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<SEC-DOCUMENT>0001047469-98-012927.txt : 19980401
<SEC-HEADER>0001047469-98-012927.hdr.sgml : 19980401
ACCESSION NUMBER: 0001047469-98-012927
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 14
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980331
SROS: PCX
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HEXCEL CORP /DE/
CENTRAL INDEX KEY: 0000717605
STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460]
IRS NUMBER: 941109521
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-08472
FILM NUMBER: 98582140
BUSINESS ADDRESS:
STREET 1: 281 TRESSER BOULEVARD
STREET 2: C/O TWO STAMFORD PLZ
CITY: STAMFORD
STATE: CT
ZIP: 06901
BUSINESS PHONE: 2039690666
MAIL ADDRESS:
STREET 1: 5794 W LAS POSITAS BLVD
CITY: PLEASANTON
STATE: CA
ZIP: 945888781
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10K
<TEXT>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NUMBER 1-8472
------------------------
HEXCEL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-1109521
(State of Incorporation) (I.R.S. Employer Identification No.)
281 TRESSER BOULEVARD
STAMFORD, CONNECTICUT 06901
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 969-0666
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ----------------------- -----------------------------------------
<S> <C>
Common Stock New York Stock Exchange
Pacific Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
7% Convertible Subordinated Debentures Due 2011
7% Convertible Subordinated Notes Due 2003
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value as of March 16, 1998 of voting stock held by
nonaffiliates of the registrant: $472,793,149
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
of reorganization confirmed by a U.S. Bankruptcy Court. Yes __X No ____
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
OUTSTANDING AT MARCH 16,
CLASS 1998
- ----------------- ----------------------------
<S> <C>
Common Stock 36,866,641
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS (TO THE EXTENT SPECIFIED
HEREIN)--PART III.
- --------------------------------------------------------------------------------
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<PAGE>
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 a leading international
developer and manufacturer of carbon fibers, reinforcement fabrics, and
lightweight, high-performance composite materials, and engineered products 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 participant in one operating joint venture and two additional joint
venture projects in Asia.
BUSINESS ACQUISITIONS
Hexcel acquired the worldwide composites division of Ciba-Geigy Limited, a
Swiss corporation ("CGL"), and Ciba-Geigy Corporation, a New York corporation
("CGC" and together with CGL, "Ciba"), including most of Ciba's composite
materials, parts and structures businesses, on February 29, 1996. The Company
subsequently acquired Ciba's Austrian composites business on May 30, 1996, and
various remaining assets of Ciba's worldwide composites division at various
dates through February 28, 1997. The composites businesses acquired from Ciba
(collectively, the "Acquired Ciba Business") are engaged in the manufacture and
marketing of reinforcement fabrics and lightweight, high-performance composite
materials, and engineered products for commercial aerospace, space and defense,
recreation, and general industrial markets. Product lines include reinforcement
fabrics, pre-impregnated fabrics ("prepregs"), structural adhesives, honeycomb
core, sandwich panels and fabricated composite parts and structures and
interiors. The aggregate purchase price for the net assets acquired was
approximately $208.7 million.
Hexcel acquired the composite products division of Hercules Incorporated
("Hercules"), including Hercules' carbon fibers and prepreg businesses (the
"Acquired Hercules Business"), on June 27, 1996. The Acquired Hercules Business,
which manufactures carbon fibers and prepregs for commercial aerospace, space
and defense, recreation, and general industrial markets, was purchased for
$139.4 million in cash.
On September 30, 1997, Hexcel acquired from Fiberite, Inc., ("Fiberite") its
satellite business consisting of intangible assets and inventory, and certain
non-exclusive, worldwide rights to other prepreg technologies, for $37.0 million
in cash. The acquisition was substantially downsized from an original agreement
whereby the Company had, subject to certain terms and conditions, committed to
purchase selected assets and businesses of Fiberite for approximately $300
million. As a result of the downsized transaction, the Company wrote-off $5.0
million of acquisition and financing costs to business acquisition and
consolidation expenses. In addition, the Company expensed $8.0 million of
acquired in process research and technology expenses purchased from Fiberite,
which is also included in business acquisition and consolidation expenses.
Further discussion of the business acquisitions is contained under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and in Notes 1, 2 and 3 to the accompanying consolidated
financial statements included in this Annual Report on Form 10-K.
BUSINESS CONSOLIDATION
In 1996, Hexcel announced plans to consolidate the Company's operations over
a period of three years. The objective of the program is to integrate the
Acquired Ciba Business and the Acquired Hercules Business (collectively, the
"Acquired Businesses") into Hexcel, and to reorganize the Company's
manufacturing and research activities around strategic centers dedicated to
select product technologies.
1
<PAGE>
The business consolidation program is also intended to eliminate excess
manufacturing capacity and redundant administrative functions.
The total expense of the business consolidation program through December 31,
1997 was $54.7 million, including $13.0 million related to the Fiberite
transaction which was not included in the original program. The Company does not
expect to incur any further significant additional expenses in relation to this
program. As of December 31, 1997, remaining cash expenditures to complete this
program are estimated at $12 million, which approximates amounts accrued. Thus,
when the program is complete, the Company expects that cash expenditures (for
expenses and capital, net of estimated proceeds from asset sales) necessary to
complete the program will approximate the initial estimate of $51 million.
Further discussion of the business consolidation program, including a
description of certain risks, uncertainties and other factors which could cause
the actual expense and cash expenditures of the consolidation program to differ
materially from the estimated amounts, is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and in Note 3 to the accompanying consolidated financial statements
included in this Annual Report on Form 10-K.
RECENTLY ANNOUNCED JOINT VENTURE ACTIVITIES
In January 1998, the Company reached an agreement in principle with The
Boeing Company ("Boeing") and Aviation Industries of China to form a joint
venture, BHA Aero Composite Parts Co., Ltd., to manufacture composite parts for
secondary structures and interior applications on commercial aircraft. This
joint venture will be located in Tianjin, China. In February 1998, the Company
signed an agreement with Boeing, Sime Darby Berhad and Malaysia Helicopter
Services to form another joint venture, Asian Composite Manufacturing Sdn. Bhd.,
to manufacture composite parts for secondary structures on commercial aircraft.
This joint venture will be located in Alor Setar, Malaysia. Products
manufactured by both joint ventures will be shipped to the Company's Kent,
Washington facility for final assembly, inspection and shipment to Boeing as
well as other customers worldwide. It is anticipated that the first parts will
be delivered to customers in 2000. The Company's total estimated financial
commitment to both of these joint ventures will be approximately $31 million,
which is expected to be made in increments through 2000. However, implementation
of these projects, including the related investments, remain subject to certain
significant conditions, including U.S. and foreign government approvals.
BUSINESS SEGMENT
Hexcel is a vertically integrated manufacturer of a variety of products
within a single business segment: Advanced Structural Materials. The Company
manufactures and sells advanced structural materials to commercial aerospace,
space and defense, recreation, and general industrial markets throughout the
U.S. and the world. Net sales, income (loss) before income taxes, total assets,
capital expenditures, and depreciation and amortization for the Company's U.S.
and international geographic segments for the past three years are contained in
Note 18 to the accompanying consolidated financial statements included in this
Annual Report on Form 10-K.
BUSINESS OVERVIEW
In connection with the purchase of the Acquired Ciba Business in 1996,
Hexcel reorganized itself into strategic business units with responsibility for
specific product groups 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 purchase
of the Acquired Ciba Business provided the Company with additional manufacturing
and marketing capabilities for reinforcement fabrics, prepregs, structural
adhesives, and various honeycomb products, in geographically complementary
areas. In addition, this acquisition extended the Company's range of product
offerings to include a variety of engineered products
2
<PAGE>
made from reinforcement fabrics and composite materials. These engineered
products encompass a number of composite parts and structures, including
finished components for aircraft structures and interiors.
As a result of the purchase of the Acquired Hercules Business, Hexcel
further extended its range of product offerings to include carbon fibers, an
important raw material for many reinforcement fabrics and prepregs. This
acquisition also provided the Company with additional prepreg manufacturing
capabilities and increased the number of products the Company is qualified to
supply for various commercial and military aerospace applications.
As a result of the purchase of the Fiberite assets, Hexcel gained immediate
access to new products and technologies in the commercial aerospace, and space
and defense industries.
Following the acquisitions of the Acquired Businesses, Hexcel is now a
vertically integrated supplier of advanced structural materials to a range of
markets throughout the world. The Company's vertical integration provides it
with an enhanced ability to control the cost, quality and delivery of its
products, and enables the Company to offer its customers a variety of solutions
to their structural materials requirements. The Company sells advanced
structural materials to major airframe manufacturers such as Boeing, Airbus
Industrie ("Airbus"), as well as many other commercial and military aerospace
customers throughout the U.S. and the world. The Company believes that it has
the broadest range of product qualifications for aerospace applications of any
advanced structural materials manufacturer in the world, and supplies material
on every commercial aircraft manufactured by Boeing and Airbus. In addition, the
Company's sales to commercial aerospace and space and defense markets are
complemented by sales of a number of advanced structural materials to recreation
and general industrial markets. Such materials are used in a variety of product
applications, including golf club shafts, fishing rods, tennis rackets, skis,
snowboards, printed circuit boards, window blinds, trains, high-speed ferries,
trucks, automobiles and civil engineering/construction applications.
Hexcel's advanced structural materials business is organized around
strategic business units within three product groups: Fibers and Fabrics,
Composite Materials, and Engineered Products. The following table identifies, by
each of these three product groups, the Company's principal products and
examples of their primary end uses.
3
<PAGE>
<TABLE>
<CAPTION>
PRODUCT GROUP PRODUCTS PRIMARY END USE
- ----------------------- --------------------------- -------------------------------------------------------
<S> <C> <C>
Fibers and Fabrics Carbon Fibers Raw materials for reinforcement fabrics and prepregs
and for filament winding for various space, defense
and industrial applications.
Reinforcement fabrics Raw materials for prepregs and honeycomb;
Various marine applications;
Printed circuit boards;
Window blinds;
Insulation;
Metal and fume filtration systems;
Soft body armor; and
Civil engineering and construction applications.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Composite Materials Prepregs Raw materials for composite structures and interiors
for aircraft, rail, marine, etc.;
Semi-finished aircraft and space components;
Rail, marine and automotive components;
Wind energy turbine blades;
Skis, snowboards, golf club shafts, fishing rods,
tennis rackets, bike frames;
Yacht bows and masts; and
Formula 1 and Indy car components.
Structural Adhesives Bonding of structural materials and components,
including composite panels.
Honeycomb Lightweight, structural core material for composite
structures and interiors for aircraft, rail, marine,
etc.;
Energy absorbers in rail and automotive industries;
Athletic shoe and protective clothing materials; and
Building facia.
Special Process Semi-finished aircraft components used in helicopter
Honeycomb blades;
Space shuttle doors;
Aircraft control surfaces (flaps, wing tips, elevators,
and fairings);
Automotive fuel injection components; and
Industrial components.
Composite Panels Aircraft flooring and interior components;
High speed ferry and train interiors:
Structural panels for train flooring; and
Semi-structural panels for ferry car decks.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Engineered Products Composite Structures Aircraft structures and finished aircraft
components, including:
Wing-to-body and flap track fairings;
Radomes;
Engine cowls and inlet ducts; and
Wing panels.
Interiors OEM and retrofit aircraft interiors, including:
Overhead stowage compartments;
Lavatories; and
Sidewalls and ceilings.
Composite Systems Structural elements and materials for repair and
and Industrial strengthening applications for civil
Structures engineering/construction; and
Composite structural parts for automotive, truck and
other industrial applications.
</TABLE>
4
<PAGE>
FIBERS AND FABRICS
The Fibers and Fabrics business units have worldwide responsibility for
manufacturing and marketing carbon fibers and reinforcement fabrics. These
business units operate manufacturing facilities in Decatur, Alabama; Salt Lake
City, Utah; Seguin, Texas; and Les Avenieres and Decines, France.
CARBON FIBERS: Carbon fibers are manufactured for sale to third party
customers and for use by Hexcel in manufacturing certain reinforcement fabrics
and composite materials. Carbon fibers are woven into carbon fabrics, used as
reinforcement in conjunction with a resin matrix to produce prepregs, and used
in filament winding and advanced fiber placement to produce various other
composite materials.
REINFORCEMENT FABRICS: Reinforcement fabrics are made from a variety of
fibers, including several types of fiberglass as well as carbon, aramid,
Thorstrand-Registered Trademark-, quartz, ceramic and other specialty
reinforcements. These fabrics are sold to third-party customers for use in a
wide range of products and are used by the Company to manufacture prepregs and
other composite materials.
Hexcel's net sales of carbon fibers and reinforcement fabrics to third party
customers were $170.1 million in 1997, $155.2 million in 1996 and $119.1 million
in 1995, respectively. The Company acquired its carbon fibers business in
connection with the purchase of the Acquired Hercules Business, and expanded its
reinforcement fabrics business in connection with the purchase of the Acquired
Ciba Business. Pro forma net sales of carbon fibers and fabrics for 1996 and
1995, giving effect to the acquisitions of the Acquired Businesses as if those
transactions had occurred at the beginning of each respective year, were $181.8
million and $194.4 million, respectively. Approximately 44% and 35% of the
Company's production of carbon fibers and reinforcement fabrics was used
internally to manufacture composite materials in 1997 and 1996, respectively.
The percentage of production of carbon fibers and reinforcement fabrics for
internal use increased significantly in 1997, due to the increase in commercial
aerospace composite materials sales.
COMPOSITE MATERIALS
The Composite Materials business units, which are organized around U.S. and
European markets, have worldwide responsibility for manufacturing and marketing
prepregs, structural adhesives, honeycomb, specially machined honeycomb parts
and composite panels. These business units operate manufacturing and research
facilities in Linz, Austria; Welkenraedt, Belgium; Duxford and Swindon, United
Kingdom; Les Avenieres and Dagneux, France; Parla, Spain; Casa Grande, Arizona;
Dublin and Livermore, California; Lancaster, Ohio; Pottsville, Pennsylvania;
Salt Lake City, Utah; and Burlington, Washington.
PREPREGS: Prepregs are manufactured for sale to third party customers and
for use by Hexcel in manufacturing other composite materials and structures,
including finished components for aircraft structures and interiors. Prepregs
are manufactured by combining high performance reinforcement fabrics or
unidirectional fibers with a resin matrix to form a composite material with
exceptional structural properties not present in either of the constituent
materials. Reinforcement fabrics used in the manufacture of prepregs include
S-2-Registered Trademark- and E-type fiberglass, carbon, aramid (including
Kevlar-Registered Trademark-), quartz, ceramic,
Thorstrand-Registered Trademark-, polyethylene and other specialty
reinforcements. Resin matrices include bismaleimide, cyanates, epoxy, phenolic,
polyester, polyimide and other specialty resins.
STRUCTURAL ADHESIVES: As a result of the purchase of the Acquired Ciba
Business, Hexcel designs and markets a comprehensive range of
Redux-Registered Trademark- film adhesives. These structural adhesives, which
bond a wide range of composite, metallic, and honeycomb surfaces, are used in a
variety of product applications.
HONEYCOMB, HONEYCOMB PARTS AND COMPOSITE PANELS: Honeycomb is a unique,
lightweight, cellular structure generally composed of hexagonal 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
5
<PAGE>
combined with the physical properties of the material from which the honeycomb
is made to meet various engineering requirements.
The Composite Materials business units produce 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), Korex-Registered Trademark- and
several other specialty materials.
The Composite Materials business units sell honeycomb core material in
standard block and sheet form, and in laminated panel form. In the construction
of composite panels, sheets of aluminum, stainless steel, prepreg or other
laminates are bonded with adhesives to each side of a slice of honeycomb core,
creating a "sandwich" structure. Hexcel also possesses advanced processing
capabilities which enable the Company to design and manufacture complex
fabricated honeycomb parts and bonded assemblies to meet customer
specifications. Such parts and assemblies are used as semi-finished components
in the manufacture of composite structures.
Hexcel's net sales of composite materials to third-party customers, sold
separately and together as complex bonded structures, were $585.4 million in
1997, $438.2 million in 1996 and $231.1 million in 1995. The Company expanded
its composite materials business in connection with the acquisitions of the
Acquired Businesses. Pro forma net sales of composite materials for 1996 and
1995, giving effect to the acquisitions of the Acquired Businesses as if those
transactions had occurred at the beginning of each respective year, were $502.0
million and $463.4 million, respectively. Approximately 11% and 7% of the
Company's production of composite materials was used internally to manufacture
composite structures and interiors in 1997 and 1996, respectively. These
products have benefited from the recent increase in commercial aerospace build
rates as further discussed under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ENGINEERED PRODUCTS
Hexcel entered the composite structures and interiors businesses in
connection with the purchase of the Acquired Ciba Business. The Engineered
Products business unit has worldwide responsibility for manufacturing and
marketing composite structures and interiors, primarily for commercial and
military aerospace markets, and operates manufacturing facilities in Kent and
Bellingham, Washington. The Company also manufactures composite structures at a
facility in Brindisi, Italy.
COMPOSITE STRUCTURES: Composite structures, and structural parts, are
manufactured from a variety of composite materials (prepregs, honeycomb and
structural adhesives) using such manufacturing processes as autoclave
processing, multi-axis numerically controlled machining, press laminating, heat
forming and other composite manufacturing techniques. Hexcel manufactures a wide
range of composite structures and parts for the commercial and military
aerospace markets.
INTERIORS: The interiors operations of the Engineered Products business
unit design and produce innovative, light weight, high-strength composite
interior systems for aircraft. Interior products are sold to Boeing and other
airframe manufacturers for production on certain aircraft, and to airlines for
replacement of existing interior components. With increasing airline traffic and
the trend of increased use of rolling carry on luggage, airlines are
increasingly requesting larger overhead stowage bins, which will accommodate
these larger bags. Hexcel Interiors has applied for and/or patented a number of
new bin designs for commercial aircraft, which will hold this larger luggage.
Sales of these products will begin in 1998.
Hexcel's net sales of engineered products to third party customers were
$181.4 million in 1997 and $101.9 million in 1996. Pro forma net sales of
engineered products for 1996 and 1995, giving effect to the acquisition of the
Acquired Ciba Business as if it had occurred at the beginning of each respective
year,
6
<PAGE>
were $114.7 million and $113.5 million, respectively. The improvement for
engineered products in 1997 primarily reflects the production of structural and
interior components outsourced to Hexcel by Boeing starting in the second half
of 1996.
PACIFIC RIM
The Pacific Rim business unit is responsible for business development in the
Asia-Pacific region, and for the sale of all of Hexcel's products within this
region. The Pacific Rim business unit operates sales offices in Sydney,
Australia; Hong Kong; Singapore; Taipei, Taiwan; Shanghai, China; and
Pleasanton, California. This business unit is also responsible for the Company's
participation in a joint venture in Japan to manufacture and market composite
materials in Asia.
Further discussion of Hexcel's business operations is contained under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
RESEARCH AND TECHNOLOGY; PATENTS AND KNOW-HOW
Hexcel's Research and Technology function ("R&T") supports all of the
Company's businesses 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 of Hexcel's strategic business units maintains research and engineering
staff and facilities to support its business operations. Worldwide investment in
research and technology is directed and coordinated by a committee consisting of
R&T representatives from each of the Company's strategic business units. This
committee is responsible for ensuring that R&T 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 $18.4 million for research and technology in 1997, $16.7
million in 1996 and $7.6 million in 1995. These expenditures were expensed as
incurred.
Hexcel's products rely primarily on the Company's expertise in materials
science, textiles, engineering and polymer chemistry. Consistent with market
demand, the Company has been placing more emphasis on cost effective product
design and lean manufacturing in recent years. Towards this end, the Company has
entered into formal and informal 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 engineered products.
In addition to the rights to certain technologies obtained as part of the
Fiberite transaction, the Company owns and maintains in excess of 400 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
Due to the vertically integrated nature of Hexcel's operations, the Company
produces several materials used in the manufacture of certain reinforcement
fabrics, composite materials and engineered products, as well as the
polyacrylonitrile ("PAN") used as a precursor material in the manufacture of
7
<PAGE>
carbon fibers. However, the Company 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 believes that the availability of certain carbon fibers, an important
raw material in manufacturing advanced structural materials, is currently
insufficient to satisfy worldwide demand. The Company estimates it has
production capacity and sufficient fiber supplier commitments to meet its
estimated 1998 and 1999 aerospace customer requirements. However, should
customer demand grow faster than expected or the mix or timing of customer
requirements change, the Company may not be able to satisfy all of its
customers' requirements. In early 1997, the Company and various other carbon
fiber manufacturers announced plans to increase carbon fiber production
capacity. During 1997, the Company substantially completed a carbon fiber
capacity expansion program costing approximately $16 million, which has
increased its capacity by 50%.
Hexcel's production activities are generally based on a combination of "make
to order" and "make to forecast" production requirements. Machined and
fabricated honeycomb parts and composite structures and interiors are
manufactured almost entirely on a "make to order" basis.
MARKETS AND CUSTOMERS
Hexcel's products are sold for a broad range of uses. The following tables
summarize net sales to third-party customers by market and by geography for the
three years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
NET SALES BY MARKET
Commercial aerospace................................................ 64% 56% 45%
Space and defense................................................... 9 11 11
Recreation.......................................................... 7 10 9
General industrial and other........................................ 20 23 35
--------- --------- ---------
Total............................................................. 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
NET SALES BY GEOGRAPHY
United States....................................................... 56% 49% 51%
U.S. exports........................................................ 8 8 5
International....................................................... 36 43 44
--------- --------- ---------
Total............................................................. 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Boeing and related subcontractors accounted for approximately 36% of 1997
sales, and Airbus and related subcontractors accounted for approximately 10% of
1997 sales. The loss of all or a significant portion of the business with Boeing
or Airbus, which Hexcel does not anticipate, could have a material adverse
effect on sales and earnings.
8
<PAGE>
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 Boeing, projects that
revenue passenger miles will increase an average of 6% per year over the next
decade, with the Asian market having the highest growth rate. Recent events in
the Asian market which have occurred after this document was published, may
result in difficulties in achieving this projected growth rate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further discussion. 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.
The number of commercial aircraft delivered by Boeing (the 7-series) and
Airbus declined by nearly 45% from 1992 to 1995. At the lowest point during this
period, Boeing (the 7-series) and Airbus reported combined deliveries of 330
aircraft. Reported aircraft deliveries by Boeing (the 7-series) and Airbus
improved only modestly in 1996, to a combined 344 aircraft. Combined aircraft
deliveries for 1997 were 503, or an increase of 46% over 1996. This increase was
the result of the surge in the commercial aerospace industry. Further, combined
backlog orders at December 31, 1997, were at record levels of 2,608 aircraft;
including 1,599 for Boeing (the 7-series) and 1,009 for Airbus. Published
industry analysis indicates that combined deliveries by these two manufacturers
in 1998 should approximate 730 aircraft. The Company sells material used on
every model of commercial aircraft sold by Boeing and Airbus, with sales per
aircraft ranging from $0.2 million to over $1.0 million per aircraft on the
Boeing 777.
Hexcel's commercial aerospace business volume is expected to increase in
1998 due both in part to the general industry improvement and to the increased
utilization of composite materials on new generation aircraft, which is
attributable to demands for improved aircraft performance. In addition, the
Company began to produce additional structural and interior components for
Boeing in the second half of 1996, and expects to continue producing such
components through 1998. Despite customer preferences for many of the high
performance characteristics of Hexcel's products, the Company must continuously
demonstrate the cost benefits of its products for aerospace applications.
SPACE AND DEFENSE
The space and defense market for composite materials and structures declined
significantly during the early part of this decade, as a result of substantial
decreases in military aircraft procurement that began in the late 1980's. The
current international and domestic political climate suggests that overall
military spending, including aircraft procurement, is not likely to change
significantly from current levels in the near future. Consequently, management
does not expect a significant change in 1998 from the current level of sales to
the space and defense market. However, by the start of the next decade a number
of new military aircraft programs in both the U.S. and Europe are anticipated to
move from development to full scale production. The Company currently has
composite material and carbon fiber qualifications on a number of these
significant military programs, including the European Fighter Aircraft, F-22,
F-18, V-22, C-17 and the Titan and Delta space programs. These programs may be
accomplished without a significant increase in defense expenditures by switching
current cost incurred in their development to funding aircraft production. These
new generation aircraft have a significantly higher portion of their fuselage
built from composite materials than their predecessors or current commercial
aircraft.
Contracts to supply materials for military and some commercial projects
contain provisions for termination at the convenience of the U.S. government or
the buyer. In the case of such a termination, Hexcel is entitled to recover
reasonable incurred cost plus a provision for profit on the incurred cost. In
9
<PAGE>
addition, the Company is subject to U.S. government cost accounting standards,
which are applicable to companies with more than $25 million of government
contract or subcontract awards each year.
RECREATION, GENERAL INDUSTRIAL AND OTHER MARKETS
Hexcel 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 chosen to
focus on select opportunities where high performance, cost effective advanced
material situations can be provided to customers. Accordingly, future
opportunities and growth depend primarily upon the success of the individual
programs and industries in which the Company has elected to participate. Within
the recreation market, key industry sectors and product applications in which
the Company is involved include golf club shafts, fishing rods, tennis rackets,
skis, snowboards, and athletic shoes. Within general industrial markets, key
sectors and applications include printed circuit boards, wind energy, civil
engineering/construction and surface transportation. Hexcel's participation in
these markets is a valuable complement to its commercial and military aerospace
businesses, and the Company is committed to the growth of composites technology
in recreation and industrial applications.
HEXCEL VENTURES
In October 1997, the Company created Hexcel Ventures, a new internal
organization responsible for certain entrepreneurial activities, outside of the
Company's aerospace and space and defense markets. This new organization will
focus on leveraging Hexcel's vertically integrated capabilities and geographic
reach to bring cost effective advanced materials solutions to new customers and
applications. In particular, Hexcel Ventures will seek to stimulate internally
and externally driven growth and diversification through targeted projects in
areas such as automotive, civil engineering/construction and composite part
making for industrial applications.
Further discussion of Hexcel's markets and customers, including certain
risks, uncertainties and other factors with respect to "forward-looking
statements" about those markets and customers, is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
SALES AND MARKETING
A staff of salaried market managers, product managers and salespeople sell
and market Hexcel products directly to customers worldwide. The Company also
uses independent distributors and manufacturer representatives for certain
products, markets and regions.
10
<PAGE>
BACKLOG
The following table summarizes the backlog of orders by product group as of
December 31, 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
RECREATION &
BACKLOG AT DECEMBER 31, 1997 AEROSPACE(a) INDUSTRIAL TOTAL
- -------------------------------------------------------- ------------- ------------- ---------
<S> <C> <C> <C>
Fibers and Fabrics...................................... $ 33.3 $ 24.4 $ 57.7
Composite Materials..................................... 273.2 19.1 292.3
Engineered Products..................................... 170.0 -- 170.0
------ ------ ---------
Total................................................. $ 476.5 $ 43.5 $ 520.0
------ ------ ---------
------ ------ ---------
<CAPTION>
RECREATION &
BACKLOG AT DECEMBER 31, 1997 AEROSPACE(a) INDUSTRIAL TOTAL
- -------------------------------------------------------- ------------- ------------- ---------
<S> <C> <C> <C>
Fibers and Fabrics...................................... $ 26.9 $ 33.6 $ 60.5
Composite Materials..................................... 194.6 15.8 210.4
Engineered Products..................................... 126.0 4.8 130.8
------ ------ ---------
Total................................................. $ 347.5 $ 54.2 $ 401.7
------ ------ ---------
------ ------ ---------
</TABLE>
(a) Includes commercial aerospace and space and defense markets.
The backlog of orders for aerospace materials to be filled within 12 months
was $476.5 million as of December 31, 1997, $347.5 million as of December 31,
1996 and $88.3 million as of December 31, 1995. The significant increase from
the end of 1996 to the end of 1997 is attributable to increased commercial
aircraft build rates. The increase from the end of 1995 to the end of 1996 is
attributable to the acquisitions of the Acquired Businesses and to increased
commercial aircraft build rates. A major portion of the backlog is cancelable by
the Company's customers 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. Aerospace orders are generally received by
the Company between one and eighteen months prior to scheduled delivery of the
aircraft to the customer.
Backlog for recreation and general industrial markets amounted to $43.5
million at December 31, 1997 compared with $54.2 million at December 31, 1996
and $33.5 million at December 31, 1995. Most of this backlog is expected to be
filled within six months. Markets for Hexcel products outside of the aerospace
industry are generally highly competitive and require shorter lead times for
delivery or stock for immediate sale.
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, the
Company's products 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,
product performance and total life cycle costs. The acquisitions of the Acquired
Businesses and the Fiberite assets enhanced the Company's competitive position
by broadening and extending the Company's product portfolio and by strengthening
the Company's position in certain geographic regions, particularly in Europe.
11
<PAGE>
ENVIRONMENTAL MATTERS
To date, 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 16 to the accompanying
consolidated financial statements included in this Annual Report on Form 10-K.
EMPLOYEES
As of December 31, 1997, Hexcel employed 5,597 full-time employees, compared
with 5,013 and 2,127 as of December 31, 1996 and 1995, respectively. The
increase from the end of 1996 to the end of 1997 is primarily attributable to
the growth in the Company's sales. As a result of the acquisitions of the
Acquired Businesses, Hexcel added approximately 2,300 employees to its workforce
in 1996.
Approximately 25% of Hexcel's employees have various union affiliations.
Although the Company had a brief strike by certain union affiliated employees at
the Company's Salt Lake City, Utah plant, which was settled in January of 1997,
and had labor disruptions in its Belgium facility in 1997, which have also been
settled, management believes that labor relations in the Company are generally
satisfactory.
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 Stamford, Connecticut and Pleasanton, California. The Company's
corporate research and technology administration and certain composite materials
laboratories are located in Dublin, California.
The following table lists the manufacturing facilities of Hexcel by
geographic location, approximate square footage, and principal products. The
following table does not include a manufacturing facility in Komatsu, Japan that
is owned by a joint venture in which the Company has a 45% equity interest.
12
<PAGE>
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
APPROXIMATE
FACILITY LOCATION SQUARE FOOTAGE PRINCIPAL PRODUCTS
- ----------------------------------------- -------------- ------------------------------------------------------
<S> <C> <C>
United States:
Decatur, Alabama....................... 159,000 PAN Precursor (used to produce Carbon Fibers)
Salt Lake City, Utah................... 371,000 Carbon Fibers; Prepregs
Seguin, Texas.......................... 204,000 Reinforcement fabrics
Livermore, California.................. 141,000 Prepregs
Lancaster, Ohio........................ 49,000 Prepregs
Casa Grande, Arizona................... 307,000 Honeycomb and Honeycomb Parts
Pottsville, Pennsylvania............... 134,000 Honeycomb Parts
Burlington, Washington................. 73,000 Honeycomb Parts
Kent, Washington....................... 883,000 Composite Structures; Interiors
Bellingham, Washington................. 188,000 Interiors
International:
Les Avenieres, France.................. 476,000 Reinforcement fabrics; Prepregs
Decines, France........................ 90,000 Reinforcement fabrics
Dagneux, France........................ 130,000 Prepregs
Linz, Austria.......................... 163,000 Prepregs
Welkenraedt, Belgium................... 223,000 Honeycomb and Honeycomb Parts
Parla, Spain........................... 43,000 Prepregs
Duxford, United Kingdom................ 440,000 Prepregs; Honeycomb and Honeycomb Parts
Swindon, United Kingdom................ 20,000 Honeycomb Parts
Brindisi, Italy........................ 110,000 Engineered Products
</TABLE>
Hexcel leases the Swindon, U.K. facility and the land on which the
Burlington, Washington facility is located. The Company also leases portions of
the Casa Grande, Arizona; Bellingham and Kent, Washington; Linz, Austria; and
Les Avenieres, France facilities.
ITEM 3. LEGAL PROCEEDINGS.
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
exclude counterclaims against other third parties. Such estimates are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
Although it is impossible to determine the level of future expenditures for
legal, environmental and related matters with any degree of certainty, it is the
Company's opinion, based on available information, that it is unlikely that
these matters, individually or in the aggregate, will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
LEGAL AND ENVIRONMENTAL CLAIMS AND PROCEEDINGS
Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess which are
included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. The
Company estimates that its liability with respect to these sites is not
material.
13
<PAGE>
Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act,
Hexcel signed an administrative consent order to pay for the environmental
remediation of a manufacturing facility it owns and formerly operated in Lodi,
New Jersey. The Company's estimate of the remaining cost to satisfy this consent
order is accrued in the accompanying consolidated balance sheets. The ultimate
cost of remediating the Lodi site will depend on developing circumstances.
In connection with the purchase of the Acquired Ciba Business, Hexcel
assumed various liabilities including a liability with respect to certain
environmental remediation activities at an acquired facility in Kent,
Washington. The Company is a party to a cost sharing agreement regarding the
operation of certain environmental remediation systems necessary to satisfy a
post-closure care permit issued to a previous owner of the Kent site by the U.S.
Environmental Protection Agency. Under the terms of the cost sharing agreement,
the Company is obligated to reimburse the previous owner for a portion of the
cost of the required remediation activities. The Company's estimate of its share
of the cost is accrued in the accompanying consolidated balance sheets as of
December 31, 1997 and 1996.
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 Composites S.A., and installed in rail cars in France and
Spain. Certain customers have alleged that Hexcel Composites 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. 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. The Company believes that, based on available
information, it is unlikely that these claims will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
14
<PAGE>
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 23 to the accompanying
consolidated financial statements included in this Annual Report on Form 10-K
and is incorporated herein by reference.
Hexcel did not declare or pay any dividends in 1997, 1996 or 1995. The
payment of dividends is generally prohibited under the terms of certain of the
Company's credit agreements.
On March 16, 1998, there were 2,290 holders of record of Hexcel common
stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by Item 6 is contained on page 35 of this Annual
Report on Form 10-K under "Selected Financial Data" and is incorporated herein
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by Item 7 is contained on pages 36 to 47 of this
Annual Report on Form 10-K under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and are incorporated herein by
reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is contained on pages 48 to 83 of this
Form 10-K under "Consolidated Financial Statements and Supplementary Data" and
is incorporated herein by reference. The reports of the independent public
accountants for the years ended December 31, 1997, 1996 and 1995 are contained
on pages 50 and 51 of this Annual Report on Form 10-K under "Report of
Independent Accountants" and "Independent Auditors' Report" and are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On July 10, 1997, the Company changed independent auditors. There were no
disagreements or other reportable events related to this change.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Listed below are the directors of Hexcel as of March 16, 1998, the
positions with the Company held by them and a brief description of each
director's prior business experience.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
John J. Lee.................. 61 1993 Has served as Chairman of the Board of Directors of Hexcel since
February 1996, Chief Executive Officer since January 1994,
President since May 1997, Chairman and Chief Executive Officer
from January 1994 to February 1995, Chairman and Co-Chief
Executive Officer from July 1993 to December 1993 and a director
of Hexcel since May 1993. Mr. Lee also serves as Chairman of the
Nominating Committee and a member of the Finance Committee of
Hexcel. In addition, Mr. Lee has served as Chairman of the
Operating Committee of Hexcel since May 1997 (the Operating
Committee is a committee comprised of certain members of senior
management of Hexcel which provides oversight of, and
establishes policies in connection with, Hexcel's worldwide
business operations). Mr. Lee is also a director of Aviva
Petroleum Corporation, an oil and gas exploration company and of
Hvide Marine Incorporated, a marine support and transportation
services company, and has served as Chairman of the Board,
President and Chief Executive Office of Lee Development
Corporation, a merchant banking company, since 1987. Mr. Lee is
a Trustee of Yale University and has been an adviser to the
Clipper Group, a private investment partnership, from 1993 to
December 1997. Mr. Lee served as a director of XTRA Corporation,
a transportation equipment leasing company, from 1990 to January
1996. 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
Corporation from 1990 through 1993. Mr. Lee is also a director
of various privately held corporations.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
John M.D. Cheesmond.......... 48 1996 Has been a director of Hexcel since February 1996. Mr. Cheesmond
also serves as Chairman of the Executive Compensation Committee
and a member of the Finance Committee of Hexcel. Mr. Cheesmond
is Executive Vice President and Head of Corporate Strategy, and
a member of the Executive Committee of Ciba Specialty Chemical
Holding Inc., ("CSCH"), a leading global specialty chemical
company and successor to Ciba's industrial chemicals business.
Mr. Cheesmond also serves as a member of Beirat of TFL, a
European headquartered joint venture in leather chemicals. Mr.
Cheesmond served as Senior Vice President and Head of Regional
Finance and Control of CGL from 1994 to 1996. From 1991 to 1993,
Mr. Cheesmond served as Group Vice President, Planning,
Information and Control at Ciba Vision Corporation.
Marshall S. Geller........... 59 1994 Has been a director of Hexcel since August 1994. Mr. Geller also
serves as a member of the Audit, Executive Compensation and
Nominating Committees of Hexcel. Mr. Geller is currently
Chairman of the Board, Chief Executive Officer and founding
partner at Geller & Friend Capital Partners, Inc., a merchant
banking firm, since November 1995. From 1991 to 1995, Mr. Geller
was Senior Managing Director 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 to
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, iMALL, Inc., Datalink Systems
Corp., Players International, Value Vision International, Inc.,
Cabletel Communications Corp. and various privately-held
corporations and charitable organizations. Mr. Geller currently
serves as Chairmen of the Investment Committee for both Players
International and Value Vision International, Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
Stanley Sherman.............. 59 1996 Has been a director of Hexcel since February 1996. Mr. Sherman
also serves as a member of the Executive Compensation and
Finance Committees of Hexcel. Mr. Sherman is President and Chief
Executive Officer of Ciba Specialty Chemicals Corporation (North
America) and Chairman of the Board of Ciba Specialty Chemicals
Canada Inc., both of which are members of the Ciba group. Mr.
Sherman served as a director and Vice President and Chief
Financial Officer of CGC from 1991 to 1996, serving on the
Finance Committee and the Corporate Management Committee of
CGC's Board of Directors. From 1986 to 1991, Mr. Sherman served
as Vice President-Corporate Planning of CGC. Mr. Sherman also
serves on the Board of the Westchester Educational Coalition and
the Chemical Manufacturers Association.
Martin L. Solomon............ 61 1996 Has been a director of Hexcel since May 1996. Mr. Solomon also
serves as Chairman of the Finance Committee and as a member of
the Audit and Executive Compensation Committees of Hexcel. Since
June 1997, Mr. Solomon has been the Chairman and Chief Executive
Officer of American Country Holdings, Inc., an insurance holding
company. Since 1990, Mr. Solomon has been a private investor.
From 1988 to 1990, he was Managing Director and general partner
of Value Equity Associates, L.L.P., an investment partnership.
From 1985 to 1987, Mr. Solomon was an investment analyst and
portfolio manager with Steinhardt Partners, an investment
partnership. From 1985 to 1996, Mr. Solomon was a Director and
Vice-Chairman of the Board of Great Dane Holdings, Inc., a
company engaged in the manufacture of transportation equipment,
automobile stamping, the lease of taxis and insurance. Since
1995, Mr. Solomon has been a Director of DLB Oil and Gas, Inc.,
a company engaged in oil exploration and production, since 1990,
Mr. Solomon has been a Director of XTRA Corporation, a lessor of
truck trailers, marine containers, and intermodal equipment, and
since June 1997, Mr. Solomon has been a Director of Telephone
and Data Systems, Inc., a diversified telecommunications service
company with established wireless and wireline operations. Mr.
Solomon is also a director of various privately held
corporations and civic organizations.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
George S. Springer........... 64 1993 Has been a director of Hexcel since January 1993. Mr. Springer
also serves as Chairman of the Technology Committee of Hexcel.
Mr. Springer is the Paul Pigott 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. Mr. Springer joined Stanford
University's faculty in 1983.
