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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(AMENDMENT NO. 2)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
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:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
7% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
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/A or any amendment to
this Form 10-K/A. /X/
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes /X/ No / /
The aggregate market value as of June 30, 2002 of voting common stock held
by non-affiliates of the registrant: $102,107,859
The number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of April 25, 2003
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COMMON STOCK 39,944,962
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EXPLANATORY NOTE
The purpose of this Amendment No. 2 to the Annual Report on Form 10-K filed
with the Securities and Exchange Commission on March 3, 2003, as amended by
Amendment No. 1 to the Annual Report on Form 10-K filed on March 31, 2002, is to
file a revised Report of Independent Accountants with respect to the financial
statements of BHA Aero Composite Parts Co. Ltd., which financial statements are
required by Rule 3-09(a) of Regulation S-X. This amendment consists solely of a
cover page, this explanatory note, the information required by Item 15 of Form
10-K (Exhibits, Financial Statement Schedules and Reports on Form 8-K), a
signature page, and the principal executive officer and principal financial
officer certifications required to be included herein. In accordance with Rule
12b-15 promulgated pursuant to the Securities Exchange Act of 1934, the complete
text of Item 15, as amended, is included herein. However, with respect to the
financial statements and financial statement schedules, other than the revised
Report of Independent Accountants with respect to the financial statements of
BHA Aero Composite Parts Co. Ltd., no changes have been made.
1
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. 1. FINANCIAL STATEMENTS
i. The consolidated financial statements of Hexcel, the notes thereto, and
the Report of Independent Accountants are listed on page 16 of this
Annual Report on Form 10-K/A and are incorporated herein by reference.
ii. The financial statements of BHA Aero Composite Parts Co. Ltd., the
notes thereto, and the Independent Auditors' Report are listed on page
16 of this Annual Report on Form 10-K/A and are incorporated herein by
reference.
2. FINANCIAL STATEMENT SCHEDULES
The financial statement schedule and the Report of Independent Accountants
required by Item 15(a)(2) are listed on page 16 of this Annual Report on
Form 10-K/A and are incorporated herein by reference.
b. REPORTS ON FORM 8-K
Current Report on Form 8-K dated October 23, 2002, relating to third
quarter of 2002 financial results.
Current Report on Form 8-K dated December 20, 2002, relating to
announcement of signed agreements to issue equity securities and planned
refinancing of existing senior credit facility.
c. EXHIBITS
Exhibit No. Description
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2.1 Asset Purchase Agreement dated March 31, 2000 between Hexcel
Corporation and Britax Cabin Interiors, Inc. (incorporated herein
by reference to Exhibit 2.1 to Hexcel's Current Report on Form
8-K dated May 10, 2000).
3.1 Restated Certificate of Incorporation of Hexcel Corporation
(incorporated herein by reference to Exhibit 1 to Hexcel's
Registration Statement on Form 8-A dated July 9, 1996,
Registration No. 1-08472).
3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of Hexcel Corporation (incorporated herein by
reference to Exhibit 3.2 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2002, filed on
March 31, 2003).
3.3 Amended and Restated Bylaws of Hexcel Corporation (incorporated
herein by reference to Exhibit 3.3 to the Company's Annual Report
on Form 10-K/A for the fiscal year ended December 31, 2002, filed
on March 31, 2003).
4.1 Indenture dated as of January 21, 1999 between Hexcel Corporation
and The Bank of New York, as trustee, relating to the issuance of
the 93/4% Senior Subordinated Notes due 2009 (incorporated herein
by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-4 (No. 333-71601), filed on February 2,
1999).
4.2 Indenture dated as of August 1, 1986 between Hexcel and the Bank
of California, N.A., as trustee, relating to the 7% Convertible
Subordinated Notes due 2011 of the Company (incorporated herein
by reference to Exhibit 4.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997).
4.2(a) Instrument of Resignation, Appointment and Acceptance, dated as
of October 1, 1993
2
(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).
4.3 Indenture, dated as of March 19, 2003 among Hexcel Corporation,
the Guarantors named therein and Wells Fargo Bank Minnesota,
National Association, as trustee, relating to the 9.875% Senior
Secured Notes due 2008 (incorporated herein by reference to
Exhibit 4.4 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2002, filed on March 31, 2003).
4.4 Certificate of Designation of Series A Convertible Preferred
Stock of Hexcel Corporation (incorporated herein by reference to
Exhibit 4.5 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2002, filed on March 31, 2003).
4.5 Certificate of Designation of Series B Convertible Preferred
Stock of Hexcel Corporation (incorporated herein by reference to
Exhibit 4.6 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2002, filed on March 31, 2003).
10.1 Credit and Guaranty Agreement, dated as of March 19, 2003, by and
among Hexcel Corporation, Hexcel Composites Limited, Hexcel
Composites GmbH (Austria), Hexcel Composites GmbH (Germany), the
Guarantors named therein, the lenders from time to time party
thereto, Fleet Capital Corporation, as Administrative Agent,
Fleet National Bank, London U.K. branch, trading as FleetBoston
Financial, as Fronting Bank and Issuing Bank, Fleet National
Bank, as Issuing Bank, and Fleet Securities Inc., as Lead
Arranger (incorporated herein by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2002, filed on March 31, 2003).
10.2 Security Agreement, dated as of March 19, 2003, by and among
Hexcel Corporation, Clark-Schwebel Corporation, Hexcel Pottsville
Corporation, Clark-Schwebel Holding Corp., CS Tech-Fab Holding,
Inc. and Fleet Capital Corporation, as Administrative Agent
(incorporated herein by reference to Exhibit 10.2 to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2002, filed on March 31, 2003).
10.3* Hexcel Corporation 2003 Incentive Stock Plan (incorporated herein
by reference to Exhibit 10.3 to the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 2002, filed on
March 31, 2003).
10.4* 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).
10.4(a)* Hexcel Corporation Incentive Stock Plan as amended and restated
January 30, 1997 and further amended December 10, 1997
(incorporated herein by reference to Exhibit 10.5(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.4(b)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on January 30, 1997, and further amended on December 10, 1997 and
March 25, 1999 (incorporated herein by reference to Exhibit 4.3
of the Company's Registration Statement on Form S-8 filed on July
26, 1999).
10.4(c)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on January 30, 1997, and further amended on December 10, 1997,
March 25, 1999 and December 2, 1999 (incorporated by reference to
Exhibit 10.3(c) of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.4(d)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on February 3, 2000 (incorporated herein by reference to Annex A
of the Company's Proxy Statement dated
3
March 31, 2000).
10.4(e)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on December 19, 2000 (incorporated herein by reference to Exhibit
10.3(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
10.4(f)* Hexcel Corporation Incentive Stock Plan, as amended and restated
on December 19, 2000 and further amended on January 10, 2002
(incorporated herein by reference to Exhibit 10.3(f) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001).
10.5* Hexcel Corporation 1998 Broad Based Incentive Stock Plan
(incorporated herein by reference to Exhibit 4.3 of the Company's
Form S-8 filed on June 19, 1998, Registration No. 333-57223).
10.5(a)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000 (incorporated by reference to Exhibit
10.1 to Hexcel's Quarterly Report on Form 10-Q for the Quarter
ended June 30, 2000).
10.5(b)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000, and further amended on February 1,
2001 (incorporated herein by reference to Exhibit 10.4(b) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.5(c)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000, and further amended on February 1,
2001 and January 10, 2002 (incorporated herein by reference to
Exhibit 10.4(c) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001).
10.5(d)* Hexcel Corporation 1998 Broad Based Incentive Stock Plan, as
amended on February 3, 2000, and further amended on February 1,
2001, January 10, 2002 and December 12, 2002 (incorporated herein
by reference to Exhibit 10.4(d) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002).
10.6* 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).
10.6(a)* Hexcel Corporation Management Stock Purchase Plan, as amended on
March 25, 1999 (incorporated herein by reference to Exhibit 4.3
of the Company's Registration Statement on Form S-8 filed on July
26, 1999).
10.6(b)* Hexcel Corporation Management Stock Purchase Plan, as amended on
March 25, 1999 and December 2, 1999 (incorporated by reference to
Exhibit 10.5(b) of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).
10.6(c)* Hexcel Corporation Management Stock Purchase Plan, as amended and
restated on February 3, 2000 (incorporated herein by reference to
Annex B of the Company's Proxy Statement dated March 31, 2000).
10.6(d)* Hexcel Corporation Management Stock Purchase Plan, as amended and
restated on December 19, 2000 (incorporated herein by reference
to Exhibit 10.5(d) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000).
10.6(e)* Hexcel Corporation Management Stock Purchase Plan, as amended and
restated on March 19, 2003 (incorporated herein by reference to
Exhibit 10.6(e) to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2002, filed on March 31,
2003).
4
10.7* Hexcel Corporation Management Incentive Compensation Plan, as
amended and restated on December 19, 2000 and as further amended
on February 27, 2002 (incorporated herein by reference to Exhibit
10.6 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001).
10.8* Hexcel Corporation Long-Term Incentive Plan (incorporated herein
by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001).
10.9* Form of Employee Option Agreement (2003) (incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2002).
10.10* Form of Employee Option Agreement (2002) (incorporated herein by
reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2001).
10.11* Form of Employee Option Agreement (2000) (incorporated herein by
reference to Exhibit 10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000).
10.12* Form of Employee Option Agreement Special Executive Grant (2000)
dated December 20, 2000 (incorporated by reference to Exhibit
10.8 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000).
10.13* Form of Employee Option Agreement Special Executive Grant (1999)
dated December 2, 1999 (incorporated by reference to Exhibit 10.7
of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.14* Form of Employee Option Agreement (1999) dated December 2, 1999
(incorporated by reference to Exhibit 10.8 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999).
10.15* Form of Employee Option Agreement (1999) (incorporated herein by
reference to Exhibit 10.1 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended March 31, 1999).
10.16* Form of Employee Option Agreement (1998) (incorporated herein by
reference to Exhibit 10.4 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1998).
10.17* 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).
10.18* 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).
10.19* 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).
10.20* Form of Retainer Fee Option Agreement for Non-Employee Directors
(2003) (incorporated herein by reference to Exhibit 10.19 the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002).
10.21* Form of Retainer Fee Option Agreement for Non-Employee Directors
(2000)
5
(incorporated by reference to Exhibit 10.16 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
2000).
10.22* Form of Retainer Fee Option Agreement for Non-Employee Directors
(1999) (incorporated by reference to Exhibit 10.14 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
10.23* Form of Retainer Fee Option Agreement for Non-Employee Directors
(1998) (incorporated herein by reference to Exhibit 10.11 to
Hexcel's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998).
10.24* Form of Retainer Fee Option Agreement for Non-Employee Directors
(1997) (incorporated herein by reference to Exhibit 10.8 to
Hexcel's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997).
10.25* 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).
10.26* Form of Supplemental Compensation Option Agreement (Directors)
(incorporated herein by reference to Exhibit 10.23 to Hexcel's
Annual Report on Form 10-K for the fiscal year ended December 31,
2001).
10.27* Form of Performance Accelerated Restricted Stock Unit Agreement
(December 20, 2000) (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, 2000).
10.28* Form of Performance Accelerated Restricted Stock Unit Agreement
(Special Executive Grant December 2, 1999) (incorporated by
reference to Exhibit 10.19 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999).
10.29* Form of Performance Accelerated Restricted Stock Unit Agreement
(December 2, 1999) (incorporated by reference to Exhibit 10.20 of
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999).
10.30* Form of Performance Accelerated Restricted Stock Unit Agreement
(1999) (incorporated herein by reference to Exhibit 10.2 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1999).
10.31* Form of Performance Accelerated Restricted Stock Unit Agreement
(1998) (incorporated herein by reference to Exhibit 10.2 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1998).
10.32* 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).
10.33* Form of Performance Accelerated Restricted Stock Unit Agreement
(1996) (incorporated herein by reference to Exhibit 10.9 to
Hexcel's Quarterly Report on Form 10-Q for the Quarter ended
March 31, 1996).
10.34* Form of Restricted Stock Unit Agreement (2003) (incorporated
herein by reference to Exhibit 10.33 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002).
10.35* Form of Restricted Stock Unit Agreement (2002) (incorporated
herein by reference to Exhibit 10.31 to Hexcel's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001).
6
10.36* 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).
10.37* Form of Reload Option Agreement (1996) (incorporated herein by
reference to Exhibit 10.10 to Hexcel's Quarterly Report on Form
10-Q for the Quarter ended March 31, 1996).
10.38* Form of Exchange Performance Accelerated Stock Option Agreement
(incorporated Herein by reference to Exhibit 10.3 to Hexcel's
Quarterly Report on Form 10-Q for the Quarter ended September 30,
1998).
10.39* 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).
10.40* 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).
10.41* Form of Grant of Restricted Stock Unit Agreement (incorporated
herein by reference to Exhibit 10.3 to Hexcel's Quarterly Report
on Form 10-Q for the Quarter ended March 31, 1999).
10.42* 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).
10.43* Hexcel Corporation 1997 Employee Stock Purchase Plan, as amended
and restated as of March 19, 2003 (incorporated herein by
reference to Exhibit 10.43 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2002, filed on
March 31, 2003).
10.44* Employment Agreement dated as of July 30, 2001 between Hexcel
Corporation and David E. Berges (incorporated by reference herein
to Exhibit 10.37 to Hexcel's Registration Statement on Form S-4
(No. 333-66582), filed on August 2, 2001).
10.44(a)* Amendment, dated December 12, 2002, to Employment Agreement dated
as of July 30, 2001 between Hexcel Corporation and David E.
Berges (incorporated herein by reference to Exhibit 10.43(a) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2002).
10.44(b)* Employee Option Agreement dated as of July 30, 2001 between
Hexcel Corporation and David E. Berges (incorporated by reference
herein to Exhibit 10.37(a) to Hexcel's Registration Statement on
Form S-4 (No. 333-66582), filed on August 2, 2001).
10.44(c)* Employment Option Agreement (performance-based option) dated as
of July 30, 2001 between Hexcel Corporation and David E. Berges
(incorporated by reference herein to Exhibit 10.37(b) to Hexcel's
Registration Statement on Form S-4 (No. 333-66582), filed on
August 2, 2001).
10.44(d)* Restricted Stock Agreement dated as of July 30, 2001 between
Hexcel Corporation and David E. Berges (incorporated by reference
herein to Exhibit 10.37(c) to Hexcel's Registration Statement on
Form S-4 (No. 333-66582), filed on August 2, 2001).
10.44(e)* Supplemental Executive Retirement Agreement dated as of July 30,
2001 between Hexcel Corporation and David E. Berges (incorporated
by reference herein to Exhibit 10.37(d) to Hexcel's Registration
Statement on Form S-4 (No. 333-66582), filed on August 2, 2001).
10.44(f)* Letter Agreement dated August 1, 2001 between Hexcel Corporation
and David E. Berges
7
(incorporated by reference herein to Exhibit 10.37(e) to Hexcel's
Registration Statement on Form S-4 (No. 333-66582), filed on
August 2, 2001).
10.44(g)* Letter Agreement dated August 28, 2001 between Hexcel Corporation
and David E. Berges (incorporated herein by reference to Exhibit
10.7 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001).
10.45* Letter dated December 2, 1999 from Hexcel Corporation to Stephen
C. Forsyth, regarding the Company's Management Incentive
Compensation Plan for 1999 (incorporated by reference to Exhibit
10.35 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999).
10.45(a)* Supplemental Executive Retirement Agreement dated as of May 10,
2000 between Hexcel Corporation and Stephen C. Forsyth
(incorporated herein by reference to Exhibit 10.5 of the
Company's Quarterly Report on Form 10-Q for the Quarter ended
June 30, 2000).
10.45(b)* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and Stephen C. Forsyth (incorporated
herein by reference to Exhibit 10.8 of the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000).
10.45(c)* Amendment to Amendments to Agreements, dated as of November 21,
2000, by and between Hexcel Corporation and Stephen C. Forsyth
(incorporated herein by reference to Exhibit 10.39(c) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.45(d)* First Amendment to Supplemental Executive Retirement Agreement
dated as of July 30, 2001 between Hexcel Corporation and Stephen
C. Forsyth (incorporated herein by reference to Exhibit 10.43(d)
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001).
10.46* Letter dated December 2, 1999 from Hexcel Corporation to Ira J.
Krakower, regarding the Company's Management Incentive
Compensation Plan for 1999 (incorporated herein by reference to
Exhibit 10.40 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000).
10.46(a)* Supplemental Executive Retirement Agreement dated as of May 10,
2000 between Hexcel and Ira J. Krakower (incorporated herein by
reference to Exhibit 10.6 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended June 30, 2000).
10.46(b)* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and Ira J. Krakower (incorporated
herein by reference to Exhibit 10.7 of the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000).
10.46(c)* First Amendment to Supplemental Executive Retirement Agreement
dated as of July 30, 2001 between Hexcel Corporation and Ira J.
Krakower (incorporated herein by reference to Exhibit 10.44(c) to
the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001).
10.47* Form of Executive Severance Agreement between Hexcel and certain
executive officers dated as of February 3, 1999 (incorporated
herein by reference to Exhibit 10.6 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1999).
10.48* Form of Executive Severance Agreement between Hexcel and certain
executive officers dated as of February 3, 1999 (incorporated
herein by reference to Exhibit 10.7 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1999).
8
10.49* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and William Hunt (incorporated herein
by reference to Exhibit 10.14 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 2000).
10.49(a)* Amendment to Amendments to Agreements, dated as of November 21,
2000, by and between Hexcel Corporation and William Hunt
(incorporated herein by reference to Exhibit 10.45(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.50* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and David Tanonis (incorporated herein
by reference to Exhibit 10.12 of the Company's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 2000).
10.51* Amendment to Agreements, dated as of October 11, 2000 by and
between Hexcel Corporation and Joseph Shaulson (incorporated
herein by reference to Exhibit 10.9 of the Company's Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2000).
10.51(a)* Amendment to Amendments to Agreements, dated as of November 21,
2000, by and between Hexcel Corporation and Joseph Shaulson
(incorporated herein by reference to Exhibit 10.48(a) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).
10.52 Lease Agreement, dated as of September 15, 1998, by and among
Clark-Schwebel Corporation (a wholly-owned subsidiary of Hexcel)
as lessee, CSI Leasing Trust as lessor, and William J. Wade as
co-trustee for CSI Leasing Trust (incorporated herein by
reference to Exhibit 10.2 of the Company's Quarterly Report on
Form 10-Q for the Quarter ended September 30, 1998).
10.53 Amended and Restated Governance Agreement, dated as of March 19,
2003, among LXH L.L.C., LXH II, L.L.C., GS Capital Partners 2000
L.P., GS Capital Partners 2000 Offshore, L.P., GS Capital
Partners 2000 Employee Fund, L.P., GS Capital Partners 2000 GmbH
& Co. Beteiligungs KG, Stone Street Fund 2000, L.P. and Hexcel
Corporation (incorporated herein by reference to Exhibit 10.53 to
the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2002, filed on March 31, 2003).
10.54 Stockholders Agreement, dated as of March 19, 2003, among
Berkshire Fund V, Limited Partnership, Berkshire Fund VI, Limited
Partnership, Berkshire Fund V Investment Corp., Berkshire Fund VI
Investment Corp., Berkshire Investors LLC, Greenbriar
Co-Investment Partners L.P, Greenbriar Equity Fund, L.P. and
Hexcel Corporation (incorporated herein by reference to Exhibit
10.54 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2002, filed on March 31, 2003).
10.55 Amended and Restated Registration Rights Agreement, dated as of
March 19, 2003, by and among Hexcel Corporation, LXH, L.L.C., LXH
II, L.L.C., GS Capital Partners 2000 L.P., GS Capital Partners
2000 Offshore, L.P., GS Capital Partners 2000 Employee Fund,
L.P., GS Capital Partners 2000 GmbH & Co. Beteiligungs KG and
Stone Street Fund 2000, L.P. (incorporated herein by reference to
Exhibit 10.55 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2002, filed on March 31,
2003).
10.56 Registration Rights Agreement, dated as of March 19, 2003, among
Hexcel Corporation, Berkshire Fund V, Limited Partnership,
Berkshire Fund VI, Limited Partnership, Berkshire Investors LLC,
Greenbriar Co-Investment Partners L.P. and Greenbriar Equity
Fund, L.P. (incorporated herein by reference to Exhibit 10.56 to
the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 2002, filed on March 31, 2003).
10.57 Agreement, dated October 11, 2000, by and among Hexcel
Corporation, LXH, L.L.C. and LXH II, L.L.C. (incorporated herein
by reference to Exhibit 10.1 to the Company's
9
Current Report on Form 8-K dated October 13, 2000).
10.58 Consent and Termination Agreement, dated as of October 11, 2000,
by and between Hexcel Corporation and Ciba Specialty Chemicals
Holding Inc. (incorporated herein by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K dated October 13, 2000).
10.59 Purchase Agreement, dated as of June 15, 2001, among Hexcel
Corporation and Credit Suisse First Boston Corporation, Deutsche
Banc Alex. Brown Inc., Goldman, Sachs & Co. and J.P. Morgan
Securities Inc (incorporated herein by reference to Exhibit 10.56
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001).
10.60 Stock Purchase Agreement, dated as of December 18, 2002, by and
among Hexcel Corporation, Berkshire Investors LLC, Berkshire Fund
V, Limited Partnership, Berkshire Fund VI, Limited Partnership,
Greenbriar Equity Fund, L.P. and Greenbriar Co-Investment
Partners, L.P. (incorporated herein by reference to Exhibit 99.1
to the Company's Current Report on Form 8-K dated December 20,
2002).
10.61 Stock Purchase Agreement, dated as of December 18, 2002, by and
among Hexcel Corporation, GS Capital Partners 2000, L.P., GS
Capital Partners 2000 Offshore, L.P., GS Capital Partners 2000
Employee Fund, L.P., GS Capital Partners 2000 GmbH & Co.
Beteiligungs KG and Stone Street Fund 2000, L.P. (incorporated
herein by reference to Exhibit 99.2 to the Company's Current
Report on Form 8-K dated December 20, 2002).
