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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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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, 1995
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from to
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Commission File Number 1-8472
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HEXCEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-1109521
(State of Incorporation) (I.R.S. Employer Identification No.)
5794 W. Las Positas Boulevard
Pleasanton, California 94588-8781
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (510) 847-9500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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COMMON STOCK NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
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
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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 15, 1996 of voting stock held by
nonaffiliates of the registrant: $162,227,491.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a U.S. Bankruptcy Court.
Yes X No
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The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 15, 1996
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COMMON STOCK 36,114,927
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
subsidiaries (herein referred to as "Hexcel" or the "Company") is an
international developer and manufacturer of lightweight, high-performance
composite materials, parts and structures for use in the commercial aerospace,
space and defense, recreation and general industrial markets. The Company
serves international markets through manufacturing and marketing facilities
located in the United States and Europe, as well as sales offices in Asia,
Australia and South America. The Company is also a partner in three joint
ventures that manufacture and sell composite materials in the U.S. and Asia.
ACQUISITION OF THE CIBA COMPOSITES BUSINESS
Hexcel acquired the worldwide composites division of Ciba-Geigy Limited, a
Swiss corporation ("Ciba"), and Ciba-Geigy Corporation, a New York corporation
("CGC"), including Ciba's and CGC's composite materials, parts and structures
businesses (the "Ciba Composites Business"), on February 29, 1996. The Ciba
Composites Business is engaged in the manufacture and marketing of composite
materials, parts and structures for aerospace, recreation and general industrial
markets. Product lines include fabrics, prepregs, adhesives, honeycomb core,
sandwich panels and fabricated components, as well as structures and interiors
primarily for the commercial and military aerospace markets.
The acquisition of the Ciba Composites Business was consummated pursuant to
a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC,
and Hexcel, as amended (the "Strategic Alliance Agreement"). Under the
Strategic Alliance Agreement, the Company acquired the assets (including the
capital stock of certain of Ciba's non-U.S. subsidiaries) and assumed the
liabilities of the Ciba Composites Business other than certain excluded assets
and liabilities, in exchange for: (a) approximately 18.0 million newly issued
shares of Hexcel common stock; (b) $25.0 million in cash; and (c) undertakings
to deliver to Ciba and/or one or more of its subsidiaries, following completion
of certain post-closing adjustment procedures contemplated by the Strategic
Alliance Agreement, senior subordinated notes in an aggregate principal amount
of approximately $43.0 million, subject to certain adjustments (the "Senior
Subordinated Notes"), and senior demand notes in a principal amount equal to the
cash on hand at certain of Ciba's non-U.S. subsidiaries (the "Senior Demand
Notes"). (The pro forma aggregate principal amount of the Senior Subordinated
Notes as of December 31, 1995 was $27.4 million. See Note 3 to the Consolidated
Financial Statements included in this Annual Report on Form 10-K.) Pursuant to
the Strategic Alliance Agreement, certain assets of the Ciba Composites Business
and certain assets of Ciba affiliates that will continue to act as distributors
for the Ciba Composites Business will be acquired by the Company from time to
time prior to February 28, 1997.
In connection with the acquisition of the Ciba Composites Business, Hexcel
obtained a new three-year revolving credit facility of up to $175.0 million (the
"Senior Secured Credit Facility") to: (a) fund the cash component of the
purchase price; (b) refinance outstanding indebtedness under certain U.S. and
European credit facilities; and (c) provide for the ongoing working capital and
other financing requirements of the Company on a worldwide basis. Further
discussion of the Senior Secured Credit
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Facility is included in "Management Discussion and Analysis" and in the Notes to
the Consolidated Financial Statements included in this Annual Report on Form 10-
K.
Management expects that significant costs will be incurred in connection
with combining the operations of Hexcel and the Ciba Composites Business,
including costs of eliminating excess manufacturing capacity and redundant
administrative and research and development activities, as well as the various
costs of consolidating the information systems and other business activities of
the two companies. Some of the costs associated with combining the two
businesses, including certain costs to eliminate redundant administrative and
research and development activities, will be incurred during 1996. The
anticipated resulting benefits are expected to be realized shortly thereafter.
However, other costs, including many of the costs to eliminate excess
manufacturing capacity, are expected to be incurred over a period of as much as
three years. This is attributable, in part, to aerospace industry requirements
to "qualify" specific equipment and manufacturing facilities for the manufacture
of certain products. Based on the Company's experience with previous plant
consolidations, these qualification requirements necessitate an approach to the
consolidation of manufacturing facilities that will require two to three years
to complete. Accordingly, the costs and anticipated future benefits of
eliminating excess manufacturing capacity are long-term in nature.
The Board of Directors of Hexcel has not yet approved the plan for
combining the operations of Hexcel and the Ciba Composites Business, but is
expected to do so in the second quarter of 1996. Subject to the approval of the
consolidation plan by the Board of Directors, management currently estimates
that the cash costs of combining the two businesses could range from $35 million
to $45 million, net of expected proceeds from asset sales which are expected to
be received at the end of the consolidation process. (This range includes the
estimated net cash cost to close the Anaheim manufacturing facility acquired as
part of the Ciba Composites Business. The decision to close this facility was
announced in the first quarter of 1996.) Management notes, however, that the
actual cash costs of combining the two businesses could vary from current
estimates due to the fact that the nature, timing and extent of certain
consolidation activities is dependent on numerous factors.
Management expects to record one or more charges to earnings for the
estimated costs of certain business consolidation activities. The estimated
costs of specific consolidation activities will be accrued in accordance with
generally accepted accounting principles as those activities are determined and
announced. Although the aggregate amount of the resulting charges to earnings
has not yet been determined, management currently estimates that the amount
could range from $40 million to $50 million, including noncash charges.
However, the actual aggregate amount of such charges could vary from current
estimates.
The nature, timing and extent of consolidation activities will be
determined, in part, by the factors described above and management's resulting
evaluation of the probable economic and competitive benefits to be gained from
specific consolidation activities. Management anticipates that the benefits to
be realized from planned consolidation activities will be sufficient to justify
the level of associated costs. However, some of the anticipated benefits are
long-term in nature, and there can be no assurance that such benefits will
actually be realized.
Further discussion of the acquisition of the Ciba Composites Business is
included in "Management Discussion and Analysis" and in the Notes to the
Consolidated Financial Statements included in this Annual Report on Form 10-K.
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BANKRUPTCY REORGANIZATION
On January 12, 1995, the United States Bankruptcy Court for the Northern
District of California (the "Bankruptcy Court") entered an order dated January
10, 1995 confirming the First Amended Plan of Reorganization (the
"Reorganization Plan") proposed by Hexcel and the Official Committee of Equity
Security Holders (the "Equity Committee"). On February 9, 1995, the
Reorganization Plan became effective and Hexcel emerged from the bankruptcy
reorganization proceedings which had begun on December 6, 1993, when Hexcel
filed a voluntary petition for relief under the provisions of Chapter 11 of the
federal bankruptcy laws.
Further discussion of the Reorganization Plan and Hexcel's emergence from
bankruptcy reorganization proceedings is included in "Management Discussion and
Analysis" and in the Notes to the Consolidated Financial Statements included in
this Annual Report on Form 10-K.
INDUSTRY SEGMENT
Hexcel operates within a single industry segment: composite materials,
parts and structures. The Company sells these materials, parts, and structures
throughout the world. The net sales, income (loss) before income taxes,
identifiable assets, capital expenditures, and depreciation and amortization for
each geographic area for the past three years are included in Note 21 to the
Consolidated Financial Statements included in this Annual Report on Form 10-K.
BUSINESS
As discussed above, Hexcel acquired the Ciba Composites Business on
February 29, 1996. Prior to the acquisition, the Company was organized around
worldwide research, manufacturing, marketing and administrative functions with
global responsibility for all of the Company's product groups. Those product
groups, which have historically been manufactured and marketed primarily in the
U.S. and Europe, were comprised of reinforcement fabrics, prepregs and
adhesives, and honeycomb, including structural products made from honeycomb.
In connection with the acquisition of the Ciba Composites Business, Hexcel
has been reorganized into strategic business units according to specific product
groups and/or geographic areas. The research, manufacturing and marketing
activities of each of the strategic business units are supported by global
administrative functions such as human resources, finance and information
systems, legal affairs, and research and technology coordination. The
acquisition of the Ciba Composites Business provides the Company with additional
manufacturing and marketing capabilities in its reinforcement fabrics, prepregs
and adhesives, and honeycomb product groups, in geographically complementary
areas. In addition, the acquisition expands the Company's range of product
offerings to include structural parts and interiors, primarily for the
commercial and military aerospace markets.
The following is a description of Hexcel's new strategic business units,
including their respective product groups and geographic areas, and the
integrated manufacturing capabilities of the Company.
3
FABRICS
The Fabrics business unit has worldwide responsibility for manufacturing
and marketing reinforcement fabrics. The business unit operates manufacturing
facilities in Les Avenieres, France; Lyon, France; and Seguin, Texas; and is
responsible for Hexcel's participation in a joint venture with Owens-Corning
Fiberglas Corporation.
The Fabrics business unit produces woven reinforcement fabrics, without
resin impregnation, from the same fibers Hexcel uses in prepregs. These fibers
include several types of fiberglass as well as carbon, aramid, Thorstrand
- -Registered Trademark-, quartz, ceramic and other specialty reinforcements.
Reinforcement fabrics are sold for use in numerous applications. These
include aerospace, marine, automotive and recreation applications, as well as
ballistics protection, printed circuit boards, metal and fume filtration
systems, insulation, window coverings, and civil engineering and other general
industrial applications.
In addition, Hexcel owns a 50% interest in a joint venture with Owens-
Corning Fiberglas Corporation. The Knytex joint venture, which was formed in
June of 1993, sells multi-layer stitchbonded reinforcement fabrics which are
stronger in all directions and generally lower cost than traditional woven
fabrics. Knytex fabrics consist of multiple layers of reinforcement material,
in varying orientations, which are stitched together to preserve the desired
orientation of the various layers.
Hexcel's net sales of reinforcement fabrics were $119.1 million in 1995,
$94.8 million in 1994 and $93.0 million in 1993. As a result of the acquisition
of the Ciba Composites Business on February 29, 1996, net sales of reinforcement
fabrics are expected to increase in 1996. The Ciba Composites Business had net
sales of reinforcement fabrics totaling approximately $23 million in 1995.
COMPOSITE MATERIALS
The Composite Materials business unit, which is organized around U.S. and
European markets, has worldwide responsibility for manufacturing and marketing
prepregs, adhesives and honeycomb. The business unit operates manufacturing
facilities in Welkenraedt, Belgium; Duxford and Swindon, England; Lyon, France;
Casa Grande, Arizona; Anaheim, Dublin, and Livermore, California; and Lancaster,
Ohio. (In the first quarter of 1996, Hexcel announced its decision to close the
Anaheim facility and relocate certain production activities from Anaheim to
other manufacturing sites.) Subject to the Company's acquisition of an Austrian
subsidiary of Ciba as contemplated by the Strategic Alliance Agreement, the
Composite Materials business unit will also operate a manufacturing facility in
Linz, Austria. This business unit is also responsible for Hexcel's
participation in a joint venture with Fyfe Associates Corporation.
The following is a description of the major product groups manufactured and
marketed by the Composite Materials business unit.
PREPREGS AND ADHESIVES
Prepregs combine high performance reinforcement fibers with a resin
matrix to form a composite material with exceptional structural properties
not present in either of the constituent materials. Hexcel impregnates
woven fabrics and non-woven fibers aligned in a single direction
(unidirectional tape).
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The Composite Materials business unit produces prepreg materials from
a variety of reinforcements including S-2-Registered Trademark- and E-type
fiberglass, carbon, aramid, quartz, ceramic, Thorstrand-Registered
Trademark-, polyethylene and other specialty reinforcements. Hexcel offers
a variety of resin matrices including bismaleimide, cyanates, epoxy,
phenolic, polyester, polyimide and other specialty resins.
Prepregs are sold to the commercial aerospace, space and defense,
recreation and general industrial markets. Product applications include
aircraft, mass transit and automotive components, as well as defense
systems, military support equipment, athletic shoes, fishing rods, tennis
rackets, golf clubs, surfboards, snow skis, snow boards and bicycles.
As a result of the acquisition of the Ciba Composites Business, Hexcel
designs and markets a comprehensive range of Redux-Registered Trademark-
film adhesives. These adhesives, which bond a wide range of composite,
metallic, and honeycomb surfaces, are used in aerospace, automotive, marine
and other applications.
HONEYCOMB
Honeycomb is a unique, lightweight, cellular structure composed of
generally hexagonal cells nested together. The product is similar in
appearance to a cross-sectional slice of a beehive. The hexagonal cell
design gives honeycomb a high strength-to-weight ratio when used in
"sandwich" form and a uniform resistance to crushing. These basic
characteristics are combined with the physical properties of the material
from which the honeycomb is made to meet various engineering requirements.
The Composite Materials business unit 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, Nomex-Registered Trademark- (a non-flammable aramid paper),
Kevlar-Registered Trademark- (an aramid fiber) and several other specialty
materials.
The Composite Materials business unit sells honeycomb core material in
standard block and sheet form. In this construction, sheets of aluminum,
stainless steel, prepreg or other laminates are bonded with adhesives to
each side of a slice of honeycomb core, creating a "sandwich" structure.
Hexcel possesses autoclave and other advanced processing capabilities which
enable the Company to manufacture complex bonded assembly parts.
The largest market for Hexcel's honeycomb products is the aerospace
market. Non-aerospace honeycomb applications include high-speed trains and
mass transit vehicles, automotive parts, energy absorption products,
athletic shoe components, marine vessel compartments, portable shelters,
business machine cabinets and other general industrial uses.
Hexcel also owns a 40% interest in a joint venture with Fyfe Associates
Corporation. Hexcel-Fyfe, which was formed in October 1992, sells and applies
high-strength architectural wrap for seismic retrofitting and strengthening of
bridges, columns and other structures.
Hexcel's net sales of prepregs, adhesives and honeycomb (including machined
and fabricated honeycomb parts), sold separately and together as complex bonded
structures, were $231.1 million in 1995, $219.0 million in 1994 and $217.6
million in 1993. As a result of the acquisition of the Ciba
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Composites Business on February 29, 1996, net sales of prepregs, adhesives and
honeycomb are expected to increase in 1996. The Ciba Composites Business had
net sales of prepregs, adhesives and honeycomb totaling approximately $195
million in 1995.
SPECIAL PROCESS
The Special Process business unit has worldwide responsibility for
designing, manufacturing and marketing machined and fabricated honeycomb parts
for use in commercial and military aerospace, automotive, and other
applications. The business unit operates manufacturing facilities in
Pottsville, Pennsylvania and Burlington, Washington, as well as special process
activities in Hexcel's Welkenraedt, Belgium; Duxford and Swindon, England; Casa
Grande, Arizona; and Bellingham, Washington facilities. The Special Process
business unit adds value to standard honeycomb by contouring and machining it
into complex shapes to meet customer specifications. Net sales of machined and
fabricated honeycomb parts for 1995, 1994 and 1993 are included in the above
sales totals for prepregs, adhesives and honeycomb.
STRUCTURES AND INTERIORS
Hexcel has acquired the structures and interiors businesses of the Ciba
Composites Business, which operate under the Heath Tecna name. The Structures
and Interiors business unit has worldwide responsibility for manufacturing and
marketing structures and interiors, and operates manufacturing facilities in
Brindisi, Italy; Bellingham, Washington; and Kent, Washington.
The structures operations of this business unit produce a wide variety of
lightweight, composite structures primarily for aerospace use. Structures
include such items as wing-to-body and flap track fairings, radomes, engine
cowls and inlet ducts, wing panels and other aircraft components. Structural
products are manufactured from advanced composite materials using such
manufacturing processes as resin transfer molding, autoclave processing, multi-
axis numerically controlled machining, press laminating, heat forming and other
composite manufacturing techniques. These products are utilized primarily by
commercial and military aircraft manufacturers. However, the Company has
recently begun to pursue several industrial applications for structural
products.
The interiors operations of this business unit design and produce
innovative, light weight, high-strength composite interior systems for aircraft.
Interior products include overhead stowage compartments and related interior
components such as lavatories, sidewalls and ceilings for commercial jet and
turboprop aircraft. These products are sold to airlines for replacement of
existing interiors. In addition, stowage bins are provided for new production
of Boeing 737 and 757 aircraft.
Hexcel did not sell structures or interiors in 1995, 1994 or 1993. The
Ciba Composites Business, which was acquired on February 29, 1996, had net sales
of structures and interiors totaling approximately $113 million in 1995.
PACIFIC RIM
The Pacific Rim business unit is responsible for business development in
the Asia-Pacific region. The business unit sells all Hexcel products within
this region through distributors and sales offices in Pleasanton, California;
Sydney, Australia; Taipei, Taiwan; and Tokyo, Japan. The Pacific Rim business
unit is also responsible for the DIC-Hexcel joint venture, which was formed in
1990 with Dainippon Ink & Chemicals, Inc. for the production and sale of Nomex
honeycomb, prepregs and decorative laminates for the Japanese market. The DIC-
Hexcel joint venture operates a manufacturing facility in Komatsu, Japan.
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Sales to the Asia-Pacific region, which are included in the above sales
totals for the Fabrics and Composite Materials business units, were less than
10% of Hexcel's total sales in 1995, 1994 and 1993.
INTEGRATED MANUFACTURING CAPABILITIES
The Fabrics business unit weaves the majority of the carbon, aramid and
fiberglass fabrics used in the manufacture of honeycomb and prepreg products by
the Composite Materials business unit. This integrated manufacturing capability
provides Hexcel with competitive advantages in developing woven reinforcements
to optimize the performance of certain of its Composite Materials products, and
a greater ability to control the cost, quality and delivery of its woven fabric
requirements.
The Special Process business unit utilizes honeycomb products manufactured
by the Composite Materials business unit in the production of machined and
fabricated honeycomb parts. Prior to the acquisition of the Ciba Composites
Business, Hexcel was a supplier of honeycomb and prepreg products to the Heath
Tecna structures and interiors businesses. Following the acquisition, the
Company expects to continue to leverage its ability to supply Composite
Materials to these businesses where it has, or can economically develop,
qualified products that can be used in the fabrication of finished structural or
interior components.
Management believes that the integrated manufacturing capabilities of
Hexcel, combined with the breadth of its product lines, strengthen the Company's
competitive position in the markets it serves and enhance its ability to develop
new product forms for new product applications.
RESEARCH AND TECHNOLOGY; PATENTS AND KNOW-HOW
Hexcel's Research and Technology function ("R&T") supports all of the
Company's business units worldwide. R&T maintains expertise in chemical
formulation and curatives, fabric forming and textile architectures, advanced
composites structures, process engineering, analysis and testing of composite
materials, computational design and prediction, and other scientific disciplines
related to the Company's worldwide business base. Additionally, R&T performs a
limited amount of contract research and development in the U.S. and Europe for
strategically important customers in the areas of ceramics, higher temperature
polymers, advanced textiles and composite structures manufacturing.
Each strategic business unit maintains research and engineering staffs and
facilities to support its business operations. Worldwide investment in research
and technology is directed and coordinated by a committee consisting of the R&T
managers within each of Hexcel's strategic business units. This committee is
responsible for ensuring that research and technology investments are targeted
towards maximizing the Company's long-term profitability and strengthening its
competitive position in the marketplace. Additionally, the committee oversees
the Company's portfolio of patents, technology licenses and other intellectual
property.
Hexcel spent $7.6 million for research and technology in 1995, $8.2 million
in 1994 and $8.0 million in 1993. These expenditures were expensed as incurred.
Following the acquisition of the Ciba Composites Business, the Company expects
to spend more than twice the 1995 level in 1996 on new product development,
process engineering and technical services for the strategic business units.
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Hexcel's products rely primarily on the Company's expertise in materials
science, engineering and polymer chemistry. Consistent with market demand, the
Company has been placing more emphasis on cost effective product design and
agile manufacturing in recent years. Towards this end, the Company has entered
into formal and informal partnerships, as well as licensing and teaming
arrangements, with several customers, suppliers, external agencies and
laboratories. Management believes that the Company possesses unique
capabilities to design, develop and 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. Management believes that the patents and know-how rights
currently owned or licensed by the Company are adequate for the conduct of its
business.
RAW MATERIALS AND PRODUCTION ACTIVITIES
Hexcel purchases most of the raw materials used in production. Several key
materials are available from relatively few sources, and in many cases the cost
of product qualification makes it impractical to develop multiple sources of
supply. The unavailability of these materials, which the Company does not
anticipate, could have a material adverse effect on operations. The Company
coordinates closely with key suppliers in an effort to avoid raw material
shortages.
Hexcel's production activities are generally based on a combination of
"make to order" and "make to forecast" production requirements. The Company's
Special Process and Structures and Interiors businesses are almost entirely
"make to order" operations.
MARKETS AND CUSTOMERS
Hexcel's materials are sold for a broad range of uses. The following tables
summarize net sales by market and by international operations for continuing
operations for the five years ended December 31.
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1995 1994 1993 1992 1991
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NET SALES BY MARKET:
Commercial aerospace 45% 47% 42% 46% 47%
Space and defense 11% 11% 18% 17% 19%
Recreation, general
industrial and other 44% 42% 40% 37% 34%
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100% 100% 100% 100% 100%
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INTERNATIONAL OPERATIONS:
International net sales(a) $ 170.7 $ 142.3 $ 125.4 $ 148.9 $ 153.2
Percentage of net sales 49% 45% 40% 42% 43%
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(a) Net sales of international subsidiaries and U.S. exports, in millions.
The Boeing Company and Boeing subcontractors accounted for approximately
21% of Hexcel's 1995 sales. The loss of all or a significant portion of this
business, which Hexcel does not anticipate, could
8
have a material adverse effect on sales and earnings. Sales to various U.S.
government programs, including some of the sales to The Boeing Company and
Boeing subcontractors noted above, were approximately 10% of sales in 1995.
The Boeing Company and Boeing subcontractors accounted for approximately
18% of the 1995 sales of the Ciba Composites Business, which was acquired by
Hexcel on February 29, 1996.
COMMERCIAL AEROSPACE
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. A recent document, published by The Boeing Company,
projects that revenue passenger miles will increase an average of 5.5% per year
through the year 2000, with the Asian market having the highest growth rate.
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 Federal Aviation
Administration regulations 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.
