the Company. The Senior Credit Facility, which consists of
revolving credit, overdraft and term loan facilities, provided Hexcel with
committed lines of approximately $353.7 as of December 31, 2001, subject to
certain limitations. Effective January 25, 2002, and in connection with an
amendment entered into with the bank syndicate, these commitments were reduced
to $338.7. These commitments consisted of funded term loans of $118.7 and
revolving credit and overdraft facilities of $220.0. As of December 31, 2001,
drawings under the revolving credit facility were $115.2. In addition, the
Company may issue letters of credit up to a value of $30.0 under the Senior
Credit Facility. The letters of credit facility reduces the funded debt the
Company may draw under the revolving credit and overdraft facilities. As of
December 31, 2001, letters of credit issued under the facility approximated
$19.4, of which $11.1 supports a loan to the Company's BHA Aero joint venture.
Undrawn commitments under the revolving credit and overdraft facilities as of
December 31, 2001, having given effect to the provisions of the January 25, 2002
amendment, were $74.8. The Company is subject to various financial covenants and
restrictions under the Senior Credit Facility, including limitations on
incurring debt, granting liens, selling assets, redeeming capital stock and
paying dividends. The Senior Credit Facility is scheduled to expire in 2004,
except for approximately $57.7 of term loans that are due for repayment in 2005.

Relating to the fourth quarter of 2001, the Company received a waiver from
compliance with the financial covenants under the Senior Credit Facility for the
period ending December 31, 2001. Effective January 25, 2002, Hexcel and the
bank syndicate entered into an amendment to the Senior Credit Facility. The
amendment provides for revised financial covenants through 2002; a 100 basis
point increase in the interest spread payable over LIBOR for advances under the
facility; an immediate decrease in the the commitment of revolving credit and
overdraft facilities from a cumulative amount of $235.0 to $220.0, with a
further reduction to $212.0 on or before September 30, 2002; and a

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requirement that the unused borrowing capacity available under the Senior Credit
Facility, together with all cash and cash equivalents held by the Company, equal
at least $30.0 on June 30, 2002. The revised covenants were derived from the
Company's financial projections plus a moderate cushion for unanticipated
events. The Senior Credit Facility financial covenants set certain maximum
values for the Company's leverage (the ratios of total and senior debt to
Adjusted EBITDA), and certain minimum values for its interest coverage (the
ratio of Adjusted EBITDA to cash interest expense) and fixed charge coverage
(the ratio of Adjusted EBITDA less capital expenditures to the sum of certain
fixed expenses). In addition, during the term of the amendment, all net proceeds
generated through asset sales, and most other liquidity events, in each case to
the extent in excess of $2.5, and 100% of all net proceeds generated from
litigation settlements and judgements, must be used to prepay loans under the
Senior Credit Facility. Hexcel has also agreed to limit capital expenditures to
$25.0 during 2002, with a $10.0 limit during any quarter in 2002.

In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable, inventory, property, plant,
equipment and real estate. It had also pledged some or all of the shares of
certain subsidiaries. Under the terms of the amendment, Hexcel has granted to
the banks a security interest in additional U.S. accounts receivable, inventory,
property, plant, equipment and real estate, as well as its intellectual
property. In addition, each of a group of Hexcel's European subsidiaries will
grant a security interest in its accounts receivable that will secure certain
local borrowings advanced to that subsidiary.

The Senior Credit Facility has been subject to several previous amendments
to accommodate, among other things, the planned sale of assets, the planned
investments in additional manufacturing capacity for selected products, the
impact of the decline of the Company's operating results on certain financial
covenants, the purchase by an investor group of approximately 14.5 shares of
Hexcel common stock held by a significant shareholder of the Company, a
restructuring of the ownership of certain of the Company's European
subsidiaries, the issuance of additional senior subordinated debt and the early
redemption of certain term debt.

