N o t e  1 - S i g n i f i c a n t   A c c o u n t i n g   P o l i c i e s

Nature of Operations and Basis of Accounting
The accompanying consolidated financial statements include the accounts of Hexcel Corporation and subsidiaries (“Hexcel” or the “company”), after elimination of intercompany transactions and accounts. Hexcel is a leading producer of advanced structural materials. The company develops, manufactures and markets lightweight, high-performance reinforcement products, composite materials and engineered products for use in the commercial aerospace, space and defense, electronics, general industrial and recreation markets. The company serves international markets through manufacturing and marketing facilities located in the United States and Europe, as well as sales offices in Asia, Australia and South America. The company is also a member of four joint ventures that manufacture and market reinforcement products and composite materials in Europe, Asia and the United States.

As discussed in Note 2, Hexcel acquired:

• certain assets and assumed certain operating liabilities from Clark-Schwebel, Inc. and its subsidiaries’ (“CS”) industrial fabrics business (the “Acquired Clark-Schwebel Business”) on September 15, 1998, including interests in three joint ventures, one of which was acquired on December 23, 1998;
• the worldwide composites division of Ciba-Geigy Limited (“CGL”), a Swiss corporation, and Ciba-Geigy Corporation, a New York corporation (“CGC” and together with CGL, “Ciba”), including most of Ciba’s composite materials, parts and structures businesses, on February 29, 1996. The company subsequently acquired Ciba’s Austrian composites business on May 30, 1996, and various remaining assets of Ciba’s worldwide composites division at various dates through February 28, 1997 (the “Acquired Ciba Business”);
• the composite products division of Hercules Incorporated (“Hercules”), including Hercules’ carbon fibers and prepreg businesses (the “Acquired Hercules Business”), on June 27, 1996; and
• the satellite business and rights to certain technologies from Fiberite, Inc. (“Fiberite”), on September 30, 1997.

All of the above acquisitions were accounted for under the purchase method of accounting. Accordingly, the accompanying consolidated balance sheets, statements of operations, stockholders’ equity, and cash flows include the financial position, results of operations and cash flows of the businesses acquired as of such dates and for such periods that these businesses were owned by Hexcel.

Estimates and Assumptions
The accompanying consolidated financial statements and related notes reflect estimates and assumptions made by the management of Hexcel. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosures with respect to contingent assets and liabilities, and the reported amounts of revenues and expenses. Although management believes that the estimates and assumptions used in preparing the accompanying consolidated financial statements and related notes are reasonable in light of known facts and circumstances, actual results could differ materially from the estimates used.

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

Accounts Receivable
Accounts receivable are net of reserves for doubtful accounts of $6,785 and $6,641 as of December 31, 1998 and 1997, respectively.

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

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

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

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

Investment in Affiliated Companies
Investment in affiliated companies consists of equity interests in joint ventures, which are accounted for using the equity method of accounting.

Debt Financing Costs
Debt financing costs are deferred and amortized over the life of the related debt, which ranges from 7 to 8 years.

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

Currency Translation
The assets and liabilities of non-U.S. Subsidiaries are translated into US dollars at year-end exchange rates, and revenues and expenses are translated at average exchange rates during the year. Cumulative currency translation adjustments are included in “stockholders’ equity.” Realized gains and losses from currency exchange transactions are recorded in “selling, general and administrative expenses” in the accompanying consolidated statements of operations and were not material to the company’s consolidated results of operations in 1998, 1997 or 1996.

Revenue Recognition
Product sales are recognized on the date of shipment.

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

Concentration of Credit Risk
Financial instruments that potentially subject the company to significant concentrations of credit risk consist primarily of trade accounts receivable. The company’s sales to two customers and their related subcontractors accounted for approximately 46% of the company’s 1998 and 1997 net sales (see Note 16). 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.

Recently Issued Accounting Standard
In June 1998, SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” was issued. SFAS 133 requires companies to record derivatives on the balance sheet as assets and liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS 133 is not expected to have a material impact on Hexcel’s consolidated financial statements. SFAS 133 is effective for fiscal years beginning after June 15, 1999. Hexcel will adopt this accounting standard as required by January 1, 2000.

Reclassifications
Certain prior year amounts in the accompanying consolidated financial statements and related notes have been reclassified to conform to the 1998 presentation.