10.62 Purchase Agreement, dated as of March 7, 2003, among Goldman,
Sachs & Co., Fleet Securities, Inc. and Hexcel Corporation
(incorporated herein by reference to Exhibit 10.62 to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2002, filed on March 31, 2003).
10.63 Exchange and Registration Rights Agreement dated as of March 19,
2003 among Hexcel Corporation, Clark-Schwebel Holding Corp.,
Clark-Schwebel Corporation, Hexcel Pottsville Corporation and CS
Tech-Fab Holding, Inc. (incorporated herein by reference to
Exhibit 10.63 to the Company's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 2002, filed on March 31,
2003).
10.64 Pledge and Security Agreement, dated as of March 19, 2003,
between Hexcel Corporation, Clark-Schwebel Holding Corp.,
Clark-Schwebel Corporation, Hexcel Pottsville Corporation, CS
Tech-Fab Holding, Inc. and Hexcel International, and HSBC Bank
USA, as Joint Collateral Agent (incorporated herein by reference
to Exhibit 10.64 to the Company's Annual Report on Form 10-K/A
for the fiscal year ended December 31, 2002, filed on March 31,
2003).
10.65 Collateral Agency Agreement, dated as of March 19, 2003, by and
among Hexcel Corporation, HSBC Bank USA, as Joint Collateral
Agent, Well Fargo Bank Minnesota, National Association, as
trustee, and the representatives of the holders of Parity Lien
Debt who may become a party thereto (incorporated herein by
reference to Exhibit 10.65 to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 2002, filed on
March 31, 2003).
10.66 Intercreditor and Agency Agreement dated as of March 19, 2003, by
and among HSBC Bank USA, as Joint Collateral Agent, Fleet Capital
Corporation, as Intercreditor Agent and Security Trustee, Fleet
Capital Corporation, as Administrative Agent under the Existing
Credit Facility, Well Fargo Bank Minnesota, National Association,
as trustee, and each other Credit Facility Agent that may become
a party thereto (incorporated herein by reference to Exhibit
10.66 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2002, filed on March 31, 2003).
12.1 Statement regarding the computation of ratio of earnings to fixed
charges for the Company (incorporated herein by reference to
Exhibit 12.1 to the Company's Annual
10
Report on Form 10-K for the fiscal year ended December 31, 2002).
21.1 Subsidiaries of the Company (incorporated herein by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2002).
23.1 Consent of Independent Accountants - PricewaterhouseCoopers LLP.
23.2 Consent of Independent Accountants - Deloitte Touche Tohmatsu
Certified Public Accountants Ltd.
24.1 Power of Attorney (incorporated herein by reference to Exhibit
24.1 to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 2002, filed on March 31, 2003).
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
----------
* Indicates management contract or compensatory plan or arrangement.
11
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
April 29, 2003 /s/ STEPHEN C. FORSYTH
--------------------------- -----------------------------
(Date) Stephen C. Forsyth
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ DAVID E. BERGES* Chairman of the April 29, 2003
----------------------------------- Board of Directors, President and
(David E. Berges) Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
/s/ STEPHEN C. FORSYTH Executive Vice President and April 29, 2003
----------------------------------- Chief Financial Officer
(Stephen C. Forsyth) (PRINCIPAL FINANCIAL OFFICER)
/s/ WILLIAM J. FAZIO* Corporate Controller April 29, 2003
----------------------------------- (PRINCIPAL ACCOUNTING OFFICER)
(William J. Fazio)
/s/ JOEL S. BECKMAN* Director April 29, 2003
-----------------------------------
(Joel S. Beckman)
/s/ H. ARTHUR BELLOWS, JR.* Director April 29, 2003
-----------------------------------
(H. Arthur Bellows, Jr.)
/s/ JAMES J. GAFFNEY* Director April 29, 2003
-----------------------------------
(James J. Gaffney)
12
/s/ SANJEEV K. MEHRA* Director April 29, 2003
-----------------------------------
(Sanjeev K. Mehra)
/s/ LEWIS RUBIN* Director April 29, 2003
-----------------------------------
(Lewis Rubin)
/s/ ROBERT J. SMALL* Director April 29, 2003
-----------------------------------
(Robert J. Small)
/s/ MARTIN L. SOLOMON* Director April 29, 2003
-----------------------------------
(Martin L. Solomon)
*By: /s/ STEPHEN C. FORSYTH
-----------------------------------
Stephen C. Forsyth
Attorney-in-fact
13
CERTIFICATIONS
I, David E. Berges, certify that:
1. I have reviewed this annual report on Form 10-K/A (Amendment No. 2) of
Hexcel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
April 29, 2003 /s/ DAVID E. BERGES
---------------------------- ---------------------------------------
(Date) David E. Berges
Chairman of the Board of Directors,
President and Chief Executive Officer
14
I, Stephen C. Forsyth, certify that:
1. I have reviewed this annual report on Form 10-K/A (Amendment No. 2) of
Hexcel Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of the registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
April 29, 2003 /s/ STEPHEN C. FORSYTH
-------------------------- ---------------------------------
(Date)
Stephen C. Forsyth
Executive Vice President and
Chief Financial Officer
15
CONSOLIDATED FINANCIAL STATEMENTS
Description Page
----------------------------------------------------------------------------------------------------------
Management Responsibility for Consolidated Financial Statements 17
Report of Independent Accountants 18
Consolidated Financial Statements Hexcel Corporation and Subsidiaries:
Consolidated Balance Sheets as of December 31, 2002 and 2001 19
Consolidated Statements of Operations for each of the three years ended December 31, 2002 20
Consolidated Statements of Stockholders' Equity (Deficit) and Comprehensive Income
(Loss) for each of the three years ended December 31, 2002 21
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2002 22
Notes to the Consolidated Financial Statements 23-57
Independent Auditors' Report 58
Financial Statements BHA Aero Composite Parts Co. Ltd.:
Balance Sheets as of December 31, 2002 and 2001 59
Statements of Operations for each of the three years ended December 31, 2002 60
Statements of Owners' Equity for each of the three years ended December 31, 2002 61
Statements of Cash Flows for each of the three years ended December 31, 2002 62
Notes to the Financial Statements 63-72
Report of Independent Accountants on Financial Statement Schedule 73
Schedule of Valuation and Qualifying Accounts 74
16
MANAGEMENT RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
Hexcel management has prepared and is responsible for the consolidated
financial statements and the related financial data contained in this report.
These financial statements, which include estimates, were prepared in accordance
with accounting principles generally accepted in the United States of America.
Management uses its best judgment to ensure that such statements reflect fairly
the consolidated financial position, results of operations and cash flows of the
Company.
Hexcel maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
purposes of preparing financial statements, and that assets are safeguarded and
accounted for properly. Underlying this concept of reasonable assurance is the
premise that the cost of control should not exceed benefits derived from
control.
The Audit Committee of the Board of Directors reviews and monitors the
financial reports and accounting practices of Hexcel. These reports and
practices are reviewed regularly by management and by the Company's independent
accountants, PricewaterhouseCoopers LLP, in connection with the audit of the
Company's consolidated financial statements. The Audit Committee, composed
solely of outside directors, meets periodically, separately and jointly, with
management and the independent accountants.
/s/ DAVID E. BERGES
------------------------------
David E. Berges
CHIEF EXECUTIVE OFFICER
/s/ STEPHEN C. FORSYTH
------------------------------
Stephen C. Forsyth
CHIEF FINANCIAL OFFICER
/s/ WILLIAM J. FAZIO
------------------------------
William J. Fazio
CHIEF ACCOUNTING OFFICER
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Hexcel Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity (deficit)
and comprehensive income (loss) and of cash flows present fairly, in all
material respects, the financial position of Hexcel Corporation and its
subsidiaries at December 31, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 1 and 3 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" effective January 1, 2002.
/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 28, 2003, except for Notes 2 and 8 which are as of March 19, 2003
18
HEXCEL CORPORATION AND SUBSIDIARIES Unaudited
CONSOLIDATED BALANCE SHEETs Pro Forma
AS OF DECEMBER 31, (see Note 24)
-----------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2002 2001
-----------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12.6 $ 8.2 $ 11.6
Accounts receivable, net 117.3 117.3 140.5
Inventories, net 113.6 113.6 131.7
Prepaid expenses and other assets 9.2 9.2 4.4
-----------------------------------------------------------------------------------------------------------------
Total current assets 252.7 248.3 288.2
Net property, plant and equipment 309.4 309.4 329.2
Goodwill, net 74.4 74.4 72.4
Investments in affiliated companies 34.0 34.0 56.9
Other assets 46.9 42.0 42.7
-----------------------------------------------------------------------------------------------------------------
Total assets $ 717.4 $ 708.1 $ 789.4
=================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of capital lease $ 6.2 $ 621.7 $ 17.4
obligations
Accounts payable 54.9 54.9 58.6
Accrued compensation and benefits 37.6 37.6 42.6
Accrued interest 15.9 19.1 18.8
Business consolidation and restructuring liabilities 10.5 10.5 33.4
Other accrued liabilities 35.3 35.3 33.7
-----------------------------------------------------------------------------------------------------------------
Total current liabilities 160.4 779.1 204.5
Long-term notes payable and capital lease obligations 512.4 - 668.5
Long-term retirement obligations 48.1 48.1 31.3
Other non-current liabilities 8.3 8.3 17.7
-----------------------------------------------------------------------------------------------------------------
Total liabilities 729.2 835.5 922.0
-----------------------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 16)
Mandatorily redeemable convertible preferred stock,
125,000 series A shares and 125,000 series B shares 96.4 - -
authorized, issued and outstanding
Stockholders' equity (deficit):
Preferred stock, no par value, 20.0 shares of stock authorized,
no shares issued or outstanding - - -
Common stock, $0.01 par value, 100.0 shares of stock
authorized, shares issued of 39.8 at December 31, 2002 0.4 0.4 0.4
and 39.4 at December 31, 2001
Additional paid-in capital 311.6 288.2 287.7
Accumulated deficit (385.7) (381.5) (367.9)
Accumulated other comprehensive loss (21.2) (21.2) (39.7)
-----------------------------------------------------------------------------------------------------------------
(94.9) (114.1) (119.5)
Less- Treasury stock, at cost, 1.3 shares at December 31, 2002
and 1.2 shares at December 31, 2001 (13.3) (13.3) (13.1)
-----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (108.2) (127.4) (132.6)
-----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 717.4 $ 708.1 $ 789.4
=================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
19
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------
Net sales $ 850.8 $ 1,009.4 $ 1,055.7
Cost of sales 689.5 818.6 824.3
---------------------------------------------------------------------------------------------------------------
Gross margin 161.3 190.8 231.4
Selling, general and administrative expenses 85.9 120.9 123.9
Research and technology expenses 14.7 18.6 21.2
Business consolidation and restructuring expenses 0.5 58.4 10.9
Impairment of goodwill and other purchased intangibles - 309.1 -
---------------------------------------------------------------------------------------------------------------
Operating income (loss) 60.2 (316.2) 75.4
Litigation gain 9.8 - -
Interest expense (62.8) (64.8) (68.7)
Gain (loss) on early retirement of debt 0.5 (2.7) -
Gain on sale of Bellingham aircraft interiors business - - 68.3
---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 7.7 (383.7) 75.0
Provision for income taxes 11.3 40.5 26.3
---------------------------------------------------------------------------------------------------------------
Income (loss) before equity in earnings (losses) (3.6) (424.2) 48.7
Equity in earnings (losses) of and write-downs of
an investment in affiliated companies (10.0) (9.5) 5.5
---------------------------------------------------------------------------------------------------------------
Net income (loss) $ (13.6) $ (433.7) $ 54.2
===============================================================================================================
Net income (loss) per share:
Basic $ (0.35) $ (11.54) $ 1.47
Diluted $ (0.35) $ (11.54) $ 1.32
Weighted average shares:
Basic 38.4 37.6 36.8
Diluted 38.4 37.6 45.7
===============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
20
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
--------------------------------------------------------------------------------------------------------------- -------------
COMMON STOCK
------------------- RETAINED ACCUMULATED
ADDITIONAL EARNINGS OTHER TOTAL
PAID-IN (ACCUMULATED COMPREHENSIVE TREASURY STOCKHOLDERS' COMPREHENSIVE
(IN MILLIONS) PAR CAPITAL DEFICIT) INCOME (LOSS) SHARES EQUITY (DEFICIT) INCOME (LOSS)
--------------------------------------------------------------------------------------------------------------- -------------
BALANCE, JANUARY 1, 2000 $ 0.4 $ 273.6 $ 11.6 $ (4.8) $ (10.7) $ 270.1
Net income 54.2 54.2 $ 54.2
Currency translation adjustment (10.2) (10.2) (10.2)
Minimum pension obligation (5.0) (5.0) (5.0)
-------------
Comprehensive income $ 39.0
=============
Activity under stock plans and
other 7.1 (0.5) 6.6
---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 0.4 $ 280.7 $ 65.8 $ (20.0) $ (11.2) $ 315.7
Net loss (433.7) (433.7) $ (433.7)
Currency translation adjustment (12.1) (12.1) (12.1)
Net unrealized loss on financial
instruments (5.9) (5.9) (5.9)
Minimum pension obligation (1.7) (1.7) (1.7)
-------------
Comprehensive loss $ (453.4)
=============
Activity under stock plans and
other 7.0 (1.9) 5.1
---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 0.4 $ 287.7 $ (367.9) $ (39.7) $ (13.1) $ (132.6)
Net loss (13.6) (13.6) $ (13.6)
Currency translation adjustment 19.6 19.6 19.6
Net unrealized gain on financial
instruments 9.3 9.3 9.3
Minimum pension obligation (10.4) (10.4) (10.4)
-------------
Comprehensive loss $ (4.9)
=============
Activity under stock plans and
other 0.5 (0.2) 0.3
---------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 0.4 $ 288.2 $ (381.5) $ (21.2) $ (13.3) $ (127.4)
===============================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
21
HEXCEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
(IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (13.6) $ (433.7) $ 54.2
Reconciliation to net cash provided by operations:
Depreciation 47.2 50.7 45.6
Amortization of goodwill and other intangibles assets - 12.5 13.1
Deferred income taxes 1.7 27.6 8.6
Business consolidation and restructuring expenses 0.5 58.4 10.9
Business consolidation and restructuring payments (24.3) (12.0) (11.8)
Impairment of goodwill and other purchased intangibles - 309.1 -
Loss (gain) on early retirement of debt (0.5) 0.7 -
Gain on sale of Bellingham aircraft interiors business - - (68.3)
Gain on curtailment of pension plan - - (5.1)
Equity in (earnings) losses of and write-downs of
an investment in affiliated companies 10.0 9.5 (5.5)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 35.6 4.6 (7.7)
Decrease (increase) in inventories 25.8 20.6 (17.0)
Decrease (increase) in prepaid expenses and other assets (1.7) 1.1 (0.4)
Increase (decrease) in accounts payable and accrued liabilities (15.7) (19.2) 10.7
Changes in other non-current assets and long-term liabilities 0.9 5.1 5.7
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65.9 35.0 33.0
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (14.9) (38.8) (39.6)
Proceeds from sale of an ownership in an affiliated company 10.0 - -
Proceeds from sale of Bellingham aircraft interiors business - - 113.3
Proceeds from sale of other assets 1.5 - 3.4
Dividends from (investments in) affiliated companies 1.6 0.8 (8.3)
Other (0.5) (0.3) -
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (2.3) (38.3) 68.8
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (repayments) of credit facilities, net (57.4) 24.6 29.5
Proceeds from issuance of long-term debt - 98.5 -
Repayments of long-term debt and capital lease obligations (9.9) (110.6) (126.0)
Debt issuance costs - (3.5) (0.9)
Activity under stock plans and other - (0.4) 2.4
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (67.3) 8.6 (95.0)
------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 0.3 1.2 (1.9)
------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (3.4) 6.5 4.9
Cash and cash equivalents at beginning of year 11.6 5.1 0.2
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8.2 $ 11.6 $ 5.1
==================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
22
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Hexcel
Corporation and its subsidiaries ("Hexcel" or "the Company"), after elimination
of intercompany transactions and accounts. Investments in affiliated companies
in which the Company's interests are generally between 20% and 50%, and where
the Company does not control the financial and operating decisions, are
accounted for using the equity method of accounting.
Hexcel is a leading producer of advanced structural materials. The Company
develops, manufactures and markets lightweight, high-performance reinforcement
products, composite materials and composite structures for use in commercial
aerospace, space and defense, electronics, and industrial applications. The
Company's materials are used in a wide variety of end products, such as
commercial and military aircraft, space launch vehicles and satellites, printed
wiring boards, computers, cellular telephones, soft body armor, high-speed
trains and ferries, cars and trucks, wind turbine blades, reinforcements for
bridges and other structures, window blinds, skis, snowboards and other
recreational equipment.
The Company serves international markets through manufacturing facilities
and sales offices located in the United States and Europe, and through sales
offices located in Asia, Australia and South America. The Company is also an
investor in six joint ventures; three of which manufacture and market
reinforcement products in Europe, Asia and the United States; one manufactures
and markets composite materials in Japan; and two manufacture composite
structures in Asia.
As discussed in Note 22, Hexcel sold its Bellingham aircraft interiors
business on April 26, 2000. As a result of this transaction, the statements of
operations, of stockholders' equity (deficit) and comprehensive income (loss),
and of cash flows include the financial position, results of operations and cash
flows of the Bellingham aircraft interiors business as of such dates and for
such periods that the business was owned.
USE OF ESTIMATES
The preparation of the consolidated financial statements and related
disclosures in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities, and the reported amounts of revenues and
expenses. Estimates are used for, but not limited to, allowances for doubtful
accounts, inventory allowances, product warranty, depreciation and amortization,
business consolidation and restructuring costs, impairment of long-lived assets,
employee benefits, taxes, and contingencies. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
All highly liquid investments with original maturities of three months or
less are considered to be cash equivalents. These investments consist primarily
of Eurodollar time deposits and are stated at cost, which approximates fair
value.
INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined
using the first-in, first-out and average cost methods. The Company provides
allowances for obsolete and unmarketable inventory. As of December 31, 2002 and
2001, inventory allowances were $21.3 million and $25.1 million, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated over
estimated useful lives using accelerated and straight-line methods. The
estimated useful lives range from 10 to 40 years for buildings and improvements
and from 3 to 20 years for machinery and equipment. Repairs and
23
maintenance are expensed as incurred, while major replacements and betterments
are capitalized and depreciated over the estimated life of the related asset.
GOODWILL AND OTHER PURCHASED INTANGIBLES
Goodwill represents the excess of the purchase price over the fair value of
the identifiable net assets of an acquired business. Effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No.142,
"Goodwill and Other Intangible Assets," ("FAS 142"). Prior to adopting FAS 142,
goodwill was amortized on a straight-line basis over estimated economic lives,
ranging from 15 to 40 years. As a result of adopting FAS 142, goodwill is no
longer amortized, but instead is tested for impairment at the reporting unit
level at least annually and whenever events or changes in circumstances indicate
that goodwill might be impaired. A reporting unit is the lowest level of an
entity that is a business and can be distinguished from other activities,
operations, and assets of the entity. If, during the annual impairment review,
the book value of the reporting unit exceeds the fair value, the implied fair
value of the reporting unit's goodwill is compared with the carrying amount of
the unit's goodwill. If the carrying amount exceeds the implied fair value,
goodwill is written down to its implied value. FAS 142 requires management to
estimate the fair value of each reporting unit, as well as the fair value of the
assets and liabilities of each reporting unit, other than goodwill. The implied
fair value of goodwill is determined as the difference between the fair value of
a reporting unit, taken as a whole, and the fair value of the assets and
liabilities of such reporting unit. No impact to the Company's consolidated
financial statements was identified upon completion of the transitional
impairment test required by FAS 142. The Company's annual impairment testing
date will be during the fourth quarter of each year. In 2001, the Company
recognized an impairment charge of $309.1 million on goodwill and other
purchased intangibles acquired through previous acquisitions (see Note 3).
IMPAIRMENT OF LONG-LIVED ASSETS
Other long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The assessment of possible impairment is based on the Company's
ability to recover the carrying value of the assets from the estimated
undiscounted future net cash flows, before interest and taxes, of the related
operations. If these cash flows are less than the carrying value of such assets,
an impairment loss is recognized for the difference between estimated fair value
and carrying value. The measurement of impairment requires estimates of these
cash flows and fair value. The calculation of fair value may be determined based
either on discounted cash flows or third party appraised values depending on the
nature of the asset.
INVESTMENTS
The Company has investments in affiliated companies with equity interests
ranging from 25% to 50%. Hexcel does not control the financial and operating
decisions of these companies and, therefore, accounts for its share of their
operating performance using the equity method of accounting. Future adverse
changes in market conditions or poor operating results of the underlying
investments could result in losses and the inability to recover the carrying
value of the investments, thereby possibly requiring an impairment charge. The
Company reviews its investments for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investments may not be
recoverable. The Company records an investment impairment charge when the
decline in value is considered to be other than temporary. The Company recorded
an impairment of $4.0 million in 2002 and $7.8 million in 2001, relating to its
investments in Asahi-Schwebel Co. Ltd. and Interglas Technologies AG,
respectively (see Note 7).
DEBT FINANCING COSTS
Debt financing costs are deferred and amortized to interest expense over
the life of the related debt, which ranges from 7 to 10 years. At December 31,
2002 and 2001, deferred debt financing costs were $11.7 million and $15.5
million, net of accumulated amortization of $14.5 million and $10.7 million,
respectively, and are included in "other assets" in the consolidated balance
sheets.
24
STOCK-BASED COMPENSATION
Stock-based compensation is accounted for under the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Accordingly, compensation expense is not
recognized when options are granted at the fair market value on the date of
grant. However, the Company does recognize compensation expense for restricted
stock and similar stock-based plans over the defined vesting periods. As of
December 31, 2002, the Company had several on-going stock-based compensation
plans, including stock options, restricted stock and various forms of restricted
stock unit awards, which are described further in Note 13.
