-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WDIxn0LgWc6Rj7PrqjSifEGZgNADh2LSQ2wQqqkwVFGEk4wxgY+DdWTi4ql1uVxf Bc8gF0kkkPDsZP7hR/QLpA== 0000950131-98-002232.txt : 19980401 0000950131-98-002232.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950131-98-002232 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CADE INDUSTRIES INC CENTRAL INDEX KEY: 0000356211 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 391371038 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12808 FILM NUMBER: 98581808 BUSINESS ADDRESS: STREET 1: 5640 ENTERPRISE DR CITY: LANSING STATE: MI ZIP: 48911 BUSINESS PHONE: 5173941333 MAIL ADDRESS: STREET 2: 5640 ENTERPRISE DRIVE CITY: LANSING STATE: MI ZIP: 48911 10-K405 1 FORM 10-K405 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- --------- Commission file number: 0-12808 CADE INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Wisconsin 39-1371038 --------- ---------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 2365 Woodlake Drive, Suite 120, Okemos, Michigan 48864 ------------------------------------------------------ (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code: (517) 347-1333 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 par value ----------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 19, 1998, 22,004,083 shares of Common Stock were outstanding, and the aggregate market value of the registrant's voting and non-voting common equity (based upon the $3 closing price of the registrant's Common Stock on that date in the Nasdaq National Market) held by nonaffiliates (excludes shares reported as beneficially owned by directors and executive officers which exclusion does not constitute an admission as to affiliate status) was approximately $48,675,654. DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which Portions of Document Document are Incorporated -------- ----------------------------------------- Portions of Annual Report to Shareholders for the fiscal year ended December 31, 1997 Part II Portions of Proxy Statement for 1998 Annual Meeting of Shareholders Part III
PART I Item 1. Business. -------- General Cade Industries, Inc. (the "Company" or "Cade") conducts its operations primarily through four operating subsidiaries, Auto-Air Composites, Inc. ("Auto- Air"), Cade Composites, Inc. ("CCI"), H.A.C. Corporation ("HAC") and Central Engineering Company ("CENCO"). Cade was incorporated in 1981 and initially was engaged in precision machining of cast parts for the aircraft industry through its former Precision Machining Division located in Marinette, Wisconsin, which was sold in June 1989. The Company acquired Auto-Air in 1984 and acquired the business that now is conducted by CCI in 1988. On November 30, 1994, the Company acquired Pollux Corporation which, through its wholly-owned HAC subsidiary, manufactures and overhauls bonded structures and composite parts for military and commercial aircraft. On October 31, 1997, the Company acquired CENCO and its subsidiaries which manufacture engine test facilites and associated ground support equipment. The Company has included the operations of CENCO in its consolidated financial statements since October 31, 1997. Products Cade engages worldwide in the design, manufacture and repair and overhaul of high technology composite components and engine test facilities for the aerospace, air transport, and specialty industries. The Company is a global leader in the manufacture of jet engine test facilities and related ground support equipment. Composite materials are physical combinations of two or more constituents. One of the materials, typically a fiber or particle such as epoxy glass, graphite, polyamide glass or epoxy kevlar, is placed or dispersed within the other constituent, called the matrix. The composite material formed by the combination of constituents must have attributes which are superior to either one of the constituent materials. Composite materials may be classified as structural or non-structural dependent upon their application. These materials are molded and cured at high temperatures under pressure or vacuum. The high strength and low weight of composite materials makes them especially well suited for aerospace and other complex applications where weight is a critical factor. Cade's primary products include molded and bonded composite jet engine components consisting of engine inlets, acoustical liners, fairings, auxiliary power unit enclosures and engine cases ("Gas Turbine Products"); metal fabricated and bonded composite airframe components consisting of various control surface products, access doors, wing tips and interior structures ("Airframe Products"); the repair and overhaul of commercial and military airframe components, commercial gas turbine engine components and flight nacelle structures ("Repair and Overhaul Services"); and test nacelle, engine test facilities, data acquisition systems, and related equipment used in the ground testing and overhaul of commercial jet engines and related ground support equipment ("Test Equipment"). These products are sold worldwide through the Company's internal sales force and independent sales representatives to major engine equipment manufacturers, airlines and overhaul facilities. For 1997, 1996 and 1995, sales of Gas Turbine Products, Airframe Products, Repair and Overhaul Services and Test Equipment as a percentage of total sales were as follows:
Percentage of Total Net Sales ----------------------------- Year Ended December 31, ----------------------------- 1997 1996 1995 ---- ---- ---- Gas Turbine Products 32.1% 29.4% 25.7% Airframe Products 21.8% 20.9% 24.8% Repair and Overhaul Services 22.3% 27.2% 24.2% Test Equipment 23.7% 19.2% 20.7% ---- ---- ---- Total 99.9% 96.7% 95.4% ==== ==== ==== - -------------------------------------------------------------------------------
Through Auto-Air and HAC, Cade operates repair stations under Federal Aviation Administration ("FAA") licenses. The repair stations are authorized to repair and overhaul certain gas turbine engine products and other 1 components, sheet metal and composite flight control surfaces, skin panels, bonded honeycomb panels, cargo doors and engine cowls. In addition to FAA certification, Auto-Air and HAC have also been certified by the European Joint Airworthiness Authority ("JAA") to repair specific aircraft parts on certain types of aircraft subject to JAA jurisdiction. Although some nations require approval from their own aviation authorities before Auto-Air and HAC are authorized to repair parts on aircraft subject to their jurisdiction, FAA and JAA certification enable Auto-Air and HAC to repair parts on aircraft subject to the jurisdiction of most foreign countries. Auto-Air and HAC have also received repair approval from the Civil Aviation Authority of China. Auto-Air has recently been certified as meeting ISO 9000 quality standards. Raw Materials The principal raw materials used in Cade's manufacturing processes consist of epoxy glass, polyamide glass, epoxy kevlar, graphite BMI and aluminum honeycomb. Although none of these materials currently is in short supply, the Company continues to experience increased order lead times in certain cases, which management attributes primarily to the increased overall demand for such material. These raw materials are purchased from multiple suppliers located in the United States and, in many cases, under long-term contracts. Alternative international sources are also available, but currently are not generally used as sources. Certain customers require that purchases be made from one or more approved suppliers or that the Company certify the material specifications in its in-house laboratories. Cade has never experienced a shortage of raw materials as a result of such supplier or material specifications restrictions. Patents and Trademarks Cade currently holds no material patents or registered trademarks, trade names or similar intellectual property, although the Company has received certain patents in the area of high temperature composites applications and anticipates seeking patent protection in the future as appropriate to preserve proprietary developments. The Company believes that the nature of its business presently does not require the development of patentable products or registered trade names or trademarks to maintain or increase market position. Marketing and Competition The Company's products are marketed primarily through its internal sales force and independent sales representatives. The majority of Cade's sales are made through individual purchase orders, as well as long-term agreements, which are cancelable by customers, subject to cancellation charges to cover certain manufacturing costs and related expenses. In addition, approximately 14% of Cade's total net sales, directly and indirectly, during fiscal 1997 was attributable to government contracts which are subject to termination or renegotiation at the option of the U.S. Government. Historically, terminations and renegotiations of government contracts have not materially impacted the Company's earnings. During the fiscal years ended December 31, 1997, 1996 and 1995, sales to the Pratt & Whitney unit of United Technologies Corporation ("Pratt & Whitney") accounted for approximately 25%, 25% and 20% of total net sales, respectively, and sales to Boeing/McDonnell Douglas accounted for approximately 11%, 6%, and 5% of total sales, respectively. For the fiscal years ended December 31, 1997, 1996 and 1995, the Company's export sales as a percentage of total net sales were 22%, 17% and 23%, respectively. Cade competes in its manufacturing operations primarily on the basis of its design capability, precise quality standards, prompt delivery and price. Management believes that certain of the Company's competitors have adequate expertise in the use of composites to meet customers' quality standards and, as to such competitors, Cade competes primarily on the basis of quality, innovative design, cost effectiveness, and delivery. Some of the Company's manufacturing competitors, including customer-affiliated manufacturing units, are larger and have substantially greater resources than Cade. Efforts by the industry's original equipment manufacturers ("OEMs") to reduce the number of their suppliers have led to a consolidation among suppliers. The Company believes that it will benefit from the consolidation and from increased OEM outsourcing. Cade believes its Auto-Air subsidiary is one of only two manufacturers licensed to design and build test nacelle and related ground support equipment for large commercial jet engines and that its CENCO subsidiary is the only manufacturer licensed to build complete turnkey facilities for the testing and certification of gas turbine engines and one of three manufacturers for data acquisition systems. In addition, Cade believes it is one of only a limited number of suppliers for certain composite jet engine and air frame components whose manufacturing processes have been approved by the relevant engine manufacturer or other prime 2 contractor. Such approval certifies that the Company has been audited by the prime contractor and meets or exceeds such contractor's process, quality control and material specifications. Cade competes in its repair and overhaul operations primarily on the basis of its expertise and ability to provide short turn times within the industry's stringent quality specifications and customers' pricing requirements. The Company's competitors for repair and overhaul services include substantially all commercial airlines and many large and small independent suppliers, many of which are larger and have substantially greater resources than Cade. The market for composite engine and airframe component overhaul and repair is fragmented with many small participants and several large, independent participants, with the major domestic competitors being the NORDAM Group, Aenocell Structures, Inc., Pemco Nacelle Services, Inc. and Aviation Equipment, Inc. Backlog The Company's backlog includes both "firm" orders supported by customer purchase orders with fixed delivery dates and "blanket" purchase orders against which customers issue production releases covering relatively short time periods ("LTAs"). At December 31, 1997, the Company's backlog of orders was $79.4 million ($34.8 million at December 31, 1996), which included $17.7 million of scheduled orders under LTAs. Of the total year-end backlog, the Company expects to ship products generating $69.5 million of revenue in 1998. The Company's order backlog is subject to customer rights of cancellation or rescheduling, although in certain cases the Company would be entitled to receive termination payments. Overhaul and repair services typically involve short lead times and thus are not included in backlog numbers. Employees Cade has approximately 600 employees, of which 55 are employed in design and design-related services; 380 are employed in manufacturing, repair and quality control; and 165 are employed in administration (management, sales and clerical). Approximately 21% of these employees are represented by a union. Year 2000 Compliance The Company has undertaken a study to assess the potential impact of year 2000 issues on its business and internal operations. The study is also directed at estimating amounts to be expended relative to year 2000 issues and their impact on the Company's operations, liquidity and capital resources. In 1997, no material amount was expended on year 2000 issues. The Company believes the costs associated with transitioning its current computer environment to one that is fully year 2000 compliant is not material to its results of operations or its liquidity and capital resources, although the total cost of compliance with these issues is not yet known. Forward Exchange and Currency Contracts The Company enters into foreign currency contracts as a hedge against foreign currency exposures for certain construction contracts to limit the Company's exposure to both favorable and unfavorable currency fluctuations. Such contracts are designated as a hedge of a firm commitment for construction or component manufacturing contracts denominated in foreign currencies, and any gains and losses are deferred and included in the measurement of the construction or component manufacturing contracts profitability. During 1997, the Company entered into forward currency contracts to hedge certain firm commitments for the delivery of goods and services for four construction or component manufacturing contracts denominated in foreign currencies. The purpose of the Company's foreign currency hedging activity is to protect it from the risk that the eventual dollar cash flows resulting from the delivery of goods and services to international customers will be adversely affected by changes in exchange rates. At December 31, 1997, the Company had forward currency contracts, all with a maturity of less than one year, to exchange British pounds, Thailand bahts and Singapore dollars for U.S. dollars in the amounts of $4,175,000, $6,066,000 and $3,383,000, respectively. There were no significant unrealized gains or losses related to foreign currency contracts at December 31, 1997. 3 Item 2. Properties. ---------- The Company's owned and leased facilities are designed and constructed for industrial purposes and are located in industrial districts. Each facility is well maintained, suitable for the Company's purposes, and effectively utilized. The table below sets forth certain information about the Company's principal manufacturing facilities.