Given its financial leverage, the Company's future compliance with the
financial covenants and other terms of the Senior Credit Facility could be
compromised if its financial performance were to deteriorate as a result of
further declines in the general macroeconomic environment or in key markets
served by the Company, or by other unforeseen events. There can be no assurance
that relief from financial covenants, if necessary, will be obtained or as to
the terms under which it may be granted by the senior lenders. Under the terms
of the amendment, the financial covenants effective beginning with the quarter
ending March 31, 2003 are those that applied before the amendment. The Company
will need to substantially improve its financial performance or substantially
reduce its indebtedness in order to comply with the financial covenants in 2003,
or will need to obtain a further amendment from its Senior Credit Facility
banks. There can be no assurance that the Company will be able to effect any
such amendment on commercially reasonable terms, or at all.

The weighted average interest rate on the Senior Credit Facility was 8.50%
and 11.55% for the years ended December 31, 2001 and 2000, respectively.
Effective January 25, 2002, interest on outstanding borrowings under the Senior
Credit Facility ranges from 2.00% to 4.25% in excess of the applicable London
interbank rate, or at the option of the Company, from 1.25% to 3.25% in excess
of

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the base rate of the administrative agent for the lenders. During the three
years ended December 31, 2001, interest rates have been in the following ranges:

The Senior Credit Facility is subject to a commitment fee varying from
approximately 0.20% to 0.50% per annum of the total facility.

At December 31, 2001 and 2000, Hexcel had an interest rate cap agreement
outstanding which covered a notional amount of $50.0 of the Senior Credit
Facility, providing a maximum fixed rate of 5.50% on the applicable London
interbank rate (see Note 15).

EUROPEAN CREDIT AND OVERDRAFT FACILITIES

In addition to the Senior Credit Facility, certain of Hexcel's European
subsidiaries have access to limited credit and overdraft facilities provided by
various local banks. These credit and overdraft facilities are primarily
uncommitted facilities that are terminable at the discretion of the lenders. The
interest rates on these credit and overdraft facilities for the years ended
December 31, 2001, 2000 and 1999 ranged from 3.0% to 6.6% per annum.

SENIOR SUBORDINATED NOTES, DUE 2009

On January 21, 1999, the Company issued $240.0 of 9.75% senior subordinated
notes, due 2009. On June 29, 2001, the Company offered an additional $100.0
under the same indenture at a price of 98.5% of face value. Net proceeds from
the subsequent offering were used to redeem $67.5 aggregate principal amount of
the Company's outstanding 7% convertible subordinated notes, due 2003, and to
pay the entire principal amount of $25.0 of the increasing rate senior
subordinated note, due 2003. The senior subordinated notes are general unsecured
obligations of Hexcel.

CONVERTIBLE SUBORDINATED NOTES, DUE 2003

The convertible subordinated notes carry an annual interest rate of 7.00%
and are convertible into Hexcel common stock at any time on or before August 1,
2003, unless previously redeemed, at a conversion price of $15.81 per share,
subject to adjustment under certain conditions. The convertible subordinated
notes are redeemable, in whole or in part, at the Company's option at any time,
at various redemption prices set forth in the convertible notes indenture, plus
accrued interest. On June 29, 2001, $67.5 aggregate principal amount of the
convertible subordinated notes were redeemed.

CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011

The convertible subordinated debentures carry an annual interest rate of
7.00% and are convertible into shares of Hexcel common stock prior to maturity,
unless previously redeemed, at a conversion price of $30.72 per share. Mandatory
redemption of the convertible debentures is scheduled to begin in 2002 through
annual sinking fund requirements of $1.1 in 2002 and $1.8 in each year
thereafter. The Company satisfied the 2002 annual sinking fund requirement in
October 2001.

INCREASING RATE SENIOR SUBORDINATED NOTE, DUE 2003

The increasing rate senior subordinated note, due 2003 was a general
unsecured obligation payable to certain subsidiaries of Ciba Specialty Chemicals
Holding, Inc. (collectively, "Ciba"). Prior to

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February 1999, the note bore interest at a rate of 7.50% per annum. Effective
February 1999, interest on the note was increased to a rate of 10.50% per annum,
a rate which increased by 0.50% per annum each February thereafter until the
note matured or until repayment of principal. The average interest rate on the
note was 11.42% in 2001, 10.96% in 2000 and 10.25% in 1999. The note was
redeemed in full on June 29, 2001 with the proceeds of the $100.0 issuance of
9.75% senior subordinated notes, due 2009.