N o t e  2 - B u s i n e s s   A c q u i s i t i o n s

Acquired Clark-Schwebel Business
On September 15, 1998, the company acquired certain assets and assumed certain operating liabilities from CS The Acquired Clark-Schwebel Business is engaged in the manufacture and sale of high-quality fiberglass fabrics, which are used to make printed circuit boards (“PCBs”) for electronic equipment such as computers, cellular telephones, televisions and automobiles. The Acquired Clark-Schwebel Business also produces high performance specialty products for use in insulation, filtration, wall and façade claddings, soft body armor and reinforcements for composite materials. The Acquired Clark-Schwebel Business currently operates four manufacturing facilities in the southeastern US and has approximately 1,300 full time employees. As part of this acquisition, Hexcel also acquired CS’s equity ownership interests in the following three joint ventures:

• a 43.6% share in CS-Interglas AG (“CS-Interglas”), headquartered in Germany, together with fixed-price options to increase this equity interest to 84.0%. Hexcel’s acquisition of the CS-Interglas equity interest and related options was completed on December 23, 1998;
• a 43.3% share in Asahi-Schwebel Co., Ltd. (“Asahi-Schwebel”), headquartered in Japan, which in turn has its own joint venture with AlliedSignal Inc. in Taiwan; and
• a 50.0% share in Clark-Schwebel Tech-Fab Company (“CS Tech-Fab”), headquartered in the United States.

CS-Interglas and Asahi-Schwebel are fiberglass fabric producers serving the European and Asian electronics and telecommunications industries. CS Tech-Fab manufactures non-woven materials for roofing, construction and other specialty applications. The fixed-price options to increase the equity interest in CS-Interglas are significantly higher than their fair market value and expire on December 31, 1999. The unconsolidated net sales in 1998 for these joint ventures were in excess of $300,000.

The acquisition of the Acquired Clark-Schwebel Business was completed pursuant to an Asset Purchase Agreement dated July 25, 1998, as amended, by and among Hexcel, Stamford CS Acquisition Corp., and C-S (the “Asset Purchase Agreement”). Under the Asset Purchase Agreement, Hexcel acquired the net assets of the acquired business, other than certain excluded assets and liabilities, in exchange for approximately $473,000 in cash, including the $19,000 paid on December 23, 1998. The assets acquired and the liabilities assumed or incurred were:

The allocations of purchase price to the assets acquired and liabilities assumed or incurred in connection with the Acquired Clark-Schwebel Business are based on current estimates of fair values, and are subject to change until September 15, 1999. As part of the acquisition, Hexcel entered into a $50,000 lease for property, plant and equipment used in the acquired business from an affiliate of CS, pursuant to a long-term lease which includes purchase options. Refer to Note 7 for acquisition financing.

Acquired Ciba Business & Acquired Hercules Business
Hexcel acquired most of Ciba’s composite materials, parts and structures businesses on February 29, 1996, Ciba’s Austrian composites business on May 30, 1996, and various remaining assets of Ciba’s worldwide composites division at various dates through February 28, 1997. The Acquired Ciba Business is engaged in the manufacture and marketing of reinforcement fabrics and lightweight, high-performance composite materials, parts and structures for commercial aerospace, space and defense, general industrial and recreation markets. Product lines include reinforcement fabrics, pre-impregnated fabrics (“prepregs”), structural adhesives, honeycomb core, sandwich panels and fabricated components, as well as composite structures and interiors primarily for the commercial and military aerospace markets.

The acquisition of the Acquired Ciba Business was consummated pursuant to a Strategic Alliance Agreement dated as of September 29, 1995, among Ciba and Hexcel, as amended (the “Strategic Alliance Agreement”). Under the Strategic Alliance Agreement, the company acquired the assets (including the capital shares of certain non-U.S. subsidiaries) and assumed the liabilities of the Acquired Ciba Business, other than certain excluded assets and liabilities, in exchange for: (a) 18,022 newly issued shares of Hexcel common stock; (b) $25,000 in cash; (c) senior subordinated notes in an aggregate principal amount of $37,476 (the “Ciba Senior Subordinated Notes”), with a fair value of $34,450; and (d) senior demand notes in an aggregate principal amount equal to the cash on hand at certain of the non-U.S. Subsidiaries included in the Acquired Ciba Business (the “Senior Demand Notes”). The total aggregate purchase price for the net assets acquired was approximately $209,000.

Hexcel acquired the assets of the composite products division of Hercules on June 27, 1996. The Acquired Hercules Business, which manufactures carbon fibers and prepregs for commercial aerospace, space and defense, general industrial and recreation markets, was purchased for $139,400 in cash.

The assets acquired and the liabilities assumed or incurred were:

Acquired Fiberite Assets
On September 30, 1997, the company acquired from Fiberite its satellite business consisting of intangible assets and inventory, and certain non-exclusive worldwide rights to other prepreg technologies, for $37,000 in cash. The acquisition was substantially downsized from the original agreement whereby the company had, subject to certain terms and conditions, committed to purchase selected assets and businesses of Fiberite for approximately $300,000. As a result of the downsized transaction, the company wrote-off $4,973 of acquisition and financing costs to business acquisition and consolidation expenses in 1997. In addition, the company expensed $8,000 of acquired in-process research and technology purchased from Fiberite which is also included in the 1997 business acquisition and consolidation expenses.

The acquisition of the satellite business and certain technologies from Fiberite on September 30, 1997 was accounted for using the purchase method. Under this method, substantially all of the $37,000 purchase price, less the $8,000 write-off of the acquired in-process research and technology, was allocated to intangible assets. Transaction costs in relation to the downsized transaction were not material.

Pro Forma Financial Information (Unaudited)
The pro forma net sales, net income and diluted net income per share of Hexcel for the years ended December 31, 1998 and 1997, giving effect to the Acquired Clark-Schwebel Business, as if it had occurred at the beginning of the periods presented were:

Pro forma adjustments giving effect to the Fiberite transaction as if it occurred at the beginning of 1997 would not have had a material effect to the company’s consolidated financial statements.

N o t e  3 - B u s i n e s s   C o n s o l i d a t i o n

In December 1998, Hexcel announced consolidation actions within its reinforcement fabrics and composite materials businesses. These actions included the integration of Hexcel’s existing fabrics business with the U.S. operations of the Acquired Clark-Schwebel Business, and the combination of the company’s US, European and Pacific Rim composite materials businesses into a single, global business unit. These actions are intended to eliminate redundancies, improve manufacturing planning, and enhance customer service, and resulted in the elimination of approximately 100 operating, sales, marketing and administrative positions. As of December 31, 1998, the cost of these actions, together with a $6,400 non-cash charge for writing down certain assets held for disposition and another $711 incurred for costs related to a proposed acquisition that was not consummated, resulted in the recognition of $12,711 in business acquisition and consolidation expenses.

In 1996, Hexcel announced plans to consolidate the company’s operations over a period of three years. The objective of the program was to integrate acquired assets and operations into Hexcel, and to reorganize the company’s manufacturing and research activities around strategic centers dedicated to select product technologies. The business consolidation program was also intended to eliminate excess manufacturing capacity and redundant administrative functions. Specific actions of the consolidation program included the elimination of 245 manufacturing, marketing and administrative positions, the closure of the Anaheim, California facility acquired in connection with the purchase of the Acquired Ciba Business, the reorganization of the company’s manufacturing operations in Europe, the consolidation of the company’s US special process manufacturing activities, and the integration of sales, marketing and administrative resources. Management expected that this consolidation program would take approximately three years to complete, in part because of the aerospace industry requirements to “qualify” specific equipment and manufacturing facilities for the manufacture of certain products. These qualification requirements increase the complexity, cost and time of moving equipment and rationalizing manufacturing activities.

As of December 31, 1998, the primary remaining activities of this consolidation program relate to the company’s European operations and certain customer qualifications of equipment transferred within the US The company expects that activities related to this consolidation program will be completed in 1999. Total expenses for this program, which remains unchanged since December 31, 1997, were $54,700, excluding $12,973 of expenses relating to the Fiberite transaction, which were not included in the original program.

Total accrued business acquisition and consolidation expenses at December 31, 1998, 1997 and 1996 and activity during the three years then ended were as follows:

Non-cash items consist of asset write-downs and currency translation effects. Accrued business consolidation costs of $8,202 and $12,173 as of December 31, 1998 and 1997, respectively, were included in “other accrued liabilities” in the accompanying consolidated balance sheets. Business consolidation activities were financed with operating cash flows and borrowings under the Senior and Revolving Credit Facilities. In addition, in 1997, the company received $8,500 of net proceeds, which approximated book value, from the sale of its Anaheim, California facility.

N o t e  4 - I n v e n t o r i e s

N o t e  5 - P r o p e r t y,   P l a n t a n d   E q u i p m e n t

N o t e  6 - I n v e s t m e n t   i n   A f f i l i a t e d   C o m p a n i e s   a n d
                   O t h e r   A s s e t s

Investment in Affiliated Companies
As part of the Acquired Clark-Schwebel Business, the company acquired equity ownership interests in three joint ventures: a 43.3% share in Asahi-Schwebel, headquartered in Japan, which in turn has its own joint venture with AlliedSignal Inc. in Taiwan; a 43.6% share in CS-Interglas, together with fixed-price options to increase this equity interest to approximately 84%; and a 50.0% share in CS Tech-Fab, headquartered in the US (see Note 2).

As of December 31, 1998 and 1997, Hexcel owned a 45% equity interest in DIC-Hexcel Limited (“DHL”), a joint venture with Dainippon Ink and Chemicals, Inc. (“DIC”). This joint venture, which owns and operates a manufacturing facility in Komatsu, Japan, was formed in 1990 and produces and sells prepregs, honeycomb, decorative laminates and bulk molding compounds using technology licensed from Hexcel and DIC. In December of 1996, Hexcel and DIC reached an agreement to continue the DHL joint venture and expand its operations. The company and DIC agreed to fund the joint venture’s operations through 1998 by each contributing an additional $3,250 in cash, payable in installments through 1998. Of this amount, $1,250 and $2,000 was paid in 1998 and 1997, respectively. In addition, the company and DIC agreed to contribute certain additional technology and product manufacturing rights to DHL. Under the terms of the agreements, Hexcel remains contingently liable to pay DIC up to $4,500 with respect to DHL’s bank debt, but the possibility that such repayment will be required has diminished as a result of the improvement in DHL’s business prospects. As of December 31, 1998, the company’s investment in DIC is zero.

In addition to the above joint ventures, in 1998, the company reached an agreement in principle with the Boeing Company (“Boeing”) and Aviation Industries of China to form a joint venture, BHA Aero Composite Parts Co., Ltd., to manufacture composite parts for secondary structures and interior applications for commercial aircraft. This joint venture will be located in Tianjin, China. Also in 1998, the company signed an agreement with Boeing, Sime Darby Berhad and Malaysia Helicopter Services (now known as Naluri Berhad) to form another joint venture, Asian Composite Manufacturing Sdn. Bhd., to manufacture composite parts for secondary structures for commercial aircraft. This joint venture will be located in Alor Setar, Malaysia. Products manufactured by both joint ventures will be shipped to the company’s Kent, Washington facility for final assembly, inspection and shipment to Boeing as well as other customers worldwide. It is anticipated that the first parts will be delivered to customers in 2001. The company’s total estimated financial commitment to both of these joint ventures will be approximately $31,000, which is expected to be made in increments through 2001. However, completion of these projects and related investments remain subject to certain significant conditions, including foreign government approvals.

N o t e  7 - N o t e s   P a y a b l e

Senior Credit Facility
In connection with the acquisition of the Acquired Clark-Schwebel Business (see Note 2) on September 15, 1998, Hexcel obtained the Senior Credit Facility to: (a) fund the purchase of the Acquired Clark-Schwebel Business; (b) refinance the company’s existing revolving credit facility; and (c) provide for ongoing working capital and other financing requirements of the company. The Senior Credit Facility, prior to the issuance in January 1999 of $240,000 of 9.75% Senior Subordinated Notes, due 2009 (see below), provided up to $910,000 of borrowing capacity, with available borrowings of $281,000 at December 31, 1998, subject to certain loan covenants. After the issuance of the 9.75% Senior Subordinated Notes, due 2009, the borrowing capacity under the Senior Credit Facility was reduced to $672,000, subject to certain loan covenants.

Depending on certain predetermined ratios and other conditions, interest on outstanding borrowings under the Senior Credit Facility is computed at an annual rate ranging from approximately 0.75% to 2.25% in excess of the applicable London interbank rate, or at the option of Hexcel, at 0 to 1.25% in excess of the base rate of the administrative agent for the lenders. In addition, the Senior Credit Facility is subject to a commitment fee ranging from 0.23% to 0.50% per annum of the total facility. As of December 31, 1998, the company had an interest rate cap agreement outstanding which covers a notional amount of $50,000 of the variable rate Senior Credit Facility providing a maximum fixed rate of 5.5%. The cost of the interest rate cap is being amortized to interest expense over the term of the contract and the unamortized amount approximated fair value at December 31, 1998.

The Senior Credit Facility is secured by a pledge of shares of certain of Hexcel’s subsidiaries. In addition, the company is subject to various financial covenants and restrictions under the Senior Credit Facility, and is generally prohibited from paying dividends or redeeming capital stock. Approximately $544,000 of the Senior Credit Facility, after the issuance of the Senior Subordinated Notes, expires by September 2004, with the balance expiring in 2005.

As a result of obtaining the Senior Credit Facility and the Amended Revolving Credit Facility (see below), the company wrote off approximately $1,600 of capitalized debt financing costs in 1998. This amount is included in “interest expense” in the accompanying consolidated statement of operations for 1998.

Revolving Credit Facility
In connection with the purchase of the Acquired Hercules Business in 1996, Hexcel obtained a revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility was obtained to: (a) refinance outstanding indebtedness under a senior secured credit facility; (b) finance the purchase of the Acquired Hercules Business; and (c) provide for the ongoing working capital and other financing requirements of the company, including business consolidation activities, on a worldwide basis. The Revolving Credit Facility was amended in March 1998 (the “Amended Revolving Credit Facility”) and in September 1998, the Senior Credit Facility replaced the Amended Revolving Credit Facility. The Amended Revolving Credit Facility, prior to its replacement, had provided up to $355,000 of borrowing capacity and would have expired in March 2003.

Interest on outstanding borrowings on the Amended Revolving Credit Facility depended upon certain predetermined ratios and other conditions and was computed at an annual rate ranging from approximately 0.3% to 1.1% in excess of the applicable London interbank rate or, at the option of Hexcel, at the base rate of the administrative agent for the lenders. In addition, the Amended Revolving Credit Facility was subject to a commitment fee ranging from approximately 0.2% to 0.4% per annum of the total facility. Interest on outstanding borrowings under the Revolving Credit Facility was computed at an annual rate of 0.4% in excess of the applicable London interbank rate or, at the option of Hexcel, at the base rate of the administrative agent for the lenders. The Revolving Credit Facility was also subject to a commitment fee of approximately 0.2% per annum on the unused portion of the facility.

European Credit and Overdraft Facilities
In addition to the Senior Credit Facility, certain of Hexcel’s European subsidiaries have access to limited credit and overdraft facilities provided by various local lenders. These credit and overdraft facilities, which are only available to finance certain activities by specific subsidiaries, are primarily uncommitted facilities that are terminable at the discretion of the lenders. The credit and overdraft facilities in use by the company’s European subsidiaries as of December 31, 1998 and 1997, other than the Senior or Revolving Credit Facilities, bear interest at rates between 3.0% and 6.4% per annum.

Convertible Subordinated Notes, due 2003
In July of 1996, Hexcel completed an offering of $114,500 in convertible subordinated notes, due 2003 (the “Convertible Subordinated Notes”). The Convertible Subordinated Notes carry an annual interest rate of 7% and are convertible into Hexcel common stock at a conversion price of $15.81 per share, subject to adjustment under certain conditions. Net proceeds of $111,351 from this offering were used to repay amounts owed under the company’s Revolving Credit Facility.

The Convertible Subordinated Notes are redeemable beginning in August of 1999, in whole or in part, at the option of Hexcel. The redemption prices range from 103.5% to 100.0% of the outstanding principal amount, depending on the period in which redemption occurs. As of December 31, 1998, $65 of the Convertible Subordinated Notes had been converted resulting in the issuance of 4 shares of common stock.

Convertible Subordinated Debentures, due 2011
The 7% convertible subordinated debentures, due 2011, are redeemable by Hexcel prior to maturity. Mandatory redemption is scheduled to begin in 2002 through annual sinking fund requirements. The debentures are convertible prior to maturity into common shares of the company at $30.72 per share.

Ciba Senior Subordinated Notes Payable
In connection with the purchase of the Acquired Ciba Business, Hexcel issued to Ciba, the Ciba Senior Subordinated Notes in an aggregate principal amount of $37,476. Hexcel also consented to an assignment by Ciba of Ciba’s rights and obligations under the Strategic Alliance Agreement to Ciba Speciality Chemical Holdings Inc. and Ciba Specialty Chemicals Corporation (collectively “CSC”). In connection with the assignment of these rights and obligations, the Ciba Senior Subordinated Notes that were previously payable to Ciba are now payable to CSC.

The Ciba Senior Subordinated Notes are general unsecured obligations of Hexcel that bear interest for three years at a rate of 7.5% per annum, payable semiannually from February 29, 1996. The interest rate will increase to 10.5% per annum on the third anniversary of the purchase of the Acquired Ciba Business (February 28, 1999), and by an additional 0.5% per year thereafter until the Ciba Senior Subordinated Notes mature in the year 2003.

At the date of issue, the aggregate fair value of the Ciba Senior Subordinated Notes was $3,026 less than the aggregate principal amount. The original discount of $3,026 reflects the absence of certain call protection provisions from the terms of the Ciba Senior Subordinated Notes and the difference between the stated interest rate on the Ciba Senior Subordinated Notes and the estimated market rate for debt obligations of comparable quality and maturity. This discount, which is amortized over the life of the Ciba Senior Subordinated Notes, had an unamortized balance of $1,801 and $2,233 as of December 31, 1998 and 1997, respectively.

On February 17, 1999, the company repaid $12,500 of its Ciba Senior Subordinated Notes payable. The repayment was financed with borrowings under the company’s Senior Credit Facility. As a result of the repayment, the company will write-off approximately $600 of the unamortized discount in 1999.

As discussed in Note 9, Hexcel has various financial and other relationships with CSC. Accordingly, the company’s net indebtedness to CSC under the Ciba Senior Subordinated Notes has been classified as “indebtedness to related parties” in the accompanying consolidated balance sheets.

9.75% Senior Subordinated Notes, due 2009
On January 21, 1999, the company issued $240,000 of 9.75% Senior Subordinated Notes, due 2009. Net proceeds of approximately $231,000 from this offering were used to repay amounts owed under the Senior Credit Facility. Simultaneously with the closing of this offering, the company amended the Senior Credit Facility to, among other things, reduce the available borrowing capacity to $672,000, modify certain financial covenants and to permit the offering.

Aggregate Maturities of Notes Payable and Indebtedness to Related Parties
As discussed above, on January 21, 1999, the company issued $240,000 of 9.75% Senior Subordinated Notes, due 2009, for net proceeds of $231,000, and amended its Senior Credit Facility. In addition, on February 17, 1999, the company repaid $12,500 of the Ciba Senior Subordinated Notes payable to CSC with borrowings under the Senior Credit Facility. The table below reflects aggregate maturities of notes payable and indebtedness to related parties, including the amended due dates and maturities from the above events (see Note 8 for maturities of capital lease obligations):

Estimated Fair Values of Notes Payable
The Senior Credit Facility, and substantially all of the various European credit facilities and other notes payable outstanding as of December 31, 1998 and 1997, are variable-rate debt obligations. Accordingly, the estimated fair values of each of these debt obligations approximates their respective book values.

The aggregate fair values of the Convertible Subordinated Notes, due 2003, and the Convertible Subordinated Debentures, due 2011, are estimated on the basis of quoted market prices, although trading in these debt securities is limited and may not reflect fair value. The aggregate fair value of the Convertible Subordinated Notes, due 2003, was approximately $96,100 and $196,000 as of December 31, 1998 and 1997, respectively. The aggregate fair value of the Convertible Subordinated Debentures, due 2011, was approximately $19,000 and $25,500 as of December 31, 1998 and 1997, respectively.

N o t e  8 - L e a s i n g   A r r a n g e m e n t s

Assets, accumulated depreciation and related liability balances under capital leasing arrangements as of December 31, 1998 and 1997, were:

As discussed in Note 2, Hexcel entered into a $50,000 capital lease for property, plant and equipment used in the Acquired Clark-Schwebel Business. The lease expires in September 2006 and includes various purchase options.

Certain sales and administrative offices, data processing equipment, and manufacturing facilities are leased under operating leases. Rental expense under operating leases was $4,656 in 1998, $4,559 in 1997 and $4,623 in 1996.

Future minimum lease payments as of December 31, 1998, were:

Total minimum capital lease payments include $17,956 of imputed interest.

(continued)

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