Square Owned Principal Address Feet or Leased Description Activity - ----------------------- ------ ---------- -------------------- ------------------- 5640 Enterprise Drive 54,000 Owned 1 and 2 story Composite Lansing, MI brick building manufacturing in industrial park 537 Camden Drive 53,000 Owned 1 and 2 story Manufacturing; Grand Prairie, Texas metal building repair and overhaul in industrial area 4075 Ruffin Road 44,000 Leased (1) 1 story reinforced Manufacturing San Diego, CA concrete building in industrial area 5720 Enterprise Drive 27,500 Owned 1 story brick Composite Lansing, MI building in manufacturing industrial park 74/76 First Street 45,100 Owned 1 story metal and Manufacturing Sunfield, MI block building in industrial park 2920 Anthony Lane 8,000 Owned 1 story brick and Office and software St. Anthony, MN block building in development industrial park 2924 Anthony Lane 9,800 Owned 1 story brick and Office and program St. Anthony, MN block building in administration industrial park 2930 Anthony Lane 23,300 Owned 1 story brick and Manufacturing St. Anthony, MN block building in industrial park
______________________________ (1) Lease expires January 31, 1999. Item 3. Legal Proceedings. ----------------- The Company is not involved in any material pending legal proceedings other than ordinary routine litigation incidental to its business. Item 4. Submission of Matters to a Vote of Security Holders. --------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997. 4 EXECUTIVE OFFICERS OF THE REGISTRANT Executive officers of Cade are elected by the Board of Directors to serve until their successors are elected and qualified. Effective September 1, 1997, John W. Sandford assumed the position as Chairman and Chief Executive Officer and Terrell L. Ruhlman resigned as Chairman and Chief Executive Officer. The following table sets forth certain information about Cade's executive officers: Name (Age) Business Experience John W. Sandford (63) Chairman of the Board and Chief Executive Officer of the Company since September 1997; formerly President and Chief Executive Officer of Rolls-Royce, Inc. from 1990 to January 1993; formerly Managing Director of Rolls-Royce PLC Aerospace Group from January 1993 to January 1995; currently director of Rolls-Royce PLC, nominee for director for Avcorp Industries and director of several other privately held entities; Member of the Company's Strategic Planning Committee and until September 1, 1997 a member of the Company's Compensation Committee. Richard A. Lund (46) President and Chief Operating Officer of the Company since May 1990; Director of the Company since January 1991; Member of the Company's Strategic Planning Committee; Chief Executive Officer of Auto-Air; President of Auto-Air from 1988 through 1994. Edward B. Stephens (50) Vice President, Treasurer, Assistant Secretary and Chief Financial Officer of the Company since July 1989; Member of the Company's Strategic Planning Committee. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. --------------------------------------------------------------------- Information in response to this item is incorporated herein by reference to the information under the caption "Selected Financial Highlights - Market Prices" in the Company's 1997 Annual Report to Shareholders. On October 31, 1997, the Company issued 250,000 shares of its Common Stock pursuant to the exemption from registration under the Securities Act of 1933, as amended (the "1933 Act") contained in Section 4(2) (the "Exemption") of the 1933 Act. The shares were issued to the nine shareholders of CENCO as part of the consideration for the Company's acquisition of CENCO. The Company relied upon the representations of CENCO and CENCO's shareholders made in the Stock Purchase Agreement as to the availability of the Exemption. Item 6. Selected Financial Data. ----------------------- Information in response to this item is incorporated herein by reference to the information under the caption "Selected Financial Highlights" in the Company's 1997 Annual Report to Shareholders. 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operation. ------------ Information in response to this item is incorporated herein by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1997 Annual Report to Shareholders. The Company may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and its reports to shareholders. Forward- looking statements are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. In connection with these "safe harbor" provisions, the Company identifies important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by or on behalf of the Company. Any such statement is qualified by reference to the following cautionary statements. Forward-looking information regarding the Company is subject to risks and uncertainties that may significantly impact expected results. The Company's outlook is based largely on its interpretation of current order levels and trends and assumptions as to trends in the air transport and aircraft industries. Certain of the Company's backlog of orders are subject to cancellation, reduction or extended delivery. The air transport and aircraft industries have historically been subject to significant cyclical fluctuations and are influenced by factors such as the general state of the economy, fuel prices, governmental regulation, competition, and the level of military spending. In addition, the Company's results are subject to pricing competition, the willingness of the airlines and aircraft manufacturers to out source work for their composite components and repairs, foreign currency fluctuations with respect of international sales, and the Company's success in the development, manufacture and marketing of composites products for other industries and uses. Developments in any of these areas, which are more fully described elsewhere in "Item 1 -- Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 4 through 7 of the Company's 1997 Annual Report to Shareholders, each of which is incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statements that may be made from time to time by or on behalf of the Company. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. ---------------------------------------------------------- Not applicable. Item 8. Financial Statements and Supplementary Data. ------------------------------------------- Information in response to this item is incorporated herein by reference to "Independent Auditor's Report," "Consolidated Balance Sheets," "Consolidated Statements of Operations," "Consolidated Statements of Changes in Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" in the Company's 1997 Annual Report to Shareholders. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. --------------------- Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- Information in response to this item is incorporated herein by reference to (i) the information under the caption "Election of Directors" in the Registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders ("Cade 1998 Proxy Statement") and (ii) the information under the caption "Executive Officers of the Registrant" in Part I hereof. 6 Item 11. Executive Compensation. ---------------------- Information in response to this item is incorporated herein by reference to the information under the caption "Executive Compensation" in the Cade 1998 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- Information in response to this item is incorporated herein by reference to the information under the caption "Principal Security Holders and Security Holdings of Management" in the Cade 1998 Proxy Statement. Item 13. Certain Relationships and Related Transactions. ---------------------------------------------- Information in response to this item is incorporated herein by reference to the information under the caption "Election of Directors - Compensation of Directors" in the Cade 1998 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. ---------------------------------------------------------------- (a) Documents filed: --------------- 1. Financial statements. -------------------- The financial statements required to be filed by Item 8 hereof have been incorporated by reference to the Registrant's 1997 Annual Report to Shareholders and consist of the following: Independent Auditor's Report. Consolidated Balance Sheets as of December 31, 1997 and 1996. Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Changes in Shareholders' Equity for the three year period ended December 31, 1997. Notes to Consolidated Financial Statements. 2. Financial statement schedules. ----------------------------- The following financial statement schedules are included in Item 14(d) hereof: Independent Auditor's Report on Consolidated Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Management Contract and Compensatory Plans and Arrangements. ----------------------------------------------------------- All management contracts and compensatory plans and arrangements are identified by an asterisk after the exhibit number on the attached Exhibit Index. 7 (b) Reports on Form 8-K: ------------------- The Company filed a Current Report on Form 8-K dated October 31, 1997 to report in Item 2 the acquisition of CENCO and in Item 7 related financial statements and exhibits. The Current Report Included the following financial statements: Financial Statements of Business Acquired Consolidated Balance Sheets as of June 30, 1997 and 1996 Consolidated Statements of Operations for the years ended June 30, 1997 and 1996 Consolidated Statements of Retained Earnings for the years ended June 30, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended June 30, 1997 and 1996 Notes to Consolidated Financial Statements Independent Auditors Report Consolidated Balance Sheet of September 30, 1997 Consolidated Statement of Earnings for the three months ended September 30, 1997 Consolidated Statement of Cash Flow for the three months ended September 30, 1997 Notes to Financial Statements On January 13, 1998, the Company filed Amendment No. 1 to the Current Report on Form 8-K/A dated October 31, 1997 to add in Item 7 the following unaudited pro forma condensed consolidated financial statements of the Company and subsidiaries, reflecting the acquisition of CENCO: Introduction to Pro Forma Consolidated Financial Statements of Cade Industries, Inc. and Central Engineering Company (unaudited). Cade Industries, Inc. and Central Engineering Company Pro Forma Unaudited Consolidated Balance Sheet as of September 30, 1997 and the Pro Forma Unaudited Consolidated Statements of Operations for the nine months then ended on September 30, 1997 and year ended December 31, 1996. Notes to Unaudited Pro Forma Consolidated Financial Statements. (c) Exhibits: -------- See the Exhibit Index immediately following the signature page of this report, which Index is incorporated herein by this reference. In addition, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Registrant hereby agrees to furnish to the Commission upon request any instrument with respect to long-term debt pursuant to which the total amount of long-term debt authorized thereunder does not exceed 10% of the Registrant's consolidated total assets. (d) Financial Statement Schedules: ----------------------------- 8 CADE INDUSTRIES, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ---------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - --------------------------------------------------------------------------------------------------------------------------------- ADDITIONS -------------------------------------- Balance at Charged to Costs Charged to Balance Beginning of and Expenses Other Accounts-- Deductions-- at End DESCRIPTION Period Describe Describe of Period - ---------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1997: Reserves and allowances deducted from asset accounts: Valuation allowances: Inventory $ 801,028 $ 853,436 $205,000(1) $365,775(2) $1,493,689 Deferred income taxes 610,000 200,000(3) 410,000 Other 187,288 70,325 150,000(1) 407,613 Amortization allowances: Goodwill 645,070 123,326 768,396 Other 333,798 20,394 354,192 ---------- ---------- -------- -------- ---------- $2,577,184 $1,067,481 $355,000 $565,775 $3,433,890 ========== ========== ======== ======== ========== Year ended December 31, 1996: Reserves and allowances deducted from asset accounts: Valuation allowances: Inventory $ 947,888 $146,860(4) $ 801,028 Deferred income taxes 640,000 30,000(5) 610,000 Other 154,766 $ 32,522 187,288 Amortization allowances: Goodwill 536,219 108,851 645,070 Other 300,206 33,592 333,798 ---------- ---------- -------- ---------- $2,579,079 $ 174,965 $176,860 $2,577,184 ========== ========== ======== ========== Year ended December 31, 1995: Reserves and allowances deducted from asset accounts: Valuation allowances: Inventory $ 461,627 $ 56,261 $430,000(1) $ 947,888 Deferred income taxes 536,000 104,000(1) 640,000 Other 135,619 24,466 $ 5,319(6) 154,766 Amortization allowances: Goodwill 444,898 91,321 536,219 Other 253,588 46,618 300,206 ---------- ---------- -------- -------- ---------- $1,831,732 $ 218,666 $534,000 $ 5,319 $2,579,079 ========== ========== ======== ======== ==========
(1) Valuation of allowances recorded via purchase accounting for acquisition of Central Engineering Company (1997) and Pollux Corporation (1995). (2) Write-off of specific inventory items. (3) Adjustment of valuation allowance to realizable amount. (4) Sale of reserved inventory. (5) Adjustments to valuation allowance from Internal Revenue Service review. (6) Uncollectible accounts written-off, net of recoveries. 