AGGREGATE MATURITIES OF NOTES PAYABLE

The table below reflects aggregate maturities of notes payable, excluding
capital lease obligations (see Note 9):

The aggregate maturities of notes payable in 2002 include European credit
and overdraft facilities of $3.5, which are repayable on demand. At
December 31, 2001, the unamortized discount on the additional $100.0 senior
subordinated notes, due 2009, issued on June 29, 2001, was approximately $1.4.

ESTIMATED FAIR VALUES OF NOTES PAYABLE

The Senior Credit Facility and the various European credit facilities
outstanding as of December 31, 2001 and 2000 are variable-rate debt obligations.
Accordingly, the estimated fair values of each of these debt obligations
approximate their respective book values. The aggregate fair values of the
Company's other notes payable as of December 31, 2001 and 2000 were as follows:

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.

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NOTE 9--LEASING ARRANGEMENTS

Assets, accumulated depreciation, and related liability balances under
capital leasing arrangements, as of December 31, 2001 and 2000, were:

Certain sales and administrative offices, data processing equipment and
manufacturing facilities are leased under operating leases. Rental expense under
operating leases was $5.4 in 2001, $7.0 in 2000, and $9.4 in 1999.

Future minimum lease payments as of December 31, 2001 were:

NOTE 10--RELATED PARTIES

CHANGE IN CONTROL

On December 19, 2000, an investor group controlled by subsidiaries of The
Goldman Sachs Group, Inc. (the "Investor Group") completed a previously
announced purchase of approximately 14.5 of the approximately 18 shares of
Hexcel common stock owned by subsidiaries of Ciba Specialty Chemicals
Holding, Inc. (together with its subsidiaries, "Ciba"). The shares acquired by
the Investor Group represented approximately 39% of the Company's outstanding
common stock. In addition, the Company and the Investor Group entered into a
governance agreement that became effective on December 19, 2000. Under this
governance agreement, the Investor Group has the right to, among other things,
designate up to three directors to sit on the Company's board of directors.

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Hexcel incurred $2.2 of costs in connection with this transaction, all of
which were included in "selling, general, and administrative expenses" during
the fourth quarter of 2000. These costs and expenses included legal, consulting,
and regulatory compliance expenses, as well as a non-cash charge attributable to
the accelerated vesting of certain stock-based compensation and to certain
amendments to an executive retirement plan. Under the terms of the Company's
various stock option and management incentive plans, the transaction constituted
a "change in control" event, resulting in all outstanding stock options becoming
vested and exercisable. The former Chief Executive Officer waived the vesting of
his stock options by such event. In addition, nine of the most senior executive
officers other than the former Chief Executive Officer agreed to defer the
vesting of their stock options such that any of their stock options that would
have otherwise vested immediately (or would have otherwise vested by their
terms) will vest one year after the closing with respect to half of such
options, and two years after the closing with respect to the remaining half of
such options, subject to earlier vesting in certain circumstances. As a result,
approximately 1.3 stock options, with exercise prices ranging from $2.41 to
$29.63 per share, and a weighted average exercise price of $8.99 per share,
vested and became exercisable on December 19, 2000 (see Note 13).

In addition, due to the change in control event, shares of the Company's
common stock underlying a total of approximately 0.8 restricted stock units and
performance accelerated restricted stock units (collectively, "stock units")
were distributed. However, the former Chief Executive Officer waived the vesting
of his stock units, and nine of the most senior executive officers other than
the former Chief Executive Officer agreed to defer the distribution of shares
underlying their stock units (although not the vesting of such stock units) such
that any shares of common stock that would have otherwise been distributed
immediately will be distributed one year after the closing with respect to half
of such stock units, and two years after the closing with respect to the
remaining half of such stock units, subject to earlier distribution under
certain circumstances (see Note 13).