Joseph T. Sullivan........... 58 1996 Has been a director of Hexcel since February 1996. Mr. Sullivan
also serves as a member of the Nominating and Technology
Committees of Hexcel. Mr. Sullivan is Joseph H. Colic Professor
of Chemical Engineering at Virginia Polytechnic Institute and
State University in Blacksburg, VA. Mr. Sullivan served as a
director and Senior Vice President of CGC from 1986 to 1996.
Hermann Vodicka.............. 55 1996 Has been a director of Hexcel since February 1996. Mr. Vodicka
also serves as a member of the Nominating and Technology
Committees of Hexcel. From 1996, Mr. Vodicka has served as the
Chief Executive Officer and as a director of Ciba. Mr. Vodicka
served as President of the Polymers Division and a member of the
Executive Committee of CGL from 1993 to 1996. Mr. Vodicka was
the Chairman of the Board of Mettler-Toledo, a leading worldwide
manufacturer of scales and balances and a wholly owned
subsidiary of CGL, until its sale in 1996. From 1988 to 1993,
Mr. Vodicka was President and Chief Executive Officer of
Mettler-Toledo.
Franklin S. Wimer............ 62 1995 Was a director of Hexcel from February 1995 to February 1996 and
was reelected in May 1996. Mr. Wimer is Chairman of the Audit
Committee and also serves on the Technology Committee of Hexcel.
Mr. Wimer is President and Principal of UniRock Management
Corporation ("UniRock"), a private merchant banking firm based
in Denver, Colorado. Mr. Wimer has been with UniRock since 1987.
UniRock acted as strategic planning consultant to Hexcel from
December 1993 through April 1996. Mr. Wimer is currently
Chairman of the Board of Vista Restaurants, Inc., Chairman of
the Board of Colorado Gaming & Entertainment Co. and is a
director of the Denver Paralegal Institute and Foresight
Products, Inc.
</TABLE>
(b) Listed below are the executive officers and other senior management of
Hexcel as of March 16, 1998, the positions held by them and a brief description
of their business experience.
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
John J. Lee.................. 61 1993 See Item 10(a) above for a brief description of Mr. Lee's
positions with Hexcel and his business experience.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
Stephen C. Forsyth........... 42 1994 Has served as Chief Financial Officer of Hexcel since November
1996, Senior Vice President of Finance and Administration of
Hexcel since February 1996 and as a member of the Operating
Committee since May 1997. Mr. Forsyth served as Vice President
of International Operations of Hexcel from October 1994 to
February 1996 and General Manager of Hexcel's Resins Business
and Export Marketing from 1989 to 1994 and held other general
management positions with Hexcel from 1980 to 1989. Mr. Forsyth
joined Hexcel in 1980.
Bruce D. Herman.............. 42 1996 Has served as Treasurer of Hexcel since April 1996. Prior to
joining Hexcel, Mr. Herman served as Vice President of Finance
in the Transportation and Industrial Financing Division of USL
Capitol Corp. (formerly U.S. Leasing Inc.) ("USL") from 1993 to
1996, Vice President of Finance in the Equipment Financing Group
of USL from 1991 to 1993 and as Vice President of Corporate
Analysis from 1988 to 1991.
Ira J. Krakower.............. 57 1996 Has served as Senior Vice President, General Counsel and Secretary
since September 1996. Prior to joining Hexcel, Mr. Krakower
served as Vice President and General Counsel to Uniroyal
Chemical Corporation from 1986 to August 1996 and served on the
Board of Directors of and as Secretary to Uniroyal Chemical
Company, Inc. from 1989 to 1996.
Wayne C. Pensky.............. 42 1993 Has served as Corporate Controller and Chief Accounting Officer of
Hexcel since July 1993. Prior to joining Hexcel in 1993, Mr.
Pensky was a partner at Arthur Andersen & Co., an accounting
firm where he was employed from 1979 to 1993.
Joseph H. Shaulson........... 32 1996 Has served as Vice President of Corporate Development of Hexcel
since April 1996. In addition, Mr. Shaulson served as Acting
General Counsel and Acting Secretary of Hexcel from April 1996
to September 1996. Prior to joining Hexcel, Mr. Shaulson was an
associate in the law firm of Skadden, Arps, Slate, Meagher &
Flom, where he was employed from 1991 to 1996.
David M. Wong................ 53 1996 Has served as Vice President of Corporate Affairs of Hexcel since
February 1996. Mr. Wong served as Hexcel's Director of Special
Projects from July 1993 to February 1996 and Corporate
Controller and Chief Accounting Officer of Hexcel from 1983 to
1993 and held other general management positions from 1979 to
1983. Mr. Wong joined Hexcel in 1979.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
James N. Burns............... 58 1996 Has served as President of Hexcel's Fibers business unit since
July 1996. Prior to his employment with Hexcel, Mr. Burns served
in a number of management positions with the Composite Products
Division of Hercules Incorporated, including Business Director
from March 1995 through June 1996, Business Unit Director of
Advanced Composite Materials from June 1992 through March 1995
and Vice President of Marketing from June 1986 through June
1992.
Michael Carpenter............ 41 1996 Has served as Vice President of Hexcel's 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 CGC prior to February
1996. He held various technical and managerial positions with
Heath Tecna from 1983.
Claude Genin................. 62 1996 President of Hexcel's Fabrics business unit since February 1996.
Mr. Genin served as managing director of Hexcel S.A. (France)
from 1977 to 1996. Hexcel S.A. (France) was acquired by Hexcel
in 1985.
William Hunt................. 55 1996 Has served as the President of Hexcel's EuroMaterials business
unit since February 1996, and as a member of the Operating
Committee since October 1997. 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
Plastics from 1990 to 1991. Prior to joining CGP in 1990, Mr.
Hunt held various other technical and managerial positions,
including the position of Managing Director of Illford Limited
(Photographic) Co.
Rodney P. Jenks, Jr.......... 47 1994 Has served as Assistant General counsel from May 1997. Mr. Jenks
served as Vice President and General Counsel of Americas and
Asia-Pacific Operations of Hexcel from April 1996 to May 1997.
From March 1994 to March 1996, Mr. Jenks served as Vice
President, General Counsel and Secretary of Hexcel. Prior to
joining Hexcel in 1994, Mr. Jenks was a partner in the law firm
of Wendel, Rosen, Black & Dean, where he continued to serve as
counsel until March 1996.
James A. Koshak.............. 54 1996 Has served as President of Hexcel's U.S. 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 of the Ciba Composites Business from 1993 to
February 1996 and as Vice President of Ciba's Polymers Division
and General Manager of Ciba's Formulated Systems unit from 1988
to 1993. Mr. Koshak held various other sales, marketing and
general managerial positions with Ciba from 1974 to 1988.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
Thomas J. Lahey.............. 57 1991 Has served as President of Hexcel's Pacific Rim business unit
since February 1996. Mr. Lahey served as Vice President of
Worldwide Sales of Hexcel from April 1993 to February 1996, Vice
President of Advanced Composites of Hexcel from 1992 to 1993,
General Manager of Advanced Composites of Hexcel from 1991 to
1992 and General Manager of Advanced Products of Hexcel 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 from 1987 to 1988 and was a Vice President
of Grumman Corporation from 1985 to 1987.
Linn Matthews................ 60 1997 Has served as Vice President of Corporate Sales and Marketing and
as a member of the Operating Committee since December 1997.
Prior to joining Hexcel, Mr. Matthews served as Vice President
of Venture Operations for Amoco Chemical Asia Pacific, located
in Hong Kong, from 1994 to 1997. From 1993 to 1994, Mr. Matthews
was Vice President of Marketing and Sales for Amoco Performance
Products. Prior to 1993, he has served in other management
positions in Amoco and Union Carbide Corporation.
William P. Meehan............ 62 1993 Has served as Vice President; Deputy Director of Operations of
Hexcel since November 1996 and as a member of the Operating
Committee since May 1997. He also served as Vice President of
Finance and Chief Financial Officer from September 1993 to
November 1996 and as Treasurer of Hexcel from April 1994 to
April 1996. 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 to
1992. From 1986 to 1989, Mr. Meehan served as Vice President of
Finance and Chief Financial Officer of Hadco Corporation.
Robert A. Petrisko........... 43 1993 Has served as Vice President of Research and Technology of Hexcel
since September 1993. Mr. Petrisko served at Hexcel's Chandler
facility as Manager of the Signature Technology Group from 1989
to April 1993 and as Director of Aerospace and Defense
Technology from April 1993 to September 1993. Mr. Petrisko
joined Hexcel in 1989 after serving as a Research Specialist
with Dow Corning Corporation from 1985 to 1989. He holds a Ph.D.
in Macromolecular Science and Engineering from the University of
Michigan and a B.S. in Chemistry from Case Western Reserve
University.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
OFFICER
NAME AGE SINCE POSITIONS WITH HEXCEL AND BUSINESS EXPERIENCE
- ----------------------------- --- ----------- ------------------------------------------------------------------
<S> <C> <C> <C>
Gary L. Sandercock........... 57 1989 Has served as Vice President of Manufacturing of Hexcel since
October 1996 and as a member of the Operating Committee since
October, 1997. From February 1996 through October 1996, he
served as President of Hexcel's Special Process business unit.
Mr. Sandercock served as Vice President of Manufacturing of
Hexcel from April 1993 to February 1996, Vice President of
Reinforcement Fabrics of Hexcel from 1989 to 1993 and General
Manager of the Trevarno Division of Hexcel from 1985 to 1989 and
held other manufacturing and general management positions from
1967 to 1985. Mr. Sandercock joined Hexcel in 1967.
David Tanonis................ 41 1996 Has served as Vice President of Hexcel's 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 CGC prior to February
1996. Mr. Tanonis has held various technical and managerial
positions with Heath Tecna since 1987. Mr. Tanonis held various
management positions with Polymer Engineering, Inc. from 1978 to
1987.
Justin Taylor................ 44 1996 Has served as President of Hexcel's Structures and Interiors
business unit since April 1996. From July 1995 to April 1996,
Mr. Taylor served as a member of CGL's strategic planning unit.
Prior to July 1995, Mr. Taylor held various management positions
in the Heath Tecna Division of CGC.
</TABLE>
(c) There are no family relationships among any of Hexcel's directors or
executive officers.
ITEM 11. EXECUTIVE COMPENSATION.
The information required in Item 11 will be contained in Hexcel's definitive
Proxy Statement for the 1998 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 1998 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 1998 Annual Meeting of Stockholders. Such information is
incorporated herein by reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
A. FINANCIAL STATEMENTS
The consolidated financial statements of Hexcel, notes thereto, and reports
of independent accountants are listed on page 48 of this Annual Report on Form
10-K and are incorporated herein by reference.
B. REPORTS ON FORM 8-K
None.
C. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Strategic Alliance Agreement dated as of September 29, 1995 among Hexcel, Ciba-Geigy Limited and
Ciba-Geigy Corporation (incorporated herein by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated as of October 13, 1995).
2.1(a) Amendment dated as of December 12, 1995 to the Strategic Alliance Agreement among Hexcel, Ciba-Geigy
Limited and Ciba-Geigy Corporation (incorporated herein by reference to Exhibit 2.1(a) to the
Company's Current Report on Form 8-K dated as of March 15, 1996).
2.1(b) Letter Agreement dated as of February 28, 1996 among Hexcel, Ciba-Geigy Limited and Ciba-Geigy
Corporation (incorporated herein by reference to Exhibit 2.1(b) to the Company's Current Report on
Form 8-K dated as of March 15, 1996).
2.1(c) Distribution Agreement dated as of February 29, 1996 among Hexcel, Brochier S.A., Composite Materials
Limited, Salver S.r.l. and Ciba-Geigy Limited (incorporated herein by reference to Exhibit 2.1(c)
to the Company's Current Report on Form 8-K dated as of March 15, 1996).
2.1(d) Consent Letter dated February 21, 1997, between Hexcel and Ciba Specialty Chemicals Holding Inc.
2.2 Sale and Purchase Agreement dated as of April 15, 1996 among Hexcel Corporation, Hercules
Incorporated, Hercules Nederland BV and HISPAN Corporation (incorporated herein by reference to
Exhibit 2.2 to Hexcel's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996).
2.3 Amendment Number One dated as of June 27, 1996 to the Sale and Purchase Agreement among Hexcel
Corporation, Hercules Incorporated, Hercules Nederland BV and HISPAN Corporation (incorporated
herein by reference to Exhibit 2.2 to Hexcel's Current Report on Form 8-K dated July 12, 1996).
2.4 Letter Agreement dated as of June 27, 1996 among Hexcel Corporation, Hercules Incorporated, Hercules
Nederland BV and HISPAN Corporation (incorporated herein by reference to Exhibit 2.3 to Hexcel's
Current Report on Form 8-K dated July 12, 1996).
3.1 Restated Certificate of Incorporation of Hexcel Corporation (incorporated herein by reference to
Exhibit 1 to Hexcel's Registration Statement on Form 8-A dated July 9, 1996).
3.2 Amended and Restated Bylaws of Hexcel Corporation (incorporated herein by reference to Exhibit 2 to
Hexcel's Registration Statement on Form 8-A dated July 9, 1996).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.1 Indenture dated as of July 24, 1996 between Hexcel Corporation and First Trust of California,
National Association (incorporated herein by reference to Exhibit 4 to Hexcel's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996).
4.2 Indenture dated as of February 29, 1996 between Hexcel and First Trust of California, National
Association, as trustee (incorporated herein by reference to Exhibit 4.1 to the Company's Current
Report on Form 8-K dated as of March 15, 1996).
4.2(a) First Supplemental Indenture dated as of June 27, 1996 between Hexcel and First Trust of California,
N.A., as trustee, to the Indenture dated as of February 29, 1996 between Hexcel and First Trust of
California, N.A., as trustee.
4.2(b) Second Supplemental Indenture dated as of March 5, 1998 between Hexcel and First Trust of California,
N.A., as trustee, to the Indenture dated as of February 29, 1996 between Hexcel and First Trust of
California, N.A., as trustee.
4.3 Indenture dated as of August 1, 1986 between Hexcel and the Bank of California, N.A., as trustee.
4.3(a) Instrument of Resignation, Appointment and Acceptance, dated as of October 1, 1988 (incorporated
herein by reference to Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.1 Credit Agreement dated as of February 29, 1996 among Hexcel 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 (incorporated herein by reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K dated as of March 15, 1996).
10.2 Second Restated and Amended Reimbursement Agreement dated as of February 29, 1996 between Hexcel and
Banque Nationale de Paris (incorporated herein by reference to Exhibit 10.3(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.2(a) Third Amended and Restated Reimbursement Agreement dated as of June 27, 1996 between Hexcel
Corporation and Banque Nationale de Paris (incorporated herein by reference to Exhibit 10.4 to
Hexcel's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).
10.3 Credit Agreement dated as of June 27, 1996 among Hexcel and certain of its subsidiaries as borrowers,
the institutions party thereto as lenders, the institutions party thereto as issuing banks,
Citibank, N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein
by reference to Exhibit 99.2 to Hexcel's Current Report on Form 8-K dated July 12, 1996).
10.4 Consent Number 1 and First Amendment dated as of July 3, 1996 to the Credit Agreement dated as of
June 27, 1996 among Hexcel Corporation and certain of its subsidiaries as borrowers, the
institutions party thereto as lenders, the institutions party thereto as issuing banks, Citibank,
N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by
reference to Exhibit 10.2 to Hexcel's Quarterly Report on Form 10-Q for the quarter ended June 30,
1996).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.4(a) Modifications dated as of July 8, 1996 to the First Amendment to the Credit Agreement among Hexcel
Corporation and certain of its subsidiaries as borrowers, the institutions party thereto as
lenders, the institutions party thereto as issuing banks, Citibank, N.A. as collateral agent and
Credit Suisse as administrative agent (incorporated herein by reference to Exhibit 10.3 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1996).
10.4(b) Consent Number 2 and Second Amendment dated as of November 12, 1996 to the Credit Agreement dated as
of June 27, 1996 among Hexcel Corporation and certain of its subsidiaries as borrowers, the
institutions party thereto as lenders, the institutions party thereto as issuing banks, Citibank,
N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by
reference to Exhibit 10.4(b) to Hexcel's Annual Report on Form 10-K for the year ended December 31,
1996).
10.4(c) Consent Number 3 and Third Amendment dated as of February 27, 1997 to the Credit Agreement dated as
of June 27, 1996 among Hexcel Corporation and certain of its subsidiaries as borrowers, the
institutions party thereto as lenders, the institutions party thereto as issuing banks, Citibank,
N.A. as collateral agent and Credit Suisse as administrative agent (incorporated herein by
reference to Exhibit 10.4(c) to Hexcel's Annual Report on Form 10-K for the year ended December 31,
1996).
10.4(d) Amended and Restated Credit Agreement dated as of March 5, 1998 among Hexcel and certain subsidiaries
as borrowers, the lenders and issuing banks party thereto, Citibank, N.A., as U.S. administrative
agent, Citibank International plc, as European administrative agent and Credit Suisse, as
syndication agent.
10.5 Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 (incorporated herein
by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8, Registration No.
333-36163).
10.5(a) Hexcel Corporation Incentive Stock Plan as amended and restated January 30, 1997 and further amended
December 10, 1997.
10.6 Hexcel Corporation Management Incentive Compensation Plan (incorporated herein by reference to
Exhibit 10.4 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.6(a) Hexcel Corporation Management Incentive Compensation Plan, as amended on December 5, 1996
(incorporated herein by reference to Exhibit 10.6(a) to Hexcel's Annual Report on Form 10-K for the
three year ended December 31, 1996).
10.6(b) Hexcel Corporation Management Stock Purchase Plan (incorporated herein by reference to Exhibit 10.9
to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.7 Form of Employee Option Agreement (1997) (incorporated herein by reference to Exhibit 10.4 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.7(a) Form of Employee Option Agreement (1996) (incorporated herein by reference to Exhibit 10.5 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.7(b) Form of Employee Option Agreement (1995) (incorporated herein by reference to Exhibit 10.6 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.8 Form of Retainer Fee Option Agreement for Non-Employee Directors (1997).
10.8(a) Form of Option Agreement (Directors) (incorporated herein by reference to Exhibit 10.13 to Hexcel's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.9 Form of Short-Term Option Agreement (incorporated herein by reference to Exhibit 10.8 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.9(a) Form of Performance Accelerated Restricted Stock Unit Agreement (1997) (incorporated herein by
reference to Exhibit 10.5 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30,
1997).
10.9(b) Form of Performance Accelerated Restricted Stock Unit Agreement (incorporated herein by reference to
Exhibit 10.9 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.9(c) Form of Reload Option Agreement (1997) (incorporated herein by reference to Exhibit 10.8 of Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.9(d) Form of Reload Option Agreement (incorporated herein by reference to Exhibit 10.10 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996).
10.9(e) Form of Performance Accelerated Stock Option Agreement (Director) (incorporated herein by reference
to Exhibit 10.6 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.9(f) Form of Performance Accelerated Stock Option (Employee) (incorporated herein by reference to Exhibit
10.7 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.9(g) Form of Grant of Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.10
to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.10 Hexcel Corporation 1997 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit
10.2 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.11 Employment Agreement dated as of February 29, 1996 between Hexcel and John J. Lee (incorporated
herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.11(a) Employee Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee (incorporated
herein by reference to Exhibit 10.14(a) to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.11(b) Bankruptcy Court Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.14(b) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.11(c) Performance Accelerated Restricted Stock Unit Agreement dated as of February 29, 1996 between Hexcel
and John J. Lee (incorporated herein by reference to Exhibit 10.14(c) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.11(d) Short-Term Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.14(d) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.11(e) Form of Reload Option Agreement dated as of February 29, 1996 between Hexcel and John J. Lee
(incorporated herein by reference to Exhibit 10.14(e) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995).
10.12 Agreement dated September 3, 1996 between Hexcel Corporation and Ira J. Krakower.
10.13 Separation and Release Agreement dated as of January 29, 1998 between Hexcel Corporation and Juergen
Habermeier.
10.14 Agreement between Hexcel Corporation and Stephen C. Forsyth (incorporated by reference to Exhibit
10.4(L) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.15 Agreement between Hexcel Corporation and Gary L. Sandercock (incorporated by reference to Exhibit
10.4(I) to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994).
10.16 Governance Agreement dated as of February 29, 1996 between Hexcel and Ciba-Geigy Limited
(incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.17 Registration Rights Agreement dated as of February 29, 1996 between Hexcel and Ciba-Geigy Limited
(incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.18 Agreement Governing United States Employment Matters dated as of September 29, 1995 between Hexcel
and Ciba-Geigy Corporation (incorporated herein by reference to Exhibit D to Exhibit 10.1 to the
Company's Current Report on Form 8-K dated as of October 13, 1995).
10.18(a) Amendment dated as of November 22, 1995 to the Agreement Governing United States Employment Matters
between Hexcel and Ciba-Geigy Corporation (incorporated herein by reference to Exhibit 10.23(a) to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.19 Employment Matters Agreement dated as of February 29, 1996 among Ciba-Geigy PLC, Composite Materials
Limited and Hexcel (incorporated herein by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.20 Asset Purchase Agreement by and among Stamford FHI Acquisition Corp., Fiberite, Inc. and Hexcel
Corporation, dated as of April 21, 1997 (incorporated herein by reference to Exhibit 10.1 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended June 30, 1997).
10.21 Amended and Restated Asset Purchase Agreement, by and among Stamford FHI Acquisition Corp., Fiberite,
Inc, and Hexcel Corporation, dated as of August 25, 1997 (incorporated herein by reference to
Exhibit 10.11 to Hexcel's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1997).
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.22 License of Intellectual Property agreement, by and among Hexcel Corporation and Fiberite, Inc., dated
as of August 29, 1997 (incorporated herein by reference to Exhibit 10.12 to Hexcel's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 1997).
21. Subsidiaries of Registrant.
23. Consent of Independent Accountants--Price Waterhouse LLP.
23.(2) Independent Auditors' Consent--Deloitte & Touche LLP.
27. Financial Data Schedule (electronic filing only).
</TABLE>
29
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
STAMFORD, STATE OF CONNECTICUT.
HEXCEL CORPORATION
March 26, 1998 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------
<C> <S> <C>
Chairman of the Board of
Directors,
/s/ JOHN J. LEE Chief Executive Officer and March 26, 1998
------------------------------------ President
(John J. Lee) (PRINCIPAL EXECUTIVE
OFFICER)
Senior Vice President and
/s/ STEPHEN C. FORSYTH Chief March 26, 1998
------------------------------------ Financial Officer
(Stephen C. Forsyth) (PRINCIPAL FINANCIAL
OFFICER)
/s/ WAYNE C. PENSKY Corporate Controller March 26, 1998
------------------------------------ (PRINCIPAL ACCOUNTING
(Wayne C. Pensky) OFFICER)
/s/ JOHN M. D. CHEESMOND March 26, 1998
------------------------------------ Director
(John M. D. Cheesmond)
/s/ MARSHALL S. GELLER March 26, 1998
------------------------------------ Director
(Marshall S. Geller)
/s/ STANLEY SHERMAN March 26, 1998
------------------------------------ Director
(Stanley Sherman)
/s/ MARTIN L. SOLOMON March 26, 1998
------------------------------------ Director
(Martin L. Solomon)
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------
<C> <S> <C>
/s/ GEORGE S. SPRINGER March 26, 1998
------------------------------------ Director
(George S. Springer)
/s/ JOSEPH T. SULLIVAN March 26, 1998
------------------------------------ Director
(Joseph T. Sullivan)
/s/ HERMANN VODICKA March 26, 1998
------------------------------------ Director
(Hermann Vodicka)
/s/ FRANKLIN S. WIMER March 26, 1998
------------------------------------ Director
(Franklin S. Wimer)
</TABLE>
31
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table summarizes selected financial data for continuing
operations as of and for the five years ended December 31:
<TABLE>
<CAPTION>
1997 1996(a) 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................................. $ 936,855 $ 695,251 $ 350,238 $ 313,795 $ 310,635
Cost of sales.............................................. 714,223 553,942 283,148 265,367 263,090
---------- ---------- ---------- ---------- ----------
Gross margin............................................... 222,632 141,309 67,090 48,428 47,545
Selling, general and administrative expenses............... 102,449 79,408 41,706 37,584 44,539
Research and technology expenses........................... 18,383 16,742 7,618 8,201 7,971
Business acquisition and consolidation expenses............ 25,343 42,370 -- -- --
Restructuring expenses..................................... -- -- -- -- 46,600
---------- ---------- ---------- ---------- ----------
Operating income (loss).................................... 76,457 2,789 17,766 2,643 (51,565)
Interest expense........................................... 25,705 21,537 8,682 11,846 8,862
Other (income) expense, net................................ -- (2,994) (791) (4,861) 12,780
Bankruptcy reorganization expenses......................... -- -- 3,361 20,152 641
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations before income
taxes.................................................... 50,752 (15,754) 6,514 (24,494) (73,848)
(Benefit) provision for income taxes....................... (22,878) 3,436 3,313 3,586 6,024
---------- ---------- ---------- ---------- ----------
Income (loss) from continuing operations................... $ 73,630 $ (19,190) $ 3,201 $ (28,080) $ (79,872)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income (loss) per share from continuing operations
Basic.................................................... $ 2.00 $ (0.58) $ 0.21 $ (3.84) $ (10.89)
Diluted.................................................. 1.74 (0.58) 0.20 (3.84) (10.89)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Current assets............................................. $ 387,050 $ 316,931 $ 128,055 $ 148,352 $ 134,710
Non-current assets......................................... 424,536 384,805 102,547 95,105 128,532
---------- ---------- ---------- ---------- ----------
Total assets............................................. $ 811,586 $ 701,736 $ 230,602 $ 243,457 $ 263,242
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Current liabilities........................................ $ 186,356 $ 188,812 $ 66,485 $ 171,307 $ 72,965
Long-term liabilities...................................... 375,329 333,595 115,743 78,035 169,524
Stockholders' equity (deficit)............................. 249,901 179,329 48,374 (5,885) 20,753
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity............... $ 811,586 $ 701,736 $ 230,602 $ 243,457 $ 263,242
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
OTHER DATA:
Cash dividends per share................................... -- -- -- -- --
Shares outstanding at year-end............................. 36,856 36,561 18,091 7,301 7,310
</TABLE>
- ------------------------
(a) A discussion of the impact of business acquisitions on 1996 selected
financial data is contained in Notes 1, 2 and 3 to the accompanying
consolidated financial statements.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
BUSINESS OVERVIEW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ----------- -----------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Sales.................................................. $ 936.9 $ 695.3 $ 350.2
Gross margin %......................................... 23.8% 20.3% 19.2%
Adjusted EBITDA(a)..................................... $ 137.6 $ 71.9 $ 29.4
Adjusted operating income %(b)......................... 10.9% 6.5% 5.1%
Income (loss) from continuing operations............... $ 73.6 $ (19.2) $ 3.2
---------- ----------- -----------
Diluted earnings (loss) per share from continuing
operations........................................... $ 1.74 $ (0.58) $ 0.20
Pro forma diluted earnings per share(c)................ $ 1.17 $ 0.48 $ 0.38
---------- ----------- -----------
</TABLE>
- ------------------------
(a) Earnings before business acquisition and consolidation expenses, other
income, interest, bankruptcy reorganization expenses, taxes, depreciation
and amortization.
(b) Excludes business acquisition and consolidation expenses.
(c) Excludes business acquisition and consolidation expenses and bankruptcy
reorganization expenses, and assumes a U.S. effective tax provision of 36%
on pro forma basis.
As Hexcel begins its 50th year in 1998, the Company completed 1997 with
record sales, operating income and net income. In just two years since the
bottom of the aerospace cycle, the Company has achieved a 168% increase in
sales, increased its gross margin from 19.2% to 23.8%, and improved its Adjusted
EBITDA from $29.4 million to $137.6 million, or a 368% increase. The Company
expects sales to exceed $1 billion in 1998 for the first time in its history.
The dramatic turnaround was a result of three major factors. First, the
Company led the consolidation of the advanced structural materials industry,
through the acquisitions of the Ciba and Hercules composite materials businesses
in 1996; second, a significant increase in commercial aerospace build
rates--which is expected to lead to record deliveries for Boeing and Airbus in
1998; and third, the Company successfully embarked on a business consolidation
program to eliminate excess capacity and to integrate the Acquired Businesses.
In addition, Hexcel has positioned itself for the future by strengthening its
balance sheet with the issuance of equity to Ciba as part of the consideration
for the Ciba composite materials business, the issuance of $114.5 million of
convertible debt in 1996, and most recently through entering into an amended and
restated credit agreement.
BUSINESS ACQUISITIONS AND CONSOLIDATION
BUSINESS ACQUISITIONS
Hexcel acquired most of Ciba's composite materials, parts and structures
businesses on February 29, 1996, Ciba's Austrian composites business on May 30,
1996, and various remaining assets of Ciba's worldwide composites division at
various dates through February 28, 1997. The aggregate purchase price for the
net assets acquired were approximately $208.7 million.
Hexcel acquired the assets of the composite products and carbon fibers
businesses of Hercules on June 27, 1996 for $139.4 million in cash.
On September 30, 1997, Hexcel acquired from Fiberite its satellite business
consisting of intangible assets and inventory, and certain non-exclusive,
worldwide rights to other prepreg technologies, for $37.0 million in cash. The
acquisition was substantially downsized from an original agreement whereby the
33
<PAGE>
Company had, subject to certain terms and conditions, committed to purchase
selected assets and businesses of Fiberite for approximately $300 million. As a
result of the downsized transaction, the Company wrote-off $5.0 million of
acquisition and financing costs to business acquisition and consolidation
expenses. In addition, the Company expensed $8.0 million of acquired in process
research and technology expenses purchased from Fiberite, which was also
included in business acquisition and consolidation expenses.
Hexcel will pursue the continued expansion of its revenues and profitability
through internally generated growth of existing product lines and by selective,
strategic acquisitions or other business combinations. Recognizing the Company's
significant market position in commercial aerospace, the growth potential of
existing product lines in this market is primarily limited by commercial
aircraft build rates and the penetration of advanced structural materials being
limited to the development of new generations of aircraft. Hexcel therefore
anticipates seeking growth through existing, developed and acquired product
lines in space and defense, recreation, electrical, surface transportation,
civil engineering/ construction and other industrial markets. The Company's
objective is to increase sales to non-commercial markets from the 36% of total
revenues reported in 1997 to less than 50% over time. Hexcel also expects to
pursue financing opportunities that would, among other things, provide support
for these objectives. There can be no assurance that growth can be accomplished
in this manner, or that appropriate acquisitions or financing can be
successfully consummated.
Further discussion of the business acquisitions is contained in Notes 1, 2
and 3 to the accompanying consolidated financial statements.
BUSINESS CONSOLIDATION
In May of 1996, Hexcel announced the commencement of a plan to consolidate
the Company's operations over a period of three years. In December of 1996, the
Company announced the commencement of further consolidation activities
identified during the ongoing integration of the Acquired Businesses. The total
expense of the business consolidation program through December 31, 1997 was
$54.7 million, including $12.3 million and $42.4 million of expenses incurred in
1997 and 1996, respectively. Total expenses exclude $13.0 million of business
acquisition and consolidation expenses relating to the Fiberite transaction
which was not included in the original program. The Company does not expect to
incur any further significant additional expenses in relation to the business
consolidation program. As of December 31, 1997, remaining cash expenditures to
complete this program are estimated at $12 million, which approximates amounts
accrued. Thus, when the program is complete, the Company expects that cash
expenditures (for expenses and capital, net of estimated proceeds from asset
sales) necessary to complete the program will approximate the initial estimate
of $51 million.
The objective of the business consolidation program is to integrate acquired
assets and operations into Hexcel, and to reorganize the Company's manufacturing
and research activities around strategic centers dedicated to select product
technologies. The business consolidation is also intended to eliminate excess
manufacturing capacity and redundant administrative functions. Specific actions
of the consolidation program included the closure of the Anaheim, California
facility acquired in connection with the purchase of the Acquired Ciba Business,
the reorganization of the Company's manufacturing operations in Europe, the
consolidation of the Company's U.S. special process manufacturing activities,
and the integration of sales, marketing and administrative resources.
As of December 31, 1997, the primary remaining activities of the business
consolidation program relate to the European operations and the installation and
customer qualifications of equipment transferred from the Anaheim facility to
other U.S. locations. These qualification requirements increase the complexity,
cost and time of moving equipment and rationalizing manufacturing activities. As
a result, the Company continues to expect that the business consolidation
program will take to the end of 1998 to complete.
34
<PAGE>
After closing the Anaheim facility on schedule in the third quarter of 1997,
the Company completed the sale of the facility on October 30, 1997. Net cash
proceeds from the sale were approximately $8.5 million, which approximated book
value.
The Company initially estimated that the business consolidation program
would result in annual cost reductions of $32 million per year, beginning in
1999. By the nature of the program (i.e., consolidation of existing and Acquired
Businesses, while at the same time the Company is experiencing an increase in
its commercial aerospace market), the exact amount of annual savings is
difficult to isolate. However, the Company continues to believe that cost
savings have been achieved and, upon completion of the program, estimated cost
savings will equal or exceed the target of $32 million per year. The program was
a key contributor to the Company's improvement in operating margins in 1997.
Further discussion of the business consolidation program is contained in
Note 3 to the accompanying consolidated financial statements.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
NET SALES: Net sales for 1997 were $936.9 million, compared with net sales
for 1996 of $695.3 million. On a pro forma basis, including full year results of
the Acquired Businesses, 1996 sales were approximately $798.5 million. The 17.4%
increase from pro forma 1996 sales was largely attributable to improved sales of
composite materials to commercial aerospace customers and sales of engineered
products to Boeing, but was partially offset by the translation effect of the
strengthening U.S. dollar. On a constant currency basis, 1997 sales would have
been approximately $38.0 million higher in 1997, reflecting a 22.2% increase
over 1996 pro forma sales.
Approximately 46% of Hexcel's 1997 sales were to Boeing, Airbus, and related
subcontractors, as compared to 32% in 1996. The increase is primarily due to the
growth of the commercial aerospace market and to a much lesser extent Boeing's
acquisition of McDonnell Douglas Corporation, which was completed on August 1,
1997. Reported commercial aircraft deliveries by Boeing (the 7-series) and
Airbus improved significantly in 1997, from a combined 344 aircraft in 1996 to
503 aircraft in 1997, including 321 of the Boeing 7-series and 182 deliveries by
Airbus. Depending on the product, orders placed with Hexcel are received
anywhere between one and eighteen months prior to delivery of the aircraft to
the customer. The Company sells material on every model of commercial aircraft
sold by Boeing and Airbus, with sales per aircraft ranging from $0.2 million to
over $1.0 million per aircraft on the Boeing 777.
The backlog of orders scheduled to be delivered in the next twelve months
was $520 million as of December 31, 1997, a 29% increase over backlog as of
December 31, 1996. In January 1998, Boeing reported that its current planned
production rate for 7-series aircraft is 40 aircraft per month, with plans to
increase this production rate to 43 aircraft per month in the second quarter of
1998. Airbus reported production output of 16.5 aircraft per month in 1997, and
they expect to increase this rate to 24 per month by the end of 1998. Total
estimated Airbus production for 1998 is expected to be 30% greater than that of
1997. Recent announcements regarding delays or cancellations of aircraft orders
from certain Asian airlines have not had an observable impact on Hexcel's sales
or backlog to date. The Company has, however, recently experienced a minor
decline in sales of other materials to the Pacific Rim. Also, should aircraft
orders be delayed or cancelled by the economic situation in Asia, and other
buyers for these orders can not be found, then the Company's sales and earnings
would be negatively impacted.
Hexcel believes that the availability of certain carbon fibers, an important
raw material in manufacturing advanced structural materials, is currently
insufficient to satisfy worldwide demand. The Company estimates it has
production capacity and sufficient supplier commitments to purchase carbon fiber
to meet its estimated 1998 and 1999 aerospace customer requirements. In early
1997, carbon fiber manufacturers, including the Company, announced plans to
increase carbon fiber production capacity.
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<PAGE>
During 1997, the Company substantially completed a carbon fiber capacity
expansion program costing approximately $16 million, which has increased its
capacity by 50%. However, should customer demand grow faster than expected or
the mix or timing of customer requirements change, the Company may not be able
to satisfy all of its customers' requirements.
Net sales to third-party customers by product group and market segment for
1997 and on a pro forma basis for 1996, which includes full year results of the
Acquired Businesses, were as follows:
<TABLE>
<CAPTION>
FIBERS AND COMPOSITE ENGINEERED
FABRICS MATERIALS PRODUCTS TOTAL
----------- ----------- ----------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1997 NET SALES
Commercial aerospace...................................... $ 23.7 $ 403.9 $ 169.8 $ 597.4 64%
Space and defense......................................... 13.9 64.2 10.2 88.3 9
Recreation................................................ 13.0 53.4 -- 66.4 7
General industrial and other.............................. 119.5 63.9 1.4 184.8 20
----------- ----------- ----------- --------- ----
Total................................................... $ 170.1 $ 585.4 $ 181.4 $ 936.9 100%
----------- ----------- ----------- --------- ----
----------- ----------- ----------- --------- ----
1996 PRO FORMA NET SALES
Commercial aerospace...................................... $ 17.4 $ 317.1 $ 102.5 $ 437.0 55%
Space and defense......................................... 20.2 60.8 10.4 91.4 11
Recreation................................................ 27.4 63.3 -- 90.7 11
General industrial and other.............................. 116.8 60.8 1.8 179.4 23
----------- ----------- ----------- --------- ----
Total................................................... $ 181.8 $ 502.0 $ 114.7 $ 798.5 100%
----------- ----------- ----------- --------- ----
----------- ----------- ----------- --------- ----
</TABLE>
The 36.7% growth in net sales to the commercial aerospace market from 1996
to 1997 was largely attributable to increased sales of composite materials and
engineered products. The improvement in sales of composite materials reflects
the commercial aircraft build rate increase noted above. The improvement for
engineered products primarily reflects the production of structural and interior
components outsourced to Hexcel by Boeing throughout 1997, as well as strong
shipments of retrofit interiors to airline customers.
Space and defense net sales decreased 3.4% from 1996 to 1997, reflecting a
decrease in sales of fibers and fabrics, which were partially offset by improved
sales of composite materials to select military programs. The Company believes
that military aircraft procurement, in both the U.S. and Europe, is likely to
increase significantly from current levels over the next five years. The Company
has composite material and carbon fiber qualifications on a number of
significant military programs, including the European Fighter Aircraft, F-22,
F-18, V-22, C-17 and the Titan and Delta space programs.
Recreation net sales also decreased from 1996 to 1997, reflecting the shift
in emphasis of production to the commercial aerospace market as a result of the
increased demand. The 3.0% increase in general industrial and other net sales
was largely due to improved sales of fabrics for printed circuit boards and
composite materials for various transportation applications. Hexcel anticipates
sales to the recreation and general industrial and other markets to grow
modestly throughout 1998.
GROSS MARGIN: Gross margin for 1997 was $222.6 million, or 23.8% of net
sales, compared with $141.3 million, or 20.3% of net sales, for 1996. The
improvement in 1997 gross margin relative to 1996 is the result of higher sales
volume, expansion of the Company's fibers capacity and continued advances in
manufacturing productivity resulting from the Company's consolidation and
restructuring activities. Product price changes were not a significant factor in
the 1997 gross margin improvement.
The integration of the Acquired Businesses into Hexcel, including the
consolidation and rationalization of manufacturing facilities and processes, is
a primary objective of the business consolidation program. While the Company has
begun to realize the productivity improvements as a result of the program, these
improvements will not be fully realized until 1999.
36
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$102.4 million in 1997, or 10.9% of net sales. This compares to $79.4 million,
or 11.4% of net sales for 1996. The aggregate dollar increase in SG&A is
primarily attributable to the Acquired Businesses.
RESEARCH AND TECHNOLOGY (R&T) EXPENSES: R&T expenses were $18.4 million in
1997, or 2.0% of net sales. This compares to $16.7 million, or 2.4% of net sales
for 1996. The aggregate dollar increase in R&T is attributable to the additional
activity from the Acquired Businesses. The Company expects to continue to
increase R&T expenditures in 1998.