Commercial aircraft build rates, based on the estimated number of aircraft
delivered, declined by more than 30% from 1992 to 1994. Commercial aircraft
production appears to be gradually recovering from this period of decline. In
1995, the build rates for certain commercial aircraft began to increase, and
published industry data indicates that 1995 commercial aircraft orders were
double the 1994 level. Industry analysis indicates that the demand for aircraft
is expected to grow through the turn of the century. Hexcel's commercial
aerospace business volume is expected to increase in 1996 in part due to this
general industry improvement and in part due to expected build rate increases
for specific commercial aircraft. In addition to build rate increases, demands
for improved aircraft performance have led to increased use of certain honeycomb
and prepreg materials in aircraft, particularly in newer models. Despite this
preference for high performance products, the Company must continuously
demonstrate the cost benefits of its products for aerospace applications.
SPACE AND DEFENSE
Hexcel's sales to space and defense markets increased slightly to $37.3
million in 1995 from $34.9 million in 1994. Sales in 1993 were $55.3 million.
The 1995 growth was based primarily on increased volume associated with a few
contracts. The current international and domestic political climate indicates
that overall military spending will continue to decline in the foreseeable
future. As a result, the Company believes that its participation in space and
defense markets will shrink or remain relatively flat over the next several
years.
Contracts to supply materials for military and some commercial projects
contain provisions for termination at the convenience of the U.S. government or
the buyer. In the case of such a termination, Hexcel is entitled to recover
reasonable incurred cost plus a provision for profit on the incurred cost. The
Company is subject to U.S. government cost accounting standards, which are
applicable to companies with more than $25 million of government contract or
subcontract awards each year.
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RECREATION, GENERAL INDUSTRIAL AND OTHER MARKETS
Hexcel's sales to recreation, general industrial and other markets were
$153.9 million in 1995, or approximately 44% of total sales. This compares with
$131.4 million in 1994 and $123.9 million in 1993. The Company has focused its
participation in recreation and general industrial markets in areas where the
application of composites technology offers significant benefits to the end
user. As a result, the Company has focused on select opportunities where high
performance is the key product criterion. Accordingly, future opportunities and
growth depend primarily upon the success of the individual programs and
industries in which the Company has elected to participate. Key industry
sectors and applications in which the Company is involved include printed
circuit boards, ballistics protection, certain recreation products (primarily
athletic shoes, golf clubs, fishing rods, snow skis and snow boards), wind
energy and marine products, and automotive, truck and mass transit components.
The Company's participation in these markets is also dependent on the Company's
willingness to fund application development and the available capacity of
manufacturing facilities.
Further discussion of Hexcel's markets and customers is included in
"Management Discussion and Analysis" included in this Annual Report on Form 10-
K.
SALES AND MARKETING
A staff of salaried market managers, product managers and salespeople
market Hexcel products directly to customers worldwide. The Company also uses
independent distributors and manufacturer representatives for certain products,
markets and regions. The Company's sales and marketing capabilities have been
enhanced by the acquisition of the Ciba Composites Business, which possesses an
existing sales and distribution network with offices in 19 countries throughout
the world.
BACKLOG
The backlog of orders for aerospace materials to be filled within 12 months
was $88.3 million as of December 31, 1995, $65.6 million as of December 31, 1994
and $61.6 million as of December 31, 1993. A major portion of the backlog is
cancelable without penalty.
Orders for aerospace materials generally lag behind the award of orders for
new aircraft by a considerable period. Thus, the level of new aircraft
procurement normally will not have an impact on aerospace orders received by
Hexcel for about one to three years, depending on the nature of the product, the
manufacturer, and delivery schedules.
Backlog for non-aerospace materials amounted to $33.5 million at December
31, 1995, compared with $40.7 million at December 31, 1994 and $29.1 million at
December 31, 1993. Most of the non-aerospace backlog is expected to be filled
within six months. Markets for Hexcel products outside of the aerospace
industry are generally highly competitive requiring shorter lead times for
delivery or stock for immediate sale.
10
COMPETITION
In the production and sale of its 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, Hexcel materials compete with substitute structural materials such as
structural foam, wood, metal, and concrete. Depending upon the material and
markets, relevant competitive factors include price, delivery, service, quality
and product performance. The acquisition of the Ciba Composites Business
enhances the Company's competitive position by broadening the Company's product
portfolio and strengthening the Company's position in certain geographic
regions.
ENVIRONMENTAL MATTERS
Environmental control regulations have not had a significant adverse effect
on overall operations. A discussion of environmental matters is included in
"Item 3. Legal Proceedings." and in Note 19 to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
EMPLOYEES
As of December 31, 1995, Hexcel employed 2,127 full-time employees in its
continuing operations, compared with 2,189 and 2,221 as of December 31, 1994 and
1993, respectively. Approximately 13% of these employees have union
affiliations. Management believes that labor relations in the Company have been
generally satisfactory.
As a result of the acquisition of the Ciba Composites Business on February
29, 1996, Hexcel added approximately 2,150 employees to its workforce, some of
whom have union affiliations.
11
ITEM 2. PROPERTIES
Hexcel owns manufacturing 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 Pleasanton, California and Stamford, Connecticut. The central
research and technology laboratories are located in Dublin, California.
The following table lists the manufacturing facilities of Hexcel by
geographic location, approximate square footage, and principal products,
including the facilities acquired in connection with the acquisition of the Ciba
Composites Business. In the first quarter of 1996, the Company announced its
decision to close the acquired Anaheim facility. Following the closure of this
facility, and the completion of certain other consolidation activities and
capital projects required to combine the operations of the Company and the Ciba
Composites Business, management believes that the Company will possess
production capacity appropriate for the conduct of its business. The following
table does not include the manufacturing facilities operated by the Company's
joint ventures.
MANUFACTURING FACILITIES
Approximate
Facility Location Square Footage Principal Products
- ----------------- -------------- ------------------
United States:
Seguin, Texas 189,000 Reinforcement Fabrics
Anaheim, California 300,000 Prepregs; Honeycomb; Adhesives
Casa Grande, Arizona 320,000 Honeycomb; Special Process Honeycomb
Lancaster, Ohio 35,000 Prepregs
Livermore, California 141,000 Prepregs
Burlington, Washington 58,000 Special Process Honeycomb
Pottsville, Pennsylvania 104,000 Special Process Honeycomb
Bellingham, Washington 185,000 Interiors; Special Process Honeycomb
Kent, Washington 910,000 Interiors; Structures
International:
Les Avenieres, France 462,000 Reinforcement Fabrics; Prepregs
Lyon, France 230,000 Reinforcement Fabrics; Prepregs
Linz, Austria 187,000 Prepregs
Welkenraedt, Belgium 223,000 Prepregs; Honeycomb; Special Process
Honeycomb
Duxford, England 380,000 Prepregs; Honeycomb; Adhesives
Swindon, England 20,000 Special Process Honeycomb
Brindisi, Italy 110,000 Structures
Hexcel leases the Swindon, England plant and the land on which the
Burlington, Washington facility is located. The Company also leases portions of
the Casa Grande, Arizona; Bellingham, Washington; Kent, Washington; Les
Avenieres, France; and Welkenraedt, Belgium facilities.
The facilities of the Ciba Composites Business acquired on February 29,
1996 were: Anaheim, California; Bellingham, Washington; Kent, Washington; Lyon,
France; Duxford, England; and Brindisi, Italy. The acquisition of the Linz,
Austria facility did not occur on February 29, 1996, but is expected to
12
be completed in connection with the Company's acquisition of an Austrian
subsidiary of Ciba in accordance with the Strategic Alliance Agreement. A
portion of the Linz, Austria facility is leased.
ITEM 3. LEGAL PROCEEDINGS.
On January 10, 1995, the Bankruptcy Court for the Northern District of
California, Oakland Division, confirmed the First Amended Plan of Reorganization
proposed by Hexcel and the Official Committee of Equity Security Holders dated
as of November 7, 1994. The effective date of the Reorganization Plan was
February 9, 1995. Further discussion of the Reorganization Plan and Hexcel's
emergence from bankruptcy reorganization proceedings is included in "Management
Discussion and Analysis" and in the Notes to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
In December 1988, Lockheed employees working with epoxy resins and
composites on classified programs filed suit against Lockheed and its suppliers
(including Hexcel) claiming various injuries as a result of exposure to these
products. Plaintiffs have filed for punitive damages which may be uninsured.
The first trial of the cases of 15 pilot plaintiffs resulted in a mistrial and a
retrial resulted in the entry of judgment in favor of the plaintiffs. The
Company did not participate in the trial due to the automatic stay resulting
from the Chapter 11 filing. Some of these claims were discharged as a result of
the plaintiffs' failure to file claims in Hexcel's Chapter 11 case. As to the
claims which have not been discharged, the Company has objected to them and
intends to proceed with those objections within the Bankruptcy Court.
Hexcel / MCI, a business unit divested in 1991, performed brazing services
in the manufacture of flexures under subcontract from Ormond which supplied the
flexures to Thiokol. The flexures are used to support a rocket motor housing in
a test stand during actual firing of the rocket. Several flexures cracked under
the dead weight of a rocket motor prior to actual test firing, and Thiokol has
sued Ormond and the Company for the costs of replacing all of the flexures
purchased ($0.9 million) (Thiokol Corporation v. Ormond, Hexcel, et al.). The
automatic stay in bankruptcy was lifted in April 1995 and the case was resumed
in the state court in Utah. Discovery is ongoing. There is no insurance
coverage available for an adverse court ruling or negotiated settlement.
Hexcel has been named as a potentially responsible party ("PRP") with
respect to several hazardous waste disposal sites that it does not own or
possess which are included on the Environmental Protection Agency's Superfund
National Priority List and/or various state equivalent lists. With respect to
its exposure relating to these sites, the Company believes its responsibility to
be de minimis. A total of 249 claims were filed in the Chapter 11 case with a
face value of over $6.7 billion. These claims were, for the most part,
duplicative as a result of the joint and several liability provisions of
applicable laws and have been categorized into claims involving 19 sites.
Claims involving 8 of the sites have been settled within the Chapter 11 case.
The Company has been named a PRP with respect to 6 sites for which no claims
were filed in the Chapter 11 case; as a result, the Company believes any further
claims to be barred. The balance of the sites and their related claims have
been passed through the bankruptcy. The Company's estimation of its exposure at
these sites is de minimis.
Also, pursuant to the New Jersey Environmental Responsibility and Clean-Up
Act, Hexcel signed an administrative consent order to pay for clean-up of a
manufacturing facility it formerly operated in Lodi, New Jersey. Hexcel has
reserved approximately $2.8 million to cover such remaining costs and believes
that actual costs should not exceed the amount which has been reserved. Fine
Organics Corporation, the current owner of the Lodi site and of Hexcel's former
chemicals business operated on that site, has asserted
13
that the clean-up costs will be significantly in excess of that amount. The
ultimate cost of remediation at the Lodi site will depend on developing
circumstances.
Fine Organics Corporation filed a proof of claim and an adversary
proceeding in the Bankruptcy Court. The court has disallowed a significant
portion of the claim by denying Fine Organics claim for treble damages and
certain contingent claims. The remaining claims are for prior clean-up costs
incurred by Fine Organics and alleged contractual and tort damages relating to
the original sale of the business and site to Fine Organics totaling
approximately $3.2 million. This matter is proceeding in the Bankruptcy Court.
Hexcel, as a defense subcontractor, is subject to U.S. government audits
and reviews of negotiations, performance, cost classifications, accounting and
general practices relating to government contracts. The Defense Contract Audit
Agency ("DCAA") reviews cost accounting and business practices of government
contractors and subcontractors including the Company. The Company has been
engaged in discussions on a number of cost accounting issues which could result
in claims by the government. Some of these issues have already been resolved.
As part of these reviews, the DCAA has alleged that Hexcel improperly
included certain land lease costs in its indirect rates at the Chandler, Arizona
facility (the "Chandler Land Lease") and that, as a result, the Company's
subcontracts had been overpriced in an amount of approximately $1.0 million.
The Company has formally responded to the DCAA that it strongly disagrees with
these allegations. In February 1996, the Company received a letter from the
United States Attorney's Office, stating that it was considering filing an
action against the Company for violation of the civil False Claims Act ("FCA")
based upon the inclusion in the indirect rates of the Chandler Land Lease costs.
While the Company does not agree that there was any violation of the FCA, if the
U.S. government elects to pursue such an action and were it to prevail, it would
be entitled to three times the actual damages claimed plus penalties of between
$5,000 and $10,000 for each false claim; the number of alleged false claims
could be significant.
In 1993, Hexcel became aware of an aluminum honeycomb sandwich panel
delamination problem with panels produced by its wholly-owned Belgium
subsidiary, Hexcel S.A., and installed in rail cars in France and Spain.
Certain customers have alleged that Hexcel S.A. is responsible for the problem.
The Company and its insurer continue to investigate these claims. The Company
is also working with the customers to repair or replace panels when necessary,
with certain costs to be allocated upon determination of responsibility for the
delamination. While no lawsuit has been filed, two customers in France
requested that a court appoint experts to investigate the claims; to date, the
experts have not reported any conclusions. The Company's primary insurer for
this matter has agreed to fund legal representation and to provide coverage of
the claim to the extent of the policy limit for one year. The Company is
investigating additional insurance coverage. Even if additional insurance
coverage is not available, management believes that, based on available
information, it is unlikely that these claims will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
In November, 1995, Hexcel was notified that Livermore Development
Corporation ("LDC") was asserting a claim for damages arising from Hexcel's
recent notification of its intent to exercise its option to purchase certain
land in Livermore, California. LDC contends that the lease was a disguised
partnership or joint venture agreement between Hexcel and LDC to develop the
property for residential use. Hexcel disputes any such agreement and seeks to
enforce its option to purchase under a written agreement. The parties are in
ongoing negotiations to resolve this claim.
14
In September, 1995, Ciba was named as a potentially responsible party with
respect to the removal of drums from a disposal site that it did not own or
possess, known as the Omega Chemical Corporation ("Omega Site"). The Omega Site
is a spent solvent recycling and treatment facility in Whittier, California.
Ciba has previously notified the EPA that it intends to comply with the EPA's
removal requirements and has paid its interim share of such removal costs to
date. This responsibility was assumed by the Company as a result of its
acquisition of the Ciba Composites Business, to the extent the Ciba waste
delivered to the Omega site was from the operations of the Ciba Composites
Business. This matter is under evaluation but is presently believed to be de
minimis.
In addition to the foregoing, Hexcel is from time to time involved in other
legal proceedings incidental to the conduct of its business. In addition, as a
result of the acquisition of the Ciba Composites Business, the Company assumed
certain liabilities, including certain legal proceedings incidental to the
conduct of the Ciba Composites Business.
Management believes, based on available information, that it is unlikely
these items, individually or in the aggregate, will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
15
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 24 to the 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 1995, 1994 or 1993, and the
payment of dividends is generally prohibited under the terms of certain of the
Company's credit agreements. On March 15, 1996, there were 2,253 holders of
record of Hexcel common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is contained on page 32 of this Annual
Report on Form 10-K under "Selected Financial Data" and is incorporated herein
by reference.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by Item 7 is contained on pages 33 to 40 of this
Annual Report on Form 10-K under "Management Discussion and Analysis" and is
incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is contained on pages 44 to 81 of this
Form 10-K under "Consolidated Financial Statements and Supplementary Data" and
is incorporated herein by reference. The report of independent public
accountants for the years ended December 31, 1995, 1994 and 1993 is contained on
page 43 of this Annual Report on Form 10-K under "Independent Auditors' Report"
and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Listed below are the directors of Hexcel as of March 21, 1996, the
positions with the Company held by them and a brief description of each
director's prior business experience.
DIRECTOR POSITIONS WITH HEXCEL AND
NAME AGE SINCE BUSINESS EXPERIENCE
- ---- --- ---- --------------------
John J. Lee 59 1993 Chairman of the Board of Directors since
February 1996; Chief Executive Officer
since January 1994; Chairman and Chief
Executive Officer from January 1994 to
February 1995; Chairman and Co-Chief
Executive Officer from July to December
1993; Director since May 1993. Mr. Lee
is chairman of the Nominating Committee
and a member of the Finance Committee of
the Board of Directors. Mr. Lee has
served as a director of XTRA
Corporation, a transportation equipment
leasing company, since 1990, and
Chairman of the Board, President and
Chief Executive Officer of Lee
Development Corporation, a merchant
banking company, since 1987. Mr. Lee
has been a Trustee of Yale University
and an advisor to The Clipper Group, a
private investment partnership, since
1993. From July 1989 through April
1993, Mr. Lee served as Chairman of the
Board and Chief Executive Officer of
Seminole Corporation, a manufacturer and
distributor of fertilizer. From April
1988 through April 1993, Mr. Lee served
as a director of Tosco Corporation, a
national refiner and marketer of
petroleum products, and as President and
Chief Operating Officer of Tosco from
1990 through April 1993. Mr. Lee is
also a director of Aviva Petroleum
Corporation and various privately-held
corporations.
17
DIRECTOR POSITIONS WITH HEXCEL AND
NAME AGE SINCE BUSINESS EXPERIENCE
- ---- --- ---- --------------------
Juergen Habermeier 54 1996 President, Chief Operating Officer, and
a member of the Board of Directors since
February 1996. Dr. Habermeier is a
member of the Technology Committee of
the Board of Directors. Dr. Habermeier
has served as the President of the Ciba
Composites Business and as a Vice
President of Ciba-Geigy Corporation
since 1989. Since 1994, Dr. Habermeier
has served on the Board of Directors of
RHR International. He is a member of
the Advisory Committee of the Polymer
Composites Laboratory of the University
of Washington.
John M. D. Cheesmond 46 1996 Director (Chairman of the Executive
Compensation Committee and a member of
the Finance Committee). Mr. Cheesmond
has served as Senior Vice President and
Head of Regional Finance and Control of
Ciba-Geigy Limited since 1994. From
1991 through 1993, Mr. Cheesmond served
as Vice President - Planning,
Information and Control at Ciba Vision
Corporation.
Marshall S. Geller 57 1994 Director (Chairman of the Audit
Committee and a member of the Executive
Compensation and Nominating Committees);
Co-Chairman of the Board of Directors
from February 1995 to February 1996.
Mr. Geller has been Chairman, Chief
Executive Officer and founding partner
at Geller & Friend Capital Partners,
Inc., a merchant banking firm, since
November 1995. From 1990 to November
1995, Mr. Geller was Senior Managing
Partner of Golenberg & Geller, Inc., a
merchant banking firm. From 1988 to
1990, he was Vice Chairman of Gruntal &
Company, an investment banking firm.
From 1967 until 1988, he was a Senior
Managing Director of Bear, Stearns & Co,
Inc., an investment banking firm. Mr.
Geller is currently a director of
Ballantyne of Omaha, Inc., Dycam, Inc.,
Players International, Value Vision
International, Inc., Styles on Video,
Inc., and various privately-held
corporations and charitable
organizations.
18
DIRECTOR POSITIONS WITH HEXCEL AND
NAME AGE SINCE BUSINESS EXPERIENCE
- ---- --- ---- --------------------
Peter A. Langerman 40 1995 Director (Chairman of the Finance
Committee and a member of the Audit and
Executive Compensation Committees); Co-
Chairman of the Board of Directors from
February 1995 to February 1996. Mr.
Langerman is a director and the
Executive Vice President of Mutual
Series Fund Inc., a diversified open-end
management investment company registered
under the Investment Company Act of 1940
and a research analyst with Heine
Securities Corporation, an investment
advisor. Mr. Langerman has been the
Executive Vice President of Mutual
Series since 1988 and has been a
research analyst at Heine Securities
since 1986. Mr. Langerman is currently
a director of Sunbeam Company, Inc. and
various privately-held corporations.
Stanley Sherman 57 1996 Director (Member of the Finance and
Executive Compensation Committees). Mr.
Sherman has served as a director and
Vice President - Finance and Information
Services of Ciba-Geigy Corporation since
1991. From 1986 through 1991, Mr.
Sherman served as Vice President -
Corporate Planning of Ciba-Geigy
Corporation. Mr. Sherman is currently a
member of the Finance Committee of Ciba-
Geigy Corporation.
George S. Springer 62 1993 Director (Chairman of the Technology
Committee). Dr. Springer is Professor
and Chairman of the Department of
Aeronautics and Astronautics and, by
courtesy, Professor of Mechanical
Engineering and Professor of Civil
Engineering, at Stanford University.
Dr. Springer joined Stanford
University's faculty in 1983.
Frederick W. Stanske 37 1995 Director from August 1994 to February
1995, reappointed as a director in April
1995 (Member of the Audit Committee).
Mr. Stanske is Vice President of Fisher
Investments, Inc., an investment
advisory firm.
19
DIRECTOR POSITIONS WITH HEXCEL AND
NAME AGE SINCE BUSINESS EXPERIENCE
- ---- --- ---- --------------------
Joseph T. Sullivan 55 1996 Director (Member of the Nominating
Committee). Dr. Sullivan has served as
a director and Senior Vice President of
Ciba-Geigy Corporation since 1986. Dr.
Sullivan is currently a member of the
Corporate Governance and Finance
Committees of Ciba-Geigy Corporation.
Hermann Vodicka 53 1996 Director (Member of the Nominating and
Technology Committees). Mr. Vodicka has
served as President of the Polymers
Division and a member of the Executive
Committee of Ciba-Geigy Limited since
1993. Effective April 25, 1996, Mr.
Vodicka will become Chairman of the
Executive Committee of Ciba-Geigy
Limited. Mr. Vodicka is currently the
Chairman of the Board of METTLER-TOLEDO,
a leading worldwide manufacturer of
scales and balances and a wholly owned
subsidiary of Ciba-Geigy Limited. From
1988 through 1993, Mr. Vodicka was
President and Chief Executive Officer of
METTLER-TOLEDO.
20
(b) Listed below are the executive officers of Hexcel as of March 21, 1996,
the positions held by them and a brief description of their business experience.
DIRECTOR POSITIONS WITH HEXCEL AND
NAME AGE SINCE BUSINESS EXPERIENCE
- ---- --- ---- --------------------
John J. Lee 59 1993 See Item 10(a) above for a brief
description of Mr. Lee's positions with
Hexcel and his business experience.
Juergen Habermeier 54 1996 See Item 10(a) above for a brief
description of Dr. Habermeier's
positions with Hexcel and his business
experience.
Stephen C. Forsyth 40 1994 Senior Vice President of Finance and
Administration since February 1996; Vice
President of International Operations
from October 1994 to February 1996;
General Manager of Resins Business and
Export Marketing from 1989 to 1994;
other general management positions from
1980 to 1989. Mr. Forsyth joined Hexcel
in 1980.
Rodney P. Jenks, Jr. 45 1994 Vice President, General Counsel and
Secretary since March 1994. Prior to
joining Hexcel in 1994, Mr. Jenks was a
partner in the law firm of Wendel,
Rosen, Black & Dean, where he continues
to serve as counsel.