NOTE 11--RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS

Hexcel maintains qualified and nonqualified defined benefit retirement plans
covering certain U.S. and European employees, as well as retirement savings
plans covering eligible U.S. employees. The defined benefit retirement plans are
generally based on years of service and employee compensation under either a
career average or final pay benefits method, except as described below. The
Company also participates in a union sponsored multi-employer pension plan
covering certain U.S. employees with union affiliations.

Under the retirement savings plans, eligible U.S. employees can contribute
up to 16% of their compensation to an individual retirement savings account.
Hexcel makes matching contributions equal to 50% of employee contributions, not
to exceed 3% of employee compensation. The Company also makes profit sharing
contributions when it meets or exceeds certain performance targets, which are
set annually.

Effective December 31, 2000, the Company made certain changes to its U.S.
retirement benefit plans that were intended to improve the flexibility and
visibility of future retirement benefits for employees. These changes included
an increase in the amount that the Company will contribute to individual 401(k)
retirement savings accounts and an offsetting curtailment of the Company's U.S.
qualified defined benefit retirement plan. Beginning January 1, 2001, the
Company started to contribute an additional 2% to 3% of each eligible employee's
salary to an individual 401(k) retirement savings account, depending on the
employee's age. This increases the maximum contribution to individual employee
savings accounts to between 5% and 6% per year, before any profit sharing
contributions. Offsetting the estimated incremental cost of this additional
benefit, participants in the Company's U.S. qualified defined benefit retirement
plan no longer accrued benefits under this plan after December 31, 2000, and no
new employees will become participants. However, employees retained all benefits
earned under this plan as of that date. The Company recognized a non-cash

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curtailment gain of $5.1 (an after-tax gain of approximately $3.3) in 2000 as a
result of the amendment to its defined benefit retirement plan.

The net periodic expense for all of these defined benefit and retirement
savings plans, for the three years ended December 31, 2001, was:

In addition to defined benefit and retirement savings plan benefits, Hexcel
also provides certain postretirement health care and life insurance benefits to
eligible U.S. retirees. Depending upon the plan, benefits are available to
eligible employees who retire on or after age 58 or 65 after rendering a minimum
of 15 years or 25 years of service to Hexcel.

The net periodic cost of Hexcel's defined benefit retirement and U.S.
postretirement plans for the three years ended December 31, 2001, were:

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The benefit obligation, fair value of plan assets, funded status, and
amounts recognized in the consolidated financial statements for Hexcel's defined
benefit retirement plans and U.S. postretirement plans, as of and for the years
ended December 31, 2001 and 2000, were:

The total accumulated benefit obligation for pension plans with accumulated
benefit obligations in excess of plan assets was $23.1 and $22.9 as of
December 31, 2001 and 2000, respectively. A minimum pension obligation was
recorded to the extent such excesses exceed the liability recognized under
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions." Offsetting amounts were recorded in "intangible assets" to the extent
of unrecognized prior service costs, with the remainder recorded in "accumulated
other comprehensive income." Amortization of loss and other prior service costs
is calculated on a straight-line basis over the expected future years of service
of the

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plans' active participants. Assets for the defined benefit pension plans
generally consist of publicly traded securities, bonds and cash investments.

As of December 31, 2001 and 2000, the prepaid benefit cost was included in
"other assets" in the accompanying consolidated balance sheets. For the same
periods, the accrued benefit costs for the U.S. defined retirement plans and
postretirement benefit plans were included in "accrued compensation and
benefits" and "other non-current liabilities," respectively, in the accompanying
consolidated balance sheets.

Assumptions used to estimate the actuarial present value of benefit
obligations at December 31, 2001, 2000 and 1999 were as follows:

For measurement purposes, the annual rate of increase in the per capita cost
of covered health care benefits is assumed to be approximately 7.0% for medical
and 5.0% for dental and vision for 2002. The medical rates are assumed to
gradually decline to 5.7% by 2006, whereas dental and vision rates are assumed
to remain constant at 5.0%.