The Company has elected to continue following APB 25 to account for its
stock-based compensation plans. The effects on net income (loss) and net income
(loss) per share as if the Company had applied the fair value method of
accounting for stock-based compensation in accordance with Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123") for the years ended December 31, 2002, 2001 and 2000
are as follows:
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
Net income (loss), as reported $ (13.6) $ (433.7) $ 54.2
ADD: Stock-based compensation expense included in
reported net income, net of tax 0.8 2.0 4.5
DEDUCT: Stock-based compensation expense determined
under fair value based method for all awards, net of tax (6.0) (5.9) (9.8)
------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ (18.8) $ (437.6) $ 48.9
NET INCOME (LOSS) PER SHARE:
Basic net income (loss) per share:
As reported $ (0.35) $ (11.54) $ 1.47
Pro forma $ (0.49) $ (11.64) $ 1.33
Diluted net income (loss) per share:
As reported $ (0.35) $ (11.54) $ 1.32
Pro forma $ (0.49) $ (11.64) $ 1.21
------------------------------------------------------------------------------------------------------------------
CURRENCY TRANSLATION
The assets and liabilities of international subsidiaries are translated
into U.S. dollars at year=end exchange rates, and revenues and expenses are
translated at average exchange rates during the year. Cumulative currency
translation adjustments are included in "accumulated other comprehensive loss"
in the stockholders' equity section of the consolidated balance sheets. Realized
gains and losses from currency exchange transactions are recorded in "selling,
general and administrative expenses" in the consolidated statements of
operations and were not material to Hexcel's consolidated results of operations
in 2002, 2001 or 2000.
REVENUE RECOGNITION
Product sales are recognized when all significant contractual obligations
have been satisfied and collection of the resulting receivable is reasonably
assured, which is generally at the time of shipment. Revenues derived from
design, installation and support services are recognized when the service is
provided, or alternatively, when the product to which the service relates is
delivered to the customer. The Company accrues for sales returns and allowances
based on its historical experience at the time of sale.
PRODUCT WARRANTY
The Company provides for an estimated amount of product warranty at the
time revenue is recognized. This estimated amount is provided by product and
based on historical warranty experience.
25
SHIPPING AND HANDLING COSTS
The Company recognizes shipping and handling costs as incurred as a
component of "cost of sales" in the consolidated statements of operations.
Shipping or handling costs billed to the customer for reimbursement purposes
were not significant.
RESEARCH AND TECHNOLOGY
Research and technology costs are expensed as incurred.
INCOME TAXES
The Company provides for income taxes using the liability approach
prescribed by the Financial Accounting Standards Board ("FASB") in Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). Under the liability approach, deferred income tax assets and liabilities
reflect tax carryforwards and the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting and
income tax purposes. Deferred tax assets require a valuation allowance when it
is more likely than not that some portion of the deferred tax assets may not be
realized. The realization of deferred tax assets is dependent upon the timing
and magnitude of future taxable income prior to the expiration of the deferred
tax assets' attributes. When events and circumstances so dictate, the Company
evaluates the realizability of its deferred tax assets and the need for a
valuation allowance by forecasting future taxable income. In 2001, the Company
established a full valuation allowance on its U.S. deferred tax assets. The
amount of the deferred tax assets considered realizable, however, could change
if estimates of future U.S. taxable income during the carry=forward period
improve (see Note 12).
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Hexcel to significant
concentrations of credit risk consist primarily of trade accounts receivable.
The Company's sales to two customers and their related subcontractors accounted
for approximately 37%, 39% and 33% of the Company's 2002, 2001 and 2000 net
sales, respectively. The Company performs ongoing credit evaluations of its
customers' financial condition but generally does not require collateral or
other security to support customer receivables. The Company establishes an
allowance for doubtful accounts based on factors surrounding the credit risk of
specific customers, historical trends and other financial information. As of
December 31, 2002 and 2001, the allowance for doubtful accounts was $5.1 million
and $8.5 million, respectively. Bad debt expense was a net credit of $(0.9)
million in 2002, $3.4 million in 2001 and $0.7 million in 2000.
DERIVATIVE FINANCIAL INSTRUMENTS
Hexcel uses various financial instruments, including foreign currency
forward exchange contracts and interest rate cap agreements, to manage its risk
to market fluctuations by generating cash flows that offset, in relation to
their amount and timing, the cash flows of certain foreign currency denominated
transactions or underlying debt instruments. The Company designates its foreign
currency forward exchange contracts as cash flow hedges against forecasted
foreign currency denominated transactions and reports the effective portions of
changes in fair value of the instruments in "other comprehensive income" until
the underlying hedged transactions affect income. The Company designates its
interest rate cap agreements as cash flow hedges against specific debt
instruments and recognizes interest differentials as adjustments to interest
expense as the differentials may occur. The most recent effective interest rate
cap agreement expired on October 29, 2002. The Company does not use financial
instruments for trading or speculative purposes.
Effective January 1, 2001, Hexcel adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133"), and its corresponding amendments under Financial
Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," ("FAS 138"). FAS 133 requires an entity to
recognize all derivatives as either assets or liabilities on its balance sheet
and measure those instruments at fair value. Gains or losses resulting from
changes in the fair values of those derivatives are accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
adoption of FAS 133 and FAS 138 did not have a material effect on the Company's
consolidated financial position or results of operations (see Note 15).
26
SELF-INSURANCE
Hexcel is self-insured up to specific levels for certain liabilities.
Accruals are established based on actuarial assumptions and historical claim
experience, and include estimated amounts for incurred but not reported claims.
Effective January 1, 2002, Hexcel expanded its self-insured medical program to
cover the majority of U.S. non-union employees, in order to more effectively
manage its medical costs. The program includes "stop loss" insurance, which caps
Hexcel's risk at $250,000 per individual per annum. By its nature, as compared
to traditional insurance plans, self-insured medical coverage may increase the
monthly volatility in cash flows of the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("FAS 145"). Among other matters,
FAS 145 rescinds FASB Statement No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required all gains and losses from extinguishment
of debt be aggregated and, if material, classified as an extraordinary item, net
of the related income tax effect. As a result, the criteria in Accounting
Principles Board Opinion 30 will now be used to classify those gains and losses.
The Company adopted FAS 145 as of January 1, 2002. As a result, a $2.7 million
extraordinary loss on early retirement of debt recorded in 2001 was reclassified
as a separate line item below operating income in the consolidated statements of
operations (see Note 8).
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("FAS 146"). FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized and measured, initially at fair value,
only when the liability is incurred; therefore, nullifying Emerging Issues Task
Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF 94-3") that required a liability for an exit cost to
be recognized at the date of an entity's commitment to an exit plan. This change
in accounting would be expected to result in a delayed recognition of certain
types of costs, especially facility closure costs. The provisions of FAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. Since FAS 146 is effective only for new exit or disposal activities,
adoption of this standard will not affect amounts currently reported in the
Company's consolidated financial statements. However, the adoption of FAS 146
could affect the types and timing of costs included in any future business
consolidation and restructuring programs. The Company adopted FAS 146 as of
January 1, 2003.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," ("FAS 148"). FAS 148 amends FAS 123 and Accounting Principles Board
Opinion No. 28, "Interim Financial Reporting" to present alternative methods of
transition for an entity that voluntarily adopts the fair value based method of
accounting for stock-based employee compensation, and provides modifications to
the disclosure provisions to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation in quarterly and annual financial statements.
At this time, the Company has not voluntarily adopted the fair value method of
accounting under FAS 123. However, appropriate disclosures about the effects on
reported net income of the Company's accounting policy with respect to
stock-based employee compensation are provided above.
In November 2002, the FASB issued Financial Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," ("FIN 45"). FIN 45 requires a
guarantor to disclose (a) the nature of the guarantee, including the approximate
term of the guarantee, how the guarantee arose, and the events or circumstances
that would require the guarantor to perform under the guarantee; (b) the maximum
potential amount of future payments under the guarantee; (c) the carrying amount
of the liability, if any, for the guarantor's obligations under the guarantee;
and (d) the nature and extent of any recourse provisions or available collateral
that would enable the guarantor to recover the amounts paid under the guarantee.
FIN 45 also clarifies that a guarantor is required to recognize, at the
inception of a
27
guarantee, a liability at fair value for the obligations it has undertaken in
issuing the guarantee, including its ongoing obligation to stand ready to
perform over the term of the guarantee in the event that the specified
triggering events or conditions occur. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. As the disclosure
requirements in FIN 45 are effective for financial statements with periods
ending after December 15, 2002, the Company has included the new disclosures
herein.
FIN 45 also addresses the disclosure requirements regarding product
warranties. Instead of disclosing the maximum potential amount of future
payments under the product warranty guarantee, a guarantor is required to
disclose its accounting policy and methodology used in determining its liability
for product warranties, as well as, a tabular reconciliation of the changes in
the guarantor's product warranty liability for the reporting period (see Note
16).
RECLASSIFICATIONS
Certain prior year amounts in the accompanying consolidated financial
statements and related notes have been reclassified to conform to the 2002
presentation.
NOTE 2 - REFINANCING OF CAPITAL STRUCTURE
On March 19, 2003, Hexcel successfully completed the refinancing of its
capital structure through the simultaneous closings of three financing
transactions: the completion of its previously announced sale of mandatorily
redeemable convertible preferred stock for $125.0 million, the issuance of
$125.0 million of 9-7/8% senior secured notes, due 2008, and the establishment
of a new $115.0 million senior secured credit facility, also due 2008.
The proceeds from the sale of the convertible preferred stock have been
used to provide for the redemption of $46.9 million principal amount of the
Company's 7% convertible subordinated notes, due 2003, and to repay outstanding
borrowings under the existing senior credit facility. Proceeds to be used to
redeem the 7% convertible subordinated notes have been remitted to US Bank
Trust, trustee for the notes, for the express purpose of retiring the
outstanding principal balance of the notes, plus accrued interest.
The remaining advances under the existing senior credit facility, after the
application of a portion of the equity proceeds, have been repaid with the
proceeds from the issuance of the Company's new 9-7/8% senior secured notes and
a new senior secured credit facility.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 19, 2003, Hexcel issued 125,000 shares of a series A convertible
preferred stock and 125,000 shares of a series B convertible preferred stock for
$125.0 million in cash. Upon issuance, the total number of Hexcel's outstanding
common shares including potential shares issuable upon conversion of both of the
new series of convertible preferred stocks increased from approximately 38.6
million shares to approximately 88.4 million shares. In addition, common shares
authorized for issuance increased from 100.0 million shares to 200.0 million
shares.
Hexcel issued 77,875 shares of series A convertible preferred stock and
77,875 shares of series B convertible preferred stock to affiliates of Berkshire
Partners LLC and Greenbriar Equity Group LLC (the "Berkshire/Greenbriar
Investors") for a cash payment of approximately $77.9 million. The series A and
the series B convertible preferred stocks are mandatorily redeemable on January
22, 2010 for cash or for common stock at the Company's election. Both preferred
stocks are convertible, at the option of the holder, into common stock at a
conversion price of $3.00 per share, and will automatically be converted into
common stock if the closing trading price of the common stock for any period of
60 consecutive trading days ending after March 19, 2006 exceeds $9.00 per share.
The preferred stockholders are entitled to vote on an as converted basis with
Hexcel's common stockholders. The series A preferred stock accrues dividends at
a rate of 6% per annum following the third anniversary of the issuance.
Dividends may be paid in cash or added to the accrued value of the preferred
stock, at Hexcel's option. The series B preferred stock does not accrue
dividends.
28
Hexcel has separately issued 47,125 shares of series A convertible
preferred stock and 47,125 shares of series B convertible preferred stock to
investment funds controlled by affiliates of The Goldman Sachs Group, Inc. (the
"Goldman Sachs Investors") for a cash payment of approximately $47.1 million.
In conjunction with the aforementioned transactions, Hexcel and the
Berkshire/Greenbriar Investors entered into a stockholders agreement, which
gives the Berkshire/Greenbriar Investors the right to nominate up to two
directors (of a total of ten) to Hexcel's board of directors and certain other
rights. The Goldman Sachs Investors will continue to have the right to nominate
up to three directors under the governance agreement entered into at the time of
their investment in Hexcel in 2000. The stockholders agreement and the amended
Goldman Sachs Investors governance agreement require that the approval of at
least six directors, including at least two directors not nominated by the
Berkshire/Greenbriar Investors or the Goldman Sachs Investors, be obtained for
board actions generally. The stockholders agreement also prohibits the purchase
of voting securities in excess of 39.5% of Hexcel's outstanding voting
securities unless approved by Hexcel's board. The Berkshire/Greenbriar Investors
and the Goldman Sachs Investors have agreed to an 18-month lock up on the
securities being issued, except for certain registered offerings.
SENIOR SECURED NOTES, DUE 2008
The Company also issued, through a private placement under Rule 144A,
$125.0 million of 9-7/8% senior secured notes at a price of 98.95% of face
value. The senior secured notes, due October 1, 2008, are secured by a first
priority security interest in substantially all of Hexcel's and its domestic
subsidiaries' property, plant and equipment, intangibles, intercompany notes and
other obligations receivable, and 100% of the outstanding voting stock of
certain of Hexcel's domestic subsidiaries. In addition, the senior secured notes
are secured by a pledge of 65% of the stock of Hexcel's French and UK first-tier
holding companies. This pledge of foreign stock is on an equal basis with a
substantially identical pledge of such stock given to secure the obligations
under the Company's new senior secured credit facility, described below. The
senior secured notes are also guaranteed by Hexcel's material domestic
subsidiaries. Hexcel has the ability to incur additional debt that would be
secured on an equal basis by the collateral securing the senior secured notes.
The amount of additional secured debt that may be incurred is currently limited
to $10.0 million, but may increase over time based on a formula relating to the
total net book value of Hexcel's domestic property, plant and equipment.
The Company will pay interest on the notes on April 1st and October 1st of
each year. The first payment will be made on October 1, 2003. The Company will
have the option to redeem all or a portion of the notes at any time during the
one-year period beginning April 1, 2006 at 104.938% of principal plus accrued
and unpaid interest. This percentage decreases to 102.469% for the one-year
period beginning April 1, 2007, and to 100.0% for the period beginning April 1,
2008. In addition, the Company may use the net proceeds from one or more equity
offerings at any time prior to April 1, 2006 to redeem up to 35% of the
aggregate principal amount of the notes at 109.875% of the principal amount,
plus accrued and unpaid interest.
The indenture governing the senior secured notes contains many other terms
and conditions, including limitations with respect to asset sales, incurrence of
debt, granting of liens, the making of restricted payments and entering into
transactions with affiliates.
Hexcel has agreed, under a registration rights agreement, to offer to all
noteholders the opportunity to exchange their notes for new notes that are
substantially identical to the existing notes except that the new notes will be
registered with the Securities and Exchange Commission ("SEC") and will not have
any restrictions on transfer. In the event that Hexcel cannot affect such an
exchange, Hexcel will be required to file a shelf registration statement with
the SEC to permit the noteholders to resell their notes generally without
restriction.
An affiliate of Goldman Sachs Investors, a related party, performed
underwriting services in connection with the Company's private placement
offering of senior secured notes, and received $2.3 million for such services
rendered.
29
SENIOR SECURED CREDIT FACILITY
Also on March 19, 2003, Hexcel entered into a $115.0 million asset-backed
senior secured credit facility with a new syndicate of lenders led by Fleet
Capital Corporation as agent. The credit facility matures on March 31, 2008.
Borrowers under the credit facility include, in addition to Hexcel Corporation,
Hexcel's operating subsidiaries in the UK, Austria and Germany. The credit
facility provides for borrowings of U.S. dollars, Pound Sterling and Euro
currencies, including the issuance of letters of credit, with the amount
available to each borrower dependent on the borrowing base of that borrower and
its subsidiaries. For Hexcel Corporation and the UK borrower, the borrowing base
is determined by an agreed percentage of eligible accounts receivable and
eligible inventory, subject to certain reserves. The borrowing base of each of
the Austrian and German borrowers is based on an agreed percentage of eligible
accounts receivable, subject to certain reserves. In addition, the UK, Austrian
and German borrowers have facility sublimits of $12.5 million, $7.5 million and
$5.0 million, respectively. Borrowings under the new facility bear interest at a
floating rate based on either the agent's defined "prime rate" plus a margin
that can vary from 0.75% to 3.25% or LIBOR plus a margin that can vary from
2.25% to 3.25%. The margin in effect for a borrowing at any given time depends
on the Company's fixed charge ratio and the currency denomination of such
borrowing. The credit facility also provides for the payment of customary fees
and expenses.
All obligations under the credit facility are secured by a first priority
security interest in accounts receivable, inventory and cash and cash
equivalents of Hexcel Corporation and its material domestic subsidiaries. In
addition, all obligations under the credit facility are secured by a pledge of
65% of the stock of Hexcel's French and UK first-tier holding companies. This
pledge of foreign stock is on an equal basis with a substantially identical
pledge of such stock given to secure the obligations under the senior secured
notes. The obligations of the UK borrower are secured by the accounts
receivable, inventory, and cash and cash equivalents of the UK borrower. The
obligations of the Austrian and German borrowers are secured by the accounts
receivable of the Austrian and German borrowers, respectively.
Hexcel is required to maintain various financial ratios throughout the term
of the credit facility . These financial covenants set maximum values for the
Company's leverage (the ratios of total and senior debt to EBITDA), fixed charge
coverage (the ratio of EBITDA, less capital expenditures and cash taxes, plus
cash dividends, to the sum of cash interest and scheduled debt amortization),
and capital expenditures (not to exceed specified annual expenditures). The
credit facility also contains limitations on, among other things, incurring
debt, granting liens, making investments, making restricted payments, entering
into transactions with affiliates and prepaying subordinated debt. The credit
facility also contains other customary terms relating to, among other things,
representations and warranties, additional covenants and events of default.
On March 19, 2003, the Company borrowed $13.0 million and issued letters of
credit totaling approximately $25.8 million under the new senior secured credit
facility.
CLASSIFICATION OF DEBT AND CAPITAL LEASE OBLIGATIONS AS OF DECEMBER 31, 2002
As of December 31, 2002, the Company had a scheduled debt obligation due
August 1, 2003, which, if made, would cause the Company to violate one or more
financial covenants in the Company's existing debt agreements. The Company also
required an amendment of its existing senior credit facility before the end of
the first quarter of 2003 to maintain compliance with the financial covenants
under that facility. As the anticipated refinancing of the Company's capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company had not obtained an amendment of the
aforementioned financial covenants, all debt and capital lease obligations had
been classified as current at December 31, 2002.
As a result of the March 19, 2003 refinancing transactions, the
uncertainties surrounding the Company's ability to meet its scheduled 2003 debt
maturities and comply with its debt covenants have been mitigated. Management
believes the Company will comply with the new debt covenants and has adequate
liquidity available to finance operations beyond December 31, 2003. Also as a
result of the refinancing transactions, substantially all of the Company's debt
will be reclassified to long-term at March 31, 2003 reflecting the new scheduled
debt maturities. Refer to Note 24, "Subsequent Event - Pro Forma Consolidated
Balance Sheet (Unaudited)."
30
NOTE 3 - GOODWILL AND OTHER PURCHASED INTANGIBLES
Upon the Company's adoption of FAS 142 as of January 1, 2002, amortization
of goodwill ceased. Although no amortization expense was recognized in 2002, the
consolidated statements of operations include amortization expense of $12.5
million in 2001 and $13.1 million in 2000.
Net income (loss) and net income (loss) per share for the years ended
December 31, 2002, 2001 and 2000, adjusted to exclude amortization expense, net
of tax, are as follows:
(IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
Net income (loss) $ (13.6) $ (433.7) $ 54.2
Goodwill amortization, net of tax - 11.2 8.5
------------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $ (13.6) $ (422.5) $ 62.7
==================================================================================================================
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) $ (0.35) $ (11.54) $ 1.47
Goodwill amortization, net of tax - 0.30 0.23
------------------------------------------------------------------------------------------------------------------
Adjusted basic net income (loss) per share $ (0.35) $ (11.24) $ 1.70
------------------------------------------------------------------------------------------------------------------
DILUTED NET INCOME (LOSS) PER SHARE:
Net income (loss) $ (0.35) $ (11.54) $ 1.32
Goodwill amortization, net of tax - 0.30 0.19
------------------------------------------------------------------------------------------------------------------
Adjusted diluted net income (loss) per share $ (0.35) $ (11.24) $ 1.51
==================================================================================================================
The gross carrying amount and accumulated amortization of goodwill, by the
Company's reportable segments, as of December 31, 2002 and 2001, are as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------------------------- ---------------------------------------------
GROSS GROSS
CARRYING ACCUMULATED CARRYING ACCUMULATED
(IN MILLIONS) AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
------------------------------------------------------------------------------------------------------------------
Reinforcements $ 69.9 $ 29.8 $ 40.1 $ 69.6 $ 29.7 $ 39.9
Composites 31.1 13.4 17.7 27.9 12.0 15.9
Structures 23.5 6.9 16.6 23.5 6.9 16.6
------------------------------------------------------------------------------------------------------------------
Goodwill $ 124.5 $ 50.1 $ 74.4 $ 121.0 $ 48.6 $ 72.4
==================================================================================================================
Changes in the net carrying amount of goodwill for the years ended December
31, 2002, 2001 and 2000, by reportable segment, are as follows:
(IN MILLIONS) REINFORCEMENTS COMPOSITES STRUCTURES TOTAL
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 $ 350.3 $ 36.9 $ 24.0 $ 411.2
Amortization of goodwill and other
purchased intangibles (9.1) (2.7) (1.3) (13.1)
Sale of Bellingham aircraft interiors business - - (4.9) (4.9)
Currency translation adjustment and other - (1.5) - (1.5)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 341.2 $ 32.7 $ 17.8 $ 391.7
Amortization of goodwill and other
purchased intangibles (9.1) (2.2) (1.2) (12.5)
Impairment of goodwill and other
purchased intangibles (292.1) (17.0) - (309.1)
Acquired goodwill - 2.9 - 2.9
Currency translation adjustment (0.1) (0.5) - (0.6)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 39.9 $ 15.9 $ 16.6 $ 72.4
Currency translation adjustment 0.2 1.8 - 2.0
==================================================================================================================
BALANCE AS OF DECEMBER 31, 2002 $ 40.1 $ 17.7 $ 16.6 $ 74.4
==================================================================================================================
As of December 31, 2002 and 2001, other purchased intangibles had no
carrying value.
IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLES
During the fourth quarter of 2001, the Company reviewed its long-lived
assets under FASB Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," particularly goodwill and other
31
purchased intangibles acquired in recent years, for impairment. The review was
undertaken in response to changes in market conditions and the Company's revised
business outlook resulting from a sharp decline in demand for the Company's
woven glass fabrics, primarily in the electronics market, and the announced
reductions in commercial airline production following the tragic events of
September 11, 2001. The Company also revised its forecasts of revenue growth for
its acquired satellite business due to the continuing slow down in commercial
satellite launches following the financial failure of a number of satellite
based telecommunication projects and the postponement of others. These adverse
changes in market conditions led to the lowering of revenue forecasts associated
with certain businesses in the Reinforcements and Composites segments.
Based on this review, the Company determined that the long-lived assets,
including goodwill, of the fabrics business acquired from Clark-Schwebel in 1998
and the satellite business acquired from Fiberite in 1997 were not fully
recoverable. The Company recorded non-cash impairment charges of $292.1 million
and $17.0 million related to the goodwill and other purchased intangibles
associated with the Clark-Schwebel and Fiberite acquisitions, respectively. The
amounts of the impairment charges were calculated as the excess of the carrying
value of the assets over their fair values. Fair values were determined using
discounted future cash flow models, market valuations and third party
appraisals, where appropriate. There were no tax benefits recognized on the
impairments because of limitations on the Company's ability to realize the tax
benefits.
NOTE 4 - BUSINESS CONSOLIDATION AND RESTRUCTURING PROGRAMS
The aggregate business consolidation and restructuring activities for the
three years ended December 31, 2002, consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 $ 3.5 $ 0.6 $ 4.1
Business consolidation expenses:
Current period expenses 3.7 10.6 14.3
Reversal of 1999 business consolidation expenses (0.3) (3.1) (3.4)
------------------------------------------------------------------------------------------------------------------
Net business consolidation expenses 3.4 7.5 10.9
Cash expenditures (3.9) (7.9) (11.8)
Non-cash items:
Reversal of 1999 business consolidation expenses - 3.1 3.1
Non-cash usage, including asset write-downs (0.6) (3.0) (3.6)
------------------------------------------------------------------------------------------------------------------
Total non-cash items (0.6) 0.1 (0.5)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 2.4 $ 0.3 $ 2.7
Business consolidation and restructuring expenses 34.5 23.9 58.4
Cash expenditures (6.4) (5.6) (12.0)
Non-cash usage, including asset write-downs - (15.7) (15.7)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 30.5 $ 2.9 $ 33.4
Business consolidation and restructuring expenses
Current period expenses - 2.8 2.8
Reversal of 1999 business consolidation expenses - (0.5) (0.5)
Change in estimated expenses (2.9) 1.1 (1.8)
------------------------------------------------------------------------------------------------------------------
Net business consolidation and restructuring expenses (2.9) 3.4 0.5
Cash expenditures (20.5) (3.8) (24.3)
Currency translation adjustment 0.9 - 0.9
Non-cash items:
Reversal of 1999 business consolidation expenses - 0.5 0.5
Non-cash usage, including asset write-downs - (0.5) (0.5)
------------------------------------------------------------------------------------------------------------------
Total non-cash items - - -
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2002 $ 8.0 $ 2.5 $ 10.5
==================================================================================================================
NOVEMBER 2001 PROGRAM
In November 2001, the Company announced a program to restructure its
business operations in accordance with a revised business outlook for build rate
reductions in commercial aircraft production, the continued depressed business
conditions in the electronics market and the weakness in the general economy.
The program targeted a 20% reduction in cash fixed costs, or $60.0 million,
compared to previous spending rates and included company-wide reductions in
managerial,
32
professional, indirect manufacturing and administrative employees along with
organizational rationalization. In connection with the program, the Company
recognized charges of $47.9 million in the fourth quarter of 2001. During 2002,
the Company continued the implementation of this program in 2002, reducing its
workforce, since announcement, by approximately 25% to 4,245 employees.
In 2002, the Company recognized a net change in estimated business
consolidation and restructuring expenses related to this program of $0.7
million. This resulted from a $1.8 million reduction of previously accrued
liabilities as employee severance and other benefit costs were lower than
previously expected, offset in part, by a $1.1 million increase in restructuring
liabilities for facility lease termination costs. An additional $1.2 million was
expensed as incurred in 2002.
Business consolidation and restructuring activities for this program
consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ - $ - $ -
Business consolidation and restructuring expenses 30.8 17.1 47.9
Cash expenditures (3.2) - (3.2)
Non-cash usage, including asset write-downs - (14.3) (14.3)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 27.6 $ 2.8 $ 30.4
Business consolidation and restructuring expenses
Current period expenses - 1.2 1.2
Change in estimated expenses (1.8) 1.1 (0.7)
------------------------------------------------------------------------------------------------------------------
Net business consolidation and restructuring expenses (1.8) 2.3 0.5
Cash expenditures (18.9) (2.1) (21.0)
Non-cash usage, including asset write-downs - (0.5) (0.5)
Currency translation adjustment 0.9 - 0.9
==================================================================================================================
BALANCE AS OF DECEMBER 31, 2002 $ 7.8 $ 2.5 $ 10.3
==================================================================================================================
JULY 2001 PROGRAM
As a result of the weakness in the electronics market, the Company
initiated cost reduction actions in July 2001. These actions incorporated steps
to furlough employees, idle manufacturing facilities and cut non-essential
expenditures, by effecting a reduction in the work force of approximately 275
employees primarily in the Reinforcements and Composites business segments. In
connection with the program, the Company recognized a charge of $3.9 million in
2001. During 2002, the Company reviewed its remaining liability under the
program and recognized a change in estimated business consolidation and
restructuring expenses of $0.6 million, as employee severance and other benefit
costs were lower than previously expected.
Business consolidation and restructuring activities for this program
consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ - $ - $ -
Business consolidation and restructuring expenses 3.6 0.3 3.9
Cash expenditures (2.1) (0.2) (2.3)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 1.5 $ 0.1 $ 1.6
Change in estimated expenses (0.6) - (0.6)
Cash expenditures (0.9) (0.1) (1.0)
==================================================================================================================
BALANCE AS OF DECEMBER 31, 2002 $ - $ - $ -
==================================================================================================================
DECEMBER 1998 AND SEPTEMBER 1999 PROGRAMS
As a result of several substantial business acquisitions, the Company
initiated business consolidation programs in December 1998 and September 1999.
The primary purpose of these programs was to integrate acquired assets and
operations into the Company, and to close or restructure insufficiently
profitable facilities and activities. Due to aerospace industry requirements to
"qualify" specific equipment and manufacturing processes for certain products,
some business consolidation actions have taken up to three years to complete.
These qualification requirements increase the complexity, cost and time of
moving equipment and rationalizing manufacturing activities. In connection with
these business consolidation programs, the Company closed three
33
manufacturing facilities, vacated approximately 560 thousand square feet of
manufacturing space, and eliminated more than 700 manufacturing, marketing and
administrative positions.
In 2000, the Company added two further actions to the September 1999
business consolidation program. The Company decided to close the two smaller of
its four U.S. prepreg manufacturing facilities - one in Lancaster, Ohio and
another in Gilbert, Arizona. The Gilbert, Arizona facility was closed in 2001
and the closure of the Lancaster, Ohio facility was completed in 2002. The
manufacturing output from these two plants is now being produced by the two
remaining U.S. prepreg facilities in Livermore, California and Salt Lake City,
Utah. In connection with the program, including the program revisions, the
Company recognized a charge of $14.3 million in 2000.
In addition, during 2000, Hexcel amended its September 1999 business
consolidation program in response to the manufacturing constraints caused by a
stronger than expected increase in sales and production for its electronic woven
glass fabrics and its ballistic protection products. Based on these improved
market conditions and a manufacturing capacity review, the Company decided to
expand its capacity by purchasing additional looms and revising the previous
decision to consolidate a number of weaving activities at two of the Company's
facilities. As a result of the decision not to proceed to consolidate
production, the Company reversed a total of $3.4 million of business
consolidation expenses that were previously recognized in 1999, including $3.1
million in non-cash write-downs of machinery and equipment that was to have been
sold or scrapped as a result of the consolidation.
In 2002, the Company recognized a change in estimated business
consolidation expenses related to this program of $0.5 million, as actual
employee severance was lower than previously expected. Business consolidation
expenses for equipment relocation and re-qualification costs, expensed as
incurred, were $1.6 million and $6.5 million in 2002 and 2001, respectively.
Equipment relocation and re-qualification costs primarily related to the planned
closure of the Lancaster, Ohio and Gilbert, Arizona prepreg manufacturing
facilities. In addition, the Company recognized a benefit on the sale of a
previously idled Cleveland, Georgia facility of $0.5 million by reversing
expenses previously accrued in 1999.
Business consolidation activities for the December 1998 and September 1999
programs consisted of the following:
EMPLOYEE FACILITY &
(IN MILLIONS) SEVERANCE EQUIPMENT TOTAL
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000(a) $ 3.5 $ 0.6 $ 4.1
Business consolidation expenses:
Current period expenses 3.7 10.6 14.3
Reversal of 1999 business consolidation expenses (0.3) (3.1) (3.4)
------------------------------------------------------------------------------------------------------------------
Net business consolidation expenses 3.4 7.5 10.9
Cash expenditures (3.9) (7.9) (11.8)
Non-cash items:
Reversal of 1999 business consolidation expenses - 3.1 3.1
Non-cash usage, including asset write-downs (0.6) (3.0) (3.6)
------------------------------------------------------------------------------------------------------------------
Total non-cash items (0.6) 0.1 (0.5)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 2.4 $ 0.3 $ 2.7
Business consolidation expenses 0.1 6.5 6.6
Cash expenditures (1.1) (5.4) (6.5)
Non-cash usage, including asset write-downs - (1.4) (1.4)
------------------------------------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 1.4 $ - $ 1.4
Business consolidation expenses
Current period expenses - 1.6 1.6
Reversal of 1999 business consolidation expenses - (0.5) (0.5)
Change in estimated expenses (0.5) - (0.5)
------------------------------------------------------------------------------------------------------------------
Net business consolidation expenses (0.5) 1.1 0.6
Cash expenditures (0.7) (1.6) (2.3)
Non-cash reversal of 1999 business consolidation expenses - 0.5 0.5
==================================================================================================================
BALANCE AS OF DECEMBER 31, 2002 $ 0.2 $ - $ 0.2
==================================================================================================================
(a) The December 1998 program had an accrued liability balance of $1.0
million for employee severance at January 1, 2000, which was utilized
during 2000.
34
As of December 31, 2002, the December 1998, September 1999 and July 2001
programs have been essentially completed, while the November 2001 program will
be substantially completed in 2003. Management will continue to closely monitor
spending under the November 2001 program and evaluate opportunities that may
exist for future actions, as the Company continues to right-size the business
in response to existing conditions in the markets it serves.
NOTE 5 - INVENTORIES
DECEMBER 31,
(IN MILLIONS) 2002 2001
-------------------------------------------------------------------------------
Raw materials $ 40.7 $ 59.1
Work in progress 37.6 35.2
Finished goods 35.3 37.4
-------------------------------------------------------------------------------
Inventories $ 113.6 $ 131.7
===============================================================================
NOTE 6 - NET PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
(IN MILLIONS) 2002 2001
-------------------------------------------------------------------------------
Land $ 21.1 $ 23.5
Buildings 140.2 132.7
Equipment 470.7 443.8
Construction in Progress 10.8 17.0
--------------------------------------------------------------------------------
Property, plant and equipment 642.8 617.0
Less accumulated depreciation (333.4) (287.8)
--------------------------------------------------------------------------------
Net property, plant and equipment $ 309.4 $ 329.2
===============================================================================
NOTE 7 - INVESTMENTS IN AFFILIATED COMPANIES
In 1999, Hexcel, Boeing International Holdings, Ltd. and Aviation
Industries of China (now known as China Aviation Industry Corporation I) formed
a joint venture, BHA Aero Composite Parts Co., Ltd. ("BHA Aero"), to manufacture
composite parts for secondary structures and interior applications for
commercial aircraft. Hexcel has a 33.3% equity ownership interest in this joint
venture, which is located in Tianjin, China. In addition, in 1999, Hexcel formed
another joint venture, Asian Composites Manufacturing Sdn. Bhd. ("Asian
Composites"), with Boeing Worldwide Operations Limited, Sime Link Sdn. Bhd., and
Malaysia Helicopter Services Bhd. (now known as Naluri Berhadto), to manufacture
composite parts for secondary structures for commercial aircraft. Hexcel has a
25% equity ownership interest in this joint venture, which is located in Alor
Setar, Malaysia. Asian Composites began shipping composite structures to
customers during the second half of 2001, while BHA Aero began deliveries in the
first half of 2002. During 2000, Hexcel made cash equity investments totaling
$8.3 million in these two joint ventures. No additional cash equity investments
were made during 2002 and 2001. As of December 31, 2002 and 2001, the Company
had an outstanding letter of credit of $11.1 million in support of a loan to BHA
Aero (see Note 16).
The Company also has equity ownership interests in three joint ventures
which manufacture reinforcement products: a 43.6% share in Interglas
Technologies AG ("Interglas"), headquartered in Germany; a 33.3% share in
Asahi-Schwebel Co., Ltd. ("Asahi-Schwebel"), headquartered in Japan, which in
turn owns interests in two joint ventures in Taiwan - a 50% interest in Nittobo
Asahi Glass and a 51% interest in Asahi-Schwebel Taiwan; and a 50% share in
Clark-Schwebel Tech-Fab Company ("CS Tech-Fab"), headquartered in the United
States. Interglas and Asahi-Schwebel are fiberglass fabric producers serving the
European and Asian manufacturers of printed circuit board laminates and other
reinforcement product applications. CS Tech-Fab manufactures non-woven
reinforcement materials for roofing, construction, sail cloth and other
specialty applications.
In 2002, the Company agreed with its Asian Electronics venture partner to
restructure its minority interest in Asahi-Schwebel. Under the terms of the
agreement, the Company reduced its ownership interest in the joint venture from
43.3% to 33.3% and received cash proceeds of $10.0 million. The
35
agreement also included, among other matters, a put option in favor of the
Company to sell and a call option in favor of the Company's joint venture
partner to purchase the Company's remaining ownership interest in the joint
venture for $23.0 million. The options are simultaneously effective for a
six-month period beginning July 1, 2003. Reflecting these terms, the Company
wrote-down the carrying value of its remaining equity investment in this joint
venture to its estimated fair market value of $23.0 million, recording a
non-cash impairment charge of $4.0 million. There was no tax benefit recognized
on the write-down.
In 2001, the Company wrote-down its investment in Interglas by $7.8
million. The write-down was the result of an assessment that an
other-than-temporary decline in value of the investment had occurred due to a
severe industry downturn and the resulting impact on the financial condition of
this company. The amount of the write-down was determined based on available
market information and appropriate valuation methodologies. The Company did not
record deferred tax benefits on the write-down because of limitations imposed by
foreign tax laws and the Company's ability to realize the tax benefits.
Lastly, Hexcel owns a 45% equity interest in DIC-Hexcel Limited ("DHL"), a
joint venture with Dainippon Ink and Chemicals, Inc. ("DIC"). This joint venture
is located in Komatsu, Japan, and produces and sells prepregs, honeycomb and
decorative laminates using technology licensed from Hexcel and DIC. Hexcel is
contingently liable to pay DIC up to $1.5 million with respect to DHL's debt
under certain defined circumstances through January 31, 2004, unless renewed.
This contingent liability will cease upon DHL's repayment of the underlying
loan.
Summarized condensed combined financial information for these joint
ventures as of December 31, 2002 and 2001 and for the three years ended December
31, 2002 is as follows:
(IN MILLIONS) DECEMBER 31,
SUMMARIZED CONDENSED COMBINED BALANCE SHEETS 2002 2001
-----------------------------------------------------------------------------------------
Current assets $ 106.0 $ 132.0
Noncurrent assets 209.7 213.3
-----------------------------------------------------------------------------------------
Total assets $ 315.7 $ 345.3
Current liabilities $ 66.8 $ 52.0
Noncurrent liabilities 99.2 87.0
-----------------------------------------------------------------------------------------
Total liabilities 166.0 139.0
Minority Interest 20.3 21.3
Partners' equity 129.4 185.0
-----------------------------------------------------------------------------------------
Total liabilities and partners' equity $ 315.7 $ 345.3
=========================================================================================
For the Year Ended December 31,
SUMMARIZED CONDENSED COMBINED STATEMENTS OF OPERATIONS 2002 2001 2000
----------------------------------------------------------------------------------------------------
Net sales $ 232.7 $ 276.5 $ 337.3
Cost of sales 207.5 204.5 250.2
----------------------------------------------------------------------------------------------------
Gross profit 25.2 72.0 87.1
Other costs and expenses 78.6 76.0 79.8
----------------------------------------------------------------------------------------------------
Net income (loss) $ (53.4) $ (4.0) $ 7.3
====================================================================================================
36
NOTE 8 - NOTES PAYABLE
DECEMBER 31,
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------------------------------------------
Senior Credit Facility $ 179.7 $ 233.9
European credit and overdraft facilities 0.2 3.5
Senior subordinated notes, due 2009 (net of unamortized discount
of $1.2 and $1.4 as of December 31, 2002 and 2001) 338.8 338.6
Convertible subordinated notes, due 2003 46.9 46.9
Convertible subordinated debentures, due 2011 22.7 24.5
Various notes payable - 0.1
------------------------------------------------------------------------------------------------------------------
Total notes payable 588.3 647.5
Capital lease obligations 33.4 38.4
------------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 621.7 $ 685.9
==================================================================================================================
Notes payable and current maturities of capital lease obligations $ 621.7 $ 17.4
Long-term notes payable and capital lease obligations, less current maturities - 668.5
------------------------------------------------------------------------------------------------------------------
Total notes payable and capital lease obligations $ 621.7 $ 685.9
==================================================================================================================
SENIOR CREDIT FACILITY
Hexcel had a global credit facility (the "Senior Credit Facility") with a
syndicate of banks to provide for ongoing working capital and other financing
requirements. The Senior Credit Facility, which consisted of revolving credit,
overdraft and term loan facilities, provided Hexcel with committed lines of
approximately $297.6 million as of December 31, 2002, subject to certain
limitations. These commitments consisted of funded term loans of $106.8 million,
revolving credit and overdraft facilities of $160.8 million, and letter of
credit facilities of $30.0 million. As of December 31, 2002, drawings under the
revolving credit facility were $72.9 million, leaving undrawn commitments under
the facilities of $87.9 million. As of December 31, 2002, letters of credit
issued under the facility approximated $24.2 million, of which $11.1 million
supports a loan to the Company's BHA Aero joint venture. The Company was subject
to various financial covenants and restrictions under the Senior Credit
Facility, including limitations on incurring debt, granting liens, selling
assets, repaying subordinated indebtedness, redeeming capital stock and paying
dividends. The Senior Credit Facility was scheduled to expire in 2004, except
for approximately $55.8 million of term loans that are due for repayment in
2005. The Senior Credit Facility was paid in full on March 19, 2003 (see Note
2).
Effective January 25, 2002, Hexcel entered into an amendment of the Senior
Credit Facility. The amendment provided for revised financial covenants through
2002; a 100 basis point increase in the interest spread payable over LIBOR for
advances under the facility; and an immediate decrease in the commitment of
revolving credit and overdraft facilities from a cumulative amount of $205.0
million to $190.0 million, with a further reduction to $182.0 million on or
before September 30, 2002. The amendment also provided for a 25 basis point
increase on January 1, 2003 if the Company did not reduce the commitment by a
further $25.0 million, prior to that date. The Senior Credit Facility financial
covenants set certain maximum values for the Company's leverage (the ratios of
total and senior debt to an Adjusted EBITDA), and certain minimum values for its
interest coverage (the ratio of an Adjusted EBITDA to cash interest expense) and
fixed charge coverage (the ratio of an Adjusted EBITDA less capital expenditures
to the sum of certain fixed expenses). In addition, during the term of the
amendment, all net proceeds generated through asset sales, and most other
liquidity events, in each case to the extent in excess of $2.5 million, and 100%
of all net proceeds generated from litigation settlements and judgments, must be
used to prepay loans under the Senior Credit Facility. Hexcel also agreed to
limit capital expenditures to $25.0 million during 2002, with a $10.0 million
limit during any quarter in 2002. At December 31, 2002, the Company was in
compliance with the covenants, as amended, under its Senior Credit Facility.
In connection with the credit agreement amendment, Hexcel also agreed to
grant additional collateral. The Company had previously granted a security
interest in most of its U.S. accounts receivable, inventory, property, plant,
equipment and real estate. It had also pledged some or all of the shares of
certain subsidiaries. Under the terms of the amendment, Hexcel granted to the
banks a security interest in additional U.S. accounts receivable, inventory,
property, plant, equipment and real
37
estate, as well as its intellectual property. In addition, each of a group of
Hexcel's European subsidiaries granted a security interest in its accounts
receivable that secured certain local borrowings advanced to that subsidiary.
The Senior Credit Facility had been subject to several previous amendments
to accommodate, among other things, the planned sale of assets, the planned
investments in additional manufacturing capacity for selected products, the
impact of the decline of the Company's operating results on certain financial
covenants, the purchase by an investor group of approximately 14.5 million
shares of Hexcel common stock held by a significant shareholder of the Company,
a restructuring of the ownership of certain of the Company's European
subsidiaries, the issuance of additional senior subordinated debt and the early
redemption of certain term debt. In connection with the 2002 and previous
amendments, included in interest expense in 2002 and 2001 are fees and expenses
incurred of approximately $1.8 million and $1.0 million, respectively.
The January 25, 2002 amendment relaxed the 2002 quarterly financial
covenants to accommodate the impact of the downturn in the commercial aerospace
and electronics markets. Under the terms of the amendment, the financial
covenants effective beginning with the quarter ending March 31, 2003 were to be
those that applied before the amendment. As these market conditions experienced
in 2002 are expected to continue during 2003, the Company needed to obtain a
further amendment of the facility before the end of the first quarter of 2003 to
accommodate its projected financial performance for that quarter and to be in
compliance with the financial covenants as provided in the Senior Credit
Facility agreement, or refinance the facility. The Company executed a
refinancing of the facility on March 19, 2003 (see Note 2).