David M. Wong 51 1996 Vice President of Corporate Affairs
since February 1996; Director of Special
Projects from July 1993 to February
1996; Corporate Controller and Chief
Accounting Officer from 1983 to 1993;
other general management positions from
1979 to 1993. Mr. Wong joined Hexcel in
1979.
William P. Meehan 60 1993 Vice President of Finance and Chief
Financial Officer since September 1993,
and Treasurer since April 1994. Prior
to joining Hexcel in 1993, Mr. Meehan
served as President and Chief Executive
Officer of Thousand Trails and NACO, a
membership campground and resort
business, from 1990 through 1992. From
1986 through 1989, Mr. Meehan served as
Vice President of Finance and Chief
Financial Officer of Hadco Corporation.
21
DIRECTOR POSITIONS WITH HEXCEL AND
NAME AGE SINCE BUSINESS EXPERIENCE
- ---- --- ---- --------------------
Wayne C. Pensky 40 1993 Corporate Controller and Chief
Accounting Officer since July 1993.
Prior to joining Hexcel in 1993, Mr.
Pensky was a partner at Arthur Andersen
& Co., where he was employed from 1979.
Michael Carpenter 39 1996 Vice President of Structures and
Interiors Business Unit, responsible
for the structures business, since
February 1996. Mr. Carpenter served as
the Vice President of Structures in
the Heath Tecna division of the Ciba
Composites Business prior the
acquisition. Mr. Carpenter has held
various technical and managerial
positions with Heath Tecna since 1983.
William Hunt 53 1996 President of the European Operations of
the Composite Materials Business Unit
since February 1996. Mr. Hunt served as
the President of the EuroMaterials unit
of the Ciba Composites Business from
1991 to February 1996, and as the
Managing Director of Ciba-Geigy
Plastics from 1990 to 1991. Prior to
joining Ciba in 1990, Mr. Hunt held
various other technical and managerial
positions, including the position of
Managing Director of Illford Limited
(Photographic) Co.
Claude Genin 60 1996 President of the Fabrics Business Unit
since February 1996; Managing Director
of Hexcel Lyon from 1977 to 1996.
Hexcel Lyon was acquired by Hexcel in
1985.
James A. Koshak 52 1996 President of the U.S. Operations of the
Composite Materials Business Unit since
February 1996. Mr. Koshak served as
Vice President of the Ciba Composites
Business and General Manager of the U.S.
Materials unit from 1993 to February
1996, and as Vice President of the
Polymers Division and General Manager of
Formulated Systems from 1988 to 1993.
Mr. Koshak held various other technical
and managerial positions with Ciba from
1974 to 1988.
22
DIRECTOR POSITIONS WITH HEXCEL AND
NAME AGE SINCE BUSINESS EXPERIENCE
- ---- --- ---- --------------------
Thomas J. Lahey 55 1991 President of the Pacific Rim
Business Unit since February 1996;
Vice President of Worldwide Sales
from April 1993 to February 1996; Vice
President of Advanced Composites from
1992 to 1993; General Manager of
Advanced Composites from 1991 to 1992;
General Manager of Advanced Products
from 1989 to 1991. Prior to joining
Hexcel in 1989, Mr. Lahey held the
position of Executive Assistant to the
President of Kaman Aerospace Corporation
in 1987 and 1988, and was a Vice
President of Grumman Corporation from
1985 to 1987.
Robert A. Petrisko 41 1993 Vice President of Research and
Technology since September 1993; Manager
of the Signature Technology Group at the
Chandler facility and Director of
Aerospace Technology from 1989 to 1993.
Dr. Petrisko joined Hexcel in 1989,
after serving as a Research Specialist
with Dow Corning Corporation from 1985
to 1989.
Gary L. Sandercock 54 1989 President of the Special Process
Business Unit since February 1996;
Vice President of Manufacturing from
April 1993 to February 1996;
Vice President of Reinforcement Fabrics
from 1989 to 1993; General Manager of
the Trevarno Division from 1985 to 1989;
other manufacturing and general
management positions from 1967 to 1985.
Mr. Sandercock joined Hexcel in 1967.
David Tanonis 39 1996 Vice President of the Structures and
Interiors Business Unit, responsible
for the interiors business, since
February 1996. Mr. Tanonis served as
the Vice President of Interiors in the
Heath Tecna division of the Ciba
Composites Business prior to the
acquisition. Mr. Tanonis has held
various technical and managerial
positions with Heath Tecna since he
joined the division in 1987. Mr.
Tanonis held various management
positions with Polymer Engineering, Inc.
from 1978 to 1987.
(c) There are no family relationships among any of Hexcel's directors or
executive officers.
23
ITEM 11. EXECUTIVE COMPENSATION.
The information required in Item 11 will be contained in Hexcel's
definitive Proxy Statement for the 1996 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in Item 12 will be contained in Hexcel's
definitive Proxy Statement for the 1996 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required in Item 13 will be contained in Hexcel's
definitive Proxy Statement for the 1996 Annual Meeting of Stockholders. Such
information is incorporated herein by reference.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. FINANCIAL STATEMENTS
The consolidated financial statements of the Company, notes thereto, and
independent auditors' report are listed on page 41 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 as of October 13, 1995, relating to the
proposed acquisition of the Ciba Composites Business.
Current Report on Form 8-K dated as of March 15, 1996, relating to the
consummation of the acquisition of the Ciba Composites Business.
Current Report on Form 8-K/A dated as of April 1, 1996, relating to the
consummation of the acquisition of the Ciba Composites Business.
c. EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Strategic Alliance Agreement dated as of September 29, 1995 among
the Company, Ciba and CGC (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K dated as of October 13, 1995 and
incorporated herein by reference).
2.1(a) Amendment dated as of December 12, 1995 to the Strategic Alliance
Agreement among the Company, Ciba and CGC (filed as Exhibit
2.1(a) to the Company's Current Report on Form 8-K dated as of
March 15, 1996 and incorporated herein by reference).
2.1(b) Letter Agreement dated as of February 28, 1996 among the Company,
Ciba and CGC (filed as Exhibit 2.1(b) to the Company's Current
Report on Form 8-K dated as of March 15, 1996 and incorporated
herein by reference).
2.1(c) Distribution Agreement dated as of February 29, 1996 among the
Company, Brochier S.A., Composite Materials Limited, Salver
S.r.l. and Ciba (filed as Exhibit 2.1(c) to the Company's Current
Report on Form 8-K dated March 15, 1996 and incorporated herein
by reference).
2.2 First Amended Plan of Reorganization Proposed by the Debtor and
the Official Committee of Equity Security Holders, dated as of
November 7, 1994 (filed as Exhibit 2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 2, 1994
and incorporated herein by reference).
2.2(a) Order Confirming First Amended Plan of Reorganization Proposed by
the Debtor and the Official Committee of Equity Security Holders,
entered on January 12, 1995 by the
25
EXHIBIT NO. DESCRIPTION
- ----------- -----------
United States Bankruptcy Court for the Northern District of
California (filed as Exhibit 2.1 to the Company's Current Report
on Form 8-K dated as of January 23, 1995 and incorporated herein
by reference).
2.2(b) Subscription Rights Plan (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated as of February 9, 1995 and
incorporated herein by reference).
3.1 Certificate of Incorporation of the Company dated as of February
9, 1995 (filed as Exhibit 3.1 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).
3.1(a) Amendment dated as of February 21, 1996 to the Certificate of
Incorporation of the Company (filed as Exhibit 3.1(a) to the
Company's Registration Statement on Form S-8, Registration No.
333-1225, and incorporated herein by reference).
3.2 Bylaws of the Company dated as of February 9, 1995 (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 and incorporated herein by
reference).
3.2(a) Amendment dated as of February 29, 1996 to the Bylaws of the
Company.
4.1 Certificate of Incorporation of the Company dated as of February
9, 1995 (see Exhibit 3.1 above).
4.1(a) Amendment dated as of February 29, 1996 to the Certificate of
Incorporation of the Company (see Exhibit 3.1(a) above).
4.2 Bylaws of the Company dated as of February 9, 1995 (see Exhibit
3.2 above).
4.2(a) Amendment dated as of February 29, 1996 to the Bylaws of the
Company (see Exhibit 3.2(a) above).
4.3 Indenture dated as of October 1, 1988 between the Company and the
Bank of California, N.A., as trustee (filed as Exhibit 4.10 to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993 and incorporated herein by reference).
4.4 Indenture dated as of February 29, 1996 between the Company and
First Trust of California, National Association, as trustee
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K
dated as of March 15, 1996 and incorporated herein by reference).
10.1 Credit Agreement dated as of February 8, 1995 among the Company,
Citicorp USA, Inc., Heller Financial, Inc., Transamerica Business
Credit Corporation and Citibank N.A. (filed as Exhibit 99.1 to
the Company's Current Report on Form 8-K dated as of February 22,
1995 and incorporated herein by reference).
26
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.2 Credit Agreement dated as of February 29, 1996 among the Company
and certain subsidiaries of the Company, as borrowers, the
lenders and issuing banks party thereto, Citibank, N.A., as U.S.
administrative agent, Citibank International plc, as European
administrative agent and Credit Suisse, as syndication agent
(filed as Exhibit 99.1 to the Company's Current Report on Form 8-
K dated as of March 15, 1996 and incorporated herein by
reference).
10.3 Restated and Amended Reimbursement Agreement dated as of February
1, 1995 between the Company and Banque Nationale de Paris (filed
as Exhibit 99.2 to the Company's Current Report on Form 8-K dated
as of February 22, 1995 and incorporated herein by reference).
10.3(a) Second Restated and Amended Reimbursement Agreement dated as of
February 29, 1996 between the Company and Banque Nationale de
Paris.
10.4 Asset Purchase Agreement dated as of November 3, 1994 between the
Company and Northrop Grumman Corporation (filed as Exhibit 10 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended October 2, 1994 and incorporated herein by
reference).
10.5 Hexcel Corporation Incentive Stock Plan (filed as Exhibit 4.3 to
the Company's Registration Statement on Form S-8, Registration
No. 333-1225, and incorporated herein by reference).
10.6 Long-Term Incentive Plan (filed as Exhibit 99.2 to the Company's
Current Report on Form 8-K dated as of January 23, 1995 and
incorporated herein by reference).
10.7 1988 Management Stock Program (filed as Exhibit 28.1 to Post-
Effective Amendment No. 1 to Form S-8, Registration No. 33-17025,
and incorporated herein by reference).
10.7(a) Amendments to 1988 Management Stock Program (filed as Exhibit
28.2 to the Company's Registration Statement on Form S-8,
Registration No. 33-28445, and incorporated herein by reference).
10.8 Form of 1988 Restricted Stock Agreement (filed as Exhibit 28.14
to Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-8, Registration No. 33-17025, and
incorporated herein by reference).
10.9 Form of 1988 Discounted Stock Option Agreement (filed as Exhibit
28.16 to Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-8, Registration No. 33-17025,
and incorporated herein by reference).
10.10 Form of 1988 Officers' Non-Qualified Stock Option Agreement
(filed as Exhibit 28.9 to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-8, Registration No.
33-17025, and incorporated herein by reference).
27
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.11 Form of Executive Deferred Compensation Agreement (filed as
Exhibit 10.10.B to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 and incorporated herein
by reference).
10.12 Directors' Retirement Plan (filed as Exhibit 11.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992 and incorporated herein by reference).
10.13 Form of Option Agreement (Directors).
10.14 Employment Agreement dated as of February 29, 1996 between the
Company and John J. Lee.
10.14(a) Employee Option Agreement dated as of February 29, 1996 between
the Company and John J. Lee.
10.14(b) Bankruptcy Court Option Agreement dated as of February 29, 1996
between the Company and John J. Lee.
10.14(c) Performance Accelerated Restricted Stock Unit Agreement dated as
of February 29, 1996 between the Company and John J. Lee.
10.14(d) Short-Term Option Agreement dated as of February 29, 1996 between
the Company and John J. Lee.
10.14(e) Form of Reload Option Agreement between the Company
and John J. Lee.
10.15 Interim Employment Agreement and Consulting Agreement between the
Company and John J. Lee (filed as Exhibit 10.4.E to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1994 and incorporated herein by reference).
10.16 Interim Employment Agreement between the Company and William P.
Meehan (filed as Exhibit 10.4.G to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference).
28
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.17 Agreement between the Company and Gary L. Sandercock (filed as
Exhibit 10.4.I to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and incorporated herein
by reference).
10.18 Agreement between the Company and Thomas J. Lahey (filed as
Exhibit 10.4.J to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994 and incorporated herein
by reference).
10.19 Memorandum Agreement dated as of January 31, 1996 between the
Company and Rodney P. Jenks, Jr.
10.20 Letter Agreement dated as of February 1, 1995 between the Company
and UniRock Management Corporation (filed as Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 and incorporated herein by reference).
10.20(a) Letter Agreement dated as of October 27, 1995 between the Company
and UniRock Management Corporation.
10.21 Governance Agreement dated as of February 29, 1996 between the
Company and Ciba.
10.22 Registration Rights Agreement dated as of February 29, 1996
between the Company and Ciba.
10.23 Agreement Governing United States Employment Matters dated as of
September 29, 1995 between the Company and CGC (filed as Exhibit
D to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated as of October 13, 1995 and incorporated herein by
reference).
10.23(a) Amendment dated as of November 22, 1995 to the Agreement
Governing United States Employment Matters between the Company
and CGC.
10.24 Employment Matters Agreement dated as of February 29, 1996 among
Ciba-Geigy plc, Composite Materials Limited and the Company.
11 Statement Regarding Computation of Per Share Earnings.
21 Subsidiaries of Registrant.
23 Independent Auditors' Consent -- Deloitte & Touche LLP
27 Financial Data Schedule (electronic filing only).
29
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
PLEASANTON, STATE OF CALIFORNIA.
HEXCEL CORPORATION
MARCH 21, 1996 By: /s/ JOHN J. LEE
--------------------------------------
John J. Lee, Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JOHN J. LEE Chairman of the March 21, 1996
- ----------------------- Board of Directors and
(John J. Lee) Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
/s/ WILLIAM P. MEEHAN Vice President and Chief March 21, 1996
- ----------------------- Financial Officer
(William P. Meehan) (PRINCIPAL FINANCIAL OFFICER)
/s/ WAYNE C. PENSKY Corporate Controller March 21, 1996
- ----------------------- (PRINCIPAL ACCOUNTING OFFICER)
(Wayne C. Pensky)
/s/ JOHN M. D. CHEESMOND Director March 21, 1996
- ------------------------
(John M. D. Cheesmond)
/s/ MARSHALL S. GELLER Director March 21, 1996
- -----------------------
(Marshall S. Geller)
/s/ JUERGEN HABERMEIER Director, President and March 21, 1996
- ----------------------- Chief Operating Officer
(Juergen Habermeier)
/s/ PETER A. LANGERMAN Director March 21, 1996
- -----------------------
(Peter A. Langerman)
30
SIGNATURE TITLE DATE
--------- ----- ----
/s/ STANLEY SHERMAN Director March 21, 1996
- -----------------------
(Stanley Sherman)
/s/ GEORGE S. SPRINGER Director March 21, 1996
- -----------------------
(George S. Springer)
/s/ FREDERICK W. STANSKE Director March 21, 1996
- ------------------------
(Frederick W. Stanske)
/s/ JOSEPH T. SULLIVAN Director March 21, 1996
- -----------------------
(Joseph T. Sullivan)
Director March 21, 1996
- -----------------------
(Hermann Vodicka)
31
SELECTED FINANCIAL DATA
The following table summarizes selected financial data for continuing
operations as of, and for, the five years ended December 31.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales $ 350,238 $ 313,795 $ 310,635 $ 352,987 $ 355,601
Cost of sales (283,148) (265,367) (263,090) (285,088) (284,875)
-----------------------------------------------------------------------
Gross margin 67,090 48,428 47,545 67,899 70,726
Marketing, general &
administrative expenses (49,324) (45,785) (52,510) (62,053) (54,797)
Other income (expenses), net 791 4,861 (12,780) 2,992 --
Restructuring expenses -- -- (46,600) (23,000) --
-----------------------------------------------------------------------
Operating income (loss) 18,557 7,504 (64,345) (14,162) 15,929
Interest expense (8,682) (11,846) (8,862) (8,196) (10,870)
Bankruptcy reorganization
expenses (3,361) (20,152) (641) -- --
-----------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes 6,514 (24,494) (73,848) (22,358) 5,059
Benefit (provision) for
income taxes (3,313) (3,586) (6,024) 6,375 54
-----------------------------------------------------------------------
Income (loss) from
continuing operations $ 3,201 $ (28,080) $ (79,872) $ (15,983) $ 5,113
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Income (loss) per share
from continuing
operations(a) $ 0.20 $ (3.84) $ (10.89) $ (2.20) $ 0.72
-----------------------------------------------------------------------
-----------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Current assets $ 128,055 $ 148,352 $ 134,710 $ 160,001 $ 213,699
Non-current assets 102,547 95,105 128,532 150,659 146,275
-----------------------------------------------------------------------
Total assets $ 230,602 $ 243,457 $ 263,242 $ 310,660 $ 359,974
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Current liabilities $ 66,485 $ 171,307 $ 72,965 $ 79,305 $ 78,545
Long-term liabilities 115,743 78,035 169,524 125,206 137,106
Shareholders' equity
(deficit) 48,374 (5,885) 20,753 106,149 144,323
-----------------------------------------------------------------------
Total liabilities and
shareholders' equity
(deficit) $ 230,602 $ 243,457 $ 263,242 $ 310,660 $ 359,974
-----------------------------------------------------------------------
-----------------------------------------------------------------------
OTHER DATA:
Cash dividends per share -- -- -- $ 0.44 $ 0.44
Shares outstanding at
year-end 18,091 7,301 7,310 7,296 7,158
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
(a) Primary and fully diluted net income (loss) per share for all five years
were the same because the fully diluted computation was antidilutive.
32
MANAGEMENT DISCUSSION AND ANALYSIS
ACQUISITION OF THE CIBA COMPOSITES BUSINESS
Hexcel acquired the Ciba Composites Business of Ciba-Geigy Limited and
Ciba-Geigy Corporation on February 29, 1996. The Ciba Composites Business is
engaged in the manufacture and marketing of composite materials, parts and
structures for aerospace, recreation and general industrial markets. Product
lines include fabrics, prepregs, adhesives, honeycomb core, sandwich panels and
fabricated components, as well as structures and interiors primarily for the
commercial and military aerospace markets.
The acquisition of the Ciba Composites Business was consummated pursuant to
the Strategic Alliance Agreement. Under the Strategic Alliance Agreement,
Hexcel acquired the assets (including the capital stock of certain of Ciba's
non-U.S. subsidiaries) and assumed the liabilities of the Ciba Composites
Business other than certain excluded assets and liabilities in exchange for: (a)
approximately 18.0 million newly issued shares of Hexcel common stock; (b) $25.0
million in cash; and (c) undertakings to deliver to Ciba and/or one or more of
its subsidiaries, following completion of certain post-closing adjustment
procedures contemplated by the Strategic Alliance Agreement, the Senior
Subordinated Notes and the Senior Demand Notes. Pursuant to the Strategic
Alliance Agreement, certain assets of the Ciba Composites Business and certain
assets of Ciba affiliates that will continue to act as distributors for the Ciba
Composites Business will be acquired by the Company from time to time prior to
February 28, 1997.
In connection with the acquisition of the Ciba Composites Business, the
Company obtained the Senior Secured Credit Facility to: (a) fund the cash
component of the purchase price; (b) refinance outstanding indebtedness under
certain U.S. and European credit facilities; and (c) provide for the ongoing
working capital and other financing requirements of the Company, including
consolidation activities, on a worldwide basis.
Further discussion of the acquisition of the Ciba Composites Business and
the Senior Secured Credit Facility is included in "Financial Condition and
Liquidity" below, as well as in "Item 1. Business." and in the Notes to the
Consolidated Financial Statements included in this Annual Report on Form 10-K.
Hexcel acquired the Ciba Composites Business on February 29, 1996.
Accordingly, the Company's results of operations for 1995, 1994 and 1993 do not
include the results of the Ciba Composites Business, and unless the context
otherwise indicates, the following discussion and analysis relates solely to the
operations of the Company prior to the acquisition of the Ciba Composites
Business.
BANKRUPTCY REORGANIZATION
On January 12, 1995, the Bankruptcy Court entered an order dated January
10, 1995 confirming the Reorganization Plan proposed by Hexcel and the Equity
Committee. On February 9, 1995, the Reorganization Plan became effective and
Hexcel emerged from the bankruptcy reorganization proceedings which had begun on
December 6, 1993, when Hexcel filed a voluntary petition for relief under the
provisions of Chapter 11 of the federal bankruptcy laws.
33
The Reorganization Plan which became effective on February 9, 1995 provided
for: (a) the replacement of a debtor-in-possession credit facility with a new
revolving credit facility (the "Revolving Credit Facility") of up to $45.0
million; (b) the creation of an amended reimbursement agreement with respect to
the letters of credit in support of certain industrial development revenue
bonds; (c) the completion of the first closing under a standby purchase
commitment whereby Mutual Series Fund Inc. ("Mutual Series") purchased
approximately 1.9 million shares of new common stock for $9.0 million and loaned
Hexcel $41.0 million as an advance against the proceeds of a subscription rights
offering for additional shares of new common stock; and (d) the reinstatement or
payment in full, with interest, of all allowed claims, including prepetition
accounts payable and notes payable.
The Revolving Credit Facility was replaced by the Senior Secured Credit
Facility on February 29, 1996.
The subscription rights offering concluded on March 27, 1995, with the
issuance of an additional 7.2 million shares of new common stock. The resulting
cash proceeds of $33.1 million were used to reduce the outstanding balance of
the loan from Mutual Series. The second closing under the standby purchase
agreement was completed on April 6, 1995, with the issuance of an additional 1.6
million shares of new common stock to Mutual Series, the issuance of an
additional 0.1 million shares of new common stock to John J. Lee, Hexcel's Chief
Executive Officer, and the retirement of the remaining balance of the Mutual
Series loan. Following the second closing under the standby purchase agreement
on April 6, 1995, the Company had a total of 18.1 million shares of common stock
issued and outstanding.
On February 9, 1995, Hexcel paid $78.1 million in prepetition claims and
interest, and reinstated another $60.6 million in prepetition liabilities. The
payment of claims and interest on February 9, 1995 was financed with: (a) cash
proceeds of $26.7 million received in the first quarter of 1995 from the sale of
the Company's Chandler, Arizona manufacturing facility and certain related
assets and technology; (b) cash proceeds of $2.6 million received in the first
quarter of 1995 from the sale of the Company's European resins business; (c) the
$50.0 million in cash received from Mutual Series in connection with the standby
purchase agreement; and (d) borrowings under the Revolving Credit Facility.