9 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. CADE INDUSTRIES, INC. By /s/ John W. Sandford Dated March 30, 1998 ---------------------------------------- -- John W. Sandford, Chairman of the Board, Chief Executive Officer and Director 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/ Molly F. Cade - ---------------------- Director March 30, 1998 Molly F. Cade -- /s/ Conrad G. Goodkind - ---------------------- Director and Secretary March 30, 1998 Conrad G. Goodkind -- /s/ William T. Gross - ---------------------- Director March 30, 1998 William T. Gross -- /s/ Richard A. Lund - ---------------------- President, Chief Operating March 30, 1998 Richard A. Lund Officer and Director -- Director March , 1998 - ---------------------- -- Joseph R. O'Gorman /s/ Terrell L. Ruhlman - ----------------------- Director March 30, 1998 Terrell L. Ruhlman -- /s/ John W. Sandford - ----------------------- Chairman of the Board and March 30, 1998 John W. Sandford Chief Executive Officer -- (principal executive officer) /s/ Edward B. Stephens - ----------------------- Vice President, Treasurer March 30, 1998 Edward B. Stephens and Chief Financial Officer -- (principal financial and accounting officer)
10 CADE INDUSTRIES, INC. Exhibit Index to Report on Form 10-K for the fiscal year ended December 31, 1997
Exhibit Incorporated herein Filed No. Description by reference to: Herewith - ------- ----------- ------------------- -------- 2.1 Agreement and Plan of Merger by Exhibit 2.1 to the Registrant's and among Cade Industries, Inc., Pollux Form S-4 Registration Statement dated Acquisition Corporation, Pollux October 28, 1994, Registration No. 33-83130 Corporation and H.A.C. Corporation ("1994 S-4") dated as of May 24, 1994 ("Agreement and Plan of Merger") 2.2 Amendment No. 1 to Agreement and Exhibit 2.2 to Registrant's 1994 S-4 Plan of Merger 2.3 Stock Purchase Agreement for the Exhibit 2 to Registrant's Current Report Acquisition of Central Engineering on Form 8-K dated October 31, 1997 Company by the Registrant dated as of ("10/31/97 8-K) October 31, 1997 3.1 Articles of Incorporation, as amended Exhibit 4.1 to the Registrant's Form S-8 Registration Statement dated November 10, 10, 1990, Registration No. 33-37911 ("1990 S-8") 3.2 By-Laws, as amended Exhibit 3.2 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 4.1 Articles IV, V and VIII of the Exhibit 4.1 to Registrant's 1990 S-8 Registrant's Articles of Incorporation, as amended 4.2 Amended and Restated Revolving Credit Exhibit 4.2 to Registrant's Annual Report on and Term Loan Agreement dated as of Form 10-K for the year ended December 31, January 30, 1995, and First Amendment 1994 ("1994 10-K") thereto dated March 3, 1995 4.3 Amendment No. 2 to Amended and Restated Exhibit 4.3 to Registrant's Form 10-K Revolving Credit and Term Loan Agreement for the year ended December 31, 1995 dated as of June 1, 1995 by and between ("1995 10-K") the Registrant and Comerica Bank 4.4 Third Amendment to Amended and Restated Exhibit 4.1 to Registrant's Revolving Credit and Term Loan Agreement Form 10-Q for the quarter ended dated as of September 29, 1995 by and September 30, 1995 between the Registrant and Comerica Bank 4.5 Fourth Amendment to Amended and Exhibit 4.1 to Registrant's Restated Revolving Credit and Term Form 10-Q for the quarter ended Loan Agreement dated September 29, 1995 June 30, 1996 by and between Cade Industries, Inc., and Comerica Bank 11
Exhibit Incorporated herein Filed No. Description by reference to: Herewith - ------- ----------- ------------------- -------- 4.6 Fifth Amendment to Amended and Exhibit 4.6 to Registrant's Form 10-K Restated Revolving Credit and Term for the year ended December 31, 1996 Loan Agreement dated February 19, 1997 by and between Cade Industries, Inc., and Comerica Bank 4.7 Loan Agreement dated as of Exhibit 4.2 to Registrant's September 1, 1990 between Form 10-Q for the quarter ended the Economic Development September 30, 1990 Corporation of the City of Lansing and Auto-Air Composites, Inc. 4.8 Reimbursement Agreement Exhibit 4.2 to Registrant's dated as of September 1, 1990 Form 10-Q for the quarter ended between Auto-Air Composites, Inc. September 30, 1990 and Comerica Bank, as successor to Manufacturers National Bank of Detroit 4.9 Amended and Restated Security Exhibit 4.5 to Registrant's 1994 10-K Agreement dated as of January 30, 1995, between Comerica Bank and the Registrant 4.10 Amended and Restated Guaranty Exhibit 4.6 to Registrant's 1994 10-K dated as of January 30, 1995, between Comerica Bank and Auto-Air Composites, Inc. 4.11 Amended and Restated Security Exhibit 4.7 to Registrant's 1994 10-K Agreement dated as of January 30, 1995, between Comerica Bank and Auto-Air Composites, Inc. 4.12 Amended and Restated Guaranty Exhibit 4.8 to Registrant's 1994 10-K dated as of January 30,1995, between Comerica Bank and Cade Composites, Inc. 4.13 Amended and Restated Security Exhibit 4.9 to Registrant's 1994 10-K Agreement dated as of January 30, 1995, between Comerica Bank and Cade Composites, Inc. 4.14 Guaranty dated as of Exhibit 4.10 to Registrant's 1994 10-K January 30, 1995, between Comerica Bank and Cade Commercial Composites, Inc. 4.15 Guaranty dated as of Exhibit 4.11 to Registrant's 1994 10-K December 1, 1994, between Comerica Bank and Pollux Acquisition Corporation 4.16 Guaranty dated as of Exhibit 4.12 to Registrant's 1994 10-K
Exhibit Incorporated herein Filed No. Description by reference to: Herewith - ------- ----------- ------------------- --------- 4.17 Form of 6% Subordinated Notes Exhibit 2.1 to Registrant's 1994 issued in the initial aggregate S-4 principal amount of $2,861,040 4.18 Fifth Amendment to Amended and Exhibit 4.1 to Registrant's Form 10-Q Restated Revolving Credit and for the quarterly period ended Term Loan Agreement Dated March 31, 1997 September 29, 1995 by and between Cade Industries, Inc. and Comerica Bank 4.19 Second Amended and Restated Credit Exhibit 4.1 to Registrant's Agreement, dated October 31, 10/31/97 8-K 1997, by and between Cade Industries, Inc. and Bank 4.20 Line of Credit Note dated October Exhibit 4.2 to Registrant's 31, 1997 10/31/97 8-K 4.21 Term Note A, dated October 31, Exhibit 4.3 to Registrant's 1997 10/31/97 8-K 4.22 Term Note B, dated October 31, Exhibit 4.4 to Registrant's 1997 10/31/97 8-K 4.23 Term Note C, dated October 31, Exhibit 4.5 to Registrant's 1997 10/31/97 8-K 10.1 I.A.M. National Pension Benefit Exhibit 19.4 to Registrant's Fund, benefit plan B standard Form 10-Q for the quarter ended participation agreement June 30, 1986 10.2 Sublease dated March 29, 1991 and Exhibit 10.15 to Registrant's First Amendment Sublease Annual Report on Form 10-K for the dated April 24, 1991 year ended December 31, 1991 between Cade Composites, ("1991 10-K") and Scientific-Atlanta, Inc. for premises located at 4075 Ruffin Road, San Diego, CA 10.3* Employee Agreement dated January Exhibit 10.14 to Registrant's 29, 1991 with Edward B. Stephens Form 10-Q for the quarter ended March 31, 1991 10.4* Nonstatutory Stock Option Exhibit 10.7 to Registrant's Agreement for the Benefit of 1994 10-K Terrell L. Ruhlman 10.5* Amendment to Employment Agreement Exhibit 10.7 to Registrant's between Richard Gribbins 1995 10-K and the Registrant dated May 11, 1995 10.6* Employment Agreement between Exhibit 10.8 to Registrant's Richard A. Lund and the 1995 10-K Registrant dated May 2, 1995 10.7 Collective Bargaining Agreement Exhibit 10.10 to Registrant's effective 1995 10-K
Exhibit Incorporated herein Filed No. Description by reference to: Herewith - ------- ----------- ------------------- -------- March 15, 1995 between Auto-Air Composites, Inc. and Lodge No. 2184, International Association of Machinists 10.8* Cade Industries, Inc. 1990 Exhibit 10.10 to Registrant's 1989 10-K Nonqualified Stock Option Plan ("1990 Stock Option Plan") 10.9* Amendment No. 1 to 1990 Stock Option Plan Exhibit 10.18 to Registrant's 1991 10-K 10.10* Cade Industries, Inc. 1994 Stock Option Exhibit 10.13 to Registrant's 1994 10-K Plan ("Director Stock Option Plan") 10.11* Form of Option Agreement under Exhibit 10.14 to Registrant's 1994 10-K Director Stock Option Plan 10.12* Lund/Stephens 1996 Incentive Plans Exhibit 10.12 to Registrant's Form 10-Q for the quarterly period ended June 30, 1997 ("June 1997 10-Q") 10.13* Lund/Stephens 1997 Incentive Plans Exhibit 10.13 to Registrant's June 1997 10-Q 10.14* Sandford/Lund/Stephens 1998 Incentive Plans X 13.1 Incorporated portions of 1997 Annual Report X to Shareholders 21.1 Subsidiaries of the Registrant X 23.1 Consent of Deloitte & Touche LLP to X incorporation by reference 27 Financial Data Schedule X
* Management contract or compensatory plan or arrangement required to be filed pursuant to Item 14 of Form 10-K. 14 EX-10.14 2 SANFORD/LUND/STEPHENS 1998 INCENTIVE PLANS EXHIBIT 10.14 CADE INDUSTRIES, INC. 1998 INCENTIVE PLAN Richard A. Lund Edward B. Stephens John W. Sandford The 1998 incentive plan will be based upon the following performance factors: FACTOR WEIGHTING FACTOR INCENTIVE % ------ ---------------- ----------- 1. Cade Industries Earnings 70 35% After Tax 2. Cash Flow From Operations 30 15% The maximum incentive is 50% of total 1998 total base compensation. The incentive award will be paid both in cash (75%) and Cade Industries stock (25%). The stock price award level is determined as the price of Cade stock on 12/31/97 ($2.375). - -------------------- -------------------- --------------------- John W. Sandford Richard A. Lund Edward B. Stephens EX-13 3 1997 CADE ANNUAL REPORT Exhibit 13.1 1997 CADE Annual Report Dear Shareholders: On the strength of a sound economy and high demand for aviation products, your company posted strong gains in revenue and more than doubled its earnings for the year ended December 31, 1997. We made good progress in the implementation of our strategic plan, and will continue to aggressively pursue our objective of product capability diversification within our core markets. The expansion of our core product capabilities, combined with a successful acquisition plan, is providing this Company with the critical mass to be effectively managed through fluctuations in the business cycles of the aerospace industry. Our year 2000 goal of generating annual revenues in excess of $100 million is within our sight. In 1997, earnings increased by 122% to $2,353,000 on revenues of $55.8 million, up 60% from $34.8 million in 1996. Basic earnings per share rose to $0.11, compared to $0.05 in the prior year, with approximately 21.7 million shares outstanding. Our growth in revenue and earnings has benefited from the Company's diversified product capabilities within the original equipment manufacturer and aftermarket overhaul and repair sectors. This expanded capability fueled our internal sales growth, which accounted for 81% of our revenue increase. Each of our four core product segments had increased revenues, with the largest dollar increases in gas turbine engine products ($7.8 million) and jet engine test equipment ($6.5 million). The largest percentage increase occurred in our engine component, overhaul and repair business, which grew at an annualized rate of 82%. The doubling of the Company's earnings was the result of the increased revenue and our employees' successful efforts to improve productivity throughout our manufacturing operations. Their efforts resulted in reduced labor costs measured by sales per labor dollar, which improved by 9.8%, as well as decreased overhead cost percentages. These improvements were partially offset by higher material costs, due primarily to changes from consigned material to purchased material, and the impact of subcontract purchases by our new subsidiary, Central Engineering Company (known in the industry as Cenco). Operating