The weighted average interest rate on the Senior Credit Facility was 7.71%,
8.50% and 11.55% for the years ended December 31, 2002, 2001 and 2000,
respectively. During the three years ended December 31, 2002, interest rates
have been in the following ranges:
IN EXCESS OF THE BASE RATE OF
IN EXCESS OF THE APPLICABLE THE ADMINISTRATIVE AGENT FOR
LONDON INTERBANK RATE THE LENDERS
--------------------------- -----------------------------
January 2002 to December 2002 2.00% - 4.25% 1.25% - 3.25%
May 2001 to January 2002 1.00% - 3.25% 0.25% - 2.25%
March 2000 to May 2001 0.75% - 3.00% 0.00% - 2.00%
Prior to March 2000 0.75% - 2.50% 0.00% - 1.50%
The Senior Credit Facility was subject to a commitment fee varying from
approximately 0.20% to 0.50% per annum of the total facility.
At December 31, 2001, Hexcel had an interest rate cap agreement outstanding
which covered a notional amount of $50.0 million of the Senior Credit Facility,
providing a maximum fixed rate of 5.50% on the applicable London interbank rate.
The agreement expired on October 29, 2002 (see Note 15).
EUROPEAN CREDIT AND OVERDRAFT FACILITIES
In addition to the Senior Credit Facility, certain of Hexcel's European
subsidiaries have access to limited credit and overdraft facilities provided by
various local banks. These credit and overdraft facilities are primarily
uncommitted facilities that are terminable at the discretion of the lenders. The
interest rates on these credit and overdraft facilities for the three years
ended December 31, 2002, ranged from 1.5% to 6.6%.
SENIOR SUBORDINATED NOTES, DUE 2009
On January 21, 1999, the Company issued $240.0 million of 9.75% senior
subordinated notes, due 2009. On June 29, 2001, the Company offered an
additional $100.0 million under the same indenture at a price of 98.5% of face
value. The senior subordinated notes are general unsecured obligations of
Hexcel.
38
Net proceeds from the subsequent offering were used to redeem $67.5 million
aggregate principal amount of the Company's outstanding 7% convertible
subordinated notes, due 2003, and to pay the entire principal amount of $25.0
million of the increasing rate senior subordinated note, due 2003. As a result
of the redemption, the Company recognized a $2.7 million loss on the early
retirement debt. With the adoption of FAS 145 on January 1, 2002, the $2.7
million extraordinary loss on early retirement of debt recorded in 2001 was
reclassified as a separate line item below operating income in the consolidated
statements of operations. There was no tax benefit recognized on the loss
because of limitations on the Company's ability to realize the tax benefits.
CONVERTIBLE SUBORDINATED NOTES, DUE 2003
The convertible subordinated notes carry an annual interest rate of 7.00%
and are convertible into Hexcel common stock at any time on or before August 1,
2003, unless previously redeemed, at a conversion price of $15.81 per share,
subject to adjustment under certain conditions. The convertible subordinated
notes are redeemable, in whole or in part, at the Company's option at any time,
at various redemption prices set forth in the convertible notes indenture, plus
accrued interest. On June 29, 2001, $67.5 million aggregate principal amount of
the convertible subordinated notes was redeemed.
CONVERTIBLE SUBORDINATED DEBENTURES, DUE 2011
The convertible subordinated debentures carry an annual interest rate of
7.00% and are convertible into shares of Hexcel common stock prior to maturity,
unless previously redeemed, at a conversion price of $30.72 per share. Mandatory
redemption of the convertible debentures was scheduled to begin in 2002 through
annual sinking fund requirements of $1.1 million in 2002 and $1.8 million in
each year thereafter. The Company satisfied the 2002 annual sinking fund
requirement in 2001. In 2002, the Company recognized a $0.5 million gain on the
early retirement of debt, relating to the repurchase of $1.8 million in
satisfaction of the 2003 sinking fund requirement. The debt was repurchased at
market prices, which resulted in a gain. In accordance with the requirements of
FAS 145, the gain has been reported as a separate line item below operating
income in the consolidated statements of operations.
INCREASING RATE SENIOR SUBORDINATED NOTE, DUE 2003
The increasing rate senior subordinated note, due 2003 was a general
unsecured obligation payable to certain subsidiaries of Ciba Specialty Chemicals
Holding, Inc. Effective February 1999, the interest rate on the note was 10.50%
per annum, a rate which increased by 0.50% per annum each February thereafter
until the repayment of principal. The average interest rate on the note was
11.42% in 2001 and 10.96% in 2000. The note was redeemed in full on June 29,
2001 with the proceeds of the $100.0 million issuance of 9.75% senior
subordinated notes, due 2009.
AGGREGATE MATURITIES OF NOTES PAYABLE
The table below reflects aggregate scheduled maturities of notes payable,
excluding capital lease obligations (see Note 9):
Payable during the years ending December 31: (IN MILLIONS)
--------------------------------------------------------------------------------
2003 $ 55.7
2004 117.1
2005 57.6
2006 1.8
2007 1.8
Thereafter 355.5
--------------------------------------------------------------------------------
Total notes payable $ 589.5
================================================================================
The aggregate maturities of notes payable in 2003 include European credit
and overdraft facilities of $0.2 million, which are repayable on demand. At
December 31, 2002, the unamortized discount on the additional $100.0 million
senior subordinated notes, due 2009, issued on June 29, 2001, was $1.2 million.
39
DEBT CLASSIFICATION AS OF DECEMBER 31, 2002
As described in Note 2, as the anticipated refinancing of the capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company had not obtained an amendment of the
aforementioned financial covenants, all debt had been classified as current at
December 31, 2002.
ESTIMATED FAIR VALUES OF NOTES PAYABLE
The Senior Credit Facility and the various European credit facilities
outstanding as of December 31, 2002 and 2001 are variable-rate debt obligations.
Accordingly, the estimated fair values of each of these debt obligations
approximate their respective book values. The approximate, aggregate fair values
of the Company's other notes payable as of December 31, 2002 and 2001 were as
follows:
(IN MILLIONS) 2002 2001
--------------------------------------------------------------------------------------------------
Senior subordinated notes, due 2009 $ 295.8 $ 190.4
Convertible subordinated notes, due 2003 46.2 27.0
Convertible subordinated debentures, due 2011 13.6 15.5
==================================================================================================
The aggregate fair values of the above notes payable were estimated on the
basis of quoted market prices; however, trading in these securities is limited
and may not reflect actual fair value.
NOTE 9 - LEASING ARRANGEMENTS
Assets, accumulated depreciation, and related liability balances under
capital leasing arrangements, as of December 31, 2002 and 2001, were:
(IN MILLIONS) 2002 2001
--------------------------------------------------------------------------------------------------
Property, plant and equipment $ 55.3 $ 61.1
Less accumulated depreciation (31.4) (26.3)
--------------------------------------------------------------------------------------------------
Net property, plant and equipment $ 23.9 $ 34.8
==================================================================================================
Capital lease obligations $ 33.4 $ 38.4
Less current maturities (6.2) (5.6)
--------------------------------------------------------------------------------------------------
Long-term capital lease obligations, net $ 27.2 $ 32.8
==================================================================================================
Certain sales and administrative offices, data processing equipment and
manufacturing facilities are leased under operating leases. Rental expense under
operating leases was $3.8 million in 2002, $5.4 million in 2001, and $7.0
million in 2000.
Scheduled future minimum lease payments as of December 31, 2002 were:
TYPE OF LEASE
(IN MILLIONS) -------------------------
Payable during years ending December 31: CAPITAL OPERATING
-------------------------------------------------------------------------------------------------
2003 $ 8.7 $ 2.9
2004 8.7 2.5
2005 8.5 2.6
2006 11.4 1.7
2007 0.5 0.7
Thereafter 3.4 2.0
-------------------------------------------------------------------------------------------------
Total minimum lease payments $ 41.2 $ 12.4
=================================================================================================
Less amounts representing interest 7.8
----------------------------------------------------------------------------------
Present value of future minimum capital lease payments 33.4
Less current obligations under capital leases 6.2
----------------------------------------------------------------------------------
Long-term obligations under capital lease $ 27.2
==================================================================================
40
CLASSIFICATION AS OF DECEMBER 31, 2002
As described in Note 2, the anticipated refinancing of the capital
structure was not completed as of February 28, 2003 (the 2002 financial
statement issuance date) and the Company has not obtained an amendment of the
aforementioned financial covenants; therefore, all capital lease obligations
have been classified as current at December 31, 2002.
NOTE 10 - RELATED PARTIES
CHANGE IN CONTROL
On December 19, 2000, the Goldman Sachs Investors completed a purchase of
approximately 14.5 million of the approximately 18 million shares of Hexcel
common stock owned by subsidiaries of Ciba Specialty Chemicals Holding, Inc. The
shares acquired by the Goldman Sachs Investors represented approximately 39% of
the Hexcel's outstanding common stock. In addition, the Company and the Goldman
Sachs Investors entered into a governance agreement that became effective on
December 19, 2000. Under this governance agreement, the Goldman Sachs Investors
have the right to, among other things, designate up to three directors to sit on
the Company's board of directors.
Hexcel incurred $2.2 million of costs in connection with this transaction,
all of which were included in "selling, general, and administrative expenses" in
2000. These costs and expenses included legal, consulting, and regulatory
compliance expenses, as well as a non-cash charge attributable to the
accelerated vesting of certain stock-based compensation and to certain
amendments to an executive retirement plan. Under the terms of the Company's
various stock option and management incentive plans, the transaction constituted
a "change in control" event, resulting in all outstanding stock options becoming
vested and exercisable. The former Chief Executive Officer waived the vesting of
his stock options by such event. In addition, nine of the most senior executive
officers other than the former Chief Executive Officer agreed to defer the
vesting of their stock options such that any of their stock options that would
have otherwise vested immediately (or would have otherwise vested by their
terms) vested one year after the closing with respect to half of such options,
and two years after the closing with respect to the remaining half of such
options, subject to earlier vesting in certain circumstances. As a result,
approximately 1.3 million stock options, with exercise prices ranging from $2.41
to $29.63 per share, and a weighted average exercise price of $8.99 per share,
vested and became exercisable on December 19, 2000 (see Note 13).
In addition, due to the change in control event, shares of the Hexcel's
common stock underlying a total of approximately 0.8 million restricted stock
units and performance accelerated restricted stock units (collectively, "stock
units") were distributed. However, the former Chief Executive Officer waived the
vesting of his stock units, and nine of the most senior executive officers other
than the former Chief Executive Officer agreed to defer the distribution of
shares underlying their stock units (although not the vesting of such stock
units), such that any shares of common stock that would have otherwise been
distributed immediately would be distributed one year after the closing with
respect to half of such stock units, and two years after the closing with
respect to the remaining half of such stock units, subject to earlier
distribution under certain circumstances (see Note 13).
NOTE 11 - RETIREMENT AND OTHER POSTRETIREMENT BENEFIT PLANS
Hexcel maintains qualified and nonqualified defined benefit retirement
plans covering certain U.S. and European employees, as well as retirement
savings plans covering eligible U.S. employees. The defined benefit retirement
plans are generally based on years of service and employee compensation under
either a career average or final pay benefits method, except as described below.
The Company also participates in a union sponsored multi-employer pension plan
covering certain U.S. employees with union affiliations.
In addition to defined benefit and retirement savings plan benefits, Hexcel
also provides certain postretirement health care and life insurance benefits to
eligible U.S. retirees. Depending upon the plan, benefits are available to
eligible employees who retire on or after age 58 or 65 after rendering a minimum
of 15 years or 25 years of service to Hexcel.
41
Under the retirement savings plans, eligible U.S. employees can contribute
up to 16% of their compensation to an individual retirement savings account.
Hexcel makes matching contributions equal to 50% of employee contributions, not
to exceed 3% of employee compensation. The Company also makes profit sharing
contributions when it meets or exceeds certain performance targets, which are
set annually.
Effective December 31, 2000, the Company made certain changes to its U.S.
retirement benefit plans that were intended to improve the flexibility and
visibility of future retirement benefits for employees. These changes included
an increase in the amount that the Company will contribute to individual 401(k)
retirement savings accounts and an offsetting curtailment of the Company's U.S.
qualified defined benefit retirement plan. Beginning January 1, 2001, the
Company started to contribute an additional 2% to 3% of each eligible employee's
salary to an individual 401(k) retirement savings account, depending on the
employee's age. This increases the maximum contribution to individual employee
savings accounts to between 5% and 6% per year, before any profit sharing
contributions. Offsetting the estimated incremental cost of this additional
benefit, participants in the Company's U.S. qualified defined benefit retirement
plan no longer accrued benefits under this plan after December 31, 2000, and no
new employees will become participants. However, employees retained all benefits
earned under this plan as of that date. The Company recognized a non-cash
curtailment gain of $5.1 million (an after-tax gain of approximately $3.3
million) in 2000 as a result of the amendment to its defined benefit retirement
plan.
The net periodic expense for all of these defined benefit and retirement
savings plans, for the three years ended December 31, 2002, was:
(IN MILLIONS) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Defined benefit retirement plans $ 6.8 $ 4.1 $ (1.2)
Union sponsored multi-employer pension plan 0.2 0.3 0.3
Retirement savings plans-matching contributions 4.5 5.0 2.9
Retirement savings plans-profit sharing and incentive contributions 6.5 7.0 5.0
------------------------------------------------------------------------------------------------------------------
Net periodic expense $ 18.0 $ 16.4 $ 7.0
==================================================================================================================
The net periodic cost of Hexcel's defined benefit retirement and U.S.
postretirement plans for the three years ended December 31, 2002, were:
(IN MILLIONS) U.S. PLANS EUROPEAN PLANS
DEFINED BENEFIT RETIREMENT PLANS 2002 2001 2000 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------
Service cost $ 0.7 $ 0.6 $ 3.0 $ 4.3 $ 2.4 $ 2.4
Interest cost 1.6 1.8 1.8 3.0 2.9 2.5
Expected return on plan assets (1.4) (1.4) (1.3) (4.1) (4.1) (4.5)
Net amortization and deferral 0.5 0.5 0.4 1.7 - (0.2)
-------------------------------------------------------------------------------------------------------------------------
Sub-total 1.4 1.5 3.9 4.9 1.2 0.2
Curtailment and settlement (gain) loss 0.5 1.0 (5.3) - 0.4 -
-------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost (benefit) $ 1.9 $ 2.5 $ (1.4) $ 4.9 $ 1.6 $ 0.2
=========================================================================================================================
POSTRETIREMENT PLANS - U.S. PLANS 2002 2001 2000
----------------------------------------------------------------------------------
Service cost $ 0.1 $ 0.2 $ 0.2
Interest cost 0.8 1.0 1.0
Net amortization and deferral (0.5) (0.4) (0.4)
----------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 0.4 $ 0.8 $ 0.8
==================================================================================
42
The benefit obligation, fair value of plan assets, funded status, and
amounts recognized in the consolidated financial statements for Hexcel's defined
benefit retirement plans and U.S. postretirement plans, as of and for the years
ended December 31, 2002 and 2001, were:
DEFINED BENEFIT RETIREMENT PLANS
----------------------------------------------
U.S. PLANS EUROPEAN PLANS POSTRETIREMENT PLANS
(IN MILLIONS) 2002 2001 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation - beginning of year $ 27.7 $ 24.1 $ 56.3 $ 49.8 $ 14.2 $ 14.2
Service cost 0.7 0.6 4.3 2.4 0.1 0.2
Interest cost 1.6 1.8 3.0 2.9 0.8 1.0
Plan participants' contributions - - 0.5 0.7 0.4 0.1
Amendments 0.6 1.8 - - (1.7) -
Actuarial loss (gain) 1.0 3.6 (3.1) 2.4 0.7 0.2
Benefits paid (4.7) (1.9) (1.0) (0.8) (1.5) (1.0)
Curtailment and settlement (gain) loss (1.0) (2.3) - 0.4 - (0.5)
Foreign exchange translation - - 6.5 (1.5) - -
---------------------------------------------------------------------------------------------------------------------------------
Benefit obligation - end of year $ 25.9 $ 27.7 $ 66.5 $ 56.3 $ 13.0 $ 14.2
---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets - beginning of year 14.5 $ 14.7 $ 51.9 $ 60.4 $ - $ -
Actual return on plan assets (0.9) (0.5) (10.3) (8.3) - -
Employer contributions 4.4 2.2 1.4 1.2 1.1 0.9
Plan participants' contributions - - 0.5 0.7 0.4 0.1
Benefits paid (4.7) (1.9) (1.0) (0.8) (1.5) (1.0)
Currency translation adjustments - - 5.0 (1.7) - -
Settlements (1.5) - - 0.4 - -
---------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets - end of year $ 11.8 $ 14.5 $ 47.5 $ 51.9 $ - $ -
---------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF FUNDED STATUS TO NET AMOUNT RECOGNIZED:
Unfunded status $ (14.1) $ (13.2) $ (19.0) $ (4.4) $ (13.0) $ (14.2)
Unrecognized actuarial loss (gain) 8.9 6.1 25.9 13.0 (2.9) 0.9
Unrecognized prior service cost 2.3 1.9 - - (1.9) (5.2)
---------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (2.9) $ (5.2) $ 6.9 $ 8.6 $ (17.8) $ (18.5)
---------------------------------------------------------------------------------------------------------------------------------
AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEETS:
Prepaid benefit costs $ - $ - $ 6.9 $ 8.6 $ - $ -
Intangible asset 1.7 1.5 - - - -
Accrued benefit liability (13.6) (13.4) (11.3) - (17.8) (18.5)
Accumulated other comprehensive income
(before tax for European Plans) 9.0 6.7 11.3 - - -
---------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (2.9) $ (5.2) $ 6.9 $ 8.6 $ (17.8) $ (18.5)
=================================================================================================================================
The total accumulated benefit obligation for pension plans with accumulated
benefit obligations in excess of plan assets was $66.3 million and $23.1 million
as of December 31, 2002 and 2001, respectively. A minimum pension obligation was
recorded to the extent such excesses exceed the liability recognized under
Statement of Financial Accounting Standards No. 87, "Employers' Accounting for
Pensions." Offsetting amounts were recorded in "intangible assets" to the extent
of unrecognized prior service costs, with the remainder recorded in "accumulated
other comprehensive income." Amortization of loss and other prior service costs
is calculated on a straight-line basis over the expected future years of service
of the plans' active participants. Assets for the defined benefit pension plans
generally consist of publicly traded equity securities, bonds and cash
investments.
As of December 31, 2002 and 2001, the prepaid benefit cost was included in
"other assets" in the accompanying consolidated balance sheets. For the same
periods, the accrued benefit costs for the U.S. defined retirement plans and
postretirement benefit plans were included in "accrued compensation and
benefits" and "other non-current liabilities," respectively, in the accompanying
consolidated balance sheets.
43
Assumptions used to estimate the actuarial present value of benefit
obligations at December 31, 2002, 2001, and 2000 were as follows:
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------
U.S. defined benefit retirement plans:
Discount rates 6.8% 7.3% 7.5%
Rate of increase in compensation 4.5% 4.5% 4.5%
Expected long-term rate of return on plan assets 9.0% 9.0% 9.0%
European defined benefit retirement plans:
Discount rates 5.3% - 6.0% 5.8% - 6.0% 5.8% - 6.0%
Rates of increase in compensation 2.5% - 3.8% 2.5% - 4.0% 2.5% - 4.0%
Expected long-term rates of return on plan assets 5.0% - 7.8% 5.8% - 7.0% 6.5% - 7.0%
Postretirement benefit plans:
Discount rates 6.8% 7.0% - 7.3% 7.0% - 7.5%
==============================================================================================================
The per capita cost of covered health care benefits increased by 22.0% in
2002. The annual rate of increase in the per capita cost of covered health care
benefits is assumed to be approximately 6.6% for medical and 5.0% for dental and
vision for 2003. The medical rates are assumed to gradually decline to 5.3% by
2012, whereas dental and vision rates are assumed to remain constant at 5.0%.
The table below presents the impact of a one-percentage-point increase and
a one-percentage-point decrease in the assumed health care cost trend on the
total of service and interest cost components, and on the postretirement benefit
obligation.
(IN MILLIONS) 2002 2001
------------------------------------------------------------------------------------------------------------
One-percentage-point increase:
Effect on total service and interest cost components $ 0.1 $ 0.1
Effect on postretirement benefit obligation $ 0.8 $ 1.1
One-percentage-point decrease:
Effect on total service and interest cost components $ (0.1) $ (0.1)
Effect on postretirement benefit obligation $ (0.7) $ (0.9)
============================================================================================================
NOTE 12 - INCOME TAXES
Income (loss) before income taxes and the provision for income taxes, for
the three years ended December 31, 2002, were as follows:
(IN MILLIONS) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes:
U.S. $ (22.5) $ (411.9) $ 22.4
International 30.2 28.2 52.6
---------------------------------------------------------------------------------------------------------------
Total income (loss) before income taxes $ 7.7 $ (383.7) $ 75.0
===============================================================================================================
Provision for income taxes:
Current:
U.S. $ - $ - $ -
International 9.6 12.9 17.7
---------------------------------------------------------------------------------------------------------------
Current provision for income taxes 9.6 12.9 17.7
---------------------------------------------------------------------------------------------------------------
Deferred:
U.S. 0.5 30.7 9.0
International 1.2 (3.1) (0.4)
---------------------------------------------------------------------------------------------------------------
Deferred provision for income taxes 1.7 27.6 8.6
---------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 11.3 $ 40.5 $ 26.3
===============================================================================================================
44
A reconciliation of the provision for income taxes at the U.S. federal
statutory income tax rate of 35% to the effective income tax rate, for the three
years ended December 31, 2002, is as follows:
(IN MILLIONS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------
Provision for taxes at U.S. federal statutory rate $ 2.7 $ (134.3) $ 26.3
U.S. state taxes, less federal tax benefit - - 0.3
Impact of different international tax rates, permanent
differences and other 0.1 (3.1) (0.2)
Valuation allowance 8.5 177.9 (0.1)
--------------------------------------------------------------------------------------------------------------
Total provision for income taxes $ 11.3 $ 40.5 $ 26.3
==============================================================================================================
In 2002, the Company received a dividend of $74.0 million from one of its
foreign subsidiaries, which is taxable for U.S. income tax purposes. The taxable
income resulting from the dividend is fully offset by net operating losses. The
utilization of net operating losses results in a corresponding reduction in the
valuation allowance.