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

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NOTE 12--INCOME TAXES

Income (loss) before income taxes and the provision for (benefit from)
income taxes, for the years ended December 31, 2001, 2000, and 1999, were:

A reconciliation of the provision for (benefit from) income taxes at the
U.S. federal statutory income tax rate of 35% to the effective income tax rate,
for the years ended December 31, 2001, 2000, and 1999, is as follows:

The Company has made no U.S. income tax provision for approximately $134.1
of undistributed earnings of international subsidiaries as of December 31, 2001.
Such earnings are considered to be permanently reinvested.

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DEFERRED INCOME TAXES

Deferred income taxes result from net operating loss carryforwards and
temporary differences between the recognition of items for income tax purposes
and financial reporting purposes. Principal components of deferred income taxes
as of December 31, 2001 and 2000, were:

Since 1999, the Company has generated taxable income in Europe offset by net
operating loss ("NOL") carryforwards in the United States. The Company's U.S.
operations have generated such losses, in part, because most of the Company's
interest expense and goodwill amortization are serviced in the United States.
Through the first quarter of 2001, the Company recognized the benefit of these
NOL carryforwards by increasing the deferred tax asset carried on its balance
sheet.

During the second quarter of 2001, the Company began to experience a sharp
decline in revenues from its electronics market. As a result, the Company
reevaulated its ability to continue to recognize a benefit for U.S. net
operating losses generated, and determined to increase its tax provision rate
through the establishment of a non-cash valuation allowance attributable to the
currently generated U.S. net operating losses until such time as the U.S.
operations return to consistent profitability. Due to the effect of significant
events that have occurred since such time, including the delay in anticipated
recovery in the electronics market, anticipated reductions in commercial
aircraft production, and a general weakening of the economy, along with the
sizable impairments on certain long-lived assets recognized in the fourth
quarter of 2001, the Company has reduced its estimates for future U.S. taxable
income during the carryforward period. As such, the Company has established a
full valuation allowance of $181.7 on its U.S. deferred tax assets, which
resulted in a tax provision of $32.6 in the fourth quarter of 2001 to record a
valuation allowance on previously reported tax assets.

Deferred tax assets require a valuation allowance when it is more likely
than not that some portion of the deferred tax assets may not be realized. The
realization of the deferred tax assets is dependent upon the timing and
magnitude of future taxable income prior to the expiration of the deferred tax
attributes. The amount of the deferred tax assets considered realizable,
however, could change if estimates of future taxable U.S. income during the
carry-forward period improve.

NET OPERATING LOSS CARRYFORWARDS

As of December 31, 2001, Hexcel had net operating loss carryforwards for
U.S. federal and Belgium income tax purposes of approximately $194.6 and $5.3,
respectively. The U.S. NOL carryforwards, which are available to offset future
taxable income, expire at various dates through the year 2020. As a result of a
change in ownership that occurred in connection with the purchase of 14.5 shares
of Hexcel common stock by the "investor group" in 2000, the Company has a
limitation on the utilization of $36.5 of U.S. NOL carryforwards subject to an
annual limitation of $22.7.

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NOTE 13--STOCKHOLDERS' EQUITY

COMMON STOCK OUTSTANDING

STOCK-BASED INCENTIVE PLANS

Hexcel has various stock option and management incentive plans for eligible
employees, officers, and directors. These plans provide for awards in the form
of stock options, stock appreciation rights, restricted stock, restricted stock
units and other stock-based awards. Options to purchase common stock are
generally granted at the fair market value on the date of grant. Substantially
all of these options have a ten-year term and generally vest over a three-year
period, except that the vesting period may be accelerated under certain
circumstances. In 2000, the aggregate number of shares of stock issuable under
these plans was increased from 7.4 to 9.1.