margins improved to 7.6% of sales and net income contribution to 4.2%. We exceeded our forecasts for both earnings and revenue growth during 1997. We indicated to you in our 1996 Letter to Shareholders that we would pursue ISO 9000 quality standards certification for our operating units. I am pleased to report that our largest subsidiary, Auto-Air Composites, received certification in 1997. Management is working diligently with our other subsidiaries to obtain ISO 9000 certification. This certification of our company commitment to the highest levels of quality is key to the expansion of our business worldwide, and will continue to be a high priority for us. We congratulate all of our employees at Auto-Air for this achievement, and challenge the other employee groups to make it happen in 1998. One of our most significant achievements in 1997 was the successful acquisition of Central Engineering Company, located in Minneapolis, Minnesota. Working with our investment bankers and professional advisors we were able to complete this transaction, which was financed primarily through the use of new debt, in 1997. We closed on the purchase on October 31, 1997, and have been working with the management teams to successfully integrate the new company into the Cade organization. Mr. John Nicholson has joined us as president of Central Engineering, and is working closely with the Company's founder and Chairman, Loren Swanson, to expand the business. The Cenco acquisition gives Cade Industries a unique capability within the world's jet engine test facility market. Cade is now capable of offering a complete turnkey facility for testing and certification of today's commercial and military gas turbine engines. Through the use of Cenco's proprietary software and sophisticated modeling methods to predict airflow characteristics, we are able to design test cell facilities to meet the engine and airline users' most demanding needs. This is evidenced by our current contract to build two of the world's largest test facilities, with completion scheduled in 1998 for the GE 90 Engine Test Facility in Wales, and the Rolls Royce Trent 895 Engine Facility in Thailand. Cenco contributed approximately $4.4 million in revenue in the last quarter of 1997, with a positive contribution to our consolidated earnings for the year. We fully expect that this acquisition will favorably impact our 1998 results. Our order backlog grew to $79.4 million as of December 31, 1997, not including overhaul & repair orders which constitute 22% of annual sales. The growth in backlog reflected the acquisition of Central Engineering, as well as continued strong demand for the Company's core products. 1 Outlook As we move into 1998, industry experts are forecasting continued growth within the aerospace industry for the next few years. Airline profitability continued to improve in 1997, with increased traffic and higher utilization rates contributing to these profits. Orders received for new aircraft deliveries increased sharply in 1997, with the number of airplane deliveries in 1998 expected to exceed 700. Successful implementation of the Company's strategic planning committee initiatives has fueled our growth and we have targeted annual revenues in excess of $100 million by year 2000. Achieving this objective will be dependent upon expansion of Cade's products and services within our four primary product groups and strategic acquisitions. There are numerous opportunities in the four product groups, and we intend to invest resources throughout these groups with an emphasis on FAA-approved overhaul and repair capabilities. World economic stability, solid industry fundamentals and an aggressive growth plan should provide the conditions that result in above-average revenue and earnings growth for Cade Industries. In 1997 our Chairman, Mr. Terrell Ruhlman, announced his decision to retire as Chairman and CEO. He will continue as a Director of Cade Industries and has been working closely with our new Chairman and CEO, Mr. John Sandford, to successfully complete this transition. We look forward to Terry's continued involvement, and reflect back with much appreciation on the impact of this leader on the success of Cade Industries. Terry, on behalf of all our employees, we thank you for your dedication. In summary, we were pleased with the 1997 performance and the progress in implementing our strategic initiatives. We enter 1998 with strong optimism based upon a healthy sales backlog and current economic environment, and we remain dedicated to enhancing shareholder value. This objective will be met by achieving solid growth internally, and by exploring opportunities that will leverage our technology base and management expertise in the aerospace industry. We look forward to seizing the opportunities to grow this business and we thank all of you for your support. /s/ John W. Sandford - ------------------------------- John W. Sandford Chairman of the Board and Chief Executive Officer /s/ Richard A. Lund - ------------------------------- Richard A. Lund President and Chief Operating Officer 2 1997 CADE Annual Report Selected Financial Highlights
Year Ended December 31 1997(1) 1996 1995 1994(2) 1993 (In thousands of dollars, except per share data) Selected Operating Data Sales $55,804 $34,867 $30,445 $20,461 $16,184 Income (loss) before cumulative effect of change in method of accounting for income taxes 2,353 1,058 (382) 159 (869) (3) Income (loss) per share before cumulative effect of accounting change 0.11 0.05 (0.02) 0.01 (0.05) Net income (loss) 2,353 1,058 (382) 159 (689) Net income (loss) per share (4): Basic 0.11 0.05 (0.02) 0.01 (0.04) Diluted 0.11 0.05 (0.02) 0.01 (0.04) Selected Balance Sheet Data Current assets 31,201 17,147 13,653 14,534 13,183 Total assets 54,570 35,304 32,685 32,937 24,890 Current liabilities 19,766 9,148 6,592 7,969 5,245 Working capital 11,435 7,999 7,061 6,565 7,938 Long-term obligations 11,471 5,473 6,433 4,930 3,046 Shareholders' equity 23,333 20,683 19,660 20,038 16,599
(1) Reflects operations of Central Engineering Company from date of acquisition (October 31, 1997). (2) Reflects operations of Pollux Corporation from date of acquisition (December 1, 1994). (3) Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes." (4) Earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Market Prices The Company's Common Stock is traded on the over-the-counter market (NASDAQ). The approximate number of recordholders of the Company's Common Stock at February 20, 1998 was 1,592. The Company presently intends to retain all available funds for the development of its business and for use as working capital and does not expect to pay dividends in the foreseeable future. There were no cash dividends paid in the period 1993 through 1997. Firstar Trust Company is the stock transfer agent for the Company's Common Stock. The following table displays the share prices for the Company's Common Stock in 1997 and 1996.
HIGH LOW HIGH LOW First Quarter $1 16/32 $1 7/32 $ 25/32 $ 18/32 Second Quarter 1 20/32 1 9/32 1 28/32 23/32 Third Quarter 3 15/32 1 15/32 1 21/32 1 Fourth Quarter 3 16/32 2 8/32 1 17/32 1 5/32
3 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations The following table sets forth, for the periods indicated, certain items from Cade Industries, Inc.'s ("Company") Consolidated Statements of Operations expressed as a percentage of net sales, and the percentage changes in the dollar amounts of such items from the prior period. Effective October 31, 1997, the Company acquired Central Engineering Company ("Cenco"). The operating results of Cenco are included with those of the Company from the date of acquisition.
Percent Increase Percentage of Net Sales in Dollar Amounts 1997 1996 1995 1997 vs. 1996 1996 vs. 1995 Net Sales 100.0% 100.0% 100.0% 60.0% 14.5% Costs and Expenses: Cost of Sales 77.9% 76.6% 82.4% 62.8% 6.5% Selling, General and Administrative Expense 14.5% 17.5% 17.8% 32.9% 12.3% Net Interest Expense 1.5% 2.1% 2.4% 14.2% 1.5% ----------------------- Total Costs and Expenses 93.9% 96.2% 102.6% 57.2% 7.4% ----------------------- Income (Loss) Before Income Taxes 6.1% 3.8% (2.6%) * * Income Tax Expense (Credit) 1.9% 0.8% (1.3%) * * ----------------------- Net Income (Loss) 4.2% 3.0% (1.3%) * * =======================
* Not meaningful to presentation Cade is engaged worldwide in the design, manufacture, and repair and overhaul of high technology composite components and engine test facilities for the aerospace, air transport and specialty industries. Cade's core products include molded and bonded composite jet engine components consisting of engine inlets, acoustical liners, fairings, auxiliary power unit enclosures and engine cases ("Gas Turbine Products"); metal fabricated and bonded composite airframe components consisting of various control surface products, access doors, wing tips and interior structures ("Airframe Products"); the repair and overhaul of commercial and military airframe components and of commercial gas turbine engine components as well as flight nacelle structures ("Repair and Overhaul Services"); and test nacelle facilities and related equipment used in the ground testing and overhaul of major commercial jet engines and related ground support equipment ("Test Facilities and Equipment"). These products are sold worldwide through the Company's internal sales force and independent sales representatives to major engine and airframe equipment manufacturers, airlines and overhaul facilities. For 1997, 1996 and 1995, sales of Gas Turbine Products, Airframe Products, Repair and Overhaul Services, and Test Facilities and Equipment as a percentage of total sales were as follows:
Percentage of Total Net Sales 1997 1996 1995 Gas Turbine Products 32.1% 29.4% 25.7% Airframe Products 21.8% 20.9% 24.8% Repair and Overhaul Services 22.3% 27.2% 24.2% Test Facilities and Equipment 23.7% 19.2% 20.7% ------------------------- 99.9% 96.7% 95.4% =========================
Outlook and Backlog At December 31, 1997, the Company's backlog of orders was $79.4 million ($34.8 million at December 31, 1996), which included $30.9 million of order backlog at Cenco. The 1997 year-end backlog included only the first two years of scheduled orders ($17.7 million) under long-term agreements; $69.5 million is scheduled for shipment in 1998. The 4 1997 CADE Annual Report Company's backlog includes both firm orders supported by customer purchase orders with fixed delivery dates, and blanket purchase orders against which customers issue production releases covering relatively short time periods. The increase (excluding Cenco) in order backlog at 1997 year-end, compared to 1996, primarily reflects the strength of the economy in general and a healthy aviation industry more specifically, as evidenced by both increased airline profits and new aircraft orders. Overhaul and repair orders, representing 22.3% of total 1997 sales, are excluded from the Company's order backlog due to their very short lead times. Each of the Company's subsidiaries has experienced growth in its backlog from the prior year-end, primarily reflecting increases in orders within each of the Company's four major product groups. The Company's order backlog is subject to customer rights of cancellation or rescheduling, although in certain cases the Company would be entitled to receive termination payments. On the basis of the current order backlog, existing long-term agreements and current economic conditions, the Company expects continued strong sales growth in 1998. 1997 Compared To 1996 Net sales for 1997 increased by $20,937,000 or 60.0% from 1996, of which $4,420,000 or 12.7% was attributed to the October 31, 1997, acquisition of Cenco. The remaining $16,517,000 of the sales increase, representing 47.3% of 1996 net sales, reflects higher sales in all of the Company's core product groups, with the largest increases coming from gas turbine engine and airframe components. Cost of sales increased 62.8% or $16,776,000 (48.5% or $12,953,000 without regard to Cenco) in 1997 from 1996, primarily as a result of the 60.0% increase in net sales. Cost of sales as a percent of net sales increased to 77.9% (77.2% without regard to Cenco) from 76.6% in 1996. This increase in cost of sales percent from 1996 results, in part, from the inclusion for part of the year of Cenco's operations, whose current material cost percentages are higher than the Company's historical cost percentages. In addition, material costs increased at certain of the Company's other operating subsidiaries due to the change from customer-provided to vendor-procured materials on certain gas turbine engine components, increased levels of tooling purchased for sale to customers and increased sales of military spares components which have higher material contents. Tooling amortization costs as a percent of sales also increased due to the increased sales of test nacelles and overhaul and repair products in 1997. Decreases in both labor and overhead costs as a percent of sales partially offset the material and tooling amortization cost increases. The labor percent decreases resulted primarily from improved productivity, lower average labor costs due to new hires in the labor force and increased sales of products with lower labor content, mainly gas turbine engine components. Overhead costs as a percent of sales decreased primarily as a result of cost containment efforts and the spreading of fixed manufacturing costs over a larger sales base. Selling, general and administrative expenses ("administrative expenses") were 14.5% (15.0% without regard to Cenco) and 17.5% in 1997 and 1996, respectively. Actual amounts expended in 1997 increased $2,002,000 ($1,599,000 excluding Cenco) from 1996. The decreased percentage of administrative expenses during 1997 compared to 1996 primarily results from the 60.0% increase in sales and the corresponding spreading of these costs over a larger sales base. Factors contributing to the higher dollar level of administrative expenditures in 1997 were increased marketing costs, commission expenses, professional and consulting fees, administrative staff and related costs, travel related costs incurred to support the higher current and expected sales levels, and higher business franchise taxes resulting from the increased sales volume. Sales commissions are directly related to the sales mix of products and/or customers involved. The higher sales commissions in 1997 resulted primarily from the continued growth in test nacelle and repair and overhaul sales subject to commission payments. Net interest expense as a percent of sales decreased to 1.5% in 1997 from 2.1% in 1996, while the actual amount increased by $104,000 to $833,000. The increase in the net amount of interest expense was due to increased usage of the line of credit to support the higher 1997 business activity, and to the additional debt associated with the acquisition of Cenco. The effect of the increased line of credit usage was partially offset by lower overall short-term interest rates as a result of borrowing at Eurodollar-based interest rates. Income tax expense was $1,037,000 or 1.9% of sales in 1997, compared to $277,000 or 0.8% of sales in 1996. The effective tax rate was lower than the statutory tax rate, due mainly to the lower tax rate applicable to the Company's foreign sales corporation. The Company had net income of $2,353,000 in 1997, compared to $1,058,000 in 1996, as a result of the factors discussed above. 1996 Compared To 1995 Net sales for 1996 increased by $4,422,000 or 14.5% from 1995. This increase in sales was due primarily to higher sales of both overhaul and repair services and gas turbine engine components. Partially offsetting these increases were lower sales of military components due to the completion of a government contract in 1995 and delays in military first article approvals in 1996. Cost of sales increased 6.5% or $1,629,000 in 1996 from 1995, primarily as a result of the 14.5% increase in net sales. In addition, the 1995 cost of sales amount included $960,000 related to the write-off in the second quarter of certain costs at the Company's Cade Composites, Inc. subsidiary associated with work-in-process, non-recurring engineering charges, contract termination costs, tooling 5 investments and prototype development costs. Excluding this write-off at Cade Composites from 1995 amounts, cost of sales for 1996 increased $2,589,000 or 10.7%. Cost of sales as a percentage of sales was 76.6% and 82.4% for 1996 and 1995, respectively. Excluding the effect of the write-off at Cade Composites, cost of sales as a percentage of sales was 79.2% in 1995. Material cost of sales as a percent of net sales in 1996 decreased due primarily to lower military sales at H.A.C. and much higher sales of commercial overhaul and repair services in 1996. Military sales in 1995 carried a higher material content than that of the Company's historical product mix, while overhaul and repair services reflect lower than normal material contents. These decreases in the material cost percentage, due to product mix changes, were partially offset by an increase in material content for certain gas turbine engine components as a result of changing from customer supplied material to purchased material in the last quarter of 1996. Overhead cost of sales as a percent of sales decreased as a result of cost containment efforts, improved operational efficiency and the spreading of fixed manufacturing costs over a larger sales base. Administrative expenses as a percent of net sales decreased slightly in 1996 to 17.5% from 17.8% in 1995, while actual amounts expended increased by $668,000 in 1996 to $6,097,000. The decreased percentage resulted primarily from the 14.5% increase in 1996 sales and the corresponding spreading of administrative expenses over a larger sales base. Factors contributing to the higher administrative expenses in 1996 were increased marketing costs, commission expense, professional and consulting fees, administrative staff and related costs, and travel related costs. The increased sales commissions in 1996 resulted primarily from greater overhaul and repair sales subject to commission payments. Net interest expense as a percent of sales decreased to 2.1% in 1996 from 2.4% in 1995, while the actual net amount expended remained relatively unchanged. Line of credit usage increased in 1996 compared to 1995. However, the effect of increased borrowing was largely offset by lower overall interest rates as a result of borrowing at Eurodollar-based interest rates. Income tax expense was $277,000 or 0.8% of sales in 1996, compared to a negative expense of ($397,000) or (1.3%) of sales in 1995. The effective tax rate was lower than the statutory tax rate due to the lower tax rate applicable to the Company's foreign sales corporation and to certain adjustments to income tax liabilities. The Company had net income of $1,058,000 in 1996, compared to a net loss of ($382,000) in 1995 due to the factors discussed above. Liquidity and Capital Resources The Company has met its working capital and longer term capital needs through operating cash flow, short and long-term bank debt, and leasing arrangements on certain items of capital equipment. The Company financed its acquisition of Cenco with long-term bank debt and the issuance of its common stock. Capital has principally been used to fund the Company's acquisition of Cenco and inventory, accounts receivable, and equipment and tooling expenditures. Management expects to continue its present level of investment in inventory to support the higher sales volume expected in 1998 and to continue to invest, at modestly increased levels, in production technology, tooling and equipment for improved manufacturing efficiency and quality enhancement. The Company is continuing to pursue acquisition opportunities to expand and/or diversify its markets. The Company financed the acquisition of Cenco with increased bank debt. Under the Company's amended and restated loan agreement with a bank, the Company has a $9,000,000 unsecured line of credit, a $4,000,000 mortgage note and $6,821,000 in two term notes. Pre-existing term debt of $2,571,000 and line of credit debt of $527,000 was retired with the proceeds from these new fixed-term obligations. At December 31, 1997, $4,844,000 of the line of credit was available and the Company also had outstanding approximately $12,265,000 of secured, long-term debt and $1,431,000 of subordinated notes. The Company has undertaken a study to assess the potential impact of year 2000 issues on its business and internal operations. The study is also directed at estimating amounts to be expended relative to year 2000 issues and their impact on the Company's operations, liquidity and capital resources. In 1997, no material amount was expended on year 2000 issues. The Company believes the costs associated with transitioning its current computer environment to one that is fully year 2000 compliant is not material to its results of operations or its liquidity and capital resources, although the total cost of compliance with these issues is not yet known. Management believes that expected increased revenues and an ongoing emphasis on working capital management will continue to provide strong cash flow from operations. As a result, the Company's cash flow from operations and its current credit facilities are believed to be adequate to finance its current operations and capital expenditure requirements at present and forecasted levels. 6 1997 CADE Annual Report Effects of Inflation The Company has entered into multi-year sales agreements with fixed prices in its core business of gas turbine engine components and test nacelle products and services. These contracts contain provisions for renegotiation should inflation of material costs exceed certain defined levels. Partially offsetting material and labor cost increases experienced by the Company were long-term material purchase agreements with suppliers and productivity improvements. In addition, Cade continuously reviews cost increases and attempts to reflect these projected cost adjustments in proposals for new orders. As a result, management believes that general inflation did not have a material impact on the Company's operations or financial condition during the periods discussed. New Accounting Pronouncements The Financial Accounting Standards Board has issued Statements of Financial Accounting Standards No. 130 "Comprehensive Income," and No. 131 "Disclosures about Segments of an Enterprise and Related Information." These statements are effective for fiscal years beginning after December 15, 1997. The Company expects the adoption of these accounting standards will not materially impact its results of operations or financial position. ---------------------------- Independent Auditor's Report Shareholders and Board of Directors Cade Industries, Inc. and Subsidiaries Lansing, Michigan We have audited the accompanying consolidated balance sheets of Cade Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Lansing, Michigan February 10, 1998 7 Cade Industries, Inc. and Subsidiaries Consolidated Balance Sheets
December 31 ------------------------------------- 1997 1996 ---- ---- Assets Current assets Cash and cash equivalents $ 1,093,176 $ 21,606 Trade accounts receivable 12,687,969 6,585,905 Costs and estimated earnings in excess of billings on uncompleted contracts 2,053,922 Inventories 13,798,967 9,913,770 Deferred income taxes 1,154,000 445,000 Prepaid expenses and other assets 413,132 180,279 ------------------------------------- Total current assets 31,201,166 17,146,560 Property, plant and equipment 17,662,161 15,006,081 Intangible and other assets Goodwill 5,552,849 3,014,369 Other assets 153,715 137,430 ------------------------------------- 5,706,564 3,151,799 ------------------------------------- $54,569,891 $35,304,440 ===================================== Liabilities and Shareholders' Equity Current liabilities Note payable to bank $ 1,460,000 $ 3,010,000 Current portion of long-term debt 3,012,998 1,558,220 Trade accounts payable 5,190,782 2,888,283 Employee compensation and amounts withheld 2,471,638 1,013,108 Billings in excess of costs and estimated earnings on uncompleted contracts 5,626,388 Accrued expenses 1,609,611 552,097 Accrued income taxes 395,088 126,216 ------------------------------------- Total current liabilities 19,766,505 9,147,924 Long-term debt 10,682,554 4,839,181 Deferred income taxes 788,000 634,000 Shareholders' equity Preferred stock, 10% cumulative, non-voting, stated value $300 per share; authorized 500 shares, none issued Common stock, par value $.001 per share; authorized 100,000,000 shares, issued 22,238,859 shares (21,972,859 shares in 1996) 22,239 21,973 Additional paid-in capital 9,360,968 8,885,977 Retained earnings 14,475,571 12,122,296 ------------------------------------- 23,858,778 21,030,246 Less cost of common stock in treasury (350,055 and 280,568 shares in 1997 and 1996, respectively) 525,946 346,911 ------------------------------------- 23,332,832 20,683,335 ------------------------------------- $54,569,891 $35,304,440 =====================================
See accompanying notes. 8
1997 CADE Annual Report Cade Industries, Inc. and Subsidiaries Consolidated Statements of Operations Year Ended December 31 1997 1996 1995 Sales $55,803,761 $34,867,072 $30,445,006 Cost of sales 43,480,918 26,704,927 25,075,996 --------------------------------------------- 12,322,843 8,162,145 5,369,010 Selling, general and administrative expenses 8,099,595 6,097,363 5,429,585 --------------------------------------------- Income (loss) from operations 4,223,248 2,064,782 (60,575) Interest expense - net (832,973) (729,290) (718,468) --------------------------------------------- Income (loss) before income taxes 3,390,275 1,335,492 (779,043) Income tax expense (credit) 1,037,000 277,000 (397,000) --------------------------------------------- Net income (loss) $ 2,353,275 $ 1,058,492 $ (382,043) ============================================= Net income (loss) per common share: Basic $ 0.11 $ 0.05 $ (0.02) Diluted $ 0.11 $ 0.05 $ (0.02)
See accompanying notes 9 Cade Industries, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31 1997 1996 1995 Operating activities Net income (loss) $ 2,353,275 $ 1,058,492 $ (382,043) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 2,898,254 2,626,109 2,356,142 Provision for deferred income taxes (benefit) (115,000) 91,000 (62,000) Loss on sale of equipment 10,529 13,520 Changes in operating assets and liabilities, net of assets and liabilities acquired from Cenco: Trade accounts receivable (2,020,716) (1,915,207) 147,260 Billings in excess of costs and estimated earnings on uncompleted contracts - net 993,793 Inventories (3,440,390) (1,995,635) 973,154 Prepaid expenses and other current assets (168,461) 317,826 (327,730) Trade accounts payable 784,240 1,202,970 (867,366) Other current liabilities 2,100,701 (149,865) 462,881 --------------------------------------------- Net cash provided by operating activities 3,396,225 1,249,210 2,300,298 Investing activities Additions to property, plant and equipment (2,683,143) (1,764,166) (2,424,229) Acquisition of Cenco (5,197,106) Acquisition of Pollux (73,497) Other - net (37,780) (2,261) (53,091) --------------------------------------------- Net cash used in investing activities (7,918,029) (1,766,427) (2,550,817) Financing activities Proceeds from long-term debt 11,470,134 507,316 3,600,000 Payments and refinancing of long-term debt (4,171,983) (1,831,021) (1,433,533) Increase (decrease) in note payable to bank (1,550,000) 1,710,000 (1,800,000) Purchases of common stock for treasury (203,957) (92,469) Exercise of stock options and other 49,180 57,512 --------------------------------------------- Net cash provided by financing activities 5,593,374 351,338 366,467 --------------------------------------------- Increase (decrease) in cash and cash equivalents 1,071,570 (165,879) 115,948 Cash and cash equivalents at beginning of year 21,606 187,485 71,537 --------------------------------------------- Cash and cash equivalents at end of year $ 1,093,176 $ 21,606 $ 187,485 ============================================= Cash paid (received) during the year for: Interest $ 730,647 $ 772,257 $ 657,805 Income taxes, net of refunds received 900,072 (39,415) 89,984 Supplemental Schedule of noncash investing and financing activities: Capital leases 248,706 507,316 Fair market value of common stock issued for acquisition 451,000 3,683
See accompanying notes. 10 Cade Industries, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity
Common Stock ---------------------- Additional Number Par Value Paid-In Retained Treasury of Shares Amount Capital Earnings Stock -------------------------------------------------------------------- Balance at January 1, 1995 21,881,499 $21,881 $8,824,874 $11,445,847 $(254,442) Shares issued in connection with acquisition 4,910 5 3,678 Net loss for the year (382,043) -------------------------------------------------------------------- Balance at December 31, 1995 21,886,409 21,886 8,828,552 11,063,804 (254,442) Stock options exercised 86,450 87 57,425 Purchase of 80,500 shares of common stock (92,469) Net income for the year 1,058,492 -------------------------------------------------------------------- Balance at December 31, 1996 21,972,859 21,973 8,885,977 12,122,296 (346,911) Stock options exercised 16,000 16 20,844 Purchase of 114,800 shares of common stock (203,957) Employee stock awards 3,397 24,922 Shares issued in connection with acquisition 250,000 250 450,750 Net income for the year 2,353,275 -------------------------------------------------------------------- Balance at December 31, 1997 22,238,859 $22,239 $9,360,968 $14,475,571 $(525,946) ====================================================================
See accompanying notes. 11 Notes to Consolidated Financial Statements Note 1. Corporate Structure and Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Cade Industries, Inc. and its wholly-owned subsidiaries (Company or Cade); Auto-Air Composites, Inc. (Auto-Air); Cade Composites, Inc. (CCI); Cade International, Inc. (CI); Central Engineering Company (Cenco); Cade Europe, Inc. (CE) and Pollux Acquisition Corporation (Pollux) and its wholly-owned subsidiary, H.A.C. Corporation (H.A.C.). Intercompany accounts and transactions have been eliminated in consolidation. Cade is engaged worldwide in the design, manufacture, and repair and overhaul of high technology composite components and engine test facilities for the aerospace, air transport and specialty industries. The Company's core products consist of original equipment components for gas turbine engines, airframe, and auxiliary power units. Its specialty niche products include ground-based test nacelle systems and facilities and repair and overhaul of commercial gas turbine engine components and both commercial and military airframe components. Through Auto-Air and H.A.C., Cade operates repair stations under Federal Aviation Administration ("FAA") licenses. In addition to FAA certification, Auto-Air and H.A.C. are certified by the European Joint Airworthiness Authority and the Civil Aviation Authority of China. The Company and its subsidiaries offer both manufacturing and design services to the industries they serve. The design and manufacturing are interrelated and the various significant operating locations have essentially the same capability. In the opinion of management, the Company operates in a single business segment. Significant accounting policies are discussed below, and where applicable, in the Notes that follow. Cash and Cash Equivalents Cash and cash equivalents includes short-term investments having maturity dates of 90 days or less when purchased. Trade Accounts Receivable/Revenue Recognition Trade accounts receivable represent amounts due from domestic and international equipment manufacturers and air carriers serving the aerospace and air transportation industries, as well as from the U.S. Government under certain long-term contracts. The Company generally does not require collateral from its customers. Credit losses have been minimal. Sales and income are generally recognized at the time products are shipped. Progress billings in advance of deliveries on certain contracts are treated as deferred revenues and are offset against inventoried contract costs in the Company's financial statements. Reserves for contract losses are accrued when estimated costs to complete exceed expected future revenues. The percentage of completion method of accounting is used for certain contracts covering the construction and manufacture of engine test facilities and related ground test equipment. Profits on contracts are recorded on the basis of the percentage of completion of individual contracts, commencing when progress reaches a point where experience is sufficient to estimate final results with reasonable accuracy. That portion of the total contract price is accrued which is allocable, on the basis of the Company's estimates of percentage of completion, to contract expenditures and work performed. Indirect costs are allocated to contract costs and inventories. As these contracts may extend over one or more years, revisions in cost and profit estimates during the course of the work are reflected in the accounting period in which the facts which require the revision become known. Additionally, the entire amount of the estimated loss is accrued at the time when it is determined that a loss on a contract is likely to occur. The asset, "costs and estimated earnings in excess of billings on uncompleted contracts," represents revenue recognized in excess of amounts billed. The liability, "billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenue recognized. Net sales to Pratt & Whitney, Boeing/McDonnell Douglas and the U.S. Government, with which the Company has long standing customer relations amounted to 25%, 11%, and 7% of the 1997 consolidated net sales, respectively (25%, 6%, and 5% in 1996, 20%, 5%, and 13% in 1995). Export sales by the Company's domestic subsidiaries were $12,002,000, $6,024,000, and $7,028,000 for the years 1997, 1996, and 1995 respectively and accounts receivable relating to foreign revenues as of December 31, 1997 and 1996 are $7,630,000 and $506,000, respectively. 12 Goodwill Goodwill is being amortized over 30 to 40 years using the straight-line method. Accumulated amortization was $768,000 and $645,000 at December 31, 1997 and 1996, respectively. It is the Company's policy to carry goodwill only if the projected undiscounted cash flows of acquired businesses over the remaining amortization periods exceed such recorded amounts of goodwill. Income Taxes Income taxes have been provided using the liability method. Deferred income tax liabilities and assets are recorded at the end of each period based on the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using the tax rate expected to be in effect when the taxes are actually paid or recovered. Research and development credits are recorded using the flow-through method of accounting whereby, in the year available for utilization, the credits are applied as a reduction of income tax expense. Significant Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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 amounts could differ from these estimates. Net Income (Loss) Per Share In 1997, Cade adopted Financial Accounting Standards Board SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires the calculation of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of stock options. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to SFAS No. 128 requirements. Fair Value of Financial Instruments Management has determined that the carrying values of cash and cash equivalents, trade accounts receivable and accounts payable approximate fair value due to the short-term maturities of these instruments. Management has also determined that the carrying value of its current and long- term debt and note payable to bank approximate market value as they largely bear interest at rates that vary with the bank's prime lending rate. It is not practical to estimate the fair value of the subordinated notes due to these notes being non-marketable and subordinated to all other debt. Long-Lived Assets And Long-Lived Assets To Be Disposed Of Effective January 1, 1996, Cade adopted Financial Accounting Standards Board Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and long- lived assets and certain identifiable intangibles to be disposed of. The adoption of this new accounting standard did not have a material effect on Cade's consolidated operating results or financial position. Forward Exchange Contracts The Company has entered into foreign currency contracts as a hedge against foreign currency exposures for certain construction contracts. These foreign currency contracts limit the Company's exposure to both favorable and unfavorable currency fluctuations. Such contracts are designated as a hedge of a firm commitment for construction contracts denominated in foreign currencies, and any gains and losses are deferred and included in the measurement of the construction contracts profitability. 13 Note 2. Acquisition In October 1997, the Company acquired 100% of the outstanding shares of Central Engineering Company and its related real estate for $8,174,000. The purchase price consisted of 250,000 shares of Cade's Common Stock and approximately $7,723,000 in cash. The cash portion of the purchase price was financed through additional bank borrowings, pursuant to which the Company's existing credit facility was increased from approximately $10.3 million to $19.8 million. In addition, cash required at acquisition was reduced as a result of on-hand cash balances at Cenco of $2,893,000. The purchase agreement contained a provision requiring the escrow of $400,000 until July 1998 to satisfy certain indemnity obligations of the former Cenco shareholders to the Company. Accordingly, the total purchase price amount may be adjusted to reflect draws against the escrow or recognition of additional acquisition costs. Cenco designs and manufactures engine test cell facilities and related ground test equipment. The acquisition of Cenco has been accounted for using the purchase method of accounting. The excess purchase price, including direct costs of acquisition, over the fair value of the net assets acquired, totaling approximately $2,862,000 was recorded as goodwill. The fair values of the assets acquired and the liabilities assumed were as follows: current assets of $9,354,000; property, plant and equipment of $2,736,000; total assets of $14,952,000, and current liabilities of $6,410,000. The results of Cenco's operations have been included in the Company's financial statements from the date of its acquisition. The following unaudited pro-forma information sets forth the results of the Company's operations as though the purchase of Cenco had been made at the beginning of 1996. 1997 1996 ---- ---- Revenues $ 73,377,000 $ 52,117,000 Net income 2,340,763 734,000 Basic income per share 0.11 0.03 Diluted income per share 0.10 0.03 The above pro-forma unaudited results of operations are not necessarily indicative of the combined operating results as they may be in the future or as they might have been for the periods indicated had the acquisition of Cenco been consummated at the beginning of 1996. Note 3. Costs and Estimated Earnings on Uncompleted Contracts Uncompleted contracts at December 31, 1997 consists of: Costs incurred on uncompleted contracts $58,740,285 Estimated earnings 5,684,123 ----------- 64,424,408 Less billings to date 67,996,874 Included in the accompanying consolidated balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts $ 2,053,922 Billings in excess of costs and estimated earnings on uncompleted contracts 5,626,388 ----------- $(3,572,466) =========== Note 4. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventoried costs relating to long-term contracts are stated at actual production cost. Inventories consist of : December 31 --------------------------- 1997 1996 ----------- ---------- Finished goods $ 882,378 $ 372,896 Work-in-progress 6,344,798 5,494,016 Raw materials and supplies 6,571,791 4,046,858 ----------- ---------- $13,798,967 $9,913,770 =========== ========== 14 1997 CADE Annual Report Note 5. Foreign Currency Contracts During 1997, the Company entered into forward currency contracts to hedge certain firm commitments for the delivery of goods and services for four construction contracts denominated in foreign currencies. The purpose of the Company's foreign currency hedging activity is to protect it from the risk that the eventual dollar cash flows resulting from the delivery of goods and services to international customers will be adversely affected by changes in exchange rates. At December 31, 1997, the Company had forward currency contracts, all with a maturity of less than one year, to exchange British pounds, Thailand bahts and Singapore dollars for U.S. dollars in the amounts of $4,175,000, $6,066,000 and $3,383,000, respectively. There were no significant unrealized gains or losses related to foreign currency contracts at December 31, 1997. Note 6. Note Payable and Long-Term Debt Note payable to bank of $1,460,000 at December 31, 1997, represents borrowing under the Company's $9,000,000 unsecured line of credit, which bears interest at the bank's announced prime interest rate less .50% (8.0% at December 31, 1997) and is subject to annual renewal each year starting in April 1999. Also, at the Company's option, increments of not less than $500,000 of the outstanding line of credit may be placed at a Eurodollar-based rate plus 2.1% (none at December 31, 1997) for fixed periods not to exceed 90 days. Up to $3,500,000 ($2,696,000 at December 31, 1997) of the line of credit may be committed to support letters of credit and foreign exchange contracts, but at no time may the total of such commitments and advances under the line of credit exceed $9,000,000. The line of credit will become secured by substantially all of the Company's and subsidiaries' tangible assets in the event the ratio of debt to tangible net worth exceeds two-to-one. In October 1997, the Company and the bank executed an amended and restated loan agreement to increase its line of credit facility, facilitate the acquisition of Cenco and refinance a portion of its then existing term debt. This amended and restated agreement provides for interest rate reduction on all floating-rate debt if certain future financial conditions are met. The weighted-average interest rate on short-term borrowings for the years ended December 31, 1997 and 1996 was 7.8% and was 8.7% for 1995. Long-term debt consists of:
December 31 1997 1996 ----------- ----------- Term Note A payable to bank in quarterly installments of $178,571, commencing January 1998 $ 3,571,429 Term Note B payable to bank in quarterly principal and interest installments of $118,624, commencing January 1998, with unpaid balance due November 2002 4,000,000 Term Note C payable to bank in quarterly installments of $270,833, commencing January 1998 3,250,000 Subordinated notes payable in four equal annual payments beginning November 1996, interest at 6.0% payable semi-annually 1,430,520 $ 2,145,780 Note payable to bank in monthly installments to July 2005 542,209 567,263 Mortgage note payable to bank in monthly installments commencing April 1997 to February 2001, with unpaid balance due March 2002 370,000 Term note payable to bank in quarterly installments of $128,571 3,085,714 Limited obligation revenue bonds 146,250 Capital lease obligations, interest rates ranging from 7.75% to 12.71%, due through March 2002 531,394 452,394 -------------------------- 13,695,552 6,397,401 Current maturities 3,012,998 1,558,220 -------------------------- $10,682,552 $ 4,839,181 =========== ===========
15 . Term Note A is secured by substantially all of the Company's and subsidiaries' tangible assets and bears interest at 8.19%. Proceeds of Term Note A were used to refinance existing term debt ($2,571,429) and partially finance the acquisition of Cenco. This term debt is guaranteed by each subsidiary. Under the amended and restated loan agreement, which covers Term Notes A, B and C, and the line of credit facility, the Company is subject to restrictive covenants, conditions and default provisions which, among others, require the maintenance of certain levels of tangible net worth ($17.0 million at December 31, 1997), maintenance of financial ratios relating to working capital and debt levels and restrictions relating to disposition of its assets, future acquisitions, incurrence of additional indebtedness and material changes in its capital structure. . To support the acquisition of Cenco, the Company executed Term Notes B and C. This term debt is secured by substantially all of the Company's and subsidiaries' tangible assets and is guaranteed by each subsidiary. Term Note B, which bears interest at the bank's announced prime interest rate less .5% (8.0% at December 31, 1997), matures November 2002, at which time the remaining balance is payable. Term Note C bears interest at 8.09% until November 1999, at which time the interest rate will float until maturity (November 2000) at the bank's announced prime interest rate less .5%. . As part of the acquisition of Pollux, the Company issued $2,861,040 of 6.0% subordinated notes in exchange for a like amount of Pollux 8.0% convertible subordinated debentures. Such notes are subordinated to all indebtedness for borrowed money and property and equipment purchases including capital leases. . The note payable to bank is secured by certain H.A.C. real estate and equipment items, bearing interest at 2.75% plus the prime lending rate, as defined (11.25% at December 31, 1997). . The mortgage note payable to bank is secured by certain Auto-Air real estate, bears interest at 8.45%, and is guaranteed by the Company. . The limited obligation revenue bonds were issued by a municipal economic development corporation under an agreement with the Company's Auto-Air subsidiary. Annual principal and semi-annual interest payments to bond holders were drawn by the appointed trustee from an irrevocable direct pay letter of credit issued by a bank which was guaranteed by the Company and was secured by substantially all of the tangible assets of Auto-Air and the Company. The bonds were repaid in 1997. Aggregate annual maturities of long-term debt, including capital leases, for periods subsequent to December 31, 1997, are approximately as follows: 1998-- $3,013,000; 1999--$2,950,000; 2000--$2,140,000; 2001--$998,000; 2002-- $1,185,000; and thereafter--$3,409,000. Note 7. Property, Plant and Equipment Property, plant and equipment are stated at cost and consist of:
December 31 Estimated 1997 1996 Useful Life Land and improvements $ 737,365 $ 500,864 Buildings 6,934,411 4,356,455 25-30 years Machinery and equipment 11,430,507 9,910,080 3-12 years Tooling 12,447,568 11,395,706 See below ----------- ----------- 31,549,851 26,163,105 Accumulated depreciation and amortization 13,887,690 11,157,024 ----------- ----------- $17,662,161 $15,006,081 =========== ===========
Tooling primarily represents production and engineering costs incurred in the manufacture of tooling for use in new component part and test cell equipment production, as well as repair and overhaul efforts. These costs are amortized over projected delivery schedules (new component part and test cell equipment) or estimated time periods (repair and overhaul). 16 Note 8. Stock Options Options activity during the years ended December 31, 1997, 1996 and 1995 is as follows:
Weighted Average Number of Exercise Exercise Number Shares Price Price of Shares Exercisable Per Share Per Share ------------------------------------------------------ Outstanding at December 31, 1994 749,000 530,400 $.67 - $2.19 $1.10 Options granted: Under 1990 Plan 96,450 .66 - .72 .71 Directors 100,000 .69 - .72 .70 Options canceled (75,000) .67 - 2.19 1.37 --------- Outstanding at December 31, 1995 870,450 683,050 .66 - 2.19 .98 Options granted under 1990 Plan 75,000 .63 - 1.13 .96 Options exercised (86,450) .63 - .69 .67 --------- Outstanding at December 31, 1996 859,000 720,000 .67 - 2.19 1.01 Options granted: Under 1990 Plan 80,000 1.38 1.38 Directors 100,000 1.38 1.38 Options exercised (16,000) .67 - 2.19 1.30 Options canceled (6,000) .83 - 2.19 1.57 --------- Outstanding at December 31, 1997 1,017,000 866,000 $.67 - $2.19 $1.07 =========
The 1990 Nonqualified Stock Option Plan provides for the granting of up to 845,000 options for shares of the Company's Common Stock. The option price is the fair market value of a share of common stock on the date of the grant. Options expire ten years from date of grant. At six months from grant date, 20% of the options may be exercised, and at one year from grant date and for each of the next three years thereafter, an additional 20% may be exercised. Options may be granted under the 1990 Plan through December 31, 2000. Members of the Board of Directors hold options to purchase 700,000 (350,000 held under the Directors Plan) shares of the Company's Common Stock. The options were granted at fair market value of a share of common stock on the date of grant and are exercisable at various dates through February 2007. The outstanding stock options at December 31, 1997, have a weighted average contractual life of 6.6 years, and a weighted average exercise price of $1.07 per share. The Company accounts for its stock option plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock option grants. Had compensation cost been determined consistent with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the effect on the Company's pro-forma net income and income per share for 1997, 1996 and 1995 would not have been material. The weighted average fair value of the stock options granted during 1997 and 1996 was $0.89. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following weighted average assumptions used for grants in 1997 and 1996, respectively: no dividend yield in either year; risk free interest rate of 5.75% and 6.50%; expected life of 8.5 years and 8.3 years; and expected volatility of 50% and 76%. 17 Note 9. Income Taxes Significant components of the Company's deferred tax assets (liabilities) as of December 31, 1997 and 1996 are as follows:
1997 1996 ----------- ----------- Current Uniform inventory capitalization $ 117,000 $ 82,000 Uniform tooling capitalization 73,000 43,000 Expense and loss accruals 764,000 320,000 Net operating loss carryforwards 200,000 ----------- ----------- Total current deferred tax assets $ 1,154,000 $ 445,000 =========== =========== Long-term Net operating loss carryforwards $ 557,000 $ 960,000 Tax credit carryforwards 101,000 101,000 ----------- ----------- Total long-term deferred tax assets 658,000 1,061,000 Valuation allowance (410,000) (610,000) ----------- ----------- Net long-term deferred tax assets 248,000 451,000 Tax over book depreciation (1,088,000) (1,119,000) Other - net 52,000 34,000 ----------- ----------- Total long-term deferred tax liabilities (1,036,000) (1,085,000) =========== =========== Net long-term deferred tax liabilities $ (788,000) $ (634,000) =========== ===========
With the acquisition of Pollux in 1994, the Company received deferred tax benefits as of the date of acquisition of $750,000, including the tax impact of net operating loss and other tax credit carryforwards with expiration dates from 2001 to 2008. Realization of these assets is contingent on future taxable earnings of Pollux. In accordance with the provisions of Statement 109, valuation allowances were recorded to reserve for these and other items which may not be realized. The provision (credit) for income taxes consisted of the following:
1997 1996 1995 ---------- ---------- ---------- Current (credit): Federal $1,123,000 $ 207,000 $ (343,000) State and local 29,000 (21,000) 8,000 ---------- ---------- ---------- Total current (credit) 1,152,000 186,000 (335,000) Deferred (credit): Federal (115,000) 91,000 (62,000) ---------- ---------- ---------- $1,037,000 $ 277,000 $ (397,000) ========== ========== ==========
The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense (credit) is:
1997 1996 1995 ---------- --------- ---------- Tax at U.S. federal statutory rate $1,152,700 $ 454,100 $ (264,900) State and local income taxes (net of federal tax benefit) 19,100 (13,900) 5,300 Non-deductible amortization 41,900 37,500 31,500 Lower effective income tax of foreign sales corporation (170,700) (55,400) (87,600) Adjustment of estimated liabilities (24,000) (150,000) (94,800) Other 18,000 4,700 13,500 ---------- --------- ---------- 1,037,000 277,000 (397,000)
18 1997 CADE Annual Report Note 10. Pension Plan Retirement benefits are provided by the Company to most salaried and non- bargaining unit, hourly employees under contributory defined contribution plans which provide for discretionary contributions. Expense related to these plans was $277,000 in 1997, $198,000 in 1996, and $151,000 in 1995. Bargaining unit employees of one subsidiary participate in a union-sponsored multi-employer defined benefit plan. Company cost and contributions were $176,000, $145,000 and $139,000 in 1997, 1996 and 1995, respectively. The Company's proportional share of the net assets, accumulated benefits and unfunded vested benefits of this plan is not available. In addition, the Company offers bargaining unit employees electing early retirement continued health benefits for a limited period, not to exceed three years, with such benefits capped at current rates. Management has determined that the financial impact of this benefit on the Company as determined under Financial Accounting Standards Board Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," is not material. Note 11. Income Per Share The following table sets forth the computation of basic and diluted earnings per share:
1997 1996 1995 ----------- ---------- ---------- Numerator: Numerator for basic and diluted earnings per share --income (loss) available to common shareholders $ 2,353,275 $ 1,058,492 $ (382,043) =========== =========== =========== Denominator: Denominator for basic earnings per share--weighted average shares 21,720,000 21,693,000 21,684,000 Effect of dilutive stock options--potential common shares 446,000 187,000 0 ----------- ---------- ---------- Denominator for diluted earnings per share-- adjusted weighted-average shares 22,166,000 21,880,000 21,684,000 =========== =========== =========== Basic income (loss) per share $ 0.11 $ 0.05 $ (0.02) =========== =========== =========== Diluted income (loss) per share $ 0.11 $ 0.05 $ (0.02) =========== =========== ===========
Note 12. Leases Future minimum lease payments, by year and in the aggregate for noncancellable operating leases with initial or remaining terms of one year or more, consisted of the following at December 31, 1997: 1998 $464,000 1999 81,000 2000 26,000 2001 25,000 2002 14,000 -------- Total minimum lease payments $610,000 ========
Rent expense for 1997, 1996 and 1995 totaled $537,000, $560,000 and $487,000, respectively. 19
Note 13. Quarterly Results (Unaudited) 1997 Three Months Ended March 31 June 30 September 30 December 31 Total Sales $ 12,355,557 $ 12,952,885 $ 13,477,498 $ 17,017,821 $ 55,803,761 Cost of sales 9,376,113 9,826,307 10,602,610 13,675,888 43,480,918 Net income 471,443 537,943 626,585 717,304 2,353,275 Net income per common share* Basic 0.02 0.02 0.03 0.03 0.11 Diluted 0.02 0.02 0.03 0.03 0.11 Weighted average common shares outstanding Basic 21,710,000 21,683,000 21,658,000 21,829,000 21,720,000 Diluted 21,999,000 22,027,000 22,172,000 22,463,000 22,166,000 1996 Three Months Ended March 31 June 30 September 30 December 31 Total Sales $ 7,164,278 $ 7,618,176 $ 9,160,054 $ 10,924,564 $ 34,867,072 Cost of sales 5,263,243 5,672,530 7,097,727 8,671,427 26,704,927 Net income 186,430 203,897 264,686 403,479 1,058,492 Net income per common share* Basic 0.01 0.01 0.01 0.02 0.05 Diluted 0.01 0.01 0.01 0.02 0.05 Weighted average common shares outstanding Basic 21,686,000 21,689,000 21,706,000 21,692,000 21,693,000 Diluted 21,688,000 21,922,000 21,950,000 21,960,000 21,880,000
* The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Statement Standards No. 128, "Earnings Per Share." ** The sum of quarterly net income per share amount does not equal the annual amount reported. Net income per share is computed independently for each quarter and the full year, and is based on respective weighted average common shares outstanding. 20 1997 Annual Table of Contents - 1 - Dear Shareholders - 3 - Selected Financial Highlights - 4 - Management's Discussion and Analysis of Financial Condition and Results of Operations - 7 - Independent Auditor's Report - 8 - Consolidated Balance Sheets - 9 - Consolidated Statements of Operations - 10 - Consolidated Statements of Cash Flows - 11 - Consolidated Statements of Changes in Shareholders' Equity - 12 - Notes to Consolidated Financial Statements -21- Corporate Information Corporate Overview Cade Industries plays a major worldwide role in the design, manufacture, and overhaul and repair of high technology composite components and engine test facilities for the aerospace and air transport industries, both domestic and international. The Company is also a global leader in the design and manufacture of jet engine test facilities and related ground testing equipment. Through acquisition and internal growth, the Company has grown 83.0% in two years with 1997 sales of $55.8 million. Cade is forecasting continued solid growth in sales and earnings due to the strengthening aerospace market and its acquisition strategy. Its core products include the design and build of gas turbine engine components, commercial and military airframe components, jet engine test equipment, facilities 1993-1997 Historical Sales (millions of dollars) [GRAPH APPEARS HERE] 1993 16.2 1994 20.5 1995 30.4 1996 34.8 1997 55.8 and related ground testing equipment, and overhaul and repair of engine and airframe components. Cade is recognized as one of the world's largest designers and manufacturers of test nacelle systems employed in the ground testing and overhaul of commercial and military engines in service and in development. Cade's overhaul and repair facilities are licensed by the Federal Aviation Administration, the European Joint Airworthiness Authority and the Civil Aviation Authority of China. International sales contributed 21.5% of Cade's sales with products and services provided to 26 countries. Commercial aviation products accounted for 86.0% of sales in 1997, with military aviation products contributing 14.0%. Cade Industries employs approximately 600 employees with manufacturing 1997 Product Mix [PIE CHART APPEARS HERE] CORPORATE INFORMATION CORPORATE HEADQUARTERS 2365 Woodlake Drive -- Suite 120 Okemos, MI 48864 Phone: 517-347-1333 Fax: 517-347-6185 GENERAL COUNSEL Quarles & Brady 411 E. Wisconsin Avenue Milwaukee, WI 53202-4497 CORPORATE AUDITORS Deloitte & Touche, LLP Suite 800 120 N. Washington Square Lansing, MI 48933-1681 BOARD OF DIRECTORS Molly F. Cade Educator Conrad G. Goodkind Partner Quarles & Brady William T. Gross Consultant Richard A. Lund President and Chief Operating Officer Terrell L. Ruhlman Consultant John W. Sandford Chairman of the Board and Chief Executive Officer Steven M. Tadler Senior Vice President Advent International Corporation CORPORATE OFFICERS John W. Sandford Chairman of the Board and Chief Executive Officer Richard A. Lund President and Chief Operating Officer Edward B. Stephens Vice President, Chief Financial Officer, Treasurer and Assistant Secretary Richard A. Joseph Vice President Richard J. Gribbins Vice President Conrad G. Goodkind Secretary SUBSIDIARIES Auto-Air Composites, Inc. 5640 Enterprise Drive Lansing, MI 48911 Phone: 517-393-4040 John F. Scanlon, President Cade Composites, Inc. 4075 Ruffin Road San Diego, CA 92123 Phone: 619-571-5220 Robert C. Spring, President Cade International, Inc. 2365 Woodlake Drive Okemos, MI 48864 Phone: 517-347-1333 H.A.C. Corporation 537 Camden Drive Grand Prairie, TX 75051 Phone: 972-263-4387 John E. Haran, President Cade Europe, Inc. Lomeshaye Business Village Nelson, Lancashire, BB9 7DR England Phone: (01282) 617788 Peter J. Clark, Director European Sales Central Engineering Company 2930 Anthony Lane Minneapolis, MN 55418 Phone: 612-781-6557 John H. Nicholson, President Transfer Agent and Registrar Correspondence and questions concerning shareholder accounts or transfer of stock should be addressed to: Firstar Trust Company 1555 N. RiverCenter Drive Milwaukee, WI 53212 Phone: (414) 905-5000 Financial & Other Information Cade's Annual Meeting of Shareholders will be held on Tuesday, May 5, 1998, in Lansing, Michigan. Cade Industries issues its news releases through PR Newswire. Faxed copies of news releases are available at no charge. To get them, call Company News On-Call at 1-800-758-5804. This electronic system requests a six-digit code (075675), and allows callers to choose from a menu of Cade Industries' news releases. The requested release will be faxed within minutes of the inquiry. This service is available 24 hours a day, 7 days a week. The On-Call information is also posted on the Internet's World Wide Web at http://www.prnewswire.com., or you may visit Cade's web site at http://www.cade-industries.com. Cade Industries files Forms 10-K and 10-Q with the Securities and Exchange Commission. Shareholders may obtain copies of these reports, and of Cade's Annual Report to Shareholders, by writing or calling: Sheryl A. Mull Cade Industries, Inc. 2365 Woodlake Drive Suite 120 Okemos, MI 48864 Phone: (517) 347-1333 Fax: (517) 347-6185 E-mail address: sherylmull@acd.net Stock Exchange Shares of Cade Industries Common Stock are traded on the over-the-counter market on the NASDAQ National Market System (ticker symbol CADE). EX-21.1 4 SUBSIDIARIES OF CADE INDUSTRIES, INC. Exhibit 21.1 Cade 1997 10-K SUBSIDIARIES OF CADE INDUSTRIES, INC.
Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- Auto-Air Composites, Inc. Michigan Cade Composites, Inc. California Cade International, Inc. Barbados Cade Commercial Composites, Inc. Wisconsin Central Engineering Company Minnesota H.A.C. Corporation Delaware Pollux Acquisition Corporation Wisconsin Cade Europe, Inc. Minnesota
EX-23.1 5 INDEPENDENT AUDITORS CONSENT EXHIBIT 23.1 [DELOITTE & TOUCHE LOGO] INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-37911 and 333-03033 of Cade Industries, Inc. on Form S-8 of our report dated February 10, 1998, appearing in the Annual Report to Shareholders and incorporated by reference in the Annual Report on Form 10-K of Cade Industries, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP March 25, 1998 Lansing, Michigan EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the financial statements in Cade Industries, Inc.'s report on Form 10-K for the year ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1997 DEC-31-1997 1,093,176 0 12,687,969 0 13,798,967 31,201,166 31,549,851 13,887,690 54,569,891 19,766,505 10,682,554 0 0 22,239 23,836,539 54,569,891 55,803,761 55,803,761 43,480,918 43,480,918 8,099,595 0 832,973 3,390,275 1,037,000 2,353,275 0 0 0 2,353,275 .11 .11
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