The Company has made no U.S. income tax provision for approximately $80.4
million of undistributed earnings of international subsidiaries as of December
31, 2002. Such earnings are considered to be permanently reinvested.
DEFERRED INCOME TAXES
Deferred income taxes result from net operating loss carryforwards and
temporary differences between the recognition of items for income tax purposes
and financial reporting purposes. Principal components of deferred income taxes
as of December 31, 2002 and 2001, were:
(IN MILLIONS) 2002 2001
--------------------------------------------------------------------------------------------------
Net operating loss carryforwards $ 55.4 $ 70.0
Reserves and other, net 43.6 48.3
Accelerated depreciation (27.0) (23.5)
Accelerated amortization 94.9 92.3
Unfunded pension liability 6.7 2.4
Valuation allowance (167.4) (185.0)
--------------------------------------------------------------------------------------------------
Net deferred tax asset $ 6.2 $ 4.5
==================================================================================================
Since 1999, the Company has generated taxable income in Europe offset by
net operating loss ("NOL") carryforwards in the United States. The Company's
U.S. operations have generated such losses, in part, because most of the
Company's interest expense and goodwill amortization are serviced in the United
States. Through the first quarter of 2001, the Company recognized the benefit of
these NOL carryforwards by increasing the deferred tax asset carried on its
balance sheet.
During the second quarter of 2001, the Company began to experience a sharp
decline in revenues from its electronics market. As a result, the Company
reevaluated its ability to continue to recognize a benefit for U.S. net
operating losses generated, and determined to increase its tax provision rate
through the establishment of a non-cash valuation allowance attributable to the
currently generated U.S. net operating losses until such time as the U.S.
operations return to consistent profitability. Due to the effect of significant
events that have occurred since such time, including the delay in anticipated
recovery in the electronics market, anticipated reductions in commercial
aircraft production, and a general weakening of the economy, along with the
sizable impairments on certain long-lived assets recognized in the fourth
quarter of 2001, the Company reduced its estimates for future U.S. taxable
income during the carryforward period. As such, the Company established a full
valuation allowance on its U.S. deferred tax assets, which resulted in a tax
provision of $32.6 million in the fourth quarter of 2001 to record a valuation
allowance on previously reported tax assets.
Deferred tax assets require a valuation allowance when it is more likely
than not that some portion of the deferred tax assets may not be realized. The
realization of the deferred tax assets is dependent upon the timing and
magnitude of future taxable income prior to the expiration of the deferred tax
attributes. The amount of the deferred tax assets considered realizable,
however, could change if estimates of future taxable U.S. income during the
carry-forward period improve.
45
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 2002, Hexcel had net operating loss carryforwards for
U.S. federal and Belgium income tax purposes of approximately $156.9 million and
$7.2 million, respectively. If the Company issues the new preferred stock
described in Note 2, the Company will likely experience an "ownership change"
pursuant to IRC Section 382, which will limit the Company's ability to utilize
net operating losses against future U.S. taxable income.
NOTE 13 - STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK OUTSTANDING
(NUMBER OF SHARES IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------------------------
Common stock:
Balance, beginning of year 39.4 38.0 37.4
Activity under stock plans 0.4 1.4 0.6
----------------------------------------------------------------------------------------------------
Balance, end of year 39.8 39.4 38.0
----------------------------------------------------------------------------------------------------
Treasury stock:
Balance, beginning of year 1.2 0.9 0.8
Repurchased 0.1 0.3 0.1
----------------------------------------------------------------------------------------------------
Balance, end of year 1.3 1.2 0.9
----------------------------------------------------------------------------------------------------
Common stock outstanding 38.5 38.2 37.1
====================================================================================================
STOCK-BASED INCENTIVE PLANS
Hexcel has various stock option and management incentive plans for eligible
employees, officers, and directors. These plans provide for awards in the form
of stock options, stock appreciation rights, restricted stock, restricted stock
units and other stock-based awards. Options to purchase common stock are
generally granted at the fair market value on the date of grant. Substantially
all of these options have a ten-year term and generally vest over a three-year
period, except that the vesting period may be accelerated under certain
circumstances. At December 31, 2002, the aggregate number of shares of stock
issuable under these plans was 9.9 million shares.
As of December 31, 2002, 2001, and 2000, Hexcel had outstanding a total of
0.1 million, 0.2 million and 0.7 million of performance accelerated restricted
stock units ("PARS"), respectively. PARS are convertible to an equal number of
shares of Hexcel common stock and generally vest at the end of a seven-year
period, subject to certain terms of employment and other circumstances that may
accelerate the vesting period. Approximately 0.1 million, 0.6 million and 0.2
million PARS were converted into Hexcel common stock in 2002, 2001 and 2000,
respectively. In 2001 and 2000, 0.1 million and 0.5 million PARS were granted
and 0.1 million and 0.7 million PARS vested, respectively. No PARS were granted
in 2002.
In 2002, Hexcel granted 0.3 million restricted stock units to eligible
officers. Restricted stock units are convertible to an equal number of shares of
Hexcel common stock and generally vest ratably over a three-year period.
One-third of the restricted stock units were converted to stock in the first
quarter of 2003. In addition, the Company's Chief Executive Officer received
approximately 0.1 million shares of common stock in connection with his hiring
in July 2001, restricted during a twenty-month vesting period.
Compensation expense of $0.8 million, $2.0 million and $4.5 million was
recognized in 2002, 2001 and 2000, respectively, in regards to the PARS,
restricted stock units and the Chief Executive Officer's restricted stock. In
2000, $2.4 million of compensation expense was recognized due to accelerated
vesting of PARS as a result of the attainment of certain financial and other
performance target, as well as the change in control event. Compensation expense
is recognized based on the quoted market price of Hexcel common stock on the
date of grant.
46
Stock option data for the years ended December 31, 2002, 2001 and 2000,
was:
NUMBER OF WEIGHTED AVERAGE
(IN MILLIONS, EXCEPT PER SHARE DATA) OPTIONS EXERCISE PRICE
----------------------------------------------------------------------------------------------------
Options outstanding as of January 1, 2000 5.9 $ 11.18
Options granted 1.6 $ 9.23
Options exercised (0.3) $ 6.52
Options expired or canceled (0.5) $ 11.85
----------------------------------------------------------------------------------------------------
Options outstanding as of December 31, 2000 6.7 $ 10.56
Options granted 1.3 $ 10.17
Options exercised (0.2) $ 6.02
Options expired or canceled (0.4) $ 10.72
----------------------------------------------------------------------------------------------------
Options outstanding as of December 31, 2001 7.4 $ 10.62
Options granted 1.3 $ 2.66
Options exercised - $ -
Options expired or canceled (0.8) $ 10.61
----------------------------------------------------------------------------------------------------
Options outstanding as of December 31, 2002 7.9 $ 8.81
====================================================================================================
As previously discussed in Note 10, approximately 1.3 million of stock
options, with exercise prices ranging from $2.41 to $29.63 per share, and having
a weighted average exercise price of $8.99 per share, became vested as a result
of the change in control event in 2000. The total number of options exercisable
as of December 31, 2002, 2001 and 2000 were 5.7 million, 5.4 million and 3.9
million, respectively, at a weighted average exercise price per share of $10.45,
$10.70 and $10.80, respectively.
The following table summarizes information about stock options outstanding
as of December 31, 2002 (in millions, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OF OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE EXERCISABLE PRICE
-----------------------------------------------------------------------------------------------------------
$ 1.37 - 2.74 1.2 9.02 $ 2.62 0.1 $ 1.41
$ 2.87 - 6.36 1.2 4.37 $ 5.55 1.1 $ 5.56
$ 6.37 - 9.94 1.1 4.38 $ 9.19 1.0 $ 9.14
$ 9.95 - 10.50 1.1 8.53 $ 10.45 0.3 $ 10.43
$ 10.51 - 11.88 0.8 4.51 $ 11.14 0.7 $ 11.17
$ 11.89 - 12.11 1.5 3.98 $ 12.00 1.5 $ 12.00
$ 12.12 - 29.63 1.0 3.34 $ 15.35 1.0 $ 15.36
-----------------------------------------------------------------------------------------------------------
$ 1.37 - 29.63 7.9 5.70 $ 8.81 5.7 $ 10.45
===========================================================================================================
The weighted average fair value of stock options granted during 2002, 2001
and 2000 was $1.96, $4.87 and $4.48, respectively, and estimated using the
Black-Scholes model with the following weighted-average assumptions:
2002 2001 2000
----------------------------------------------------------------------------------------------
Expected life (in years) 5 4 4
Interest rate 2.78% 4.35% 6.50%
Volatility 88.6% 68.9% 40.1%
Dividend yield - - -
==============================================================================================
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
Hexcel maintains an ESPP, under which eligible employees may contribute up
to 10% of their base earnings toward the quarterly purchase of the Company's
common stock at a purchase price equal to 85% of the fair market value of the
common stock on the purchase date. The maximum number of shares of common stock
reserved for issuance under the ESPP is 0.5 million. During 2002, 2001 and 2000,
an aggregate total of approximately 0.2 million shares of common stock were
issued under the ESPP.
47
NOTE 14 - NET INCOME (LOSS) PER SHARE
Computations of basic and diluted net income (loss) per share for the years
ended December 31, 2002, 2001 and 2000, are as follows:
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS):
Net income (loss) $ (13.6) $ (433.7) $ 54.2
Effect of dilutive securities:
Convertible subordinated notes, due 2003 - - 5.1
Convertible subordinated debentures, due 2011 - - 1.1
------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) for diluted purposes $ (13.6) $ (433.7) $ 60.4
============================================================================================================
BASIC NET INCOME (LOSS) PER SHARE:
Weighted average common shares outstanding 38.4 37.6 36.8
Basic net income (loss) per share $ (0.35) $ (11.54) $ 1.47
============================================================================================================
DILUTED NET INCOME (LOSS) PER SHARE:
Weighted average common shares outstanding 38.4 37.6 36.8
Effect of dilutive securities:
Stock options - - 0.8
Convertible subordinated notes, due 2003 - - 7.2
Convertible subordinated debentures, due 2011 - - 0.9
------------------------------------------------------------------------------------------------------------
Diluted weighted average common shares outstanding 38.4 37.6 45.7
Diluted net income (loss) per share $ (0.35) $ (11.54) $ 1.32
============================================================================================================
The convertible subordinated notes, due 2003, the convertible subordinated
debentures, due 2011, and all of the stock options were excluded from the 2002
and 2001 computations of diluted net loss per share, as they were antidilutive.
Approximately 4.5 million stock options were excluded from the 2000 calculation
of diluted net income per share as their exercise price was higher than the
Company's average stock price. The exercise price for these stock options ranged
from approximately $9.19 to $29.63 per share, with the weighted average price
being approximately $12.55 per share.
NOTE 15 - DERIVATIVE FINANCIAL INSTRUMENTS
INTEREST RATE CAP AGREEMENT
The Company's financial results are affected by interest rate changes on
its variable rate debt. In order to partially mitigate this interest rate risk,
the Company entered into a five-year interest rate cap agreement in 1998. The
agreement provided for a maximum fixed rate of 5.5% on the applicable London
interbank rate used to determine the interest on a notional amount of $50.0
million of variable rate debt under the Senior Credit Facility. The fair value
and carrying amount of this contract at December 31, 2001, along with hedge
ineffectiveness for the period ended October 29, 2002 and the year ended
December 31, 2001, were not material. The interest rate cap agreement expired on
October 29, 2002.
FOREIGN CURRENCY FORWARD EXCHANGE CONTRACTS
A number of the Company's European subsidiaries are exposed to the impact
of exchange rate volatility between the U.S. dollar and the subsidiaries'
functional currencies, being either the Euro or the British Pound Sterling.
During 2001, Hexcel entered into a number of foreign currency forward exchange
contracts to exchange U.S. dollars for Euros at fixed rates on specified dates
through March 2005. The aggregate notional amount of these contracts was $58.0
million and $83.9 million at December 31, 2002 and 2001, respectively. The
purpose of these contracts is to hedge a portion of the forecasted transactions
of European subsidiaries under long-term sales contracts with certain customers.
These contracts are expected to provide the Company with a more balanced
matching of future cash receipts and expenditures by currency, thereby reducing
the Company's exposure to fluctuations in currency exchange rates. For the years
ended December 31, 2002 and 2001, hedge
48
ineffectiveness was immaterial and the fair value of the foreign currency cash
flow hedges recognized in "comprehensive income (loss)" was a net gain of $9.3
million and a net loss of $5.9 million, respectively. Approximately $2.0 million
of the amounts recorded in other comprehensive income is expected to be
reclassified into earnings in fiscal 2003 as the hedged sales are recorded.
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Hexcel is involved in litigation, investigations and claims arising out of
the normal conduct of its business, including those relating to commercial
transactions, as well as to environmental, employment and health and safety
matters. The Company estimates and accrues its liabilities resulting from such
matters based on a variety of factors, including outstanding legal claims and
proposed settlements; assessments by internal and external counsel of pending or
threatened litigation; and assessments by environmental engineers and
consultants of potential environmental liabilities and remediation costs. Such
estimates exclude counterclaims against other third parties and are not
discounted to reflect the time value of money due to the uncertainty in
estimating the timing of the expenditures, which may extend over several years.
The Company believes that it has meritorious defenses and is taking
appropriate actions against such matters. While it is impossible to ascertain
the ultimate legal and financial liability with respect to certain contingent
liabilities and claims, the Company believes, based upon its examination of
currently available information, its experience to date, and advice from legal
counsel, that the individual and aggregate liabilities resulting from the
ultimate resolution of these contingent matters, after taking into consideration
its existing insurance coverage and amounts already provided for, will not have
a material adverse impact on the Company's consolidated results of operations,
financial position or cash flows.
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. Because
CERCLA provides for joint and several liability, the Company could be
responsible for all remediation costs at such sites, even if it is one of many
potentially responsible parties ("PRPs"). The Company believes, based on the
amount and the nature of its waste, and the number of other financially viable
PRPs, that its liability in connection with such matters will not be material.
Pursuant to the New Jersey Industrial Sites Recovery Act, Hexcel signed an
administrative consent order and a later Remediation Agreement to pay for the
environmental remediation of a manufacturing facility it owns and formerly
operated in Lodi, New Jersey. The ultimate cost of remediating the Lodi site
will depend on developing circumstances.
Hexcel was party to a cost-sharing agreement regarding the operation of
certain environmental remediation systems necessary to satisfy a post-closure
care permit issued to a previous owner of the Company's Kent, Washington site by
the U.S. Environmental Protection Agency. Under the terms of the cost-sharing
agreement, the Company was obligated to reimburse the previous owner for a
portion of the cost of the required remediation activities. Management has
determined that the cost-sharing agreement terminated in December 1998; however,
the other party disputes this determination.
At its Livermore, California facility, Hexcel has received a series of
notices of violation of air quality standards from the Bay Area Air Quality
Management District. Hexcel has investigated and corrected the issues and has
cooperated with the District.
The Company's estimate of its liability as a PRP, of the remaining costs
associated with its responsibility to remediate the Lodi, New Jersey, and Kent,
Washington sites and for any fines and penalties that may be assessed relating
to the Livermore, California notices of violation is accrued in the accompanying
consolidated balance sheets.
49
OTHER PROCEEDINGS
Hexcel is aware of a grand jury investigation being conducted by the
Antitrust Division of the United States Department of Justice with respect to
the carbon fiber and carbon fiber prepreg industries. The Department of Justice
appears to be reviewing the pricing of all manufacturers of carbon fiber and
carbon fiber prepreg since 1993. The Company, along with other manufacturers of
these products, has received a grand jury subpoena requiring production of
documents to the Department of Justice. Toho Tenax Co. Ltd., one of their
subsidiaries and one of their employees have been indicted for obstruction of
justice; Toho and its subsidiary pleaded guilty to obstruction of justice and
received a combined fine of $500,000. No other indictments have been issued in
the case to date. The Company is not in a position to predict the direction or
outcome of the investigation; however, it is cooperating with the Department of
Justice.
In 1999, Hexcel was joined in a class action lawsuit alleging antitrust
violations in the sale of carbon fiber, carbon fiber industrial fabrics and
carbon fiber prepreg (Thomas & Thomas Rodmakers, Inc. et. al. v. Newport
Adhesives and Composites, Inc., et. al., Amended and Consolidated Class Action
Complaint filed October 4, 1999, United States District Court, Central District
of California, Western Division, CV-99-07796-GHK (CTx)). The Company was one of
many manufacturers joined in the lawsuit, which was spawned from the Department
of Justice investigation. The Court has granted the Plaintiff's motion to
certify the class. Discovery is continuing. The Company is not in a position to
predict the outcome of the lawsuit, but believes that the lawsuit is without
merit as to the Company.
Of the eleven companies that have opted out of the class in the Thomas &
Thomas Rodmakers, Inc. case, one, Horizon Sports Technologies, Inc., has filed a
case on its own behalf, with similar allegations (Horizon Sports Technologies,
Inc., v. Newport Adhesives and Composites, Inc., et. al., First Amended
Complaint filed October 15, 2002, United States District Court, Central District
of California, Southern Division, SACV 02-911 DOC (MLGX)). The Company is not in
a position to predict the outcome of the lawsuit, but believes that the lawsuit
is without merit as to the Company.
The Company has also been joined as a party in numerous class action
lawsuits in California and in Massachusetts spawned by the Thomas & Thomas
Rodmakers, Inc. class action. These actions also allege antitrust violations and
are brought on behalf of purchasers located in California and in Massachusetts,
respectively, who indirectly purchased carbon fiber products. The California
cases have been ordered to be coordinated in the Superior Court for the County
of San Francisco and are currently referred to as Carbon Fibers Cases I, II and
III, Judicial Council Coordinator Proceeding Numbers 4212, 4216 and 4222. The
California cases are Lazio v. Amoco Polymers Inc., et.al., filed August 21,
2000; Proiette v. Newport Adhesives and Composite, Inc. et. al., filed September
12, 2001; Simon v. Newport Adhesives and Composite, Inc. et. al., filed
September 21, 2001; Badal v. Newport Adhesives and Composite, Inc. et.al., filed
September 26, 2001; Yolles v. Newport Adhesives and Composite, Inc. et.al.,
filed September 26, 2001; Regier v. Newport Adhesives and Composite, Inc.
et.al., filed October 2, 2001; and Connolly v. Newport Adhesives and Composite,
Inc. et.al., filed October 4, 2001; Elisa Langsam v Newport Adhesives and
Composites, Inc, et al., filed October 4, 2001; Jubal Delong et al. v Amoco
Polymers, Inc. et al., filed October 26, 2001; and Louis V. Ambrosio v Amoco
Polymers, Inc. et. al., filed October 25, 2001. The Massachusetts case is
Ostroff v. Newport Adhesives and Composites, Inc. et. al., filed June 7, 2002 in
the Superior Court Department of the Trial Court of Middlesex, Massachusetts,
Civil Action No. 02-2385. The Company is not in a position to predict the
outcome of these lawsuits, but believes that the lawsuits are without merit as
to the Company.
In 1999, a QUI TAM case was filed under seal by executives of Horizon
Sports Technologies, Inc. alleging that Boeing and other prime contractors to
the United States Government and certain carbon fiber and carbon fiber prepreg
manufacturers, including the Company, submitted claims for payment to the U.S.
Government which were false or fraudulent because the defendants knew of the
alleged conspiracy to fix prices of carbon fiber and carbon prepreg described in
the above cases (Beck, on behalf of the United States of America, v. Boeing
Defense and Space Group, Inc., et. al., filed July 27, 1999, in the United
States District Court for the Southern District of California, Civil Action No.
99 CV 1557 JM JAH). The case was unsealed in 2002 when the U.S. advised that it
was unable to decide whether to intervene in the case based on the information
available to it at that time and the Relators served the Company and other
defendants. The Company is not in a position to predict the outcome of the
lawsuit, but believes that the lawsuit is without merit as to the Company.
50
LETTERS OF CREDIT
Letters of credit are purchased guarantees that ensure the performance or
payment to third parties in accordance with specified terms and conditions. The
Company had $25.9 million and $19.4 million letters of credit outstanding at
December 31, 2002 and 2001, respectively, of which $11.1 million was issued in
support of a loan to the Company's BHA Aero joint venture in 2001.
LOAN GUARANTEES
The Company has a contingent liability to pay DIC up to $1.5 million with
respect to DHL's debt (see Note 7).