Further discussion of the Reorganization Plan, the Chandler and European
resins transactions, and Hexcel's emergence from bankruptcy reorganization
proceedings is included in the Notes to the Consolidated Financial Statements
included in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Hexcel generated income from continuing operations of $3.2 million in 1995,
or $0.20 per share. This compares with losses from continuing operations of
$28.1 million in 1994 and $79.9 million in 1993. The Company earned net income
of $2.7 million in 1995, or $0.17 per share. The Company incurred net losses of
$30.0 million and $86.0 million in 1994 and 1993, respectively.
Operating results for 1995 include other income of $0.8 million and
bankruptcy reorganization expenses of $3.4 million. Other income relates
primarily to additional monies received in connection with the sale of the
Chandler, Arizona manufacturing facility and certain related assets and
technology in 1994.
Operating results for 1994 include other income of $4.9 million, which is
largely comprised of $15.9 million in income related to the Chandler
transaction, less an $8.0 million provision to reflect the
34
estimated cost of restructuring a joint venture and a $2.9 million provision for
bankruptcy claim adjustments. The 1994 loss from continuing operations also
includes bankruptcy reorganization expenses of $20.2 million, as well as
interest expenses for bankruptcy claims and exit financing of $2.5 million and a
provision for the settlement of various tax audits of $1.8 million.
Operating results for 1993 include restructuring charges of $46.6 million
for a major expansion of the restructuring program begun in December 1992. The
1993 loss from continuing operations also includes other expenses of $12.8
million for the write-down of certain assets and increases in reserves for
warranties and environmental matters on property previously owned. The
impairment of assets was due primarily to the bankruptcy proceedings, changes in
business conditions, and depressed real estate prices on property held for sale.
In addition, Hexcel recorded a $10.9 million provision in 1993 to reflect the
adverse impact of bankruptcy proceedings and substantial operating losses on the
potential realization of deferred income tax benefits.
Losses from discontinued operations totaled $0.5 million, $1.9 million and
$10.6 million in 1995, 1994 and 1993, respectively. These losses reflect the
results of the discontinued resins business, including provisions to write-down
the net assets of this business by $2.8 million in 1994 and $6.0 million in
1993. The divestiture of the resins business was completed in October 1995.
The 1993 losses from discontinued operations also reflect the results of the
discontinued fine chemicals business, including a provision to write-down the
net assets of this business by $2.8 million in 1993. The divestiture of the
fine chemicals business was completed in January 1994.
In 1993, the Company recorded a one-time, cumulative benefit of $4.5
million from the adoption of a new accounting standard for income taxes.
SALES
Net sales for 1995 totaled $350.2 million, compared with 1994 net sales of
$313.8 million and 1993 net sales of $310.6 million. The improvement in 1995
sales over 1994 and 1993 levels is attributable to increased sales of prepregs
and reinforcement fabrics, partially offset by decreased sales of honeycomb.
Sales of prepregs to commercial aerospace and general industrial markets were
higher, as were sales of reinforcement fabrics for use in the recreation,
electrical (printed circuit boards) and ballistics industries. In addition,
Hexcel benefited from a significant military contract for prepregs, and improved
sales of honeycomb to the commercial aerospace market. The overall decrease in
honeycomb sales is attributable to the divestiture of the Chandler facility and
the related reduction in military aerospace sales. The Chandler facility and
certain related assets and technology were sold to the Northrop Grumman
Corporation in December 1994.
The increase in sales from 1994 to 1995 reflects a modest increase in
demand for certain products used in the commercial aerospace market, further
penetration of selected recreation and general industrial markets, and continued
improvement in the overall economic environment in both the U.S. and Europe.
Changes in currency exchange rates were also a factor in the increase. During
1995, the U.S. dollar declined against most of the major European currencies,
including the Belgian and French francs; accordingly, sales from Hexcel's
primary international subsidiaries were increased when translated into U.S.
dollars. Due to the highly competitive nature of most of the markets in which
the Company competes, product price changes were not a significant factor in
1995 sales growth.
U.S. sales were $179.5 million in 1995, compared with $171.5 million in
1994 and $185.2 million in 1993. The 1995 increase is primarily attributable to
a significant military contract for prepregs and
35
improved sales of reinforcement fabrics to general industrial and other markets.
The reduction in honeycomb sales attributable to the divestiture of the Chandler
facility was partially offset by increased sales of honeycomb to commercial
aerospace and other markets. The 1994 decrease in U.S. sales was mainly due to
reduced sales of prepregs and honeycomb to commercial and military aerospace
markets, partially negated by improved sales of prepregs to general industrial
and other markets.
International sales were $170.7 million in 1995, compared with $142.3
million in 1994 and $125.4 million in 1993. The 1995 and 1994 increases reflect
higher sales of prepregs and reinforcement fabrics to recreation, electrical
(printed circuit boards) and other industries, as well as increased sales of
prepregs to certain European aerospace customers. A portion of each increase is
also attributable to changes in currency exchange rates. The U.S. dollar
declined relative to the Belgian and French francs in 1994 as well as in 1995.
COMMERCIAL AEROSPACE SALES
Worldwide sales were $159.0 million in 1995, compared with $147.5 million
in 1994 and $131.4 million in 1993. Sales of prepregs and honeycomb to the
commercial aerospace market increased in 1995 as a result of modest improvements
in the build rates for certain commercial aircraft, as well as increased sales
of selected products. In addition, Hexcel benefited from the improved economic
environment in Europe, which also contributed to the 1994 sales increase.
Nonetheless, while sales of individual products such as graphite honeycomb and
certain prepreg products have increased during the past two years in response to
the production of new wide-bodied aircraft, the Company continues to face
intense competition for many of the products it sells to the commercial
aerospace market. As a result, there is significant price pressure on several
of these products.
SPACE AND DEFENSE SALES
Worldwide sales were $37.3 million in 1995, compared with $34.9 million in
1994 and $55.3 million in 1993. The slight increase in 1995 sales is
attributable to a significant military contract for prepregs, partially negated
by a decline in honeycomb sales. The decline in honeycomb sales reflects the
divestiture of the Chandler facility and the related reduction in military
aerospace sales.
The reduction in space and defense sales from 1993 to 1994 continued a
trend which began in 1988, when sales to this market exceeded $100 million, and
reflects Hexcel's declining involvement in a major military aerospace program as
well as the general decline in U.S. military spending.
RECREATION, GENERAL INDUSTRIAL AND OTHER SALES
Worldwide sales were $153.9 million in 1995, compared with $131.4 million
in 1994 and $123.9 million in 1993. Sales of new products introduced within the
past few years continued to grow, and Hexcel benefited from strong European
demand for printed circuit boards. In addition, sales of lightweight, high-
strength materials for use in athletic shoes, golf club shafts, energy
absorption products, and certain automotive and mass transit components remained
relatively strong. Continued growth in sales to recreation, general industrial
and other markets has contributed to an increase of such sales as a percentage
of the consolidated total from 34% in 1991 to 44% in 1995.
GROSS MARGIN
Gross margin was $67.1 million, or 19.2% of sales, in 1995. This compares
with gross margin of $48.4 million, or 15.4% of sales, in 1994 and $47.5
million, or 15.3% of sales, in 1993. The increase in 1995 gross margin over
1994 and 1993 levels reflects the impact of higher sales, as well as certain
36
manufacturing cost reductions. Cost reductions include the closure of the
Graham, Texas plant, the sale of the Chandler facility and the consolidation of
selected honeycomb production activities into Hexcel's site at Casa Grande,
Arizona. Although these measures were initially undertaken in 1993 and 1994,
the transfer of certain production processes from Graham and Chandler to Casa
Grande was not completed until the middle of 1995. Consequently, the beneficial
impact of these facility reductions and the consolidation of honeycomb
production activities began to be realized during 1995.
Due to the highly competitive nature of most of the markets in which Hexcel
competes, product price changes were not a significant factor in the growth of
1995 gross margin.
MARKETING, GENERAL AND ADMINISTRATIVE (M,G&A) EXPENSES
M,G&A expenses were $49.3 million in 1995, compared with $45.8 million in
1994 and $52.5 million in 1993. The increase in M,G&A expenses during 1995 is
largely attributable to higher selling expenses, certain costs incurred in
connection with the acquisition of the Ciba Composites Business and changes in
currency exchange rates. The decrease in M,G&A expenses during 1994 was mainly
due to significant headcount reductions made during 1993 and the first quarter
of 1994. These headcount reductions were achieved through a reorganization of
sales, marketing and administrative functions to reduce redundancies and
inefficiencies. M,G&A expenses include research and technology expenses of $7.6
million in 1995, $8.2 million in 1994 and $8.0 million in 1993.
INTEREST EXPENSE
Interest expense was $8.7 million in 1995, compared with $11.8 million in
1994 and $8.9 million in 1993. The 1994 total includes accrued interest on
prepetition accounts payable as well as notes payable. The decline in interest
expense from 1994 to 1995 reflects the absence of interest on bankruptcy claims
after February 9, 1995, as well as the elimination of various debt obligations
with proceeds from the subscription rights offering and the Chandler
transaction. Hexcel also benefited from slightly lower interest rates on
certain variable rate debt.
The increase in interest expense from 1993 to 1994 reflects the accrual of
interest on bankruptcy claims beginning December 6, 1993, the cost of a debtor-
in-possession credit facility and higher interest rates on certain variable rate
obligations. These factors were only partially offset by reduced levels of
borrowing by Hexcel's European subsidiaries.
INCOME TAXES
As of December 31, 1995, the Company had net operating loss ("NOL")
carryforwards for U.S. federal income tax purposes of approximately $65 million
and net operating loss carryforwards for international income tax purposes of
approximately $5 million. The U.S. NOL carryforwards, which are available to
offset future taxable income, expire at various dates through the year 2010. As
a result of the ownership changes which occurred in connection with the
Reorganization Plan and the acquisition of the Ciba Composites Business,
utilization of the U.S. NOL carryforwards is subject to certain annual
limitations, as described in Note 16 to the Consolidated Financial Statements
included in this Annual Report on Form 10-K.
The 1995 income tax provision of $3.3 million resulted primarily from state
income taxes and taxable income for certain European subsidiaries. The 1994 and
1993 income tax provisions of $3.6 million and $6.0 million, respectively, were
attributable to the same factors. In addition, the 1994 provision includes the
impact of settling various tax audits. Hexcel fully reserved the income tax
assets
37
generated by the pre-tax losses of certain subsidiaries in 1995, 1994 and 1993,
due to uncertainty as to the realization of those assets.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL RESOURCES
In connection with the acquisition of the Ciba Composites Business on
February 29, 1996, Hexcel obtained the Senior Secured Credit Facility. The
Senior Secured Credit Facility is a three-year revolving credit facility of up
to $175.0 million which is available to: (a) fund the $25.0 million cash
component of the purchase price paid for the Ciba Composites Business; (b)
refinance outstanding indebtedness under certain U.S. and European credit
facilities; and (c) provide for the ongoing working capital and other financing
requirements of the Company, including consolidation activities, on a worldwide
basis. The Senior Secured Credit Facility replaces the Revolving Credit
Facility which was obtained on February 9, 1995, in connection with Hexcel's
Reorganization Plan, as well as certain European credit facilities.
The Senior Secured Credit Facility is secured by a pledge of stock of
certain of Hexcel's subsidiaries, and is also guaranteed by the Company and
certain of its subsidiaries. In addition, the Company is subject to various
financial covenants and restrictions under the Senior Secured Credit Facility,
including minimum levels of tangible net worth and fixed charge coverage, and
maximum levels of debt to earnings before interest, taxes, depreciation and
amortization. The Senior Secured Credit Facility also imposes certain
restrictions on incurring additional indebtedness, and generally prohibits the
Company from paying dividends or redeeming capital stock.
In addition to providing for typical events of default, including an event
of default resulting from a "change in control" (as defined) of the Company, the
Senior Secured Credit Facility provides that an event of default would occur if,
under certain circumstances, Ciba: (a) ceases to hold, directly or indirectly
through one or more wholly-owned subsidiaries, 100% of the outstanding principal
amount of the Senior Subordinated Notes, or (b) ceases to beneficially own,
directly or indirectly, at least 40% of Hexcel's voting stock. In light of the
foregoing, the Company and Ciba entered into a Retention Agreement, dated as of
February 29, 1996, pursuant to which Ciba agreed, subject to the limitations set
forth therein, to: (a) hold directly or indirectly through one or more wholly-
owned subsidiaries, 100% of the outstanding principal amount of the Senior
Subordinated Notes, and (b) beneficially own, directly or indirectly, at least
40% of the Company's voting stock. Further discussion of the Senior Secured
Credit Facility is included in the Notes to the Consolidated Financial
Statements included in this Annual Report on Form 10-K.
Management believes that the Senior Secured Credit Facility provides Hexcel
with more borrowing capacity and imposes less restrictive conditions than the
credit facilities which it has replaced. Management expects that the financial
resources of Hexcel, including the Senior Secured Credit Facility, will be
sufficient to fund the Company's worldwide operations, including the operations
of the Ciba Composites Business.
CASH FLOWS
Unaudited pro forma financial information as to the acquisition of the Ciba
Composites Business, including the financing of this acquisition, is included in
Note 3 to the Consolidated Financial Statements included in this Annual Report
on Form 10-K.
38
Income from continuing operations before interest expense, bankruptcy
reorganization expenses, income taxes, and depreciation and amortization
("EBITDA") was $30.2 million in 1995, but continuing operations used $3.0
million of cash. Approximately $23.0 million of the difference between EBITDA
and net cash flow used by continuing operations is attributable to the payment
of prepetition accounts payable and accrued liabilities that had been reinstated
on February 9, 1995, and another $6.5 million is attributable to the payment of
accrued restructuring costs. In addition, Hexcel incurred $8.7 million of
interest expense, $3.4 million of bankruptcy reorganization expenses, and
financed a $9.9 million increase in accounts receivable and inventories
resulting from higher sales levels. However, the Company benefited from a $19.4
million increase in postpetition accounts payable and accrued liabilities,
reflecting both higher production levels and a return to normal credit terms
with most vendors.
EBITDA was $21.7 million in 1994, and net cash provided by continuing
operations was $1.1 million. Interest and bankruptcy reorganization expenses
totaled $32.0 million, but these expenditures were largely offset by a
comparable increase in accounts payable and accrued liabilities (including
liabilities subject to disposition in bankruptcy reorganization). The increase
in accounts payable and accrued liabilities was primarily attributable to the
accrual of interest on prepetition obligations, adjustments to allowed claims,
and a return to payment terms with some vendors. In addition, Hexcel paid
approximately $10.1 million in restructuring costs and financed a $7.4 million
increase in accounts receivable and inventories.
EBITDA is presented for purposes of describing the significant components
of Hexcel's cash flows from continuing operating activities, and is not
presented as an alternative measure of those cash flows or of the Company's
operating results as determined in accordance with generally accepted accounting
principles.
CAPITAL EXPENDITURES
Capital expenditures were $12.1 million in 1995, compared with $8.4 million
in 1994 and $6.3 million in 1993. The increase from 1994 and 1993 levels is due
to purchases of equipment necessary to improve manufacturing processes, and to
the deferral of expenditures during bankruptcy reorganization proceedings.
Further increases in capital spending are expected in 1996, partially as a
result of the acquisition of the Ciba Composites Business. The 1995 capital
expenditures of the Ciba Composites Business were $13.2 million, and management
expects that the Company's 1996 capital expenditures will exceed the $25.3
million spent in the aggregate by the Company and the Ciba Composites Business
during 1995. Such expenditures will be financed with cash generated from
operations and borrowings under the Senior Secured Credit Facility.
RECENTLY ISSUED ACCOUNTING STANDARDS
Hexcel is required to adopt Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), in 1996. SFAS 121 requires that the
recoverability of long-lived assets to be held or used, including intangible
assets, be assessed when events or circumstances indicate that the value of
those assets may be impaired. That assessment, determined by reference to the
estimated undiscounted future cash flows resulting from the use of the assets,
will be based on each group of assets within each of the Company's strategic
business units. Management has not yet determined the impact, if any, that the
adoption of SFAS 121 will have on the Company's consolidated financial position
or results of operations.
39
Hexcel is required to adopt Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. SFAS 123
establishes accounting and disclosure requirements using a fair value based
method of accounting for stock based employee compensation plans. Under SFAS
123, the Company may either adopt the new fair value based accounting method or
continue the intrinsic value based method and provide pro forma disclosures of
net earnings and earnings per share as if the fair value method had been
applied. The Company plans to adopt only the disclosure requirements of SFAS
123. Consequently, the adoption of SFAS 123 will have no effect on the
Company's consolidated net earnings.
40
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Description Page
- --------------------------------------------------------------------------------------------------
Management Responsibility for Financial Statements 42
Independent Auditors' Report 43
Consolidated Financial Statements:
Consolidated Statements of Operations: Three years ended December 31, 1995 44
Consolidated Balance Sheets: December 31, 1995 and 1994 45
Consolidated Statements of Cash Flows: Three years ended December 31, 1995 46
Consolidated Statements of Shareholders' Equity (Deficit):
Three years ended December 31, 1995 47
Notes to the Consolidated Financial Statements 48 - 81
Statement Regarding Computation of Per Share Earnings (Unaudited) Exhibit 11
Financial statement schedules have been omitted because they are not
applicable or the required information is included in the consolidated financial
statements or notes thereto.
41
MANAGEMENT RESPONSIBILITY FOR FINANCIAL STATEMENTS
Hexcel management has prepared and is responsible for the consolidated
financial statements and the related financial data contained in this report.
These financial statements, which include estimates, were prepared in accordance
with generally accepted accounting principles. Management uses its best
judgment to ensure that such statements reflect fairly the consolidated
financial position, results of operations and cash flows of the Company.
Hexcel maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements and that assets are safeguarded and
accounted for properly. Underlying this concept of reasonable assurance is the
premise that the cost of control should not exceed benefits derived from
control.
The Audit Committee of the Board of Directors reviews and monitors the
financial reports and accounting practices of Hexcel. These reports and
practices are reviewed regularly by management and by the independent auditors,
Deloitte & Touche LLP, in connection with the audit of the Company's financial
statements. The Audit Committee, composed solely of outside directors, meets
periodically, separately and jointly, with management and the independent
auditors.
/s/ JOHN J. LEE
- ------------------------------
(John J. Lee)
CHIEF EXECUTIVE OFFICER
/s/ WILLIAM P. MEEHAN
- ------------------------------
(William P. Meehan)
CHIEF FINANCIAL OFFICER
/s/ WAYNE C. PENSKY
- ------------------------------
(Wayne C. Pensky)
CHIEF ACCOUNTING OFFICER
42
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Shareholders of Hexcel Corporation:
We have audited the accompanying consolidated balance sheets of Hexcel
Corporation and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of Hexcel's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Hexcel Corporation and subsidiaries
at December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements, on January 12,
1995, the U.S. Bankruptcy Court entered an order dated January 10, 1995
confirming Hexcel's plan of reorganization which became effective on February 9,
1995. The terms of the plan of reorganization are more fully described in Note
4.
As discussed in Notes 2 and 3 to the consolidated financial statements, on
February 29, 1996, Hexcel acquired the Ciba Composites Business.
As discussed in Note 1 to the consolidated financial statements, Hexcel changed
its method of accounting for income taxes effective January 1, 1993 to conform
with Statement of Financial Accounting Standards No. 109.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Oakland, California
March 1, 1996
43
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
Net sales $ 350,238 $ 313,795 $ 310,635
Cost of sales (283,148) (265,367) (263,090)
- -------------------------------------------------------------------------------------------------------
Gross margin 67,090 48,428 47,545
Marketing, general and administrative expenses (49,324) (45,785) (52,510)
Other income (expenses), net 791 4,861 (12,780)
Restructuring expenses - - (46,600)
- -------------------------------------------------------------------------------------------------------
Operating income (loss) 18,557 7,504 (64,345)
Interest expense (8,682) (11,846) (8,862)
Bankruptcy reorganization expenses (3,361) (20,152) (641)
- -------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations before income taxes 6,514 (24,494) (73,848)
Provision for income taxes (3,313) (3,586) (6,024)
- -------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 3,201 (28,080) (79,872)
Discontinued operations:
Income (loss) from operations, net of (provision) for
income taxes of ($441) in 1994 and ($177) in 1993 - 989 (6,584)
Losses during phase-out period, net of benefit
(provision) for income taxes of ($136) in 1994
and $383 in 1993 (468) (2,879) (4,039)
- -------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change 2,733 (29,970) (90,495)
Cumulative effect of change in accounting for income taxes - - 4,500
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,733 $ (29,970) $ (85,995)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Net income (loss) per share and equivalent share:
Primary and fully diluted:
Continuing operations $ 0.20 $ (3.84) $ (10.89)
Discontinued operations (0.03) (0.26) (1.45)
Cumulative effect of change in accounting for
income taxes - - 0.61
- -------------------------------------------------------------------------------------------------------
Net income (loss) $ 0.17 $ (4.10) $ (11.73)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
Weighted average shares and equivalent shares 15,742 7,310 7,330
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
THE ACCOMPANING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
44
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------
DECEMBER 31, December 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1994
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and equivalents $ 3,829 $ 931
Receivables from asset sales - 29,340
Accounts receivable 65,888 64,136
Inventories 55,475 47,364
Prepaid expenses 2,863 3,581
Net assets of discontinued operations - 3,000
- ---------------------------------------------------------------------------------------------------------------
Total current assets 128,055 148,352
- ---------------------------------------------------------------------------------------------------------------
Property, plant and equipment 203,580 186,328
Less accumulated depreciation 117,625 103,215
- ---------------------------------------------------------------------------------------------------------------
Net property, plant and equipment 85,955 83,113
- ---------------------------------------------------------------------------------------------------------------
Investments and other assets 16,592 11,992
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 230,602 $ 243,457
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of long-term liabilities $ 1,802 $ 12,720
Accounts payable 22,904 18,163
Accrued liabilities 38,892 32,234
Accrued restructuring liabilities 2,887 11,165
Liabilities subject to disposition in bankruptcy reorganization - 97,025
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 66,485 171,307
- ---------------------------------------------------------------------------------------------------------------
Long-term notes payable and capital lease obligations 88,342 16,004
Deferred liabilities 27,401 21,279
Liabilities subject to disposition in bankruptcy reorganization - 40,752
- ---------------------------------------------------------------------------------------------------------------
Shareholders' equity (deficit):
Common stock, $0.01 par value, authorized 40,000 shares, shares
issued and outstanding of 18,091 in 1995 and 7,301 in 1994 181 73
Additional paid-in capital 111,259 62,626
Accumulated deficit (69,981) (72,714)
Minimum pension obligation adjustment (535) (137)
Cumulative currency translation adjustment 7,450 4,267
- ---------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 48,374 (5,885)
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 230,602 $ 243,457
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
45
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations $ 3,201 $ (28,080) $ (79,872)
Reconciliation to net cash provided (used) by
continuing operations:
Depreciation and amortization 11,623 14,230 14,880
Deferred provision (benefit) for income taxes (329) 3,609 4,805
Other income relating to sale of the Chandler, Arizona
manufacturing facility and related assets and technology (600) (15,900) -
Provision for DIC-Hexcel Limited - 8,000 -
Restructuring expenses - - 46,600
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (1,752) (1,168) 9,157
(Increase) decrease in inventories (8,111) (6,228) 3,336
(Increase) decrease in prepaid expenses 718 (454) (1,775)
Increase (decrease) in accounts payable and
accrued liabilities (10,090) 30,966 3,959
Changes in other non-current assets and long-term liabilities 2,346 (3,876) 9,736
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by continuing operations (2,994) 1,099 10,826
Net cash provided (used) by discontinued operations 486 (2,206) 624
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (2,508) (1,107) 11,450
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (12,144) (8,362) (6,264)
Proceeds from equipment sold 17 229 764
Deferred business acquisition costs, incurred in connection
with the acquisition of the Ciba Composites Business (4,150) - -
Proceeds from sale of discontinued resins business 4,648 6,125 -
Proceeds from sale of the Chandler, Arizona manufacturing
facility and certain related assets and technology 27,294 2,294 -
Proceeds from sale of stitchbonded fabrics business to
joint venture - - 4,500
Investments in joint ventures - - (1,750)
Proceeds from sale of discontinued fine chemicals business - - 500
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 15,665 286 (2,250)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 4,317 171 -
Payments of long-term debt (5,402) (11,413) (4,801)
Proceeds of short-term debt, net 20,923 1,687 6,847
Proceeds from issuance of common stock 48,741 - 270
Payments of allowed claims pursuant to the Reorganization Plan (78,144) - -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (9,565) (9,555) 2,316
- ----------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and equivalents (694) (41) (535)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 2,898 (10,417) 10,981
Cash and equivalents at beginning of year 931 11,348 367
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $ 3,829 $ 931 $ 11,348
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
46
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Retained Minimum Cumulative Total
----------------------- Additional Earnings Pension Currency Shareholders'
Outstanding Paid-in (Accumulated Obligation Translation Equity
(In thousands) Shares Amount Capital Deficit) Adjustment Adjustment (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1993 7,296 $ 73 $ 62,292 $ 43,251 - $ 533 $ 106,149
Net loss - - - (85,995) - - (85,995)
Activity under stock plans 14 - 270 - - - 270
Pension obligation adjustment - - - - $ (646) - (646)
Currency translation adjustment - - - - - 975 975
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 7,310 73 62,562 (42,744) (646) 1,508 20,753
Net loss - - - (29,970) - - (29,970)
Activity under stock plans (9) - 64 - - - 64
Pension obligation adjustment - - - - 509 - 509
Currency translation adjustment - - - - - 2,759 2,759
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 7,301 73 62,626 (72,714) (137) 4,267 (5,885)
Net income - - - 2,733 - - 2,733
Sale of new common stock under
standby purchase commitment
and subscription rights offering 10,800 108 48,631 - - - 48,739
Activity under stock plans (10) - 2 - - - 2
Pension obligation adjustment - - - - (398) - (398)
Currency translation adjustment - - - - - 3,183 3,183
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 18,091 $ 181 $ 111,259 $ (69,981) $ (535) $ 7,450 $ 48,374
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF ACCOUNTING
The consolidated financial statements include the accounts of Hexcel
Corporation and subsidiaries ("Hexcel" or the "Company"), after elimination of
intercompany transactions and accounts. Hexcel is an international developer
and manufacturer of lightweight, high-performance composite materials, parts and
structures for use in the commercial aerospace, space and defense, recreation
and general industrial markets. The Company serves international markets
through manufacturing and marketing facilities located in the United States and
Europe, as well as sales offices in Asia, Australia and South America. The
Company is also a partner in three joint ventures that manufacture and sell
composite materials in the U.S. and Asia.
As discussed in Notes 2 and 3, Hexcel acquired the worldwide composites
division of Ciba-Geigy Limited, a Swiss corporation ("Ciba"), and Ciba-Geigy
Corporation, a New York corporation ("CGC"), including Ciba's and CGC's
composite materials, parts and structures businesses (the "Ciba Composites
Business"), on February 29, 1996. The Company acquired the Ciba Composites
Business in exchange for: (a) approximately 18,022 newly issued shares of Hexcel
common stock; (b) $25,000 in cash; and (c) undertakings to deliver to Ciba
and/or one or more of its subsidiaries, following completion of certain post-
closing adjustment procedures, various senior subordinated notes and senior
demand notes. In connection with the acquisition of the Ciba Composites
Business, the Company obtained a new three-year revolving credit facility of up
to $175,000 (the "Senior Secured Credit Facility") to: (a) fund the cash
component of the purchase price; (b) refinance outstanding indebtedness under
certain U.S. and European credit facilities; and (c) provide for the ongoing
working capital and other financing requirements of the Company on a worldwide
basis (see Note 10). The acquisition of the Ciba Composites Business and
related financing activities occurred subsequent to December 31, 1995, and have
not been reflected in the historical consolidated financial statements and
accompanying notes presented herein.
As discussed in Note 4, Hexcel Corporation (a Delaware corporation)
operated as a debtor-in-possession under the provisions of Chapter 11 of the
federal bankruptcy laws from December 6, 1993 until February 9, 1995, when the
First Amended Plan of Reorganization (the "Reorganization Plan") proposed by
Hexcel and the Official Committee of Equity Security Holders (the "Equity
Committee") became effective. Consequently, the consolidated financial
statements as of December 31, 1994, and for each of the three years in the
period ended December 31, 1995, have been prepared in accordance with Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," issued by the American Institute of Certified Public
Accountants ("SOP 90-7").
CASH AND EQUIVALENTS
The Company invests excess cash in investments with original maturities of
less than three months. The investments consist of Eurodollar time deposits and
are stated at cost, which approximates market value. The Company considers such
investments to be cash equivalents for purposes of the statements of cash flows.
ACCOUNTS RECEIVABLE
Accounts receivable were net of reserves for doubtful accounts of $2,603
and $1,249 as of December 31, 1995 and 1994, respectively.
48
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs and
maintenance are charged to expense as incurred; replacements and betterments are
capitalized. Interest expense associated with major long-term construction
projects is capitalized. No interest was capitalized in 1995 or 1994; $227 of
interest was capitalized in 1993.
The Company depreciates property, plant and equipment over estimated useful
lives. Accelerated and straight-line methods are used for financial statement
purposes. The estimated useful lives range from 10 to 40 years for buildings
and improvements and 3 to 20 years for machinery and equipment.
CURRENCY TRANSLATION
The assets and liabilities of European subsidiaries are translated into
U.S. dollars at year-end exchange rates, and revenues and expenses are
translated at average exchange rates during the year. Cumulative currency
translation adjustments are included in shareholders' equity. Realized gains
and losses from currency exchange transactions were not material to the
Company's consolidated results of operations in 1995, 1994 or 1993.
RESEARCH AND TECHNOLOGY COSTS
Research and technology costs of $7,618 in 1995, $8,201 in 1994 and $7,971
in 1993 were expensed as incurred, and are included in "marketing, general and
administrative expenses" in the consolidated statements of operations.
ACCOUNTING CHANGE
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") (see
Note 16). The cumulative effect of this accounting change has been reflected in
the consolidated statement of operations for the year ended December 31, 1993.
EARNINGS PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by
the weighted average number of common shares and dilutive common share
equivalents (stock options) outstanding during each year. The computation on
the fully diluted basis, which considers the exercise of stock options and the
conversion of the convertible subordinated debentures, was antidilutive in 1995,
1994 and 1993.
RECLASSIFICATIONS
Certain prior year amounts in the consolidated financial statements and
notes have been reclassified to conform to the 1995 presentation.
ESTIMATES AND ASSUMPTIONS
The consolidated financial statements and accompanying notes reflect
numerous estimates and assumptions made by the management of Hexcel. These
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosures with respect to contingent assets and liabilities, and the
reported amounts of revenues and expenses. Although management believes that
the estimates and assumptions used in preparing the consolidated financial
statements and accompanying notes are reasonable in light of known facts and
circumstances, actual results could differ from the estimates used.
49
RECENTLY ISSUED ACCOUNTING STANDARDS
Hexcel is required to adopt Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"), in 1996. SFAS 121 requires that the
recoverability of long-lived assets to be held or used, including intangible
assets, be assessed when events or circumstances indicate that the value of
those assets may be impaired. That assessment, determined by reference to the
estimated undiscounted future cash flows resulting from the use of the assets,
will be based on each group of assets within each of the Company's strategic
business units. Management has not yet determined the impact, if any, that the
adoption of SFAS 121 will have on the Company's consolidated financial position
or results of operations.
Hexcel is required to adopt Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in 1996. SFAS 123
establishes accounting and disclosure requirements using a fair value based
method of accounting for stock based employee compensation plans. Under SFAS
123, the Company may either adopt the new fair value based accounting method or
continue the intrinsic value based method and provide pro forma disclosures of
net earnings and earnings per share as if the fair value method had been
applied. The Company plans to adopt only the disclosure requirements of SFAS
123. Consequently, the adoption of SFAS 123 will have no effect on the
Company's consolidated net earnings.
NOTE 2 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS
Hexcel acquired the Ciba Composites Business of Ciba-Geigy Limited and
Ciba-Geigy Corporation on February 29, 1996. The Ciba Composites Business is
engaged in the manufacture and marketing of composite materials, parts and
structures for aerospace, recreation and general industrial markets. Product
lines include fabrics, prepregs, adhesives, honeycomb core, sandwich panels and
fabricated components, as well as structures and interiors primarily for the
commercial and military aerospace markets.
The acquisition of the Ciba Composites Business was consummated pursuant to
a Strategic Alliance Agreement dated as of September 29, 1995 among Ciba, CGC,
and Hexcel, as amended (the "Strategic Alliance Agreement"). Under the
Strategic Alliance Agreement, the Company acquired the assets (including the
capital stock of certain of Ciba's non-U.S. subsidiaries) and assumed the
liabilities of the Ciba Composites Business other than certain excluded assets
and liabilities in exchange for: (a) approximately 18,022 newly issued shares of
Hexcel common stock; (b) $25,000 in cash; and (c) undertakings to deliver to
Ciba and/or one or more of its subsidiaries, following completion of certain
post-closing adjustment procedures contemplated by the Strategic Alliance
Agreement, senior subordinated notes in an aggregate principal amount of
approximately $43,000, subject to certain adjustments (the "Senior Subordinated
Notes"), and senior demand notes in a principal amount equal to the cash on hand
at certain of Ciba's non-U.S. subsidiaries (the "Senior Demand Notes"). (The
pro forma aggregate principal amount of the Senior Subordinated Notes as of
December 31, 1995 was $27,400. See Note 3.) In connection with the acquisition
of the Ciba Composites Business, the Company obtained the Senior Secured Credit
Facility to: (a) fund the cash component of the purchase price; (b) refinance
outstanding indebtedness under certain U.S. and European credit facilities; and
(c) provide for the ongoing working capital and other financing requirements of
the Company on a worldwide basis (see Note 10). The acquisition of the Ciba
Composites Business and related financing activities occurred subsequent to
December 31, 1995, and have not been reflected in the historical consolidated
financial statements and accompanying notes presented herein.
50
NOTE 3 -- ACQUISITION OF THE CIBA COMPOSITES BUSINESS: PRO FORMA FINANCIAL
INFORMATION (UNAUDITED)
The following unaudited pro forma financial information combines the
condensed balance sheets and statements of operations of Hexcel and the Ciba
Composites Business after giving effect to the acquisition of the Ciba
Composites Business by the Company. The unaudited pro forma condensed combined
balance sheet as of December 31, 1995 gives effect to the acquisition as if it
had occurred on December 31, 1995. The unaudited pro forma condensed combined
statement of operations for the year ended December 31, 1995 gives effect to the
acquisition as if it had occurred on January 1, 1995. The pro forma adjustments
account for the acquisition as a purchase of the Ciba Composites Business by the
Company, and are based upon the assumptions set forth in the accompanying
disclosures.
The following unaudited pro forma financial information is not necessarily
indicative of the financial position or operating results that would have
occurred had the acquisition of the Ciba Composites Business been consummated on
the dates indicated, nor is it necessarily indicative of future operating
results or financial position. Management expects that significant costs will
be incurred in connection with combining the operations of Hexcel and the Ciba
Composites Business, including costs of eliminating excess manufacturing
capacity and redundant administrative and research and development activities,
as well as the various costs of consolidating the information systems and other
business activities of the two companies. Some of the costs associated with
combining the two businesses, including certain costs to eliminate redundant
administrative and research and development activities, will be incurred during
1996. The anticipated resulting benefits are expected to be realized shortly
thereafter. However, other costs, including many of the costs to eliminate
excess manufacturing capacity, are expected to be incurred over a period of as
much as three years. This is attributable, in part, to aerospace industry
requirements to "qualify" specific equipment and manufacturing facilities for
the manufacture of certain products. Based on the Company's experience with
previous plant consolidations, these qualification requirements necessitate an
approach to the consolidation of manufacturing facilities that will require two
to three years to complete. Accordingly, the costs and anticipated future
benefits of eliminating excess manufacturing capacity are long-term in nature.
The Board of Directors of Hexcel has not yet approved the plan for
combining the operations of Hexcel and the Ciba Composites Business, but is
expected to do so in the second quarter of 1996. Subject to the approval of the
consolidation plan by the Board of Directors, management currently estimates
that the cash costs of combining the two businesses could range from $35,000 to
$45,000, net of expected proceeds from asset sales which are expected to be
received at the end of the consolidation process. (This range includes the
estimated net cash cost to close the Anaheim manufacturing facility of the Ciba
Composites Business. The decision to close this facility was announced in the
first quarter of 1996.) Management notes, however, that the actual cash costs
of combining the two businesses could vary from current estimates due to the
fact that the nature, timing and extent of certain consolidation activities is
dependent on numerous factors.
Management expects to record one or more charges to earnings for the
estimated costs of certain business consolidation activities. The estimated
costs of specific consolidation activities will be accrued in accordance with
generally accepted accounting principles as those activities are determined and
announced. Although the aggregate amount of the resulting charges to earnings
has not yet been determined, management currently estimates that the amount
could range from $40,000 to $50,000, including noncash charges. However, the
actual aggregate amount of such charges could vary from current estimates.
The cash expenditures necessary to combine the Ciba Composites Business
with Hexcel are expected to occur over a period of as much as three years. The
nature, timing and extent of these expenditures will be determined, in part, by
management's evaluation of the probable economic and competitive benefits to
51
be gained from specific consolidation activities. Management anticipates that
the benefits to be realized from planned consolidation activities will be
sufficient to justify the level of associated costs. However, some of the
anticipated benefits are long-term in nature, and there can be no assurance that
such benefits will actually be realized. Accordingly, no effect has been given
to the costs of combining the two businesses, or to the operating, financial and
other benefits that may be realized from the combination, in the accompanying
pro forma financial information.
52
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------
HISTORICAL PRO FORMA
----------------------- -----------------------
CIBA
HEXCEL COMPOSITES ADJUSTMENTS COMBINED
--------- ---------- ----------- --------
ASSETS
Current assets:
Cash and equivalents $ 3,829 $ 8,412 $ (8,412) (a) $ 3,829
Accounts receivable 65,888 58,799 (5,805) (b) 118,882
Inventories 55,475 60,337 (1,545) (c) 114,267
Prepaid expenses and other assets 2,863 9,957 (6,019) (d) 6,801
-------- -------- --------- --------
Total current assets 128,055 137,505 (21,781) 243,779
-------- -------- --------- --------
Net property, plant and equipment 85,955 156,364 (45,487) (e) 196,832
Excess of purchase price over net
assets acquired 44,300 (f) 44,300
Investments and other assets 16,592 46,425 (47,069) (g) 15,948
-------- -------- --------- --------
Total assets $ 230,602 $ 340,294 $ (70,037) $ 500,859
-------- -------- --------- --------
-------- -------- --------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current
maturities of long-term
liabilities $ 1,802 $ 10,469 $ (9,052) (h) $ 3,219
Accounts payable 22,904 29,611 (1,208) (i) 51,307
Accrued liabilities 41,779 27,574 69,353
-------- -------- --------- --------
Total current liabilities 66,485 67,654 (10,260) 123,879
-------- -------- --------- --------
Senior subordinated notes, payable to
Ciba-Geigy 26,300 (j) 26,300
Other long-term liabilities, less
current maturities 115,743 28,723 18,898 (k) 163,364
Minority interest 6,968 (6,968) (l)
-------- -------- --------- --------
Shareholders' equity:
Common stock & additional
paid-in capital 111,440 140,600 (m) 252,040
Accumulated deficit (69,981) (1,658) (n) (71,639)
Minimum pension obligation
adjustment (535) (535)
Cumulative currency translation
adjustment 7,450 7,450
Invested capital 236,949 (236,949) (o)
-------- -------- --------- --------
Total shareholders' equity 48,374 236,949 (98,007) 187,316
-------- -------- --------- --------
Total liabilities and
shareholders' equity $ 230,602 $ 340,294 $ (70,037) $ 500,859
-------- -------- --------- --------
-------- -------- --------- --------
53
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------
HISTORICAL PRO FORMA
----------------------- ---------------------------
CIBA
HEXCEL COMPOSITES ADJUSTMENTS COMBINED
--------- ---------- ----------- ---------
Net sales $ 350,238 $ 331,073 $ (3,207) (p) $ 678,104
Cost of sales (283,148) (273,997) 6,860 (q) (550,285)
---------- ---------- --------- ----------
Gross margin 67,090 57,076 3,653 127,819
Marketing, general and administrative expenses (49,324) (57,966) (107,290)
Amoritization and write-downs of intangible assets (6,930) 4,385 (r) (2,545)
Other income (expenses), net 791 (1,102) (311)
Restructuring expenses (2,362) (2,362)
---------- ---------- --------- ----------
Operating income (loss) 18,557 (11,284) 8,038 15,311
Interest expense (8,682) (668) (869) (s) (10,219)
Bankruptcy reorganization expenses (3,361) (t) (3,361) (t)
Minority interest (1,506) 1,506 (u)
---------- ---------- --------- ----------
Income (loss) from continuing operations before
income taxes 6,514 (13,458) 8,675 1,731
Provision for income taxes (3,313) (5,085) (v) (8,398)
---------- ---------- --------- ----------
Income (loss) from continuing operations 3,201 (18,543) 8,675 6,667
Loss from discontinued operations (468) (468)
---------- ---------- --------- ----------
Net income (loss) $ 2,733 $ (18,543) $ 8,675 $ (7,135)
---------- ---------- --------- ----------
---------- ---------- --------- ----------
Net income (loss) per share and equivalent share:
Primary and fully diluted
Continuing operations $ 0.20 $ (0.20)
Discontinued operations (0.03) (0.01)
---------- ----------
Net income (loss) $ 0.17 $ (0.21)
---------- ----------
---------- ----------
Weighted average shares and equivalent shares 15,742 33,764
---------- ----------
---------- ----------
The 1995 net loss for the Ciba Composites Business of $18,543 includes a fourth
quarter net loss of $9,537. The fourth quarter net loss includes approximately
$6,340 costs attibutable to write-downs of certain fixed and intangible
assets, severance expenses, reserves for uncollectible receivables, and
acquisition-related expenses.
54
PURCHASE PRICE SUMMARY AND RELATED ALLOCATION
The purchase price paid by Hexcel for the Ciba Composites Business is
comprised of the following components:
18,022 shares of Hexcel common stock, valued at $8.00 per share (1) $ 144,200
Senior Subordinated Notes payable to Ciba in 2003 (2) 26,300
Cash paid to Ciba (3) 25,000
Estimated fees and expenses in connection with the acquisition (3) 7,600
- --------------------------------------------------------------------------------
Total purchase price $ 203,100
- --------------------------------------------------------------------------------
The allocation of the total purchase price to the net assets of the Ciba
Composites Business is based upon the estimated fair values of the net assets
acquired, and is summarized as follows:
Cash and equivalents (4) --
Accounts receivable (5) $ 53,285
Inventories (6) 58,792
Prepaid expenses (5) 3,938
Net property, plant & equipment (7) 110,877
Other assets, net (8) 1,000
Investments and other assets (5) 4,214
Current liabilities (9) (57,685)
Other long-term liabilities, less current maturities (9) (19,221)
Minority interest (10) --
Shareholders' equity (11) 3,600
Excess of purchase price over net assets acquired (12) 44,300
- --------------------------------------------------------------------------------
Total purchase price $ 203,100
- --------------------------------------------------------------------------------
(1) The aggregate value of the Hexcel common stock issued to Ciba is determined
by multiplying the discounted market price per share by the number of
shares issued. The market price per share is determined by reference to
the prices at which Hexcel common stock was trading on the New York Stock
Exchange during a reasonable period before and after December 12, 1995, the
date upon which Hexcel and Ciba amended the aggregate amount of
consideration to be paid by Hexcel for the Ciba Composites Business by
agreeing to reduce the initial aggregate principal amount of the senior
subordinated notes by $5,000. The market price is then discounted to
reflect the illiquidity of the Hexcel common stock issued to Ciba caused by
the size of Ciba's holding, the contractual restrictions on transferring
such shares and, accordingly, limitations on the price Ciba could realize,
the contractual limitation on the price per share Ciba could realize in
certain types of transactions, the fact that such shares are "restricted
securities" within the meaning of the Securities Act of 1933, and various
other factors.
For purposes of valuing the Hexcel common stock issued to Ciba, a
discounted market price of $8.00 per share is used. The discounted market
price is based on a market price of $10.00 per share during a reasonable
period before and after December 12, 1995, and a discount rate of 20%. The
discounted market price of the shares issued is used in determining the
total purchase price because the discounted market price of Hexcel common
stock is more reliably measurable than the fair value of the assets
acquired and the liabilities assumed.
(2) Based on the formula included in the Strategic Alliance Agreement, the pro
forma aggregate principal amount of the Senior Subordinated Notes as of
December 31, 1995 is approximately
55
$27,400. (Such amount is estimated as follows: $43,029 (a) increased by
$9,000 for the price of acquiring a minority interest in an Austrian
subsidiary of the Ciba Composites Business; (b) increased by $6,126 for the
decline in the adjusted net working capital of Hexcel from July 2, 1995 to
December 31, 1995; (c) decreased by $25,378 for the decline in the adjusted
net working capital of the Ciba Composites Business from July 2, 1995 to
December 31, 1995; and (d) decreased by $5,377 for certain net assets of
the Ciba Composites Business retained by Ciba and other adjustments.)
However, the actual aggregate principal amount of the Senior Subordinated
Notes to be issued may be higher or lower, because the adjustments required
under the Strategic Alliance Agreement to reflect changes in working
capital and certain other items as of February 29, 1996 have not yet been
determined.
The fair value of the Senior Subordinated Notes as of December 31, 1995 is
estimated to be $26,300, which is $1,100 lower than the pro forma aggregate
principal amount. The $1,100 discount reflects the absence of certain call
protection provisions from the terms of the Senior Subordinated Notes and
the difference between the stated interest rate on the Senior Subordinated
Notes and the estimated market rate for debt obligations of comparable
quality and maturity (see Note 10).
(3) The cash paid to Ciba and certain estimated fees and expenses in connection
with the acquisition of the Ciba Composites Business have been financed
with the proceeds from the Senior Secured Credit Facility (see Note 10).
(4) Under the terms of the Strategic Alliance Agreement, the cash and cash
equivalents of the Ciba Composites Business, except for cash on hand at
certain of Ciba's non-U.S. subsidiaries, are retained by Ciba. The cash on
hand at certain of Ciba's non-U.S. subsidiaries was acquired in exchange
for the Senior Demand Notes. The amount of acquired cash and the
corresponding principal amount of the Senior Demand Notes, which Hexcel
expects will be presented for payment shortly after issuance, are equal and
offset each other. Accordingly, the acquisition of such cash and the
issuance of the Senior Demand Notes has not been reflected in the unaudited
pro forma condensed combined balance sheet.
(5) The fair values of accounts receivable, prepaid expenses and investments
and other assets acquired in the purchase of the Ciba Composites Business
are estimated to equal respective net book values. Under the terms of the
Strategic Alliance Agreement, a portion of the Ciba Composites Business'
accounts receivable and prepaid expenses are retained by Ciba.
(6) The fair value of inventories acquired in the purchase of the Ciba
Composites Business is estimated to equal aggregate current sales value
less estimated selling costs. Under the terms of the Strategic Alliance
Agreement, a portion of the Ciba Composites Business' inventories is
retained by Ciba.
(7) The fair value of the property, plant and equipment acquired in the
purchase of the Ciba Composites Business is estimated to be $45,000 lower
than the respective net book value. The estimated fair value, which is
based on a preliminary review of the production facilities and equipment of
the Ciba Composites Business, reflects the fact that certain of these
assets are expected to: (a) duplicate capabilities or productive capacities
already possessed by Hexcel; or (b) be in excess of the combined company's
needs. This estimate is subject to modification in connection with further
analysis. In addition, under the terms of the Strategic Alliance
Agreement, a portion of the Ciba Composites Business' property, plant and
equipment is retained by Ciba.
56
(8) The fair value assigned to other assets reflects the capitalization of
estimated fees and expenses incurred to secure the Senior Secured Credit
Facility in connection with the acquisition of the Ciba Composites
Business.
(9) The fair values of the current and long-term liabilities assumed by Hexcel
in connection with the purchase of the Ciba Composites Business are
estimated to equal the respective net book values. Under the terms of the
Strategic Alliance Agreement, certain of the liabilities of the Ciba
Composites Business are not assumed by Hexcel.
(10) Prior to Hexcel's acquisition of the Ciba Composites Business, Ciba
eliminated the minority interest in an Austrian subsidiary of the Ciba
Composites Business ("Danutec") by purchasing that interest, subject to
certain governmental approvals which were subsequently obtained.
Accordingly, the estimated pro forma purchase price and purchase price
allocation reflect the transfer of 100% of the capital stock of Danutec to
the Company, and the minority interest in Danutec has been eliminated on a
pro forma basis.
(11) The estimated fees and expenses incurred in connection with issuing the
Hexcel common stock to Ciba are deducted from shareholders' equity.
(12) The excess of purchase price over net tangible assets acquired will be
allocated to identifiable intangible assets and goodwill pursuant to an
analysis and valuation of those assets in accordance with the provisions of
Accounting Principles Board Opinion No. 16. Such analysis and valuation
has not yet been performed. Accordingly, for purposes of the unaudited pro
forma financial information, the excess of purchase price over net tangible
assets acquired has been treated as a single intangible asset, with a 20-
year life. While the values and estimated lives of various intangible
assets resulting from the final purchase allocation will vary from these
pro forma assumptions, management does not expect these variances to be
material to the unaudited pro forma financial information contained herein.
The purchase price allocation does not reflect any liabilities for the costs of
consolidating the business operations of the Ciba Composites Business and
Hexcel. Those costs, as discussed above, are expected to be significant (see
pages 51 and 52).
PRO FORMA ADJUSTMENTS -- UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) Adjustment to eliminate the cash and cash equivalents of the Ciba
Composites Business which are retained by Ciba $ (8,412)
---------------------------------------------------------------------------
(b) Adjustment to eliminate accounts receivable of the Ciba
Composites Business which are retained by Ciba, as well as trade
account balances between the Ciba Composites Business and Hexcel $ (5,805)
---------------------------------------------------------------------------
(c) Adjustment to eliminate inventories of the Ciba Composites Business
which are retained by Ciba, and to record acquired inventories at
estimated fair value $ (1,545)
---------------------------------------------------------------------------
(d) Adjustment to eliminate prepaid expenses and other assets of the
Ciba Composites Business which are retained by Ciba $ (6,019)
---------------------------------------------------------------------------
57
(e) Adjustment to eliminate property, plant and equipment of the
Ciba Composites Business which is retained by Ciba, and to
record acquired property, plant and equipment at estimated
fair value $ (45,487)
---------------------------------------------------------------------------
(f) Adjustment to record the excess of purchase price over net
assets acquired $ 44,300
---------------------------------------------------------------------------
(g) Adjustment to reflect the following:
Elimination of the intangible assets of the Ciba Composites
Business $ (42,211)
Capitalization and reclassification of certain fees and
expenses incurred in connection with the acquisition (3,200)
Write-off of capitalized debt issuance costs in connection
with the extinguishment of certain existing debt
obligations with proceeds from the Senior Secured Credit
Facility (1,658)
---------------------------------------------------------------------------
Net adjustment $ (47,069)
---------------------------------------------------------------------------
(h) Adjustment to eliminate notes payable of the Ciba Composites
Business which are not assumed by Hexcel $ (9,052)
---------------------------------------------------------------------------
(i) Adjustment to eliminate current liabilities of the Ciba
Composites Business which are not assumed by Hexcel, as well
as trade balances between the the Ciba Composites Business and
Hexcel $ (1,208)
---------------------------------------------------------------------------
(j) Adjustment to reflect the issuance of the Senior Subordinated
Notes payable to Ciba $ 26,300
---------------------------------------------------------------------------
(k) Adjustment to reflect the following:
Elimination of long-term liabilities of the Ciba Composites
Business which are not assumed by Hexcel $ (9,502)
Net borrowings under the Senior Secured Credit Facility to
finance the cash payment to Ciba and certain fees and
expenses incurred in connection with the acquisition 28,400
---------------------------------------------------------------------------
Net adjustment $ 18,898
---------------------------------------------------------------------------
(l) Adjustment to reflect the elimination of the minority interest
in Danutec $ (6,968)
---------------------------------------------------------------------------
(m) Adjustment to reflect the issuance of Hexcel common stock to
Ciba, net of certain fees and expenses incurred in connection
with issuing such stock $ 140,600
---------------------------------------------------------------------------
(n) Adjustment to reflect the write-off of capitalized debt
issuance costs in connection with the extinguishment of
certain existing debt obligations with proceeds from the
Senior Secured Credit Facility $ (1,658)
---------------------------------------------------------------------------
(o) Adjustment to eliminate Ciba's investment in the Ciba Composites
Business $ (236,949)
---------------------------------------------------------------------------
58
PRO FORMA ADJUSTMENTS -- UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF
OPERATIONS
(p) Adjustment to eliminate sales between the Ciba Composites
Business and Hexcel $ (3,207)
---------------------------------------------------------------------------
(q) Adjustment to reflect the following:
Elimination of cost of sales between the Ciba Composites
Business and Hexcel $ 2,708
Reduction in depreciation costs resulting from the purchase
price adjustment to the net property, plant and equipment
of the Ciba Composites Business 4,152
---------------------------------------------------------------------------
Net adjustment $ 6,860
---------------------------------------------------------------------------
(r) Adjustment to reflect the following:
Reduction in amortization expense and write-downs of
intangible assets resulting from the elimination of the
intangible assets of the Ciba Composites Business in
connection with the purchase price allocation $ 6,930
Amortization of the excess of purchase price over net assets
acquired (20 year amortization period) (2,215)
Amortization of capitalized fees and expenses incurred in
connection with securing the Senior Secured Credit
Facility (3 year amortization period) (330)
---------------------------------------------------------------------------
Net adjustment $ 4,385
---------------------------------------------------------------------------
(s) Adjustment to reflect the following:
Elimination of interest expense on liabilities of the Ciba
Composites Business which are not assumed by Hexcel $ 1,032
Net reduction in interest expense resulting from the
refinancing of certain credit facilities with the Senior
Secured Credit Facility 992
Estimated interest expense on the Senior Subordinated Notes
payable to Ciba (2,893)
---------------------------------------------------------------------------
Net adjustment $ (869)
---------------------------------------------------------------------------
(t) On February 9, 1995, Hexcel emerged from bankruptcy reorganization
proceedings which had begun on December 6, 1993. In connection with those
proceedings, Hexcel incurred bankruptcy reorganization expenses of $3,361
during the year ended December 31, 1995. Although the resolution of
certain bankruptcy-related issues, including the final settlement of
disputed claims and professional fees, resulted in expenses being incurred
after February 9, 1995, Hexcel has not incurred any significant bankruptcy-
related expenses since October 1, 1995.
(u) Adjustment to eliminate the minority interest in the operating results of
the Ciba Composites Business $ 1,506
---------------------------------------------------------------------------
(v) The income tax consequences of the cumulative pro forma adjustments are
estimated to be zero. This is due to the fact that the pro forma combined
company incurred losses from continuing operations before income taxes for
the year ended December 31, 1995, and no income tax benefits relating to
these losses have been recognized. Furthermore, the pro forma combined
company has sufficient net operating loss carryforwards for income tax
purposes to substantially eliminate any tax liabilities arising from pro
forma adjustments.
59
NOTE 4 -- BANKRUPTCY REORGANIZATION
On January 12, 1995, the United States Bankruptcy Court for the Northern
District of California (the "Bankruptcy Court") entered an order dated January
10, 1995 confirming the Reorganization Plan proposed by Hexcel and the Equity
Committee. On February 9, 1995, the Reorganization Plan became effective and
Hexcel emerged from the bankruptcy reorganization proceedings which had begun on
December 6, 1993, when Hexcel filed a voluntary petition for relief under the
provisions of Chapter 11 of the federal bankruptcy laws.
The Reorganization Plan which became effective on February 9, 1995 provided
for: (a) the replacement of a debtor-in-possession credit facility with a new
revolving credit facility (the "Revolving Credit Facility") of up to $45,000;
(b) the creation of an amended reimbursement agreement with respect to the
letters of credit in support of certain industrial development revenue bonds;
(c) the completion of the first closing under a standby purchase commitment
whereby Mutual Series Fund Inc. ("Mutual Series") purchased 1,946 shares of new
common stock for $9,000 and loaned Hexcel $41,000 as an advance against the
proceeds of a subscription rights offering for additional shares of new common
stock; and (d) the reinstatement or payment in full, with interest, of all
allowed claims, including prepetition accounts payable and notes payable.
The Revolving Credit Facility was replaced by the Senior Secured Credit
Facility on February 29, 1996 (see Note 10).
The subscription rights offering concluded on March 27, 1995, with the
issuance of an additional 7,156 shares of new common stock. The resulting cash
proceeds of $33,098 were used to reduce the outstanding balance of the loan from
Mutual Series. The second closing under the standby purchase agreement was
completed on April 6, 1995, with the issuance of an additional 1,590 shares of
new common stock to Mutual Series, the issuance of an additional 108 shares of
new common stock to John J. Lee, Hexcel's Chief Executive Officer, and the
retirement of the remaining balance of the Mutual Series loan. Following the
second closing under the standby purchase agreement on April 6, 1995, the
Company had a total of 18,101 shares of common stock issued and outstanding.
The Reorganization Plan provided for the reinstatement or payment in full,
with interest, of all allowed claims, including prepetition accounts payable and
notes payable. The total of all claims reinstated or paid, less the portion
representing accrued interest for the period from January 1 to February 9, 1995,
has been reflected as "liabilities subject to disposition in bankruptcy
reorganization" in the consolidated balance sheet as of December 31, 1994. On
February 9, 1995, Hexcel paid $78,144 in prepetition claims and interest, and
reinstated another $60,575 in prepetition liabilities. Reinstated liabilities
were reclassified from "liabilities subject to disposition in bankruptcy
reorganization" to the appropriate liability captions of the consolidated
balance sheet on February 9, 1995. The payment of claims and interest on
February 9, 1995 was financed with: (a) cash proceeds of $26,694 received in the
first quarter of 1995 from the sale of the Company's Chandler, Arizona
manufacturing facility and certain related assets and technology (see Note 5);
(b) cash proceeds of $2,602 received in the first quarter of 1995 from the sale
of the Company's European resins business (see Note 5); (c) the $50,000 in cash
received from Mutual Series in connection with the standby purchase agreement;
and (d) borrowings under the Revolving Credit Facility.
Professional fees and other costs directly related to bankruptcy
proceedings were expensed as incurred, and have been reflected in the
consolidated statements of operations as "bankruptcy reorganization expenses."
Bankruptcy reorganization expenses have consisted primarily of professional fees
paid to legal and financial advisors of Hexcel, the Equity Committee and the
Official Committee of Unsecured Creditors. In addition, these expenses included
incentives for employees to remain with the Company for the duration of
bankruptcy proceedings and the write-off of previously capitalized costs
60
related to the issuance of prepetition debt, as required by SOP 90-7. The
resolution of certain bankruptcy-related issues, including the final settlement
of disputed claims and professional fees, resulted in expenses being incurred
after the effective date of the Reorganization Plan. However, the Company has
not incurred any significant bankruptcy-related expenses since October 1, 1995.
NOTE 5 -- RECEIVABLES FROM ASSET SALES
SALE OF CHANDLER, ARIZONA MANUFACTURING FACILITY AND CERTAIN RELATED ASSETS AND
TECHNOLOGY
Hexcel sold its Chandler, Arizona manufacturing facility and certain
related assets and technology to Northrop Grumman Corporation ("Northrop") in
the fourth quarter of 1994. In connection with the sale, the Company recognized
other income of $15,900, which includes the effects of reversing $10,000 of a
previously established restructuring reserve related to the Chandler facility
and $5,900 which represents the excess of the sales price over the carrying
value of the net assets sold. The transaction generated net cash proceeds of
$28,988, of which $2,294 was received in 1994 and $26,694 was received in the
first quarter of 1995. The net proceeds received in the first quarter of 1995
have been reflected in "receivables from asset sales" in the consolidated
balance sheet as of December 31, 1994.
Under the terms of the Chandler transaction, Hexcel retained a royalty-
free, non-exclusive license to use the technology sold in non-military
applications and will receive royalties from Northrop on certain applications of
that technology. In addition, the Company may receive up to an additional
$2,300 pursuant to the terms of the transaction, when certain conditions are
satisfied. Of this amount, $600 was received in the third quarter of 1995 and
has been reflected in "other income (expense), net" in the 1995 consolidated
statement of operations. An additional $1,560 was received in February 1996;
the resulting income will be recognized in the first quarter of 1996.
SALE OF RESINS BUSINESS
On December 29, 1994, Hexcel sold its European resins operations to Axson
S.A., a French corporation, through the sale of all of the Company's shares in
the capital stock of its European resins subsidiaries. The sale and related
settlement transactions generated net cash proceeds of approximately $8,727, of
which $6,125 was received in the fourth quarter of 1994 and $2,602 was received
in the first quarter of 1995. The net proceeds received in the first quarter of
1995 have been reflected in "receivables from asset sales" in the consolidated
balance sheet as of December 31, 1994.
Hexcel sold its U.S. resins operations to Fiber-Resin Corporation, a
wholly-owned subsidiary of H.B. Fuller Company, on October 30, 1995. The
estimated net proceeds from the sale approximated the net book value of the
assets sold. The sale of the Company's U.S. resins operations completed the
divestiture of the resins business, which has been accounted for as a
discontinued operation in the consolidated financial statements for all periods
presented (see Note 23).
61
NOTE 6 -- INVENTORIES
Inventories as of December 31, 1995 and 1994 were:
- -----------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------
Raw materials $ 22,257 $ 18,846
Work in progress 13,688 12,518
Finished goods 17,778 14,934
Supplies 1,752 1,066
- -----------------------------------------------------------------------------
Inventories $ 55,475 $ 47,364
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NOTE 7 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1995 and 1994 were:
- -----------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------
Land $ 2,349 $ 2,213
Buildings 46,560 36,913
Equipment 154,671 147,202
- -----------------------------------------------------------------------------
Property, plant and equipment 203,580 186,328
Less accumulated depreciation (117,625) (103,215)
- -----------------------------------------------------------------------------
Net property, plant and equipment $ 85,955 $ 83,113
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NOTE 8 -- INVESTMENTS AND OTHER ASSETS
Investments and other assets as of December 31, 1995 and 1994 were:
- -----------------------------------------------------------------------------
1995 1994
- -----------------------------------------------------------------------------
Investments in joint ventures $ 6,615 $ 6,287
Deferred business acquisition costs 4,150 --
Debt financing costs, net of accumulated
amortization of $529 as of December 31, 1995 1,658 --
Other assets 4,169 5,705
- -----------------------------------------------------------------------------
Investments and other assets $ 16,592 $ 11,992
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Investments in joint ventures consist of a 50% equity interest in Knytex
Company, L.L.C. ("Knytex"), which is jointly owned and operated with Owens-
Corning Fiberglas Corporation, and a 40% equity interest in Hexcel-Fyfe, L.L.C.
("Hexcel-Fyfe"), which is jointly owned and operated with Fyfe Associates
Corporation. The Company also owns an equity interest in DIC-Hexcel Limited, a
joint venture with Dainippon Ink and Chemicals, Inc. ("DIC"), for which there
was no recorded asset value as of December 31, 1995 or 1994 (see Note 9).
Investments in joint ventures are accounted for by the equity method. Equity in
the earnings of joint ventures were not material to the Company's consolidated
results of operations in 1995, 1994 or 1993.
Knytex was formed on June 30, 1993 when the Company sold 50% of its
stitchbonded business to Owens-Corning and contributed the remaining 50% to the
joint venture. The Company received proceeds of $4,500 and recognized a gain of
$1,541 from the sale.
62
Deferred business acquisition costs consists of certain transaction-related
costs incurred in connection with the acquisition of the Ciba Composites
Business through December 31, 1995. Such costs will be included in the
allocation of the total purchase price to the net assets acquired as of the
acquisition date, in accordance with the provisions of Accounting Principles
Board Opinion No. 16.
Debt financing costs are deferred and amortized over the life of the
related debt. All debt financing costs as of December 31, 1995 relate to debt
obligations that were extinguished on February 29, 1996 with proceeds from the
Senior Secured Credit Facility. Accordingly, the unamortized balance of such
costs will be written off by a charge to "interest expense" during the first
quarter of 1996.
NOTE 9 -- DIC-HEXCEL LIMITED
The Company owns an equity interest in DIC-Hexcel Limited, a joint venture
with Dainippon Ink and Chemicals, Inc. ("DIC"). The joint venture was formed in
1990 for the production and sale of Nomex honeycomb, advanced composites and
decorative laminates for the Japanese market. The joint venture owns and
operates a manufacturing facility in Komatsu, Japan.
Under the terms of the original joint venture agreement, DIC agreed to
guarantee all bank debt incurred by this venture. In turn, the Company provided
an undertaking that in the event the joint venture went into liquidation the
Company would reimburse DIC for 50% of all guaranteed bank loans, net of any
proceeds from the sale of the venture's assets. During 1994, the economic
viability of this joint venture became questionable, and the cost of product
qualification efforts and the attendant lack of revenues were resulting in
negative cash flows. During the third quarter of 1994, DIC proposed to
liquidate the joint venture. The Company responded with a proposal to
restructure the joint venture, subject to various conditions, which DIC agreed
to consider. Under either proposal, the Company would retain responsibility for
a portion of the joint venture's guaranteed bank debt. Accordingly, the Company
recorded an $8,000 provision in the third quarter of 1994 to reflect the
estimated cost of restructuring or liquidating DIC-Hexcel Limited. This
provision has been included in "other income (expenses), net" in the 1994
consolidated statement of operations, and the corresponding liability has been
included in "liabilities subject to disposition in bankruptcy reorganization" in
the consolidated balance sheet as of December 31, 1994.
On February 20, 1995, Hexcel and DIC entered into an amendment to the
original joint venture agreements which provided additional funding to permit
DIC-Hexcel Limited to complete its product qualification efforts and limited the
Company's potential liability for the venture's bank debt guaranteed by DIC to
$9,000. Under the terms of the amendment, the Company and DIC each agreed to
contribute $4,500 in cash to the venture, payable in installments of $1,438 in
the first quarter of 1995 and $438 in each of the next seven quarters. It was
agreed that such cash contributions by the Company would reduce pro-rata its
potential liability of $9,000. The amendment also provided, after taking
account to the transactions contemplated thereunder, for a reduction in the
Company's equity interest in DIC-Hexcel Limited to approximately 42% with a
corresponding increase in DIC's equity interest. After December 31, 1996, should
demand be made under the loans made to DIC-Hexcel Limited guaranteed by DIC, the
Company will be required to pay 50% of any amount DIC pays on account of its
guarantees, up to a cumulative amount of $4,500. Furthermore, the Company and
DIC agreed that they would discuss and review the prospects of the venture and
its future financing during the second half of 1996. During this period both
DIC and the Company each have the right to request the liquidation of DIC-Hexcel
Limited. If such right is exercised, the Company will be required to make
payment of the remaining contingent liability of up to $4,500. If such
liquidation right is exercise by either party, it is not anticipated that
payment would be required prior to January 1997.
63
Management believes that the $8,000 provision recorded in the third quarter
of 1994 remains the best estimate of the Company's total probable liability
under the amended joint venture agreement, based on the terms of that agreement
and the projected future operating results of DIC-Hexcel Limited. The Company
contributed $2,750 of cash to the joint venture during 1995, reducing the
remaining probable liability to $5,250 as of December 31, 1995. Of this amount,
$1,750 has been included in "accrued liabilities" and $3,500 has been included
in "deferred liabilities" in the consolidated balance sheet as of December 31,
1995 (see Note 17).
NOTE 10 -- NOTES PAYABLE
Notes payable and capital lease obligations as of December 31, 1995 and
1994 were:
1995
UNAUDITED
PRO FORMA
(SEE NOTE 3) 1995 1994
- -----------------------------------------------------------------------------------------------------------------
Senior Secured Credit Facility $ 74,605 -- --
Revolving Credit Facility -- $ 30,091 --
European credit facilities 1,692 17,806 $ 18,128
Debtor-in-possession credit facility -- -- 4,189
Prepetition credit facility -- -- 12,000
Senior Subordinated Notes payable to Ciba-Geigy 26,300 -- --
10.12% senior notes, originally due 1998 -- -- 30,000
7% convertible subordinated debentures, due 2011 25,625 25,625 25,625
Obligations under IDRB variable rate demand notes,
due through 2024, net 11,990 11,990 13,310
Capital lease obligations (see Note 11) 3,217 3,217 3,234
Various notes payable, due through 2007 1,715 1,715 3,053
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations 145,144 90,144 109,539
Less amount subject to disposition in bankruptcy
reorganization -- -- (80,815)
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations, net $ 145,144 $ 90,144 $ 28,724
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Notes payable and current maturities of long-term
liabilities, net $ 1,802 $ 1,802 $ 12,720
Long-term notes payable and capital lease
obligations, net 143,342 88,342 16,004
- -----------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations, net $ 145,144 $ 90,144 $ 28,724
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
SENIOR SECURED CREDIT FACILITY
In connection with the acquisition of the Ciba Composites Business, Hexcel
obtained the Senior Secured Credit Facility on February 29, 1996. The Senior
Secured Credit Facility is a three-year revolving credit facility of up to
$175,000 which is available to: (a) fund the $25,000 cash component of the
purchase price paid for the Ciba Composites Business; (b) refinance outstanding
indebtedness under certain U.S. and European credit facilities; and (c) provide
for the ongoing working capital and other financing requirements of the Company,
including consolidation activities, on a worldwide basis. The Senior Secured
Credit Facility replaces the Revolving Credit Facility which was obtained on
February 9, 1995, in connection with Hexcel's Reorganization Plan, as well as
certain European credit facilities.
64
Interest on outstanding borrowings under the Senior Secured Credit Facility
is computed at an annual rate of 0.4% in excess of the applicable London
interbank rate or, at the option of Hexcel, the base rate of the administrative
agent for the lenders. In addition, the Senior Secured Credit Facility is
subject to a commitment fee of approximately 0.2% per annum on the unused
portion of the facility and a letter of credit fee of up to 0.5% per annum on
the outstanding face amount of letters of credit. The Company also paid one-
time arrangement, syndication and closing fees totaling $869, as well as certain
other costs and expenses related to the implementation of the Senior Secured
Credit Facility.
The Senior Secured Credit Facility is secured by a pledge of stock of
certain of Hexcel's subsidiaries, and is also guaranteed by the Company and
certain of its subsidiaries. In addition, the Company is subject to various
financial covenants and restrictions under the Senior Secured Credit Facility,
including minimum levels of tangible net worth and fixed charge coverage, and
maximum levels of debt to earnings before interest, taxes, depreciation and
amortization. The Senior Secured Credit Facility also imposes certain
restrictions on incurring additional indebtedness, and generally prohibits the
Company from paying dividends or redeeming capital stock.
In addition to providing for typical events of default, including an event
of default resulting from a "change in control" (as defined) of the Company, the
Senior Secured Credit Facility provides that an event of default would occur if,
under certain circumstances, Ciba: (a) ceases to hold, directly or indirectly
through one or more wholly-owned subsidiaries, 100% of the outstanding principal
amount of the Senior Subordinated Notes, or (b) ceases to beneficially own,
directly or indirectly, at least 40% of Hexcel's voting stock. In light of the
foregoing, the Company and Ciba entered into a Retention Agreement, dated as of
February 29, 1996, pursuant to which Ciba agreed, subject to the limitations set
forth therein, to: (a) hold directly or indirectly through one or more wholly-
owned subsidiaries, 100% of the outstanding principal amount of the Senior
Subordinated Notes, and (b) beneficially own, directly or indirectly, at least
40% of the Company's voting stock.
REVOLVING CREDIT FACILITY
The Revolving Credit Facility, which replaced the Debtor-in-possession
credit facility on February 9, 1995, was replaced by the Senior Secured Credit
Facility on February 29, 1996.
EUROPEAN CREDIT FACILITIES
Certain European credit facilities were replaced by the Senior Secured
Credit Facility on February 29, 1996.
SENIOR SUBORDINATED NOTES PAYABLE TO CIBA-GEIGY
In connection with the acquisition of the Ciba Composites Business, Hexcel
has undertaken to deliver to Ciba and/or one or more of its subsidiaries the
Senior Subordinated Notes. The Senior Subordinated Notes, which will be issued
following the completion of certain post-closing adjustment procedures
contemplated by the Strategic Alliance Agreement, will be general unsecured
obligations of the Company in an aggregate principal amount of approximately
$43,000, subject to certain adjustments. The actual aggregate principal amount
of the Senior Subordinated Notes to be issued may be higher or lower than
$43,000, because the adjustments required under the Strategic Alliance Agreement
to reflect changes in working capital and certain other items as of February 29,
1996 have not yet been determined. (The pro forma aggregate principal amount of
the Senior Subordinated Notes as of December 31, 1995 was $27,400, and the pro
forma estimated fair value of the Senior Subordinated Notes on that date was
$26,300. See Note 3.)
The Senior Subordinated Notes will bear interest for three years at a rate
of 7.5% per annum, payable semiannually, from February 29, 1996. The interest
rate will increase to 10.5% per annum on the third anniversary of the
acquisition of the Ciba Composites Business, and by an additional 0.5% per year
65
thereafter until the Senior Subordinated Notes mature in the year 2003. The
payment of principal and interest on the Senior Subordinated Notes will be
subordinate to the Senior Secured Credit Facility.
The Senior Subordinated Notes will be callable, in whole or in part, at the
option of Hexcel at any time without penalty, and the Company will not be
required to make mandatory redemption or sinking fund payments. Under certain
circumstances, upon a "change of control" of the Company, as defined in the
indenture governing the Senior Subordinated Notes, the holders of the Senior
Subordinated Notes (except, under certain circumstances, Ciba) will have the
right to cause the Company to repurchase all or any part of the Senior
Subordinated Notes at a price equal to 101% of the principal amount to be
repurchased plus accrued interest. Under such indenture, the Company will be
subject to various restrictions, including restrictions on incurring additional
indebtedness, paying dividends and redeeming capital stock.
7% CONVERTIBLE SUBORDINATED DEBENTURES
The 7% convertible subordinated debentures were subject to disposition in
bankruptcy reorganization, and were reinstated on February 9, 1995, pursuant to
the Reorganization Plan. These debentures are redeemable by the Company under
certain provisions, although any such redemption is restricted by the terms of
the Senior Secured Credit Facility. Mandatory redemption is scheduled to begin
in 2002 through annual sinking fund requirements. The debentures are
convertible prior to maturity into common stock of the Company at $30.72 per
share, subject to adjustment under certain conditions.
OBLIGATIONS UNDER IDRB VARIABLE RATE DEMAND NOTES
Hexcel has various industrial development revenue bonds ("IDRBs")
outstanding, guaranteed by bank letters of credit for fees of 0.5%. These IDRBs
were subject to disposition in bankruptcy reorganization, and were reinstated on
February 9, 1995, pursuant to the Reorganization Plan. The letters of credit
which guarantee the IDRBs were also reinstated, in accordance with the terms of
an amended reimbursement agreement (the "Reimbursement Agreement") with the
issuing bank, and extended until December 31, 1998. The Reimbursement Agreement
originally provided that, commencing April 1, 1995 and every three months
thereafter for the duration of the agreement, the Company would either redeem
$600 of the guaranteed IDRBs, obtain a $600 letter of credit in favor of the
issuing bank, or deposit $600 into a sinking fund in which the issuing bank
and/or the trustees for the IDRBs will hold a first priority security interest.
However, these provisions were eliminated by an amendment to the Reimbursement
Agreement dated February 29, 1996. This amendment, which was agreed to by the
issuing bank in connection with the Company's acquisition of the Ciba Composites
Business, also eliminated certain financial covenants and other restrictions
previously contained in the Reimbursement Agreement. The interest rates on the
IDRBs are variable and averaged 6.2% in 1995, 3.9% in 1994 and 2.5% in 1993.
On November 1, 1994, Hexcel sold the property it owned in the City of
Industry, California for $2,600, which approximated net book value. Under the
terms of the sales agreement, the buyer paid the Company $260 in cash and
assumed responsibility for $2,340 of the outstanding principal of a $4,900 IDRB
related to the property. As of December 31, 1995, the outstanding balance of
the IDRB had been reduced to $4,700, of which $2,160 was an assumed obligation
of the buyer. The Company is contingently liable for that portion of the IDRB
assumed by the buyer, in the event the buyer should default on assumed payment
obligations.
INSTALLMENTS DUE ON NOTES PAYABLE
Excluding obligations extinguished with proceeds from the Senior Secured
Credit Facility, installments due on long-term notes payable are $1,489 in 1996,
$267 in 1997 and $38,966 in years after
66
the year 2000. The Senior Secured Credit Facility, which was used to refinance
long-term debt obligations totaling $46,205 as of December 31, 1995, expires in
1999.
AGGREGATE FAIR VALUE OF LONG-TERM DEBT
Management believes that the aggregate fair value of Hexcel's long-term
debt, excluding the 7% convertible subordinated debentures, approximates the
aggregate book value, as substantially all such debt is comprised of variable-
rate obligations. However, there can be no assurance that the aggregate fair
value of the Company's long-term debt will not materially vary from the
aggregate book value. The fair value of the 7% convertible subordinated
debentures is estimated on the basis of quoted market prices, although trading
in the debentures is limited and may not reflect fair value. The estimated fair
value of all of the outstanding debentures was $21,781 and $15,888 as of
December 31, 1995 and 1994, respectively.
INTEREST PAYMENTS
Interest payments were $8,345 in 1995, $3,909 in 1994 and $8,802 in 1993.
Hexcel was legally prohibited from paying interest on most prepetition debt
obligations in 1994.
NOTE 11 -- LEASING ARRANGEMENTS
Assets, accumulated depreciation and related liability balances under
capital leasing arrangements as of December 31, 1995 and 1994 were:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Property, plant and equipment $ 7,205 $ 6,734
Less accumulated depreciation (2,611) (2,246)
- --------------------------------------------------------------------------------
Net property, plant and equipment $ 4,594 $ 4,488
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capital lease obligations $ 3,217 $ 3,234
Less current maturities (313) (410)
- --------------------------------------------------------------------------------
Long-term capital lease obligations, net $ 2,904 $ 2,824
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Certain sales and administrative offices, data processing equipment, and
manufacturing facilities are leased under operating leases. Rental expenses
under operating leases were $2,871 in 1995, $3,675 in 1994 and $3,530 in 1993.
Future minimum lease payments as of December 31, 1995 were:
- --------------------------------------------------------------------------------
Type of Lease
---------------------------
Payable during years ending December 31: Capital Operating
- --------------------------------------------------------------------------------
1996 $ 675 $ 2,520
1997 675 1,975
1998 675 1,327
1999 675 1,078
2000 582 737
2001 and thereafter 2,267 2,147
- --------------------------------------------------------------------------------
Total minimum lease payments $ 5,549 $ 9,784
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total minimum capital lease payments include $2,332 of imputed interest.
67
NOTE 12 -- ACCRUED RESTRUCTURING LIABILITIES
In December 1992, Hexcel initiated a worldwide restructuring program
designed to improve facility utilization and determine the proper workforce
requirements to support projected reduced levels of business in 1993 and beyond.
The Company recorded a charge for this program of $23,000 in the fourth quarter
of 1992.
In April 1993, Hexcel announced the closing of the Graham, Texas
manufacturing facility and the consolidation of Graham operations into other
plants. The estimated costs of this closure were included in the 1992
restructuring charge. The Graham closure was substantially completed in 1994.
In September 1993, Hexcel announced plans to significantly expand the
restructuring program in response to the expected further decline in commercial
and military aerospace markets. Accordingly, the Company recorded a charge of
$44,000 in the third quarter of 1993. This expansion included deeper cuts in
overhead and further consolidation of facilities in the United States and
Europe. During the fourth quarter of 1993, an additional charge of $2,600 was
recorded in connection with the expanded restructuring program. The 1993 and
1992 restructuring charges included approximately $34,000 of non-cash write-
downs related to facility closures and the impairment of certain assets due to
declining sales and the changed business environment.
In the fourth quarter of 1994, Hexcel sold the Chandler, Arizona
manufacturing facility and certain related assets and technology (see Note 5).
Together with the closure of the Graham facility, this completed the reduction
in honeycomb production capacity contemplated by the expanded restructuring
program. The Company transferred certain assets and production processes
located at the Chandler facility, which were not included in the sale, to the
Company's facility in Casa Grande, Arizona. The estimated costs associated with
this transfer were included in the restructuring charge recorded in the third
quarter of 1993.
The total of $69,600 in restructuring charges taken in 1992 and 1993 and
the remaining balances of accrued restructuring charges as of December 31, 1995
and 1994 were:
- ------------------------------------------------------------------------------------------------------------------------------
Accrued Accrued
1992 & 1993 Restructuring Restructuring
Restructuring Liabilities at Liabilities at
Expenses 12/31/95 12/31/94
- ------------------------------------------------------------------------------------------------------------------------------
Estimated costs to close and relocate facilities:
Asset write-downs $ 19,500 $ 500 $ 2,230
Cash costs, net of expected sales proceeds 11,000 1,190 2,835
Estimated employee severance costs (excluding
severance related to the closure of facilities) 15,900 260 1,100
Asset write-downs due to changed business conditions 14,700 -- --
Estimated cash costs of various other
restructuring actions 8,500 937 5,000
- ------------------------------------------------------------------------------------------------------------------------------
$ 69,600 $ 2,887 $ 11,165
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
The decrease in accrued restructuring liabilities during 1995 is primarily
attributable to the consolidation of honeycomb manufacturing operations in
connection with the disposal of the Chandler facility, as well as severance
payments and implementation of a new management information system. The
consolidation of honeycomb operations reflected in the 1992 and 1993
restructuring charges is substantially complete, while implementation of the
information system will continue through 1996.
68
NOTE 13 -- LIABILITIES SUBJECT TO DISPOSITION IN BANKRUPTCY REORGANIZATION
Liabilities subject to disposition in bankruptcy reorganization as of
December 31, 1994 were:
- --------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------
Accounts payable $ 23,271
Accrued liabilities, including interest 33,691
Notes payable and capital lease obligations (see Note 10) 80,815
- --------------------------------------------------------------------------------
Total liabilities subject to disposition in bankruptcy
reorganization $ 137,777
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Current liabilities subject to disposition in bankruptcy
reorganization $ 97,025
Long-term liabilities subject to disposition in bankruptcy
reorganization 40,752
- --------------------------------------------------------------------------------
Total liabilities subject to disposition in bankruptcy
reorganization $ 137,777
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Reorganization Plan provided for the reinstatement or payment in full,
with interest, of all allowed claims, including prepetition accounts payable and
notes payable. The total of all claims reinstated or paid, less the portion
representing accrued interest for the period from January 1 to February 9, 1995,
has been reflected as "liabilities subject to disposition in bankruptcy
reorganization" in the consolidated balance sheet as of December 31, 1994.
NOTE 14 -- RETIREMENT PLANS
The Company has various retirement and profit sharing plans covering
substantially all U.S. employees and certain European employees. The net cost
of these plans was $2,768 in 1995, $2,443 in 1994 and $2,330 in 1993.
In the United States, the Company maintains a defined contribution plan and
a defined benefit pension plan. The defined contribution plan is available to
substantially all U.S. employees, and is comprised of a 401(k) savings plan and
a profit sharing plan. Under the 401(k) savings plan, the Company makes
matching contributions equal to 50% of the contributions of the employees, not
to exceed 3% of employee compensation. The defined benefit pension plan is a
career average pension plan covering substantially all U.S. hourly employees.
Effective January 1, 1996, participation in the defined benefit pension plan was
extended to U.S. salaried employees as well. Benefits are based on years of
service and the annual compensation of the employee, and the Company's funding
policy is to contribute the minimum amount required by applicable regulations.
The Company also maintains a defined benefit pension plan for employees in
the United Kingdom, and defined benefit retirement plans for certain senior
executives and directors. The Company's European subsidiaries, except for those
in the United Kingdom, participate in government retirement plans which cover
all employees of those subsidiaries.
69
Contributions to the 401(k) savings plan were $1,290 for 1995, $1,039 for
1994 and $1,130 for 1993. There were no contributions to the profit sharing
plan for 1995, 1994 or 1993. The net cost of the Company's defined benefit
pension and retirement plans for the years ended December 31, 1995, 1994 and
1993 consisted of:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 661 $ 753 $ 749
Interest cost on projected benefit obligation 660 706 713
Return on assets - actual (1,103) 33 (1,385)
Net amortization and deferral 1,260 (88) 1,123
- --------------------------------------------------------------------------------
Net periodic pension cost $ 1,478 $1,404 $ 1,200
- --------------------------------------------------------------------------------
Assumptions used in the accounting for these defined benefit and retirement
plans were:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Discount rate 7.0% 8.0% 7.0%
Rate of increase in compensation 4.0% 4.0% 4.0%
Expected long-term rate of return on plan assets 9.5% 9.5% 9.5%
- --------------------------------------------------------------------------------
The funded status and amounts recognized for the defined benefit pension
and retirement plans as of December 31, 1995 and 1994 were:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested benefit obligation $ 8,047 $ 6,688
Non-vested benefit obligation 1,281 1,022
- --------------------------------------------------------------------------------
Accumulated benefit obligation $ 9,328 $ 7,710
- --------------------------------------------------------------------------------
Projected benefit obligation for service rendered to date $10,985 $ 8,658
Less plan assets at fair value, primarily listed stocks
and insurance contracts (5,117) (3,128)
- --------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 5,868 5,530
Unrecognized net loss (2,176) (814)
Unrecognized prior service costs (240) (285)
Unrecognized net transition obligation being recognized
over 15 years (255) (298)
Adjustment required to recognize minimum pension liability 1,014 449
- --------------------------------------------------------------------------------
Defined benefit pension and retirement liability 4,211 4,582
Less current portion of pension and retirement liability (1,780) (1,762)
- --------------------------------------------------------------------------------
Deferred pension and retirement liability (see Note 17) $ 2,431 $ 2,820
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 15 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides certain postretirement health care and life insurance
benefits to eligible retirees. Substantially all U.S. employees hired on or
before December 31, 1995 who retire on or after age 58 after rendering at least
15 years of service are eligible for benefits. Benefits consist of coverage of
up to 50% of the annual cost of certain health insurance plans, as well as
annual life insurance coverage equal to 65% of the final base pay of the retiree
until the age of 70. Upon reaching 70 years of age, life insurance coverage is
reduced.
70
The Company funds postretirement health care and life insurance benefit
costs on a pay-as-you-go basis and, for 1995, 1994 and 1993, made benefit
payments of $583, $423 and $576, respectively. Net defined postretirement
benefit costs for the years ended December 31, 1995, 1994 and 1993 were:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 279 $ 389 $ 400
Interest cost on accumulated postretirement
benefit obligation 780 915 1,100
Net amortization and deferral (201) -- --
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 858 $1,304 $1,500
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Defined postretirement benefit liabilities as of December 31, 1995 and 1994
were:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 6,766 $ 7,661
Fully eligible active plan participants 1,264 985
Other active plan participants 3,726 3,211
- --------------------------------------------------------------------------------
11,756 11,857
Unrecognized net gain 2,778 2,402
- --------------------------------------------------------------------------------
Defined postretirement benefit liability 14,534 14,259
Less current portion of postretirement benefit liability (583) (651)
- --------------------------------------------------------------------------------
Deferred postretirement benefit liability (see Note 17) $13,951 $13,608
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Two health care cost trend rates were used in measuring the accumulated
postretirement benefit obligation. The assumed indemnity health care cost trend
in 1996 was 11.0% for participants less than 65 years of age and 7.0% for
participants 65 years of age and older, gradually declining to 6.0% for both age
groups in the year 2001. The assumed HMO health care cost trend in 1996 was
8.0% for participants less than 65 years of age and 5.0% for participants 65
years of age and older, gradually declining to 6.0% and 5.0%, respectively, in
the year 1998.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% in 1995 and 8.0% in 1994. The rate
of increase in compensation used in determining the obligation was 4.0% in both
1995 and 1994.
If the health care cost trend rate assumptions were increased by 1.0%, the
accumulated postretirement benefit obligation as of December 31, 1995 would be
increased by 3.6%. The effect of this change on the sum of the service cost and
interest cost would be an increase of 3.0%.
Effective January 1, 1996, Hexcel amended its postretirement benefit
program to eliminate any benefits for employees hired after December 31, 1995
(other than certain former employees of the Ciba Composites Business hired on
February 29, 1996), and to limit health care benefit coverage to selected health
insurance plans for the majority of active employees hired on or before December
31, 1995. These amendments are expected to reduce the Company's accumulated
postretirement benefit obligation by approximately $1,600, which will be
recognized as a reduction in future benefit expense on a straight line basis
over 14 years.
71
NOTE 16 -- INCOME TAXES
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1995, the Company had net operating loss ("NOL")
carryforwards for U.S. federal income tax purposes of approximately $65,000 and
net operating loss carryforwards for international income tax purposes of
approximately $5,000. The U.S. NOL carryforwards, which are available to offset
future taxable income, expire at various dates through the year 2010.
As a result of the ownership change which occurred in connection with the
Reorganization Plan (see Note 4), a limitation on the utilization of NOL
carryforwards in the U.S. was created. This utilization limitation, which
applies to loss carryforwards generated prior to February 9, 1995, is estimated
to be approximately $5,000 per year. As a result of the acquisition of the Ciba
Composites Business (see Notes 2 and 3), a second successive limitation on the
utilization of NOL carryforwards in the U.S. has been created. This utilization
limitation, which applies to loss carryforwards generated between February 9,
1995 and February 29, 1996, is estimated to be approximately $12,000 per year.
Under U.S. federal tax law, NOL carryforwards are utilized in the order of
successive limitations. Consequently, the NOL carryforwards subject to the
first annual limitation may be utilized to reduce future taxable income of up to
$5,000 per year, and the NOL carryforwards subject to the second annual
limitation may then be utilized to reduce future taxable income of up to $12,000
per year. The aggregate utilization of NOL carryforwards subject to both
limitations may not exceed $12,000 annually.
PROVISION FOR INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," effective January 1, 1993. The cumulative effect
of adopting SFAS 109 was the recognition of $4,500 of income, which was recorded
in the first quarter of 1993. In connection with the adoption of SFAS 109, the
Company established a valuation allowance of $4,693 against its deferred income
tax assets.
During 1993, substantial uncertainty developed as to the realization of
Hexcel's deferred income tax assets. As a result, the Company increased the
valuation allowance against its deferred income tax assets, reducing the
recorded value of those assets to zero. The increase to the valuation allowance
reflected the Company's assessment that the bankruptcy reorganization
proceedings of Hexcel and substantial operating losses had jeopardized the
realization of deferred income tax assets.
In 1994 and 1995, Hexcel continued to reserve for the income tax assets
generated by the pre-tax losses of certain subsidiaries. As a result of
settlements of various tax audits, state income taxes and taxable income for
certain European subsidiaries, the Company recorded a provision for income taxes
of $3,586 in 1994. As a result of state income taxes and taxable income for
certain European subsidiaries, the Company recorded a provision for income taxes
of $3,313 in 1995.
72
Income (loss) before income taxes and the tax provision for income taxes
from continuing operations for the years ended December 31, 1995, 1994 and 1993
were:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Income (loss) before income taxes:
United States $(1,027) $(24,745) $(58,554)
International 7,541 251 (15,294)
- --------------------------------------------------------------------------------
Total income (loss) before income taxes $ 6,514 $(24,494) $(73,848)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Benefit (provision) for income taxes:
Current:
U.S. $ (197) $ (85) $ (243)
International (3,445) 108 (976)
- --------------------------------------------------------------------------------
Current benefit (provision) for income taxes (3,642) 23 (1,219)
- --------------------------------------------------------------------------------
Deferred:
U.S. -- (2,226) (6,590)
International 329 (1,383) 1,785
- --------------------------------------------------------------------------------
Deferred benefit (provision) for income taxes 329 (3,609) (4,805)
- --------------------------------------------------------------------------------
Total provision for income taxes $ (3,313) $ (3,586) $ (6,024)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the tax provision to the U.S. federal statutory income
tax rate of 34% for the years ended December 31, 1995, 1994 and 1993 was:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Benefit (provision) at U.S. federal statutory
rate $(2,215) $ 8,328 $25,108
U.S. state taxes, less federal tax benefit 254 (244) (104)
Impact of different international tax rates,
adjustments to income tax accruals and other (492) (3,837) 5,471
Valuation allowance (860) (7,833) (36,499)
- --------------------------------------------------------------------------------
Total provision for income taxes $(3,313) $(3,586) $(6,024)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company paid income taxes of $3,864 in 1995, $253 in 1994 and $203 in
1993. The Company has made no U.S. income tax provision for approximately
$27,000 of undistributed earnings of international subsidiaries as of December
31, 1995. Such earnings are considered to be permanently reinvested. The
additional U.S. income tax on these earnings, if repatriated, would be offset in
part by foreign tax credits.
DEFERRED INCOME TAXES
Deferred income taxes result from temporary differences between the
recognition of items for income tax purposes and financial reporting purposes.
Principal temporary differences as of December 31, 1995 and 1994 were:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Accelerated depreciation and amortization $ 10,473 $ 15,443
Accrued restructuring charges (655) (14,382)
Net operating loss carryforwards (27,562) (10,880)
Reserves and other, net (30,309) (37,045)
Valuation allowance 50,006 49,146
- --------------------------------------------------------------------------------
Deferred tax liability (see Note 17) $ 1,953 $ 2,282
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
73
NOTE 17 -- DEFERRED LIABILITIES
Deferred liabilities as of December 31, 1995 and 1994 were:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Deferred DIC-Hexcel liability (see Note 9) $ 3,500 --
Deferred pension and retirement liability (see Note 14) 2,431 $ 2,820
Deferred postretirement benefit liability (see Note 15) 13,951 13,608
Deferred tax liability (see Note 16) 1,953 2,282
Other 5,566 2,569
- --------------------------------------------------------------------------------
Deferred liabilities $27,401 $21,279
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 18 -- SHAREHOLDERS' EQUITY AND INCENTIVE STOCK PLAN
SHAREHOLDERS' EQUITY
On February 21, 1996, Hexcel's shareholders approved an amendment to the
Company's Certificate of Incorporation increasing the number of authorized
shares of Hexcel common stock from 40,000 to 100,000. On February 29, 1996, the
Company issued 18,022 shares of Hexcel common stock to Ciba in connection with
the acquisition of the Ciba Composites Business. As a result, Ciba owned 49.9%
of the total number of shares of Hexcel common stock issued and outstanding as
of that date.
There are 1,500 shares of Hexcel preferred stock authorized for issuance,
but no such shares have been issued.
Hexcel did not declare or pay any dividends in 1995, 1994 or 1993. The
Board of Directors suspended dividend payments beginning in 1993, and such
payments are generally prohibited by the Senior Secured Credit Facility.
INCENTIVE STOCK PLAN
On February 21, 1996, Hexcel's shareholders approved the Incentive Stock
Plan. The Incentive Stock Plan authorizes an aggregate of 3,000 shares of
Hexcel common stock for use by the Company in providing a variety of stock-based
awards to eligible employees, officers, directors and consultants. The
Incentive Stock Plan provides for grants of stock options, stock appreciation
rights, restricted shares, and other stock-based awards.
74
Stock option data for the two years ended December 31, 1995 were:
- ---------------------------------------------------------------------------------------------------------------------
NUMBER OPTION PRICE EXPIRATION
OF SHARES PER SHARE DATES
- ---------------------------------------------------------------------------------------------------------------------
Options outstanding at January 1, 1994 534 $ 7.56 - 32.06 1998 - 2003
Options granted -- -- --
Options exercised -- -- --
Options expired or canceled (66) $ 10.44 - 32.06 1998 - 2003
- ---------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1994 468 $ 7.56 - 32.06 1998 - 2003
Options granted 787 $ 4.75 - 6.38 2000 - 2005
Options exercised (1) $ 7.56 2000
Options expired or canceled (240) $ 6.38 - 32.06 1998 - 2003
- ---------------------------------------------------------------------------------------------------------------------
Options outstanding at December 31, 1995 1,014 $ 4.75 - 32.06 1998 - 2005
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Options exercisable at December 31, 1995 251 $ 9.13 - 32.06 1998 - 2003
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
The options granted during 1995 become exercisable in increments in 1996
and 1997. An additional 1,115 options primarily at exercise prices of $12.50
per share were granted on February 29 and March 1, 1996. Included in this total
are 228 short-term options which expire 90 days after the grant date. The
holders of the short-term options are entitled to receive two additional
"reload" options for each short-term option exercised. Consequently, as many as
456 additional options could be granted during the 90 day period beginning March
1, 1996, in connection with the exercise of short-term options. Except for the
short-term options, the options granted on February 29 and March 1, 1996 become
exercisable in increments through 1999, and expire between 2001 and 2006.
As of December 31, 1995 and 1994, the Company had outstanding a total of 10
and 24 shares of restricted stock, respectively, which vest in increments
through 1997. The holders of these shares are entitled to vote. An additional
269 shares of performance accelerated restricted stock ("PARS") were granted in
March 1996. The PARS vest in increments through 2003, subject to accelerated
vesting under certain circumstances.
NOTE 19 -- CONTINGENCIES
Hexcel is involved in litigation, investigations and claims arising out of
the conduct of its business, including those relating to government contracts,
commercial transactions, and environmental, health and safety matters. The
Company estimates its liabilities resulting from such matters based on a variety
of factors, including outstanding legal claims and proposed settlements,
assessments by internal and external counsel of pending or threatened
litigation, and assessments by environmental engineers and consultants of
potential environmental liabilities and remediation costs. Such estimates
incorporate insignificant amounts for probable recoveries under applicable
insurance policies but exclude counterclaims against other third parties. Such
estimates are not discounted to reflect the time value of money due to the
uncertainty in estimating the timing of the expenditures, which may extend over
several years. Although it is impossible to determine the level of future
expenditures for legal, environmental and related matters with any degree of
certainty, it is management's opinion, based on available information, that it
is unlikely that these matters, individually or in the aggregate, will have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
U.S. GOVERNMENT CLAIMS
Hexcel, as a defense subcontractor, is subject to U.S. government audits
and reviews of negotiations, performance, cost classifications, accounting and
general practices relating to government contracts. The Defense Contract Audit
Agency ("DCAA") reviews cost accounting and business practices of government
75
contractors and subcontractors including the Company. The Company has been
engaged in discussions on a number of cost accounting issues which could result
in claims by the government. Some of these issues have already been resolved.
As part of these reviews, the DCAA has alleged that Hexcel improperly
included certain land lease costs in its indirect rates at the Chandler, Arizona
facility (the "Chandler Land Lease") and that, as a result, the Company's
subcontracts had been overpriced in an amount of approximately $1,000. The
Company has formally responded to the DCAA that it strongly disagrees with these
allegations. In February 1996, the Company received a letter from the United
States Attorney's Office, stating that it was considering filing an action
against the Company for violation of the civil False Claims Act ("FCA") based
upon the inclusion in the indirect rates of the Chandler Land Lease costs.
While the Company does not agree that there was any violation of the FCA, if the
U.S. government elects to pursue such an action and were it to prevail, it would
be entitled to three times the actual damages claimed plus penalties of between
$5 and $10 for each false claim; the number of alleged false claims could be
significant.
LEGAL CLAIMS AND PROCEEDINGS
In December 1988, Lockheed employees working with epoxy resins and
composites on classified programs filed suit against Lockheed and its suppliers
(including Hexcel) claiming various injuries as a result of exposure to these
products. Plaintiffs have filed for punitive damages which may be uninsured.
The first trial of the cases of 15 pilot plaintiffs resulted in a mistrial and a
retrial resulted in the entry of judgment in favor of the plaintiffs. The
Company did not participate in the trial due to the automatic stay resulting
from the Chapter 11 filing. Some of these claims were discharged as a result of
the plaintiffs' failure to file claims in Hexcel's Chapter 11 case. As to the
claims which have not been discharged, the Company has objected to them and
intends to proceed with those objections within the Bankruptcy Court.
Hexcel / MCI, a business unit divested in 1991, performed brazing services
in the manufacture of flexures under subcontract from Ormond which supplied the
flexures to Thiokol. The flexures are used to support a rocket motor housing in
a test stand during actual firing of the rocket. Several flexures cracked under
the dead weight of a rocket motor prior to actual test firing, and Thiokol has
sued Ormond and the Company for the costs of replacing all of the flexures
purchased ($900) (Thiokol Corporation v. Ormond, Hexcel, et al.). The automatic
stay in bankruptcy was lifted in April 1995 and the case was resumed in the
state court in Utah. Discovery is ongoing. There is no insurance coverage
available for an adverse court ruling or negotiated settlement.
In November 1995, Hexcel was notified that Livermore Development
Corporation ("LDC") was asserting a claim for damages arising from Hexcel's
recent notification of its intent to exercise its option to purchase certain
land in Livermore, California. LDC contends that the lease was a disguised
partnership or joint venture agreement between Hexcel and LDC to develop the
property for residential use. Hexcel disputes any such agreement and seeks to
enforce its option to purchase under a written agreement. The parties are in
ongoing negotiations to resolve this claim.
As the result of the acquisition of the Ciba Composites Business in
February 1996, Hexcel assumed certain liabilities including certain legal
proceedings.
ENVIRONMENTAL CLAIMS AND PROCEEDINGS
Hexcel has been named as a potentially responsible party ("PRP") with
respect to several hazardous waste disposal sites that it does not own or
possess which are included on the Environmental Protection Agency's Superfund
National Priority List and/or various state equivalent lists. With respect to
its exposure relating to these sites, the Company believes its responsibility to
be de minimis. A total of 249 claims were filed in the Chapter 11 case with a
face value of over $6.7 billion. These claims were, for the most part,
duplicative as a result of the joint and several liability provisions of
applicable laws and have
76
been categorized into claims involving 19 sites. Claims involving 8 of the
sites have been settled within the Chapter 11 case. The Company has been named
a PRP with respect to 6 sites for which no claims were filed in the Chapter 11
case; as a result, the Company believes any further claims to be barred. The
balance of the sites and their related claims have been passed through the
bankruptcy. The Company's estimation of its exposure at these sites is de
minimis.
Also, pursuant to the New Jersey Environmental Responsibility and Clean-Up
Act, Hexcel signed an administrative consent order to pay for clean-up of a
manufacturing facility it formerly operated in Lodi, New Jersey. Hexcel has
reserved approximately $2,800 to cover such remaining costs and believes that
actual costs should not exceed the amount which has been reserved. Fine
Organics Corporation, the current owner of the Lodi site and Hexcel's former
chemicals business operated on that site, has asserted that the clean-up costs
will be significantly in excess of that amount. The ultimate cost of
remediation at the Lodi site will depend on developing circumstances.
Fine Organics Corporation filed a proof of claim and an adversary
proceeding in the Bankruptcy Court. The court has disallowed a significant
portion of the claim by denying Fine Organics claim for treble damages and
certain contingent claims. The remaining claims are for prior clean-up costs
incurred by Fine Organics and alleged contractual and tort damages relating to
the original sale of the business and site to Fine Organics totaling
approximately $3,200. This matter is proceeding in the Bankruptcy Court.
In September 1995, Ciba was named as a potentially responsible party with
respect to the removal of drums from a disposal site that it did not own or
possess, known as the Omega Chemical Corporation ("Omega Site"). The Omega Site
is a spent solvent recycling and treatment facility in Whittier, California.
Ciba has previously notified the EPA that it intends to comply with the EPA's
removal requirements and has paid its interim share of such removal costs to
date. This responsibility was assumed by the Company as a result of its
acquisition of the Ciba Composites Business, to the extent the Ciba waste
delivered to the Omega site was from the operations of the Ciba Composites
Business. This matter is under evaluation but is presently believed to be de
minimis.
PRODUCT CLAIMS
In 1993, Hexcel became aware of an aluminum honeycomb sandwich panel
delamination problem with panels produced by its wholly-owned Belgium
subsidiary, Hexcel S.A., and installed in rail cars in France and Spain.
Certain customers have alleged that Hexcel S.A. is responsible for the problem.
The Company and its insurer continue to investigate these claims. The Company
is also working with the customers to repair or replace panels when necessary,
with certain costs to be allocated upon determination of responsibility for the
delamination. While no lawsuit has been filed, two customers in France
requested that a court appoint experts to investigate the claims; to date, the
experts have not reported any conclusions. The Company's primary insurer for
this matter has agreed to fund legal representation and to provide coverage of
the claim to the extent of the policy limit for one year. The Company is
investigating additional insurance coverage. Even if additional insurance
coverage is not available, management believes that, based on available
information, it is unlikely that these claims will have a material adverse
effect on the consolidated financial position or results of operations of the
Company.
NOTE 20 -- RAW MATERIALS; SIGNIFICANT CUSTOMERS; MARKETS
Hexcel purchases most of the raw materials used in production. Several key
materials are available from relatively few sources, and in many cases the cost
of product qualification makes it impractical to develop multiple sources of
supply. The unavailability of these materials, which the Company does not
anticipate, could have a material adverse effect on sales and earnings.
77
The Boeing Company and Boeing subcontractors accounted for approximately
21% of 1995 sales, 22% of 1994 sales and 21% of 1993 sales. The loss of all or
a significant portion of this business, which Hexcel does not anticipate, could
have a material adverse effect on sales and earnings.
Net sales by market for the years ended December 31, 1995, 1994 and 1993
were:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Commercial aerospace 45% 47% 42%
Space and defense 11% 11% 18%
Recreation, general industrial and other 44% 42% 40%
- --------------------------------------------------------------------------------
Net sales 100% 100% 100%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 21 -- BUSINESS SEGMENT DATA
The Company operates within a single business segment: composite
materials, parts and structures. The following table summarizes certain
financial data for continuing operations by geographic area as of
December 31, 1995, 1994, and 1993 and for the years then ended:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Net sales:
United States $ 179,573 $ 171,536 $ 185,261
International 170,665 142,259 125,374
- --------------------------------------------------------------------------------
Consolidated $ 350,238 $ 313,795 $ 310,635
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Income (loss) before income taxes:
United States $ 2,912 $ (21,462) $ (55,660)
International 3,602 (3,032) (18,188)
- --------------------------------------------------------------------------------
Consolidated $ 6,514 $ (24,494) $ (73,848)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Identifiable assets:
United States $ 134,972 $ 149,890 $166,201
International 95,630 90,567 84,954
- --------------------------------------------------------------------------------
Consolidated $ 230,602 $ 240,457 $ 251,155
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Capital expenditures:
United States $ 7,729 $ 6,022 $ 4,694
International 4,415 2,340 1,570
- --------------------------------------------------------------------------------
Consolidated $ 12,144 $ 8,362 $ 6,264
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Depreciation and amortization:
United States $ 6,528 $ 8,455 $ 9,607
International 5,095 5,775 5,273
- --------------------------------------------------------------------------------
Consolidated $ 11,623 $ 14,230 $ 14,880
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
International net sales consist of the net sales of international
subsidiaries, sold primarily in Europe, and U.S. exports. U.S. exports were
$18,902 in 1995, $14,008 in 1994 and $11,889 in 1993.
To compute income (loss) before income taxes, the Company allocated
administrative expenses to International of $3,939 in 1995, $3,283 in 1994 and
$2,894 in 1993.
78
NOTE 22 -- OTHER INCOME AND EXPENSES, NET
The Company recognized $791 of other income in 1995, including $600 of
income relating to the sale of the Chandler facility and related assets and
technology (see Note 5).
The Company recognized $4,861 of other income in 1994, including $15,900 of
income relating to the Chandler transaction (see Note 5), partially offset by an
$8,000 provision for the estimated cost of restructuring or liquidating DIC-
Hexcel Limited (see Note 9) and a $2,900 provision for bankruptcy claim
adjustments. The provision for bankruptcy claim adjustments resulted from the
reconciliation and settlement of certain claims as well as changes in the
estimate of assumed liabilities.
The Company incurred $12,780 of other expenses in 1993, primarily as a
result of write-downs of certain assets and increases in reserves for warranties
and environmental matters on property previously owned. The impairment of
assets was attributable to bankruptcy reorganization proceedings, changes in
business conditions, and depressed real estate prices on property held for sale.
NOTE 23 -- DISCONTINUED OPERATIONS
The divestiture of Hexcel's discontinued resins business was completed on
October 30, 1995 (see Note 5). The Company recorded a $2,800 provision in 1994
to write down the net assets of the resins business to expected realizable
value, following a $6,000 charge in 1993.
The divestiture of Hexcel's discontinued fine chemicals business was
completed in 1994. The Company recorded a $2,800 provision in 1993 to write
down the net assets of the fine chemicals business to expected realizable value.
Net sales of discontinued operations for the years ended December 31, 1995,
1994 and 1993 were:
- --------------------------------------------------------------------------------
1995 1994 1993
- --------------------------------------------------------------------------------
Resins business $ 6,944 $ 30,691 $ 27,933
Fine chemicals business -- -- 5,704
- --------------------------------------------------------------------------------
Total discontinued operations $ 6,944 $ 30,691 $ 33,637
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net assets of the discontinued resins business as of December 31, 1994
were:
- --------------------------------------------------------------------------------
1994
- --------------------------------------------------------------------------------
Current assets $ 3,970
Current liabilities (4,591)
Non-current assets 3,621
- --------------------------------------------------------------------------------
Net assets $ 3,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
79
NOTE 24 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1995 and 1994 were:
- --------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------------------------------
1995
Net sales $ 85,155 $ 91,023 $ 81,366 $ 92,694
Gross margin 14,795 18,055 15,888 18,352
Income (loss) from continuing
operations (2,369) 1,950 1,561 2,059
Loss from discontinued operations (112) (185) (171) --
Net income (loss) (2,481) 1,765 1,390 2,059
- --------------------------------------------------------------------------------
Net income (loss) per share and
equivalent share:
Primary and fully diluted:
Continuing operations $ (0.27) $ 0.11 $ 0.09 $ 0.11
Discontinued operations (0.01) (0.01) (0.01) --
Net income (loss) (0.28) 0.10 0.08 0.11
- --------------------------------------------------------------------------------
Dividends per share -- -- -- --
Market price:
High $ 6.63 $ 7.25 $ 12.25 $ 11.25
Low 4.25 4.50 7.25 8.25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1994
Net sales $ 77,682 $ 84,964 $ 74,434 $ 76,715
Gross margin 11,683 14,165 11,601 10,979
Loss from continuing operations (5,325) (4,894) (15,319) (2,542)
Income (loss) from discontinued
operations 301 472 (2,620) (43)
Net loss (5,024) (4,422) (17,939) (2,585)
- --------------------------------------------------------------------------------
Net income (loss) per share and
equivalent share:
Primary and fully diluted:
Continuing operations $ (0.73) $ (0.67) $ (2.09) $ (0.34)
Discontinued operations 0.04 0.06 (0.36) (0.01)
Net loss (0.69) (0.61) (2.45) (0.35)
- --------------------------------------------------------------------------------
Dividends per share -- -- -- --
Market price:
High $ 4.25 $ 4.00 $ 6.00 $ 5.75
Low 2.75 3.00 3.00 4.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
During the third quarter of 1995, the Company recognized other income of
$600 relating to the sale of the Chandler facility and related assets and
technology (see Notes 5 and 22).
During the third quarter of 1994, the Company recorded an $8,000 provision
for the estimated cost of restructuring or liquidating DIC-Hexcel Limited (see
Note 9), and a $2,800 provision to write down the net assets of the discontinued
resins business to expected net realizable value (see Note 23).
During the fourth quarter of 1994, the Company recognized other income of
$15,900 relating to the Chandler transaction (see Notes 5 and 22). In addition,
the Company recorded a total of approximately
80
$10,800 in expenses for bankruptcy claim adjustments, additional interest on
allowed claims, and the settlement of various tax audits.
81