As of December 31, 2001, 2000, and 1999, Hexcel had outstanding a total of
0.2, 0.7, and 0.3 of performance accelerated restricted stock units ("PARS"),
respectively. PARS are convertible to an equal number of shares of Hexcel common
stock and generally vest at the end of a seven-year period, subject to certain
terms of employment and other circumstances that may accelerate the vesting
period. In 2001, 2000, and 1999, 0.1, 0.6 and 0.1 PARS were granted,
respectively, 0.1, 0.7, and 0.1 PARS vested, respectively, and 0.6, 0.2 and 0.3
PARS were converted into shares of Hexcel common stock, respectively. In
addition, the Company's Chief Executive Officer received approximately 0.1
shares of restricted stock in connection with his hiring in July 2001.
Approximately $2.0 of compensation expense was recognized in 2001 with respect
to the PARS and the Chief Executive Officer's restricted stock, and
approximately $4.5 and $0.5 of compensation expense was recognized in 2000 and
1999, respectively, with respect to the PARS. In 2000, $2.4 of PARS compensation
expense was recognized due to accelerated vesting as a result of the attainment
of certain financial and other performance targets as well as the change in
control event. Compensation expense is recognized based on the quoted market
price of Hexcel common stock on the date of grant.

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Stock option data for the three years ended December 31, 2001, 2000, and
1999, was:

As previously discussed in Note 10, approximately 1.3 of stock options, with
exercise prices ranging from $2.41 to $29.63 per share, and having a weighted
average exercise price of $8.99 per share, became vested as a result of the
change in control event in 2000. The total number of options exercisable as of
December 31, 2001, 2000 and 1999 were 5.4, 3.9 and 2.1, respectively, at a
weighted average exercise price per share of $10.70, $10.80 and $12.02,
respectively.

The following table summarizes information about stock options outstanding
as of December 31, 2001:

EMPLOYEE STOCK PURCHASE PLAN ("ESPP")

Hexcel maintains an ESPP, under which eligible employees may contribute up
to 10% of their base earnings toward the quarterly purchase of the Company's
common stock at a purchase price equal to 85% of the fair market value of the
common stock on the purchase date. The maximum number of shares of common stock
reserved for issuance under the ESPP is 0.5. During 2001, 2000 and 1999, an
aggregate total of approximately 0.2 shares of common stock were issued under
the ESPP.

PRO FORMA DISCLOSURES

The Company has elected to continue to follow APB Opinion No. 25 for
accounting for its stock-based incentive plans. Had compensation expense for the
Company's stock option plans been

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determined as prescribed by FAS 123, pro forma net income (loss) and related per
share amounts would have been as follows:

The weighted average fair value of options granted, as determined by the
Black-Scholes pricing model, during 2001, 2000 and 1999 was $4.87, $4.48 and
$3.20, respectively. The following ranges of assumptions were used in the
Black-Scholes pricing models for options granted in 2001, 2000 and 1999:
risk-free interest of 4.4% to 6.5%; estimated volatility of 40% to 69%; dividend
yield of 0.0%; and an expected life of 4 to 5 years.

NOTE 14--NET INCOME (LOSS) PER SHARE

Computations of basic and diluted net income (loss) per share for the years
ended December 31, 2001, 2000 and 1999, are as follows:

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The convertible subordinated notes, due 2003, the convertible subordinated
debentures, due 2011, and all of the stock options were excluded from the 2001
and 1999 computation of diluted net loss per share, as they were antidilutive.
Approximately 4.5 stock options were excluded from the 2000 calculation of
diluted net income per share as their exercise price was higher than the
Company's average stock price. The exercise price for these stock options ranged
from approximately $9.19 to $29.63 per share, with the weighted average price
being approximately $12.55 per share.

NOTE 15--DERIVATIVE FINANCIAL INSTRUMENTS

INTEREST RATE CAP AGREEMENT

The Company's financial results are affected by interest rate changes on its
variable rate debt. In order to partially mitigate this interest rate risk, the
Company entered into a five-year interest rate cap agreement in 1998. The
agreement provides for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of
$50.0 million of variable rate debt under the Senior Credit Facility. The fair
value and carrying amount of this contract at December 31, 2001 and 2000, along
with hedge ineffectiveness for the year ended December 31, 2001, were not
material.

FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS

A number of the Company's European subsidiaries are exposed to the impact of
exchange rate volatility between the U.S. dollar and the subsidiaries'
functional currencies, being either the Euro or the British pound sterling.
During 2001, Hexcel entered into a number of foreign currency forward exchange
contracts to exchange U.S. dollars for Euros at fixed rates on specified dates
through March 2005. The aggregate notional amount of these contracts was $83.9
at December 31, 2001. The purpose of these contracts is to hedge a portion of
the forecasted transactions of European subsidiaries under long-term sales
contracts with certain customers. These contracts are expected to provide the
Company with a more balanced matching of future cash receipts and expenditures
by currency, thereby reducing the Company's exposure to fluctuations in currency
exchange rates. For the year ended December 31, 2001, hedge ineffectiveness was
immaterial and the fair value of the foreign currency cash flow hedges
recognized in "comprehensive loss" was a net loss of $5.9. Approximately $1.2 of
the other comprehensive losses are expected to be reclassified into earnings in
fiscal 2002 as the hedged sales are recorded.

NOTE 16--COMMITMENTS AND CONTINGENCIES

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

87

LEGAL AND ENVIRONMENTAL CLAIMS AND PROCEEDINGS

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

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

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

At its Livermore, California facility, Hexcel has received a series of
notices of violation of air quality standards from the Bay Area Air Quality
Management District. Hexcel is investigating the issues and is cooperating with
the District.

OTHER PROCEEDINGS

Hexcel is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. It appears that Toho Tenax Co. Ltd., one
of its subsidiaries and one of its employees have been indicted for obstruction
of justice. No other indictments have been issued in the case to date. The
Company is not in a position to predict the direction or outcome of the
investigation; however, it is cooperating with the Department of Justice.

In 1999, Hexcel was joined in a purported class action lawsuit alleging
antitrust violations in the sale of carbon fiber, carbon fiber industrial
fabrics and carbon fiber prepreg. The Company was one of many manufacturers
joined in the lawsuit, which was spawned from the Department of Justice
investigation. The Court has issued a tentative ruling to certify the class, but
no final ruling has been issued. If the tentative ruling becomes final,
discovery is expected to continue to proceed. The Company is not in a position
to predict the outcome, but believes that the lawsuit is without merit as to the
Company.

In addition, spawned by the class action lawsuit described in the preceding
paragraph, the Company has been joined as a party in numerous purported class
actions in California. These actions also allege antitrust violations and are
brought on behalf of purchasers located in California who directly purchased
carbon fiber products. The Company is not in a position to predict the outcome,
but believes that the lawsuits are without merit as to the Company.

88

On May 10, 1999, the Company filed a complaint against Hercules, Inc.,
seeking recovery of certain disputed items relating to the 1996 purchase by
Hexcel of the Hercules Composite Products Division. On June 1, 2001, Hexcel was
awarded a judgment in the amount of $7.3, plus interest for a total of $10.2;
interest on the judgment continues to accrue. Hercules appealed the judgment and
delivered a bond to secure collection of the judgment. In the first quarter of
2002, the judgment was upheld, but the judgment has not become final. Hexcel
strongly believes that the judgment will become final.

LETTERS OF CREDIT

Letters of credit are purchased guarantees that ensure the performance or
payment to third parties in accordance with specified terms and conditions. The
Company had $19.4 and $7.3 letters of credit outstanding at December 31, 2001
and 2000, respectively, of which $11.1 was issued in support of a loan to the
Company's BHA Aero joint venture in 2001.

LOAN GUARANTEES

Hexcel is contingently liable to pay DIC up to $2.3 with respect to DHL's
bank debt (see Note 7).

NOTE 17--SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information, including non-cash financing and
investing activities, for the years ended December 31, 2001, 2000 and 1999,
consist of the following:

NOTE 18--SEGMENT INFORMATION

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

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

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

ENGINEERED PRODUCTS: This segment manufactures and sells a range of
lightweight, high-strength composite structures primarily to the commercial
aerospace and space and defense markets. As discussed in Note 2, the Engineered
Products business segment includes the results of the Bellingham aircraft
interiors business, up to the date of its disposal on April 26, 2000. This
business manufactured and sold composite interiors to the aircraft refurbishment
market.