PRODUCT WARRANTY
The Company provides for an estimated amount of product warranty at the
time revenue is recognized. This estimated amount is provided by product and
based on historical warranty experience. Warranty expense for the years ended
December 31, 2002, 2001 and 2000, and accrued warranty cost, included in "other
accrued liabilities" in the consolidated balance sheets at December 31, 2002 and
2001, was as follows:
PRODUCT
(IN MILLIONS) WARRANTIES
-----------------------------------------------------------------------------------------
BALANCE AS OF JANUARY 1, 2000 $ 6.6
Warranty expense 3.2
Deductions and other (4.5)
-----------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2000 $ 5.3
Warranty expense 6.0
Deductions and other (6.3)
-----------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2001 $ 5.0
Warranty expense 2.9
Deductions and other (3.9)
-----------------------------------------------------------------------------------------
BALANCE AS OF DECEMBER 31, 2002 $ 4.0
=========================================================================================
NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information, including non-cash financing and
investing activities, for the years ended December 31, 2002, 2001 and 2000,
consist of the following:
(IN MILLIONS) 2002 2001 2000
-----------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ 59.3 $ 62.0 $ 63.3
Taxes $ 8.4 $ 20.4 $ 11.5
-----------------------------------------------------------------------------------------------------
Non-cash items:
Common stock issued under incentive plans $ 2.0 $ 6.6 $ 4.2
-----------------------------------------------------------------------------------------------------
51
NOTE 18 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) and other gains
and losses affecting shareholders' equity (deficit) that are not reflected in
the consolidated statements of operations. The components of accumulated other
comprehensive loss as of December 31, 2002 and 2001 were as follows:
(IN MILLIONS) 2002 2001
----------------------------------------------------------------------------------------------------
Currency translation adjustments $ (7.5) $ (27.1)
Minimum pension obligations (17.1) (6.7)
Net unrealized gains (losses) on financial instruments 3.4 (5.9)
----------------------------------------------------------------------------------------------------
Accumulated other comprehensive loss $ (21.2) $ (39.7)
====================================================================================================
NOTE 19 - SEGMENT INFORMATION
The financial results for Hexcel's business segments have been prepared
using a management approach, which is consistent with the basis and manner in
which Hexcel management internally segregates financial information for the
purposes of assisting in making internal operating decisions. Hexcel evaluates
performance based on operating income and generally accounts for intersegment
sales based on arm's-length prices. Corporate and other expenses are not
allocated to the business segments, except to the extent that the expenses can
be directly attributable to the business segments. Accounting principles used in
the segment information are generally the same as those used for the
consolidated financial statements.
As part of the Company's November 2001 restructuring program, effective
January 1, 2002, management responsibility for the Company's carbon fiber
product line was transferred to the Composites business segment. As a result of
this change in management responsibilities, the Company changed its business
segment reporting to reflect the reclassification of this product line from the
Reinforcements segment to the Composites segment. The Company also changed the
names of its business segments to Reinforcements, Composites and Structures. The
Company's three business segments were previously known as Reinforcement
Products, Composite Materials and Engineered Products. Results for the years
ended December 31, 2001 and 2000 have been reclassified for comparative
purposes. Hexcel's business segments and related products are as follows:
REINFORCEMENTS: This segment manufactures and sells carbon, glass and
aramid fiber fabrics. These reinforcement products comprise the foundation of
most composite materials, parts and structures. The segment weaves electronic
fiberglass fabrics that are a substrate for printed circuit boards. All of the
Company's electronics sales come from reinforcement fabric sales. This segment
also sells products for industrial applications such as decorative blinds and
soft body armor. In addition, this segment sells to the Company's Composites
business segment, and to other third-party customers in the commercial aerospace
and space and defense markets.
COMPOSITES: This segment manufactures and sells carbon fibers and composite
materials, including prepregs, honeycomb, structural adhesives, sandwich panels
and specially machined honeycomb parts, primarily to the commercial aerospace
and space and defense markets, as well as to industrial markets. This segment
also sells to the Company's Structures business segment.
STRUCTURES: This segment manufactures and sells a range of lightweight,
high-strength composite structures primarily to the commercial aerospace and
space and defense markets. As discussed in Note 22, the Structures business
segment includes the results of the Bellingham aircraft interiors business, up
to the date of its disposal on April 26, 2000. The Bellingham business
manufactured and sold composite interiors to the aircraft refurbishment market.
52
The following table presents financial information on the Company's
business segments as of December 31, 2002, 2001 and 2000, and for the years then
ended:
CORPORATE/
(IN MILLIONS) REINFORCEMENTS COMPOSITES STRUCTURES ELIMINATIONS TOTAL
------------------------------------------------------------------------------------------------------------------------------
Third-Party Sales
2002 $ 217.9 $ 532.4 $ 100.5 $ - $ 850.8
2001 245.7 638.8 124.9 - 1,009.4
2000 331.7 594.5 129.5 - 1,055.7
------------------------------------------------------------------------------------------------------------------------------
Intersegment sales
2002 $ 70.3 $ 17.2 $ - $ (87.5) $ -
2001 90.2 22.7 - (112.9) -
2000 84.1 21.3 - (105.4) -
------------------------------------------------------------------------------------------------------------------------------
Operating income (loss)
2002 $ 19.6 $ 65.8 $ 0.4 $ (25.6) $ 60.2
2001 (304.6) 37.0 (4.5) (44.1) (316.2)
2000 42.7 62.2 4.1 (33.6) 75.4
------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization
2002 $ 15.4 $ 29.3 $ 2.4 $ 0.1 $ 47.2
2001 26.1 32.1 4.1 0.9 63.2
2000 23.9 28.7 4.7 1.4 58.7
------------------------------------------------------------------------------------------------------------------------------
Equity in earnings (losses) of and write-down
of an investment in affiliated companies
2002 $ (5.2) $ - $ (4.8) $ - $ (10.0)
2001 (6.5) - (3.0) - (9.5)
2000 5.9 - (0.4) - 5.5
------------------------------------------------------------------------------------------------------------------------------
Business consolidation and restructuring
expenses (net credits)
2002 $ (0.5) $ 1.9 $ 0.2 $ (1.1) $ 0.5
2001 18.8 24.5 5.7 9.4 58.4
2000 (1.4) 11.1 1.3 (0.1) 10.9
------------------------------------------------------------------------------------------------------------------------------
Business consolidation and restructuring payments
2002 $ 7.9 $ 11.2 $ 1.6 $ 3.6 $ 24.3
2001 2.7 7.6 0.1 1.6 12.0
2000 2.2 7.1 1.9 0.6 11.8
------------------------------------------------------------------------------------------------------------------------------
Segment assets
2002 $ 245.4 $ 435.5 $ 80.8 $ (53.6) $ 708.1
2001 272.3 433.4 101.6 (17.9) 789.4
2000 605.7 482.4 102.0 21.3 1,211.4
------------------------------------------------------------------------------------------------------------------------------
Investments in affiliated companies
2002 $ 29.2 $ - $ 4.8 $ - $ 34.0
2001 47.3 - 9.6 - 56.9
2000 59.6 - 12.5 - 72.1
------------------------------------------------------------------------------------------------------------------------------
Capital expenditures
2002 $ 4.0 $ 10.4 $ 0.4 $ 0.1 $ 14.9
2001 18.0 19.3 0.6 0.9 38.8
2000 13.5 23.3 1.1 1.7 39.6
==============================================================================================================================
53
GEOGRAPHIC DATA
Net sales and long-lived assets, by geographic area, consisted of the
following for the three years ended December 31, 2002, 2001 and 2000:
(IN MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------------------------
NET SALES TO EXTERNAL CUSTOMERS:
United States $ 479.5 $ 595.1 $ 650.7
-------------------------------------------
International
France 160.6 166.8 164.6
United Kingdom 60.5 71.5 75.0
Other 150.2 176.0 165.4
----------------------------------------------------------------------------------------------------
Total international 371.3 414.3 405.0
----------------------------------------------------------------------------------------------------
Total consolidated net sales $ 850.8 $ 1,009.4 $ 1,055.7
----------------------------------------------------------------------------------------------------
LONG-LIVED ASSETS:
United States $ 225.3 $ 254.2 $ 281.4
-------------------------------------------
International
France 34.3 30.4 33.4
United Kingdom 35.3 30.7 33.6
Other 31.7 29.2 26.7
----------------------------------------------------------------------------------------------------
Total international 101.3 90.3 93.7
----------------------------------------------------------------------------------------------------
Total consolidated long-lived assets $ 326.6 $ 344.5 $ 375.1
====================================================================================================
Net sales are attributed to geographic areas based on the location in which
the sale originated. U.S. net sales include U.S. exports to non-affiliates of
$54.2 million, $72.6 million and $47.7 million, for the years ended December 31,
2002, 2001 and 2000, respectively, of which, $12.1 million for the year ended
December 31, 2000 were sales attributable to the Bellingham aircraft interiors
business. Long-lived assets primarily consist of property, plant and equipment
and other tangible assets.
SIGNIFICANT CUSTOMERS
To the extent that the end application of net sales can be identified, The
Boeing Company and its subcontractors accounted for approximately 22%, 23% and
20% of 2002, 2001 and 2000 net sales, respectively. Similarly, EADS, including
Airbus and its subcontractors accounted for approximately 15%, 16% and 13% of
2002, 2001 and 2000 net sales, respectively.
NOTE 20 - LITIGATION GAIN
In 2002, the Company recognized a litigation gain of $9.8 million (net of
related fees and expenses) in connection with a contract dispute with Hercules,
Inc. that arose out of the acquisition of Hercules' Composites Products Division
in 1996. The net cash proceeds received from Hercules Inc. of $11.1 million were
in satisfaction of the judgment entered in favor of the Company after Hercules
had exhausted all appeals from a lower court decision in the New York courts.
NOTE 21 - NON-RECURRING EXPENSES
In connection with the retirement of the former Chief Executive Officer,
the Company recorded compensation expenses of $4.7 million in 2001 as a result
of the early vesting of certain deferred compensation and equity compensation
awards together with a contractual termination payment. These expenses are
included in "selling, general and administrative expenses" in the consolidated
statement of operations.
NOTE 22 - GAIN ON SALE OF BELLINGHAM AIRCRAFT INTERIORS BUSINESS
On April 26, 2000, Hexcel sold its Bellingham aircraft interiors business
to Britax Cabin Interiors, Inc., a wholly owned subsidiary of Britax
International plc, for cash proceeds of $113.3 million. The sale resulted in a
pre-tax gain of $68.3 million and an after-tax gain of approximately $44.3
million (or $0.97 per diluted share). Net proceeds from the sale were used to
repay $111.6 million of
54
outstanding term debt under the Company's Senior Credit Facility. The
consolidated financial statements and accompanying notes reflect Bellingham's
operating results as a continuing operation in the Structures business segment
up to the date of disposal. Net sales and operating income for the Bellingham
business were $18.9 million and $0.6 million, respectively, in 2000.
NOTE 23 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 2002 and 2001,
were:
FIRST SECOND THIRD FOURTH
(IN MILLIONS) QUARTER QUARTER QUARTER QUARTER
---------------------------------------------------------------------------------------------------------------
2002
---------------------------------------------------------------------------------------------------------------
Net sales $ 222.1 $ 221.2 $ 201.0 $ 206.5
Gross margin 39.6 44.8 37.3 39.6
Business consolidation and restructuring
expenses (net credits) 0.7 0.1 (0.1) (0.2)
Operating income 13.3 19.5 15.1 12.3
Litigation gain - 9.8 - -
Loss (gain) on early retirement of debt - - (0.5) -
Net income (loss) (9.2) 5.3 (3.6) (6.1)
---------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ (0.24) $ 0.14 $ (0.09) $ (0.16)
Diluted $ (0.24) $ 0.14 $ (0.09) $ (0.16)
---------------------------------------------------------------------------------------------------------------
Market price:
High $ 4.99 $ 5.40 $ 4.35 $ 3.15
Low $ 2.14 $ 3.50 $ 2.36 $ 1.25
---------------------------------------------------------------------------------------------------------------
2001
-------------------------------------------------------- ------------------------------------------------------
Net sales $ 276.2 $ 253.5 $ 240.6 $ 239.1
Gross margin 60.1 51.7 43.8 35.2
Business consolidation and restructuring expenses 1.1 1.8 4.4 51.1
Impairment of goodwill and other purchased
intangibles - - - 309.1
Operating income (loss) (a) 22.6 11.4 7.2 (357.4)
Loss (gain) on early retirement of debt - 3.1 - (0.4)
Net income (loss) (a) 5.5 (12.6) (12.8) (413.8)
---------------------------------------------------------------------------------------------------------------
Net income (loss) per share:
Basic $ 0.15 $ (0.34) $ (0.34) $ (10.88)
Diluted $ 0.15 $ (0.34) $ (0.34) $ (10.88)
---------------------------------------------------------------------------------------------------------------
Market price:
High $ 12.40 $ 12.99 $ 12.69 $ 4.06
Low $ 8.76 $ 8.90 $ 3.96 $ 1.98
---------------------------------------------------------------------------------------------------------------
(a) Operating and net loss for the second quarter of 2001 include
compensation expenses of $4.7 million in connection with the retirement
of the former Chief Executive Officer (see Note 21).
Hexcel has not declared or paid cash dividends per common stock during the
periods presented.
NOTE 24 - SUBSEQUENT EVENT - PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
The unaudited pro forma consolidated balance sheet as of December 31, 2002
has been prepared to illustrate the effect of (i) the issuance of $125.0 million
mandatorily redeemable convertible preferred stock, (ii) the private placement
under Rule 144A of $125.0 million 9-7/8% senior secured notes, due 2008, and
(iii) the establishment of a new $115.0 million senior secured credit facility,
as if the transactions had occurred as of December 31, 2002. The proceeds from
the sale of mandatorily redeemable convertible preferred stock have been used to
provide for the redemption of the
55
Company's 7% convertible subordinated notes, due 2003, and to repay outstanding
borrowings under the existing senior credit facility. The remaining advances
under the existing senior credit facility, after the application of a portion of
the equity proceeds, have been repaid with the proceeds from the issuance of the
Company's new 9-7/8% senior secured notes and a new senior credit facility. The
transactions closed on March 19, 2003 (see Note 2).
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN MILLIONS, EXCEPT PER SHARE DATA) HISTORICAL ADJUSTMENTS PRO FORMA
---------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8.2 $ 4.4(a) $ 12.6
Accounts receivable, net 117.3 - 117.3
Inventories, net 113.6 - 113.6
Prepaid expenses and other assets 9.2 - 9.2
---------------------------------------------------------------------------------------------------------------
Total current assets 248.3 4.4 252.7
Net property, plant and equipment 309.4 - 309.4
Goodwill, net 74.4 - 74.4
Investments in affiliated companies 34.0 - 34.0
Other assets 42.0 4.9 46.9
---------------------------------------------------------------------------------------------------------------
Total assets $ 708.1 $ 9.3 $ 717.4
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current maturities of capital lease $ 621.7 $ (615.5)(a) $ 6.2
obligations
Accounts payable 54.9 - 54.9
Accrued compensation and benefits 37.6 - 37.6
Accrued interest 19.1 (3.2)(a) 15.9
Business consolidation and restructuring liabilities 10.5 - 10.5
Other accrued liabilities 35.3 - 35.3
---------------------------------------------------------------------------------------------------------------
Total current liabilities 779.1 (618.7) 160.4
Long-term notes payable and capital lease obligations - 512.4(a) 512.4
Long-term retirement obligations 48.1 - 48.1
Other non-current liabilities 8.3 - 8.3
---------------------------------------------------------------------------------------------------------------
Total liabilities 835.5 (106.3) 729.2
---------------------------------------------------------------------------------------------------------------
Mandatorily redeemable convertible preferred stock,
125,000 series A shares and 125,000 series B shares
authorized, issued and outstanding - 96.4(b) 96.4
Stockholders' equity (deficit):
Preferred stock, no par value, 20.0 shares of stock
authorized, no shares issued or outstanding - - -
Common stock, $0.01 par value, 100.0 shares of stock
authorized, shares issued of 39.8 at December 31, 2002 0.4 - 0.4
Additional paid-in capital 288.2 23.4(b) 311.6
Accumulated deficit (381.5) (4.2)(c) (385.7)
Accumulated other comprehensive loss (21.2) - (21.2)
---------------------------------------------------------------------------------------------------------------
(114.1) 19.2 (94.9)
Less- Treasury stock, at cost, 1.3 shares at December 31, 2002 (13.3) - (13.3)
---------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (127.4) 19.2 (108.2)
---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 708.1 $ 9.3 $ 717.4
===============================================================================================================
(a) The Company received gross proceeds of $123.7 million from the issuance of
9-7/8% senior secured notes, due 2008, after discount of $1.3 million, along
with $125.0 million of gross proceeds from the issuance of mandatorily
redeemable convertible preferred stock. The proceeds from the issuance of
the senior secured notes, together with a portion of the proceeds from the
issuance of mandatorily redeemable convertible preferred stock, were used to
repay $179.9 million
56
of the Company's existing Senior Credit Facility, accrued interest of $1.8
million on the existing Senior Credit Facility as of December 31, 2002 and a
portion of total estimated transaction fees and expenses of $14.3 million
(which includes the preferred stock issuance expenses of $5.2 million). The
remaining portion of the proceeds from the issuance of the mandatorily
redeemable convertible preferred stock was used remitted to US Bank Trust,
trustee for the Company's 7% convertible subordinated notes, due August 1,
2003, for the express purpose of retiring the remaining $46.9 million of
such notes and paying the accrued interest of $1.4 million thereon as of
December 31, 2002. Estimated excess cash proceeds of approximately $4.4
million will be used for general corporate purposes. A substantial portion
of the Company's indebtedness has been reclassified as long-term to reflect
scheduled debt payments after the refinancing transactions.
(b) The Company received net proceeds of $119.8 million, after issuance expenses
of $5.2 million, from the issuance of 125,000 shares of series A preferred
stock and 125,000 shares of series B preferred stock. In addition, a
beneficial conversion feature of $23.4 million was recognized. The
beneficial conversion feature is the implicit discount on the preferred
stock computed based upon the conversion to the underlying common stock at
the conversion price of $3.00 per share and the average market price of
Hexcel common stock on March 19, 2003 of $2.93 per share.
(c) As the result of the repayment of the existing Senior Credit Facility and
the 7% convertible subordinated notes, due 2003, the Company wrote-off $4.2
million unamortized discount and capitalized debt issuance costs.
57
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS OF BHA AERO COMPOSITE PARTS CO., LTD.
(A Sino-foreign equity joint venture established in the People's Republic of
China)
We have audited the accompanying balance sheets of BHA Aero Composite Parts Co.,
Ltd. (the "Company") as of December 31, 2002 and 2001, and the related
statements of operations, owners' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 financial statements present fairly, in all material
respects, the financial position of the BHA Aero Composite Parts Co., Ltd. at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company's recurring losses from operations and
accumulated deficit raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Deloitte Touche Tomatsu
---------------------------
Deloitte Touche Tohmatsu
Certified Public Accountants Ltd.
Beijing, China
March 2, 2003
58
BHA AERO COMPOSITE PARTS CO., LTD.
BALANCE SHEETS
December 31, December 31,
2001 2002 2002
------------ ------------ -----------
RMB RMB US$
ASSETS
Current assets:
Cash 104,374,290 3,516,469 424,833
Account receivable - related party - 5,423,054 655,172
Other receivables - others 3,150,437 1,154,352 139,460
- related party - 364,013 43,977
Value-added tax receivable 696,125 3,512,760 424,385
Prepaid expenses 59,087 139,595 16,865
Advance to suppliers 34,196 2,271,093 274,376
Inventories 12,291,162 18,354,749 2,217,480
----------- ------------ -----------
Total current assets 120,605,297 34,736,085 4,196,548
----------- ------------ -----------
Property, plant and equipment, net 260,526,689 250,780,914 30,297,430
----------- ------------ -----------
TOTAL ASSETS 381,131,986 285,516,999 34,493,978
=========== =========== ==========
LIABILITIES AND OWNERS' EQUITY
Current Liabilities:
Accounts payable - trade 625,138 4,002,034 483,495
- related party - 41,221 4,980
Other payables - others 32,071,673 5,233,684 632,294
- related parties 1,494,514 9,646,676 1,165,438
Accrued expenses 16,745,053 11,105,218 1,341,647
----------- ------------ -----------
Total current liabilities 50,936,378 30,028,833 3,627,854
Long-term Liabilities:
Deferred tax liability 406,000 406,000 49,050
Long-term bank loans 216,022,240 233,416,680 28,199,616
----------- ------------ -----------
Total long-term liabilities 216,428,240 233,822,680 28,248,666
----------- ------------ -----------
Total liabilities 267,364,618 263,851,513 31,876,520
----------- ------------ -----------
Commitments (Note 12)
Owners' Equity:
Paid in capital 165,562,762 165,562,762 20,002,025
Accumulated losses (51,795,394) (143,897,276) (17,384,567)
----------- ------------ -----------
113,767,368 21,665,486 2,617,458
----------- ------------ -----------
TOTAL LIABILITIES AND OWNERS' EQUITY 381,131,986 285,516,999 34,493,978
=========== =========== ==========
See accompanying notes to financial statements.
59
BHA AERO COMPOSITE PARTS CO., LTD.
STATEMENTS OF OPERATIONS
Year ended Year ended
December 31, December 31, Year ended December 31,
2000 2001 2002 2002
------------ ------------ ----------- -----------
RMB RMB RMB US$
(unaudited)
Sales - - 14,878,101 1,797,458
Cost of sales - - (52,441,976) (6,335,638)
---------- ----------- ----------- -----------
Gross loss - - (37,563,875) (4,538,180)
Operating expenses:
Selling, general and administrative (3,288,193) (49,399,753) (46,880,099) (5,663,694)
---------- ----------- ----------- -----------
Loss from operations (3,288,193) (49,399,753) (84,443,974) (10,201,874)
---------- ----------- ----------- -----------
Other income (expense):
Interest income - 2,405,474 669,453 80,878
Interest expense - (541,730) (7,640,625) (923,082)
Foreign exchange loss - (79,896) (197,930) (23,912)
Other - (485,296) (488,806) (59,054)
---------- ----------- ----------- -----------
- 1,298,552 (7,657,908) (925,170)
---------- ----------- ----------- -----------
Net loss before income tax provision 3,288,193 48,101,201 92,101,882 11,127,044
Income tax provision - deferred - 406,000 - -
---------- ----------- ----------- -----------
Net loss 3,288,193 48,507,201 92,101,882 11,127,044
========== =========== =========== ===========
See accompanying notes to financial statements.
60
BHA AERO COMPOSITE PARTS CO., LTD.
STATEMENTS OF OWNERS' EQUITY
Accumulated Total owners'
Paid-in capital losses equity
--------------- ----------- -------------
RMB RMB RMB
Balance, January 1, 2000 (unaudited) 66,516,090 - 66,516,090
Capital contribution (unaudited) 99,046,672 - 99,046,672
Net loss (unaudited) - (3,288,193) (3,288,193)
----------- ---------- -----------
Balance, January 1, 2001 165,562,762 (3,288,193) 162,274,569
Net loss - (48,507,201) (48,507,201)
----------- ---------- -----------
Balance, December 31, 2001 165,562,762 (51,795,394) 113,767,368
Net loss - (92,101,882) (92,101,882)
----------- ---------- -----------
Balance, December 31, 2002 165,562,762 (143,897,276) 21,665,486
=========== ============ ==========
In US$ 20,002,025 (17,384,567) 2,617,458
=========== ============ ==========
See accompanying notes to financial statements.
61
BHA AERO COMPOSITE PARTS CO., LTD.
STATEMENTS OF CASH FLOWS
December 31, December 31, December 31,
2000 2001 2002 2002
------------ ------------ ------------ -----------
RMB RMB RMB US$
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (3,288,193) (48,507,201) (92,101,882) (11,127,044)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 265,193 2,416,887 18,641,555 2,252,130
Gain on disposal of fixed assets - - 101,990 12,322
CHANGES IN OPERATING ASSETS AND LIABILITIES
Account receivable - related party - - (5,423,054) (655,172)
Other receivables - others (632,997) (2,517,440) 1,996,085 241,151
- related parties - - (364,013) (43,977)
Value-added tax receivable - (696,125) (2,816,635) (340,284)
Prepaid expenses (59,523) 436 (80,508) (9,726)
Advance to suppliers - (34,196) (2,236,897) (270,245)
Inventories - (12,291,162) (6,063,587) (732,556)
Accounts payable - trade - 625,138 3,376,896 407,971
- related party - - 41,221 4,980
Other payables - others 7,078,763 906,489 (1,257,055) (151,868)
- related parties - 8,152,162 984,882
Accrued expenses 1,290,756 15,454,297 (5,639,835) (681,362)
Deferred tax liability - 406,000 - -
----------- ----------- ------------ -----------
Net cash used in operating activities 4,653,999 (44,236,877) (83,673,557) (10,108,798)
----------- ----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution 99,046,672 - - -
Purchase of property, plant and equipment (27,643,083) (209,984,751) (34,697,037) (4,191,830)
Proceeds received from disposal of fixed assets
- - 118,333 14,296
----------- ----------- ------------ -----------
Net cash used in investing activities 71,403,589 (209,984,751) (34,578,704) (4,177,534)
----------- ----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank borrowings - 216,022,240 17,394,440 2,101,463
----------- ----------- ------------ -----------
Net cash provided by financing activities - 216,022,240 17,394,440 2,101,463
----------- ----------- ------------ -----------
Net increase (decrease) in cash 76,057,588 (38,199,388) (100,857,821) (12,184,870)
Cash at beginning of year 66,516,090 142,573,678 104,374,290 12,609,703
----------- ----------- ------------ -----------
Cash at end of year 142,573,678 104,374,290 3,516,469 424,833
=========== =========== ============ ===========
Supplemental Cash Flow Information
Cash paid during the year:
Interest - 1,922,079 7,250,911 876,000
=========== =========== ============ ===========
See accompanying notes to financial statements.
62
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
BHA Aero Composite Parts Co., Ltd. (the "Company") was incorporated in
Tianjin, the People's Republic of China ("PRC") as a Sino-foreign equity
joint venture with an operation period of 22 years commencing July 8, 1999.
The Company is invested by Hexcel China Holdings Corporation ("Hexcel
China"), Boeing International Holdings, Ltd. ("Boeing") and China Aviation
Industry Corporation ("China Aviation"). Total registered capital of the
Company is US$20,000,001, which is equivalent to RMB165,562,762, and each
investor has equal share in the Company.
The Company is primarily engaged in the manufacturing of aero composite
parts. Major raw materials were purchased from Hexcel Corporation and all
sales have been made to Hexcel Corporation, in year 2002 and 2001. Hexcel
Corporation is the holding company of Hexcel China.
2. BASIS OF PREPARATION OF FINANCIAL STATEMENTS
The financial statements of the Company are prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the Company, which are required to be
prepared in accordance with the accounting principles and the relevant
financial regulations as established by the Ministry of Finance of the PRC
("PRC GAAP"). There was no material difference except for capitalization of
borrowing cost and recognition of deferred tax.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GOING CONCERN - The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements for the year ended December 31, 2002, the Company
incurred a net loss of RMB92,101,882 (US$11,127,044) and cash flows used in
operating activities totaled RMB83,673,557(US$10,108,798). These factors
indicate that the Company may potentially be unable to continue as a going
concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flows to meet its obligations on a timely basis, to obtain
additional financing and ultimately to attain successful operations.
Management believes the Company can meet its obligations and sustain
operations from a combination of additional equity and/or debt financing,
which it is currently seeking, and the release of new products.
63
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES - Inventories are stated at the lower of cost (weighted
average) or market.
PROPERTY, PLANT AND EQUIPMENT, NET - Property, plant and equipment is
stated at cost less accumulated depreciation and amortization. Depreciation
and amortization is computed over its estimate useful life using the
straight-line method as follows:
Land use rights Over the shorter of lease term or operation period
Buildings 20 years
Machinery and production equipment 10 years
System software and related
electronic equipment 5 years
Motor vehicles 5 years
The Company constructs certain of its production equipment. In addition to
costs under the construction contracts, internal costs directly related to
the construction of such equipment including interest and salaries of
certain employees, are capitalized. No depreciation is charged on
construction in progress until the assets are operational.
IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may no longer be recoverable. When these events
occur, the Company measures impairment by comparing the carrying value of
the long-lived assets to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition.
If the sum of the expected undiscounted cash flows is less than the
carrying amount of the assets the Company would recognize an impairment
loss. There was no impairment in the carrying value of long-lived assets at
December 31, 2002 and 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial instruments
consist of cash, accounts receivable, accounts payable and bank borrowings.
At December 31, 2002 and 2001, the fair value of such instruments
approximated their financial statements carrying amounts.
REVENUE RECOGNITION - Revenue from products sold directly to the customer
is recognized upon delivery. The Company does not record a provision for
estimated returns and warranty costs at the time revenue is recognized.
Estimated returns and warranty costs have not been material in any period
presented.
FOREIGN CURRENCIES - Transactions in currencies other than RMB are
translated at the approximate rates ruling on the dates of the
transactions. Monetary assets and liabilities denominated in currencies
other than RMB are translated at the rates ruling on the balance sheet
date. Exchange gains and losses are taken to the statement of operations.
64
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONVENIENCE TRANSLATION INTO UNITED STATES DOLLARS - The financial
statements are presented in Renminbi. The translation of Renminbi amounts
into United States dollars has been made for the convenience of the reader
and has been made at the rate of exchange quoted by the People's Bank of
China on December 31, 2002 of RMB8.2773 to US$1.00. Such translation
amounts should not be construed as representations that the Renminbi
amounts could be readily converted into United States dollars at that rate
or any other rate.
COMPREHENSIVE LOSS - SFAS No. 130, "Reporting Comprehensive Income"
requires that an enterprise report by major components and as a single
total, the change in its net assets from non-owner sources. Comprehensive
loss equals net loss for both years ended December 31, 2002 and 2001.
CAPITALIZATION OF INTEREST - The Company capitalized interest costs based
upon the cost of capital projects in progress during 2001. Capitalized
interest of RMB2,708,650 (US$327,238) in 2001, has been added to the cost
of the underlying assets during the period and is amortized over the
respective useful lives of the assets. Amortization expenses relating to
capitalized interest for the year was RMB135,432 (US$16,362), RMB11,286 and
nil (unaudited) for 2002, 2001 and 2000, respectively.
INCOME TAXES - Deferred income taxes are provided using the asset and
liability method. Under this method, deferred income taxes are recognized
for all significant temporary differences between the tax and financial
statement bases of assets and liabilities and for net operating loss and
tax credit carry forwards. The tax consequences of those differences are
classified as current or non-current based upon the classification of the
related asset or liability in the financial statements. A valuation
allowance is provided to reduce the amount of deferred tax asset if it is
considered more likely than not that some portion of, or all of, the
deferred tax asset will not be realized.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
SEGMENT INFORMATION - The company reports segment data pursuant to SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company operates in one
reportable segments (Note 13).
65
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 2001, the Financial
Accounting Standards Board issued ("FASB") issued SFAS No.141, "Business
Combinations," and SFAS No.142, "Goodwill and Other Intangible Assets."
SFAS No.141 requires that all business combinations initiated after June
30, 2001 be accounted for under the purchase method and addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination. SFAS No.142 addresses the initial
recognition and measurement of intangible assets acquired outside of a
business combination and the accounting for goodwill and other intangible
assets subsequent to their acquisition. SFAS No.142 provides that
intangible assets with indefinite useful lives will not be amortized, but
will be tested at least annually for impairment. The Company did not have
goodwill or other intangible assets at December 31, 2002. Consequently, the
adoption of SFAS No.142, effective January 1, 2002, did not have an impact
on its financial statements.
In August 2001, FASB issued SFAS No.144, "Accounting for Impairment of
Disposal of Long-Lived Assets". SFAS No.144 supersedes SFAS No.121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The adoption of SFAS
No.144, effective January 1, 2002, did not have an impact on its financial
statements.
In June 2002, the FASB issued SFAS No.146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for
restructuring and similar costs. SFAS No.146 supersedes previous accounting
guidance, principally Emerging Issue Task Force Issue ("EITF") No.94-3. The
Company will adopt the provisions of SFAS No.146 for restructuring
activities initiated after December 31, 2002. SFAS No.146 requires that the
liability for costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF No.94-3, a liability
for an exit cost was recognized at the date of commitment to an exit plan.
SFAS No.146 also establishes that the liability should initially be
measured and recorded at fair value. Accordingly, SFAS No.146 may affect
the timing of recognizing future restructuring costs as well as the amounts
recognized. The Company does not believe the adoption of such
interpretation will have a material impact on its results of operations or
financial position.
In November 2002, the FASB issued Interpretation Number 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). This interpretation
requires certain disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees
that it has issued. It also requires a guarantor to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The disclosure requirements of FIN 45
are effective for interim and annual periods after December 15, 2002 and
the Company has adopted those requirements for these financial statements.
The initial recognition and initial measurement requirements of FIN 45 are
effective prospectively for guarantees issued or modified after December
31, 2002. The Company does not believe the adoption of such interpretation
will have a material impact on its results of operations or financial
position.
66
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." This interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among
parties involved. It explains how to identify variable interest entities
and how an enterprise assesses its interests in a variable interest entity
to decide whether to consolidate that entity. This interpretation applies
in the first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The Company does not
believe the adoption of such interpretation will have a material impact on
its results of operations or financial position.
4. INVENTORIES
December 31, December 31,
2001 2002 2002
------------- ---------- ---------
RMB RMB US$
Raw materials 12,291,162 13,201,120 1,594,858
Work in progress - 3,963,747 478,870
Finished goods - 1,189,882 143,752
---------- ---------- ----------
Inventories 12,291,162 18,354,749 2,217,480
========== ========== ==========
5. PROPERTY, PLANT AND EQUIPMENT, NET
December 31, December 31,
2001 2002 2002
------------ ----------- ----------
RMB RMB US$
Land use rights 5,092,160 5,092,237 615,205
Buildings 156,098,987 161,513,897 19,512,872
Machinery and production equipment 88,363,675 84,550,008 10,214,686
System software and related electronic equipment 7,897,039 19,515,807 2,357,750
Motor vehicles 2,025,789 1,534,589 185,397
----------- ----------- ----------
259,459,650 272,206,538 32,885,910
Less: Accumulated depreciation and amortization (2,682,079) (21,425,624) (2,588,480)
----------- ----------- ----------
256,777,571 250,780,914 30,297,430
Projects under construction 3,749,118 - -
----------- ----------- ----------
Property, plant and equipment, net 260,526,689 250,780,914 30,297,430
=========== =========== ==========
The depreciation and amortization expense for 2002, 2001 and 2000 was
RMB18,641,555 (US$2,252,130), RMB2,416,887 and RMB265,193 (unaudited),
respectively.
67
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
6. ACCRUED EXPENSES
December 31, December 31,
2001 2002 2002
------------ ---------- ----------
RMB RMB US$
Interest accrual 1,328,300 1,718,015 207,557
Payroll accrual 12,842,780 3,661,610 442,368
Other accruals 2,573,973 5,725,593 691,722
---------- ---------- ---------
Accrued expenses 16,745,053 11,105,218 1,341,647
========== ========== =========
7. LONG TERM BANK LOANS
As of December 31, 2002, the Company had total long term credit facilities,
composed of US dollar loan and RMB loan facilities, for working capital
purposes totaling US$21,333,334 and RMB88,320,000 (equivalent to
US$10,670,146) expiring in May 2004 and July 2004 respectively. The US
dollar loan facilities are guaranteed by Hexcel China and Boeing and the
RMB loan facilities are guaranteed by China Aviation. Unused facilities was
US$2,533,334 and RMB10,516,560 (equivalent to US$1,270,530) as of December
31, 2002.
December 31, December 31,
2001 2002 2002
------------ ----------- ----------
RMB RMB US$
Loans drawn down from US dollar facilities bear
interest at rate of LIBOR plus 0.5% per annum
(2.417% weighted average in 2002) and due in
May 2004 144,012,840 155,613,240 18,800,000
Loans drawn down from RMB facilities bear interest
at a rate of 4.437% per annum and due in
July 2004. 72,009,400 77,803,440 9,399,616
----------- ----------- ----------
216,022,240 233,416,680 28,199,616
=========== =========== ==========
8. TAXATION
INCOME TAX
The Company is governed by the Income Tax Law of the PRC (the "Income Tax
Laws"). Under the Income Tax Laws, companies generally are subject to
income tax at an effective rate of 33% (30% state income taxes plus 3%
local income taxes) on income as reported in their statutory financial
statements after appropriate tax adjustments unless the enterprise is
located in specially designated regions or cities for which more favorable
effective rates apply.
68
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
8. TAXATION - Continued
Pursuant to the Income Tax Laws, companies approved as manufacturing
enterprises with operation period more than 10 years are eligible for a
two-year exemption from income tax followed by a 50% reduction of income
tax for the next three years. Since the Company is located in Tianjin new
technology development zone, it also enjoys a reduced income tax rate at
15% with approval.
No current year tax provision has been made as the Company does not has any
taxable income in 2002 and 2001.
DEFERRED TAX
Significant components of the Company's deferred income tax liabilities are
as follows:
December 31, December 31,
2001 2002 2002
------------ -------- -------
RMB RMB US$
Deferred tax liabilities:
Interest capitalization (406,000) (406,000) (49,050)
-------- -------- -------
Total deferred tax liabilities (406,000) (406,000) (49,050)
======== ======== =======
Significant components of deferred income tax assets are as follows:
December 31, December 31,
2001 2002 2002
------------ ----------- ----------
RMB RMB US$
Deferred tax assets:
Net operating loss carry forwards - 12,556,000 1,516,920
Inventory valuation - 1,395,000 168,533
Depreciation and amortization 8,114,000 8,968,000 1,083,445
---------- ----------- ----------
Total deferred tax assets 8,114,000 22,919,000 2,768,898
Valuation allowance (8,114,000) (22,919,000) (2,768,898)
---------- ----------- ----------
Total net deferred tax assets - - -
========== =========== ==========
At December 31, 2002, the Company had tax loss carry-forwards of
approximately RMB83.71 million (US$10.11 million), which expire in 2007.
The utilization of the carry forwards is dependant upon the future
profitability of the Company. A full valuation allowance was taken by the
Company due to the uncertainties of their eventual realization.
69
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
9. VALUE ADDED TAX
The Company is subject to value added tax at a rate of 17% on product
sales. Value added tax payable on sales is computed net of value added tax
paid on purchases for all domestic sales. For all good produced for
overseas sales purpose, the Company is entitled to an exemption on value
added taxes on the sales amount and conversely the input value added tax
levied on the raw materials purchased is allowed to be settled with any
domestic sales incurred in the future. The Company did not generate any
domestic sales in 2002, 2001 and 2000 therefore the Company has not
recorded any value added tax payable.
10. DISTRIBUTION OF PROFITS
As stipulated by the relevant laws and regulations applicable to China's
foreign investment enterprises, the Company is required to make
appropriations from net income as determined under accounting principles
generally accepted in the PRC ("PRC GAAP") to non-distributable reserves
which include a general reserve, an enterprise expansion reserve and a
employee welfare and bonus reserve.
The general reserve is used to offset future extraordinary losses as
defined under PRC GAAP. The Company may, upon a resolution passed by the
owners, convert the general reserve into capital. The employee welfare and
bonus reserve is used for the collective welfare of the employees of the
Company. The enterprise expansion reserve is used for the expansion of the
Company and can be converted to capital subject to approval by the relevant
authorities. The Company did not record any reserves in 2002, 2001 and 2000
as the Company incurred loss under PRC GAAP. Therefore was not required to
record such reserves.
11. RELATED PARTY TRANSACTIONS
All sales generated in 2002 were made to Hexcel Corporation. The balance
related to such sales is included in account receivable - related party
balance.
The Company purchases raw materials from Hexcel Corporation. Total raw
materials purchased from Hexcel Corporation in 2002, 2001 and 2000 was
RMB1.68 million (US$0.20 million), Nil and Nil (unaudited), respectively.
The balance related to such purchases are included in accounts payable -
related party balance.
Other receivables from related party represented reimbursements paid on
behalf of Hexcel Corporation, which are non-interest bearing, unsecured and
repayable on demand.
70
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS - Continued
Other payables to investors are as follows:
December 31, December 31,
2001 2002 2002
------------ --------- -----------
RMB RMB US$
Royalty fee payables:
Hexcel Corporation - 80,559 9,733
Boeing - 40,279 4,866
China Aviation - 60,419 7,299
--------- --------- ---------
- - 21,898
--------- --------- ---------
Temporary advance:
Hexcel Corporation 275,991 275,991 33,344
--------- --------- ---------
Reimbursements:
Hexcel Corporation 1,218,523 7,139,157 862,498
Boeing - 2,050,271 247,698
--------- --------- ---------
1,218,523 9,189,428 1,110,196
--------- --------- ---------
1,494,514 9,646,676 1,165,438
========= ========= =========
The reimbursements represents salaries and related benefits paid by the
investors on behalf of the Company.
Pursuant to the royalty agreements signed between the Company and the
investors. Royalty fee is calculated based on a fixed percentage of the
cash collection of the Company's annual sales and is payable on a
semi-annual basis. Accordingly, the Company has recorded RMB181,257
(US$21,898) in 2002 and Nil in 2001, and 2000 in royalty expenses.
At December 31, 2002 and 2001, the investors have guaranteed the Company's
bank credit facilities and bank borrowings.
12. COMMITMENTS
Operating lease - As of December 31, 2002, the Company was committed under
certain operating leases, requiring annual rental expense as follows:
RMB US$
2003 2,727,000 329,455
2004 365,000 44,097
--------- -------
3,092,000 373,552
========= =======
71
BHA AERO COMPOSITE PARTS CO., LTD.
NOTES TO THE FINANCIAL STATEMENTS
12. COMMITMENTS - Continued
The rent expense in 2002, 2001 and 2000 was RMB3,889,533 (US$469,904),
RMB3,250,379 and RMB274,443 (unaudited), respectively.
Commitments - at December 31, 2002, the Company had purchase commitments to
purchase machinery and equipment for approximately RMB200,000 (US$24,000)
from a third party by April 30, 2003.
13. SEGMENT REPORTING
SFAS No. 131 requires disclosures regarding products and services,
geographic areas, and major customers. The Company operates in one
reportable segment. For the year ended December 31, 2002, the Company
recorded revenue from a customer from the United States.
The Company generates revenue from one segment, products for aero composite
parts. The Company's business activities and accounts receivable are with a
sole customer, Hexcel Corporation. The Company will maintain allowances for
estimated potential bad debt losses and will revise its estimates of
collectibility on a periodic basis. There is no history of bad debt
experience with Hexcel Corporation and collection of receivable is
reasonably assured.
The Company's business growth is dependent on demand from Hexcel
corporation. The slow down of airline industry globally will have a
material adverse effect on the Company's business. The Company's customer
base is concentrated and the loss of Hexcel Corporation could cause the
Company's business to suffer.
14. EMPLOYEE RETIREMENT BENEFITS AND POST- RETIREMENT BENEFITS
The Company's employees in the PRC are entitled to retirement benefits
calculated with reference to their basic salaries on retirement and their
length of service in accordance with a government managed benefit plan. The
government is responsible for the benefit liability to these retired
employees. The Company has to contribute to the fund based on 25.7% of the
employees' basic monthly salaries. The expense of such arrangements to the
Company was approximately RMB1,187,111 (US$143,418), RMB764,406 and
RMB50,158 (unaudited) for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company is not obligated under any other post-retirement
plans and does not provide any post-employment benefits.
72
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Hexcel Corporation:
Our audits of the consolidated financial statements referred to in our report
dated February 28, 2003, except for Notes 2 and 8 which are as of March 19,
2003, appearing in this Annual Report on Form 10-K/A to Stockholders of Hexcel
Corporation also included an audit of the financial statement schedule listed in
Item 15(a)(2) of this Form 10-K/A. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
February 28, 2003, except for Notes 2 and 8 which are as of March 19, 2003
73
SCHEDULE II
HEXCEL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED BALANCE
BEGINNING (CREDITED) DEDUCTIONS AT END OF
(IN MILLIONS) OF YEAR TO EXPENSE AND OTHER YEAR
------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2002
Allowance for doubtful accounts $ 8.5 $ (0.9) $ (2.5) $ 5.1
Allowance for obsolete and unmarketable
inventory 25.1 7.6 (11.4) 21.3
Valuation allowance for deferred tax asset 185.0 8.5 (26.1) 167.4
YEAR ENDED DECEMBER 31, 2001
Allowance for doubtful accounts $ 7.0 $ 3.4 $ (1.9) $ 8.5
Allowance for obsolete and unmarketable
inventory 30.7 6.3 (11.9) 25.1
Valuation allowance for deferred tax asset 6.2 180.3 (1.5) 185.0
YEAR ENDED DECEMBER 31, 2000
Allowance for doubtful accounts $ 5.7 $ 0.7 $ 0.6 $ 7.0
Allowance for obsolete and unmarketable
inventory 28.7 17.7 (15.7) 30.7
Valuation allowance for deferred tax asset 6.4 (0.1) (0.1) 6.2
74