OPERATING INCOME: Operating income increased from $2.8 million, or 0.4% of
net sales, in 1996 to $76.5 million, or 8.2% of net sales, in 1997. The
aggregate increase in operating income reflects the higher sales volume,
improved gross margins and a $17.0 million decrease in business acquisition and
consolidation expenses. Excluding business acquisition and consolidation
expenses, operating income as a percentage of sales increased from 6.5% in 1996
to 10.9% in 1997.
INTEREST EXPENSE: Interest expense was $25.7 million, or 2.7% of net sales,
for 1997 compared to $21.5 million, or 3.1% of net sales, for 1996. The increase
in interest expense primarily represents the cost of financing the acquisitions
of the Acquired Businesses. The 1996 amount also includes a $3.4 million
write-off of capitalized debt issuance costs.
PROVISION FOR INCOME TAXES: In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), in
1996 and 1995 the Company had fully provided valuation allowance reserves
against its net deferred tax assets primarily in the U.S. and Belgium where
there were uncertainties in generating sufficient future taxable income. In
1997, the Company reversed $59.9 million of its valuation allowance reserve as
follows: $17.0 million due to current year profitable U.S. operations, $39.0
million due to the Company's assessment that the realization of the remaining
U.S. net deferred tax assets is more likely than not, and $3.9 million in
Belgium due to a gain on sale of tangible and intangible assets to other Hexcel
subsidiaries. The Company continues to reserve the balance of the net deferred
tax assets of its Belgium operations. Going forward, the Company expects that
its effective U.S. income tax rate will approximate the statutory rate.
NET INCOME (LOSS): Net income for 1997 was $73.6 million or $1.74 per
diluted share compared with a net loss of $19.2 million or $0.58 per diluted
share for 1996. Excluding the $25.3 million in business acquisition and
consolidation expenses and assuming a U.S. effective income tax rate of 36%,
1997 pro forma net income would have been $1.17 per share on a diluted basis.
Pro forma net income for 1996 would have been $0.48 per diluted share on a
comparable basis.
There were 36.7 million weighted average shares outstanding in 1997 compared
to 33.4 million during 1996. The increase in the number of weighted average
shares in 1997 is primarily attributable to the full year impact of the delivery
of 18.0 million newly issued shares of Hexcel common stock to Ciba on February
29, 1996 in connection with the purchase of the Acquired Ciba Business. As of
December 31, 1997, there were 36.9 million shares of Hexcel common stock issued
and outstanding. See Note 15 to the accompanying consolidated financial
statements for the calculation and the number of shares used for diluted
earnings per share.
1996 COMPARED TO 1995
NET SALES: Net sales for 1996 were $695.3 million, compared with net sales
for 1995 of $350.2 million. The results for 1996 include the results of the
Acquired Ciba Business and the Acquired Hercules Business for the periods from
the respective acquisition dates through December 31, 1996. Excluding the
results of the Acquired Businesses, 1996 sales were approximately $385 million,
a 10% increase over 1995. This increase was largely attributable to improved
sales of composite materials to commercial aerospace customers, and reflected
the initial impact of increases in production rates for certain aircraft as well
as the increased utilization of composite materials on new generation aircraft.
In particular, the Company
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<PAGE>
benefited from higher sales of carbon honeycomb core and carbon-based prepregs.
The Company also benefited from improved sales of fabricated honeycomb parts to
the commercial aerospace market, and from increased sales of fabrics for use in
the manufacture of printed circuit boards. Changes in foreign currency exchange
rates did not have a material impact on the level of 1996 sales relative to 1995
sales.
Approximately 32% of Hexcel's 1996 sales were to Boeing, Airbus, and related
subcontractors. Reported commercial aircraft deliveries of Boeing 7-series and
Airbus improved only modestly in 1996, from a combined 330 aircraft in 1995 to
344 aircraft in 1996. However, the 1996 sales benefited from the increase in
scheduled deliveries for 1997 as orders placed with Hexcel are received anywhere
between one and eighteen months prior to delivery of the aircraft to the
customer.
PRO FORMA NET SALES: Pro forma net sales for 1996, giving effect to the
acquisitions of the Acquired Businesses as if those transactions had occurred at
the beginning of the year, were $798.5 million. This compares with pro forma net
sales for 1995 of $771.3 million. Pro forma net sales to third-party customers
by product group and market segment for 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
FIBERS AND COMPOSITE ENGINEERED
FABRICS MATERIALS PRODUCTS TOTAL
----------- ----------- ----------- ---------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1996 PRO FORMA NET SALES
Commercial aerospace...................................... $ 17.4 $ 317.1 $ 102.5 $ 437.0 55%
Space and defense......................................... 20.2 60.8 10.4 91.4 11
Recreation................................................ 27.4 63.3 -- 90.7 11
General industrial and other.............................. 116.8 60.8 1.8 179.4 23
----------- ----------- ----------- --------- ----
Total................................................... $ 181.8 $ 502.0 $ 114.7 $ 798.5 100%
----------- ----------- ----------- --------- ----
----------- ----------- ----------- --------- ----
1995 PRO FORMA NET SALES
Commercial aerospace...................................... $ 14.8 $ 294.7 $ 94.9 $ 404.4 52%
Space and defense......................................... 25.3 49.0 15.8 90.1 12
Recreation................................................ 31.3 74.3 -- 105.6 14
General industrial and other.............................. 123.0 45.4 2.8 171.2 22
----------- ----------- ----------- --------- ----
Total................................................... $ 194.4 $ 463.4 $ 113.5 $ 771.3 100%
----------- ----------- ----------- --------- ----
----------- ----------- ----------- --------- ----
</TABLE>
The growth in pro forma sales to the commercial aerospace market from 1995
to 1996 was largely attributable to increased sales of composite materials and
commercial aerospace engineered products. The improvement in sales of composite
materials reflects the commercial aircraft build rate and product utilization
increases noted above. The improvement for engineered products primarily
reflects the production of structural and interior components outsourced to
Hexcel by Boeing during the second half of 1996, as well as strong shipments of
retrofit interiors to airline customers.
Pro forma space and defense sales were essentially unchanged from 1995 to
1996, reflecting a decline in sales of fibers and fabrics and engineered
structures, offset by improved sales of composite materials to select military
programs.
The decrease in pro forma sales to the recreation market during 1996 is
primarily attributable to reduced demand for composite materials by ski and
snowboard manufacturers due to excess inventories. Pro forma sales of fabrics
for certain marine applications were also slightly lower. The increase in pro
forma general industrial sales reflects improved sales of fabrics for printed
circuit boards and composite materials for various transportation applications,
partially offset by reduced sales of carbon fibers to non-aerospace customers.
GROSS MARGIN: Gross margin for 1996 was $141.3 million, or 20.3% of sales,
compared with $67.1 million for 1995, or 19.2% of sales. Excluding the Acquired
Businesses, 1996 gross margin was approximately 24% of sales. The improvement in
1996 gross margin relative to 1995, excluding the impact
38
<PAGE>
of the Acquired Businesses, is the result of both higher sales volumes and
improved manufacturing productivity, especially for composite materials. Hexcel
also benefited from the cost reductions associated with the completion, in
mid-1995, of a previous restructuring of the Company's composite materials
business. Product price changes were not a significant factor in the 1996 gross
margin improvement.
The aggregate gross margin of the Acquired Businesses from the respective
acquisition dates through December 31, 1996, was approximately 16% of sales. The
integration of the Acquired Businesses into Hexcel, including the consolidation
and rationalization of manufacturing facilities and processes, is a primary
objective of the business consolidation program. Although the consolidation
program commenced in 1996, the productivity improvements expected to result from
this program will not be fully realized until 1999.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES: SG&A expenses were
$79.4 million in 1996, or 11.4% of sales. This compares with 1995 SG&A expenses
of $41.7 million, or 11.9% of sales. The aggregate dollar increase in SG&A
expenses from 1995 to 1996 is attributable to the acquisitions of the Acquired
Businesses. The slight decrease in SG&A expenses as a percentage of sales
primarily reflects higher sales levels.
RESEARCH AND TECHNOLOGY (R&T) EXPENSES: R&T expenses were $16.7 million in
1996, or 2.4% of net sales. This compares to $7.6 million, or 2.2% of net sales
for 1995. The aggregate dollar increase in R&T is attributable to the
acquisitions of the Acquired Businesses.
OPERATING INCOME: Operating income was $2.8 million in 1996, or 0.4% of
sales, compared with $17.8 million in 1995, or 5.1% of sales. The $74.2 million
increase in gross margin from 1995 to 1996 was more than offset by $37.7 million
in additional SG&A expenses and $42.4 million in business acquisition and
consolidation expenses.
INTEREST EXPENSE: Interest expense totaled $21.5 million in 1996 and $8.7
million in 1995. The year-on-year increase primarily reflects the cost of
financing the acquisitions of the Acquired Businesses. Hexcel financed
approximately $200 million of aggregate purchase price with various debt and
credit facilities, and wrote off $3.4 million of capitalized debt financing
costs in connection with the acquisition-related refinancing of certain debt in
1996.
PROVISION FOR INCOME TAXES: Income tax provisions of $3.4 million in 1996
and $3.3 million in 1995 primarily reflect international taxes on certain
European subsidiaries, state taxes, and the settlement of various tax audits.
The 1996 income tax provision is net of a $2.5 million benefit from the
favorable resolution of a U.S. federal tax audit. As of December 31, 1996,
Hexcel had net operating loss ("NOL") carryforwards for U.S. federal income tax
purposes of approximately $70 million and NOL carryforwards for Belgium income
tax purposes of approximately $22 million. For the years ended December 31, 1996
and 1995, the Company has not recognized any tax benefits in 1996 or 1995
attributable to the potential future realization of these NOL carryforwards or
any other deferred tax assets.
NET INCOME (LOSS): The 1996 net loss was $19.2 million, or $0.58 per
diluted share, compared with net income for 1995 of $2.7 million, or $0.17 per
diluted share. The 1996 net loss includes business acquisition and consolidation
expenses of $42.4 million, or $1.16 per share after income taxes. Net income for
1995 is after bankruptcy reorganization expenses of $3.4 million, or $0.21 per
share.
There were 33.4 million weighted average shares outstanding during 1996,
versus 15.6 million during 1995. The increase in the number of weighted average
shares in 1996 is primarily attributable to the delivery of 18.0 million newly
issued shares of Hexcel common stock to Ciba on February 29, 1996, in connection
with the purchase of the Acquired Ciba Business. As of December 31, 1996, there
were 36.6 million shares of Hexcel common stock issued and outstanding.
39
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL RESOURCES
The Company had a Revolving Credit Facility, which provided up to $254.6
million of borrowing capacity. As of December 31, 1997, outstanding borrowings
and letter of credit commitments under the Revolving Credit Facility totaled
$158.3 million. The Revolving Credit Facility was scheduled to expire in
February of 1999.
On March 5, 1998, the Company amended and restated the Revolving Credit
Facility (the "Amended Facility"). The Amended Facility provides for borrowing
capacity of up to $355 million and extends the expiration date by four years to
March 2003. While the Company continues to be subject to various financial
covenants and restrictions and is generally prohibited from paying dividends or
redeeming capital stock, the Amended Facility provides $100 million in increased
borrowing capacity and more flexibility as to the use of the borrowings than the
Company's prior facility.
The Company expects that the financial resources of Hexcel, including the
Amended Facility, will be sufficient to fund the Company's worldwide operations
for the foreseeable future. Further discussion of the Company's financial
resources is contained in Note 7 to the accompanying consolidated financial
statements.
ADJUSTED EBITDA AND CASH FLOWS
1997: Earnings before business acquisition and consolidation expenses,
other income, interest, bankruptcy reorganization expenses, taxes, depreciation
and amortization ("Adjusted EBITDA") was $137.6 million. Net cash provided from
operations was $26.0 million including $33.6 million of business acquisition and
consolidation payments and a $47.7 million increase in working capital as a
result of the increase in sales volume.
Net cash used for investing activities was $82.9 million, including $57.4
for capital expenditures and $37.0 million for the Fiberite transaction,
partially offset by $13.5 million of proceeds from the sale of the Anaheim
facility and the Company's 50% interest in the Knytex joint venture to Owens
Corning. These investing activities were funded by cash from operations and
$57.2 million of borrowings primarily under the Revolving Credit Facility.
1996: Adjusted EBITDA was $71.9 million. Pro forma Adjusted EBITDA, giving
effect to the acquisitions of the Acquired Businesses as if those transactions
had occurred at the beginning of the year, was approximately $86 million.
Net cash provided by operating activities was $26.5 million. Net cash used
for investing activities was $206.4 million, including $164.4 million used in
connection with the acquisitions of the Acquired Businesses and $43.6 million
for capital expenditures. Net cash provided by financing activities, including
borrowings under the Revolving Credit Facility and proceeds from the issuance of
$114.5 million in convertible subordinated notes, was $181.7 million. Non-cash
financing of the purchase of the Acquired Ciba Business included the issuance of
debt securities valued at $37.2 million and the issuance of 18.0 million shares
of Hexcel common stock valued at $144.2 million.
1995: Adjusted EBITDA was $29.4 million, and pro forma Adjusted EBITDA was
approximately $62 million. Net cash used by operating activities was $2.5
million. Net cash provided by investing activities was $15.7 million, primarily
reflecting $31.9 million in cash proceeds from the sale of various assets and
$12.1 million of capital expenditures. Net cash used by financing activities of
$9.6 million includes proceeds from short-term debt and the issuance of Hexcel
common stock, as well as the repayment of allowed claims in connection with
Hexcel Corporation's emergence from bankruptcy reorganization proceedings.
40
<PAGE>
Adjusted EBITDA and pro forma Adjusted EBITDA have been presented to provide
a measure of Hexcel's operating performance that is commonly used by investors
and financial analysts to analyze and compare companies. Adjusted EBITDA and pro
forma Adjusted EBITDA do not represent alternative measures of the Company's
cash flows or operating income, and should not be considered in isolation or as
substitutes for measures of performance presented in accordance with generally
accepted accounting principles.
CAPITAL EXPENDITURES
Capital expenditures were $57.4 million in 1997 compared with $43.6 million
in 1996 and $12.1 million in 1995. The increase in 1997 expenditures over prior
years reflects the impact of the Acquired Businesses on capital requirements,
including the impact of certain business consolidation activities. The increase
also reflects expenditures on manufacturing equipment necessary to improve
manufacturing processes and to expand production capacity for select product
lines that are in high demand, such as the Company's carbon fiber capacity
expansion. A modest increase in capital spending is expected in 1998 as a result
of ongoing opportunities for additional manufacturing improvements. Such
expenditures will be financed with cash generated from operations and borrowings
under the Amended Facility.
YEAR 2000
The Company is continuing to monitor as well as implement its plan to
resolve the Year 2000 issue in both existing software and other systems with
embedded microprocessors. The Year 2000 issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a major system failure or miscalculations.
The Company presently believes that, with modifications to existing software
and other systems with embedded microprocessors, and conversion to new software
and other systems, the Year 2000 issue will not pose significant operational
problems for the Company's computer and other systems as so modified and
converted. However, if such modifications and conversions are not completed in a
timely manner, or the Company's customers and suppliers do not successfully
address their Year 2000 issues, the Year 2000 issue may have a material impact
on the operations of the Company. The Company continues to evaluate appropriaste
courses of corrective action, including replacement of certain systems whose
associated costs would be recorded as assets and amortized. The Company does not
expect amounts required to be expensed for Year 2000 issues over the next two
years to have a material effect on its financial position or results of
operations. The amount expensed in 1997 was immaterial.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"). Hexcel is required to adopt
SFAS 130 in the first quarter of 1998. SFAS 130 establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. Management does not anticipate that the adoption
of SFAS 130 will have a significant impact on the consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board also issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). Hexcel is required to adopt SFAS 131 in its annual consolidated
financial statements covering the year ending December 31, 1998. SFAS 131
establishes standards for the way business enterprises report information about
operating segments in annual financial statements. Beginning in 1999, the
Company will also be required to report selected information about operating
segments in its interim financial reports to stockholders. The Company has not
yet determined the impact, if any, that the adoption of SFAS 131 will have on
the consolidated financial statements.
41
<PAGE>
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," elsewhere in this document, the
Company's annual report or other communications (including press releases and
analysts calls) that are not of historical fact, constitute "forward-looking
statements" regarding events and trends which effect the Company's future
operating results and financial position. Such forward-looking statements
include, but are not limited to: (a) revenue and profitability growth
objectives, including increasing sales to non-commercial aerospace markets as
well as the execution of strategic acquisitions or other business combinations;
(b) estimates of commercial aircraft orders and deliveries; (c) estimates of
government defense procurement budgets and military and space build rates; (d)
expectations regarding sales growth, sales mix, gross margins, manufacturing
productivity, selling, general and administrative and R&T expenses, and capital
expenditures; (e) the availability and utilization of NOL carryforwards for
income tax purposes; (f) expectations regarding Hexcel's financial condition and
liquidity, as well as future cash flows; (g) expectations regarding capital
expenditures; (h) the estimated total cost of the Company's business
consolidation program, the estimated amount of cash expenditure to complete the
program and the estimated annual cost savings resulting from the consolidation
program; and (i) the Year 2000 issue. The words "believes", "estimates",
"anticipate", "expect", "intend" and "project", as well as other words or
expressions of similar meaning, are intended to identify forward-looking
statements. Such statements are based on current expectations, are inherently
uncertain, and are subject to changing assumptions.
Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of Hexcel, or industry results, to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: ability to identify and successfully consummate acquisitions and
secure related financing; general economic and business conditions; changes in
political, social and economic conditions and local regulations, particularly in
Asia and Europe; foreign currency fluctuations; level of profitability by
country; changes in, or failure to comply with, government regulations;
demographic changes; changes in customer preferences; changes in build rates;
the loss of any significant customers, particularly Boeing or Airbus; changes in
sales mix; changes in government defense procurement budgets; changes in current
pricing levels; technology; industry capacity; competition; changes in business
strategy or development plans; availability of carbon fiber; disruptions of
established supply channels; manufacturing capacity constraints; indebtedness of
the Company; and the availability, terms and deployment of capital.
Because of the foregoing factors, in addition to other factors that affect
the Company's operating results and financial position, past financial
performance or the Company's expectations should not be considered to be a
reliable indicator of future performance. Investors should not use historical
trends to anticipate results or trends in future periods. Further, the Company's
stock price is subject to volatility. Any of the factors discussed above could
have an adverse impact on the Company's stock price. In addition, failure of
sales or income in any quarter to meet the investment community's expectations,
as well as broader market trends, can have an adverse impact on the Company's
stock price.
The Company does not undertake an obligation to update its forward-looking
statements or risk factors to reflect future events or circumstances.
42
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ------------------------------------------------------------------------ ------
<S> <C>
Management Responsibility for Financial Statements...................... 49
Report of Independent Accountants....................................... 50
Independent Auditor's Report............................................ 51
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... 52
Consolidated Statements of Operations for the three years ended
December 31, 1997................................................... 53
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1997............................................. 54
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997................................................... 55
Notes to the Consolidated Financial Statements........................ 56-83
</TABLE>
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.
43
<PAGE>
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 Company's independent
accountants, Price Waterhouse LLP, in connection with the audit of the Company's
financial statements. The Audit Committee, composed solely of outside directors,
meets periodically, separately and jointly, with management and the independent
accountants.
/s/ JOHN J. LEE
- --------------------------------------
(John J. Lee)
CHIEF EXECUTIVE OFFICER
/s/ STEPHEN C. FORSYTH
- --------------------------------------
(Stephen C. Forsyth)
CHIEF FINANCIAL OFFICER
/s/ WAYNE C. PENSKY
- --------------------------------------
(Wayne C. Pensky)
CHIEF ACCOUNTING OFFICER
44
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Hexcel Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Hexcel
Corporation and its subsidiaries at December 31, 1997, and the results of their
operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The financial statements of Hexcel Corporation for the years ended December
31, 1996 and 1995 were audited by other independent accountants whose report
dated February 28, 1997 expressed an unqualified opinion on those statements.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Jose, California
January 28, 1998, except as to
Aggregate Maturities of Notes
Payable in Note 7, which is as
of March 5, 1998
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Hexcel Corporation:
We have audited the accompanying consolidated balance sheet of Hexcel
Corporation and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the two years in the period ended December 31, 1996. 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, 1996, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Oakland, California
February 28, 1997
46
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1997 1996
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 9,033 $ 7,975
Accounts receivable............................................................... 181,192 151,263
Inventories....................................................................... 165,321 145,884
Prepaid expenses and other assets................................................. 6,665 11,809
Deferred tax asset................................................................ 24,839 --
------------ -------------
Total current assets............................................................ 387,050 316,931
------------ -------------
Property, plant and equipment....................................................... 488,916 468,173
------------ -------------
Less accumulated depreciation....................................................... (157,439) (141,390)
------------ -------------
Net property, plant and equipment............................................... 331,477 326,783
------------ -------------
Intangibles and other assets........................................................ 93,059 58,022
------------ -------------
Total assets.................................................................... $ 811,586 $ 701,736
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term liabilities..................... $ 13,858 $ 23,835
Accounts payable.................................................................. 70,011 73,117
Accrued compensation and benefits................................................. 37,306 30,969
Other accrued liabilities......................................................... 65,181 60,891
------------ -------------
Total current liabilities....................................................... 186,356 188,812
------------ -------------
Long-term notes payable and capital lease obligations............................... 304,546 254,919
Indebtedness to related parties..................................................... 34,967 32,262
Other non-current liabilities....................................................... 35,816 46,414
------------ -------------
Stockholders' equity:
Preferred stock, no par value, 20,000 shares authorized, no shares issued or
outstanding in 1997 and 1996.................................................... -- --
Common stock, $0.01 par value, 100,000 shares authorized, shares issued and
outstanding of 36,856 in 1997 and 36,561 in 1996................................ 369 366
Additional paid-in capital........................................................ 266,177 259,592
Accumulated deficit............................................................... (15,541) (89,171)
Cumulative currency translation adjustment........................................ (1,104) 8,542
------------ -------------
Total stockholders' equity...................................................... 249,901 179,329
------------ -------------
Total liabilities and stockholders' equity...................................... $ 811,586 $ 701,736
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales.................................................................. $ 936,855 $ 695,251 $ 350,238
Cost of sales.............................................................. 714,223 553,942 283,148
----------- ----------- -----------
Gross margin............................................................... 222,632 141,309 67,090
Selling, general and administrative expenses............................... 102,449 79,408 41,706
Research and technology expenses........................................... 18,383 16,742 7,618
Business acquisition and consolidation expenses............................ 25,343 42,370 --
----------- ----------- -----------
Operating income........................................................... 76,457 2,789 17,766
Interest expense........................................................... 25,705 21,537 8,682
Other income, net.......................................................... -- (2,994) (791)
Bankruptcy reorganization expenses......................................... -- -- 3,361
----------- ----------- -----------
Income (loss) from continuing operations before income taxes............... 50,752 (15,754) 6,514
(Benefit) provision for income taxes....................................... (22,878) 3,436 3,313
----------- ----------- -----------
Income (loss) from continuing operations................................... 73,630 (19,190) 3,201
Discontinued operations:
Losses during phase-out period........................................... -- -- 468
----------- ----------- -----------
Net income (loss)...................................................... $ 73,630 $ (19,190) $ 2,733
----------- ----------- -----------
----------- ----------- -----------
Net income (loss) per share:
Basic
Continuing operations.................................................... $ 2.00 $ (0.58) $ 0.21
Discontinued operations.................................................. -- -- (0.03)
----------- ----------- -----------
Net income (loss)...................................................... $ 2.00 $ (0.58) $ 0.18
----------- ----------- -----------
----------- ----------- -----------
Diluted
Continuing operations.................................................... $ 1.74 $ (0.58) $ 0.20
Discontinued operations.................................................. -- -- (0.03)
----------- ----------- -----------
Net income (loss)...................................................... $ 1.74 $ (0.58) $ 0.17
----------- ----------- -----------
----------- ----------- -----------
Weighted average shares:
Basic.................................................................... 36,748 33,351 15,605
Diluted.................................................................. 45,997 33,351 15,742
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK MINIMUM CUMULATIVE
-------------------------- ADDITIONAL PENSION CURRENCY
OUTSTANDING PAID-IN ACCUMULATED OBLIGATION TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT ADJUSTMENT
------------- ----------- ----------- ------------ ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995................ 7,301 $ 73 $ 62,626 $ (72,714) $ (137) $ 4,267
Net income............................ 2,733
Sale of new common stock under standby
purchase commitment and subscription
rights offering..................... 10,800 108 48,631
Activity under stock plans............ (10) 2
Pension obligation adjustment......... (398)
Currency translation adjustment....... 3,183
------ ----- ----------- ------------ ----- -----------
BALANCE, DECEMBER 31, 1995.............. 18,091 181 111,259 (69,981) (535) 7,450
Net loss.............................. (19,190)
Issuance of shares to Ciba at $8, net
of issuance costs of $2,993......... 18,022 180 141,001
Activity under stock plans............ 408 4 7,133
Other issuance of shares.............. 40 1 199
Pension obligation adjustment......... 535
Currency translation adjustment....... 1,092
------ ----- ----------- ------------ ----- -----------
BALANCE, DECEMBER 31, 1996.............. 36,561 366 259,592 (89,171) -- 8,542
Net income............................ 73,630
Activity under stock plans............ 292 3 6,535
Conversion of Subordinated Notes...... 3 50
Currency translation adjustment....... (9,646)
------ ----- ----------- ------------ ----- -----------
BALANCE, DECEMBER 31, 1997.............. 36,856 $ 369 $ 266,177 $ (15,541) $ -- $ (1,104)
------ ----- ----------- ------------ ----- -----------
------ ----- ----------- ------------ ----- -----------
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, JANUARY 1, 1995................ $ (5,885)
Net income............................ 2,733
Sale of new common stock under standby
purchase commitment and subscription
rights offering..................... 48,739
Activity under stock plans............ 2
Pension obligation adjustment......... (398)
Currency translation adjustment....... 3,183
-------------
BALANCE, DECEMBER 31, 1995.............. 48,374
Net loss.............................. (19,190)
Issuance of shares to Ciba at $8, net
of issuance costs of $2,993......... 141,181
Activity under stock plans............ 7,137
Other issuance of shares.............. 200
Pension obligation adjustment......... 535
Currency translation adjustment....... 1,092
-------------
BALANCE, DECEMBER 31, 1996.............. 179,329
Net income............................ 73,630
Activity under stock plans............ 6,538
Conversion of Subordinated Notes...... 50
Currency translation adjustment....... (9,646)
-------------
BALANCE, DECEMBER 31, 1997.............. $ 249,901
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE>
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations.................................... $ 73,630 $ (19,190) $ 3,201
Reconciliation to net cash provided (used) by continuing operations:
Depreciation and amortization............................................. 35,797 26,730 11,623
Deferred income taxes..................................................... (33,203) (520) (329)
Write-off of purchased in-process technologies............................ 8,000 -- --
Accrued business acquisition and consolidation expenses................... 25,343 42,370 --
Business acquisition and consolidation payments........................... (33,595) (11,579) --
Other income.............................................................. -- (1,560) (600)
Changes in assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable......................................... (37,557) (14,695) (1,752)
Increase in inventories................................................. (23,797) (5,072) (8,111)
Decrease (increase) in prepaid expenses and other assets................ 1,667 (1,430) 718
Increase (decrease) in accounts payable and accrued liabilities......... 23,567 15,549 (10,090)
Changes in other non-current assets and long-term liabilities........... (13,878) (4,096) 2,346
---------- ---------- ----------
Net cash provided (used) by continuing operations......................... 25,974 26,507 (2,994)
Net cash provided by discontinued operations.............................. -- -- 486
---------- ---------- ----------
Net cash provided (used) by operating activities.......................... 25,974 26,507 (2,508)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................................ (57,369) (43,569) (12,144)
Cash paid for business acquisitions......................................... (37,000) (164,400) (4,150)
Proceeds from sale of certain manufacturing facilities and an interest in a
joint venture............................................................. 13,500 1,560 27,294
Proceeds from sale of discontinued resins business.......................... -- -- 4,648
Other....................................................................... (2,000) -- 17
---------- ---------- ----------
Net cash (used) provided by investing activities.......................... (82,869) (206,409) 15,665
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt.................................... 3,199 286,974 4,317
Repayments of long-term debt................................................ (9,679) (124,288) (5,402)
Proceeds from the revolving credit facility and short-term debt, net........ 57,186 15,319 20,923
Proceeds from issuance of common stock...................................... 6,538 3,702 48,741
Payments of allowed claims pursuant to the Reorganization Plan.............. -- -- (78,144)
---------- ---------- ----------
Net cash provided (used) by financing activities.......................... 57,244 181,707 (9,565)
---------- ---------- ----------
Effect of exchange rate changes on cash and cash equivalents.................. 709 2,341 (694)
---------- ---------- ----------
Net increase in cash and cash equivalents..................................... 1,058 4,146 2,898
---------- ---------- ----------
Cash and cash equivalents at beginning of year................................ 7,975 3,829 931
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 9,033 $ 7,975 $ 3,829
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE>
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 accompanying consolidated financial statements include the accounts of
Hexcel Corporation and subsidiaries ("Hexcel" or the "Company"), after
elimination of intercompany transactions and accounts. Hexcel is a leading
international developer and manufacturer of carbon fibers, reinforcement
fabrics, and 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 a joint venture that manufactures and markets composite
materials in Asia.
As discussed in Note 2, Hexcel acquired the worldwide composites division of
Ciba-Geigy Limited ("CGL"), a Swiss corporation, and Ciba-Geigy Corporation, a
New York corporation ("CGC" and together with CGL, "Ciba"), including most of
Ciba's composite materials, parts and structures businesses, on February 29,
1996. The Company subsequently acquired Ciba's Austrian composites business on
May 30, 1996, and various remaining assets of Ciba's worldwide composites
division at various dates through February 28, 1997 (the "Acquired Ciba
Business"). As also discussed in Note 2, Hexcel acquired the composite products
division of Hercules Incorporated ("Hercules"), including Hercules' carbon
fibers and prepreg businesses (the "Acquired Hercules Business"), on June 27,
1996, and the satellite business and rights to certain technologies from
Fiberite, Inc. ("Fiberite") on September 30, 1997. Accordingly, the accompanying
consolidated balance sheets, statements of operations, stockholders' equity and
cash flows include the financial position, results of operations and cash flows,
of the businesses acquired from Ciba, Hercules and Fiberite as of such dates and
for such periods that these businesses were owned by the Company.
ESTIMATES AND ASSUMPTIONS
The accompanying consolidated financial statements and related 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 accompanying consolidated
financial statements and related notes are reasonable in light of known facts
and circumstances, actual results could differ from the estimates used.
CASH AND CASH EQUIVALENTS
Hexcel invests excess cash in investments with original maturities of less
than three months. The investments consist primarily of Eurodollar time deposits
and are stated at cost, which approximates fair value. The Company considers
such investments to be cash equivalents for purposes of the statements of cash
flows.
ACCOUNTS RECEIVABLE
Accounts receivable are net of reserves for doubtful accounts of $6,641 and
$6,625 as of December 31, 1997 and 1996, respectively.
51
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out and average cost methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Repairs and maintenance
are charged to expense as incurred; replacements and betterments are
capitalized.
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 from 3 to 20 years for machinery and equipment.
INTANGIBLES AND OTHER ASSETS
Goodwill and other purchased intangibles are included in "intangibles and
other assets" at cost, less accumulated amortization (see Note 6). Amortization
is provided on a straight-line basis over estimated economic lives which range
from 10 to 20 years.
The Company periodically reviews the recoverability of long-term assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable.
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 stockholders' equity. Realized gains and losses from
currency exchange transactions are recorded in "selling, general and
administrative expenses" in the accompanying consolidated statements of
operations and were not material to the Company's consolidated results of
operations in 1997, 1996 or 1995.
REVENUE RECOGNITION
Product sales are recognized on the date of shipment.
EARNINGS PER SHARE
The Financial Accounting Standards Board issued Statement No. 128, "Earnings
Per Share" ("SFAS 128"), in March 1997 which is effective for reporting periods
ending after December 15, 1997. The Company adopted SFAS 128 in the fourth
quarter of 1997. SFAS 128 requires the presentation of "Basic" earnings per
share which represents net earnings divided by the weighted average shares
outstanding excluding all potential common shares. A dual presentation of
"Diluted" earnings per share reflecting the dilutive effects of all potential
common shares, is also required. The Diluted presentation is similar to fully
diluted earnings per share under the prior accounting standard (see Note 15).
52
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
In 1996, Hexcel adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which provide for the disclosure of pro forma net
earnings and earnings per share as if the fair value method were used to account
for stock-based employee compensation plans (see Note 14). Pursuant to SFAS 123,
the Company has elected to continue to use the intrinsic value method to account
for such plans in the accompanying consolidated financial statements, in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees".
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's sales to two customers and their related subcontractors accounted
for approximately 46% and 32% of the Company's 1997 and 1996 net sales,
respectively (see Note 17). The Company performs on-going credit evaluations of
its customers' financial condition but generally does not require collateral or
other security to support customer receivables. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of specific customers, historical trends and other financial information.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("SFAS 130"). Hexcel is required to adopt
SFAS 130 in the first quarter of 1998. SFAS 130 establishes standards for
reporting comprehensive income and its components in a full set of general
purpose financial statements. Management does not anticipate that the adoption
of SFAS 130 will have a significant impact on the consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board also issued Statement
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"). Hexcel is required to adopt SFAS 131 in its annual consolidated
financial statements covering the year ending December 31, 1998. SFAS 131
establishes standards for the way business enterprises report information about
operating segments in annual financial statements. Beginning in 1999, the
Company will also be required to report selected information about operating
segments in its interim financial reports to stockholders. The Company has not
yet determined the impact, if any, that the adoption of SFAS 131 will have on
the consolidated financial statements.
RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 1997
presentation.
NOTE 2 -- BUSINESS ACQUISITIONS
ACQUIRED CIBA BUSINESS
Hexcel acquired most of Ciba's composite materials, parts and structures
businesses on February 29, 1996, Ciba's Austrian composites business on May 30,
1996, and various remaining assets of Ciba's
53
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- BUSINESS ACQUISITIONS (CONTINUED)
worldwide composites division at various dates through February 28, 1997. The
Acquired Ciba Business is engaged in the manufacture and marketing of
reinforcement fabrics and lightweight, high-performance composite materials,
parts and structures for commercial aerospace, space and defense, recreation,
and general industrial markets. Product lines include reinforcement fabrics,
pre-impregnated fabrics ("prepregs"), structural adhesives, honeycomb core,
sandwich panels and fabricated components, as well as composite structures and
interiors primarily for the commercial and military aerospace markets.
The acquisition of the Acquired Ciba Business was consummated pursuant to a
Strategic Alliance Agreement dated as of September 29, 1995, among Ciba and
Hexcel, as amended (the "Strategic Alliance Agreement"). Under the Strategic
Alliance Agreement, the Company acquired the assets (including the capital stock
of certain non-U.S. subsidiaries) and assumed the liabilities of the Acquired
Ciba Business, other than certain excluded assets and liabilities, in exchange
for: (a) 18,022 newly issued shares of Hexcel common stock; (b) $25,000 in cash;
(c) senior subordinated notes in an aggregate principal amount of $34,928,
subject to certain adjustments (the "Senior Subordinated Notes"); and (d) senior
demand notes in an aggregate principal amount equal to the cash on hand at
certain of the non-U.S. subsidiaries included in the Acquired Ciba Business (the
"Senior Demand Notes"). In exchange for assets acquired between January 1, 1997
and February 28, 1997, from Ciba affiliates that continued to act as
distributors for the Acquired Ciba Business (the "Ciba Distributors") throughout
1996, Hexcel undertook to deliver additional Senior Subordinated Notes to Ciba
Specialty Chemicals Holding Inc., a Swiss Corporation ("CSCH"), as successor to
Ciba in an aggregate principal amount of approximately $2,300 which was accrued
in 1997. The aggregate purchase price for the net assets acquired was
approximately $208,700.
ACQUIRED HERCULES BUSINESS
Hexcel acquired the assets of the composite products division of Hercules
(the "Acquired Hercules Business") on June 27, 1996. The Acquired Hercules
Business, which manufactures carbon fibers and prepregs for commercial
aerospace, space and defense, recreation, and general industrial markets, was
purchased for $139,400 in cash.
In connection with the purchase of the Acquired Hercules Business, Hexcel
obtained a new revolving credit facility (the "Revolving Credit Facility"). As
discussed in Note 7, the Revolving Credit Facility was obtained to: (a)
refinance outstanding indebtedness under a senior secured credit facility; (b)
finance the purchase of the Acquired Hercules Business; and (c) provide for the
ongoing working capital and other financing requirements of the Company,
including business consolidation activities, on a worldwide basis (see Note 3).
ACQUIRED FIBERITE ASSETS
On September 30, 1997, the Company acquired from Fiberite its satellite
business consisting of intangible assets and inventory, and certain
non-exclusive worldwide rights to other prepreg technologies, for $37,000 in
cash. The acquisition was substantially downsized from the original agreement
whereby the Company had, subject to certain terms and conditions, committed to
purchase selected assets and businesses of Fiberite for approximately $300,000.
As a result of the downsized transaction, the Company wrote-off $4,973 of
acquisition and financing costs to business acquisition and consolidation
expenses. In addition, the Company expensed $8,000 of acquired in-process
research and technology purchased from Fiberite which is also included in
business acquisition and consolidation expenses.
54
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- BUSINESS ACQUISITIONS (CONTINUED)
The acquisition of the satellite business and certain technologies from
Fiberite on September 30, 1997 was accounted for using the purchase method, in
accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations" ("APBO No. 16"). Under this method, substantially all of the
$37,000 purchase price, less the $8,000 write-off of the acquired in-process
research and technology expenses, was allocated to intangible assets.
Transaction costs in relation to the downsized transaction were not material.
ASSETS ACQUIRED AND LIABILITIES ASSUMED OR INCURRED
The acquisitions of the Acquired Ciba Business and the Acquired Hercules
Business (collectively, the "Acquired Businesses"), have been accounted for
using the purchase method, in accordance with APBO No. 16. The assets acquired
and the liabilities assumed or incurred in 1996 were:
<TABLE>
<CAPTION>
ACQUIRED ACQUIRED TOTAL
CIBA HERCULES ACQUIRED
BUSINESS BUSINESS BUSINESSES
---------- ---------- ----------
<S> <C> <C> <C>
Estimated fair values of assets acquired:
Accounts receivable.................................... $ 53,861 $ 16,819 $ 70,680
Inventories............................................ 63,048 22,289 85,337
Property, plant and equipment.......................... 119,446 110,611 230,057
Goodwill and other purchased intangibles............... 48,539 -- 48,539
Other assets........................................... 3,069 642 3,711
---------- ---------- ----------
Total assets acquired.................................. 287,963 150,361 438,324
---------- ---------- ----------
Estimated fair values of liabilities assumed or incurred:
Accounts payable and accrued liabilities............... 62,582 7,688 70,270
Notes payable and capital lease obligations............ 4,743 2,774 7,517
Deferred liabilities................................... 14,233 499 14,732
---------- ---------- ----------
Total liabilities assumed or incurred.................. 81,558 10,961 92,519
---------- ---------- ----------
Estimated fair values of net assets acquired............. $ 206,405 $ 139,400 $ 345,805
---------- ---------- ----------
---------- ---------- ----------
Purchase price:
Cash................................................... $ 25,000 $ 139,400 $ 164,400
Senior Subordinated Notes issued to Ciba, at aggregate
fair value........................................... 31,902 -- 31,902
Senior Demand Notes issued to Ciba..................... 5,329 -- 5,329
Hexcel common stock issued to Ciba, valued at $8 per
share................................................ 144,174 -- 144,174
---------- ---------- ----------
Aggregate purchase price............................... $ 206,405 $ 139,400 $ 345,805
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The acquisitions of the Acquired Businesses were subject to certain
post-closing adjustments, including the adjustment to the Senior Subordinated
Notes discussed above and the pension adjustment discussed in Note 6.
55
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- BUSINESS ACQUISITIONS (CONTINUED)
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma net sales, net loss and net loss per share of Hexcel for the
years ended December 31, 1996 and 1995, giving effect to the acquisitions of the
Acquired Businesses and the related issuance of the Convertible Subordinated
Notes (see Note 7) as if those transactions had occurred at the beginning of the
periods presented, were:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Pro forma net sales................................................... $ 798,515 $ 771,325
Pro forma net loss.................................................... (21,191) (10,189)
Pro forma basic and diluted net loss per share........................ (0.59) (0.30)
---------- ----------
---------- ----------
Shares used in computing pro forma basic and diluted net loss per
share............................................................... 36,003 33,614
---------- ----------
---------- ----------
</TABLE>
Pro forma adjustments giving effect to the Fiberite transaction as if it
occurred at the beginning of 1997 and 1996 would not have had a material effect
to the Company's consolidated financial statements.
NOTE 3 -- BUSINESS CONSOLIDATION
In May of 1996, Hexcel announced the commencement of a plan to consolidate
the Company's operations over a period of three years. In December of 1996, the
Company announced the commencement of further consolidation activities
identified during the ongoing integration of the Acquired Businesses. The total
expense of the business consolidation program was estimated to be approximately
$58,000. Total expenses through December 31, 1997 were $54,700, excluding costs
associated with the Fiberite transaction which were not included in the original
program. The Company does not expect to incur any further significant additional
expenses in relation to this program. As of December 31, 1997, cash expenditures
remaining to complete this program are estimated at $12,000, which approximates
amounts accrued. Thus, when the program is complete, the Company expects that
cash expenditures (for expenses and capital, net of estimated proceeds from
asset sales) necessary to complete the program will approximate the initial
estimate of $51,000.
The objective of the business consolidation program is to integrate acquired
assets and operations into Hexcel, and to reorganize the Company's manufacturing
and research activities around strategic centers dedicated to select product
technologies. The business consolidation is also intended to eliminate excess
manufacturing capacity and redundant administrative functions. Specific actions
of the consolidation program included the closure of the Anaheim, California
facility acquired in connection with the purchase of the Acquired Ciba Business,
the reorganization of the Company's manufacturing operations in Europe, the
consolidation of the Company's U.S. special process manufacturing activities,
and the integration of sales, marketing and administrative resources.
As of December 31, 1997, the primary remaining activities of the business
consolidation program relate to the European operations and the installation and
customer qualifications of equipment transferred from the Anaheim facility to
other U.S. locations. These qualification requirements increase the complexity,
cost and time of moving equipment and rationalizing manufacturing activities. As
a result, the Company continues to expect that the business consolidation
program will take to the end of 1998 to complete.
56
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 -- BUSINESS CONSOLIDATION (CONTINUED)
After closing the Anaheim facility on schedule in the third quarter of 1997,
the Company completed the sale of the facility on October 30, 1997. Net cash
proceeds from the sale were approximately $8,500, which approximated book value.
Total accrued business acquisition and consolidation expenses at December
31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
EMPLOYEE FACILITY
SEVERANCE CLOSURE &
AND EQUIPMENT FIBERITE
RELOCATION RELOCATION OTHER TRANSACTION TOTAL
----------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AS OF JANUARY 1, 1996........................ -- -- -- -- --
Business acquisition and consolidation expenses...... $ 17,285 $ 10,488 $ 14,597 $ -- $ 42,370
Liabilities assumed or incurred in business
acquisitions....................................... 7,104 2,497 -- -- 9,601
Cash expenditures.................................... (5,306) (1,109) (5,164) -- (11,579)
Non-cash usage, including asset write-downs.......... -- (6,678) (8,357) -- (15,035)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1996...................... 19,083 5,198 1,076 -- 25,357
Business acquisition and consolidation expenses...... (25) 7,651 4,744 12,973 25,343
Cash expenditures.................................... (6,644) (8,771) (5,207) (12,973) (33,595)
Non-cash usage, including asset write-downs, currency
translation effects and reclassifications.......... (2,759) (2,068) (105) -- (4,932)
----------- ----------- --------- ----------- ----------
BALANCE AS OF DECEMBER 31, 1997...................... $ 9,655 $ 2,010 $ 508 $ -- $ 12,173
----------- ----------- --------- ----------- ----------
----------- ----------- --------- ----------- ----------
</TABLE>
The consolidation program calls for the elimination of approximately 345
manufacturing, marketing and administrative positions at certain locations,
partially offset by the addition of new positions at other locations. As of
December 31, 1997, approximately 245 positions have been eliminated.
Accrued business consolidation costs of $12,173 as of December 31, 1997 were
included in "other accrued liabilities", and $21,780 and $3,577 as of December
31, 1996, were included in "other accrued liabilities" and "other non-current
liabilities," respectively, in the accompanying consolidated balance sheets.
During 1997 and 1996, business consolidation activities were financed with
operating cash flows and borrowings under the Revolving Credit Facility.
NOTE 4 -- INVENTORIES
Inventories as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 90,429 $ 66,055
Work in progress...................................................... 47,953 45,469
Finished goods........................................................ 26,939 34,360
---------- ----------
Inventories........................................................... $ 165,321 $ 145,884
---------- ----------
---------- ----------
</TABLE>
57
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land.............................................. $ 13,729 $ 19,253
Buildings......................................... 206,900 127,863
Equipment......................................... 268,287 321,057
----------- -----------
Property, plant and equipment..................... 488,916 468,173
Less accumulated depreciation..................... (157,439) (141,390)
----------- -----------
Net property, plant and equipment................. $ 331,477 $ 326,783
----------- -----------
----------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $33,214, $24,656 and $11,623, respectively.
NOTE 6 -- INTANGIBLES AND OTHER ASSETS
Intangibles and other assets as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Goodwill and other purchased intangibles, net of
accumulated amortization of $4,657 and $2,074 as
of December 31, 1997 and 1996, respectively..... $ 67,237 $ 47,692
Debt financing costs, net of accumulated
amortization of $2,487 and $877 as of December
31, 1997 and 1996, respectively................. 4,030 5,915
Prepaid pension asset............................. 8,619 --
Deferred income taxes............................. 9,901 --
Investments in joint ventures..................... -- 1,450
Other assets...................................... 3,272 2,965
---------- ----------
Intangibles and other assets...................... $ 93,059 $ 58,022
---------- ----------
---------- ----------
</TABLE>
GOODWILL AND OTHER PURCHASED INTANGIBLES
Goodwill and other purchased intangibles include certain intellectual
property acquired in connection with the purchases of the Acquired Ciba
Business, the Fiberite assets and the Hexcel-Fyfe joint venture (see below).
Amortization expense for these assets for the years ended December 31, 1997 and
1996, was $2,583 and $2,074, respectively.
DEBT FINANCING COSTS
Debt financing costs are deferred and amortized over the life of the related
debt. Unamortized debt financing costs relate to the Revolving Credit Facility
obtained in June of 1996, and to the Convertible Subordinated Notes issued in
July of 1996 (see Notes 2 and 7).
58
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 -- INTANGIBLES AND OTHER ASSETS (CONTINUED)
INVESTMENTS IN JOINT VENTURES
Investments in joint ventures are accounted for by the equity method. Equity
in the earnings of joint ventures were not material to Hexcel's consolidated
results of operations for 1997, 1996 or 1995.
As of December 31, 1997 and 1996, Hexcel owned a 45% and 43% equity interest
in DIC-Hexcel Limited ("DHL"), respectively, a joint venture with Dainippon Ink
and Chemicals, Inc. ("DIC"). On August 12, 1997, the Company sold its 40% equity
interest in Hexcel-Fyfe, LLC, to its joint venture partner, Fyfe Associates
Corporation, for net cash proceeds and the receipt of rights to certain
intangible assets that approximated the Company's investment. On December 31,
1996, the Company sold its 50% equity interest in Knytex Company, LLC to the
joint venture partner, Owens Corning Corporation, for net cash proceeds that
approximated the Company's investment.
The DHL joint venture, which owns and operates a manufacturing facility in
Komatsu, Japan, was formed in 1990 for the production and sale of Nomex
honeycomb, prepregs and decorative laminates for the Japanese market. In
December of 1996, Hexcel and DIC reached an agreement in principle to continue
the DHL joint venture and expand its operations. The Company and DIC agreed to
fund the joint venture's operations through 1998 by each contributing an
additional $3,250 in cash, payable in installments through 1998. Of this amount,
$2,000 was paid in 1997. As of December 31, 1997 and 1996, the Company's
liability with respect to funding the venture's activities, has been accrued for
in the accompanying consolidated balance sheets. In addition, the Company and
DIC agreed to contribute certain additional technology and product manufacturing
rights to DHL. Under the terms of the agreement in principle, the Company
remains contingently liable to pay DIC up to $4,500 with respect to DHL's bank
debt, but the possibility that such repayment will be required has diminished as
a result of the improvement in the venture's business prospects.
PREPAID PENSION ASSET
As part of the Acquired Ciba Business, the Company acquired a net pension
asset from a defined benefit plan covering employees of a United Kingdom
subsidiary. Pursuant to the terms of the purchase agreement, these employees
continued to participate in a defined benefit retirement plan sponsored by Ciba
up to January 1, 1997, at which time, the net pension asset was valued at $8,688
and was transferred to a newly created plan sponsored by the Company.
Accordingly, the Company recorded the $8,688 as a prepaid pension asset with a
corresponding reduction in goodwill. As of December 31, 1997, the prepaid
pension asset was $8,619, reflecting the net change for the year.
59
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE
Notes payable, capital lease obligations and indebtedness to related parties
as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revolving Credit Facility......................... $ 158,267 $ 98,656
European Credit and Overdraft Facilities.......... 13,909 23,405
Convertible Subordinated Notes, due 2003.......... 114,450 114,500
Convertible Subordinated Debentures, due 2011..... 25,625 25,625
Obligations Under IDRB Variable Rate Demand
Notes........................................... -- 8,450
Various notes payable............................. 680 1,212
---------- ----------
Total notes payable............................... 312,931 271,848
Capital lease obligations (see Note 8)............ 5,473 6,906
Senior Subordinated Notes Payable to CSC, net of
unamortized discount of $2,233 and $2,666 as of
December 31, 1997 and 1996, respectively........ 34,967 32,262
---------- ----------
Total notes payable, capital lease obligations and
indebtedness to related parties................. $ 353,371 $ 311,016
---------- ----------
---------- ----------
Notes payable and current maturities of long-term
liabilities..................................... $ 13,858 $ 23,835
Long-term notes payable and capital lease
obligations, less current maturities............ 304,546 254,919
Indebtedness to related parties................... 34,967 32,262
---------- ----------
Total notes payable, capital lease obligations and
indebtedness to related parties................. $ 353,371 $ 311,016
---------- ----------
---------- ----------
</TABLE>
REVOLVING CREDIT FACILITY
In connection with the acquisition of the Acquired Hercules Business on June
27, 1996, Hexcel obtained the Revolving Credit Facility to: (a) refinance
outstanding indebtedness under its current credit facility; (b) finance the
purchase of the Acquired Hercules Business; and (c) provide for the ongoing
working capital and other financing requirements of the Company, including
business consolidation activities, on a worldwide basis. The Revolving Credit
Facility provided for up to $254,600 of borrowing capacity and would have
expired in February 1999. As discussed in Note 24, the Revolving Credit Facility
was amended and restated in March 1998.
Interest on outstanding borrowings under the Revolving Credit Facility was
computed at an annual rate of 0.4% in excess of the applicable London interbank
rate or, at the option of Hexcel, at the base rate of the administrative agent
for the lenders. In addition, the Revolving Credit Facility was subject to a
commitment fee of approximately 0.2% per annum on the unused portion of the
facility. As of
December 31, 1997, letters of credit with an aggregate face amount of $3,700
were outstanding under the Revolving Credit Facility.
The Revolving Credit Facility was secured by a pledge of stock of certain of
Hexcel's subsidiaries. In addition, the Company was subject to various financial
covenants and restrictions under the Revolving Credit Facility, and was
generally prohibited from paying dividends or redeeming capital stock.
60
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
As a result of obtaining the Revolving Credit Facility and the corresponding
extinguishment of certain of the Company's credit facilities, Hexcel wrote off
$3,400 of capitalized debt financing costs in 1996. This amount is included in
"interest expense" in the accompanying consolidated statement of operations for
1996.
EUROPEAN CREDIT AND OVERDRAFT FACILITIES
In addition to the Revolving Credit Facility, certain of Hexcel's European
subsidiaries have access to limited credit and overdraft facilities provided by
various local lenders. These credit and overdraft facilities, which are only
available to finance certain activities by specific subsidiaries, are primarily
uncommitted facilities that are terminable at the discretion of the lenders. The
credit and overdraft facilities in use by the Company's European subsidiaries as
of December 31, 1997 and 1996, other than the Revolving Credit Facility, bear
interest at rates between 2.5% and 7.7% per year.
CONVERTIBLE SUBORDINATED NOTES, DUE 2003
In July of 1996, Hexcel completed an offering of $114,500 in convertible
subordinated notes due 2003 (the "Convertible Subordinated Notes"). The
Convertible Subordinated Notes carry an annual interest rate of 7% and are
convertible into Hexcel common stock at a conversion price of $15.81 per share,
subject to adjustment under certain conditions. Net proceeds of $111,351 from
this offering were used to repay outstanding borrowings under the Revolving
Credit Facility.
The Convertible Subordinated Notes are redeemable beginning in August of
1999, in whole or in part, at the option of Hexcel. The redemption prices range
from 103.5% to 100.0% of the outstanding principal amount, depending on the
period in which redemption occurs. As of December 31, 1997, $50 of the
Convertible Subordinated Notes had been converted resulting in the issuance of 3
shares of common stock.
CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011
The 7% convertible subordinated debentures, due 2011, are redeemable by
Hexcel under certain provisions, although any such redemption is restricted by
the terms of the Revolving 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
In 1997, Hexcel repaid in full various industrial development revenue bonds
("IDRBs") to obtain the benefit of reduced administration costs. The IDRBs had
original maturity dates after 2001 and were guaranteed by bank letters of credit
issued under the Revolving Credit Facility. The interest rates on the IDRBs were
variable and averaged 4.0% in 1997, 4.2% in 1996 and 6.2% in 1995.
SENIOR SUBORDINATED NOTES PAYABLE TO CSC
In connection with the purchase of the Acquired Ciba Business, Hexcel
delivered Senior Subordinated Notes to Ciba in an aggregate principal amount of
$34,928. Hexcel has also consented to an assignment by Ciba of Ciba's rights and
obligations under the Alliance Agreement to CSCH, and Ciba Specialty Chemicals
Corporation, a Delaware corporation (collectively "CSC"). In connection with the
assignment
61
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
of these rights and obligations, the Senior Subordinated Notes that were
previously payable to Ciba are now payable to CSC. In accordance with the terms
of the amended Strategic Alliance Agreement, Hexcel acquired certain assets of
the Ciba Distributors between January 1, 1997 and February 28, 1997, in exchange
for an undertaking to deliver additional Senior Subordinated Notes in an
aggregate principle amount of approximately $2,300. Upon delivery of these
additional Senior Subordinated Notes, the total aggregate principle amount of
Senior Subordinated Notes payable to CSC will be approximately $37,200.
At the date of issue, the aggregate fair value of the Senior Subordinated
Notes was $31,902, or $3,026 less than the aggregate principal amount. The
original discount of $3,026 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.
This discount, which is amortized over the life of the Senior
Subordinated Notes, had an unamortized balance of $2,233 and $2,666 as of
December 31, 1997 and 1996, respectively.
The Senior Subordinated Notes are general unsecured obligations of Hexcel
that 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 purchase of the Acquired Ciba Business
(February 28, 1999), and by an additional 0.5% per year thereafter until the
Senior Subordinated Notes mature in the year 2003.
As discussed in Note 9, Hexcel has various financial and other relationships
with CSC. Accordingly, the Company's net indebtedness to CSC under the Senior
Subordinated Notes has been classified as "indebtedness to related parties" in
the accompanying consolidated balance sheets.
AGGREGATE MATURITIES OF NOTES PAYABLE
Aggregate maturities of notes payable, excluding capital lease obligations
(see Note 8), as of December 31, 1997, were:
<TABLE>
<S> <C>
Payable during years ending December 31:
1998............................................ $ 13,511
1999............................................ 672
2000............................................ 147
2001............................................ 154
2002............................................ 1,856
2003 and thereafter............................. 331,558
---------
Total notes payable........................... $ 347,898
---------
---------
</TABLE>
At December 31, 1997, amounts owed under the Revolving Credit Facility
totaled $158,267. As discussed in Note 24, the Revolving Credit Facility was
amended and restated in March 1998. Under the amended terms, the facility was
extended to 2003, and accordingly, the above table reflects the amended due
date.
62
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 -- NOTES PAYABLE (CONTINUED)
ESTIMATED FAIR VALUES OF NOTES PAYABLE
The Revolving Credit Facility, and substantially all of the various European
credit facilities and other notes payable outstanding as of December 31, 1997
and 1996, are variable-rate debt obligations. Accordingly, management believes
that the estimated fair value of each of these debt obligations approximates the
respective book value.
The aggregate fair values of the Convertible Subordinated Notes, due 2003,
and the Convertible Subordinated Debentures, due 2011, are estimated on the
basis of quoted market prices, although trading in these debt securities is
limited and may not reflect fair value. The aggregate fair value of the
Convertible Subordinated Notes, due 2003, was approximately $196,000 and
$141,700 as of December 31, 1997 and 1996, respectively. The aggregate fair
value of the Convertible Subordinated Debentures, due 2011, was approximately
$25,500 and $24,000 as of December 31, 1997 and 1996, respectively.
NOTE 8 -- LEASING ARRANGEMENTS
Assets, accumulated depreciation and related liability balances under
capital leasing arrangements as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Property, plant and equipment..................... $ 10,197 $ 11,572
Less accumulated depreciation..................... (3,593) (2,927)
--------- ---------
Net property, plant and equipment................. $ 6,604 $ 8,645
--------- ---------
--------- ---------
Capital lease obligations......................... $ 5,473 $ 6,906
less current maturities........................... (347) (768)
--------- ---------
Long-term capital lease obligations, net.......... $ 5,126 $ 6,138
--------- ---------
--------- ---------
</TABLE>
Certain sales and administrative offices, data processing equipment, and
manufacturing facilities are leased under operating leases. Rental expense under
operating leases was $4,559 in 1997, $4,623 in 1996 and $2,871 in 1995.
Future minimum lease payments as of December 31, 1997, were:
<TABLE>
<CAPTION>
TYPE OF LEASE
----------------------
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
Payable during years ending December 31:
1998............................................ $ 858 $ 3,935
1999............................................ 858 3,304
2000............................................ 783 1,987
2001............................................ 512 714
2002............................................ 512 233
2003 and thereafter............................. 5,948 1,402
--------- -----------
Total minimum lease payments.................. $ 9,471 $ 11,575
--------- -----------
--------- -----------
</TABLE>
Total minimum capital lease payments include $3,999 of imputed interest.
63
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 -- RELATED PARTIES
In connection with the purchase of the Acquired Ciba Business, Hexcel
delivered 18,022 newly issued shares of Hexcel common stock to Ciba,
representing 49.9% of the Hexcel common stock issued and outstanding at that
date. In addition, the Company and Ciba entered into the Alliance Agreement
which currently provides for, among other things, the designation by Ciba of
four of the Company's ten directors, and the approval of a majority of these
four designated directors for the taking of certain significant actions by the
Company. On February 21, 1997, the Company consented to an assignment by Ciba of
Ciba's rights and obligations under the Alliance Agreement to CSC. In connection
with the assignment of these rights and obligations, all of the Hexcel common
stock previously held by Ciba is now held by CSC.
As discussed in Notes 2 and 7, Hexcel has delivered Senior Subordinated
Notes in an aggregate principal amount of $34,928 to Ciba in connection with the
purchase of the Acquired Ciba Business and has undertaken to deliver
approximately $2,300 additional Senior Subordinated Notes in connection with the
acquisition of certain assets of the Ciba Distributors. In connection with the
assignment of Ciba's rights and obligations under the Alliance Agreement, the
Senior Subordinated Notes that were previously payable to Ciba will be payable
to CSC. During 1996, the Company also delivered Senior Demand Notes to Ciba in
an aggregate principle amount of $5,329. The Senior Demand Notes were presented
for payment and paid in full prior to December 31, 1996. Aggregate interest
expense on the Senior Subordinated Notes in 1997 and 1996 was $2,762 and $2,715,
respectively.
Hexcel purchases certain raw materials from various CSC subsidiaries, as
successor to Ciba subsidiaries. In addition, the Company sells certain finished
products to various CSC subsidiaries, including the Ciba Distributors. The
Company's aggregate purchases from CSC subsidiaries and their predecessor Ciba
subsidiaries for 1997 and for the period from March 1, 1996 through December 31,
1996, were $34,255 and $15,116, respectively. The Company's aggregate sales to
CSC subsidiaries and their predecessor Ciba subsidiaries for the same periods
were $5,620 and $32,408, respectively. These sales were primarily to the Ciba
Distributors pursuant to a distribution agreement, which expired February 28,
1997. In addition, in 1997 and 1996 the Company incurred $1,234 and $214,
respectively, of expenses related to the Acquired Ciba Business that are subject
to reimbursement by CSC as successor to Ciba under the terms of the Strategic
Alliance Agreement. As of December 31, 1997 and 1996, aggregate receivables from
CSC or CSC subsidiaries and their Ciba predecessors included in "accounts
receivable" in the accompanying consolidated balance sheets were $400 and
$5,951, respectively. Aggregate payables to CSC or CSC and their Ciba
predecessors included in "accounts payable" and "accrued liabilities" as of the
same dates were $1,196 and $1,812, respectively.
64
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 -- OTHER NON-CURRENT LIABILITIES
Other non-current liabilities as of December 31, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Postretirement benefit liability (see Note 12).... $ 14,066 $ 13,726
Liability for environmental remediation
activities...................................... 5,080 7,070
Liability for business consolidation activities
(see Note 3).................................... -- 3,577
Liability for DIC-Hexcel Limited (see Note 6)..... -- 3,250
Pension and retirement liability (see Note 11).... 2,702 2,206
Deferred tax liability (see Note 13).............. 2,970 1,433
Other............................................. 10,998 15,152
--------- ---------
Other non-current liabilities..................... $ 35,816 $ 46,414
--------- ---------
--------- ---------
</TABLE>
NOTE 11 -- RETIREMENT PLANS
Hexcel maintains a retirement savings and contribution plan and a defined
benefit retirement plan covering most U.S. employees, except for certain
employees with union affiliations. In addition, the Company maintains a separate
retirement savings plan available to certain U.S. employees with union
affiliations, and contributes to a union sponsored multi-employer pension plan
covering these same employees. The Company also maintains various retirement
plans covering certain European employees, as well as defined benefit
supplemental retirement plans for eligible senior executives. The net expense to
the Company of all of these retirement plans was $11,500 in 1997, $9,107 in 1996
and $2,768 in 1995.
Under the U.S. retirement savings and contribution plan, eligible employees
may contribute up to 16% of their compensation to an individual retirement
savings account. Hexcel makes matching contributions to individual retirement
savings accounts equal to 50% of employee contributions, not to exceed 3% of
employee compensation. Furthermore, the Company makes profit sharing
contributions of up to an additional 4% of employee compensation when the
Company meets or exceeds certain annual performance targets. Matching
contributions to the U.S. retirement savings and contribution plan were $2,309
for 1997, $2,160 for 1996 and $1,290 for 1995. The profit sharing contributions
were $3,648 for 1997 and $3,236 for 1996. There was no profit sharing
contribution for 1995.
The U.S. defined benefit retirement plan is a career average pension plan
covering both hourly and salaried employees. Benefits are based on years of
service and the annual compensation of the employee. Hexcel's funding policy is
to contribute the minimum amount required by applicable regulations.
Hexcel maintains a separate retirement savings plan available to certain
U.S. employees with union affiliations of the composite structures business
acquired from Ciba on February 29, 1996. Under this plan, employees may
contribute up to 14% of their compensation to an individual retirement savings
account. There are no matching or profit sharing contributions. In addition, the
Company participates in a union sponsored multi-employer pension plan covering
these same employees. The Company's contributions to this plan were $1,326 for
1997 and $731 for 1996.
As part of the Acquired Ciba Business, the Company acquired a net pension
asset from a defined benefit retirement plan covering employees of a United
Kingdom subsidiary. Pursuant to the terms of the purchase agreement, these
employees continued to participate in a defined benefit retirement plan
65
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- RETIREMENT PLANS (CONTINUED)
sponsored by Ciba up to January 1, 1997, at which time, the accumulated benefit
obligation and net pension asset was valued and transferred to a newly created
plan sponsored by the Company.
The net periodic cost of Hexcel's defined benefit retirement plans for the
years ended December 31, 1997, 1996 and 1995, were:
<TABLE>
<CAPTION>
U.S. Plans European Plans
1997 1996 1995 1997 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year..... $ 2,310 $ 2,365 $ 661 $ 1,933 $ 150
Interest cost on projected benefit obligation..... 817 646 660 2,168 132
Return on plan assets--actual..................... (739) (477) (1,103) (6,799) (109)
Net amortization and deferral..................... 265 273 1,260 4,002 --
--------- --------- --------- --------- ---------
Net periodic pension cost......................... $ 2,653 $ 2,807 $ 1,478 $ 1,304 $ 173
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The following table sets forth the funded status of the plans as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
U.S. Plans European Plans
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations--
Vested benefit obligation......................... $ 12,424 $ 9,082 $ 22,813 $ 2,760
Non-vested benefit obligation..................... 613 473 -- --
--------- --------- --------- ---------
Accumulated benefit obligation.................... $ 13,037 $ 9,555 $ 22,813 $ 2,760
--------- --------- --------- ---------
--------- --------- --------- ---------
Projected benefit obligation...................... $ 14,910 $ 11,070 $ 32,627 $ 3,494
Plan assets at fair value......................... 8,343 5,974 44,557 2,405
--------- --------- --------- ---------
Plan assets more (less) than projected benefit
obligation...................................... (6,567) (5,096) 11,930 (1,089)
Unrecognized net (gain) loss...................... 1,436 157 (3,311) --
Unrecognized net transition obligation............ 169 212 -- --
Unrecognized prior service cost................... 4 32 -- 1,183
--------- --------- --------- ---------
Prepaid (accrued) pension liability............... (4,958) (4,695) 8,619 94
--------- --------- --------- ---------
less current portion............................ 2,256 2,395 -- --
--------- --------- --------- ---------
Long-term portion prepaid (accrued) pension
liability....................................... $ (2,702) $ (2,300) $ 8,619 $ 94
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
66
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 -- RETIREMENT PLANS (CONTINUED)
Assumptions used to estimate the actuarial present value of benefit
obligations as of December 31, 1997, 1996 and 1995, were:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
U.S. defined benefit retirement plans:
Discount rate................................... 7.5 % 7.5 % 7.0 %
Rate of increase in compensation.................. 4.5 % 4.5 % 4.0 %
Expected long-term rate of return on plan
assets.......................................... 9.0 % 9.0 % 9.5 %
</TABLE>
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
European defined benefit retirement plans:
Discount rates.................................. 6.5% - 7.0% 6.5% - 7.5%
Rates of increase in compensation............... 2.0% - 5.0% 2.0% - 4.5%
Expected long-term rates of return on plan
assets........................................ 6.5% - 7.5% 6.5% - 9.0%
</TABLE>
NOTE 12 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
Hexcel provides certain postretirement health care and life insurance
benefits to eligible retirees. Substantially all U.S. employees hired on or
before December 31, 1995, are eligible for benefits, as well as certain U.S.
employees hired on February 29, 1996, in connection with the purchase of the
Acquired Ciba Business, and on June 27, 1996, in connection with the purchase of
the Acquired Hercules Business. Effective January 1, 1996, the Company amended
its postretirement benefit program to eliminate any benefits for employees hired
after December 31, 1995, other than senior executives and certain employees
hired in connection with business acquisitions.
Benefits are available to eligible employees who retire on or after age 58
after rendering at least 15 years of service to Hexcel, including years of
service rendered to the Acquired Ciba Business or the Acquired Hercules Business
prior to the dates of acquisition. 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.
Effective January 1, 1996, Hexcel amended its postretirement benefit program to
limit health care benefit coverage to selected health insurance plans for the
majority of active employees.
Hexcel funds postretirement health care and life insurance benefit costs on
a pay-as-you-go basis and, for 1997, 1996 and 1995, made benefit payments of
approximately $750, $400 and $600, respectively. Net defined postretirement
benefit costs for the years ended December 31, 1997, 1996 and 1995, were:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the year..... $ 91 $ 80 $ 279
Interest cost on accumulated postretirement
benefit obligation.............................. 752 701 780
Net amortization and deferral..................... (213) (222) (201)
--------- --------- ---------
Net periodic postretirement benefit cost.......... $ 630 $ 559 $ 858
--------- --------- ---------
--------- --------- ---------
</TABLE>
67
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 -- POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED)
Defined postretirement benefit liabilities as of December 31, 1997 and 1996,
were:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees........................................ $ 7,483 $ 7,302
Fully eligible active plan participants......... 1,897 1,658
Other active plan participants.................. 1,456 1,031
--------- ---------
10,836 9,991
Unrecognized prior service credit................. 556 890
Unrecognized net gain............................. 3,210 3,567
--------- ---------
Defined postretirement benefit liability.......... 14,602 14,448
less current portion of postretirement benefit
liability....................................... (536) (722)
--------- ---------
Deferred postretirement benefit liability (see
Note 10)........................................ $ 14,066 $ 13,726
--------- ---------
--------- ---------
</TABLE>
Two health care cost trend rates were used in measuring the accumulated
postretirement benefit obligation. For indemnity health care costs, the assumed
cost trend in 1997 was 10.0% for participants less than 65 years of age and 6.0%
for participants 65 years of age and older, gradually declining to 5.0% for both
age groups in the year 2002. For Health Maintenance Organization health care
costs, the assumed cost trend in 1997 was 7.0% for participants less than 65
years of age and 4.0% for participants 65 years of age and older, gradually
declining to 5.0% and 4.0%, respectively, in the year 1999.
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% in 1997 and 7.5% in 1996. The rate of
increase in compensation used in determining the obligation was 4.5% in 1997 and
1996 and 4.0% in 1995.
If the health care cost trend rate assumptions were increased by 1.0%, the
accumulated postretirement benefit obligation as of December 31, 1997 would be
increased by 6.1%. The effect of this change on the sum of the service cost and
interest cost would be an increase of 5.6%.
68
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 -- INCOME TAXES
PROVISION FOR INCOME TAXES
Income (loss) before income taxes and the (benefit) provision for income
taxes from continuing operations for the years ended December 31, 1997, 1996 and
1995, were:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S....................................................... $ 24,197 $ (11,956) $ (1,027)
International............................................. 26,555 (3,798) 7,541
---------- ---------- ---------
Total income (loss) before income taxes..................... $ 50,752 $ (15,754) $ 6,514
---------- ---------- ---------
---------- ---------- ---------
Provision (benefit) for income taxes:
Current:
U.S....................................................... $ 798 $ (1,600) $ 197
International............................................. 9,527 5,556 3,445
---------- ---------- ---------
Current provision for income taxes.......................... 10,325 3,956 3,642
---------- ---------- ---------
Deferred:
U.S....................................................... (33,935) -- --
International............................................. 732 (520) (329)
---------- ---------- ---------
Deferred benefit for income taxes........................... (33,203) (520) (329)
---------- ---------- ---------
Total (benefit) provision for income taxes.................. $ (22,878) $ 3,436 $ 3,313
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
A reconciliation of the (benefit) provision to the U.S. federal statutory
income tax rate of 35%, 34% and 34% for the years ended December 31, 1997, 1996
and 1995, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) at U.S. federal statutory rate........... $ 17,763 $ (5,356) $ 2,215
U.S. state taxes, less federal tax benefit................... 519 21 (254)
Impact of different international tax rates, adjustments to
income tax accruals and other.............................. 18,773 (9,656) 492
Valuation allowance.......................................... (59,933) 18,427 860
---------- --------- ---------
Total (benefit) provision for income taxes................... $ (22,878) $ 3,436 $ 3,313
---------- --------- ---------
---------- --------- ---------
</TABLE>
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), in 1996 and 1995 the Company had
fully provided valuation allowance reserves against its net deferred tax assets
primarily in the U.S. and Belgium where there were uncertainties in generating
sufficient future taxable income. In 1997, the Company reversed $59.9 million of
its valuation allowance reserve as follows: $17.0 million due to current year
profitable U.S. operations, $39.0 million due to the Company's assessment that
the realization of the remaining U.S. net deferred tax assets is more likely
than not, and $3.9 million in Belgium due to a gain on sale of certain tangible
and intangible assets to other Hexcel subsidiaries. The Company continues to
reserve the balance of the net deferred tax asset related to its Belgium
operations.
69
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 -- INCOME TAXES (CONTINUED)
The Company has made no U.S. income tax provision for approximately $46,000
of undistributed earnings of international subsidiaries as of December 31, 1997.
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, 1997 and 1996, were:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net operating loss carryforwards...................................... $ 21,000 $ 33,922
Reserves and other, net............................................... 31,580 37,596
Accrued business acquisition and consolidation expenses............... 4,380 9,128
Accelerated depreciation and amortization............................. (16,690) (13,646)
Valuation allowance................................................... (8,500) (68,433)
---------- ----------
Net deferred tax asset (liability).................................... $ 31,770 $ (1,433)
---------- ----------
---------- ----------
</TABLE>
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, Hexcel had net operating loss ("NOL") carryforwards
for U.S. federal and Belgium income tax purposes of approximately $53,000 and
$5,000, respectively. 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 purchase
of the Acquired Ciba Business, the Company has a limitation on the utilization
of U.S. NOL carryforwards of approximately $12,000 per year.
NOTE 14 -- STOCK-BASED INCENTIVE PLANS
The Hexcel Corporation Incentive Stock Plan as amended and restated
("Incentive Stock Plan"), authorizes the use of Hexcel common stock for
providing a variety of stock-based incentive awards to eligible employees,
officers, directors and consultants. The Incentive Stock Plan provides for
grants of stock options, stock appreciation rights, restricted stock and
restricted stock units, and other stock-based awards. In May 1997, Hexcel's
stockholders increased the aggregate number of shares of Hexcel common stock
available for use under the Incentive Stock Plan by 3,850 to 4,013. As of
December 31, 1997, 1,193 options were vested.
As of December 31, 1997 and 1996, the Company had outstanding a total of 352
and 286, respectively, of performance accelerated restricted stock units
("PARS"). Subject to certain conditions of employment, PARS vest in increments
through 2004, subject to accelerated vesting under certain circumstances, and
are convertible into an equal number of shares of Hexcel common stock. As of
December 31, 1997, no PARS were vested.
In May 1997, Hexcel's stockholders approved the Management Stock Purchase
Plan (the "MSPP"). The MSPP authorizes an aggregate of 150 shares of Hexcel
common stock for use by the Company in
70
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 -- STOCK-BASED INCENTIVE PLANS (CONTINUED)
providing stock-based incentive awards to senior executives and certain key
management employees. Eligible executives and employees may purchase Restricted
Stock Units ("Units") for up to 50% of their annual bonus pursuant to an
irrevocable election made previously. Each Unit is purchased at 80% of the fair
market value (as defined in the MSPP) of the Company's common stock at the date
the bonus becomes available and is restricted for a period of three years.
Subject to certain conditions of employment, the Units vest equally over a
period of three years, and upon expiration of the restricted period are
convertible on a one-to-one basis for shares of Hexcel common stock. No Units
had been purchased as of December 31, 1997.
In December 1997, the Board of Directors resolved to permit non-employee
directors to elect to receive a portion or all of their annual retainer fees in
the form of non-qualified stock options issued under the Incentive Stock Plan.
These options may be used to purchase common stock of the Company at a price of
50% of the fair market value at the date of grant. Options vest proportionately
over a period of one year from the date of grant. No such options had been
granted as of December 31, 1997.
Stock option data for the three years ended December 31, 1997, 1996 and
1995, were:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
----------- -----------
<S> <C> <C>
Options outstanding at January 1, 1995............ 468 $ 12.37
Options granted................................... 787 $ 5.63
Options exercised................................. (1) $ 7.56
Options expired or canceled....................... (240) $ 11.80
----------- -----------
Options outstanding at December 31, 1995.......... 1,014 $ 7.27
Options granted................................... 1,577 $ 12.69
Options exercised................................. (447) $ 9.40
Options expired or canceled....................... (85) $ 11.45
----------- -----------
Options outstanding at December 31, 1996.......... 2,059 $ 10.36
Options granted................................... 3,094 $ 18.24
Options exercised................................. (289) $ 9.64
Options expired or canceled....................... (25) $ 15.51
----------- -----------
Options outstanding at December 31, 1997.......... 4,839 $ 15.39
----------- -----------
----------- -----------
</TABLE>
71
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 -- STOCK-BASED INCENTIVE PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
WEIGHTED WEIGHTED
NUMBER OF WEIGHTED AVERAGE AVERAGE NUMBER OF AVERAGE
OPTIONS REMAINING LIFE EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ------------------------------------------------- ----------- ----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 4.75 - 5.00................................... 160 7.3 $ 4.75 160 $ 4.75
$ 5.01 - 10.00................................... 373 5.5 $ 5.99 335 $ 6.10
$10.01 - 15.00................................... 1,211 8.0 $ 12.43 648 $ 12.42
$15.01 - 20.00................................... 3,058 9.1 $ 18.13 49 $ 16.71
$20.01 - 25.00................................... 15 9.2 $ 20.13 -- --
$25.01 - 30.00................................... 20 9.6 $ 27.39 1 $ 29.38
$30.01 - 32.06................................... 2 9.2 $ 30.49 -- $ 32.06
--
----------- ----------- ----------- -----------
$ 4.75 - 32.06................................... 4,839 8.5 $ 15.39 1,193 $ 9.80
-- --
--
--
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
In July 1997, the Company established an ESPP to provide eligible employees
an additional opportunity to share in the ownership of Hexcel. The maximum
number of shares of common stock reserved for issuance under the ESPP is 200.
Under the ESPP, eligible employees may contribute up to 10% of their base
earnings toward the quarterly purchase of the Company's common stock at a
purchase price equal to 85% of the fair market value of the common stock on the
purchase date. During 1997, approximately 3 shares of common stock were issued
under the ESPP.
PRO FORMA DISCLOSURES
In 1996, Hexcel adopted the disclosure requirements of SFAS 123, which
provide for the disclosure of pro forma net earnings and net earnings per share
as if the fair value method were used to account for stock-based employee
incentive plans. Pursuant to SFAS 123, the Company has elected to continue to
use the intrinsic value method to account for its stock option plans in the
accompanying consolidated financial statements, in accordance with APBO No. 25.
If compensation expense had been determined for stock options granted in
1997, 1996 and 1995 using the fair value method at the date of grant, consistent
with the provisions of SFAS 123, Hexcel's pro forma net income (loss) and
diluted income (loss) per share would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Net income (loss), as reported.................... $ 73,630 $ (19,190) $ 2,733
Pro forma compensation adjustment................. (6,275) (43) (1,029)
--------- ---------- ---------
Pro forma net income (loss)....................... $ 67,355 $ (19,233) $ 1,704
--------- ---------- ---------
--------- ---------- ---------
Diluted net income (loss) per share, as
reported........................................ $ 1.74 $ (0.58) $ 0.17
Pro forma compensation adjustment................. (0.14) 0.02 (0.06)
--------- ---------- ---------
Pro forma diluted net income (loss) per share..... $ 1.60 $ (0.56) $ 0.11
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
72
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 -- STOCK-BASED INCENTIVE PLANS (CONTINUED)
The weighted average fair value of options granted during 1997, 1996 and
1995 were $18.24, $12.75 and $5.63, respectively. The following ranges of
assumptions were used in the Black-Scholes pricing models for options granted in
1997, 1996 and 1995: risk-free interest of 5.6% to 6.2%, estimated volatility of
40% to 49%, and an expected life of 3.6 years to 4.7.
During 1996, the Company recognized $3,635 of compensation expense under the
intrinsic value method resulting from stock options which vested in connection
with the purchase of the Acquired Ciba Business. This compensation expense was
based on the difference between the exercise price of the stock options granted
and the market price of Hexcel common stock on the date that the Company's
stockholders approved the Incentive Stock Plan under which these options were
granted. The recognition of compensation expense in connection with these stock
options resulted in a corresponding $3,635 increase in the additional paid-in
capital of the Company.
NOTE 15 -- EARNINGS PER SHARE
In the fourth quarter of 1997, Hexcel adopted SFAS 128. SFAS 128 requires
the presentation of "Basic" earnings per share which represents net earnings
divided by the weighted average shares outstanding excluding all potential
common shares. A dual presentation of "Diluted" earnings per share reflecting
the dilutive effects of all potential common shares is also required. The
Diluted presentation is similar to fully diluted earnings per share under the
prior accounting standard.
73
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 -- EARNINGS PER SHARE (CONTINUED)
Computations of basic and diluted earnings (loss) per share for the years
ended December 31, 1997, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Basic earnings (loss) per share:
Net income (loss) from continuing operations...... $ 73,630 $ (19,190) $ 3,201
--------- ---------- ---------
Weighted average common shares outstanding........ 36,748 33,351 15,605
--------- ---------- ---------
Basic earnings (loss) per share................... $ 2.00 $ (0.58) $ 0.21
--------- ---------- ---------
--------- ---------- ---------
Diluted earnings (loss) per share:
Net income (loss) from continuing operations...... $ 73,630 $ (19,190) $ 3,201
Effect of dilutive securities--
Senior Subordinated Notes, due 2003............. 5,087 -- --
Senior Subordinated Debentures, due 2011........ 1,111 -- --
--------- ---------- ---------
Adjusted net income (loss) from
continuing operations........................... $ 79,828 $ (19,190) $ 3,201
--------- ---------- ---------
Weighted average common shares outstanding........ 36,748 33,351 15,605
Effect of dilutive securities--
Stock options................................... 1,176 -- 137
Senior Subordinated Notes, due 2003............. 7,239 -- --
Senior Subordinated Debentures, due 2011........ 834 -- --
--------- ---------- ---------
Adjusted weighted average common shares
outstanding..................................... 45,997 33,351 15,742
--------- ---------- ---------
Diluted earnings (loss) per share................. $ 1.74 $ (0.58) $ 0.20
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
The Convertible Subordinated Notes, due 2003, which were issued in 1996, and
the Convertible Subordinated Debentures, due 2011, were excluded from the 1996
and 1995 computations of diluted earnings (loss) per share, as applicable, as
they were antidilutive. Substantially all of the Company's stock options were
included in the calculation of diluted earnings per share for the year ended
December 31, 1997.
NOTE 16 -- 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
exclude counterclaims against other third parties. Such estimates are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
Although it is impossible to determine the level of future expenditures for
legal, environmental and related matters with any degree of certainty, it is the
Company's opinion, based on available information, that it is unlikely
74
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- CONTINGENCIES (CONTINUED)
that these matters, individually or in the aggregate, will have a material
adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
LEGAL AND ENVIRONMENTAL CLAIMS AND PROCEEDINGS
Hexcel has been named as a potentially responsible party with respect to
several hazardous waste disposal sites that it does not own or possess which are
included on the Superfund National Priority List of the U.S. Environmental
Protection Agency or on equivalent lists of various state governments. The
Company believes that its liability with respect to these sites is not material.
Pursuant to the New Jersey Environmental Responsibility and Clean-Up Act,
Hexcel signed an administrative consent order to pay for the environmental
remediation of a manufacturing facility it owns and formerly operated in Lodi,
New Jersey. The Company's estimate of the remaining cost to satisfy this consent
order is accrued in the accompanying consolidated balance sheets. The ultimate
cost of remediating the Lodi site will depend on developing circumstances.
In connection with the purchase of the Acquired Ciba Business, Hexcel
assumed various liabilities including a liability with respect to certain
environmental remediation activities at an acquired facility in Kent,
Washington. The Company is a party to a cost sharing agreement regarding the
operation of certain environmental remediation systems necessary to satisfy a
post-closure care permit issued to a previous owner of the Kent site by the U.S.
Environmental Protection Agency. Under the terms of the cost sharing agreement,
the Company is obligated to reimburse the previous owner for a portion of the
cost of the required remediation activities. The Company's estimate of its share
of the cost is accrued in the accompanying consolidated balance sheets as of
December 31, 1997 and 1996.
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 Composites S.A., and installed in rail cars in France and
Spain. Certain customers have alleged that Hexcel Composites 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. 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. The Company believes that, based on available
information, it is unlikely that these claims will have a material adverse
effect on the consolidated financial position, results of operations or cash
flows 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. Under the direction of the
Corporate Administrative Contracting Officer ("CACO"), the Defense Contract
Audit Agency ("DCAA") reviews cost accounting and business practices of
government contractors and subcontractors, including the Company. In 1996, the
Company was engaged in discussions with the CACO and the DCAA regarding a number
of cost accounting issues identified during the course
75
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 -- CONTINGENCIES (CONTINUED)
of various audits performed by the DCAA. The Company reached an agreement with
the CACO and the DCAA that resolved the primary issues identified during the
course of these audits. Under the terms of the agreement, the Company paid the
U.S. federal government $1,314 in exchange for the irrevocable discharge of any
claims with respect to the issues that were resolved.
NOTE 17 -- RAW MATERIALS, SIGNIFICANT CUSTOMERS AND 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.
The Boeing Company ("Boeing") and Boeing subcontractors accounted for
approximately 36% of 1997 sales, 22% of 1996 sales and 21% of 1995 sales. The
Airbus Industrie ("Airbus") consortium and Airbus subcontractors accounted for
approximately 10% of 1997 and 1996 sales, and less than 10% of 1995 sales. The
loss of all or a significant portion of the business with Boeing or Airbus,
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, 1997, 1996 and 1995,
were:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Commercial aerospace.............................................. 64% 56% 45%
Space and defense................................................. 9 11 11
Recreation........................................................ 7 10 9
General industrial and other...................................... 20 23 35
--------- --------- ---------
Net sales......................................................... 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
</TABLE>
76
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 18 -- BUSINESS SEGMENT DATA
Hexcel operates within a single business segment: Advanced Structural
Materials. The following table summarizes certain financial data for continuing
operations by geographic area as of December 31, 1997, 1996 and 1995, and for
the years then ended:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- ----------
<S> <C> <C> <C>
Net sales to non-affiliates:
U.S................................................... $ 598,555 $ 394,524 $ 197,665
International......................................... 338,300 300,727 152,573
---------- ----------- ----------
Consolidated.......................................... $ 936,855 $ 695,251 $ 350,238
---------- ----------- ----------
---------- ----------- ----------
Income (loss) before income taxes:
U.S................................................... $ 34,684 $ (2,934) $ 2,912
International......................................... 16,068 (12,820) 3,602
---------- ----------- ----------
Consolidated.......................................... $ 50,752 $ (15,754) $ 6,514
---------- ----------- ----------
---------- ----------- ----------
Total assets:
U.S................................................... $ 547,471 $ 429,025 $ 134,972
International......................................... 264,115 272,711 95,630
---------- ----------- ----------
Consolidated.......................................... $ 811,586 $ 701,736 $ 230,602
---------- ----------- ----------
---------- ----------- ----------
Capital expenditures:
U.S................................................... $ 40,667 $ 27,217 $ 7,729
International......................................... 16,702 16,352 4,415
---------- ----------- ----------
Consolidated.......................................... $ 57,369 $ 43,569 $ 12,144
---------- ----------- ----------
---------- ----------- ----------
Depreciation and amortization:
U.S................................................... $ 22,348 $ 15,239 $ 6,528
International......................................... 13,449 11,491 5,095
---------- ----------- ----------
Consolidated.......................................... $ 35,797 $ 26,730 $ 11,623
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
The international segment is comprised primarily of operations in Western
Europe conducted by various European subsidiaries. International net sales
consist of the net sales of these European subsidiaries, sold primarily in
Europe.
U.S. net sales include U.S. exports to non-affiliates of $70,875 in 1997,
$53,333 in 1996 and $18,092 in 1995. Transfers from the Company's U.S.
subsidiaries to its international subsidiaries for the years ended December 31,
1997, 1996 and 1995 were $44,650, $30,390 and $18,590, respectively. Transfers
from the Company's international subsidiaries to its U.S. subsidiaries for the
years ended December 31, 1997, 1996 and 1995 were $22,700, $11,480 and $4,380,
respectively. Transfers between geographic areas are recorded on the basis of
arm's length prices established by the Company.
To compute income (loss) before income taxes, Hexcel allocated
administrative expenses to the international segment of $10,487 in 1997, $9,022
in 1996 and $3,939 in 1995.
77
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 19 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information, including non-cash financing and
investing activities, for the years ended December 31, 1997, 1996 and 1995,
consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Cash paid for:
Interest..................................................... $ 22,300 $ 14,061 $ 8,345
Taxes........................................................ 3,929 8,911 3,864
--------- ---------- ---------
Non-cash items:
Debt issued in connection with Ciba acquisition.............. -- 37,231 --
Common stock issued in connection with Ciba Acquisition...... -- 144,174 --
Conversion of Senior Subordinated Notes...................... 50 -- --
Compensation expense in connection with the issuance of
common stock (see Note 14)................................. -- 3,635 --
</TABLE>
NOTE 20 -- OTHER INCOME, NET
Other income of $2,994 recognized in 1996 is largely attributable to the
receipt of an additional $1,560 of cash in connection with the disposition of
the Chandler, Arizona manufacturing facility and certain related assets in 1994,
and to the receipt of $1,054 in partial settlement of a claim arising from the
sale of certain assets in 1991.
Other income of $791 recognized in 1995 is largely attributable to the
receipt of an additional $600 of cash in connection with the disposition of the
Chandler, Arizona manufacturing facility and certain related assets in 1994.
Hexcel sold its Chandler, Arizona manufacturing facility and certain related
assets, including technology, to Northrop Grumman Corporation ("Northrop") in
1994. Under the terms of the Chandler transaction, Hexcel retained a
royalty-free, non-exclusive license to use the technology sold to Northrop in
non-military applications. In addition, the Company will receive royalties from
Northrop on certain applications of the technology by Northrop. The Company
received net cash proceeds of $1,560 and $27,294 in relation to this sale in
1996 and 1995, respectively.
NOTE 21 -- BANKRUPTCY REORGANIZATION
On January 12, 1995, the U.S. Bankruptcy Court for the Northern District of
California 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
Corporation (a Delaware corporation) 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, among other things: (a) the completion of the first closing under a standby
purchase commitment whereby Mutual Series Fund Inc. ("Mutual Series") purchased
1,946 shares of newly issued Hexcel common stock for
78
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 21 -- BANKRUPTCY REORGANIZATION (CONTINUED)
$9,000 and loaned the Company $41,000 as an advance against the proceeds of a
subscription rights offering for additional shares of Hexcel common stock; and
(b) the reinstatement or payment in full, with interest, of all allowed claims,
including prepetition accounts payable and notes payable. The subscription
rights offering concluded on March 27, 1995, with the issuance of an additional
7,156 shares of Hexcel 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 Hexcel common stock to
Mutual Series, the issuance of an additional 108 shares of Hexcel common stock
to John J. Lee, the Company's Chief Executive Officer, and the retirement of the
remaining balance of the Mutual Series loan.
The Reorganization Plan provided for the reinstatement or payment in full,
with interest, of all allowed claims, including prepetition accounts payable and
notes payable. On February 9, 1995, Hexcel paid $78,144 in prepetition claims
and interest, and reinstated another $60,575 in prepetition liabilities. 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
(see Note 20); (b) the $50,000 in cash received from Mutual Series in connection
with the standby purchase agreement; and (c) borrowings under a $45,000 U.S.
credit facility obtained on February 9, 1995. This $45,000 U.S. credit facility
was subsequently replaced by a secured credit facility on February 29, 1996,
which in turn was replaced by the Revolving Credit Facility on June 27, 1996
(see Notes 2 and 7).
Professional fees and other costs directly related to bankruptcy proceedings
were expensed as incurred, and have been reflected in the accompanying
consolidated statements of operations as "bankruptcy reorganization expenses."
Bankruptcy reorganization expenses 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 related
to the issuance of prepetition debt.
NOTE 22 -- DISCONTINUED OPERATIONS
In October of 1995, the Company sold its U.S. resins operations for net cash
proceeds that approximated the net book value of the assets sold. This sale,
which completed the divestiture of the Company's resins business, has been
accounted for as a discontinued operation in the accompanying consolidated
statements of operations and cash flows for 1995. The net sales of the
discontinued resins business were $6,944 in 1995.
79
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 23 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1997 and 1996,
were:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
Net sales.................................... $ 214,009 $ 241,629 $ 226,611 $ 254,606
Gross margin................................. 46,889 57,818 54,967 62,958
Business acquisition and consolidation
expenses................................... (2,899) (2,818) (15,433) (4,193)
Operating income............................. 16,384 24,516 9,331 26,226
Net income................................... 8,226 15,135 37,948 12,321
Earnings per share
Basic...................................... $ 0.22 $ 0.41 $ 1.03 $ 0.33
Diluted.................................... 0.22 0.38 0.87 0.30
Dividends per share.......................... -- -- -- --
Market price:
High....................................... $ 21.38 $ 20.00 $ 30.25 $ 31.75
Low........................................ 16.00 16.38 18.75 22.25
1996
Net sales.................................... $ 126,418 $ 166,770 $ 189,542 $ 212,521
Gross margin................................. 26,783 35,188 35,813 43,525
Business acquisition and consolidation
expenses................................... (5,211) (29,209) (1,382) (6,568)
Operating income (loss)...................... 4,090 (17,900) 8,789 7,810
Net income (loss)............................ 1,848 (23,667) 346 2,283
Basic and diluted net income (loss) per
share...................................... $ 0.07 $ (0.65) $ 0.01 $ 0.06
Dividends per share.......................... -- -- -- --
Market price:
High....................................... $ 13.13 $ 16.00 $ 20.00 $ 19.88
Low........................................ 10.63 11.50 12.75 15.75
</TABLE>
For the nine months ended September 30, 1997 and for the year ended December
31, 1996, except for the $39,000 reversal of the U.S. tax valuation allowance
reserve on September 30, 1997, there was no net federal tax provision recorded
on the Company's U.S. income (loss). Third quarter 1997 results include both the
$39,000 reversal of the U.S. tax valuation allowance reserve and an additional
charge of $13,000 to business acquisition and consolidation expenses in
connection with the Company's acquisition of the Fiberite assets. In addition,
first quarter 1996 results include other income of $2,697 (see Note 20).
NOTE 24 -- SUBSEQUENT EVENTS (UNAUDITED)
REVOLVING CREDIT FACILITY
On March 5, 1998, the Company amended and restated its Revolving Credit
Facility (the "Amended Facility"). The Amended Facility provides for borrowing
capacity of up to $355,000 and extends the expiration date to March 2003.
Depending on certain predetermined ratios and other conditions, interest
80
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 24 -- SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
on outstanding borrowings under the Amended Facility is computed at an annual
rate ranging from 0.313 to 1.125% in excess of the applicable London interbank
rate or, at the option of Hexcel, at the base rate of the administrative agent
for the lenders. In addition, the Amended Facility is subject to a commitment
fee ranging from approximately 0.188 to 0.375% per annum of the total facility.
The Amended Facility is secured by a pledge of stock of certain of Hexcel's
subsidiaries. In addition, the Company continues to be subject to various
financial covenants and restrictions, and is generally prohibited from paying
dividends or redeeming capital stock.
JOINT VENTURES
In January 1998, the Company reached an agreement in principle with Boeing
and Aviation Industries of China to form a joint venture, BHA Aero Composite
Parts Co., Ltd., to manufacture composite parts for secondary structures and
interior applications on commercial aircraft. This joint venture will be located
in Tianjin, China. In February 1998, the Company signed an agreement with
Boeing, Sime Darby Berhad and Malaysia Helicopter Services to form another joint
venture, Asian Composite Manufacturing Sdn. Bhd., to manufacture composite parts
for secondary structures for commercial aircraft. This joint venture will be
located in Alor Setar, Malaysia. Products manufactured by both joint ventures
will be shipped to the Company's Kent, Washington facility for final assembly,
inspection and shipment to Boeing as well as other customers worldwide. It is
anticipated that the first parts will be delivered to customers in 2000. The
Company's total estimated financial commitment to both of these joint ventures
will be approximately $31,000, which is expected to be made in increments
through 2000. However, completion of these projects and related investments
remain subject to certain significant conditions, including U.S. and foreign
government approvals.
STOCK-BASED INCENTIVE PLAN
On February 5, 1998, the Company adopted the 1998 Broad Based Stock
Incentive Plan (the "Broad Based Plan"), which authorizes the use of Hexcel
common stock for providing a variety of stock-based incentive awards to eligible
employees and consultants (but not to directors, officers and related
consultants). The Broad Based Plan provides for grants of stock options, stock
appreciation rights, restricted stock and restricted stock units, and other
stock-based awards. The aggregate number of shares of Hexcel common stock
available under the Broad Based Plan is 500.
81
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-2.1(D)
<SEQUENCE>2
<DESCRIPTION>EXHIBIT 2.1(D)
<TEXT>
<PAGE>
EXHIBIT 2.1(d)
CIBA SPECIALTY CHEMICALS HOLDING INC.
CH 4002
BASLE, SWITZERLAND
February 21, 1997
LETTER AGREEMENT
Dear Sirs:
We refer to the Strategic Alliance Agreement dated as of September
29, 1995 among Ciba-Geigy Limited ("Ciba"), Ciba-Geigy corporation ("CGC")
and Hexcel Corporation ("Hexcel"), as amended (the "SAA"), the Ancillary
Agreements (as defined in the SAA) and the Retention Agreement dated as of
June 27, 1996, between Hexcel and Ciba (the "Retention Agreement"), and
collectively with the SAA and the Ancillary Agreement, the "Agreements").
Capitalized terms used in this Letter Agreement but not defined herein shall
have the meanings set forth in the SAA.
Ciba and Sandoz Limited ("Sandoz") effected a business combination
on December 20, 1996 (the "Combination"), forming Novartis Inc., a Swiss
corporation ("Novartis"). Ciba previously formed a new subsidiary, Ciba
Specialty Chemicals Holding Inc. ("SpinCo"), the holding company for
Novartis' (formerly Ciba's) specialty chemicals businesses (including its
direct or indirect interest in Hexcel Common and Senior Subordinated Debt and
its rights and obligations under the Agreements) and plans to distribute the
stock of SpinCo on a pro rata basis to the stockholders of Novartis (the
"Spin-off").
In connection with the Spin-off:
1. Hexcel hereby consents to the consummation of the Spin-off
and, in connection therewith, to the assignment to and the assumption by
SpinCo and any of its wholly-owned Subsidiaries (by operation of law or
otherwise in a manner reasonably satisfactory to Hexcel) of the Agreements.
Such consent is being granted by Hexcel subject to the following: (a) the
consummation of the Spin-off and the related assignments and assumptions will
have no adverse consequences to Hexcel under the revolving credit facility as
in effect on the date hereof and entered into by Hexcel and certain of its
Subsidiaries in connection with Hexcel's acquisition of Hercules' Composite
Products Division (the "Credit Facility"), (b) SpinCo will pay (or reimburse
Hexcel for) any and all out-of-pocket fees and/or expenses incurred in
connection with obtaining any required consents to or waivers regarding the
Spin-off and the related and assumptions under the Credit Facility and (c)
immediately after the Spin-off, SpinCo will contain Ciba's former Additives,
Pigments, Polymers, Textile Dyes and Chemicals Divisions. SpinCo
<PAGE>
acknowledges that such consent shall be null and void if any of the foregoing
conditions are not satisfied.
2. As a result of the Combination and the Spin-off, the
Agreements shall be deemed amended so that all references therein to Ciba, a
Subsidiary of Ciba or the term "Ciba" shall, subject to the effectiveness of
the foregoing consents, effective upon consummation of the Spin-off, be
references to SpinCo, a Subsidiary of SpinCo or the name of SpinCo, as the
case may be.
3. Subject to the effectiveness of the foregoing consents, (a)
Hexcel waives any violations of the Agreements that may result solely from
the consummation of the Spin-off, (b) Hexcel confirms that, after giving
effect to this Letter Agreement, consummation of the Spin-off will not
conflict with or give rise to any right of termination, cancellation or
acceleration by Hexcel or any of its Subsidiaries, or the loss by Ciba,
Novartis, SpinCo or any of their respective Subsidiaries of any right (other
than by virtue of having assigned such right to and in favor of SpinCo or any
of its Subsidiaries, as the case may be, as contemplated by this Letter
Agreement), under the Agreements and (c) upon consummation of the Spin-off,
Hexcel releases Novartis and its Subsidiaries from any and all obligations
under the Agreements, whether or not existing on the date of this Letter
Agreement.
4. For purposes of paragraph 1, adverse consequences shall mean
(a) any and all fees, costs, expenses and other adverse consequences
(including any increase in interest rates) under the Credit Facility that
result solely from the Spin-off or a Default or Event of Default under
Sections 15.1(m), (n), (o) or (p) of the Credit Facility resulting solely
from the Spin-off (a "Spin-off Event or Default"), if at the time of the
Spin-off there are no other Defaults or Events of Defaults, as defined in the
Credit Facility, and (b) in the event that any other Default, Event of
Default or other adverse consequence occurs under the Credit Facility (other
than a Spin-off Event of Default), only those fees, costs, expenses and other
adverse consequences (including any increase in interest rates) that the
lenders under the Credit Facility (after having first met in good faith
jointly with SpinCo and Hexcel representatives) specifically identify in
writing as attributable solely to the Spin-off and/or a Spin-off Event of
Default. The fees, costs and expenses required to be paid or reimbursed by
SpinCo or other adverse consequences for which SpinCo is responsible under
this Letter Agreement shall be limited to solely to those fees, costs,
expenses and other adverse consequences as described in this paragraph 4, and
upon (i) payment of all such fees, costs and expenses by SpinCo or (ii)
resolution of each other adverse consequence by SpinCo in a manner reasonably
satisfactory to Hexcel no further action shall be required and no such
adverse consequence shall be deemed to have occurred hereunder.
5. SpinCo agrees to provide reasonable prior notice to Hexcel as
to the timing of the spin-off and, SpinCo and Hexcel agree to cooperate with
each other in negotiating jointly in good faith with the lenders to obtain
any necessary consents or waivers, reduce or obviate any fees, costs and
expenses and minimize and otherwise resolve any other adverse consequences
for which SpinCo is responsible under paragraph 4 of this Letter Agreement.
Notwithstanding anything herein to the contrary, SpinCo shall
retain without prejudice its right to assert that any consent or waiver by
Hexcel referred to in this Letter
<PAGE>
Agreement is not necessary in order to consummate the Spin-off without
affecting any party's rights under any particular Agreement, and Hexcel shall
retain without prejudice its right to assert that any such consent or waiver
is necessary.
The provisions of this Letter Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, regardless of the laws
that might otherwise govern under applicable principles of conflicts of law.
As used herein, the term "Including" means including, without limitation.
Except as expressly set forth herein, each of the Agreements shall remain in
full force and effect.
If the foregoing is in accordance with your understanding of our
agreement, please sign where indicated below and return a copy of the same to
the undersigned, whereupon this Letter Agreement shall represent a binding
agreement between SpinCo and Hexcel
Very truly Yours,
CIBA SPECIALTY CHEMICALS
HOLDING INC.
by
-------------------------------------
Name: B. Kamm Dr. Peter Rudolf
Title: Head Senior Division Counsel
Affiliate Financing
The foregoing is hereby confirmed and accepted as of the date first above
written:
HEXCEL CORPORATION
by:
-----------------------------
Name: S.C. Forsyth
Title: Senior Vice President
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2(A)
<SEQUENCE>3
<DESCRIPTION>EXHIBIT 4.2(A)
<TEXT>
<PAGE>
EXHIBIT 4.2(a)
FIRST SUPPLEMENTAL INDENTURE dated as of June 27, 1996
(this "Supplemental Indenture"), to the Indenture dated as of
February 29, 1996 (the "Indenture"), between HEXCEL CORPORATION,
a Delaware corporation (the "Company"), and FIRST TRUST OF
CALIFORNIA, NATIONAL ASSOCIATION, a national banking association,
as trustee (the "Trustee"). Capitalized terms used but not
defined in this Supplemental Indenture shall have the meanings
ascribed to them in the Indenture.
WHEREAS, the Company desires to amend certain provisions of the
Indenture, among other things, in respect of the Credit Agreement (as defined
in Section 1(b) below) which is being entered into concurrently with this
Supplemental Indenture;
WHEREAS, the Company desires to issue up to $115 million of its
Convertible Subordinated Notes due 2003;
WHEREAS, Section 9.02 of the Indenture authorizes the Company and
the Trustee to amend certain provisions of the Indenture with the consent of
the Securityholders;
WHEREAS, the Company has not issued any Securities under the
Indenture as of the date of this Supplemental Indenture;
WHEREAS, pursuant to the Strategic Alliance Agreement, dated as of
September 29, 1995, and as subsequently amended (the "Strategic Alliance
Agreement"), among Ciba-Geigy Limited ("Ciba"), Ciba-Geigy Corporation and
the Company, all the Securities to be issued under the Indenture shall be
issued to Ciba and its Subsidiaries (as defined in the Strategic Alliance
Agreement); and
WHEREAS, Ciba and the Company have agreed to modify the terms of
the Securities as set forth in this Supplemental Indenture, and accordingly,
Ciba consents to this Supplemental Indenture.
NOW, THEREFORE, the Company and the Trustee hereby agree for the
equal and ratable benefit of the Securityholders as follows:
<PAGE>
2
SECTION 1. AMENDMENT OF INDENTURE. (a) The definition of "Ciba"
contained in Article I of the Indenture is hereby amended to read as follows:
""CIBA" means Ciba-Geigy Limited, a corporation organized
under the laws of Switzerland, together with its successors and
assigns, including, upon consummation of the merger or
combination of Ciba-Geigy Limited and Sandoz Limited, Novartis
Limited."
(b) The definition of "Credit Agreement" contained in Article I of
the Indenture is hereby amended to read as follows:
""CREDIT AGREEMENT" means, collectively, the Credit Agreement
dated as of June 27, 1996, among the Company, certain of its
Subsidiaries, the institutions from time to time party thereto as
Lenders, Citibank, N.A. (or any successor thereto) in its
separate capacity as collateral agent for the Lenders and Credit
Suisse (or any successor thereto) in its separate capacity as
administrative agent for the Lenders, as the same may from time
to time be amended, renewed, supplemented or otherwise modified
at the option of the parties thereto, and any other agreement
pursuant to which any of the Indebtedness, commitments,
obligations, costs, expenses, fees, reimbursements and other
indemnities payable or owing thereunder may be replaced or
refinanced, in any such event having an aggregate principal
amount and availability not in excess of $310,000,000 LESS the
amount of any Indebtedness Incurred by Subsidiaries of the
Company pursuant to Section 13.1(j) of the Credit Agreement (or
any successor provision) PLUS amounts otherwise permitted
pursuant to Section 4.03(b)(i) of this Indenture."
<PAGE>
3
(c) The definition of "Specified Properties" contained in Article
I of the Indenture is hereby amended to read as follows:
""SPECIFIED PROPERTIES" shall mean (i) the Company's
manufacturing plants located in (a) Lancaster, Ohio, (b)
Welkenraedt, Belgium and (c) Graham, Texas, (ii) the
manufacturing plants of Hexcel Omega Corporation located in
Anaheim, California, (iii) the outstanding capital stock of
Hexcel Omega Corporation and (iv) the outstanding capital stock
and intercompany obligations of Hercules Aerospace Espana, S.A.,
a Spanish corporation, to the extent such properties are sold
pursuant to the letter agreement dated June 27, 1996, between the
Company and Hercules Incorporated."
(d) Section 4.03(b)(i) of the Indenture is hereby amended to read
as follows:
"(i) Indebtedness under the Credit Agreement and any other
loan or other agreement in an aggregate principal amount
outstanding at any time not to exceed the sum of (A) the
outstanding Indebtedness under the Credit Agreement and the
unused commitments thereunder as of the date the Credit Agreement
first becomes effective and (B) $12,500,000."
(e) Section 4.03(b)(vi) of the Indenture is hereby amended to read
as follows:
"(vi) Refinancing Indebtedness Incurred in respect of
Indebtedness Incurred pursuant to clause (iv) or (v) above or
Section 13.1(j) of the Credit Agreement as in effect on the date
the Credit Agreement first becomes effective (or any successor
provision having the same terms)."
(f) Section 4.03(b)(x) of the Indenture is hereby amended to read
as follows:
"(x)(A) Guarantees of any Subsidiary in respect of
obligations of the Company, (B) Guarantees of the Company in
respect of Indebtedness of any Subsidiary Incurred pursuant to
Section 13.1(j) of the Credit Agreement as in effect on the date
the Credit Agreement first becomes effective (or any successor
provision having the same terms) and (C) Guarantees of any
partnership or
<PAGE>
4
joint venture (other than Existing Joint Ventures) to the extent
that the Incurrence of such obligations shall not cause to
Maximum Partnership/Joint Venture Amount to exceed $15,000,000 at
any time; PROVIDED that no such Investment may be made as long as
any Default or Event of Default has occurred and is continuing or
would occur as a result of such Investment;"
(g) Section 4.03(b) of the Indenture is hereby amended by
inserting the following new clauses (xv) and (xvi) at the end thereof:
"(xv) Indebtedness of the Company in respect of unsecured
standby and commercial letters of credit issued by Lenders under
the Credit Agreement in an aggregate face amount (including,
without limitation, any reimbursement obligations owing in
respect thereof) not to exceed $10,000,000; or
(xvi) Indebtedness represented by the Company's Convertible
Subordinated Notes due 2003 in an aggregate principal amount not
to exceed $115 million."
(h) The face of Exhibit A to the Indenture is hereby amended to
state that the principal amount of the Securities is payable on March 1, 2003.
(i) The second sentence of Section 1 of Exhibit A to the Indenture
is hereby amended to read as follows:
"On the third anniversary of the date of the Closing (as
defined in the Strategic Alliance Agreement dated as of September
29, 1995, among Ciba-Geigy Limited, Ciba-Geigy Corporation and
the Company), the rate of interest then borne by the Securities
shall increase to 10.5%, and on each subsequent anniversary of
the Closing the rate of interest then borne by the Securities
shall increase by an additional 0.5%."
(j) Exhibit B to the Indenture is hereby amended and restated in
the form of Exhibit B hereto.
SECTION 2. CONFIRMATION. Except as hereby expressly amended, the
Indenture is in all respects ratified and confirmed and all the terms,
conditions and provisions thereof shall remain in full force and effect.
SECTION 3. EFFECTIVENESS. This Supplemental Indenture shall take
effect immediately upon its execution and delivery by the Company, the
Trustee and Ciba.
<PAGE>
5
SECTION 4. COUNTERPARTS. This Supplemental Indenture may be
executed in any number of counterparts, each of which, when so executed,
shall be deemed to be an original, but all of which shall together constitute
but one contract.
SECTION 5. EXECUTION. Delivery of an executed counterpart of a
signature page by facsimile transmission shall be effective as delivery of a
manually executed counterpart of this Supplemental Indenture.
SECTION 6. APPLICABLE LAW. THIS SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
IN WITNESS WHEREOF, the parties hereto have caused this
Supplemental Indenture to be duly executed by their duly authorized officers,
all as of the date and year first above written.
HEXCEL CORPORATION
by
---------------------------------
Name:
Title:
FIRST TRUST OF CALIFORNIA, NATIONAL
ASSOCIATION
by
-----------------------------------
Name:
Title:
<PAGE>
6
CONSENTED AND AGREED TO BY:
CIBA-GEIGY LIMITED
by
----------------------------
Name:
Title:
by
----------------------------
Name:
Title:
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.2(B)
<SEQUENCE>4
<DESCRIPTION>EXHIBIT 4.2(B)
<TEXT>
<PAGE>
EXHIBIT 4.2(b)
SECOND SUPPLEMENTAL INDENTURE dated as of
March 3, 1998 (this "Supplemental Indenture"), to the Indenture
dated as of February 29, 1996 (the "Indenture"), between HEXCEL
CORPORATION, a Delaware corporation (the "Company"), and FIRST
TRUST OF CALIFORNIA, NATIONAL ASSOCIATION, a national banking
association, as trustee (the "Trustee"), as previously
supplemented. Capitalized terms used but not defined in this
Supplemental Indenture shall have the meanings ascribed to them
in the Indenture.
WHEREAS, the Company desires to amend certain provisions of the
Indenture, among other things, in respect of the Credit Agreement (as defined
in Section 1(a) below) which is being amended and restated concurrently with
this Supplemental Indenture;
WHEREAS, Section 9.02 of the Indenture authorizes the Company and the
Trustee to amend certain provisions of the Indenture with the consent of the
Securityholders; and
WHEREAS, Ciba Specialty Chemical Holding Inc. ("Ciba"), as successor to
Ciba Geigy Limited, and the Company have agreed to modify the terms of the
Securities as set forth in this Supplemental Indenture, and accordingly, Ciba
consents to this Supplemental Indenture.
NOW, THEREFORE, the Company and the Trustee hereby agree for the equal
and ratable benefit of the Securityholders as follows:
SECTION 1. AMENDMENT OF INDENTURE. (a) The definition of "Ciba"
contained in Article I of the Indenture is hereby amended to read as follows:
"CIBA" means Ciba Specialty Chemical Holding Inc., a corporation organized
under the laws of Switzerland, together with its successors and assigns."
(b) The definition of "Credit Agreement" contained in Article I of the
Indenture is hereby amended to read as follows:
<PAGE>
"CREDIT AGREEMENT" means, collectively, the Credit Agreement
dated as of June 27, 1996, among the Company, certain of its
Subsidiaries, the institutions from time to time party thereto as
Lenders, Citibank, N.A. (or any successor thereto) in its
separate capacity as collateral agent for the Lenders and Credit
Suisse (or any successor thereto) in its separate capacity as
administrative agent for the Lenders, including any related
notes, letters of credit, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and
in each case as the same may from time to time be amended,
renewed, replaced, refunded, supplemented, or otherwise modified
at the option of the parties thereto (including, without
limitation, any extension of maturity thereof or increase in
commitments or principal amounts eligible to be borrowed
thereunder), and any other agreement pursuant to which any of the
Indebtedness, commitments, obligations, costs, expenses, fees,
reimbursements and other indemnities payable or owing thereunder
may be replaced or refinanced and the amount of any Indebtedness
incurred by Subsidiaries of the Company pursuant to Section
13.1(j) of the Credit Agreement (or any successor provision)."
(c) In Sections 4.06(a) and (b) the references to "$10 million" are
hereby deleted and the phrase "$20 million" inserted in lieu thereof.
SECTION 2. CONFIRMATION. Except as hereby expressly amended, the
Indenture is in all respects ratified and confirmed and all the terms,
conditions and provisions thereof shall remain in full force and effect.
SECTION 3. EFFECTIVENESS. This Supplemental Indenture shall take
effect immediately up on its execution and delivery by the Company, the
Trustee and Ciba.
SECTION 4. COUNTERPARTS. This Supplemental Indenture may be
executed in any number of counterparts, each of which, when so executed,
shall be deemed to be an original, but all of which shall together constitute
but one contract.
SECTION 5. EXECUTION. Delivery of an executed counterpart of a
signature page by facsimile transmission shall be effective as delivery of a
manually executed counterpart of this Supplemental Indenture.
2
<PAGE>
SECTION 6. APPLICABLE LAW. THIS SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed by their duly authorized officers, all as of the
date and year first above.
HEXCEL CORPORATION
by__________________________
Name:
Title:
FIRST TRUST OF CALIFORNIA,
NATIONAL ASSOCIATION
by___________________________
Name:
Title:
CONSENTED AND AGREED TO BY:
CIBA SPECIALTY CHEMICAL HOLDING INC.
by______________________________
Name:
Title:
by______________________________
Name:
Title:
4
<PAGE>
OFFICERS' CERTIFICATE
The undersigned hereby certify that they are duly elected officers of
Hexcel Corporation (the "Company"), and in such capacities they state the
following with respect to the Second Supplemental Indenture, dated as of
March ____, 1998 (the "Supplemental Indenture"), between the Company and
First Trust of California, National Association, as trustee (the "Trustees"),
which supplements the Indenture, dated as of February 29, 1996 as previously
supplemented (the "Indenture"), between the Company and the Trustee with
respect to the Increasing Rate Senior Subordinated Notes due 2003 (the
"Notes") of the Company. Ciba Specialty Chemical Holding Inc. has consented
to the Supplemental Indenture.
Based upon the foregoing and the investigation referred to below, the
undersigned certify that:
1. The undersigned have read the Supplemental Indenture and Section
9.02 of the Indenture.
2. The foregoing investigation was, in the opinion of the undersigned,
sufficient to enable to undersigned to express the opinion whether the
provisions of Section 9.02 of the Indenture have been complied with; and
3. The undersigned are of the opinion that the Supplemental Indenture
is permitted by Section 9.02 of the indenture.
IN WITNESS WHEREOF, the undersigned have executed this Officer's
Certificate as of the ____ day of March, 1998.
__________________________
Name:
Title:
__________________________
Name:
Title:
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.3
<SEQUENCE>5
<DESCRIPTION>EXHIBIT 4.3
<TEXT>
<PAGE>
EXHIBIT 4.3
HEXCEL CORPORATION
AND
THE BANK OF CALIFORNIA, N.A.
Trustee
Indenture
Dated as of August 1, 1986
7% Convertible Subordinated Debentures due 2011
<PAGE>
RECONCILIATION AND TIE SHEET*
BETWEEN
PROVISIONS OF THE TRUST INDENTURE ACT OF 1939
AND
INDENTURE, DATED AS OF AUGUST 1, 1986
BETWEEN
HEXCEL CORPORATION
AND
THE BANK OF CALIFORNIA, N.A.
<TABLE>
<CAPTION>
Section Section of
of Act Indenture
----------
<S> <C>
310(a)(1) 9.09
310(a)(2) 9.09
310(a)(3) Inapplicable
310(a)(4) Inapplicable
310(b) 9.08,9.10
310(c) Inapplicable
311(a) 9.13(a), 9.13(c)
311(b) 9.13(b), 9.13(c)
311(c) Inapplicable
312(a) 7.01, 7.02(a)
312(b) 7.02(b)
312(c) 7.02(c)
313(a) 7.4(a)
313(b)(1) Inapplicable
313(b)(2) 7.04(b)
313(c) 7.04(c)
313(d) 7.04(d)
314(a)(1) 7.03(a)
314(a)(2) 7.03(b)
314(a)(3) 7.03(c)
314(b) Inapplicable
314(c)(1) 16.05
314(c)(2) 16.05
314(c)(3) Inapplicable
314(d) Inapplicable
314(e) 16.05
314(f) Omitted
315(a) 9.01
315(b) 8.07
315(c) 9.01
315(d) 9.01
315(e) 8.08
316(a)(1) 8.06,10.04
316(a)(2) Omitted
316(b) 8.04
317(a) 8.02
317(b) 6.04(a)
318(a) 16.07
</TABLE>
* This Reconciliation and Tie Sheet is not a part of the Indenture.
<PAGE>
i
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
Page
----
<S> <C>
PARTIES 1
RECITALS:
Purpose of Indenture 1
Form of Face of Debenture 1
Form of Reverse of Debenture 3
Form of Trustee's Certificate of Authentication 8
Form of Conversion Notice 9
Compliance with Legal Requirements 10
Purpose of and Consideration for Indenture 10
</TABLE>
ARTICLE ONE
DEFINITIONS
<TABLE>
<S> <C> <C>
SECTION 1.01. Certain Terms Defined 10
Authenticating Agent 10
Bankruptcy Code 10
Board of Directors 10
Business Day 11
Common Stock 11
Company 11
Conversion Price 11
Date of Conversion 11
Debenture or Debentures; outstanding 11
Debentureholder; registered bolder 12
Event of Default 12
Indenture 12
Officers' Certificate 12
Opinion of Counsel 12
Responsible Officer 12
Senior Indebtedness 12
Subsidiary 13
Trustee; Principal Office 13
Trust Indenture Act of 1939 13
SECTION 1.02. References Are to Indenture 13
</TABLE>
* This Table of Contents is not part of the Indenture.
<PAGE>
ii
ARTICLE TWO
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND
EXCHANGE OF DEBENTURES
<TABLE>
<CAPTION>
Page
- ----
<S> <C> <C>
13 SECTION 2.01. Designation, Amount, Authentication and Delivery of
Debentures
14 SECTION 2.02. Form of Debentures and Trustee's Certificate
14 SECTION 2.03. Date of Debentures and Denominations
15 SECTION 2.04. Execution of Debentures
16 SECTION 2.05. Exchange of Debentures
17 SECTION 2.06. Temporary Debentures
17 SECTION 2.07. Mutilated, Destroyed, Lost or Stolen Debentures
18 SECTION 2.08. Cancellation of Surrendered Debentures
</TABLE>
ARTICLE THREE
SUBORDINATION OF DEBENTURES
<TABLE>
<S> <C> <C>
19 SECTION 3.01. Agreement to Subordinate
19 SECTION 3.02. Distribution on Dissolution, Liquidation and
Reorganization; Subrogation of Debentures
22 SECTION 3.03. Payments on Debentures Prohibited During Event of
Default Under Senior Indebtedness
23 SECTION 3.05. Authorization of Debentureholders to Trustee to Effect
Subordination
23 SECTION 3.06. Notices to Trustee
</TABLE>
<PAGE>
ARTICLE FOUR
CONVERSION OF DEBENTURES
<TABLE>
<S> <C> <C>
23 SECTION 4.01. Conversion Privilege
23 SECTION 4.02. Manner of Exercise of Conversion Privilege
24 SECTION 4.03. Cash Adjustment Upon Conversion
25 SECTION 4.04. Initial Conversion Price
25 SECTION 4.05. Adjustment of Conversion Price . .
28 SECTION 4.06. Effect of Reclassifications, Consolidations, Mergers
or Sales on Conversion Privilege
</TABLE>
<PAGE>
iii
<TABLE>
<CAPTION>
Page
- ----
<S> <C> <C>
29 SECTION 4.07. Taxes on Conversion
29 SECTION 4.08. Company to Reserve Stock
30 SECTION 4.09. Disclaimer by Trustee of Responsibility for Certain
Matters
30 SECTION 4.10. Company to Give Notice of Certain Events
</TABLE>
ARTICLE FIVE
REDEMPTION OF DEBENTURES-SINKING FUND
<TABLE>
<S> <C> <C>
31 SECTION 5.01. Redemption Prices
31 SECTION 5.02 Notice of Redemption; Selection of Debentures
33 SECTION 5.03. When Debentures Called for Redemption Become Due and
Payable
33 SECTION 5.04. Sinking Fund
35 SECTION 5.05. Application of Sinking Fund Payments
36 SECTION 5.06. Redemption in Event of Default
36 SECTION 5.07 Manner of Redeeming Debentures
37 SECTION 5.08. Cancellation of Redeemed Debentures
37 SECTION 5.09. Conversion Arrangements on Call for Redemption
</TABLE>
ARTICLE SIX
PARTICULAR COVENANTS OF THE COMPANY
<TABLE>
<S> <C> <C>
37 SECTION 6.01. Payment of Principal of (and Premium, if Any) and
Interest on Debentures
37 SECTION 6.02. Maintenance of Office or Agency for Registration of
Transfer, Conversion, Exchange and Payment of
Debentures
<PAGE>
38 SECTION 6.03. Appointment to Fill a Vacancy in the Office of Trustee
38 SECTION 6.04. Provision as to Paying Agent
39 SECTION 6.05. Maintenance of Corporate Existence
39 SECTION 6.06. Further Assurance
40 SECTION 6.07. Officers' Certificates as to Default
</TABLE>
<PAGE>
iv
ARTICLE SEVEN
DEBENTUREHOLDERS' LISTS AND REPORTS BY
THE COMPANY AND THE TRUSTEE
<TABLE>
<S> <C> <C>
40 SECTION 7.01. Company to Furnish Trustee Information as to Names and
Addresses of Debentureholders
41 SECTION 7.02. Preservation and Disclosure of Lists
42 SECTION 7.03. Reports by the Company
43 SECTION 7.04. Reports by the Trustee
</TABLE>
ARTICLE EIGHT
REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS
ON EVENT OF DEFAULT
<TABLE>
<S> <C> <C>
44 SECTION 8.01. Events of Default Defined
47 SECTION 8.02. Payment of Debentures on Default; Suit Therefor
49 SECTION 8.03. Application of Moneys Collected by Trustee
50 SECTION 8.04. Limitation on Suits by Holders of Debentures
51 SECTION 8.05. Proceedings by Trustee; Remedies Cumulative and
Continuing
51 SECTION 8.06. Rights of Holders of Majority in Principal Amount of
Debentures to Direct Trustee and to Waive Defaults
52 SECTION 8.07. Trustee to Give Notice of Defaults Known to It, But
May Withhold in Certain Circumstances
52 SECTION 8.08. Requirement of an Undertaking to Pay Costs in Certain
Suits Under the Indenture or Against the Trustee
53 SECTION 8.09. Enforcement of Rights of Conversion by Debentureholders
</TABLE>
ARTICLE NINE
CONCERNING THE TRUSTEE
<PAGE>
<TABLE>
<S> <C> <C>
SECTION 9.01. Duties and Responsibilities of Trustee
53
SECTION 9.02. Reliance on Documents, Opinions, etc
54
SECTION 9.03. No Responsibility for Recitals, etc
56
SECTION 9.04. Trustee, Paying Agent, Conversion Agent or Debenture
Registrar May Own Debentures
56
SECTION 9.05. Moneys Received by Trustee to be Held in Trust Without
Interest
56
</TABLE>
<PAGE>
v
<TABLE>
<CAPTION>
Page
- ----
<S> <C> <C>
57 SECTION 9.06. Compensation and Expenses of Trustee
57 SECTION 9.07. Right of Trustee to Rely on Officers'
Certificate Where No
Other Evidence Specifically Prescribed
57 SECTION 9.08. Conflicting Interest of Trustee
63 SECTION 9.09. Requirements for Eligibility of Trustee
64 SECTION 9.10. Resignation or Removal of Trustee
65 SECTION 9.11. Acceptance by Successor to Trustee; Notice of
Succession of a Trustee
66 SECTION 9.12. Successor to Trustee by Merger, Consolidation or
Succession to Business
66 SECTION 9.13. Limitations on Rights of Trustee as a Creditor
71 SECTION 9.14 Authenticating Agent
</TABLE>
ARTICLE TEN
CONCERNING THE DEBENTUREHOLDERS
<TABLE>
<S> <C> <C>
72 SECTION 10.01. Evidence of Action by Debentureholders
72 SECTION 10.02. Proof of Execution of Instruments and of Holding of
Debentures
73 SECTION 10.03. Who May Be Deemed Owners of Debentures
73 SECTION 10.04. Debentures Owned by Company or Controlled or
Controlling Persons Disregarded for Certain Purposes
74 SECTION 10.05. Record Date for Action by Debentureholders
74 SECTION 10.06. Instruments Executed by Debentureholders Bind
Future Holders
</TABLE>
<PAGE>
ARTICLE ELEVEN
DEBENTUREHOLDERS' MEETINGS
<TABLE>
<S> <C> <C>
75 SECTION 11.01. Purposes for Which Meetings May be Called
75 SECTION 11.02. Manner of Calling Meetings; Record Date
76 SECTION 11.03. Call of Meeting by Company or Debentureholders
76 SECTION 11.04. Who May Attend and Vote at Meetings
76 SECTION 11.05. Regulations
77 SECTION 11.06. Manner of Voting at Meetings and Record to be Kept
78 SECTION 11.07. Exercise of Rights of Trustee and Debentureholders
Not to be Hindered or Delayed
</TABLE>
<PAGE>
vi
ARTICLE TWELVE
SUPPLEMENTAL INDENTURES
<TABLE>
<CAPTION>
Page
- ----
<S> <C> <C>
78 SECTION 12.O1. Purposes for Which Supplemental Indentures May be
Entered into Without Consent of Debentureholders
80 SECTION 12.02. Modification of Indenture with Consent of Holders
of 66 2/3% in Principal Amount of Debentures
81 SECTION 12.03. Effect of Supplemental Indentures
81 SECTION 12.04. Debentures May Bear Notation of Changes by
Supplemental Indentures
81 SECTION 12.05. Opinion of Counsel
</TABLE>
ARTICLE THIRTEEN
CONSOLIDATION, MERGER AND SALE
<TABLE>
<S> <C> <C>
82 SECTION 13.01. Company May Consolidate, etc., on Certain Terms
83 SECTION 13.02. Successor Corporation to be Substituted
83 SECTION 13.03. Opinion of Counsel
</TABLE>
ARTICLE FOURTEEN
SATISFACTION AND DISCHARGE OF INDENTURES;
UNCLAIMED MONEYS
<TABLE>
<S> <C> <C>
84 SECTION 14.01. Satisfaction and Discharge of Indenture
84 SECTION 14.02. Application by Trustee of Funds Deposited for
Payment of Debentures
84 SECTION 14.03. Repayment of Moneys Held by Paying Agent
<PAGE>
85 SECTION 14.04. Repayment of Moneys Held by Trustee
</TABLE>
ARTICLE FIFTEEN
IMMUNITY OF INCORPORATORS, STOCKHOLDER%
OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C>
85 SECTION 15.01. Incorporators, Stockholders, Officers and Directors
of Company Exempt from Individual Liability
</TABLE>
<PAGE>
vii
ARTICLE SIXTEEN
MISCELLANEOUS PROVISIONS
<TABLE>
<CAPTION>
Page
- ----
<S> <C> <C>
86 SECTION 16.01. Successors and Assigns of Company Bound by
Indenture
86 SECTION 16.02. Acts of Board, Committee or Officer of Successor
Corporation Valid
86 SECTION 16.03. Required Notices or Demands May be Served by Mail;
Waiver
86 SECTION 16.04. Indenture and Debentures to be Construed in
Accordance with the Laws of the State of California
87 SECTION 16.05. Evidence of Compliance with Conditions Precedent
88 SECTION 16.06. Payments Due on Saturdays, Sundays and Holidays
88 SECTION 16.07. Provisions Required by Trust Indenture Act of 1939
to Control
88 SECTION 16.08. Provisions of the Indenture and Debentures
for the Sole Benefit of the Parties and
the Debentureholders
89 SECTION 16.09. Indenture May be Executed in Counterparts;
Acceptance by Trustee
89 SECTION 16.10. Article and Section Headings
89 SECTION 16.11. Severability
89 TESTIMONIUM
89 SIGNATURES AND SEALS
90 ACKNOWLEDGEMENTS
</TABLE>
<PAGE>
THIS INDENTURE, dated as of the first day of August, 1986, between HEXCEL
CORPORATION, a corporation duly organized and existing under the laws of the
State of Delaware (hereinafter sometimes referred to as the "Company"), party of
the first part, and THE BANK OF CALIFORNIA, N.A., a national banking association
incorporated under the laws of the United States (hereinafter sometimes referred
to as the "Trustee"), party of the second part,
WITNESSETH:
WHEREAS, for its lawful corporate purposes, the Company has duly authorized
an issue of its 7% Convertible Subordinated Debentures due 2011 (hereinafter
referred to as the "Debentures"), for an aggregate principal amount of up to
$35,000,000 to be issued as registered Debentures without coupons, to be
authenticated by the Trustee, to be payable August 1, 2011, to be redeemable as
hereinafter provided, and to be convertible into Common Stock of the Company as
hereinafter provided; and, to provide the terms and conditions upon which the
Debentures are to be authenticated, issued and delivered, the Company has duly
authorized the execution of this Indenture; and
WHEREAS, the Debentures and the Trustee's certificate of authentication to
be borne by the Debentures are to be substantially in the following forms,
respectively:
[FORM OF FACE OF DEBENTURE)
No. $ .....
HEXCEL CORPORATION
7% CONVERTIBLE SUBORDINATED DEBENTURE DUE 2011
HEXCEL CORPORATION, a corporation organized and existing under the laws
of the State of Delaware (hereinafter called the "Company," which term shall
include any successor corporation), for value received, hereby promises to
pay to.........., or registered assigns, the principal sum of................
DOLLARS on August 1, 2011, at the office or agency maintained by the Company
for that purpose in the City of San Francisco, State of California, or in the
Borough of Manhattan, The City of New York, State of New York, in such coin
or currency of the United States of America as at the time of payment is
legal tender for the payment of public and private debts, and to pay to the
registered holder hereof, as hereinafter provided, interest on said principal
sum at the rate per annum specified in the title of this Debenture, in like
coin or currency, from the February 1 or the August 1 next preceding the date
hereof to which interest has been paid or duly provided for (unless the date
hereof is a February 1 or August 1 to which interest has been paid or duly
provided for, in which case
<PAGE>
2
from the date hereof, or unless the date hereof is between the close of business
on January 15 or July 15, as the case may be, and the following February 1 or
August 1, in which case from such February 1 or August 1; provided, however,
that if the Company shall default in payment of the interest due on such
February 1 or August 1, then from the next preceding February 1 or August 1 to
which interest has been paid or duly provided for or, if no interest has been
paid or duly provided for on the Debentures, from August 1, 1986) semi-annually
on February 1 and August 1 in each year, until payment of said principal sum has
been made or duly provided for. The interest so payable on any February 1 or
August 1 will, subject to certain exceptions provided in the Indenture
hereinafter referred to, be paid to the person in whose name this Debenture is
registered at the close of business on the January 15 or July 15, as the case
may be, next preceding such February 1 or August 1 or, if such January 15 or
July 15 is not a business day, the business day next preceding such January 15
or July 15. Interest shall be computed on the basis of a 360-day year of twelve
30-day months. Unless other arrangements are made by the Company, payment of
interest will be made by check mailed by the Company to the registered address
of the person entitled thereto.
This Debenture is continued on the reverse hereof and the additional
provisions there set forth shall for all purposes have the same effect as if set
forth at this place.
This Debenture shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been signed by the
Trustee or Authenticating Agent under the Indenture.
IN WITNESS WHEREOF, HEXCEL CORPORATION has caused this Debenture to be
executed in its corporate name by the signature of its President or one of its
Vice Presidents manually or in facsimile and a facsimile of its corporate seal
to be imprinted hereon and attested by the signature of its Secretary or one of
its Assistant Secretaries or its Treasurer or one of its Assistant Treasurers,
manually or in facsimile.
HEXCEL CORPORATION
By.....................................
[CORPORATE SEAL]
Attest:
..........................................
<PAGE>
3
[FORM OF REVERSE OF DEBENTURE]
This Debenture is one of a duly authorized issue of Debentures of the
Company known as its 7% Convertible Subordinated Debentures due 2011 (herein
referred to as the "Debentures"), limited (subject to certain exceptions
provided for in the Indenture hereinafter referred to) in aggregate principal
amount to thirty-five million dollars ($35,000,000), all issued or to be issued
under and pursuant to an Indenture dated as of August 1, 1986 (herein referred
to as the "Indenture"), duly executed and delivered between the Company and The
Bank of California, N.A., trustee (herein referred to as the "Trustee"), to
which Indenture and all indentures supplemental thereto reference is hereby made
for a description of the respective rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Company, the holders of
Senior Indebtedness and the holders of the Debentures.
In case an Event of Default, as defined in the Indenture, shall have
occurred and be continuing, the principal hereof may be declared and upon such
declaration shall become due and payable, in the manner, with the effect and
subject to the conditions provided in the Indenture. The Indenture provides
that in certain events such declaration and its consequences may be waived by
the holders of a majority in aggregate principal amount of the Debentures then
outstanding or outstanding on the record date, if any, fixed therefor in
accordance with the provisions of the Indenture. It is also provided in the
Indenture that the holders of a majority in aggregate principal amount of the
Debentures then outstanding or outstanding on the record date, if any, fixed
therefor in accordance with the provisions of the Indenture may, on behalf of
the holders of all of the Debentures, waive, prior to such declaration, any past
default under the Indenture and its consequences, except a default in the
payment of the principal of (or premium, if any) or interest on any of the
Debentures or a default in the making of any sinking fund payment.
The payment of the principal of (and premium, if any) and interest on this
Debenture is expressly subordinated, as provided in the Indenture, to the
payment of all Senior Indebtedness, as defined in the Indenture, and by
acceptance of this Debenture the holder hereof agrees, expressly for the benefit
of the present and future holders of Senior Indebtedness, to be bound by the
provisions of the Indenture.
Subject to the provisions of the Indenture, the holder of this Debenture is
entitled, at his option, at any time on or before August 1, 2011 (except that,
in case this Debenture or any portion hereof shall be called for redemption,
such right shall terminate with respect to this Debenture or portion hereof, as
<PAGE>
4
the case may be, so called for redemption at the close of business on the date
fixed for redemption as provided in the Indenture), to convert the principal
amount of this Debenture (or any portion hereof which is $1,000 or a whole
multiple thereof) into shares of Common Stock of the Company, as said shares
shall be constituted at the date of conversion, at the conversion price of
$47.80 principal amount of Debentures for each share of such Common Stock, or at
the adjusted conversion price in effect at the date of conversion determined as
provided in the Indenture, upon surrender of this Debenture to the Company at
the office or agency of the Company in the City of San Francisco, State of
California, or in the Borough of Manhattan, The City of New York, State of New
York, accompanied by written notice of election to convert in the form provided
hereon, duly executed, and (if so required by the Company) by instruments of
transfer, in form satisfactory to the Company, duly executed by the registered
holder or by his duly authorized attorney. Such surrender shall, if made during
the period from the close of business on the January 15 or July 15 next
preceding an interest payment date (or the next preceding business day if such
January 15 or July 15 is a day on which banking institutions in the City of San
Francisco, State of California or The City of New York, State of New York are
authorized or obligated by law to close) to the opening of business on such
interest payment date (unless this Debenture or the portion being converted
shall have been called for redemption on a date fixed for redemption during such
period), also be accompanied by payment in New York Clearing House funds or
other funds acceptable to the Company of an amount equal to the interest payable
on such interest payment date on the principal amount of this Debenture then
being converted. Subject to the foregoing and the right of the person in whose
name this Debenture is registered at the close of business on the January 15 or
July 15 next preceding an interest payment date to receive the interest payable
on such interest payment date (with certain exceptions provided in the
Indenture), no adjustment is to be made on conversion for interest accrued
hereon or for dividends on Common Stock issued on conversion. The Company is
not required to issue fractional shares upon any such conversion, but shall make
adjustment therefor in cash on the basis of the current market value of such
fractional interest as provided in the Indenture.
The Indenture contains provisions permitting the Company, with the consent
of the holders of not less than a majority in aggregate principal amount of the
Debentures then outstanding or outstanding on the record date, if any, fixed
therefor in accordance with the provisions of the Indenture, to fail or omit to
comply with certain covenants set forth in the Indenture. The Indenture also
contains provisions permitting the Company and the Trustee, with the consent
<PAGE>
5
of the holders of not less than 66 2/3% in aggregate principal amount of the
Debentures then outstanding or outstanding on the record date, if any, fixed
therefor in accordance with the provisions of the Indenture, evidenced as in the
Indenture provided, to execute supplemental indentures adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
(including, but not limited to, those relating to the Company's Sinking Fund
obligations) or of any supplemental indenture or modifying in any manner the
rights of the holders of the Debentures; provided, however, that no such
supplemental indenture shall (i) extend the stated maturity of any Debenture, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce any premium payable upon the redemption
thereof, or alter the provisions of the Indenture so as to affect adversely the
terms of conversion of the Debentures into Common Stock of the Company, without
the consent of the holder of each Debenture so affected, or (ii) reduce the
aforesaid percentage of Debentures, the consent of the holders of which is
required for any such supplemental indenture, without the consent of the holders
of all Debentures then outstanding; and provided further that no change shall
terminate or impair the subordination provisions of the Indenture without the
prior written consent of the holders of Senior Indebtedness.
Any such consent or waiver by the registered holder of this Debenture
(unless effectively revoked as provided in the Indenture) shall be conclusive
and binding upon such holder and upon all future holders of this Debenture and
of any Debenture issued in exchange or substitution herefor, irrespective of
whether or not any notation of such consent or waiver is made upon this
Debenture or such other Debenture.
No reference herein to the Indenture and no provision of this Debenture or
of the Indenture (except those provisions by which the Debentures are
subordinated to Senior Indebtedness) shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal of (and
premium, if any) and interest on this Debenture at the place, at the respective
times, at the rate and in the currency herein prescribed.
The Debentures are issuable as fully registered Debentures without coupons
in the denominations of $1,000 and any whole multiple thereof, at the office or
agency of the Company referred to on the face hereof, and in the manner and
subject to the limitations provided in the Indenture. Debentures may be
exchanged for a like aggregate principal amount of Debentures of other
authorized denominations, without payment of any charge other than a sum
sufficient to reimburse the Company for any tax or other governmental charge
<PAGE>
6
incident thereto. Principal of (and premium, if any) on this Debenture is
payable at the office or agency of the Company maintained for that purpose in
the City of San Francisco, State of California or in the Borough of Manhattan,
The City of New York, State of New York. Unless other arrangements are made by
the Company, payment of interest hereon will be made by check mailed by the
Company to the registered address of the person entitled thereto.
The Debentures are subject to redemption (otherwise than through the
operation of the Sinking Fund), at the option of the Company, as a whole or in
part at any time, on any date prior to maturity, upon mailing by first-class
mail a notice of such redemption not less than 30 nor more than 60 days prior to
the date fixed for redemption to the holders of Debentures to be redeemed as a
whole or in part at their registered addresses as they shall appear upon the
registry books, all as provided in the Indenture, at the redemption prices set
forth in the following table (expressed in percentages of the principal amount
thereof to be redeemed) together with accrued and unpaid interest on the
principal amount thereof to be redeemed to the date fixed for redemption, except
that Debentures may not be so redeemed before August 1, 1989, unless the closing
price of the Common Stock of the Company on the New York Stock Exchange (or on
any national securities exchange on which the Common Stock may then be listed
or, if the Common Stock shall not then be listed on any exchange, the highest
bid quotation in the over-the-counter market as reported by the National
Association of Securities Dealers, Inc. through NASDAQ, or its successor or such
other generally accepted source of publicly reported bid and ask quotations as
the Company may reasonably designate) shall have equaled or exceeded 150% of the
conversion price then in effect for at least 20 out of 30 consecutive trading
days ending within five business days prior to the date the notice of redemption
is given.
<TABLE>
If redeemed If redeemed
during the twelve during the twelve
months' period months' period
beginning Redemption beginning Redemption
August 1 Price August 1 Price
-------- ----- -------- -----
<S> <C> <C> <C>
1986 105.0% 1991 102.5%
1987 104.5 1992 102.0
1988 104.0 1993 101.5
1989 103.5 1994 101.0
1990 103.0 1995 100.5
</TABLE>
and thereafter at 100% of their principal amount.
<PAGE>
7
Any such notice which is mailed in the manner hereinabove provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives the notice.
The Debentures are entitled to the benefits of a Sinking Fund, beginning on
August 1, 1997, through the operation of which Debentures are subject to
redemption (upon notice as set forth above) at 100% of the principal amount
thereof together with accrued and unpaid interest to the date for redemption,
all as more fully provided in the Indenture.
Any Debentures called for redemption, unless surrendered for conversion on
or before the close of business on the date fixed for redemption, are subject to
being purchased from the holder of such Debentures at the redemption price by
one or more investment bankers or other purchasers who may agree with the
Company to purchase such Debentures and convert them into Common Stock of the
Company.
The transfer of this Debenture is registrable by the registered holder
hereof in person or by his attorney duly authorized in writing on the books of
the Company at the office or agency of the Company referred to on the face
hereof, subject to the terms of the Indenture but without payment of any charge
other than a sum sufficient to reimburse the Company for any tax or other
governmental charge incident thereto, and upon surrender and cancellation of
this Debenture upon any such transfer, a new Debenture or Debentures of
authorized denomination or denominations, for the same aggregate principal
amount, will be issued to the transferee in exchange herefor.
The Company, the Trustee, any paying or conversion agent and any Debenture
registrar may deem and treat the person in whose name this Debenture shall be
registered upon the books of the Company as the absolute owner of this Debenture
(whether or not this Debenture shall be overdue and notwithstanding any notation
of ownership or other writing hereon) for the purpose of receiving payment of or
on account of the principal hereof, premium, if any, and interest due hereon and
for all other purposes, and neither the Company nor the Trustee nor any paying
or conversion agent nor any Debenture registrar shall be affected by any notice
to the contrary. All such payments shall be valid and effectual to satisfy and
discharge the liability on this Debenture to the extent of the sum or sums so
paid.
<PAGE>
8
No recourse shall be had for the payment of the principal of, premium, if
any, or the interest on this Debenture, or for any claim based hereon, or
otherwise in respect hereof, or based on or in respect of the Indenture or any
indenture supplemental thereto, against any incorporator, stockholder, officer
or director, as such, past, present or future, of the Company or of any
successor corporation, whether by virtue of any constitution, statute or rule of
law, or by the enforcement of any assessment or penalty or otherwise, all such
liability being, by the acceptance hereof and as part of the consideration for
the issue hereof, expressly waived and released.
As provided in the Indenture, this Debenture shall for all purposes be
governed by and construed in accordance with the laws of the State of
California.
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
Dated:
This is one of the Debentures described in the within-mentioned Indenture.
THE BANK OF CALIFORNIA, N.A.,
as Trustee
By...................................
Authorized Officer
OR
THE BANK OF CALIFORNIA, N.A.,
as Trustee
By The Bank of California
New York Trust Company,
Authenticating Agent
By................................
Authorized Officer
<PAGE>
9
[FORM OF CONVERSION NOTICE]
To HEXCEL CORPORATION:
The undersigned owner of this Debenture hereby irrevocably exercises the
option to convert this Debenture, or portion hereof (which is $ 1,000 or a whole
multiple thereof) below designated, into shares of Common Stock of Hexcel
Corporation in accordance with the terms of the Indenture referred to in this
Debenture, and directs that the shares issuable and deliverable upon the
conversion, together with any check in payment for fractional shares and any
Debentures representing any unconverted principal amount hereof, be issued and
delivered to the registered holder hereof unless a different name has been
indicated below. If shares are to be issued in the name of a person other than
the undersigned, the undersigned will pay all transfer taxes payable with
respect thereto. Any amount required to be paid by the undersigned on account
of interest accompanies this Debenture.
Dated: ..........
..................................
Signature
Principal Amount to be Converted
(in a whole multiple of $1,000
if less than All):
..................................
.......................................
Signature Guarantee: All
signature(s) must be
guaranteed by a member of
the New York Stock Exchange
or a commercial bank or
trust company.
Fill in for registration of shares of Common Stock and Debentures if to be
issued other-wise than to the registered holder.
.......................................
(Name)
Social Security or Other
Taxpayer
Identifying Number
..................................
.......................................
Please print name and
address
(including zip code number)
<PAGE>
10
AND WHEREAS, all acts and things necessary to make the Debentures, when
executed by the Company and authenticated and delivered by the Trustee or the
Authenticating Agent as in this Indenture provided, the valid, binding and
legal obligations of the Company, and to constitute these presents a valid
indenture and agreement according to its terms, have been done and performed,
and the execution of this Indenture and the issue hereunder of the Debentures
have in all respects been duly authorized, and the Company, in the exercise
of the legal right and power vested in it, executes this Indenture and
proposes to make, execute, issue and deliver the Debentures;
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the
Debentures are authenticated, issued, delivered and held, and in
consideration of the premises, of the purchase and acceptance of the
Debentures by the holders thereof and of the sum of one dollar to it duly
paid by the Trustee at the execution of these presents, the receipt whereof
is hereby acknowledged, the Company covenants and agrees with the Trustee,
for the equal and proportionate benefit of the respective holders from time
to time of the Debentures, as follows:
ARTICLE ONE
DEFINITIONS
SECTION 1.01. Certain Terms Defined. The terms defined in this Section
1.01 (except as otherwise expressly provided or unless the context otherwise
requires), for all purposes of this Indenture and of any indenture
supplemental hereto, shall have the respective meanings specified in this
Section 1.01. All other terms used in this Indenture which are defined in the
Trust Indenture Act of 1939 or which are by reference therein defined in the
Securities Act of 1933, as amended (except as herein otherwise expressly
provided or unless the context otherwise requires), shall have the meanings
assigned to such terms in said Trust Indenture Act and in said Securities Act
as they were in force at the date of the execution of this Indenture.
Authenticating Agent. The term "Authenticating Agent" shall mean the
agent or agents, if any, of the Trustee which at any time shall have been
appointed pursuant to Section 9.14.
Bankruptcy Code. The term "Bankruptcy Code" shall mean Title 11, U.S.
Code or any similar Federal or State law for the relief of debtors.
Board of Directors: The term "Board of Directors," when used with
reference to the Company, shall mean the Board of Directors of the Company or
any duly authorized committee of such Board.
<PAGE>
Business Day: The term "business day" shall mean a day other than a
Saturday, a Sunday or a day on which banking institutions in the City of San
Francisco, State of California or The City of New York, State of New York are
authorized or obligated by law to close.
Common Stock The term "Common Stock," when used with reference to stock
of the Company, shall mean all shares now or hereafter authorized of the
class of the Common Stock of the Company presently authorized and stock of
any other class into which such shares may hereafter have been changed.
Company: The term "Company" shall mean HEXCEL CORPORATION, a Delaware
corporation, and, subject to the provisions of Article Thirteen, shall also
include its successors and assigns.
Conversion Price. The term "conversion price" shall mean the price per
share of Common Stock from time to time in effect at which Debentures may be
converted into Common Stock as hereinafter in Article Four provided.
Date of Conversion: The term "date of conversion" shall mean the date on
which any Debenture shall be surrendered for conversion and notice given in
accordance with the provisions of Article Four hereof.
Debenture or Debentures; outstanding: The term "Debenture" or
"Debentures" shall mean any Debenture or Debentures, as the case may be,
authenticated and delivered under this Indenture.
The term "outstanding," when used with reference to Debentures, shall,
subject to the provisions of Section 10.04, mean, as of any particular time,
all Debentures authenticated and delivered by the Trustee under this
Indenture, except
(a) Debentures theretofore cancelled by the Trustee or delivered
to the Trustee for cancellation;
(b) Debentures, or portions thereof, for the payment or redemption
of which moneys in the necessary amount shall have been deposited in trust
with the Trustee or with any paying agent (other than the Company) or
shall have been set aside and segregated in trust by the Company (if the
Company shall act as its own paying agent), provided that such Debentures
shall have reached their stated maturity, or, if such Debentures are to be
redeemed prior to the maturity thereof, notice of such redemption shall
have been given as in Article Five provided, or provision satisfactory to
the Trustee shall have been made for giving such notice; and
(c) Debentures in lieu of or in substitution for which other
Debentures shall have been authenticated and delivered pursuant to the
terms
<PAGE>
12
of Section 2.07, unless proof satisfactory to the Trustee is presented
that any such Debentures are held by bona fide holders in due course.
Debentureholder; registered holder. The term "debentureholder," "holder
of Debentures," "registered holder" or other similar term, shall mean any
person who shall at the time be the registered holder of any Debenture or
Debentures on the books of the Company kept for that purpose in accordance
with the provisions of the Indenture and shall also mean the executors,
administrators and other legal representatives of such person.
Event of Default. The term "Event of Default" shall mean any event
specified in Section 8.01, continued for the period of time, if any, and
after the giving of notice, if any, therein designated.
Indenture. The term "Indenture" shall mean this instrument as
originally executed, or, if amended or supplemented as herein provided, as so
amended or supplemented.
Officers' Certificate. The term "Officers' Certificate" shall mean a
certificate signed by the Chairman of the Board or President or any Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary of the Company. Each such certificate shall include
the statements provided for in Section 16.05, if and to the extent required
by the provisions thereof.
Opinion of Counsel: The term "Opinion of Counsel" shall mean an opinion
in writing signed by legal counsel, who may be an employee of, or of counsel
to, the Company or may be other counsel and who shall be acceptable to the
Trustee. Each such opinion shall include the statements provided for in
Section 16.05, if and to the extent required by the provisions thereof.
Responsible Officer: The term "responsible officer," when used with
respect to the Trustee, shall mean the chairman of the board of directors,
the president, every vice president, the treasurer, every trust officer, and
every other officer and assistant officer to whom any corporate trust matter
is referred because of his knowledge of and familiarity with the particular
subject.
Senior Indebtedness. The term "Senior Indebtedness" shall mean the
principal of, premium, if any, and unpaid interest on (a) indebtedness of the
Company (including indebtedness of others guaranteed by the Company), other
than the Debentures, whether outstanding on the date hereof or thereafter
created, incurred, assumed, or guaranteed, for (i) money borrowed, (ii)
reimbursement obligations in connection with letters of credit issued for the
account of the Company and bankers' acceptances, (iii) purchase obligations
and (iv) lease obligations (including but not limited to capitalized lease
obligations), unless in the instrument creating or evidencing the same or
<PAGE>
13
pursuant to which the same is outstanding it is provided that such
indebtedness is not superior in right of payment to the Debentures, and (b)
renewals, extensions, modifications and refundings of any such indebtedness.
Senior Indebtedness does not include the 9% Convertible Subordinated
Guaranteed Debentures due 1996 issued by Hexcel International Finance N.V.
and guaranteed by the Company, which debentures rank pari passu with the
Debentures.
Subsidiary: The term "Subsidiary" shall mean any corporation or other
entity at least a majority of the outstanding voting shares of which is at
the time directly or indirectly owned or controlled (either alone or through
Subsidiaries or together with Subsidiaries) by the Company or another
Subsidiary.
Trustee; principal office: The term "Trustee" shall mean The Bank of
California, N.A., and, subject to the provisions of Article Nine, shall also
include its successors. The term "principal office" of the Trustee shall
mean the principal office of the Trustee at which at any particular time its
corporate trust business may be principally administered, which office at the
date hereof is located at 400 California Street, San Francisco, California
94104.
Trust Indenture Act of 1939 The term "Trust Indenture Act of 1939"
shall mean the Trust Indenture Act of 1939 as it was in force at the date of
execution of this Indenture except as provided by Article Twelve.
SECTION 1.02. References are to Indenture. Unless the context
otherwise requires, all references herein to "Articles," "Sections" and other
subdivisions refer to the corresponding Articles, Sections and other
subdivisions of this Indenture, and the words "herein," "hereof," "hereby,"
"hereunder" and words of similar import refer to this Indenture as a whole
and not to any particular Article, Section or other subdivision hereof.
ARTICLE TWO
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION
AND EXCHANGE OF DEBENTURES
SECTION 2.01. Designation, Amount, Authentication and Delivery of
Debentures. The Debentures shall be designated as "7% Convertible
Subordinated Debentures due 2011." Debentures for the aggregate principal
amount of thirty-five million dollars ($35,000,000), upon the execution of
this Indenture, or from time to time thereafter, may be executed by the
Company and delivered to the Trustee or Authenticating Agent for
authentication, and the Trustee or
<PAGE>
14
Authenticating Agent shall thereupon authenticate and deliver said Debentures
to or upon the written order of the Company, signed by its President or a
Vice President without any further corporate action by the Company.
The aggregate principal amount of Debentures authorized by this
Indenture is limited to thirty-five million dollars ($35,000,000) and, except
as provided in Section 2.07, the Company shall not execute and the Trustee or
the Authenticating Agent shall not authenticate or deliver Debentures in
excess of such aggregate principal amount.
Nothing contained in this Section 2.01 or elsewhere in this Indenture,
or in the Debentures, is intended to or shall limit execution by the Company
or authentication or delivery by the Trustee or the Authenticating Agent of
Debentures under the circumstances contemplated by Section 2.05, 2.06, 2.07,
4.02, 5.02 and 12.04.
SECTION 2.02. Form of Debentures and Trustee's Certificate. The
definitive Debentures and the Trustee's or the Authenticating Agent's
certificate of authentication to be borne by the Debentures shall be
substantially of the tenor and purport as in this Indenture above recited,
and may have such letters, numbers or other marks of identification or
designation and such legends or endorsements printed, lithographed or
engraved thereon as the officers executing the same may deem appropriate and
as are not inconsistent with the provisions of this Indenture, or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Debentures may be listed, or to conform to usage.
SECTION 2.03. Date of Debentures and Denominations. The Debentures
shall bear interest at the rate per annum set forth in their title, payable
semi-annually on February 1 and August 1, commencing February 1, 1987, shall
mature on August 1, 2011 and shall be issuable as registered Debentures
without coupons in denominations of $1,000 and any whole multiple thereof.
The person in whose name any Debenture is registered at the close of business
on any record date (as hereinbelow defined) with respect to any interest
payment date shall be entitled to receive the interest payable thereon on
such interest payment date notwithstanding the cancellation of such Debenture
upon any registration of transfer, conversion or exchange thereof subsequent
to such record date and prior to such interest payment date, unless such
Debenture shall have been called for redemption on a date fixed for
redemption subsequent to such record date and prior to such interest payment
date, or unless an Event of Default shall have occurred and be continuing as
the result of a default in
<PAGE>
15
the payment of interest due on such interest payment date on any Debenture,
in which case such defaulted interest shall be paid to the person in whose
name such Debenture (or any Debenture or Debentures issued upon registration
of transfer or exchange thereof) is registered on the record date for payment
of such defaulted interest. Unless other arrangements are made by the
Company, payment of interest will be made by check mailed by the Company to
the registered address of the person entitled thereto. The term "record
date" as used in this Section 2.03 with respect to any interest payment date
shall mean the January 15 or July 15, as the case may be, next preceding such
interest payment date, or, if such January 15 or July 15 is not a business
day, the business day next preceding such January 15 or July 15, and such
term, as used in this Section, with respect to the payment of any defaulted
interest shall mean the tenth day next preceding the date fixed by the
Company for the payment of defaulted interest or, if such tenth day is not a
business day, the business day next preceding such tenth day, but in no case
shall such record date be less than 10 days after notice thereof shall have
been mailed by or on behalf of the Company to all registered holders of
Debentures at their registered addresses.
Except as provided in the next sentence, the Debentures shall be dated
the date of authentication and shall bear interest from the February 1 or
August 1 next preceding the date thereof to which interest has been paid or
duly provided for, unless the date of authentication is a February 1 or
August 1 to which interest has been paid or duly provided for, in which case
they shall bear interest from such date. Each Debenture authenticated
between the record date for any interest payment date and such interest
payment date shall be dated the date of its authentication but shall bear
interest from such interest payment date; provided, however, that if and to
the extent the Company shall default in the payment of the interest due on
such interest payment date, then any Debenture so authenticated shall bear
interest from the next preceding February 1 or August 1, as the case may be,
to which interest has been paid or duly provided for or, if no interest has
been paid on the Debentures, from August 1, 1986. Interest shall be computed
on the basis of a 360-day year of twelve 30-day months.
SECTION 2.04. Execution of Debentures. The Debentures shall be signed
on behalf of the Company, manually or in facsimile, by its President or a
Vice President under its corporate seal (which may be in facsimile)
reproduced thereon and attested, manually or in facsimile, by its Secretary
or an Assistant Secretary or its Treasurer or an Assistant Treasurer. Only
such Debentures as shall bear thereon a certificate of authentication
substantially
<PAGE>
16
in the form hereinbefore recited, signed manually by the Trustee or the
Authenticating Agent, shall be entitled to the benefits of this Indenture or
be valid or obligatory for any purpose. Such certificate by the Trustee upon
any Debenture executed by the Company shall be conclusive evidence that the
Debenture so authenticated has been duly authenticated and delivered
hereunder and that the holder is entitled to the benefits of this Indenture.
In case any officer of the Company whose signature appears on any of the
Debentures, manually or in facsimile, shall cease to be such officer before
such Debentures so signed shall have been authenticated and delivered by the
Trustee or the Authenticating Agent, or disposed of by the Company, such
Debentures nevertheless may be authenticated and delivered or disposed of as
though the person whose signature appears on such Debentures had not ceased
to be such officer of the Company; and any Debenture may be signed, and the
corporate seal reproduced thereon may be attested, on behalf of the Company,
manually or in facsimile, by such persons as, at the actual date of the
execution of such Debenture, shall be the proper officers of the Company,
although at the date of the execution of this Indenture any such person was
not such officer.
SECTION 2.05. Exchange of Debentures. Debentures may be exchanged for
a like aggregate principal amount of Debentures of other authorized
denominations. The Debentures to be exchanged shall be surrendered at the
offices or agencies to be maintained by the Company in accordance with the
provisions of Section 6.02, and the Company shall execute and the Trustee or
the Authenticating Agent shall authenticate and deliver in exchange therefor
the Debenture or Debentures which the debentureholder making the exchange
shall be entitled to receive.
The Company shall keep, at one of the offices or agencies to be
maintained by the Company in accordance with the provisions of Section 6.02,
a register or registers in which, subject to such reasonable regulations as
it may prescribe, the Company shall register Debentures and shall register
the transfer of Debentures as in this Article Two provided. Upon surrender
for registration of transfer of any Debenture at such office or agency, the
Company shall execute and the Trustee or the Authenticating Agent shall
authenticate and deliver in the name of the transferee or transferees a new
Debenture or Debentures for a like aggregate principal amount.
All Debentures presented or surrendered for exchange, registration of
transfer, redemption, conversion or payment shall, if so required by the
Company or the Trustee or any Debenture registrar, be accompanied by a
written instrument or instruments of transfer, in form satisfactory to the
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17
Company and the Trustee and such registrar, duly executed by the registered
holder or by his duly authorized attorney.
No service charge shall be made for any exchange or registration of
transfer of Debentures, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto.
The Company shall not be required to issue, register the transfer of or
exchange any Debentures for a period of fifteen days next preceding any date
for the selection of Debentures to be redeemed. The Company shall not be
required to register the transfer of or exchange any Debenture called or
being called for redemption except, in the case of any Debenture to be
redeemed in part, the portion thereof not to be so redeemed.
SECTION 2.06. Temporary Debentures. Pending the preparation of
definitive Debentures, the Company may execute and the Trustee or the
Authenticating Agent shall authenticate and deliver temporary Debentures
(printed, lithographed or typewritten) of any authorized denomination and
substantially in the form of the definitive Debentures, but with or without a
recital of specific redemption prices and with such omissions, insertions and
variations as may be appropriate for temporary Debentures, all as may be
determined by the Board of Directors of the Company. Temporary Debentures
may contain such reference to any provisions of the Indenture as may be
appropriate. Every such temporary Debenture shall be authenticated by the
Trustee or the Authenticating Agent upon the same conditions and in
substantially the same manner, and with the same effect, as the definitive
Debentures. Without unnecessary delay the Company will execute and deliver
to the Trustee or to the Authenticating Agent definitive Debentures and
thereupon any or all temporary Debentures may be surrendered in exchange
therefor, at the offices or agencies to be maintained by the Company in
accordance with the provisions of Section 6.02, and the Trustee or the
Authenticating Agent shall authenticate and deliver in exchange for such
temporary Debentures an equal aggregate principal amount of definitive
Debentures. Until so exchanged, the temporary Debentures shall in all
respects be entitled to the same benefits under this Indenture as definitive
Debentures authenticated and delivered hereunder.
SECTION 2.07. Mutilated, Destroyed, Lost or Stolen Debentures. In case
any temporary or definitive Debenture shall become mutilated or be destroyed,
lost or stolen, the Company, in the case of any mutilated Debenture shall,
and in the case of any destroyed, lost or stolen Debenture in its discretion
may, in the absence of notice to the Company or the Trustee or the
Authenticating
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18
Agent that such Debenture has been acquired by a bona fide purchaser, execute
and upon its request the Trustee or the Authenticating Agent shall
authenticate and deliver a new Debenture bearing a number not
contemporaneously outstanding in exchange and substitution for the mutilated
Debenture, or in lieu of and substitution for the Debenture so destroyed,
lost or stolen, or, if any such Debenture shall have matured or shall be
about to mature or shall have been selected for redemption, instead of
issuing a substituted Debenture, the Company may pay the same without
surrender thereof except in the case of a mutilated Debenture. In every case
the applicant for a substituted Debenture or for such payment shall furnish
to the Company and to the Trustee and to the Authenticating Agent such
security or indemnity as may be required by them to save each of them
harmless, and, in every case of destruction, loss or theft, the applicant
shall also furnish to the Company and to the Trustee and to the
Authenticating Agent evidence to their satisfaction of the destruction, loss
or theft of such Debenture and of the ownership thereof. The Trustee or the
Authenticating Agent may authenticate any such substituted Debenture and
deliver the same, or the Trustee or any paying agent of the Company may make
any such payment, upon the written request or authorization of any officer of
the Company, and shall incur no liability to anyone by reason of anything
done or omitted to be done by it in good faith under the provisions of this
Section 2.07. Upon the issue of any substituted Debenture, the Company may
require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any expenses
connected therewith.
Every substituted Debenture issued pursuant to the provisions of this
Section 2.07 in substitution for any destroyed, lost or stolen Debenture
shall constitute an additional contractual obligation of the Company, whether
or not the destroyed, lost or stolen Debenture shall be found at any time,
and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Debentures duly issued hereunder.
All Debentures shall be held and owned upon the express condition that
the foregoing provisions are exclusive with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Debentures, and shall
preclude (to the extent lawful) any and all other rights or remedies,
notwithstanding any law or statute existing or hereafter enacted to the
contrary with respect to the replacement or payment of negotiable instruments
or other securities without their surrender.
SECTION 2.08. Cancellation of Surrendered Debentures. All Debentures
surrendered for the purpose of payment, redemption, conversion, exchange,
substitution or registration of transfer, or in discharge in whole or
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19
in part of any Sinking Fund payment, shall, if surrendered to the Company or
any paying or conversion agent or registrar, be delivered to the Trustee and
the same, together with Debentures surrendered to the Trustee for
cancellation, shall be promptly cancelled by it, and no Debentures shall be
issued in lieu thereof except as expressly permitted by any of the provisions
of this Indenture. The Trustee shall destroy cancelled Debentures and shall
deliver certificates of destruction thereof to the Company from time to time
unless the Company shall otherwise direct in writing. If the Company shall
purchase or otherwise acquire any of the Debentures, however, such purchase
or acquisition shall not operate as a payment, redemption or satisfaction of
the indebtedness represented by such Debentures unless and until the Company,
at its option, shall deliver or surrender the same to the Trustee for
cancellation.
ARTICLE THREE
SUBORDINATION OF DEBENTURES
SECTION 3.01. Agreement to Subordinate. The Company, for itself, its
successors and assigns, covenants and agrees, and each holder of Debentures,
by his acceptance thereof, likewise covenants and agrees, that the payment of
the principal of and premium, if any, and interest on each and all of the
Debentures, including payment through the operation of the Sinking Fund as
provided in this Indenture, is hereby expressly subordinated, to the extent
and in the manner hereinafter set forth, in right of payment to the prior
payment in full of all Senior Indebtedness and that such subordination is for
the benefit of the holders of Senior Indebtedness. All persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, shall be entitled to rely hereon. and such provisions are made
for the benefit of the holders of Senior Indebtedness, and they or any of
them may proceed to enforce such provisions directly against the holders of
Debentures or the Trustee.
SECTION 3.02. Distribution on Dissolution, Liquidation and
Reorganization; Subrogation of Debentures. Upon any distribution of assets
of the Company upon any dissolution, winding up, liquidation or
reorganization of the Company, whether in bankruptcy, insolvency,
reorganization or receivership proceedings or upon an assignment for the
benefit of creditors or any other marshalling of the assets and liabilities
of the Company or otherwise:
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20
(a) the holders of all Senior Indebtedness shall first be entitled
to receive payment in full of the principal thereof, premium, if any, and
the interest due thereon before the holders of the Debentures are entitled
to receive any payment upon the principal of and premium, if any, or
interest on indebtedness evidenced by the Debentures;
(b) any payment or distribution of assets of the Company of any
kind or character, whether in cash, property or securities, to which the
holders of the Debentures or the Trustee would be entitled except for the
provisions of this Article Three shall be paid or delivered by the Company
or any liquidating trustee, trustee in bankruptcy, receiver, agent or
other person making such payment or distribution directly to the holders
of Senior Indebtedness or their representative or representatives or to
the trustee or trustees under any indenture under which any instruments
evidencing any of such Senior Indebtedness may have been issued, as their
interests appear, to the extent necessary to make payment in full of all
Senior Indebtedness remaining unpaid, after giving effect to any
concurrent payment or distribution to the holders of such Senior
Indebtedness; and
(c) in the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company of any kind or character, whether
in cash, property or securities, shall be received by the Trustee or
holders of the Debentures before all Senior Indebtedness is paid in full,
such payment or distribution shall be paid over or delivered to the
holders of such Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any indenture under
which any instruments evidencing any of such Senior Indebtedness may have
been issued, as their interests appear, for application to the payment of
all Senior Indebtedness remaining unpaid until all such Senior
Indebtedness shall have been paid in full, after giving effect to any
concurrent payment or distribution to the holders of such Senior
Indebtedness.
The consolidation of the Company with, or the merger of the Company
into, another corporation or the liquidation or dissolution of the Company
following the sale or conveyance of its property or assets as an entirety, or
substantially as an entirety, to another corporation upon the terms and
conditions provided in Article Thirteen shall not be deemed a dissolution,
winding up, liquidation or reorganization of the Company for the purposes of
this Article Three if such other corporation shall, as a part of such
consolidation, merger, sale or conveyance, comply with the conditions stated
in Article Thirteen.
<PAGE>
21
Subject to the payment in full of all Senior Indebtedness, the holders
of the Debentures shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the
principal of, premium, if any, and interest on the Debentures shall be paid
in full and no such payments or distributions to the holders of the
Debentures of cash, property or securities otherwise distributable to the
Senior Indebtedness shall, as between the Company, its creditors other than
the holders of Senior Indebtedness, and the holders of the Debentures, be
deemed to be a payment by the Company to or on account of the Debentures. It
is understood that the provisions of this Article Three are and are intended
solely for the purpose of defining the relative rights of the holders of the
Debentures, on the one hand, and the holders of Senior Indebtedness, on the
other hand. Nothing contained in this Article Three or elsewhere in this
Indenture or in the Debentures is intended to or shall impair, as between the
Company, its creditors other than the holders of Senior Indebtedness, and the
holders of the Debentures, the obligation of the Company, which is
unconditional and absolute, to pay to the holders of the Debentures the
principal of, premium, if any, and interest on the Debentures as and when the
same shall become due and payable in accordance with their terms or to affect
the relative rights of the holders of the Debentures and creditors of the
Company other than the holders of Senior Indebtedness, nor shall anything
herein or in the Debentures prevent the Trustee or the holder of any
Debenture from exercising all remedies otherwise permitted by applicable law
upon default under this Indenture, subject to the rights, if any, under this
Article Three of the holders of Senior Indebtedness in respect of cash,
property or securities of the Company received upon the exercise of any such
remedy. Upon any payment or distribution of assets of the Company referred to
in this Article Three, the Trustee, subject to the provisions of Section
9.01, and the holders of the Debentures shall be entitled to rely upon any
order or decree of a court of competent jurisdiction in which any proceedings
of the nature referred to in this Section are pending or upon a certificate
of the liquidating trustee, trustee in bankruptcy, receiver, agent or other
person making any distribution to the Trustee or to the holders of the
Debentures, for the purpose of ascertaining the persons entitled to
participate in such payment or distribution, the holders of Senior
Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
others facts pertinent thereto or to this Article Three. In the event that
the Trustee determines, in good faith, that evidence is required with respect
to the right of any person as a holder of Senior Indebtedness to participate
in any payment or distribution
<PAGE>
22
pursuant to this Section, the Trustee may request such person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Indebtedness held by such person, as to the extent to which such
person is entitled to participate in such payment or distribution, and as to
other facts pertinent to the rights of such person under this Section, and if
such evidence is not furnished, the Trustee may defer any payment to such
person pending judicial determination as to the right of such person to
receive such payment.
The Trustee, however, shall not be deemed to owe any fiduciary duty to
the holders of Senior Indebtedness and shall not be liable to any such
holders if it shall mistakenly pay over or distribute to or on behalf of
holders of Debentures or the Company moneys or assets to which any holders of
Senior Indebtedness shall be entitled by virtue of this Article Three.
SECTION 3.03. Payments on Debentures Prohibited During Event of Default
Under Senior Indebtedness. In the event and during the continuation of any
default in the payment of principal of, or premium, if any, or interest on,
any Senior Indebtedness beyond any applicable period of grace, or in the
event that any other event of default (as defined in the instrument governing
such Senior Indebtedness) with respect to any Senior Indebtedness shall have
occurred and be continuing, or would occur as a result of the payment
referred to hereinafter, permitting the holders of such Senior Indebtedness
(or a trustee on behalf of the holders thereof) to accelerate the maturity
thereof, then, unless and until such default or event of default shall have
been cured or waived or shall have ceased to exist, no payment of principal
of, premium, if any, or interest on the Debentures and no Sinking Fund
payment shall be made by the Company (except Sinking Fund payments made on
Debentures redeemed or acquired or converted prior to the happening of such
default or event of default), nor shall Debentures be directly or indirectly
purchased by the Company or any Subsidiary.
SECTION 3.04. Payments on Debentures Permitted. Nothing contained in
this Indenture or in any of the Debentures shall (a) affect the obligation of
the Company to make, or prevent the Company from making, at any time except
as provided in Sections 3.02 and 3.03, payments of principal of, premium, if
any, or interest on the Debentures, or (b) prevent the application by the
Trustee or any paying agent of any moneys deposited with it hereunder to the
payment of or on account of the principal of, premium, if any, or interest on
the Debentures, if, prior to mailing or otherwise effecting distribution of
checks or other instruments representing such payment, the Trustee or paying
agent, as the case may be, did not have written notice of any event
prohibiting the making of such deposit by the Company.
<PAGE>
23
SECTION 3.05. Authorization of Debentureholders to Trustee to Effect
Subordination. Each Holder of Debentures by his acceptance thereof
authorizes and directs the Trustee in his behalf to take such action as may
be necessary or appropriate to effectuate the subordination as provided in
this Article Three and appoints the Trustee his attorney-in-fact for any and
all such purposes.
SECTION 3.06. Notices to Trustee. The Company shall give prompt notice
to the Trustee of any fact known to the Company which would prohibit the
making of any payment to or by the Trustee or any paying agent in respect of
the Debentures pursuant to the provisions of this Article Three.
Notwithstanding the provisions of this Article Three or any other provisions
of this Indenture, neither the Trustee nor any paying agent (other than the
Company) shall be charged with knowledge of the existence of any Senior
Indebtedness or of any event which would prohibit the making of any payment
of moneys to or by the Trustee or such paying agent, unless and until the
Trustee or such paying agent shall have received written notice thereof at
the principal office of the Trustee from the Company or from the holder of
any Senior Indebtedness or from the representative of any such holder.
ARTICLE FOUR
CONVERSION OF DEBENTURES
SECTION 4.01. Conversion Privilege. Subject to and upon compliance
with the provisions of this Article Four, at the option of the holder, any
Debenture or any portion of the principal amount thereof which is $1,000 or a
whole multiple thereof, may, at any time on or before August 1, 2011, or in
case such Debenture or some portion thereof shall be called for redemption
prior to such date, then, with respect to such Debenture or portion thereof
so called for redemption, until and including, but not after, the close of
business on the date fixed for such redemption, be converted at the principal
amount thereof into Common Stock at the conversion price in effect at the
date of conversion.
SECTION 4.02. Manner of Exercise of Conversion Privilege. In order to
exercise the conversion privilege, the holder of any Debenture to be
converted shall surrender such Debenture to the Company at the office or
agency to be maintained by the Company in accordance with the provisions of
Section 6.02, together with the conversion notice, which shall be
irrevocable, in the form provided on the Debentures duly executed, and, if so
required by the Company, the Debenture shall also be accompanied by proper
assignments thereof to the Company or in blank for transfer and any requisite
Federal and State transfer
<PAGE>
24
tax stamps. Debentures so surrendered during the period from the close of
business on the record date preceding an interest payment date to the opening
of business on such interest payment date shall (unless any such Debenture or
the portion thereof being converted shall have been called for redemption on
a date fixed for redemption during such period) also be accompanied by
payment in New York Clearing House funds, or other funds acceptable to the
Company, of an amount equal to the interest payable on such interest payment
date on the principal amount of such Debenture then being converted. As
promptly as practicable after the surrender of such Debenture for conversion
as aforesaid, the Company shall issue and shall deliver at said office or
agency to such holder, or on his written order, a certificate or certificates
for the number of full shares issuable upon the conversion of such Debenture
or portion thereof and a check or cash in respect of any fraction of a share
of Common Stock issuable upon such conversion, all as provided in this
Article Four, together with a Debenture or Debentures in principal amount
equal to the unconverted and unredeemed portion, if any, of the Debenture so
converted. Such conversion shall be deemed to have been effected on the date
on which such notice shall have been received at said office or agency and
such Debenture shall have been surrendered as aforesaid, and the person or
persons in whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed to have
become on said date the holder or holders of record of the shares represented
thereby; provided, however, that any such surrender on any date when the
stock transfer books of the Company shall be closed shall constitute the
person or persons in whose name or names the certificates are to be issued as
the record holder or holders thereof for all purposes on the next succeeding
day on which such stock transfer books are open, but on such conversion shall
be at the conversion price in effect on such next succeeding day on which
such transfer books are open. Subject to the foregoing, no adjustment shall
be made for interest accrued on any Debenture that shall be converted or for
dividends on any Common Stock that shall be issued upon the conversion of
such Debenture.
SECTION 4.03. Cash Adjustment Upon Conversion. The Company shall not
be required to issue Fractions of shares of Common Stock upon conversion of
Debentures. If more than one Debenture shall be surrendered for conversion
at one time by the same holder, the number of full shares which shall be
issuable upon conversion thereof shall be computed on the basis of the
aggregate principal amount of the Debentures so surrendered. If any
fractional interest in a share of Common Stock would be deliverable upon the
conversion of any
<PAGE>
25
Debenture or Debentures, the Company shall make an adjustment therefor in
cash equal to the current market value of such fractional interest computed
to the nearest one-hundredth of a share either on the basis of the last
reported sale price regular way of the Common Stock on the New York Stock
Exchange (or, if not listed on the New York Stock Exchange, then on such
other exchange on which the Common Stock is listed as the Company may
designate) on the last business day prior to the date of conversion or, if
there shall not have been a sale on such last business day, on the basis of
the average of the bid and ask quotations therefor on such exchange on such
last business day or, if the Common Stock shall not then be listed on any
exchange, at the highest bid quotation in the over-the-counter market on such
last business day as reported by the National Association of Securities
Dealers, Inc. through NASDAQ, its automated system for reporting quotes, or
its successor or such other generally accepted source of publicly reported
bid and ask quotations as the Company may reasonably designate.
SECTION 4.04. Initial Conversion Price. The conversion price shall be
as specified in the form of Debenture hereinabove set forth or, after
adjustment as provided in this Article Four, the conversion price as so
adjusted.
SECTION 4.05. Adjustment of Conversion Price. The conversion price
shall be adjusted from time to time as follows:
(a) In case the Company shall, at any time or from time to time
while any of the Debentures are outstanding, (i) pay a dividend in shares
of its Common Stock, (ii) subdivide its outstanding shares of Common
Stock, or (iii) combine its outstanding shares of Common Stock into a
smaller number of shares, the conversion price in effect immediately prior
thereto shall be adjusted so that the holder of any Debenture thereafter
surrendered for conversion shall be entitled to receive the number of
shares of Common Stock or other securities of the Company which he would
have owned or been entitled to receive after the happening of any of the
events described above, had such Debenture been converted immediately
prior to the happening of such event. Any adjustment made pursuant to this
subdivision (a) shall become effective, in the case of a dividend, on the
payment date retroactively to immediately after the opening of business on
the day following the record date for the determination of shareholders
entitled to receive such dividend, subject to the provisions of
subdivision (f) of this Section 4.05, and shall become effective in the
case of a subdivision or combination immediately after the opening of
business on the day following the day when such subdivision or
combination, as the case may be, becomes effective.
<PAGE>
26
(b) In case the Company shall, at any time or from time to time
while any of the Debentures are outstanding, issue rights or warrants to
all holders of shares of its Common Stock entitling them (for a period
expiring within 45 days of the record date mentioned below) to subscribe
for or purchase shares of Common Stock at a price per share less than
the current market price per share of Common Stock (as defined in
subdivision (d) below) at such record date, the conversion price in
effect immediately prior to the issuance of such right or warrants shall
be adjusted as follows: the number of shares of Common Stock into which
$1,000 principal amount of Debentures was theretofore convertible shall
be multiplied by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding immediately prior to such record
date plus the number of additional shares of Common Stock offered for
subscription or purchase, and the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
record date plus the number of shares which the aggregate offering price
of the total number of shares so offered would purchase at such current
market price; and the conversion price shall be adjusted by dividing
$1,000 by the new number of shares into which $1,000 principal amount of
Debentures shall be convertible as aforesaid. Such adjustment shall
become effective on the date of such issuance retroactively to
immediately after the opening of business on the day following the
record date for the determination of shareholders entitled to receive
such rights or warrants, subject to the provisions of subdivision (f) of
this Section 4.05.
(c) In case the Company shall, at any time or from time to time
while any of the Debentures are outstanding, distribute to all holders
of shares of its Common Stock evidences of its indebtedness or
securities (excluding those referred to in subdivision (a) above) or
assets (excluding cash dividends or cash distributions payable out of
consolidated earnings or retained earnings, or dividends payable in
shares of Common Stock) or rights to subscribe (excluding those referred
to in subdivision (b) above), the conversion price in effect immediately
prior to such distribution shall be adjusted by multiplying the number
of shares of Common Stock into which $1,000 principal amount of
Debentures was theretofore convertible by a fraction, the numerator of
which shall be the current market price per share of Common Stock (as
defined in subdivision (d) below) on the record date for such
distribution, and the denominator of which shall be such current market
price per share of the Common Stock, less the then
<PAGE>
27
fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the portion of such
assets or securities or evidences of indebtedness so distributed or of
such subscription rights applicable to one share of Common Stock; and
the conversion price shall be adjusted by dividing $1,000 by the new
number of shares into which $1,000 principal amount of Debentures shall
be convertible as aforesaid. Such adjustment shall become effective on
the date of such distribution retroactively to immediately after the
opening of business on the day following the record date for the
determination of shareholders entitled to receive such distribution,
subject to the provisions of subdivision (f) of this Section 4.05. For
the purposes of this subdivision (c), consolidated earnings or retained
earnings shall be computed by adding thereto all charges against
retained earnings on account of dividends paid in shares of Common Stock
in respect of which the conversion price has been adjusted, all as
determined by the independent public accountants then regularly auditing
the accounts of the Company, whose determination shall be conclusive.
(d) For the purpose of any computation under subdivisions (b) and
(c) above, the current market price per share of Common Stock at any
date shall be deemed to be the average of the market values of the
Common Stock for the ten consecutive business days immediately preceding
the day in question. The market value of the Common Stock for each day
shall be determined as provided in Section 4.03 hereof.
(e) Except as herein otherwise provided, no adjustment in the
conversion price shall be made by reason of the issuance in exchange for
cash, property or services, of shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock, or carrying
the right to purchase any of the foregoing. Notwithstanding the other
provisions of this Article Four, no adjustment in the conversion price
shall be made for (i) rights to purchase Common Stock pursuant to a plan
for reinvestment of dividends or interest, including optional cash
purchases, or (ii) a change in the par value of, or a change to or from
no par value for, the Common Stock.
(f) If the Company shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive any dividend
or any subscription or purchase rights or any distribution and shall,
thereafter and before the distribution to stockholders of any such
dividend, subscription or purchase rights or distribution, legally
abandon its plan to pay or deliver such dividend, subscription or
purchase rights or distribution, then no adjustment of the conversion
price shall be required by reason of the taking of such record.
<PAGE>
28
(g) No adjustment in the conversion price shall be required unless
such adjustment would require an increase or decrease of at least 1% in
such price; provided, however, that any adjustments which by reason of
this subdivision (g) are not required to be made shall be carried
forward and taken into account in any subsequent adjustment. Except as
provided in Section 4.03, all calculations under this Article Four shall
be made to the nearest cent or to the nearest one-hundredth of a share,
as the case may be.
(h) Whenever the conversion price is adjusted as herein provided,
the Company shall (i) forthwith place on file at the principal office of
the Trustee a statement signed by the President or a Vice President of
the Company and by its Treasurer or an Assistant Treasurer showing in
detail the facts requiring such adjustment and the conversion price
after such adjustment and the Trustee shall exhibit the same from time
to time to any Debentureholder desiring an inspection thereof, and (ii)
cause a notice stating that such adjustment has been effected and the
adjusted conversion price to be mailed to the holders of Debentures at
their last addresses as they shall appear on the registry books.
(i) No adjustment in the conversion price shall be required for a
transaction specified in subdivisions (a), (b) or (c) above if
debentureholders, upon conversion, are permitted to participate in the
transactions on a basis and with notice that the Board of Directors
determines to be fair and appropriate in light of the basis and notice
on which holders of Common Stock participate in the transaction.
SECTION 4.06. Effect of Reclassifications, Consolidations, Mergers or
Sales on Conversion Privilege. In case of any reclassification or change of
outstanding shares of Common Stock issuable upon conversion of the Debentures
(other than a change in par value, or from par value to no par value, or from
no par value to par value, or as a result of a subdivision or combination),
or in case of any consolidation of the Company with one or more other
corporations (other than a consolidation in which the Company is the
continuing corporation and which does not result in any reclassification or
change of outstanding shares of Common Stock issuable upon conversion of the
Debentures), or in case of the merger of the Company into another
corporation, or in case of any sale or conveyance to another corporation of
the property of the Company as an entirety or substantially as an entirety,
the Company, or such successor or purchasing corporation, as the case may be,
shall execute with the Trustee a supplemental indenture (which shall conform
to the Trust Indenture Act of 1939 as in force at the date of the execution
of such supplemental indenture) providing that the holder of each Debenture
then
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29
outstanding shall have, in lieu of the right to convert such Debenture into
Common Stock of the Company, the right to convert such Debenture into the
kind and amount of shares of stock and other securities and property
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Common Stock into which
such Debenture might have been converted immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Such
supplemental indenture shall provide for adjustments which shall be as
nearly, equivalent as may be practicable to the adjustments provided for in
this Article Four and any such adjustments which shall be approved by the
Board of Directors and set forth in such supplemental indenture shall be
conclusive for all purposes of this Section 4.06, and the Trustee shall not
be under any responsibility to determine the correctness of any provision
contained in such supplemental indenture relating to either the kind or
amount of shares of stock or securities or property receivable by
debentureholders upon the conversion of their Debentures after any such
reclassification, change, consolidation, merger, sale or conveyance. To the
extent the Debentures become convertible into cash, no adjustment need be
made thereafter as to the cash, and interest will not accrue on the cash.
The above provisions of this Section 4.06 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, sales and
conveyances.
SECTION 4.07. Taxes on Conversion. The issue of stock certificates on
conversion of Debentures shall be made without charge to the converting
debentureholder for any issue tax in respect of the issue thereof. The
Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of shares in
any name other than that of the holder of any Debenture converted, and the
Company shall not be required to issue or deliver any such stock certificate
unless and until the person or persons requesting the issue thereof shall
have paid to the Company the amount of such tax or shall have established to
the satisfaction of the Company that such tax has been paid.
SECTION 4.08. Company to Reserve Stock. The Company shall at all times
reserve and keep available out of its authorized but unissued shares, for the
purpose of effecting the conversion of the Debentures, such number of its
duly authorized shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding Debentures.
If any shares of Common Stock reserved or to be reserved for the purpose
of conversion of Debentures hereunder require registration with or approval
of any governmental authority under any Federal or State law before such
shares may be validly issued upon conversion, then the Company covenants
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30
that it will in good faith and as expeditiously as practicable endeavor to
secure such registration or approval, as the case may be.
The Company covenants that all shares of Common Stock which may be
issued upon conversion of Debentures shall upon issue be fully paid and
nonassessable by the Company and free from all taxes, liens and charges with
respect to the issue thereof.
SECTION 4.09. Disclaimer by Trustee of Responsibility for Certain
Matters. Neither the Trustee nor any conversion agent shall at any time be
under any duty or responsibility to any holder of Debentures to determine
whether any facts exist which may require any adjustment of the conversion
price, or with respect to the nature, accuracy or extent of any such
adjustment when made, or with respect to the method employed, or herein or in
any supplemental indenture provided to be employed, in making the same,
subject, however, to the provisions of Section 9.01 of this Indenture.
Neither the Trustee nor any conversion agent shall be accountable with
respect to the validity or value (or the kind or amount) of any shares of
Common Stock, or of any securities or property, which may at any time be
issued or delivered upon the conversion of any Debenture; and neither of them
makes any representations with respect thereto. Neither the Trustee nor any
conversion agent shall be responsible for any failure of the Company to make
any cash payment or to issue, transfer or deliver any shares of Common Stock
or stock certificates or other securities or property upon the surrender of
any Debenture for the purpose of conversion or, subject to Section 9.01, to
comply with any of the covenants of the Company contained in this Article
Four.
SECTION 4.10. Company to Give Notice of Certain Events. In the event
(1) that the Company shall pay any dividend or make any
distribution to the holders of Common Stock otherwise than in cash out
of its retained earnings; or
(2) that the Company shall offer for subscription, pro rata, to
the holders of Common Stock any additional shares of stock of any class
or any other right; or
(3) that the Company shall effect any reclassification or change
of outstanding shares of the Common Stock issuable upon the conversion
of the Debentures (other than a change in par value, or from par value
to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or any consolidation of the Company with,
or merger of the Company into, another corporation (other than a
consolidation or merger in which the Company is the continuing
corporation and which does not result in any reclassification or change
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31
of outstanding shares of Common Stock issuable upon conversion of the
Debentures), or any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety;
then, and in any one or more of such events, the Company will give to
the Trustee and any conversion agent written notice thereof at least ten
days (or such shorter period acceptable to the Trustee) prior to (i) the
record date fixed with respect to any of the events specified in (1) and
(2) above, and (ii) the effective date of any of the events specified in
(3) above; and shall mail a copy of such notice to the holders of
Debentures at their last addresses as they shall appear upon the
registry books.
ARTICLE FIVE
REDEMPTION OF DEBENTURES - SINKING FUND
SECTION 5.01. Redemption Prices. (a) The Company may, at its option,
redeem all or from time to time any part of the Debentures, otherwise than
through the operation of the Sinking Fund provided for in this Article Five,
subject to the conditions and at the prices specified in the form of
Debenture hereinbefore set forth for redemption otherwise than through the
operation of the Sinking Fund, together with interest accrued and unpaid
thereon to the date fixed for redemption.
(b) The Debentures are also subject to redemption in part on August 1,
1997 and on each August 1 thereafter to and including August 1, 2010, through
the operation of the Sinking Fund described in Section 5.04, at 100% of the
principal amount thereof, together with interest accrued and unpaid thereon
to the date fixed for redemption.
SECTION 5.02. Notice of Redemption; Selection of Debentures. In case
the Company shall desire to exercise such right to redeem all or, as the case
may be, any part of the Debentures in accordance with the right reserved so
to do, it shall give notice of such redemption to the Trustee, and the
Trustee shall thereupon, in the name of and at the expense of the Company,
give notice on behalf of the Company of such redemption to the holders of the
Debentures to be !redeemed as hereinafter in this Section 5.02 provided.
Notice of redemption shall be given to the holders of Debentures to be
redeemed as a whole or in part by mailing by first-class mail a notice of
such redemption not less than thirty nor more than sixty days prior to the
date fixed for redemption to their last addresses as they shall appear upon
the registry books, but failure to give such notice by mailing to the holder
of any Debenture designated for redemption as a whole or in part, or any
defect therein, shall not affect the validity of the proceedings for the
redemption of any other Debentures.
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Any notice which is mailed in the manner herein provided shall be
conclusively presumed to have been duly given, whether or not the holder
receives the notice.
Each such notice of redemption shall specify the total principal amount
to be redeemed, the date fixed for redemption and the redemption price at
which Debentures are to be redeemed, and shall state that payment of the
redemption price of the Debentures to be redeemed will be made at the office
or agency to be maintained by the Company in accordance with the provisions
of Section 6.02, upon presentation and surrender of such Debentures, that
interest accrued to the date fixed for redemption will be paid as specified
in said notice, that on and after said date interest thereon will cease to
accrue and such notice shall state the current conversion price, the date on
which the right to convert the Debentures or portion of the principal amount
thereof to be redeemed will terminate and the places where such Debentures
may be surrendered for conversion. If less than all the Debentures are to be
redeemed, the notice of redemption to each holder shall specify the numbers
of such Debentures to be redeemed. In case any Debenture is to be redeemed
in part only, the notice which relates to such Debenture shall state the
portion of the principal amount thereof to be redeemed (which shall be
$1000 or a whole multiple thereof), and shall state that on and after the date
fixed for redemption, upon surrender of such Debenture, the holder will
receive the redemption price together with accrued interest in respect of the
principal amount thereof called for redemption and, without charge, a new
Debenture or Debentures of authorized denominations for the principal amount
thereof remaining unredeemed.
On or prior to the redemption date specified in the notice of redemption
given as provided in this Section 5.02, the Company will deposit with the
Trustee or with one or more paying agents an amount of money in immediately
available funds sufficient to redeem on the redemption date all the
Debentures or portions of Debentures so called for redemption at the
appropriate redemption price, together with accrued interest to the date
fixed for redemption.
If all the Debentures are to be redeemed, the Company shall give the
Trustee notice thereof at least thirty-five days (or such shorter period
acceptable to the Trustee) in advance of the date fixed for redemption. If
less than all the Debentures are to be redeemed, the Company shall give the
Trustee, at least forty-five days (or such shorter period acceptable to the
Trustee) in advance of the date fixed for redemption, notice of the aggregate
principal amount of Debentures to be redeemed, and thereupon the Trustee
shall select by lot or in such other manner as it shall deem appropriate and
fair, in its discretion, the Debentures or portions thereof to be redeemed
and shall thereafter promptly
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33
notify the Company in writing of the number of the Debentures or portions
thereof to be redeemed. For the purpose of any redemption of less than all
the Debentures, the Company and the Trustee may treat as outstanding
Debentures surrendered for conversion during the period of fifteen days
immediately preceding the mailing of the notice of redemption.
If any Debenture selected for redemption in part is surrendered for
conversion in part on or before the close of business on the third business
day next preceding the date fixed for redemption, the part of such Debenture
converted shall be applied first to the part to be redeemed.
SECTION 5.03. When Debentures Called for Redemption Become Due and
Payable. If the giving of notice of redemption shall have been completed as
above provided, the Debentures or portions of Debentures specified in such
notice shall, unless theretofore converted into Common Stock, become due and
payable on the date and at the place stated in such notice at the applicable
redemption price, together with interest accrued to the date fixed for
redemption, and (i) on and after such date fixed for redemption (unless the
Company shall default in the payment of such Debentures at the redemption
price, together with interest accrued to the date fixed for redemption)
interest on the Debentures or portions of Debentures so called for redemption
shall cease to accrue, and (ii)any right to convert the Debentures or
portions of Debentures so called for redemption shall terminate at the close
of business on the date fixed for redemption. On presentation and surrender
of such Debentures at said place of payment in said notice specified, the
said Debentures shall be paid and redeemed by the Company at the applicable
redemption price, together with interest accrued to the date fixed for
redemption. Upon presentation of any Debenture which is redeemed in part
only, the Company shall execute and register and the Trustee or the
Authenticating Agent shall authenticate and deliver at the expense of the
Company, a new Debenture or Debentures in principal amount equal to the
unredeemed portion of the Debenture so presented.
SECTION 5.04. Sinking Fund. (a) As and for a Sinking Fund for the
retirement of Debentures, the Company covenants that, on or before August 1,
1997, and annually on or before August 1 of each year thereafter to and
including August 1, 2010, it will pay to the Trustee a sum in immediately
available funds sufficient to retire by redemption 5% of the aggregate
principal amount of Debentures issued at a redemption price which shall be
100% of the principal amount thereof, provided, however, that in any such
year in which August 1 is not a business day, such payment shall be made to
the Trustee on or before the last business day preceding such August 1; and
provided, further,
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34
that such principal amount of Debentures may, at the option of the Company,
be reduced by an amount not exceeding the sum of the following:
(i) the principal amount of Debentures theretofore issued and
reacquired (otherwise than through redemption pursuant to this Article
Five) by the Company and delivered to the Trustee for cancellation and not
theretofore made the basis for the reduction of a Sinking Fund payment;
(ii) the principal amount of Debentures theretofore converted into
Common Stock pursuant to Article Four and not theretofore made the basis
for the reduction of a Sinking Fund payment pursuant to this subparagraph
(ii), or Section 5.05(b) or otherwise;
(iii) the principal amount of Debentures redeemed and paid pursuant
to the provisions of this Article Five (otherwise than through the
operation of the Sinking Fund), or which shall have been duly called for
redemption (otherwise than through the operation of the Sinking Fund) and
the redemption price of which shall have been deposited in trust for that
purpose, and which have not theretofore been made the basis for the
reduction of a Sinking Fund payment; and
(iv) the principal amount of Debentures redeemed through optional
Sinking Fund payments made pursuant to Section 5.04(b) and not theretofore
made the basis for the reduction of a Sinking Fund payment.
On or before June 1 in each year, beginning June 1, 1997 to and including
June 1, 2010, the Company shall deliver to the Trustee an Officer's
Certificate stating whether it elects to reduce the amount to be paid to the
Trustee in cash on the next succeeding August 1 and, if it elects to make
such a reduction, setting forth the amount of the reduction and the basis or
bases provided above for such reduction, together with any Debentures
theretofore issued and reacquired (otherwise than through redemption pursuant
to this Article Five) by the Company and not theretofore delivered to the
Trustee for cancellation, which are to be made the basis for such reduction
of a Sinking Fund payment.
(b) In addition to the funds required to be paid to the Trustee pursuant to
paragraph (a) of this Section 5.04, the Company may at its option on or
before August 1, 1997, and annually on or before August 1 of each year
thereafter to and including August 1, 2010, pay to the Trustee as and for the
Sinking Fund a sum in immediately available funds not exceeding the amount
required to retire by redemption an additional 5% of the aggregate principal
amount of Debentures issued at a redemption price which shall be 100% of the
principal
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35
amount thereof on such August 1. Any such election by the Company shall be
evidenced by an Officers' Certificate delivered to the Trustee not later than
the June 1 next preceding the August I in question and shall be irrevocable
upon such delivery. The right granted in this paragraph (b) shall be
noncumulative so that the failure to exercise such right in any year, in
whole or in part, shall not increase the maximum amount which may be paid to
the Trustee in any subsequent year.
(c) All funds paid to the Trustee pursuant to the provisions of this
Section 5.04 shall be applied in accordance with the provisions of this
Article Five.
SECTION 5.05. Application of Sinking Fund Payments. (a) In each year
commencing with 1997, as soon as practicable after June 1, the Trustee shall
take the action herein specified to call for redemption on the next
succeeding August 1, at a redemption price which shall be 100% of the
principal amount thereof, an amount of Debentures sufficient to exhaust, as
nearly as may be practicable, the sums then held by it in the Sinking Fund or
required to be paid to it for the Sinking Fund pursuant to Sections 5.04(a)
and (b) prior to such August 1; provided, however, that such action shall be
taken only if such sums shall be sufficient to redeem $25,000 principal
amount of Debentures or more.
(b) In the event that any Debenture or portion thereof called for
redemption through operation of the Sinking Fund pursuant to paragraph (a) of
this Section 5.05 is converted into Common Stock of the Company after being
so called for redemption, the Company may, at its option, reduce in whole or
part the amount of the payment currently required or payable under Section
5.04(a) (and Section 5.04(b) if applicable) by an amount equal to the
principal amount of such Debenture or portion thereof so converted, provided
that the Company shall notify the Trustee in writing at the time any Sinking
Fund payment is made whether the Company elects to reduce such payment, and,
if so, the amount of the reduction.
(c) Any unused balance of moneys remaining in the hands of the Trustee
on the June 1 preceding the Sinking Fund payment date in any year shall be
added to any Sinking find payment to be made I immediately available funds in
that year, and together with such payment, if any, shall be applied to the
redemption of Debentures in accordance with the provisions of this Section
5.05.
The Company will pay to the Trustee, with respect to any Debentures to
be redeemed pursuant to this Section 5.05, accrued interest to be paid by the
Trustee in respect of such Debentures, it being the intention that accrued
interest and any other expenses shall not be charged against Sinking Fund
moneys.
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36
SECTION 5.06. Redemption in Event of Default. The Trustee shall not
redeem any Debentures with Sinking Fund moneys or mail any notice of
redemption of Debentures by operation of the Sinking Fund during any period
in which the Trustee is charged with knowledge of the continuance of either a
default in payment of interest on the Debentures or of any Event of Default
(other than an Event of Default occurring as a consequence of this
paragraph), except that if the notice of redemption of any Debentures shall
theretofore have been mailed in accordance with the provisions hereof, the
Trustee shall redeem such Debentures if funds sufficient for that purpose
shall be paid to the Trustee for that purpose in accordance with the terms of
this Article Five. Except as aforesaid, any moneys in the Sinking Fund
during any period in which the Trustee is charged with the knowledge of the
continuance of any such default or Event of Default shall, during such
period, be held as security for the payment of all the Debentures; provided,
however, that in case such Event of Default shall have been cured or waived
as provided herein, such moneys shall thereafter be applied on the next
August 1 on which such moneys may be applied pursuant to the provisions of
this Section 5.06.
For the purposes of this Section 5.06 and of Section 8.07, the Trustee
shall not be charged with knowledge of the continuance either of default in
payment of interest on the Debentures or of any Event of Default unless
either (a) a responsible officer of the Trustee assigned to its corporate
trust department shall, as such officer, have actual knowledge thereof or (b)
written notice of such continuance shall have been given to the Trustee by
the Company or by the holders of at least five percent of the aggregate
principal amount of the Debentures at the time outstanding.
SECTION 5.07. Manner of Redeeming Debentures. The Debentures to be
redeemed from time to time as in Section 5.05 provided shall be selected by
the Trustee for redemption in the manner provided in Section 5.02 and notice
thereof shall be given by the Trustee to the Company, and the Company hereby
authorizes the Trustee, in the name of and at the expense of the Company, to
give notice on behalf of the Company of the call of such Debentures, all in
the manner and with the effect in this Article Five specified except that, in
addition to the matters required to be included in such notice by Section
5.02, such notice shall also state that the Debentures therein designated for
redemption are to be redeemed through operation of the Sinking Fund. Subject
to the provisions of Section 5.06 and to the receipt by the Trustee of the
funds and the accrued interest to be paid to the Trustee pursuant to Sections
5.04 and 5.05, the Trustee shall cause such Debentures to be so redeemed and
paid in accordance with such notice in the manner and with the effect
provided in Sections 5.02 and 5.03
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37
SECTION 5.08. Cancellation of Redeemed Debentures. All Debentures
surrendered to the Trustee, pursuant to the provisions of this Article Five,
shall be forthwith cancelled by it, and shall be destroyed by the Trustee,
which shall, upon request, deliver its certificate thereof to the Company.
SECTION 5.09. Conversion Arrangements on Call for Redemption. In
connection with any redemption of Debentures, the Company may arrange for the
purchase and conversion of any Debentures by an agreement with one or more
investment bankers or other purchasers to purchase such Debentures by paying
to debentureholders, or to the Trustee in trust for the debentureholders, on
or before the close of business on the date fixed for redemption, an amount
not less than the redemption price payable by the Company on redemption of
such Debentures. Notwithstanding anything to the contrary contained in this
Article Five, the obligation of the Company to pay the redemption price of
such Debentures shall be satisfied and discharged to the extent such amount
is so paid by such purchasers. Pursuant to such an agreement, any Debentures
tendered by the holder for redemption or not duly surrendered for conversion
by the holder shall be deemed acquired by such purchasers from such holders
and surrendered by such purchasers for conversion, all as of immediately
prior to the close of business on the date fixed for redemption, subject to
payment of the above as aforesaid.
ARTICLE SIX
PARTICULAR COVENANTS OF THE COMPANY
The Company covenants as follows:
SECTION 6.01. Payment of Principal of (and Premium, if Any) and
Interest on Debentures. The Company will duly and punctually pay or cause to
be paid the principal of (and premium, if any) and interest on each of the
Debentures at the time and place and in the manner provided in the Debentures
and this Indenture.
SECTION 6.02. Maintenance of Office or Agency for Registration of
Transfer, Conversion Exchange and Payment of Debentures. So long as any of
the Debentures shall remain outstanding, the Company will maintain an office
or agency in the City of San Francisco, the State of California and in the
Borough of Manhattan, The City of New York, State of New York, where the
Debentures may be surrendered for exchange, conversion or registration of
transfer as in this Indenture provided, and where notices and demands to or
upon the Company in respect of the Debentures or of this Indenture may be
served, and where the Debentures may be presented or surrendered for payment.
The Company initially appoints each of the Trustee and the Authenticating
Agent its office or agency for each of said purposes. The
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Company will give to the Trustee notice of the location of any such office or
agency and of any change of location thereof. In case the Company shall fail
to maintain any such office or agency or shall fail to give such notice of
the location or of any change in the location thereof, such surrenders,
presentations and demands may be made and notices may be served at the
principal office of the Trustee in the City of San Francisco, and the Company
hereby appoints the Trustee its agent to receive at the aforesaid office all
such surrenders, presentations, notices and demands. Unless other
arrangements are made by the Company, payment of interest will be made by
check mailed by the Company to the registered address of the person entitled
thereto.
The Company may from time to time designate one or more other offices or
agencies (in or outside of the Borough of Manhattan, The City of New York)
where the Debentures may be presented or surrendered for any or all of such
purposes, and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve
the Company of its obligation to maintain an office or agency in the City of
San Francisco and in the Borough of Manhattan, The City of New York, for such
purposes as stated in this Section. The Company will give prompt written
notice to the Trustee of any such designation and any change in the location
of any such office or agency.
SECTION 6.03. Appointment to Fill a Vacancy in the Office of Trustee.
The Company, whenever necessary to avoid or fill a vacancy in the office of
Trustee, will appoint, in the manner provided in Section 9.10, a Trustee, so
that there shall at all times be a Trustee hereunder.
SECTION 6.04. Provision as to Paying Agent. (a) If the Company shall
appoint a paying agent other than the Trustee, it will cause such paying
agent to execute and deliver to the Trustee an instrument in which such agent
shall agree with the Trustee, subject to the provisions of this Section 6.04,
(1) that it will hold all sums held by it as such agent for the
payment of the principal of (and premium, if any) or interest on the
Debentures (whether such sums have been paid to it by the Company or by
any other obligor on the Debentures) in trust for the benefit of the
persons entitled thereto, and
(2) that it will give the Trustee notice of any failure by the
Company (or by any other obligor on the Debentures) to make any payment
of the principal of (and premium, if any) or interest on the Debentures
when the same shall be due and payable, and
(3) that it will, at any time during the continuance of any such
default, upon the written request of the Trustee, forthwith pay to the
Trustee all sums so held in trust, by such paying agent.
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(b) Whenever the Company shall have one or more paying agents, it will,
on or prior to each due date of the principal of (and premium, if any) or
interest on any Debentures, deposit with a paying agent a sum sufficient to
pay the principal (and premium, if any) or interest so becoming due, such sum
to be held ins trust for the benefit of the holders of Debentures entitled to
such principal, premium or interest, and (unless such paying agent is the
Trustee) the Company will promptly notify the Trustee of its failure so to
act.
(c) If the Company shall act as its own paying agent, it will, on or
before each due date of the principal of (and premium, if any) or interest on
the Debentures, set aside, segregate wad hold in trust for the benefit of the
persons entitled thereto, a sum sufficient to pay such principal (and
premium, if any) or interest so becoming due and will notify the Trustee of
any failure to take such action.
(d) Anything in this Section 6.04 to the contrary notwithstanding, the
Company may, at any time, for the purpose of obtaining a satisfaction and
discharge of this Indenture, or for any other reason, pay or cause to be paid
to the Trustee all sums held in trust by it, or any paying agent hereunder,
as required by this Section 6.04, such sums to be held by the Trustee upon
the trusts herein contained.
(e) Anything in this Section 6.04 to the contrary notwithstanding, the
agreement to hold sums in trust as provided in this Section 6.04 is subject
to the provisions of Sections 14.03 and 14.04.
SECTION 6.05. Maintenance of Corporate Existence. So long as any of
the Debentures shall remain outstanding, the Company will at all times
(except as otherwise provided or permitted in this Section 6.05 or elsewhere
in this Indenture) do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence and franchises and
the corporate existence and franchises of each Subsidiary; provided that
nothing herein shall require the Company to continue the corporate existence
or franchises of any Subsidiary if in the judgment of the Company it shall be
necessary, advisable or in the interest of the Company to discontinue the
same.
SECTION 6.06. Further Assurance. From time to time whenever reasonably
demanded by the Trustee the Company will make, execute and deliver or cause
to be made, executed and delivered any and all such further and other
instruments and assurances as may be reasonably necessary or proper to carry
out the intention of or to facilitate the performance of the terms of this
Indenture or to secure the rights and remedies hereunder of the holders of
the Debentures.
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SECTION 6.07. Officers' Certificate as to Default. The Company will, so
long as any of the Debentures are outstanding:
(a) deliver to the Trustee, forthwith upon becoming aware of any
default or defaults in the performance of any covenant, agreement or
condition contained in this Indenture, an Officers' Certificate specifying
such default or defaults,
(b) deliver to the Trustee, forthwith upon becoming aware of any
default or defaults under Section 8.01(d) of this Indenture, an Officers'
Certificate specifying such default or defaults, and
(c) deliver to the Trustee within 90 days after the end of each
fiscal year of the Company, which on the date hereof ends December 31,
beginning with the fiscal year 1986, an Officers' Certificate stating that:
(1) a review of the activities of the Company during such
year and of performance under this Indenture has been made under his
supervision; and
(2) to the best of his knowledge, based on such review, the
Company has fulfilled all its obligations under this Indenture
throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known
to him and the nature and status thereof.
ARTICLE SEVEN
DEBENTUREHOLDERS' LISTS AND REPORTS BY THE
COMPANY AND THE TRUSTEE
SECTION 7.01. Company to Furnish Trustee Information as to Names and
Addresses of Debentureholders. The Company will furnish or cause to be
furnished to the Trustee:
(a) semi-annually, not more than 15 days after each January 15 and
July 15, beginning January 15, 1987, a list, in such form as the Trustee
may reasonably require, of the names and addresses of the debentureholders
as of such January 15 and July 15, as the case may be (or if such January
15 or July 15 is not a business day, as of the business day next preceding
such January 15 or July 15), and
(b) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a list
of similar form and content as of a date not more than 15 days prior to the
time such list is furnished.
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provided, however, that so long as the Trustee is the Debenture registrar, no
such lists shall be required to be furnished.
SECTION 7.02. Preservation and Disclosure of Lists. (a) The Trustee shall
preserve, in as current a form as is reasonably practicable, all information as
to the names and addresses of the holders of Debentures (1) contained in the
most recent list furnished to it as provided in Section 7.01 and (2) received by
it in the capacity of paying agent (if so acting) or Debenture registrar.
The Trustee may destroy any list furnished to it as provided in Section
7.01 upon receipt of a new list so furnished.
(b) In case three or more holders of Debentures (hereinafter referred to
as "applicants") apply in writing to the Trustee, and furnish to the Trustee
reasonable proof that each such applicant has owned a Debenture for a period of
at least six months preceding the date of such application, and such application
states that the applicants desire to communicate with other holders of
Debentures with respect to their rights under this Indenture or under the
Debentures, and is accompanied by a copy of the form of proxy or other
communication which such applicants propose to transmit, then the Trustee shall,
within five business days after the receipt of such application, at its election
either
(1) afford such applicants access to the information preserved at
the time by the Trustee in accordance with the provisions of subsection (a)
of this Section 7.02, or
(2) inform such applicants as to the approximate number of holders
of Debentures whose names and addresses appear in the information preserved
at the time by the Trustee in accordance with the provisions of subsection
(a) of this Section 7.02, and as to the approximate cost of mailing to such
debentureholders the form of proxy or other communication, if any,
specified in such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each debentureholder whose name and address appears in the information
preserved at the time by the Trustee in accordance with the provisions of
subsection (a) of this Section 7.02, a copy of the form of proxy or other
communication which is specified in such request, with reasonable promptness
after a tender to the Trustee of the material to be mailed and of payment, or
provision for the payment, of the reasonable expenses of mailing, unless within
five days after such tender, the Trustee shall mail to such applicants
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42
and file with the Securities and Exchange Commission, together with a copy of
the material to be mailed, a written statement to the effect that, in the
opinion of the Trustee, such mailing would be contrary to the best interests of
the holders of Debentures or would be violation of applicable law. Such written
statement shall specify the basis of such opinion. If said Commission, after
opportunity for a hearing upon the objections specified in the written statement
so filed, shall enter an order refusing to sustain any of such objections or if,
after the entry of an order sustaining one or more of such objections, said
Commission shall find, after notice and opportunity for hearing, that all the
objections so sustained have been met and shall enter an order so declaring, the
Trustee shall mail copies of such material to all such debentureholders with
reasonable promptness after the entry of such order and the renewal of such
tender; otherwise the Trustee shall be relieved of any obligation or duty to
such applicants respecting their application. All notices, demands, filings or
other documents received by the Trustee from, or sent by the Trustee to,
debentureholders or said Commission pursuant to subsection (b) shall also be
sent to the Company by the Trustee promptly after receipt or concurrently with
sending.
(c) Each and every holder of the Debentures, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any paying agent nor the Debenture registrar shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the holders of Debentures in accordance with the provisions of
subsection (b) of this Section 7.02, regardless of the source from which such
information was derived, and that the Trustee shall not be held accountable by
reason of mailing any material pursuant to a request made under said subsection
(b).
SECTION 7.03. Reports by the Company. (a) The Company covenants and agrees
to file with the Trustee within fifteen days after the Company is required to
file the same with the Securities and Exchange Commission, copies of the annual
reports and of the information, documents and other reports (or copies of such
portions of any of the foregoing as said Commission may from time to time by
rules and regulations prescribe) which the Company may be required to file with
said Commission pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934, as amended; or, if the Company is not required to file
information, documents or reports pursuant to either of such sections, then to
file with the Trustee and said Commission, in accordance with rules and
regulations prescribed from time to time by said Commission, such of the
supplementary and periodic information, documents and reports which may be
required pursuant to Section 13 of the Securities Exchange Act of 1934, as
amended, in respect of a security listed and registered on a national securities
exchange as may be prescribed from time to time in such rules and regulations.
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43
(b) The Company covenants and agrees to file with the Trustee and the
Securities and Exchange Commission, in accordance with the rules and regulations
prescribed from time to time by said Commission, such additional information,
documents, and reports with respect to compliance by the Company with the
conditions and covenants provided for in this Indenture as may be required from
time to time by such rules and regulations.
(c) The Company covenants and agrees to transmit to the holders of
Debentures within thirty days after the filing thereof with the Trustee, in the
manner and to the extent provided in subsection (c) of Section 7.04 with respect
to reports pursuant to subsection (a) of said Section 7.04, such summaries of
any information, documents and reports required to be filed by the Company
pursuant to subsections (a) and (b) of this Section 7.03 as may be required by
rules and regulations prescribed from time to time by the Securities and
Exchange Commission.
SECTION 7.04. Reports by the Trustee. (a) On or before July 15, 1987, and
on or before July 15 in every year thereafter, so long as any Debentures are
outstanding hereunder, the Trustee shall transmit to the debentureholders, as
hereinafter in this Section 7.04 provided, and to the Company, a brief report
dated as of May 15 of the year in which such report is made with respect to:
(1) its eligibility under Section 9.09, and its qualifications
under Section 9.08, or in lieu thereof, if to the best of its knowledge it
has continued to be eligible and qualified under such Sections, a written
statement to such effect;
(2) the character and amount of any advances (and if the Trustee
elects so to state, the circumstances surrounding the making thereof) made
by the Trustee (as such) which remain unpaid on the date of such report,
and for the reimbursement of which it claims or may claim a lien or charge,
prior to that of the Debentures, on any property or funds held or collected
by it as Trustee, except that the Trustee shall not be required (but may
elect) to state such advances if such advances so remaining unpaid
aggregate not more than one-half of one per cent of the principal amount of
the Debentures outstanding on the date of such report;
(3) the amount, interest rate, and maturity date of all other
indebtedness owing by the Company (or by any other obligor on the
Debentures) to the Trustee in its individual capacity, on the date of such
report, with a brief description of any property held as collateral
security therefor, except an indebtedness based upon a creditor
relationship arising in any manner described in paragraph (2), (3), (4) or
(6) of subsection (b) of Section 9.13;
(4) the property and funds of the Company, if any, physically in
the possession of the Trustee (as such) on the date of such report;
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44
(5) any additional issue of Debentures which the Trustee has not
previously reported; and
(6) any action taken by the Trustee in the performance of its
duties under this Indenture which it has not previously reported and which
in its opinion materially affects the Debentures, except action in respect
of a default, notice of which has been or is to be withheld by it in
accordance with the provisions of Section 8.07.
(b) The Trustee shall transmit to the debentureholders, as hereinafter
provided, and to the Company, a brief report with respect to the character and
amount of any advances (and if the Trustee elects so to state, the circumstances
surrounding the making thereof) made by the Trustee (as such) since the date of
the last report transmitted pursuant to the provisions of subsection (a) of this
Section 7.04 (or if no such report has yet been so transmitted, since the date
of execution of this Indenture), for the reimbursement of which it claims or may
claim a lien or charge prior to that of the Debentures on property or funds held
or collected by it as Trustee, and which it has not previously reported pursuant
to this subsection, except that the Trustee shall not be required (but may
elect) to report such advances if such advances remaining unpaid at any time
aggregate ten per cent or less of the principal amount of Debentures outstanding
at such time, such report to be transmitted within ninety days after such time.
(c) Reports pursuant to this Section 7.04 shall be transmitted by mail to
all holders of Debentures, as the names and addresses of such holders appear
upon the registry books of the Company, and to the Company in accordance with
Section 16.03.
(d) A copy of each such report shall, at the time of such transmission to
debenturebolders, be filed by the Trustee with each stock exchange upon which
the Debentures are listed and also with the Securities and Exchange Commission.
The Company will notify the Trustee when and as the Debentures become listed on
any stock exchange.
ARTICLE EIGHT
REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS
ON EVENT OF DEFAULT
SECTION 8.01. Events of Default Defined. In case one or more of the
following Events of Default shall have occurred and be continuing, that is to
say:
(a) default in the payment, whether or not prohibited by the
provisions of Article Three, of any instalment of interest upon any of the
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45
Debentures as and when the same shall become due and payable, and
continuance of such default for a period of thirty days; or
(b) default in the payment, whether or not prohibited by the
provisions of Article Three, of the principal of (and premium, if any, on)
any of the Debentures as and when the same shall become due and payable
either at maturity, upon redemption, by declaration or otherwise, or in the
making of any Sinking Fund payment; or
(c) failure on the part of the Company duly to observe or perform
in any material respect any other of the covenants or agreements on the
part of the Company in the Debentures or in this Indenture contained for a
period of sixty days after the date on which written notice of such
failure, requiring the same to be remedied, shall have been given to the
Company by the Trustee, or to the Company and the Trustee by the holders of
at least twenty-five per cent in aggregate principal amount of the
Debentures at the time outstanding; or
(d) If an event of default as defined in any mortgage, indenture or
instrument, under which there may be issued, or by which there may be
secured or evidenced, any indebtedness of the Company or any Subsidiary
(other than indebtedness owing to a seller or any of its affiliates,
successors and assigns for real or personal property (including
intangibles) and other than indebtedness owing to a lessor or any of its
affiliates, successors and assigns under any lease of real or personal
property (including, but not limited to any capitalized lease)), whether
such indebtedness now exists or shall hereafter be created, shall happen
and shall result in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable, provided that (i) such acceleration shall not be rescinded or
annulled within thirty days after there has been given, by registered or
certified mail, to the Company by the Trustee or to the Company and the
Trustee by the holders of at least 25% in aggregate principal amount of the
Debentures a written notice specify in such event of default and requiring
the Company to cause such acceleration to be rescinded or annulled and (ii)
the amount of the indebtedness subject to acceleration equals or exceeds
15% of the consolidated total indebtedness of the Company as of the last
date of the next preceding fiscal quarter of the Company; or
(e) a court having jurisdiction in the premises shall enter a
decree or order for relief in respect of the Company in an involuntary case
under
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46
any applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Company or for any
substantial part of its property, or ordering the winding-up or liquidation
of its affairs, and such decree or order shall remain unstayed and in
effect for a period of sixty consecutive days; or
(f) the Company shall commence a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or shall consent to the entry of an order for relief in an
involuntary case under any such law, or shall consent to the appointment of
or taking possession by a receiver, liquidator, assignee, trustee,
custodian, sequestrator (or similar official) of the Company or for any
substantial part of its property, or shall make any general assignment for
the benefit of creditors, or shall fail generally to pay is debts as they
become due or shall take any corporate action in furtherance of any of the
foregoing,
then and in each and every such case, unless the principal of all the Debentures
shall have already become due and payable, either the Trustee or the holders of
not less than twenty-five per cent in aggregate principal amount of the
Debentures then outstanding hereunder, by notice in writing to the Company (and
to the Trustee if given by debentureholders), may declare the principal of all
the Debentures to be due and payable immediately, and upon any such declaration
the same shall become and shall be immediately due and payable, anything in this
Indenture or in the Debentures contained to the contrary notwithstanding. This
provision, however, is subject to the condition that if, at any time after the
principal of the Debentures shall have been so declared due and payable, and
before any judgment or decree for the payment of the moneys due shall have been
obtained or entered as hereinafter provided, the Company shall pay or shall
deposit with the Trustee a sum sufficient to pay all matured instalments of
interest upon all the Debentures and the principal of (and premium, if any, on)
any and all Debentures which shall have become due otherwise than by declaration
(with interest on overdue instalments of interest to the extent permitted by
law, and on such principal and premium, if any, at the rate of interest borne by
the Debentures to the date of such payment or deposit) and the expenses of the
Trustee, and any and all defaults under the Indenture, other than the nonpayment
of principal of and accrued interest on Debentures which shall have become due
by declaration, shall have been remedied-then and in every such case the holders
of a majority in aggregate principal amount of the Debentures then outstanding,
by written notice to the Company and to the Trustee, may waive all defaults and
rescind and annul
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47
such declaration and its consequences; but no such waiver or rescission and
annulment shall extend to or shall affect any subsequent default, or shall
impair any right consequent thereon.
In case the Trustee shall have proceeded to enforce any right under this
Indenture and such proceedings shall have been discontinued or abandoned because
of such rescission or annulment or for any other reason or shall have been
determined adversely to the Trustee, then and in every such case the Company,
the Trustee and the holders of the Debentures shall be restored respectively to
their former positions and rights hereunder, and all rights, remedies and powers
of the Company and the Trustee shall continue as though no such proceedings had
been taken.
SECTION 8.02. Payment of Debentures on Default; Suit Therefor. The
Company covenants that (1) in case default shall be made in the payment of any
instalment of interest on any of the Debentures, as and when the same shall
become due and payable, and such default shall have continued for a period of
thirty days, or (2) in case default shall be made in the payment of the
principal of (and premium, if any, on) any of the Debentures when the same shall
have become due and payable, whether upon maturity of the Debentures or upon
redemption or upon declaration or otherwise-then, upon demand of the Trustee, or
upon the request of 25% of the debentureholders the Company will pay to the
Trustee, for the benefit of the holders of the Debentures, the whole amount that
then shall have become due and payable on all such Debentures for principal (and
premium, if any) or interest, or both, as the case may be, with interest upon
the overdue principal (and premium, if any) and instalments of interest (to the
extent permitted by law) at the rate of interest borne by the Debentures; and,
in addition thereto, such further amount as shall be sufficient to cover the
costs and expenses of collection, including a reasonable compensation to the
Trustee, its agents, attorneys and counsel, and any expenses or liabilities
incurred by the Trustee hereunder other than through its negligence or bad
faith.
In case the Company shall fail forthwith to pay such amounts upon such
demand, the Trustee, in is own name and as trustee of an express trust, shall be
entitled and empowered to institute any action or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceeding to judgment or final decree, and may enforce any such
judgment or final decree against the Company or any other obligor upon the
Debentures, and collect in the manner provided by law out of the
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48
property of the Company or any other obligor upon the Debentures wherever
situated the moneys adjudged or decreed to be payable.
In case there shall be pending proceedings for the bankruptcy or for the
reorganization of the Company or any other obligor upon the Debentures under the
Bankruptcy Code or any other applicable law or in connection with the insolvency
of the Company or any other obligor upon the Debentures or in case a receiver or
trustee shall have been appointed for any substantial part of its property, or
in case of any other judicial proceedings of a similar nature relative to the
Company or any other obligor upon the Debentures or to creditors or property of
the Company or such other obligor, the Trustee, irrespective of whether the
principal of the Debentures shall then be due and payable as therein expressed
or by declaration or otherwise and irrespective of whether the Trustee shall
have made any demand pursuant to the provisions of this Section 8.02, shall be
entitled and empowered by intervention in such proceedings or otherwise, to file
and prove a claim or claims for the whole amount of principal, premium, if any,
and interest owing and unpaid in respect of the Debentures, and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee and of the debentureholders allowed in any such judicial
proceedings relative to the Company or any other obligor upon the Debentures,
its creditors, or its property, and to collect and receive any moneys or other
property payable or deliverable on any such claims, and to distribute the same
after the deduction of its charges and expenses and any other amounts due the
Trustee pursuant to Section 9.06; and any receiver, assignee or trustee in
bankruptcy or reorganization is hereby authorized by each of the
debentureholders to make such payments to the Trustee, and, in the event that
the Trustee shall consent to the making of such payments directly to the
debentureholders, to pay to the Trustee any amount due it for compensation and
expenses, including counsel fees incurred by it up to the date of such
distribution and any other amounts due the Trustee pursuant to Section 9.06. To
the extent that such payment of reasonable compensation, expenses, liabilities
and counsel fees out of the estate in any such proceedings shall be denied for
any reason, payment of the same shall be secured by a lien on, and shall be paid
out of, any and all distributions, dividends, moneys, securities and other
property which the holders of the Debentures may be entitled to receive in such
proceedings, whether in liquidation or under any plan of reorganization or
arrangement or otherwise.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any debentureholder
<PAGE>
49
any plan of reorganization, arrangement, adjustment or composition affecting the
Debentures or the rights of any holder thereof, or to authorize the Trustee to
vote in respect of the claim of any debentureholder in any such proceeding.
All rights of action and of asserting claims under this Indenture, or under
any of the Debentures, may be enforced by the Trustee without the possession of
any of the Debentures, or the production thereof at any trial or other
proceeding relative thereto, and any such suit or proceeding instituted by the
Trustee shall be brought in its own name as Trustee of an express trust, and any
recovery of judgment shall be for the ratable benefit of the holders of the
Debentures and the Trustee.
SECTION 8.03. Application of Moneys Collected by Trustee. Subject to the
provisions of Article Three, any moneys collected by the Trustee pursuant to
section 8.02 shall be applied in the order following, at the date or dates fixed
by the Trustee for the distribution of such moneys, upon presentation of the
several Debentures, and stamping thereon the payment, if only partially paid,
and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
9.06;
SECOND: In case no principal of the outstanding Debentures shall
have become due and be unpaid, to the payment of interest on the
Debentures, in the order of the maturity of the instalments of such
interest, with interest upon the overdue instalments of interest (so far as
permitted by law and to the extent that such interest has been collected by
the Trustee) at the rate of interest borne by the Debentures, such payments
to be made ratably to the persons entitled thereto, without discrimination
or preference;
THIRD: In case any principal of the outstanding Debentures shall have
become due, by declaration or otherwise, to the payment of the whole amount
then owing and unpaid upon the Debentures for principal (and premium, if
any) and interest, with interest on the overdue principal (and premium, if
any) and instalments of interest (so far as permitted by law and to the
extent that such interest has been collected by the Trustee) at the rate of
interest borne by the Debentures; and in case such moneys shall be
insufficient to pay in full the whole amount so due and unpaid upon the
Debentures, then to the payment of such principal (and premium, if any) and
interest, without preference or priority of principal (and premium, if any)
over interest, or of interest over principal (and premium, if any), or of
any instalment of interest over any other instalment of interest,
<PAGE>
50
ratably to the aggregate of such principal (and premium, if any) and
accrued and unpaid interest; and
FOURTH: To the payment of the remainder, if any, to the Company, its
successors or assigns, or to whosoever may be lawfully entitled to receive
the same, or as a court of competent jurisdiction may direct.
SECTION 8.04. Limitation on Suits by Holders of Debentures. No holder of
any Debenture shall have any right by virtue or by availing of any provision of
this Indenture to institute any suit, action or proceeding in equity or at law
upon or under or with respect to this Indenture or for the appointment of a
receiver or trustee, or for any other remedy hereunder, unless such holder
previously shall have given to the Trustee written notice of default and of the
continuance thereof, as hereinabove provided, and unless also the holders of not
less than twenty-five per cent in aggregate principal amount of the Debentures
then outstanding shall have made written request upon the Trustee to institute
such action, suit or proceeding in its own name as Trustee hereunder and shall
have offered to the Trustee such reasonable indemnity as it may require against
the costs, expenses and liabilities to be incurred therein or thereby, and the
Trustee, for sixty days after its receipt of such notice, request and offer of
indemnity, shall have neglected or refused to institute any such action, suit or
proceeding and no direction inconsistent with such written request shall have
been given to the Trustee pursuant to Section 8.06; it being understood and
intended, and being expressly covenanted by the holder of every Debenture with
every other debentureholder and the Trustee, that no one or more holders of
Debentures shall have any right in any manner whatever by virtue or by availing
of any provision of this Indenture to affect, disturb or prejudice the rights of
the holders of any other of such Debentures, or to obtain or seek to obtain
priority over or preference to any other such holder, or to enforce any right
under this Indenture, except in the manner herein provided and for the equal,
ratable and common benefit of all holders of Debentures. For the protection and
enforcement of the provisions of this Section 8.04, each and every
debentureholder and the Trustee shall be entitled to such relief as can be given
either at law or in equity.
Notwithstanding any other provisions in this Indenture, but subject to the
provisions of Article Three, the right of any holder of any Debenture to receive
payment of the principal of (and premium, if any) and interest on such
Debenture, on or after the respective due dates expressed in such Debenture, or
to institute suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of such
holder.
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51
SECTION 8.05. Proceedings by Trustee: Remedies Cumulative and Continuing.
In case of a default hereunder the Trustee may in its discretion proceed to
protect and enforce the rights vested in it by this Indenture by such
appropriate judicial proceedings as the Trustee shall deem most effectual to
protect and enforce any of such rights, either by suit in equity or by action at
law or by proceeding in bankruptcy or otherwise whether for the specific
enforcement of any covenant or agreement contained in this Indenture or in aid
of the exercise of any power granted in this Indenture, or to enforce any other
legal or equitable right vested in the Trustee by this Indenture or by law. All
powers and remedies given by this Article Eight to the Trustee or to the
debentureholders shall, to the extent permitted by law, be deemed cumulative and
not exclusive of any thereof or of any other powers and remedies available to
the Trustee or the holders of the Debentures, by judicial proceedings or
otherwise, to enforce the performance or observance of the covenants and
agreements contained in this Indenture, and no delay or omission of the Trustee
or of any holder of any of the Debentures to exercise any right or power
accruing upon any default occurring and continuing as aforesaid shall impair any
such right or power, or shall be construed to be a waiver of any such default or
an acquiescence therein; and, subject to the provisions of Section 8.04, every
power and remedy given by this Article Eight or by law to the Trustee or to the
debentureholders may be exercised from time to time, and as often as shall be
deemed expedient, by the Trustee or by the debentureholders.
SECTION 8.06. Rights of Holders of Majority in Principal Amount of
Debentures to Direct Trustee and to Waive Defaults. The holders of a majority
in aggregate principal amount of the Debentures at the time outstanding
(determined as provided in Section 10.04), or, if a record date is set in
accordance with Section 10.05, as of such record date, shall have the right to
direct the time, method, and place of conducting any proceeding for any remedy
available to the Trustee, or exercising any trust or power conferred on the
Trustee; provided, however, that subject to the provisions of Section 9.01, the
Trustee shall have the right to decline to follow any such direction if the
Trustee being advised by counsel shall determine that the action so directed may
not lawfully be taken, or if the Trustee in good faith shall, by a responsible
officer or officers of the Trustee, determine that the proceedings so directed
would be illegal or subject it to any personal liability or be unjustly
prejudicial to the debentureholders not consenting, and provided further that
nothing in this Indenture shall impair the right of the Trustee in its
discretion to take any action deemed proper by the Trustee and which is not
inconsistent with such direction by the debentureholders. Prior to the
declaration of the maturity of the
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52
Debentures as provided in Section 8.01, the holders of a majority in aggregate
principal amount of the Debentures at the time outstanding (determined as
provided in Sections 10.04 and 10.05) may on behalf of the holders of all of the
Debentures waive any past default hereunder and its consequences, except a
default in the payment of interest or premium on, or the principal of, any of
the Debentures or the making of any Sinking Fund payment or a default in respect
of a covenant or provision hereof which under Article Twelve cannot be modified
or amended without the consent of each outstanding Debenture so affected. In
the case of any such waiver the Company, the Trustee and the holders of the
Debentures shall be restored to their former positions and rights thereunder,
respectively; but no such waiver shall extend to any subsequent or other default
or impair any right consequent thereon.
SECTION 8.07. Trustee to Give Notice of Defaults Known to It, But May
Withhold in Certain Circumstances. The Trustee shall, within ninety days after
the occurrence of a default hereunder, give to the debentureholders, in the
manner and to the extent provided in subsection (c) of Section 7.04 with respect
to reports pursuant to subsection (a) of Section 7.04, notice of such defaults
known to the Trustee unless such defaults shall have been cured or waived before
the giving of such notice (the term "defaults" for the purposes of this Section
8.07 being hereby defined to be the events specified in clauses (a), (b), (c),
(d), (e) and (f) of Section 8.01, not including any periods of grace provided
for in clauses (a), (c), (d) and (e), respectively, and irrespective of the
giving of notice specified in clause (c)); provided that, except in the case of
default in the payment of the principal of (and premium, if any) or interest on
any of the Debentures or any Sinking Fund payment, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee, or a trust committee of directors and/or responsible
officers of the Trustee in good faith determines that the withholding of such
notice is in the interest of the debentureholders.
SECTION 8.08. Requirement of an Undertaking to Pay Costs in Certain Suits
Under the Indenture or Against the Trustee. All parties to this Indenture
agree, and each holder of any Debenture by his acceptance thereof shall be
deemed to have agreed, that any court may in its discretion require, in any suit
for the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the costs
of such suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made
<PAGE>
53
by such party litigant; but the provisions of this Section 8.08 shall not
apply to any suit instituted by the Trustee, to any suit instituted by any
debenturebolder, or group of debentureholders, holding in the aggregate more
than ten per cent in aggregate principal amount of the Debentures
outstanding, or to any suit instituted by any debentureholder for the
enforcement of the payment of the principal of (and premium, if any) or
interest on any Debenture, on or after the due date expressed in such
Debenture, or for the enforcement of the right to convert any Debenture as
provided in Article Four.
SECTION 8.09. Enforcement of Rights of Conversion by Debentureholders.
Anything in this Indenture to the contrary notwithstanding, the holder of any
Debenture, without reference to and without the consent of either the Trustee or
the holder of any other Debenture, in his own behalf and for his own benefit may
enforce, and may institute and maintain any proceedings suitable to enforce, his
right to convert his Debenture into Common Stock as provided in Article Four.
ARTICLE NINE
CONCERNING THE TRUSTEE
SECTION 9.01. Duties and Responsibilities of Trustee. The Trustee, prior
to the occurrence of an Event of Default and after the curing or waiving of all
Events of Default which may have occurred, undertakes to perform such duties and
only such duties as are specifically set forth in this Indenture. In case an
Event of Default has occurred (which has not been cured or waived) the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in their exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
No provision of this Indenture shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to
act, or its own willful misconduct, provided, however, that
(a) prior to the occurrence of an Event of Default and after the
curing or waiving of all Events of Default which may have occurred:
(1) the duties and obligations of the Trustee shall be
determined solely by the express provisions of this Indenture, and the
Trustee shall only be liable for the performance of such duties and
obligations as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
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(2) in the absence of bad faith on the part of the Trustee,
the Trustee may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Trustee and conforming to
the requirements of this Indenture; but in the case of any such
certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee
shall be under a duty to examine the same to determine whether or not
they conform to the requirements of this Indenture;
(b) the Trustee shall not be liable for any error of judgment made
in good faith by a responsible officer or officers of the Trustee, unless
it shall be proved that the Trustee was negligent in ascertaining the
pertinent facts; and
(c) the Trustee shall not be liable with respect to any action
taken, suffered or omitted to be taken by it in good faith in accordance
with the direction of the holders of not less than a majority in principal
amount of the Debentures at the time outstanding (determined as provided in
Sections 10.04 and 10.05) relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture.
None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties hereunder or in the
exercise of any of its rights or powers, if there is reasonable ground for
believing that the repayment of such funds or adequate indemnity against such
risk or liability is not reasonably assured to it.
Whether or not therein expressly provided, every provision of this
Indenture relating to the conduct or affecting the liability of, or affording
protection to, the Trustee shall be subject to the provisions of this Section
9.01.
SECTION 9.02. Reliance on Documents, Opinions, etc. Subject to the
provisions of Section 9.01:
(a) The Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval,
bond, debenture or other paper or document believed by it to be genuine
and to, have been signed or presented by the proper party or parties;
(b) any request direction, order or demand of the Company mentioned
herein shall be sufficiently evidenced by an instrument signed
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in the name of the Company by the President or any Vice President and the
Secretary or any Assistant Secretary or the Treasurer or any Assistant
Treasurer (unless other evidence in respect thereof be herein specifically
prescribed); and any resolution of the Board of Directors of the Company
may be evidenced to the Trustee by a copy thereof certified by the
Secretary or any Assistant Secretary of the Company;
(c) The Trustee may consult with counsel and the advice of such
counsel or any Opinion of Counsel shall be full and complete authorization
and protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in accordance with such advice or Opinion of
Counsel;
(d) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the debentureholders, pursuant to the provisions of
this Indenture, unless such debentureholders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred therein or thereby;
(e) The Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this
Indenture;