89

The financial results for Hexcel's business segments have been prepared
using a management approach, which is consistent with the basis and manner in
which Hexcel management internally segregates financial information for the
purposes of assisting in making internal operating decisions. Hexcel evaluates
performance based on operating income before business consolidation and
restructuring expenses, impairment of goodwill and other purchased intangibles,
and compensation expenses associated with the former CEO's retirement ("adjusted
operating income"), and generally accounts for intersegment sales based on
arm's-length prices. Corporate and other expenses are not allocated to the
business segments, except to the extent that the expenses can be directly
attributable to the business segments. Accounting principles used in the segment
information are generally the same as those used for the consolidated financial
statements.

90

The following table presents financial information on the Company's business
segments as of December 31, 2001, 2000 and 1999, and for the years then ended:

91

A reconciliation of the totals reported for adjusted operating income to
consolidated operating income (loss) for the years ended December 31, 2001, 2000
and 1999 is as follows:

GEOGRAPHIC DATA

Sales and long-lived assets, by geographic area, consisted of the following
for the three years ended December 31, 2001, 2000 and 1999:

Net sales are attributed to geographic areas based on the location in which
the sale originated. U.S. net sales include U.S. exports to non-affiliates of
$72.6, $47.7 and $91.4, for the years ended December 31, 2001, 2000 and 1999,
respectively, of which, $12.1 and $32.7 for the years ended December 31, 2000
and 1999, respectively, were sales attributable to the Bellingham aircraft
interiors business. Long-lived assets primarily consist of property, plant and
equipment, intangibles, investments in affiliated companies and other assets,
less long-term deferred tax assets.

SIGNIFICANT CUSTOMERS

To the extent that the end application of net sales can be identified, The
Boeing Company and its subcontractors accounted for approximately 23%, 20% and
27% of 2001, 2000 and 1999 net sales, respectively. Similarly, EADS, including
Airbus and its subcontractors accounted for approximately 16%, 13% and 11% of
2001, 2000 and 1999 net sales, respectively.

92

NOTE 19--COMPREHENSIVE INCOME

Comprehensive income (loss) represents net income (loss) and other gains and
losses affecting shareholders' equity that that are not reflected in the
Consolidated Statements of Operations. The components of accumulated other
comprehensive loss as of December 31, 2001 and 2000 were as follows:

NOTE 20--EXTRAORDINARY LOSS ON EARLY RETIREMENT OF DEBT

An extraordinary loss of $2.7 was recorded in 2001 as a result of the early
retirement of $67.5 million aggregate principal amount of the Company's
outstanding 7% convertible subordinated notes, due 2003 and the redemption of
the entire principal amount of $25.0 of the Company's outstanding increasing
rate senior subordinated note, due 2003. There was no tax benefit recognized on
the extraordinary loss because of limitations on the Company's ability to
realize the tax benefits.

NOTE 21--NON-RECURRING EXPENSES

In connection with the retirement of the former Chief Executive Officer, the
Company recorded compensation expenses of $4.7 in 2001 as a result of the early
vesting of certain deferred compensation and equity compensation awards together
with a contractual termination payment. These expenses are included in "selling,
general and administrative expenses" in the consolidated statement of
operations.

93

NOTE 22--QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data for the years ended December 31, 2001 and 2000,
were:

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

(a) Operating and net loss for the second quarter of 2001 include compensation
expenses of $4.7 in connection with the retirement of the former Chief
Executive Officer (see Note 21).

(b) As discussed in Note 2, the Bellingham aircraft interiors business was sold
on April 26, 2000, resulting in an after-tax gain of approximately $44.3, or
$0.97 per diluted share.

Hexcel has not declared or paid cash dividends per common stock during the
periods presented.

94

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of Hexcel Corporation:

Our audits of the consolidated financial statements referred to in our
report dated January 25, 2002 appearing in this Annual Report on Form 10-K to
Stockholders of Hexcel Corporation also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP
Stamford, Connecticut
January 25, 2002

95

SCHEDULE II

HEXCEL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS