-----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, CxnZd6SQjKuM6AyksUUjr4lvmKDMl0PObfx0io8Wz8MoqTLICTgma0sVuSHAnSwr i/fOCQmTGxJUGrn9CU7+eA== 0000950131-99-001894.txt : 19990331 0000950131-99-001894.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950131-99-001894 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99577468 BUSINESS ADDRESS: STREET 1: 2365 WOODLAKE DRIVE STREET 2: SUITE 120 CITY: OKEMOS STATE: MI ZIP: 48864 BUSINESS PHONE: 5173471333 MAIL ADDRESS: STREET 1: 2365 WOODLAKE DRIVE STREET 2: SUITE 120 CITY: OKEMOS STATE: MI ZIP: 48864 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, 1998 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, par value $.001 Common Stock Purchase Rights ---------------------------- (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. [ ] As of March 18, 1999, 21,701,663 shares of Common Stock were outstanding (including the Common Stock Purchase Rights), and the aggregate market value of the registrant's voting and non-voting common equity (based upon the $2-3/16 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 $34,784,308. 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, 1998 Part II Portions of Proxy Statement for 1999 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, Cade AutoAir, Inc., formerly Auto-Air Composites, Inc., ("AutoAir"), Cade Composites, Inc. ("CCI"), Cade HAC, Inc., formerly H.A.C. Corporation ("HAC"), and Cade Cenco, Inc., formerly Central Engineering Company ("Cenco"). Cade was incorporated in 1981. The Company acquired AutoAir in 1984, CCI in 1988, HAC in 1994 and Cenco in 1997. Products 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 speciality industries, principally through two segments. Cade's core products include molded and bonded composite jet engine components, metal fabricated and bonded composite airframe components and the repair and overhaul of commercial and military gas turbine engine and airframe components as well as flight nacelle structures ("Engine and Airframe Products and Services"); and engine test facilities, related computer software and data acquisition systems, and associated equipment ("Test Facilities and Equipment"). Engine and Airframe Products and Services include engine inlets and cases, acoustical liners, fairings, auxiliary power unit enclosures, various control surface products, access doors, wing tips, interior structures and repair and overhaul services. Test Facilities and Equipment are used in the ground testing and overhaul of major commercial jet engines and related ground support 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, U.S. Government and overhaul facilities. For 1998, 1997, and 1996, sales of Engine and Airframe Products and Services and Test Facilities and Equipment as a percentage of total sales were as follows:
Percentage of Total Sales ---------------------------- 1998 1997* 1996* -------- -------- -------- Engine and airframe products and services 52.7% 76.3% 77.5% Test Facilities and Equipment 47.0% 23.6% 19.2% ---- ----- ----- Total 99.7% 99.9% 96.7% ==== ===== =====
*Certain of the 1997 and 1996 amounts have been reclassified to conform to the 1998 segment presentation. The large shift in percentage relationships from 1997 to 1998 primarily reflects the inclusion of the sales of Cenco, whose products classify as Test Facilities and Equipment, for all of 1998. 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 1998 Annual Report to Shareholders. Through AutoAir 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 components, sheet metal and composite flight control surfaces, skin panels, bonded honeycomb panels, cargo doors and engine cowls. In addition to FAA certification, AutoAir 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 AutoAir and HAC are authorized 1 to repair parts on aircraft subject to their jurisdiction, FAA and JAA certification enables AutoAir and HAC to repair parts on aircraft subject to the jurisdiction of most foreign countries. AutoAir and HAC have also received repair approval from the Civil Aviation Authority of China. AutoAir and HAC have 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 its 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 8.7% of Cade's total sales, directly and indirectly, during fiscal 1998 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. Sales to the Pratt & Whitney unit of United Technologies Corporation, Rolls Royce, General Electric and Boeing/McDonnell Douglas accounted for approximately 18%, 18%, 13% and 4% of 1998 consolidated sales, respectively (25%, 3%, 5% and 11% in 1997 and 25%, 0%, 4% and 10% in 1996). For the fiscal years ended December 31, 1998, 1997 and 1996, the Company's export sales as a percentage of total sales were 40%, 22% and 17%, 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 AutoAir 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 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. 2 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, Aerocell 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, 1998, the Company's backlog of orders was $75.0 million ($79.4 million at December 31, 1997), which included $25.8 million of scheduled orders under LTAs. Of the total year-end backlog, the Company expects to ship products generating $70.0 million of revenue in 1999. 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 690 employees, of which 70 are employed in design and design-related services; 440 are employed in manufacturing, repair and quality control; and 180 are employed in administration (management, sales and clerical). Approximately 22% of these employees are represented by a union. Year 2000 Compliance The information in response to this item is incorporated herein by reference to the information under the caption "Year 2000 Compliance" in the Company's 1998 Annual Report to Shareholders. 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 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 or component manufacturing contracts' profitability. During 1998, 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, 1998, the Company had forward currency contracts, all with a maturity of less than one year, to exchange British pounds, Thai bahts, Singapore dollars and German marks for U.S. dollars in the amounts of $553,000, $361,000, $533,000 and $1,123,000, respectively. There were no significant unrealized gains or losses related to foreign currency contracts at December 31, 1998. 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, TX 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 1540 Keystone Avenue 48,750 Owned 1 story brick Manufacturing; Lansing, MI building in repair and overhaul 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 St. Anthony, MN block building in manufacturing 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 639 Campus Drive 16,000 Leased (2) 1 story block and Office and software New Brighton, MN steel framed development building in industrial park
- -------- (1) Lease expires November 12, 2003 (2) Lease expires July 31, 2008 4 Item 3. Legal Proceedings. Except as described below, the Company is not involved in any material pending legal proceedings other than ordinary routine litigation incidental to its business. During the third quarter, the Company became aware that the design intended to reduce certain acoustic emissions at an engine test facility sold by Cenco for delivery in April 1998 had failed to achieve contract specifications in certain respects. The original acoustic design and installation work had been performed for Cenco under subcontract by a French company which filed for protection under French bankruptcy in early 1998 prior to completion. Cenco has provided certain remedial work in an attempt to bring the acoustic emissions within contract specifications. Cenco, along with engineering services believed to be reliable, has identified other possible solutions aimed at remedying the acoustic emissions problem. Cenco is in the process of modifying the facility's acoustic design and expects to have the remedial work completed in mid 1999. Subject to completion of an agreement with the customer, Cenco will fund the cost of the remedial work and certain costs incurred by the customer in connection with the interim use of alternative test facilities prior to the time the facility becomes operational. The Company estimates the total cost of completion of remedial work and engine test to range from $6 million to $8 million. The Company believes that these costs are for the most part covered under a combination of insurance guaranteeing the design work of the subcontractor, an errors and omissions insurance policy covering damages resulting from Cenco design and engineering deficiencies and by warranty and other reserves established by the Company. The subcontractor has asserted a claim against Cenco in a French bankruptcy action and Cenco has filed an action against the subcontractor's insurer in England. It is not possible at this time to estimate the full extent of Cenco's liability for the actual costs of modifications to the facility, or the outcome of the French bankruptcy or English litigation. However, the Company believes that up to $13 million of potential insurance recoveries may be available to Cenco for the costs of modifications to the facility and for the interim use of alternative test facilities, although the actual extent of the Company's recoveries cannot yet be determined. 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, 1998. 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, 1998, Richard A. Lund assumed the position of Chief Executive Officer and John W. Sandford resigned as Chief Executive Officer. The following table sets forth certain information about Cade's executive officers: Name (Age) Business Experience John W. Sandford (64) Chairman of the Board since September 1997 and former Chief Executive Officer of the Company from September 1997 to September 1998; 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, director of 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 (47) Chief Executive Officer of the Company since September 1998; President since May 1990; Chief Operating Officer of the Company from May 1990 until September 1998; Director of the Company since January 1991; Member of the Company's Strategic Planning Committee; Chief Executive Officer of AutoAir; President of AutoAir from 1988 through 1994. 5 Edward B. Stephens (51) 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 1998 Annual Report to Shareholders. 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 1998 Annual Report to Shareholders. 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 1998 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 to 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 6 through 11 of the Company's 1998 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. Information in response to this item is incorporated herein by reference to the information under the caption "Notes to Consolidated Financial Statements" in the Company's 1998 Annual Report to Shareholders. The Company is exposed to market risk from changes in foreign currency and interest rates and, to a lesser extent, commodities. To reduce such risk, all hedging transactions are authorized and executed pursuant to existing policies and procedures of the Company, which strictly prohibit the use of financial instruments for trading purposes. 6 A disclosure of the Company's accounting policies for financial instruments is included in the Note captioned "Corporate Structure and Significant Accounting Policies" in the Consolidated Financial Statements and further disclosures relating to the Company's financial instruments are included in the Note captioned "Note Payable and Long-Term Debt." Foreign Currency Exchange Rate Risk The Company has significant international operations, primarily through Cenco. In most instances, the Company's products are produced in the U.S. and sold, often pursuant to contracts denominated in U.S. currency. However, some contracts are paid in foreign currencies and the Company identifies transactions described below to protect against anticipated exposures. The Company's financial position is not materially sensitive to fluctuations in exchange rates as gains or losses on foreign currency exposure are generally offset by gains and losses on the underlying payables or receivables. Set forth below is a summary. Current Fixed Equivalent Exchange Equivalent Market Foreign Maturity Exchange U.S. Dollar Rate at U.S. Dollar Rate Currency Date Rate Amount Amount 12-31-98 Amount Position - ------------------ -------- -------- ---------- ----------- -------- ----------- ------- Thai Baht 01-07-99 41.2900 14,921,412 361,381 36.5500 408,247 46,866 Deutsche Mark 01-29-99 1.8125 1,360,000 750,345 1.6685 815,103 01-29-99 1.8176 677,770 372,893 1.6685 406,216 --------- --------- 1,123,238 1,221,319 98,081 British Pound 02-26-99 .6055 335,000 553,219 .6026 555,933 2,714 Sterling Singapore Dollar 03-15-99 1.6145 860,986 533,283 1.6519 521,210 (12,073)
Interest Rate Risk At December 31, 1998, the Company had $8.4 million of borrowings subject to fixed interest rates (weighted average interest rate of 7.5%) due at various dates from June 1999 to December 2003 and the Company had $3.5 million of borrowings subject to variable interest rates (weighted average interest rate of 8.1%) due at various times from April 1999 to June 2005. Item 8. Financial Statements and Supplementary Data. Information in response to this item is incorporated herein by reference to "Independent Auditors' Report," "Consolidated Balance Sheets," "Consolidated Statements of Income," "Consolidated Statements of Changes in Shareholders' Equity," "Consolidated Statements of Cash Flows" and "Notes to Consolidated Financial Statements" in the Company's 1998 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 1999 Annual Meeting of Shareholders ("Cade 1999 Proxy Statement"); (ii) the information under the caption "Executive Compensation--Section 16(a) Beneficial Ownership Reporting Compliance" in the Cade 1999 Proxy Statement; and (iii) the information under the caption "Executive Officers of the Registrant" in Part I hereof. 7 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 1999 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 1999 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 1999 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 1998 Annual Report to Shareholders and consist of the following: Independent Auditors' Report. Consolidated Balance Sheets as of December 31, 1998 and 1997. Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Shareholders' Equity for the three-year period ended December 31, 1998. Notes to Consolidated Financial Statements. 2. Financial statement schedules. The following financial statement schedules are included in Item 14(d) hereof: Independent Auditors' 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. 8 (b) Reports on Form 8-K: None (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: 9 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, 1998: Reserves and allowances deducted from asset accounts: Valuation allowances: Inventory $1,493,689 $3,635,247 $ 44,701 (2) $5,084,235 Deferred income taxes 410,000 200,000 (3) 210,000 Other 407,613 58,134 68,163 (6) 397,584 Amortization allowances: Goodwill 768,396 200,292 968,688 Other 354,192 17,734 371,926 ---------- ---------- -------- ----------- $3,433,890 $3,911,407 $312,864 $7,032,433 ========== ========== ======== =========== 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 ========== ========== ======== ===========
(1) Valuation allowances recorded via purchase accounting for acquisition of Cenco. (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 recovery and adjustment of tooling and contract reserves to realizable amount. 10 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 24, 1999 ---------------------- John W. Sandford, Chairman of the Board 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 24, 1999 - ------------------------- Molly F. Cade /s/ Conrad G. Goodkind Director and Secretary March 24, 1999 - ------------------------- Conrad G. Goodkind /s/ William T. Gross Director March 24, 1999 - ------------------------- William T. Gross /s/ Richard A. Lund President, Chief Executive Officer March 24, 1999 - ------------------------- (principal executive officer) and Richard A. Lund Director /s/ Joseph R. O'Gorman Director March 24, 1999 - ------------------------- Joseph R. O'Gorman /s/ Terrell L. Ruhlman Director March 24, 1999 - ------------------------- Terrell L. Ruhlman /s/ John W. Sandford Chairman of the Board March 24, 1999 - ------------------------- and Director John W. Sandford /s/ Edward B. Stephens Vice President, Treasurer March 24, 1999 - ------------------------- and Chief Financial Officer Edward B. Stephens (principal financial and accounting officer)
S-1 CADE INDUSTRIES, INC. Exhibit Index to Report on Form 10-K for the fiscal year ended December 31, 1998
Exhibit Incorporated herein Filed No. Description by reference to: Herewith - ------- ----------- ------------------- -------- 2.1 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, 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 3.3 Shareholder Rights Plan Exhibit 99.1 to Form 8/A filed August 4, 1998 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 Security Exhibit 4.5 to Registrant's Form 10-K Agreement dated as of January 30, for the year ended December 31, 1994 1995, between Comerica Bank and ("1994 10-K") the Registrant 4.3 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. 4.4 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. 4.5 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. 4.6 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. 4.7 Guaranty dated as of Exhibit 4.10 to Registrant's 1994 10-K January 30, 1995, between Comerica Bank and Cade Commercial Composites, Inc.
E-i
Exhibit Incorporated herein Filed No. Description by reference to: Herewith - ------- ----------- ------------------- -------- 4.8 Guaranty dated as of Exhibit 4.11 to Registrant's 1994 10-K December 1, 1994, between Comerica Bank and Pollux Acquisition Corporation 4.9 Guaranty dated as of Exhibit 4.12 to Registrant's 1994 10-K December 1, 1994, between Comerica Bank and H.A.C. Corporation 4.10 Form of 6% Subordinated Notes issued Exhibit 2.1 to Registrant's Form in the initial aggregate principal S-4 filed in 1994 amount of $2,861,040 4.11 Second Amended and Restated Credit Exhibit 4.1 to Registrant's 10/31/97 Agreement, dated October 31, 8-K 1997, by and between Cade Industries, Inc. and Comerica Bank 4.12 Line of Credit Note dated Exhibit 4.2 to Registrant's 10/31/97 October 31, 1997 8-K 4.13 Term Note A, dated October 31, 1997 Exhibit 4.3 to Registrant's 10/31/97 8-K 4.14 Term Note B, dated October 31, 1997 Exhibit 4.4 to Registrant's 10/31/97 8-K 4.15 Term Note C, dated October 31, 1997 Exhibit 4.5 to Registrant's 10/31/97 8-K 4.16 Guaranty dated as of October 31, 1997, X between Comerica Bank and Central Engineering Company 4.17 Security agreement dated as of October X 31, 1997, between Comerica Bank and Central Engineering Company 4.18 Guaranty dated as of October 31, 1997, X between Comerica Bank and Cenco Europe, Inc. 4.19 Security agreement dated as of X October 31, 1997, between Comerica Bank and Cenco Europe, Inc. 4.20 Term Note between Comerica Bank X and Registrant dated August 1, 1998 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 Annual First Amendment to Sublease dated Report on Form 10-K for the year ended April 24, 1991 between Cade December 31, 1991 ("1991 10-K") Composites, Inc. and
E-ii
Exhibit Incorporated herein Filed No. Description by reference to: Herewith - ------- ----------- ------------------- -------- 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 Form 10-Q 29, 1991 with Edward B. Stephens for the quarter ended March 31, 1991 10.4* Employment Agreement between Richard Exhibit 10.8 to Registrant's Form 10-K A. Lund and the Registrant dated for the year ended December 31, 1995 May 2, 1995 10.5* Cade Industries, Inc. 1994 Stock Exhibit 10.13 to Registrant's 1994 10-K Option Plan ("Director Stock Option Plan") 10.6* Form of Option Agreement under Exhibit 10.14 to Registrant's 1994 10-K Director Stock Option Plan 10.7* 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") 10.8* Lund/Stephens 1997 Incentive Plans Exhibit 10.13 to Registrant's June 1997 10-Q 10.9* Sandford/Lund/Stephens 1998 Incentive Exhibit 10.14 to Registrant's Form 10-K Plans for the year ended December 31, 1997 ("1997 10-K") 10.10* Cade Industries, Inc. 1998 Omnibus Exhibit A to Registrant's Proxy Statement, Incentive Stock Plan dated March 24, 1998. 10.11* Sandford/Lund/Stephens 1999 Incentive X Plan 10.12* Form of Executive Change in Control X Agreement (Lund/Stephens) 10.13* Form of Executive Change in Control X Agreement (other officers) 10.14 Second Amendment to Sublease dated X August 4, 1998 between Cade Composites, Inc. and Scientific-Atlanta, Inc. for premises located at 4075 Ruffin Road, San Diego, CA 13.1 Incorporated portions of 1998 Annual X Report 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. E-iii EX-4.16 2 GUARANTY BETWEEN COMERICA AND CENTRAL ENGINEERING Comerica Guaranty The undersigned, for value received, unconditionally and absolutely guarantee(s) to Comerica Bank ("Bank"), a Michigan banking corporation of 100 Renaissance Center, Detroit, Michigan 48243 and to the Bank's successors and assigns, payment when due, whether by stated maturity, demand, acceleration or otherwise, of all existing and future indebtedness to the Bank of Cade Industries, Inc. whose address is 5640 Enterprise Drive, Lansing, Michigan 48911 and also of any successor in interest, including without limit any debtor-in-possession or trustee in bankruptcy which succeeds to the interests of this party or person (jointly and severally the "Borrower"), however this indebtedness has been or may be incurred or evidenced, whether absolute or contingent, direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, and whether or not known to the undersigned at the time of this Guaranty or at the time any future indebtedness is incurred (the "Indebtedness"). The Indebtedness guaranteed includes without limit: (a) any and all direct indebtedness of the Borrower to the Bank, including indebtedness evidenced by any and all promissory notes; (b) any and all obligations or liabilities of the Borrower to the Bank arising under any guaranty where the Borrower has guaranteed the payment of indebtedness owing to the Bank from a third party; (c) any and all obligations or liabilities of the Borrower to the Bank arising from applications or agreements for the issuance of letters of credit; (d) any and all obligations or liabilities of the Borrower to the Bank arising out of any other agreement by the Borrower, including without limit any agreement to indemnify the Bank for environmental liability or to clean up hazardous waste; (e) any and all indebtedness, obligations or liabilities for which the Borrower would otherwise be liable to the Bank were it not for the invalidity, irregularity or unenforceability of them by reason of any bankruptcy, insolvency or other law or order of any kind, or for any other reason, including without limit liability for interest and attorney fees on, or in connection with, any of the Indebtedness from and after the filing by or against the Borrower of a bankruptcy petition; (f) any and all amendments, modifications, renewals and/or extensions of any of the above, including without limit amendments, modifications, renewals and/or extensions which are evidenced by new or additional instruments, documents or agreements; and (g) all costs of collecting Indebtedness, including without limit reasonable attorney fees. The undersigned waive(s) notice of acceptance of this Guaranty and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, and diligence in collecting any Indebtedness, and agree(s) that the Bank may modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit the Borrower to incur additional Indebtedness, all without notice to the undersigned and without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned further waive(s) any and all other notices to which the undersigned might otherwise be entitled. The undersigned acknowledge(s) and agree(s) that the liabilities created by this Guaranty are direct and are not conditioned upon pursuit by the Bank of any remedy the Bank may have against the Borrower or any other person or any security. No invalidity, irregularity or unenforceability of any part or all of the Indebtedness or any documents evidencing the same, by reason of any bankruptcy, insolvency or other law or order of any kind or for any other reason, and no defense or setoff available at any time to the Borrower, shall impair, affect or be a defense or setoff to the obligations of the undersigned under this Guaranty. The undersigned deliver(s) this Guaranty based solely on the undersigned's independent investigation of the financial condition of the Borrower and is (are) not relying on any information furnished by the Bank. The undersigned assume(s) full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate from time to time. The undersigned waive(s) any duty on the part of the Bank, and agree(s) that it is not relying upon nor expecting the Bank to disclose to the undersigned any fact now or later known by the Bank, whether relating to the operations or condition of the Borrower the existence, liabilities or financial condition of any co-guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, notwithstanding any effect these facts may have upon the undersigned's risk under this Guaranty or the undersigned's rights against the Borrower. The undersigned knowingly accept(s) the full range of risk encompassed in this Guaranty, which risk includes without limit the possibility that the Borrower may incur Indebtedness to the Bank after the financial condition of the Borrower, or its ability to pay its debts as they mature, has deteriorated. The undersigned represent(s) and warrant(s) that: (a) the Bank has made no representation to the undersigned as to the creditworthiness of the Borrower; and (b) the undersigned has (have) established adequate means of obtaining from the Borrower on a continuing basis financial and other information pertaining to the Borrower's financial condition. The undersigned agree(s) to keep adequately informed of any facts, events or circumstances which might in any way affect the risks of the undersigned under this Guaranty. -2- The undersigned grant(s) to the Bank a security interest in and the right of setoff as to any and all property of the undersigned now or later in the possession of the Bank. The undersigned subordinate(s) any claim of any nature that the undersigned now or later has (have) against the Borrower to and in favor of all Indebtedness and agree(s) not to accept payment or satisfaction of any claim that the undersigned now or later may have against the Borrower without the prior written consent of the Bank. Should any payment, distribution, security, or proceeds, be received by the undersigned upon or with respect to any claim that the undersigned now or may later have against the Borrower, the undersigned shall immediately deliver the same to the Bank in the form received (except for endorsement or assignment by the undersigned where required by the Bank) for application on the Indebtedness, whether matured or unmatured, and until delivered the same shall be held in trust by the undersigned as the property of the Bank. The undersigned further assign(s) to the Bank as collateral for the obligations of the undersigned under this Guaranty all claims of any nature that the undersigned now or later has (have) against the Borrower with full right on the part of the Bank, in its own name or in the name of the undersigned to collect and enforce these claims. The undersigned agree(s) that no security now or later held by the Bank for the payment of any Indebtedness, whether from the Borrower, any guarantor, or otherwise, and whether in the nature of a security interest, pledge, lien, assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise, shall affect in any manner the unconditional obligation of the undersigned under this Guaranty, and the Bank, in its sole discretion, without notice to the undersigned, may release, exchange, enforce and otherwise deal with any security without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned acknowledge(s) and agree(s) that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Indebtedness, and the undersigned is (are) not relying upon any asset(s) in which the Bank has or may have a lien or security interest for payment of the Indebtedness. The undersigned acknowledge(s) that the effectiveness of this Guaranty is not conditioned on any or all of the Indebtedness being guaranteed by anyone else. Until the Indebtedness is irrevocably paid in full, the undersigned waive(s) any and all rights to be subrogated to the position of the Bank or to have the benefit of any lien, security interest or other guaranty now or later held by the Bank for the Indebtedness or to enforce any remedy which the Bank now or later has against the Borrower or any other person. Until the Indebtedness is irrevocably paid in full, the undersigned shall -3- have no right of reimbursement, indemnity, contribution or other right of recourse to or with respect to the Borrower or any other person. The undersigned agree(s) to indemnify and hold harmless the Bank from and against any and all claims, actions, damages, costs and expenses, including without limit reasonable attorneys' fees, incurred by the Bank in connection with the undersigned's exercise of any right of subrogation, contribution, indemnification or recourse with respect to this Guaranty. The Bank has no duty to enforce or protect any rights which the undersigned may have against the Borrower or any other person and the undersigned assume(s) full responsibility for enforcing and protecting these rights. Notwithstanding any provision of the preceding paragraph or anything else in this Guaranty to the contrary, if any of the undersigned is or becomes an "insider" or "affiliate" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) with respect to the Borrower, then that undersigned irrevocably and absolutely waives any and all rights of subrogation, contribution, indemnification, recourse, reimbursement and any similar rights against the Borrower (or any other guarantor) with respect to this Guaranty, whether such rights arise under an express or implied contract or by operation of law. It is the intention of the parties that the undersigned shall not be (or be deemed to be) a "creditor" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) of the Borrower (or any other guarantor) by reason of the existence of this Guaranty in the event that the Borrower becomes a debtor in any proceeding under the Federal Bankruptcy Code. This waiver is given to induce the Bank to enter into certain written contracts with the Borrower included in the Indebtedness. The undersigned warrant(s) and agree(s) that none of the Bank's rights, remedies or interests shall be directly or indirectly impaired because of any of the undersigned's status as an "insider" or "affiliate" of the Borrower, and the undersigned shall take any action, and shall execute any document, which the Bank may request in order to effectuate this warranty to the Bank. If any Indebtedness is guaranteed by two or more guarantors, the obligation of the undersigned shall be several and also joint, each with all and also each with any one or more of the others, and may be enforced at the option of the Bank against each severally, any two or more jointly, or some severally and some jointly. The Bank, in its sole discretion, may release any one or more of the guarantors for any consideration which it deems adequate, and may fail or elect not to prove a claim against the estate of any bankrupt, insolvent, incompetent or deceased guarantor; and after that, without notice to any other guarantor, the Bank may extend or renew any or all Indebtedness and may permit the Borrower to incur additional Indebtedness, without affecting in any manner the unconditional obligation of the -4- remaining guarantor(s). This action by the Bank shall not, however, be deemed to affect any right to contribution which may exist among the guarantors. Any of the undersigned may terminate their obligation under this Guaranty as to future Indebtedness (except as provided below) by (and only by) delivering written notice of termination to an officer of the Bank and receiving from an officer of the Bank written acknowledgement of delivery; provided, the termination shall not be effective until the opening of business on the forty- fifth (45th) day following written acknowledgement of delivery. Any termination shall not affect in any way the unconditional obligations of the remaining guarantor(s), whether or not the termination is known to the remaining guarantor(s). Any termination shall not affect in any way the unconditional obligations of the terminating guarantor(s) as to any Indebtedness existing at the effective date of termination or any Indebtedness created after that pursuant to any commitment or agreement of the Bank or any Borrower loan with the Bank existing at the effective date of termination (whether advances or readvances by the Bank are optional or obligatory), or any modifications, extensions or renewals of any of this Indebtedness, whether in whole or in part, and as to all of this Indebtedness and modifications, extensions or renewals of it, this Guaranty shall continue effective until the same shall have been fully paid. The Bank has no duty to give notice of termination by any guarantor(s) to any remaining guarantor(s). The undersigned shall indemnify the Bank against all claims, damages, costs and expenses, including without limit reasonable attorney fees, incurred by the Bank in connection with any suit, claim or action against the Bank arising out of any modification or termination of a Borrower loan or any refusal by the Bank to extend additional credit in connection with the termination of this Guaranty. Notwithstanding any prior revocation, termination, surrender or discharge of this Guaranty (or of any lien, pledge or security interest securing this Guaranty) in whole or part, the effectiveness of this Guaranty, and of all liens, pledges and security interests securing this Guaranty, shall automatically continue or be reinstated, as the case may be, in the event that (a) any payment received or credit given by the Bank in respect of the Indebtedness is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, diversion of trust funds, or otherwise under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned as if the returned, disgorged or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it; -5- or (b) any liability is imposed, or sought to be imposed, against the Bank relating to the environmental condition of, or the presence of hazardous or toxic substances on, in or about, any property given as collateral to the Bank by the Borrower, whether this condition is known or unknown, now exists or subsequently arises (excluding only conditions which arise after any acquisition by the Bank of any such property, by foreclosure, in lieu of foreclosure or otherwise, to the extent due to the wrongful act or omission of the Bank), in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned to the extent of all liability, costs and expenses (including without limit reasonable attorneys' fees) incurred by the Bank as the direct or indirect result of any environmental condition or hazardous or toxic substances. In the event of continuation or reinstatement of this Guaranty and the liens, pledges and security interests securing it, the undersigned agree(s) upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the undersigned to do so shall not affect in any way the reinstatement or continuation. If the undersigned do(es) not execute and deliver to the Bank upon demand such documents, the Bank and each Bank officer is irrevocably appointed (which appointment is coupled with an interest) the true and lawful attorney of the undersigned (with full power of substitution) to execute and deliver such documents in the name and on behalf of the undersigned. For purposes of this Guaranty, "environmental condition" includes, without limitation, conditions existing with respect to the surface or groundwater, drinking water supply, land surface or subsurface and the air; and "hazardous or toxic substances" shall include any and all substances now or subsequently determined by any federal, state or local authority to be hazardous or toxic, or otherwise regulated by any of these authorities. Although the intent of the undersigned and the Bank is that Michigan law shall apply to this Guaranty, regardless if Michigan law applies, the undersigned further agree(s) as follows: With respect to the limitation, if any, stated in the Additional Provisions below on the amount of principal guaranteed under this Guaranty, the undersigned agree(s) that (a) this limitation shall not be a limitation on the amount of Borrower's Indebtedness to the bank; (b) any payments by the undersigned shall not reduce the maximum liability of the undersigned under this Guaranty unless written notice to that effect is actually received by the Bank at or prior to the time of the payment; and (c) the liability of the undersigned to the Bank shall at all times be deemed to be the aggregate liability of the undersigned under this Guaranty and any other guaranties previously or subsequently given to the Bank by the undersigned and not expressly revoked, modified or invalidated in writing. -6- The undersigned waive(s) any right to require the Bank to: (a) proceed against any person, including without limit the Borrower; (b) proceed against or exhaust any security held from the Borrower or any other person; (c) give notice of the terms, time and place of any public or private sale of personal property security held from the Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the Michigan or other applicable Uniform Commercial Code; (d) pursue any other remedy in the Bank's power; or (e) make any presentments or demands for performance, or give any notices of nonperformance, protests, notices of protest, or notices of dishonor in connection with any obligations or evidences of Indebtedness held by the Bank as security, in connection with any other obligations or evidences of indebtedness which constitute in whole or in part Indebtedness, or in connection with the creation of new or additional Indebtedness. The undersigned authorize(s) the Bank, either before or after termination of this Guaranty, without notice to or demand on the undersigned and without affecting the undersigned's liability under this Guaranty, from time to time to: (a) apply any security and direct the order or manner of sale of it, including without limit, a non-judicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as the Bank in its discretion may determine; (b) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness; and (c) apply payments received by the Bank from the Borrower to any indebtedness of the Borrower to the Bank, in such order as the Bank shall determine in its sole discretion, whether or not this indebtedness is covered by this Guaranty, and the undersigned waive(s) any provision of law regarding application of payments which specifies otherwise. The Bank may without notice assign this Guaranty in whole or in part. Upon the Bank's request, the undersigned agree(s) to provide to the Bank copies of the undersigned's financial statements. The undersigned waive(s) any defense based upon or arising by reason of (a) any disability or other defense of the Borrower or any other person; (b) the cessation or limitation from any cause whatsoever, other than final and irrevocable payment in full, of the Indebtedness; (c) any lack of authority of any officer, director, partner, agent or any other person acting or purporting to act on behalf of the Borrower which is a corporation, partnership or other type of entity, or any defect in the formation of the Borrower; (d) the application by the Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by the Borrower to the Bank or intended or understood by the Bank or the undersigned; (e) any act or omission by the Bank which directly or indirectly results in or aids the discharge of the Borrower or any Indebtedness by operation of law or otherwise; or (f) any modification of the Indebtedness, in any form whatsoever including without limit any -7- modification made after effective termination, and including without limit the renewal, extension, acceleration or other change in time for payment of the Indebtedness, or other change in the terms of any Indebtedness, including without limit increase or decrease of the interest rate. The undersigned waive(s) any defense the undersigned may have based upon any election of remedies by the Bank which destroys the undersigned's subrogation rights or the undersigned's right to proceed against the Borrower for reimbursement, including without limit any loss of rights the undersigned may suffer by reason of any rights, powers or remedies of the Borrower in connection with any anti- deficiency, appraisement or valuation laws or any other laws limiting, qualifying or discharging any Indebtedness. The undersigned acknowledge(s) that the Bank has the right to sell, assign, transfer, negotiate, or grant participations in all or any part of the Indebtedness and any related obligations, including without limit this Guaranty. In connection with that right, the Bank may disclose any documents and information which the Bank now or later acquires relating to the undersigned and this Guaranty, whether furnished by the Borrower, the undersigned or otherwise. The undersigned further agree(s) that the Bank may disclose these documents and information to the Borrower. The total obligation under this Guaranty shall be UNLIMITED unless specifically limited in the Additional Provisions of this Guaranty, and this obligation (whether unlimited or limited to the extent indicated in the Additional Provisions) shall include, IN ADDITION TO any limited amount of principal guaranteed, any and all interest on all Indebtedness and any and all costs and expenses of any kind, including without limit reasonable attorney fees, incurred by the Bank at any time(s) for any reason in enforcing any of the duties and obligations of the undersigned under this Guaranty or otherwise incurred by the Bank in any way connected with this Guaranty, the Indebtedness or any other guaranty of the Indebtedness (including without limit reasonable attorney fees and other expenses incurred in any suit involving the conduct of the Bank, the Borrower or the undersigned). All of these costs and expenses shall be payable immediately by the undersigned when incurred by the Bank, without demand, and until paid shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. Any reference in this Guaranty to attorney fees shall be deemed a reference to fees, charges, costs and expenses of both in-house and outside counsel and paralegals, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorney fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. Any reference in the Additional Provisions or elsewhere (a) to this Guaranty being secured by certain collateral shall NOT be deemed to limit the total obligation of the undersigned under -8- this Guaranty or (b) to this Guaranty being limited in any respect shall NOT be deemed to limit the total obligation of the undersigned under any prior or subsequent guaranty given by the undersigned to the Bank. The undersigned unconditionally and irrevocably waive(s) each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of the undersigned under this Guaranty, and acknowledge(s) that each such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from the undersigned now or later securing this Guaranty and/or the Indebtedness, and acknowledge(s) that as of the date of this Guaranty no such defense or setoff exists. The undersigned acknowledge(s) that the effectiveness of this Guaranty is subject to no conditions of any kind. This Guaranty shall remain effective with respect to successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, until this Guaranty is terminated in the manner and to the extent provided above. The undersigned warrant(s) and agree(s) that each of the waivers set forth above are made with the undersigned's full knowledge of their significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any of these waivers are determined to be contrary to any applicable law or public policy, these waivers shall be effective only to the extent permitted by law. This Guaranty constitutes the entire agreement of the undersigned and the Bank with respect to the subject matter of this Guaranty. No waiver, consent, modification or change of the terms of this Guaranty shall bind any of the undersigned or the Bank unless in writing and signed by the waiving party or an authorized officer of the waiving party, and then this waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. This Guaranty shall inure to the benefit of the Bank and its successors and assigns. This Guaranty shall be binding on the undersigned and the undersigned's heirs, legal representatives, successors and assigns including, without limit, any debtor in possession or trustee in bankruptcy for any of the undersigned. The undersigned has (have) knowingly and voluntarily entered into this Guaranty in good faith for the purpose of inducing the Bank to extend credit or make other financial accommodations to the Borrower, and the undersigned acknowledge(s) that the terms of this Guaranty are reasonable. If any provision of this Guaranty is unenforceable in whole or in part for any reason, the -9- remaining provisions shall continue to be effective. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN. Additional Provisions (if any): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS GUARANTY OR THE INDEBTEDNESS. IN WITNESS WHEREOF, the undersigned has (have) signed this Guaranty on ____________________, 19__. GUARANTOR(S): Central Engineering Company ----------------------------- TYPE/PRINT NAME OF ENTITY (IF APPLICABLE) WITNESSES: /s/ Lori M. Fisher By:/s/ Edward B. Stephens - ----------------------- ------------------------- SIGNATURE OF SIGNATURE OF Its:Vice President ----------------------- TITLE (IF APPLICABLE) /s/ Ronda M. Bruskotter By: - ----------------------- ------------------------ SIGNATURE OF SIGNATURE OF Its: ----------------------- TITLE (IF APPLICABLE) -10- GUARANTOR'S ADDRESS: 2930 Anthony Lane ------------------------------------ STREET ADDRESS Minneapolis MN 55418 ------------------------------------ CITY STATE ZIP CODE -11- EX-4.17 3 SECURITY AGRMNT. BETWEEN COMERICA AND CENT. ENG. SECURITY AGREEMENT ------------------ (Central Engineering Company) THIS AGREEMENT made as of this 31st day of October, 1997, by and between Central Engineering Company, a Minnesota corporation, of Minneapolis, Minnesota herein called "Company") and Comerica Bank (successor in interest by reason of merger to Manufacturers Bank, N.A., formerly known as Manufacturers National Bank of Detroit, a Michigan banking corporation, of Detroit, Michigan (herein called "Bank"); WITNESSETH: WHEREAS, Cade Industries, Inc. ("Borrower") has requested that Bank make certain credit available to Borrower and Bank has agreed to do so upon the condition, among others, that Company grant Bank a security interest in certain of Company's assets; NOW, THEREFORE, in consideration of the premises and to induce Bank to make such loans and extend such other credit to Company and/or Borrower and for other valuable consideration, Company and Bank agree as follows: 1. GRANT OF SECURITY INTEREST 1.1 Company hereby assigns, transfers, mortgages, pledges and delivers to Bank and conveys and grants to Bank a continuing security interest in the following described property of Company whether it is now owned or existing or hereafter arising or acquired (all of which is herein called "Collateral"): (a) all accounts, accounts receivable, rights under contracts, chattel paper, tax refunds, general intangibles, instruments, and all obligations due Company for goods sold or to be sold, or leased or to be leased, or services rendered or to be rendered, (all of the foregoing being herein called "Accounts"); (b) all inventory, whether raw materials, work-in-process, finished goods, parts or supplies or otherwise; all goods, merchandise and other property held for sale or lease or to be furnished under any contract of service; and all documents of title covering any goods which are or are to become inventory (all of the foregoing being herein called "Inventory"); (c) all machinery, equipment, furniture, trade fixtures, tools, motor vehicles, and all accessories, parts and equipment now or hereafter affixed thereto or used in connection therewith, and all other tangible personal property (all of the foregoing being herein called "Equipment"); and (d) all cash and non-cash proceeds of any of the foregoing received upon the sale, exchange, collection or other disposition of same including without limitation all insurance payable by reason of loss or damage to any of the foregoing. 2. OBLIGATIONS 2.1 The Collateral shall be security for the following described obligations and all full or part extensions and renewals thereof (all of which is herein called "Indebtedness"): (a) all liabilities and obligations of Borrower under that certain Second Amended and Restated Credit Agreement dated as of October 31, 1997 made between Borrower and Bank and all present and future amendments thereto (herein called "Loan Agreement") and the Notes issued thereunder, excluding, however, any obligations and liabilities of Borrower to Bank under Section 1.A of the Loan Agreement; provided, however, upon the occurrence of a Collateral Trigger Event (as defined in the Loan Agreement) all obligations and liabilities of Company and/or Borrower to Bank shall constitute Indebtedness for purposes of this Agreement; (b) all liabilities and obligations of Company to Bank under that certain Guaranty Agreement dated as of October 31, 1997 from Company to Bank pursuant to which Company has guaranteed certain indebtedness and obligations of Borrower to Bank; provided, however, Company's obligations with respect to Borrower's obligations to Bank under Section 1.A of the Loan 2 Agreement shall not constitute Indebtedness secured hereunder until the occurrence of a Collateral Trigger Event (as defined below); (c) any and all other present and future liabilities and obligations of Company and/or Borrower to Bank, including letter of credit reimbursement obligations, howsoever evidenced, existing, arising, or acquired by Bank, whether direct or indirect, joint or several, absolute or contingent, due or to become due, now existing or hereafter arising but excluding any liabilities and obligations of Borrower to Bank under that certain promissory note dated October 31, 1997 in the principal amount of Nine Million Dollars ($9,000,000) and any extensions or renewals thereof; provided, however, upon the occurrence of a Collateral Trigger Event (as defined in the Loan Agreement) all obligations and liabilities of Company and/or Borrower to Bank shall constitute Indebtedness for purposes of this Agreement; and (e) any and all of Bank's costs and expenses (including reasonable attorneys' fees and legal expenses) incurred in the preparation hereof, the filing or recording of any financing statement or other document, the protection or preservation of the Collateral, the collection and/or repossession of the Collateral, or the enforcement of its rights hereunder. 3. REPRESENTATIONS AND WARRANTIES Company represents and warrants that: 3.1 Company owns the Collateral free and clear of all liens, encumbrances and security interests other than in favor of Bank or as permitted by the Loan Agreement ("Permitted Liens") and no financing statement other than to Bank or with respect to the Permitted Liens has been given or has been filed with any recording officer with respect to any of the Collateral. Company has full power and right to grant the security interest granted by it under this Agreement. 3 3.2 The Collateral is located at the locations listed in Exhibit A attached hereto and in no other states or jurisdictions. 3.3 All records concerning the Collateral are located at 2930 Anthony Lane Minneapolis, MN 55418 and at no other place. 3.4 The chattel paper is genuine, valid and subsisting, and in all respects what it purports to be and no event has occurred or condition exists which is or with the passage of time and/or giving of notice would be an event of default thereunder. 3.5 The accounts and accounts receivable included in the Accounts are genuine and valid obligations due or to become due to Company, and Company hereby confirms that the value of same is as has been represented to Bank and that when taken as a whole said accounts and accounts receivable are not subject to offsets or counterclaims materially reducing the aggregate value thereof. 3.6 The Equipment is and will continue to be used by Company in the operation of its business and is not held for sale or lease and does not constitute inventory as such term is defined in the Uniform Commercial Code as adopted in Michigan and does not constitute real estate fixtures under applicable law. 4. PERFECTION OF SECURITY INTEREST 4.1 Company agrees to furnish such financing statements (and amendments thereto and continuations thereof) as Bank may at any time request, to cause same to be filed in all public offices deemed necessary by Bank, to pay all costs of filing, and to do such other acts and things as Bank may at any time request to establish and maintain for Bank a valid first priority security interest in the Collateral. 4.2 Company agrees upon the request of Bank, to cause all certificates of title for all motor vehicles comprising part of the Collateral to be issued and/or reissued reflecting Bank thereon as secured party or the equivalent. 4.3 Company agrees to note the security interest of Bank, in form satisfactory to Bank, on all items of chattel paper comprising part of the Collateral. 4 4.4 Company agrees to notify Bank of all changes in Company's name, legal structure, or chief executive office, or in the location of the Collateral or Company's records concerning same and to file or cause to be filed all financing statements or amendments necessary or appropriate to establish and maintain for Bank a valid first priority security interest in all the Collateral subject only to Permitted Liens. 5. COVENANTS Company covenants and agrees that so long as Bank has any obligation or commitment to lend to Company or so long as any part of the Indebtedness remains unpaid it will: 5.1 Keep the Collateral and all records concerning the Collateral at the locations set forth in Sections 3.2 and 3.3 hereof. 5.2 Not permit any part of the Equipment to become or constitute a real estate fixture under applicable law. 5.3 Maintain insurance on the Inventory and the Equipment with an insurance company reasonably satisfactory to Bank against such risks and in such amounts as Bank may reasonably require and which are against such risks and in such amounts as are customary and prudent for businesses similar to Company in size and nature with the loss payable under any such policy to Company and Bank as their interests may appear; all said policies or copies thereof, with all endorsements thereon, to be deposited with Bank. The proceeds of any such insurance shall, subject to the provisions of Section 9.11 hereof, be applied, at Bank's option, to replacement of the Collateral or payment of the Indebtedness, whether or not then due; provided, however, if no default hereunder then exists, proceeds of any such insurance payable with respect to a claim which is in an amount less than $25,000 may be paid directly to Company. 5.4 Maintain the Inventory and the Equipment in good condition, ordinary wear and tear excepted, pay all taxes and assessments applicable thereto, and not use them or permit their use for any unlawful purpose or in any manner likely to cause a material decline in its value. Company may, at its expense and in its own name, in good faith contest any such taxes or 5 assessments and, in the event of such contest may permit the taxes or assessments to remain unpaid during the pendency of such contest and any appeal therefrom unless Bank shall notify Company that, in the opinion of Bank's counsel, by nonpayment of any such items, the lien of this Agreement will be materially endangered or the Collateral or any part thereof may be subject to loss or forfeiture, in which event such taxes or assessment shall be paid promptly. 5.5 Timely perform its obligations and take all reasonable actions under any and all contracts and agreements which are or will be part of the Collateral to insure that all persons or parties obligated to Company thereon may not avail themselves of defenses, offsets or counterclaims, and take all action necessary and appropriate to enforce and collect all obligations due Company on the Accounts or any other part of the Collateral. 5.6 Not sell, transfer, assign or otherwise dispose of any part of the Collateral (other than Inventory, but in such case only in the ordinary course of Company's business and Equipment which is obsolete or no longer useful in the operation of Company's business, but in such case only in the ordinary course of Company's business with the book value of the Equipment so disposed not to exceed $50,000 in the aggregate during any single fiscal year of Company) or give up possession or control thereof or create or permit to exist any lien or encumbrance on or security interest in any part thereof except to Bank and the Permitted Liens. 5.7 Furnish Bank such information concerning Company and the Collateral as Bank may at any time reasonably request. 5.8 Permit Bank to, upon written request and upon reasonable notice, through its authorized attorneys, accountants, and representatives, during normal business hours, examine and inspect the Collateral and to inspect, audit and make copies of and extracts from all records and documents pertaining to the Collateral. 5.9 Promptly notify Bank of any actual or imminent material decline in the value of the Collateral (other than a decline in value resulting from ordinary use and depreciation or from obsolescence). 6 5.10 Promptly upon Bank's request deliver to Bank, appropriately endorsed to the order of Bank, any note, trade acceptance, chattel paper or other instrument or writing for the payment of money which shall be received by Company and which may at any time evidence any obligation to Company arising from any of the Accounts. 5.11 Reimburse Bank for all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by Bank in preserving or protecting the Collateral (including without limitation payment of taxes, insurance premiums, and costs of maintenance and repairs) or in seeking to collect or enforce any rights under the Collateral or collecting the Indebtedness and enforcing its rights hereunder, together with interest thereon from the date of advance thereof at the highest rate per annum then borne by any part of the Indebtedness. 6. REMITTANCE BASIS LOANS 6.1 Company agrees that at the option of Bank exercisable only after a default described in Section 7.1 hereof, the Indebtedness shall be on a remittance basis and the following provisions shall apply: (a) Company shall maintain a lock box in its name with Bank and Company shall direct account debtors to pay all accounts receivable credited from the date hereof into such lock box. Bank shall forward to Company all documentation received in connection with such payments. (b) Company will forthwith, upon receipt, transmit and deliver to Bank, in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by Bank) which may be received by Company at any time in full or partial payment of any of the Collateral. Any such items which may be so received by Company will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and upon express trust for Bank until delivery is made to Bank. 7 (c) All items or accounts which are delivered by Company to Bank on account of partial or full payment of, or any other amount payable with respect to, any of the Collateral shall, at Bank's option, be applied to payment of the Indebtedness whether then due or not, in such order of application as Bank may determine or, at Bank's option, shall be immediately deposited to the credit of the lock box account (herein called the "Assignee Deposit Account") of Company with Bank, as security for payment of the Indebtedness. Company shall have no right to withdraw any funds deposited in the Assignee Deposit Account. On each business day, Bank shall apply all or any of the balance then representing collected funds in the Assignee Deposit Account, toward payment of the Indebtedness, whether or not then due, in such order of application as Bank may determine, and Bank may, from time to time, in its discretion, release all or any of such balance to Company; provided, however, that so long as no default shall exist hereunder, collected funds in the Assignee Deposit Account shall be applied only toward the part of the indebtedness evidenced by the Line of Credit Note. 7. DEFAULTS 7.1 It shall be a default under this Agreement if any of the following shall occur: (a) nonpayment of any amount payable on any of the Indebtedness on the due date thereof and expiration of any period of grace applicable thereto; (b) the occurrence of an event of default under any other obligation included in the Indebtedness and such event, expiration of any period of grace applicable thereto; (c) any failure to perform any of the obligations of Company under Sections 4.1, 4.2, 4.3, 5.4, 5.5, 5.7, or 5.11 and continuance thereof for five (5) days after written notice thereof by Bank to Company; 8 (d) any failure to perform any of the other obligations of Company hereunder or under any agreement secured hereby and continuance thereof in either event beyond any applicable period of grace; (e) failure of any representation or warranty of Company herein to be true in all material respects when made; (f) a material decline in the value of the Collateral or any significant part thereof from any cause whatsoever (excluding any decline in value from ordinary use and depreciation, from obsolescence or from an insured casualty loss). 8. REMEDIES 8.1 In the event of a default hereunder, in addition to any rights Bank may have under any other agreement or by law, Bank may take any or all of the following actions: (a) declare all of the Indebtedness immediately due and payable; (b) require Company to assemble the Collateral or any part thereof and deliver same to Bank at a place designated by Bank reasonably convenient to Company; (c) take possession of the Collateral and any records concerning same wherever it or they may be found, with or without process of law, using such force as may be necessary, and at Bank's option, leave any part of the Collateral on Company's premises (rendered unusable, if Bank shall so elect, by any reasonable means which causes no damages to the Collateral) and dispose of the Collateral from said premises; (d) sell, transfer and otherwise dispose of the Collateral or any part thereof in any way permitted or not prohibited by applicable law; (e) notify, or require Company, at Company's expense, to notify, any person or party obligated on any of the Collateral to make payment to Bank of any amounts due 9 or to become due thereunder; enforce collection of any of the Collateral by suit or otherwise; and surrender, release or exchange all or any part thereof or settle, adjust or compromise or extend or renew for any period (whether or not longer than the original period) any claim or indebtedness thereunder or evidenced thereby; and endorse Company's name on any commercial paper given in payment; and generally do in Company's name, place and stead anything which Company could do itself, all as Bank in its sole discretion shall deem necessary or appropriate to realize on the Collateral; (f) complete, in Bank's sole discretion, any work in process prior to disposition thereof; (g) make or effect any necessary repairs to or maintenance on any of the Collateral; (h) obtain insurance coverage, conforming to the requirements of this Agreement, on any of the Collateral; and (i) pay any taxes applicable to any of the Collateral. 8.2 Any disposition by Bank of the Collateral or any part thereof shall be deemed made with reasonable and sufficient notice thereof, if Bank, at least five (5) days prior to the specified date of disposition, shall deposit in the mail, postage prepaid, addressed to Company's last address known to Bank, and sent by registered or certified mail, return receipt requested, a notice of the time, place and manner of such disposition. Company agrees that no such notice need be given by Bank if Bank in its sole discretion determines that the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a stock or commodity exchange or other recognized market. 9. MISCELLANEOUS 9.1 Bank shall have no duty to protect, preserve or enforce rights in or to the Collateral or with respect to any goods evidenced thereby, other than a duty of reasonable custodial care of the Collateral in its possession. 10 9.2 Effective after the occurrence of a default as described in Section 7.1, Company makes, constitutes and appoints Bank its true and lawful attorney- in-fact with full power of substitution to take any action in furtherance of this Agreement, including, without limitation, the signing of financing statements, endorsing of instruments, and the execution and delivery of all documents and agreements necessary to obtain or accomplish any protection for or collection or disposition of any part of the Collateral. Such appointment shall be deemed irrevocable and coupled with an interest. 9.3 Any transferee of, or endorser, guarantor or surety or any pledgor or other party providing security paying the Indebtedness secured hereby may take over all or any part of the Collateral subject hereto, and shall succeed to all rights of the Bank in respect thereto and the Bank shall be under no further responsibility therefor, but no party shall succeed to any of the rights of Bank so long as any part of the Indebtedness remains unpaid to Bank. 9.4 Company hereby waives all defenses otherwise available to parties secondarily or in any other degree liable or whose property stands as security for the Indebtedness, including, without being limited to, the following: presentment, demand, protest and notice of dishonor and nonpayment with respect to any of the Indebtedness, the enforcement and preservation of any lien or right of set off otherwise held by the Bank, and the enforcement and preservation of any of the Indebtedness or of any guaranty or other undertaking. Company agrees that Bank may enforce any security interest granted hereunder without being obligated first to enforce any other security interest, mortgage, guaranty or other source of collection whether granted by Company or any other person. 9.5 This Agreement shall not be construed in any way to obligate Bank to take any action with respect to any of Company's obligations or duties for or under any part of the Collateral, including without limitation all of Company's obligations under this Agreement or under any contract or agreement which is or will be or will give rise to any part of the Collateral. 9.6 No delay on the part of Bank in the exercise of any right or remedy shall operate as a waiver thereof, and no single 11 or partial exercise by Bank of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. 9.7 This Agreement has been delivered at Detroit, Michigan, and shall be construed in accordance with the laws of the State of Michigan. 9.8 Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 9.9 The rights granted Bank hereunder are cumulative and in addition to any other rights which Bank may have by other agreement or under applicable law. 9.10 Any notice to Company, if mailed, shall be deemed to be completed upon mailing by registered or certified mail, return receipt requested, addressed to Company at its chief executive office, or the address set forth below, or at any other address Company has provided to Bank. 9.11 If the Collateral or any part thereof shall be damaged, Company shall give prompt notice of such occurrence to Bank and shall, except as otherwise provided in Section 5.3 with respect to certain insurance claims in an amount less than $25,000, deposit all insurance or other moneys received for such loss with Bank. As soon as practical, but no later than 120 days after such damage, Company shall elect in writing to Bank whether to restore or replace the property or prepay the Indebtedness. Company may only restore or replace the Collateral, if, in the reasonable judgment of Bank, Company has reasonably demonstrated that it has available to it sufficient moneys to undertake such restoration or replacement. 9.12 This Agreement shall be binding upon Company and its successors and assigns and shall inure to the benefit of Bank and its successors and assigns. 12 WITNESS the due execution hereof as of the day and year first above written. CENTRAL ENGINEERING COMPANY Address: By:/s/ Edward B. Stephens ---------------------- 2930 Anthony Lane Its: Vice President Minneapolis, MN 55418 -------------- Accepted: COMERICA BANK By:/s/ Lori M Fisher ----------------- Its: Vice President -------------- 13 EX-4.18 4 GUARANTY BETWEEN COMERICA AND CENCO EUROPE Comerica Guaranty The undersigned, for value received, unconditionally and absolutely guarantee(s) to Comerica Bank ("Bank"), a Michigan banking corporation of 100 Renaissance Center, Detroit, Michigan 48243 and to the Bank's successors and assigns, payment when due, whether by stated maturity, demand, acceleration or otherwise, of all existing and future indebtedness to the Bank of Cade Industries, Inc. whose address is 5640 Enterprise Drive, Lansing, Michigan 48911 and also of any successor in interest, including without limit any debtor-in-possession or trustee in bankruptcy which succeeds to the interests of this party or person (jointly and severally the "Borrower"), however this indebtedness has been or may be incurred or evidenced, whether absolute or contingent, direct or indirect, voluntary or involuntary, liquidated or unliquidated, joint or several, and whether or not known to the undersigned at the time of this Guaranty or at the time any future indebtedness is incurred (the "Indebtedness"). The Indebtedness guaranteed includes without limit: (a) any and all direct indebtedness of the Borrower to the Bank, including indebtedness evidenced by any and all promissory notes; (b) any and all obligations or liabilities of the Borrower to the Bank arising under any guaranty where the Borrower has guaranteed the payment of indebtedness owing to the Bank from a third party; (c) any and all obligations or liabilities of the Borrower to the Bank arising from applications or agreements for the issuance of letters of credit; (d) any and all obligations or liabilities of the Borrower to the Bank arising out of any other agreement by the Borrower, including without limit any agreement to indemnify the Bank for environmental liability or to clean up hazardous waste; (e) any and all indebtedness, obligations or liabilities for which the Borrower would otherwise be liable to the Bank were it not for the invalidity, irregularity or unenforceability of them by reason of any bankruptcy, insolvency or other law or order of any kind, or for any other reason, including without limit liability for interest and attorney fees on, or in connection with, any of the Indebtedness from and after the filing by or against the Borrower of a bankruptcy petition; (f) any and all amendments, modifications, renewals and/or extensions of any of the above, including without limit amendments, modifications, renewals and/or extensions which are evidenced by new or additional instruments, documents or agreements; and (g) all costs of collecting Indebtedness, including without limit reasonable attorney fees. The undersigned waive(s) notice of acceptance of this Guaranty and presentment, demand, protest, notice of protest, dishonor, notice of dishonor, notice of default, notice of intent to accelerate or demand payment of any Indebtedness, and diligence in collecting any Indebtedness, and agree(s) that the Bank may modify the terms of any Indebtedness, compromise, extend, increase, accelerate, renew or forbear to enforce payment of any or all Indebtedness, or permit the Borrower to incur additional Indebtedness, all without notice to the undersigned and without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned further waive(s) any and all other notices to which the undersigned might otherwise be entitled. The undersigned acknowledge(s) and agree(s) that the liabilities created by this Guaranty are direct and are not conditioned upon pursuit by the Bank of any remedy the Bank may have against the Borrower or any other person or any security. No invalidity, irregularity or unenforceability of any part or all of the Indebtedness or any documents evidencing the same, by reason of any bankruptcy, insolvency or other law or order of any kind or for any other reason, and no defense or setoff available at any time to the Borrower, shall impair, affect or be a defense or setoff to the obligations of the undersigned under this Guaranty. The undersigned deliver(s) this Guaranty based solely on the undersigned's independent investigation of the financial condition of the Borrower and is (are) not relying on any information furnished by the Bank. The undersigned assume(s) full responsibility for obtaining any further information concerning the Borrower's financial condition, the status of the Indebtedness or any other matter which the undersigned may deem necessary or appropriate from time to time. The undersigned waive(s) any duty on the part of the Bank, and agree(s) that it is not relying upon nor expecting the Bank to disclose to the undersigned any fact now or later known by the Bank, whether relating to the operations or condition of the Borrower the existence, liabilities or financial condition of any co-guarantor of the Indebtedness, the occurrence of any default with respect to the Indebtedness, or otherwise, notwithstanding any effect these facts may have upon the undersigned's risk under this Guaranty or the undersigned's rights against the Borrower. The undersigned knowingly accept(s) the full range of risk encompassed in this Guaranty, which risk includes without limit the possibility that the Borrower may incur Indebtedness to the Bank after the financial condition of the Borrower, or its ability to pay its debts as they mature, has deteriorated. The undersigned represent(s) and warrant(s) that: (a) the Bank has made no representation to the undersigned as to the creditworthiness of the Borrower; and (b) the undersigned has (have) established adequate means of obtaining from the Borrower on a continuing basis financial and other information pertaining to the Borrower's financial condition. The undersigned agree(s) to keep adequately informed of any facts, events or circumstances which might in any way affect the risks of the undersigned under this Guaranty. -2- The undersigned grant(s) to the Bank a security interest in and the right of setoff as to any and all property of the undersigned now or later in the possession of the Bank. The undersigned subordinate(s) any claim of any nature that the undersigned now or later has (have) against the Borrower to and in favor of all Indebtedness and agree(s) not to accept payment or satisfaction of any claim that the undersigned now or later may have against the Borrower without the prior written consent of the Bank. Should any payment, distribution, security, or proceeds, be received by the undersigned upon or with respect to any claim that the undersigned now or may later have against the Borrower, the undersigned shall immediately deliver the same to the Bank in the form received (except for endorsement or assignment by the undersigned where required by the Bank) for application on the Indebtedness, whether matured or unmatured, and until delivered the same shall be held in trust by the undersigned as the property of the Bank. The undersigned further assign(s) to the Bank as collateral for the obligations of the undersigned under this Guaranty all claims of any nature that the undersigned now or later has (have) against the Borrower with full right on the part of the Bank, in its own name or in the name of the undersigned to collect and enforce these claims. The undersigned agree(s) that no security now or later held by the Bank for the payment of any Indebtedness, whether from the Borrower, any guarantor, or otherwise, and whether in the nature of a security interest, pledge, lien, assignment, setoff, suretyship, guaranty, indemnity, insurance or otherwise, shall affect in any manner the unconditional obligation of the undersigned under this Guaranty, and the Bank, in its sole discretion, without notice to the undersigned, may release, exchange, enforce and otherwise deal with any security without affecting in any manner the unconditional obligation of the undersigned under this Guaranty. The undersigned acknowledge(s) and agree(s) that the Bank has no obligation to acquire or perfect any lien on or security interest in any asset(s), whether realty or personalty, to secure payment of the Indebtedness, and the undersigned is (are) not relying upon any asset(s) in which the Bank has or may have a lien or security interest for payment of the Indebtedness. The undersigned acknowledge(s) that the effectiveness of this Guaranty is not conditioned on any or all of the Indebtedness being guaranteed by anyone else. Until the Indebtedness is irrevocably paid in full, the undersigned waive(s) any and all rights to be subrogated to the position of the Bank or to have the benefit of any lien, security interest or other guaranty now or later held by the Bank for the Indebtedness or to enforce any remedy which the Bank now or later has against the Borrower or any other person. Until the Indebtedness is irrevocably paid in full, the undersigned shall -3- have no right of reimbursement, indemnity, contribution or other right of recourse to or with respect to the Borrower or any other person. The undersigned agree(s) to indemnify and hold harmless the Bank from and against any and all claims, actions, damages, costs and expenses, including without limit reasonable attorneys' fees, incurred by the Bank in connection with the undersigned's exercise of any right of subrogation, contribution, indemnification or recourse with respect to this Guaranty. The Bank has no duty to enforce or protect any rights which the undersigned may have against the Borrower or any other person and the undersigned assume(s) full responsibility for enforcing and protecting these rights. Notwithstanding any provision of the preceding paragraph or anything else in this Guaranty to the contrary, if any of the undersigned is or becomes an "insider" or "affiliate" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) with respect to the Borrower, then that undersigned irrevocably and absolutely waives any and all rights of subrogation, contribution, indemnification, recourse, reimbursement and any similar rights against the Borrower (or any other guarantor) with respect to this Guaranty, whether such rights arise under an express or implied contract or by operation of law. It is the intention of the parties that the undersigned shall not be (or be deemed to be) a "creditor" (as defined in Section 101 of the Federal Bankruptcy Code, as it may be amended) of the Borrower (or any other guarantor) by reason of the existence of this Guaranty in the event that the Borrower becomes a debtor in any proceeding under the Federal Bankruptcy Code. This waiver is given to induce the Bank to enter into certain written contracts with the Borrower included in the Indebtedness. The undersigned warrant(s) and agree(s) that none of the Bank's rights, remedies or interests shall be directly or indirectly impaired because of any of the undersigned's status as an "insider" or "affiliate" of the Borrower, and the undersigned shall take any action, and shall execute any document, which the Bank may request in order to effectuate this warranty to the Bank. If any Indebtedness is guaranteed by two or more guarantors, the obligation of the undersigned shall be several and also joint, each with all and also each with any one or more of the others, and may be enforced at the option of the Bank against each severally, any two or more jointly, or some severally and some jointly. The Bank, in its sole discretion, may release any one or more of the guarantors for any consideration which it deems adequate, and may fail or elect not to prove a claim against the estate of any bankrupt, insolvent, incompetent or deceased guarantor; and after that, without notice to any other guarantor, the Bank may extend or renew any or all Indebtedness and may permit the Borrower to incur additional Indebtedness, without affecting in any manner the unconditional obligation of the -4- remaining guarantor(s). This action by the Bank shall not, however, be deemed to affect any right to contribution which may exist among the guarantors. Any of the undersigned may terminate their obligation under this Guaranty as to future Indebtedness (except as provided below) by (and only by) delivering written notice of termination to an officer of the Bank and receiving from an officer of the Bank written acknowledgement of delivery; provided, the termination shall not be effective until the opening of business on the forty- fifth (45th) day following written acknowledgement of delivery. Any termination shall not affect in any way the unconditional obligations of the remaining guarantor(s), whether or not the termination is known to the remaining guarantor(s). Any termination shall not affect in any way the unconditional obligations of the terminating guarantor(s) as to any Indebtedness existing at the effective date of termination or any Indebtedness created after that pursuant to any commitment or agreement of the Bank or any Borrower loan with the Bank existing at the effective date of termination (whether advances or readvances by the Bank are optional or obligatory), or any modifications, extensions or renewals of any of this Indebtedness, whether in whole or in part, and as to all of this Indebtedness and modifications, extensions or renewals of it, this Guaranty shall continue effective until the same shall have been fully paid. The Bank has no duty to give notice of termination by any guarantor(s) to any remaining guarantor(s). The undersigned shall indemnify the Bank against all claims, damages, costs and expenses, including without limit reasonable attorney fees, incurred by the Bank in connection with any suit, claim or action against the Bank arising out of any modification or termination of a Borrower loan or any refusal by the Bank to extend additional credit in connection with the termination of this Guaranty. Notwithstanding any prior revocation, termination, surrender or discharge of this Guaranty (or of any lien, pledge or security interest securing this Guaranty) in whole or part, the effectiveness of this Guaranty, and of all liens, pledges and security interests securing this Guaranty, shall automatically continue or be reinstated, as the case may be, in the event that (a) any payment received or credit given by the Bank in respect of the Indebtedness is returned, disgorged or rescinded as a preference, impermissible setoff, fraudulent conveyance, diversion of trust funds, or otherwise under any applicable state or federal law, including, without limitation, laws pertaining to bankruptcy or insolvency, in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned as if the returned, disgorged or rescinded payment or credit had not been received or given by the Bank, and whether or not the Bank relied upon this payment or credit or changed its position as a consequence of it; -5- or (b) any liability is imposed, or sought to be imposed, against the Bank relating to the environmental condition of, or the presence of hazardous or toxic substances on, in or about, any property given as collateral to the Bank by the Borrower, whether this condition is known or unknown, now exists or subsequently arises (excluding only conditions which arise after any acquisition by the Bank of any such property, by foreclosure, in lieu of foreclosure or otherwise, to the extent due to the wrongful act or omission of the Bank), in which case this Guaranty, and all liens, pledges and security interests securing this Guaranty, shall be enforceable against the undersigned to the extent of all liability, costs and expenses (including without limit reasonable attorneys' fees) incurred by the Bank as the direct or indirect result of any environmental condition or hazardous or toxic substances. In the event of continuation or reinstatement of this Guaranty and the liens, pledges and security interests securing it, the undersigned agree(s) upon demand by the Bank to execute and deliver to the Bank those documents which the Bank determines are appropriate to further evidence (in the public records or otherwise) this continuation or reinstatement, although the failure of the undersigned to do so shall not affect in any way the reinstatement or continuation. If the undersigned do(es) not execute and deliver to the Bank upon demand such documents, the Bank and each Bank officer is irrevocably appointed (which appointment is coupled with an interest) the true and lawful attorney of the undersigned (with full power of substitution) to execute and deliver such documents in the name and on behalf of the undersigned. For purposes of this Guaranty, "environmental condition" includes, without limitation, conditions existing with respect to the surface or groundwater, drinking water supply, land surface or subsurface and the air; and "hazardous or toxic substances" shall include any and all substances now or subsequently determined by any federal, state or local authority to be hazardous or toxic, or otherwise regulated by any of these authorities. Although the intent of the undersigned and the Bank is that Michigan law shall apply to this Guaranty, regardless if Michigan law applies, the undersigned further agree(s) as follows: With respect to the limitation, if any, stated in the Additional Provisions below on the amount of principal guaranteed under this Guaranty, the undersigned agree(s) that (a) this limitation shall not be a limitation on the amount of Borrower's Indebtedness to the bank; (b) any payments by the undersigned shall not reduce the maximum liability of the undersigned under this Guaranty unless written notice to that effect is actually received by the Bank at or prior to the time of the payment; and (c) the liability of the undersigned to the Bank shall at all times be deemed to be the aggregate liability of the undersigned under this Guaranty and any other guaranties previously or subsequently given to the Bank by the undersigned and not expressly revoked, modified or invalidated in writing. -6- The undersigned waive(s) any right to require the Bank to: (a) proceed against any person, including without limit the Borrower; (b) proceed against or exhaust any security held from the Borrower or any other person; (c) give notice of the terms, time and place of any public or private sale of personal property security held from the Borrower or any other person, or otherwise comply with the provisions of Section 9-504 of the Michigan or other applicable Uniform Commercial Code; (d) pursue any other remedy in the Bank's power; or (e) make any presentments or demands for performance, or give any notices of nonperformance, protests, notices of protest, or notices of dishonor in connection with any obligations or evidences of Indebtedness held by the Bank as security, in connection with any other obligations or evidences of indebtedness which constitute in whole or in part Indebtedness, or in connection with the creation of new or additional Indebtedness. The undersigned authorize(s) the Bank, either before or after termination of this Guaranty, without notice to or demand on the undersigned and without affecting the undersigned's liability under this Guaranty, from time to time to: (a) apply any security and direct the order or manner of sale of it, including without limit, a non-judicial sale permitted by the terms of the controlling security agreement, mortgage or deed of trust, as the Bank in its discretion may determine; (b) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness; and (c) apply payments received by the Bank from the Borrower to any indebtedness of the Borrower to the Bank, in such order as the Bank shall determine in its sole discretion, whether or not this indebtedness is covered by this Guaranty, and the undersigned waive(s) any provision of law regarding application of payments which specifies otherwise. The Bank may without notice assign this Guaranty in whole or in part. Upon the Bank's request, the undersigned agree(s) to provide to the Bank copies of the undersigned's financial statements. The undersigned waive(s) any defense based upon or arising by reason of (a) any disability or other defense of the Borrower or any other person; (b) the cessation or limitation from any cause whatsoever, other than final and irrevocable payment in full, of the Indebtedness; (c) any lack of authority of any officer, director, partner, agent or any other person acting or purporting to act on behalf of the Borrower which is a corporation, partnership or other type of entity, or any defect in the formation of the Borrower; (d) the application by the Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by the Borrower to the Bank or intended or understood by the Bank or the undersigned; (e) any act or omission by the Bank which directly or indirectly results in or aids the discharge of the Borrower or any Indebtedness by operation of law or otherwise; or (f) any modification of the Indebtedness, in any form whatsoever including without limit any -7- modification made after effective termination, and including without limit the renewal, extension, acceleration or other change in time for payment of the Indebtedness, or other change in the terms of any Indebtedness, including without limit increase or decrease of the interest rate. The undersigned waive(s) any defense the undersigned may have based upon any election of remedies by the Bank which destroys the undersigned's subrogation rights or the undersigned's right to proceed against the Borrower for reimbursement, including without limit any loss of rights the undersigned may suffer by reason of any rights, powers or remedies of the Borrower in connection with any anti- deficiency, appraisement or valuation laws or any other laws limiting, qualifying or discharging any Indebtedness. The undersigned acknowledge(s) that the Bank has the right to sell, assign, transfer, negotiate, or grant participations in all or any part of the Indebtedness and any related obligations, including without limit this Guaranty. In connection with that right, the Bank may disclose any documents and information which the Bank now or later acquires relating to the undersigned and this Guaranty, whether furnished by the Borrower, the undersigned or otherwise. The undersigned further agree(s) that the Bank may disclose these documents and information to the Borrower. The total obligation under this Guaranty shall be UNLIMITED unless specifically limited in the Additional Provisions of this Guaranty, and this obligation (whether unlimited or limited to the extent indicated in the Additional Provisions) shall include, IN ADDITION TO any limited amount of principal guaranteed, any and all interest on all Indebtedness and any and all costs and expenses of any kind, including without limit reasonable attorney fees, incurred by the Bank at any time(s) for any reason in enforcing any of the duties and obligations of the undersigned under this Guaranty or otherwise incurred by the Bank in any way connected with this Guaranty, the Indebtedness or any other guaranty of the Indebtedness (including without limit reasonable attorney fees and other expenses incurred in any suit involving the conduct of the Bank, the Borrower or the undersigned). All of these costs and expenses shall be payable immediately by the undersigned when incurred by the Bank, without demand, and until paid shall bear interest at the highest per annum rate applicable to any of the Indebtedness, but not in excess of the maximum rate permitted by law. Any reference in this Guaranty to attorney fees shall be deemed a reference to fees, charges, costs and expenses of both in-house and outside counsel and paralegals, whether or not a suit or action is instituted, and to court costs if a suit or action is instituted, and whether attorney fees or court costs are incurred at the trial court level, on appeal, in a bankruptcy, administrative or probate proceeding or otherwise. Any reference in the Additional Provisions or elsewhere (a) to this Guaranty being secured by certain collateral shall NOT be deemed to limit the total obligation of the undersigned under -8- this Guaranty or (b) to this Guaranty being limited in any respect shall NOT be deemed to limit the total obligation of the undersigned under any prior or subsequent guaranty given by the undersigned to the Bank. The undersigned unconditionally and irrevocably waive(s) each and every defense and setoff of any nature which, under principles of guaranty or otherwise, would operate to impair or diminish in any way the obligation of the undersigned under this Guaranty, and acknowledge(s) that each such waiver is by this reference incorporated into each security agreement, collateral assignment, pledge and/or other document from the undersigned now or later securing this Guaranty and/or the Indebtedness, and acknowledge(s) that as of the date of this Guaranty no such defense or setoff exists. The undersigned acknowledge(s) that the effectiveness of this Guaranty is subject to no conditions of any kind. This Guaranty shall remain effective with respect to successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, until this Guaranty is terminated in the manner and to the extent provided above. The undersigned warrant(s) and agree(s) that each of the waivers set forth above are made with the undersigned's full knowledge of their significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any of these waivers are determined to be contrary to any applicable law or public policy, these waivers shall be effective only to the extent permitted by law. This Guaranty constitutes the entire agreement of the undersigned and the Bank with respect to the subject matter of this Guaranty. No waiver, consent, modification or change of the terms of this Guaranty shall bind any of the undersigned or the Bank unless in writing and signed by the waiving party or an authorized officer of the waiving party, and then this waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. This Guaranty shall inure to the benefit of the Bank and its successors and assigns. This Guaranty shall be binding on the undersigned and the undersigned's heirs, legal representatives, successors and assigns including, without limit, any debtor in possession or trustee in bankruptcy for any of the undersigned. The undersigned has (have) knowingly and voluntarily entered into this Guaranty in good faith for the purpose of inducing the Bank to extend credit or make other financial accommodations to the Borrower, and the undersigned acknowledge(s) that the terms of this Guaranty are reasonable. If any provision of this Guaranty is unenforceable in whole or in part for any reason, the -9- remaining provisions shall continue to be effective. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN. Additional Provisions (if any): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE UNDERSIGNED AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS GUARANTY OR THE INDEBTEDNESS. IN WITNESS WHEREOF, the undersigned has (have) signed this Guaranty on _____________, 19__. GUARANTOR(S): Cenco Europe, Inc. ------------------- TYPE/PRINT NAME OF ENTITY (IF APPLICABLE) WITNESSES: /s/ Lori M. Fisher By:/s/ Edward B. Stephens - ------------------ ------------------------ SIGNATURE OF SIGNATURE OF Its: Vice President --------------------- TITLE (IF APPLICABLE) /s/ Ronda M. Bruskotter By: - ----------------------- ---------------------- SIGNATURE OF SIGNATURE OF Its: --------------------- TITLE (IF APPLICABLE) -10- GUARANTOR'S ADDRESS: 2930 Anthony Lane ------------------------------------ STREET ADDRESS Minneapolis MN 55418 ------------------------------------ CITY STATE ZIP CODE -11- EX-4.19 5 SECURITY AGRMNT. BETWEEN COMERICA AND CENCO SECURITY AGREEMENT ------------------ (Cenco Europe, Inc.) THIS AGREEMENT made as of this 31st day of October, 1997, by and between Cenco Europe, Inc., a Minnesota corporation, of Minneapolis, Minnesota herein called "Company") and Comerica Bank (successor in interest by reason of merger to Manufacturers Bank, N.A., formerly known as Manufacturers National Bank of Detroit, a Michigan banking corporation, of Detroit, Michigan (herein called "Bank"); WITNESSETH: WHEREAS, Cade Industries, Inc. ("Borrower") has requested that Bank make certain credit available to Borrower and Bank has agreed to do so upon the condition, among others, that Company grant Bank a security interest in certain of Company's assets; NOW, THEREFORE, in consideration of the premises and to induce Bank to make such loans and extend such other credit to Company and/or Borrower and for other valuable consideration, Company and Bank agree as follows: 1. GRANT OF SECURITY INTEREST 1.1 Company hereby assigns, transfers, mortgages, pledges and delivers to Bank and conveys and grants to Bank a continuing security interest in the following described property of Company whether it is now owned or existing or hereafter arising or acquired (all of which is herein called "Collateral"): (a) all accounts, accounts receivable, rights under contracts, chattel paper, tax refunds, general intangibles, instruments, and all obligations due Company for goods sold or to be sold, or leased or to be leased, or services rendered or to be rendered, (all of the foregoing being herein called "Accounts"); (b) all inventory, whether raw materials, work-in-process, finished goods, parts or supplies or otherwise; all goods, merchandise and other property held for sale or lease or to be furnished under any contract of service; and all documents of title covering any goods which are or are to become inventory (all of the foregoing being herein called "Inventory"); (c) all machinery, equipment, furniture, trade fixtures, tools, motor vehicles, and all accessories, parts and equipment now or hereafter affixed thereto or used in connection therewith, and all other tangible personal property (all of the foregoing being herein called "Equipment"); and (d) all cash and non-cash proceeds of any of the foregoing received upon the sale, exchange, collection or other disposition of same including without limitation all insurance payable by reason of loss or damage to any of the foregoing. 2. OBLIGATIONS 2.1 The Collateral shall be security for the following described obligations and all full or part extensions and renewals thereof (all of which is herein called "Indebtedness"): (a) all liabilities and obligations of Borrower under that certain Second Amended and Restated Credit Agreement dated as of October 31, 1997 made between Borrower and Bank and all present and future amendments thereto (herein called "Loan Agreement") and the Notes issued thereunder, excluding, however, any obligations and liabilities of Borrower to Bank under Section 1.A of the Loan Agreement; provided, however, upon the occurrence of a Collateral Trigger Event (as defined in the Loan Agreement) all obligations and liabilities of Company and/or Borrower to Bank shall constitute Indebtedness for purposes of this Agreement; (b) all liabilities and obligations of Company to Bank under that certain Guaranty Agreement dated as of October 31, 1997 from Company to Bank pursuant to which Company has guaranteed certain indebtedness and obligations of Borrower to Bank; provided, however, Company's obligations with respect to Borrower's obligations to Bank under Section 1.A of the Loan Agreement shall not constitute Indebtedness secured hereunder until the occurrence of a Collateral Trigger Event (as defined below); (c) any and all other present and future liabilities and obligations of Company and/or Borrower to Bank, including letter of credit reimbursement obligations, howsoever evidenced, existing, arising, or acquired by Bank, whether direct or indirect, joint or several, absolute or contingent, due or to become due, now existing or hereafter arising but excluding any liabilities and obligations of Borrower to Bank under that certain promissory note dated October 31, 1997 in the principal amount of Nine Million Dollars ($9,000,000) and any extensions or renewals thereof; provided, however, upon the occurrence of a Collateral Trigger Event (as defined in the Loan Agreement) all 2 obligations and liabilities of Company and/or Borrower to Bank shall constitute Indebtedness for purposes of this Agreement; and (e) any and all of Bank's costs and expenses (including reasonable attorneys' fees and legal expenses) incurred in the preparation hereof, the filing or recording of any financing statement or other document, the protection or preservation of the Collateral, the collection and/or repossession of the Collateral, or the enforcement of its rights hereunder. 3. REPRESENTATIONS AND WARRANTIES Company represents and warrants that: 3.1 Company owns the Collateral free and clear of all liens, encumbrances and security interests other than in favor of Bank or as permitted by the Loan Agreement ("Permitted Liens") and no financing statement other than to Bank or with respect to the Permitted Liens has been given or has been filed with any recording officer with respect to any of the Collateral. Company has full power and right to grant the security interest granted by it under this Agreement. 3.2 The Collateral is located at the locations listed in Exhibit A attached hereto and in no other states or jurisdictions. 3.3 All records concerning the Collateral are located at 2930 Anthony Lane Minneapolis, MN 55418 and at no other place. 3.4 The chattel paper is genuine, valid and subsisting, and in all respects what it purports to be and no event has occurred or condition exists which is or with the passage of time and/or giving of notice would be an event of default thereunder. 3.5 The accounts and accounts receivable included in the Accounts are genuine and valid obligations due or to become due to Company, and Company hereby confirms that the value of same is as has been represented to Bank and that when taken as a whole said accounts and accounts receivable are not subject to offsets or counterclaims materially reducing the aggregate value thereof. 3.6 The Equipment is and will continue to be used by Company in the operation of its business and is not held for sale or lease and does not constitute inventory as such term is defined in the Uniform Commercial Code as adopted in Michigan and does not constitute real estate fixtures under applicable law. 4. PERFECTION OF SECURITY INTEREST 3 4.1 Company agrees to furnish such financing statements (and amendments thereto and continuations thereof) as Bank may at any time request, to cause same to be filed in all public offices deemed necessary by Bank, to pay all costs of filing, and to do such other acts and things as Bank may at any time request to establish and maintain for Bank a valid first priority security interest in the Collateral. 4.2 Company agrees upon the request of Bank, to cause all certificates of title for all motor vehicles comprising part of the Collateral to be issued and/or reissued reflecting Bank thereon as secured party or the equivalent. 4.3 Company agrees to note the security interest of Bank, in form satisfactory to Bank, on all items of chattel paper comprising part of the Collateral. 4.4 Company agrees to notify Bank of all changes in Company's name, legal structure, or chief executive office, or in the location of the Collateral or Company's records concerning same and to file or cause to be filed all financing statements or amendments necessary or appropriate to establish and maintain for Bank a valid first priority security interest in all the Collateral subject only to Permitted Liens. 5. COVENANTS Company covenants and agrees that so long as Bank has any obligation or commitment to lend to Company or so long as any part of the Indebtedness remains unpaid it will: 5.1 Keep the Collateral and all records concerning the Collateral at the locations set forth in Sections 3.2 and 3.3 hereof. 5.2 Not permit any part of the Equipment to become or constitute a real estate fixture under applicable law. 5.3 Maintain insurance on the Inventory and the Equipment with an insurance company reasonably satisfactory to Bank against such risks and in such amounts as Bank may reasonably require and which are against such risks and in such amounts as are customary and prudent for businesses similar to Company in size and nature with the loss payable under any such policy to Company and Bank as their interests may appear; all said policies or copies thereof, with all endorsements thereon, to be deposited with Bank. The proceeds of any such insurance shall, subject to the provisions of Section 9.11 hereof, be applied, at Bank's option, to replacement of the Collateral or payment of the Indebtedness, whether or not then due; provided, however, if no default hereunder then exists, proceeds of any such insurance payable 4 with respect to a claim which is in an amount less than $25,000 may be paid directly to Company. 5.4 Maintain the Inventory and the Equipment in good condition, ordinary wear and tear excepted, pay all taxes and assessments applicable thereto, and not use them or permit their use for any unlawful purpose or in any manner likely to cause a material decline in its value. Company may, at its expense and in its own name, in good faith contest any such taxes or assessments and, in the event of such contest may permit the taxes or assessments to remain unpaid during the pendency of such contest and any appeal therefrom unless Bank shall notify Company that, in the opinion of Bank's counsel, by nonpayment of any such items, the lien of this Agreement will be materially endangered or the Collateral or any part thereof may be subject to loss or forfeiture, in which event such taxes or assessment shall be paid promptly. 5.5 Timely perform its obligations and take all reasonable actions under any and all contracts and agreements which are or will be part of the Collateral to insure that all persons or parties obligated to Company thereon may not avail themselves of defenses, offsets or counterclaims, and take all action necessary and appropriate to enforce and collect all obligations due Company on the Accounts or any other part of the Collateral. 5.6 Not sell, transfer, assign or otherwise dispose of any part of the Collateral (other than Inventory, but in such case only in the ordinary course of Company's business and Equipment which is obsolete or no longer useful in the operation of Company's business, but in such case only in the ordinary course of Company's business with the book value of the Equipment so disposed not to exceed $50,000 in the aggregate during any single fiscal year of Company) or give up possession or control thereof or create or permit to exist any lien or encumbrance on or security interest in any part thereof except to Bank and the Permitted Liens. 5.7 Furnish Bank such information concerning Company and the Collateral as Bank may at any time reasonably request. 5.8 Permit Bank to, upon written request and upon reasonable notice, through its authorized attorneys, accountants, and representatives, during normal business hours, examine and inspect the Collateral and to inspect, audit and make copies of and extracts from all records and documents pertaining to the Collateral . 5.9 Promptly notify Bank of any actual or imminent material decline in the value of the Collateral (other than a decline in value resulting from ordinary use and depreciation or from obsolescence). 5 5.10 Promptly upon Bank's request deliver to Bank, appropriately endorsed to the order of Bank, any note, trade acceptance, chattel paper or other instrument or writing for the payment of money which shall be received by Company and which may at any time evidence any obligation to Company arising from any of the Accounts. 5.11 Reimburse Bank for all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by Bank in preserving or protecting the Collateral (including without limitation payment of taxes, insurance premiums, and costs of maintenance and repairs) or in seeking to collect or enforce any rights under the Collateral or collecting the Indebtedness and enforcing its rights hereunder, together with interest thereon from the date of advance thereof at the highest rate per annum then borne by any part of the Indebtedness. 6. REMITTANCE BASIS LOANS 6.1 Company agrees that at the option of Bank exercisable only after a default described in Section 7.1 hereof, the Indebtedness shall be on a remittance basis and the following provisions shall apply: (a) Company shall maintain a lock box in its name with Bank and Company shall direct account debtors to pay all accounts receivable credited from the date hereof into such lock box. Bank shall forward to Company all documentation received in connection with such payments. (b) Company will forthwith, upon receipt, transmit and deliver to Bank, in the form received, all cash, checks, drafts and other instruments for the payment of money (properly endorsed, where required, so that such items may be collected by Bank) which may be received by Company at any time in full or partial payment of any of the Collateral. Any such items which may be so received by Company will not be commingled with any other of its funds or property, but will be held separate and apart from its own funds or property and upon express trust for Bank until delivery is made to Bank. (c) All items or accounts which are delivered by Company to Bank on account of partial or full payment of, or any other amount payable with respect to, any of the Collateral shall, at Bank's option, be applied to payment of the Indebtedness whether then due or not, in such order of application as Bank may determine or, at Bank's option, shall be immediately deposited to the credit of the lock box account (herein called the 6 "Assignee Deposit Account") of Company with Bank, as security for payment of the Indebtedness. Company shall have no right to withdraw any funds deposited in the Assignee Deposit Account. On each business day, Bank shall apply all or any of the balance then representing collected funds in the Assignee Deposit Account, toward payment of the Indebtedness, whether or not then due, in such order of application as Bank may determine, and Bank may, from time to time, in its discretion, release all or any of such balance to Company; provided, however, that so long as no default shall exist hereunder, collected funds in the Assignee Deposit Account shall be applied only toward the part of the indebtedness evidenced by the Line of Credit Note. 7. DEFAULTS 7.1 It shall be a default under this Agreement if any of the following shall occur: (a) nonpayment of any amount payable on any of the Indebtedness on the due date thereof and expiration of any period of grace applicable thereto; (b) the occurrence of an event of default under any other obligation included in the Indebtedness and in such event, expiration of any period of grace applicable thereto; (c) any failure to perform any of the obligations of Company under Sections 4.1, 4.2, 4.3, 5.4, 5.5, 5.7, or 5.11 and continuance thereof for five (5) days after written notice thereof by Bank to Company; (d) any failure to perform any of the other obligations of Company hereunder or under any agreement secured hereby and continuance thereof in either event beyond any applicable period of grace; (e) failure of any representation or warranty of Company herein to be true in all material respects when made; (f) a material decline in the value of the Collateral or any significant part thereof from any cause whatsoever (excluding any decline in value from ordinary use and depreciation, from obsolescence or from an insured casualty loss). 8. REMEDIES 7 8.1 In the event of a default hereunder, in addition to any rights Bank may have under any other agreement or by law, Bank may take any or all of the following actions: (a) declare all of the Indebtedness immediately due and payable; (b) require Company to assemble the Collateral or any part thereof and deliver same to Bank at a place designated by Bank reasonably convenient to Company; (c) take possession of the Collateral and any records concerning same wherever it or they may be found, with or without process of law, using such force as may be necessary, and at Bank's option, leave any part of the Collateral on Company's premises (rendered unusable, if Bank shall so elect, by any reasonable means which causes no damages to the Collateral) and dispose of the Collateral from said premises; (d) sell, transfer and otherwise dispose of the Collateral or any part thereof in any way permitted or not prohibited by applicable law; (e) notify, or require Company, at Company's expense, to notify, any person or party obligated on any of the Collateral to make payment to Bank of any amounts due or to become due thereunder; enforce collection of any of the Collateral by suit or otherwise; and surrender, release or exchange all or any part thereof or settle, adjust or compromise or extend or renew for any period (whether or not longer than the original period) any claim or indebtedness thereunder or evidenced thereby; and endorse Company's name on any commercial paper given in payment; and generally do in Company's name, place and stead anything which Company could do itself, all as Bank in its sole discretion shall deem necessary or appropriate to realize on the Collateral; (f) complete, in Bank's sole discretion, any work in process prior to disposition thereof; (g) make or effect any necessary repairs to or maintenance on any of the Collateral; (h) obtain insurance coverage, conforming to the requirements of this Agreement, on any of the Collateral; and (i) pay any taxes applicable to any of the Collateral. 8 8.2 Any disposition by Bank of the Collateral or any part thereof shall be deemed made with reasonable and sufficient notice thereof, if Bank, at least five (5) days prior to the specified date of disposition, shall deposit in the mail, postage prepaid, addressed to Company's last address known to Bank, and sent by registered or certified mail, return receipt requested, a notice of the time, place and manner of such disposition. Company agrees that no such notice need be given by Bank if Bank in its sole discretion determines that the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a stock or commodity exchange or other recognized market. 9. MISCELLANEOUS 9.1 Bank shall have no duty to protect, preserve or enforce rights in or to the Collateral or with respect to any goods evidenced thereby, other than a duty of reasonable custodial care of the Collateral in its possession. 9.2 Effective after the occurrence of a default as described in Section 7.1, Company makes, constitutes and appoints Bank its true and lawful attorney- in-fact with full power of substitution to take any action in furtherance of this Agreement, including, without limitation, the signing of financing statements, endorsing of instruments, and the execution and delivery of all documents and agreements necessary to obtain or accomplish any protection for or collection or disposition of any part of the Collateral. Such appointment shall be deemed irrevocable and coupled with an interest. 9.3 Any transferee of, or endorser, guarantor or surety or any pledgor or other party providing security paying the Indebtedness secured hereby may take over all or any part of the Collateral subject hereto, and shall succeed to all rights of the Bank in respect thereto and the Bank shall be under no further responsibility therefor, but no party shall succeed to any of the rights of Bank so long as any part of the Indebtedness remains unpaid to Bank. 9.4 Company hereby waives all defenses otherwise available to parties secondarily or in any other degree liable or whose property stands as security for the Indebtedness, including, without being limited to, the following: presentment, demand, protest and notice of dishonor and nonpayment with respect to any of the Indebtedness, the enforcement and preservation of any lien or right of set off otherwise held by the Bank, and the enforcement and preservation of any of the Indebtedness or of any guaranty or other undertaking. Company agrees that Bank may enforce any security interest granted hereunder without being obligated first to enforce any other security interest, mortgage, 9 guaranty or other source of collection whether granted by Company or any other person. 9.5 This Agreement shall not be construed in any way to obligate Bank to take any action with respect to any of Company's obligations or duties for or under any part of the Collateral, including without limitation all of Company's obligations under this Agreement or under any contract or agreement which is or will be or will give rise to any part of the Collateral. 9.6 No delay on the part of Bank in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by Bank of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. 9.7 This Agreement has been delivered at Detroit, Michigan, and shall be construed in accordance with the laws of the State of Michigan. 9.8 Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 9.9 The rights granted Bank hereunder are cumulative and in addition to any other rights which Bank may have by other agreement or under applicable law. 9.10 Any notice to Company, if mailed, shall be deemed to be completed upon mailing by registered or certified mail, return receipt requested, addressed to Company at its chief executive office, or the address set forth below, or at any other address Company has provided to Bank. 9.11 If the Collateral or any part thereof shall be damaged, Company shall give prompt notice of such occurrence to Bank and shall, except as otherwise provided in Section 5.3 with respect to certain insurance claims in an amount less than $25,000, deposit all insurance or other moneys received for such loss with Bank. As soon as practical, but no later than 120 days after such damage, Company shall elect in writing to Bank whether to restore or replace the property or prepay the Indebtedness. Company may only restore or replace the Collateral, if, in the reasonable judgment of Bank, Company has reasonably demonstrated that it has available to it sufficient moneys to undertake such restoration or replacement. 10 9.12 This Agreement shall be binding upon Company and its successors and assigns and shall inure to the benefit of Bank and its successors and assigns. WITNESS the due execution hereof as of the day and year first above written. CENCO EUROPE, INC. Address: By:/s/ Edward B. Stephens ---------------------- 2930 Anthony Lane Its: Vice President Minneapolis, MN 55418 --------------------- Accepted: COMERICA BANK By: Lori M. Fisher -------------- Its: Vice President -------------- 11 EX-4.20 6 TERM NOTE BETWEEN COMERICA AND REGISTRANT Comerica Fixed Rate-Installment Note Obligor # 1289932796 Note # Note Date August 1, 1998 Tax Identification Number 38-1371038 Amount $1,000,000.00 Lansing, Michigan Maturity date January 1, 2001 For Value Received the undersigned promise(s) to pay to the order of Comerica Bank ("Bank"), at any office of the Bank in the State of Michigan, One Million and no/100 Dollars (U.S.) in installments of $100,000.00 each PLUS [STRIKE ONE] interest on the unpaid principal balance from the date of this Note at the rate of 7.88% per annum until maturity, whether by acceleration or otherwise, or until Default, as later defined, and after that at a default rate equal to the rate of interest otherwise prevailing under this Note plus 3% per annum (but in no event in excess of the maximum rate permitted by law). Interest shall be calculated for the actual number of days the principal is outstanding on the basis of a 360-day year if this Note evidences a business or commercial loan or a 365/366-day year if a consumer loan. Installments of principal and accrued interest due under this Note shall be payable on the 1st day of each quarter, commencing October 1, 1998, and the entire remaining unpaid balance of principal and accrued interest shall be payable on January 1, 2001. If the frequency of principal and interest installments is not otherwise specified, installments of principal and interest due under this Note shall be payable monthly on the first day of each month. If this Note or any installment of principal or interest under this Note shall become payable on a day other than a day on which the Bank is open for business, this payment shall be extended to the next succeeding business day and interest shall be payable at the rate specified in this Note during this extension. A late installment charge equal to 5% of each late installment may be charged on any installment payment not received by the Bank within 10 calendar days after the installment due date, but acceptance of payment of this charge shall not waive any Default under this Note. The Bank does not have to accept any prepayment of principal under this Note except as described below or as required under applicable law. The undersigned may prepay principal of this Note in increments of $100.00 at any time as long as the Bank is provided written notice of the prepayment at least five business days prior to the date of prepayment. The notice of prepayment shall contain the following information: (a) the date of prepayment (the "Prepayment Date") and (b) the amount of principal to be prepaid. On the Prepayment Date, the undersigned will pay to the Bank, in addition to the other amounts then due on this Note, the Prepayment Amount described below. The Bank, in its sole discretion, may accept any prepayment of principal even if not required to do so under this Note and may deduct from 1 the amount to be applied against principal the other amounts required as part of the Prepayment Amount. The Prepaid Principal Amount (as defined below) will be applied to this Note in the reverse order of which the principal payments would have been due under this Note's principal amortization schedule. In other words, if this Note requires multiple principal payments, then as opposed to prepaying the next principal payment due, the Prepaid Principal Amount will be applied beginning with the final principal payment due on this Note. If the Bank exercises its right to accelerate the payment of the Note prior to maturity, the undersigned will pay to the Bank, in addition to the other amounts then due on this Note, on the date specified by the Bank as the Prepayment Date, the Prepayment Amount. The Bank's determination of the Prepayment Amount will be conclusive in the absence of obvious error or fraud. If requested in writing by the undersigned, the Bank will provide the undersigned a written statement specifying the Prepayment Amount. The following (the "Prepayment Amount") shall be due and payable in full on the Prepayment Date: (a) If the face amount of this Note exceeds Seven Hundred Fifty Thousand Dollars ($750,000) (regardless of what the outstanding principal balance may be on the Prepayment Date) then the Prepayment Amount is the sum of: (i) the amount of principal which the undersigned has elected to prepay or the amount of principal which the Bank has required the undersigned to prepay because of acceleration, as the case may be (the "Prepaid Principal Amount"), (ii) interest accruing on the Prepaid Principal Amount up to, but not including, the Prepayment Date, (iii) Five Hundred Dollars ($500) plus (iv) the present value, discounted at the Reinvestment Rates (as defined below), of the positive amount by which (A) the interest the Bank would have earned had the Prepaid Principal Amount been paid according to the Note's amortization schedule at the Note's interest rate exceeds (B) the interest the Bank would earn by reinvesting the Prepaid Principal Amount at the Reinvestment Rates. (b) If the face amount of this Note is Seven Hundred Fifty Thousand Dollars ($750,000) or less (regardless of what the outstanding principal balance may be on the Prepayment Date), then the Prepayment Amount is the sum of: (i) the amount of principal which the undersigned has elected to prepay or the amount of principal which the Bank has required the undersigned to prepay because of acceleration, -2- as the case may be (the "Prepaid Principal Amount"), (ii) interest accruing on the Prepaid Principal Amount up to, but not including, the Prepayment Date, plus (iii) an amount equal to one percent (1%) of the Prepaid Principal Amount multiplied by the number of calendar years remaining until the maturity date of this Note, but in no event less than two percent (2%) of the Prepaid Principal Amount. For purposes of this computation, any portion of a calendar year remaining until the maturity date of this Note shall be deemed to be a full calendar year. "Reinvestment Rates" mean the per annum rates of interest equal to one half percent (1/2%) above the rates of interest reasonably determined by the Bank to be in effect not more than seven days prior to the Prepayment Date in the secondary market for United States Treasury Obligations in amount(s) and with maturity(ies) which correspond (as closely as possible) to the principal installment amount(s) and the payment date(s) against which the Prepaid Principal Amount will be applied. This Note and any other indebtedness and liabilities of any kind of the undersigned (or any of them) to the Bank, and any and all modifications, renewals or extensions of it, whether joint or several, contingent or absolute, now existing or later arising, and however evidenced (collectively "indebtedness") are secured by and the Bank is granted a security interest in all items deposited in any account of any of the undersigned with the Bank and by all proceeds of these items (cash or otherwise), all account balances of any of the undersigned from time to time with the Bank, by all property of any of the undersigned from time to time in the possession of the Bank and by any other collateral, rights and properties described in each and every mortgage, security agreement, pledge, assignment and other security or collateral agreement which has been, or will at any time(s) later be, executed by any (or all) of the undersigned to or for the benefit of the Bank (collectively "Collateral"). Notwithstanding the above, to the extent that any portion of the Indebtedness is a consumer loan, that portion shall not be secured by any mortgage on or other security interest in the undersigned's principal dwelling which is not a purchase money security interest as to that portion, unless expressly provided to the contrary in another place. If the undersigned (or any of them) or any guarantor under a guaranty of all or part of the Indebtedness ("guarantor") (a) fail(s) to pay this Note or any of the Indebtedness when due, by maturity, acceleration or otherwise, or fail(s) to pay any Indebtedness owing on a demand basis upon demand; or (b) fail(s) to comply with any of the terms or provisions of any agreement between the undersigned (or any of them) or any guarantor and the Bank; or (c) become(s) insolvent or the subject of a voluntary or involuntary proceeding in bankruptcy, or a reorganization, -3- arrangement or creditor composition proceeding, (if a business entity) cease(s) doing business as a going concern, (if a natural person) die(s) or become(s) incompetent, (if a partnership) dissolve(s) or any general partner of it dies, becomes incompetent or becomes the subject of a bankruptcy proceeding or (if a corporation) is the subject of a dissolution, merger or consolidation; or (d) if any warranty or representation made by any of the undersigned or any guarantor in connection with this Note or any of the Indebtedness shall be discovered to be untrue or incomplete; (e) or if there is any termination, notice of termination, or breach of any guaranty, pledge, collateral assignment or subordination agreement relating to all or any part of the indebtedness; or (f) if there is any failure by any of the undersigned or any guarantor to pay when due any of its Indebtedness (other than to the Bank) or in the observance or performance of any term, covenant or condition in any document evidencing, securing or relating to such Indebtedness; or (g) if the Bank deems itself insecure believing that the prospect of payment of this Note or any of the Indebtedness is impaired or shall fear deterioration, removal or waste of any of the Collateral; or (h) if there is filed or issued a levy or writ of attachment or garnishment or other like judicial process upon the undersigned (or any of them) or any guarantor or any of the Collateral, including without limit, any accounts of the undersigned (or any of them) or any guarantor with the Bank, then the Bank, upon the occurrence of any of these events (each a "Default"), may at its option and without prior notice to the undersigned (or any of them), declare any or all of the Indebtedness to be immediately due and payable (notwithstanding any provisions contained in the evidence of it to the contrary), sell or liquidate all or any portion of the Collateral, set off against the Indebtedness any amounts owing by the Bank to the undersigned (or any of them), charge interest at the default rate provided in the document evidencing the relevant Indebtedness and exercise any one or more of the rights and remedies granted to the Bank by any agreement with the undersigned (or any of them) or given to it under applicable law. All payments under this Note shall be in immediately available United States funds, without setoff or counterclaim. If this Note is signed by two or more parties (whether by all as makers or by one or more as an accommodation party or otherwise), the obligations and undertakings under this Note shall be that of all and any two or more jointly and also of each severally. This Note shall bind the undersigned, and the undersigned's respective heirs, personal representatives, successors and assigns. The undersigned waive(s) presentment, demand, protest, notice of dishonor, notice of demand or intent to demand, notice of acceleration or intent to accelerate, and all other notices, and agree(s) that no extension or indulgence to the undersigned (or any of them) or release, substitution or nonenforcement of any -4- security, or release or substitution of any of the undersigned, any guarantor or any other party, whether with or without notice, shall affect the obligations of any of the undersigned. The undersigned waive(s) all defenses or right to discharge available under Section 3-606 of the Uniform Commercial Code and waive(s) all other suretyship defenses or right to discharge. The undersigned agree(s) that the Bank has the right to sell, assign, or grant participations, or any interest, in any or all of the Indebtedness, and that, in connection with this right, but without limiting its ability to make other disclosures to the full extent allowable, the Bank may disclose all documents and information which the Bank now or later has relating to the undersigned or the Indebtedness. The undersigned agree(s) to reimburse the holder or owner of this Note for any and all costs and expenses (including without limit, court costs, legal expenses and reasonable attorney fees, whether inside or outside counsel is used, whether or not suit is instituted and, if suit is instituted, whether at the trial court level, appellate level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in collecting or attempting to collect this Note or incurred in any other matter or proceeding relating to this Note. The undersigned acknowledge(s) and agree(s) that there are no contrary agreements, oral or written, establishing a term of this Note and agree(s) that the terms and conditions of this Note may not be amended, waived or modified except in a writing signed by an officer of the Bank expressly stating that the writing constitutes an amendment, waiver or modification of the terms of this Note. As used in this Note, the word "undersigned" means, individually and collectively, each maker, accommodation party, indorser and other party signing this Note in a similar capacity. If any provision of this Note is unenforceable in whole or part for any reason, the remaining provisions shall continue to be effective. THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN. THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS. For Corporations or Partnerships Cade Industries, Inc. By: /s/ Edward B. Stephens - --------------------- ---------------------- OBLIGOR NAME TYPED/PRINTED SIGNATURE OF Its: Vice President -------------- -5- Title 2365 Woodlake Drive ---------------------- STREET ADDRESS Okemos, MI 48864 ---------------------- CITY STATE ZIP CODE -6- EX-10.11 7 SANDFORD/LUND/STEPHENS 1999 INCENTIVE PLAN CADE INDUSTRIES, INC. 1999 INCENTIVE PLAN John W. Sandford Richard A. Lund Edward B. Stephens The 1999 incentive plan will be based upon the following performance factors:
WEIGHTING INCENTIVE FACTOR FACTOR PERCENT ------ --------- ---------- 1. Cade Industries' After Tax Earnings 70 35.0% 2. Cade Industries' Cash Flow From 20 10.0% Operations 3. Cade Industries' Stock Valuation - 10 5.0% 1999
The maximum incentive is 50% of total 1999 base compensation. The incentive award will be paid in both Cash (75%) and Cade Industries' Stock (25%). The number of shares represented by the stock award will be based on the closing price of Cade stock on 12/31/98 ($2.1875). - ---------------------- ---------------------------- ----------------------- John W. Sandford Richard A. Lund Edward B. Stephens EX-10.12 8 FORM OF EXEC. CHNG. IN CNTRL. AGMT. (LUND/STEPHENS) CHANGE IN CONTROL AGREEMENT FOR [LUND/STEPHENS] This Agreement is made as of August 4, 1998 (the "Effective Date"), between Cade Industries, Inc., a Wisconsin corporation (the "Company"), and Lund/Stephens (the "Executive"). WHEREAS, the Executive is a valued employee of the Company; and WHEREAS, the Company desires to enter into this Change in Control Agreement with the Executive to provide the Executive with contractual assurances to induce the Executive to remain as an employee of the Company notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company, provided that the Executive remains in his current position at the time of a Change in Control; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Executive and the Company agree as follows: 1. Employment and Duties. The Company hereby employs Executive, as President and Chief Executive Officer with all powers and authority as are customary to this position, and Executive hereby accepts employment with the Company in accordance with the terms and conditions set forth herein. Executive shall have such executive responsibilities as is customary with this position and as the Company's Board of Directors shall from time to time assign to him. Executive agrees to devote his full time (excluding annual vacation time), skill, knowledge, and attention to the business of the Company and the performance of his duties under this Agreement. 2. Termination and Severance Pay. a. As used in this Agreement, a Change in Control means: (i) a sale of over 50% of the stock of the Company measured in terms of voting power, other than in a public offering or in connection with acquisition by the Company of a business filing reports under Section 13 or 15(d) of the Securities Exchange Act of 1934; or (ii) the sale by the Company of over 50% of its business or assets in one or more transactions over a consecutive 12-month period; or (iii) a merger or consolidation of the Company with or into any other corporation or corporations such that the shareholders of the Company prior to the merger or consolidation do not own at least 50% of the surviving entity measured in terms of voting power; or (iv) the acquisition by any means of more than 25% of the voting power or common stock of the Company by any person or group of persons; or (v) the election of directors constituting a majority of the Company's board of directors pursuant to a proxy solicitation not recommended by the Company's board of directors. b. As used in this Agreement, a Triggering Event means: (i) a reduction in the compensation amount paid by the Company to the Executive or a reduction in the fringe benefits received by the Executive from the Company from the levels received by the Executive at the time of a Change in Control or during the 120 day period immediately preceding the Change in Control; or (ii) a material change in the Executive's position or duties, Executive's reporting responsibilities, or persons reporting to the Executive from the levels existing at the time of a Change in Control or during the 120 day period immediately preceding the Change in Control; or (iii) a change in the location or headquarters where the Executive is expected to provide services of 30 or more miles from the previous location existing at the time of the Change in Control or during the 120 day period immediately preceding the Change in Control. c. After a Change in Control and for the period ending one year after a Change in Control, the Executive can terminate his position voluntarily or involuntarily and the Company shall pay in one lump sum within 30 days of termination the total amount that would have been received by the Executive over a period of three years (including bonus, which shall not be less than the average annual amount earned by the Executive over the five years prior to a Change in Control) and continued participation for three years in the Company's welfare benefit programs at no cost following the termination of employment. If a Triggering Event occurs within 24 months of the date of a Change in Control, the Executive may terminate his services, voluntarily or involuntarily. Upon termination after a Change in Control and a Triggering Event and provided the Executive has not received the benefits provided above, the Company shall: (i) continue to provide insurance benefits as customarily offered by the Company to the Executive at the Change in Control for a two year period after termination at no cost to the Executive; and (ii) pay in one lump sum within 30 days after the termination date the total amount that would be received by the Executive over a period of two years after the termination (based upon compensation amounts paid to the Executive at the date of the Change in Control) including amounts that would be paid for bonuses during the two year period after the termination (provided the bonus amount shall -2- not be less than the average annual bonus amount paid over the five years prior to the Change in Control). d. In the event that the severance benefits payable to the Executive under this section or any other payments or benefits received or to be received by the Executive from the Company (whether payable pursuant to the terms of this Agreement, any other plan, agreement or arrangement with the Company) or any corporation ("Affiliate") affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive, constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and the present value of such "parachute payments" equals or exceeds three times the average of the annual compensation payable to the Executive by the Company (or an Affiliate) and includable in the Executive's gross income for federal income tax purposes for the five calendar years preceding the year in which a Change in Control of the Company occurred ("Base Amount"), such Severance Benefits shall be reduced to an amount the present value of which (when combined with the present value of any other payments or benefits otherwise received or to be received by the Executive from the Company (or an Affiliate) that are deemed "parachute payments") is equal to $1 less than the Base Amount, notwithstanding any other provision to the contrary in this Agreement. The Severance Benefits shall not be reduced to the extent that (A) the Executive shall have effectively waived his receipt or enjoyment of any such payment or benefit which triggered the applicability of this section, or (B) in the opinion of tax counsel, the Severance Benefits (in their full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code are reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4) of the Code, and such payments are deductible by the Company. The Base Amount shall include every type and form of compensation includable in the Executive's gross income in respect of his employment by the Company (or an Affiliate), except to the extent otherwise provided in temporary or final regulations promulgated under Section 280G(b) of the Code. For purposes of this section only, a Change in Control shall have the meaning of a "change in ownership or control" as set forth in Section 280G(b) of the Code and any temporary or final regulations promulgated thereunder. The present value of any non- cash benefit or any deferred cash payment shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(b)(3) and (4) of the Code. e. The Executive shall have the right to request that the Company obtain a ruling from the Internal Revenue Service ("Service") as to whether any or all payments or benefits determined by such tax counsel are, in the view of the Service, "parachute payments" under Section 280G. If a ruling is sought pursuant to the Executive's request, no Severance Benefits payable under this Agreement shall be made to the Executive until after 15 days from the date of such ruling. For purposes of this section, the Executive and the Company agree to be bound by the Service's ruling as to whether payments constitute "parachute -3- payments" under Section 280G. If the Service declines, for any reason, to provide the ruling requested, the tax counsel's opinion provided in this section with respect to what payments or benefits constitute "parachute payments" shall control, and the period during which the Severance Benefits may be deferred shall be extended to a date 15 days from the date of the Service's notice indicating that no ruling would be forthcoming. In the event that Section 280G, or any successor statute, is repealed, this Section shall cease to be effective on the effective date of such repeal. The parties to this Agreement recognize that final regulations under Section 280G of the Code may affect the amounts that may be paid under this Agreement and agree that, upon issuance of such final regulations, this Agreement may be modified as in good faith deemed necessary in light of the provisions of such regulations to achieve the purposes of this Agreement, and that consent to such modifications shall not be unreasonably withheld. f. Notwithstanding any provision herein, no amounts will be due under this Agreement in the event the Executive's employment is terminated by the Company for cause. The term "for cause" shall mean solely the following events: (i) Executive has been convicted of a felony which has adversely affected the Company's reputation; (ii) Executive has materially misappropriated Company funds, property or opportunities; or (iii) Executive has materially breached any of the provisions of this Agreement having been provided by written notice a reasonable opportunity (not less than 15 business days) to cure such breach. 3. Confidential Information. Executive acknowledges that all Confidential Information is and shall continue to be the exclusive proprietary property of the Company, whether or not disclosed to or entrusted to the custody of Executive. Executive will not, either during the term hereof or at any time thereafter, disclose any Confidential Information, in whole or in part, to any person or entity other than to employees or affiliates of the Company, for any reason or purpose, unless the Company gives its prior written consent to such disclosure or is required to carry out the duties. Executive also will not, either during the term hereof or at any time thereafter, use in any manner any Confidential Information for his own purposes or for the benefit of any person or entity except the Company and its affiliates whether such use consists of duplication, removal, oral communication, disclosure, transfer or other unauthorized use thereof, unless the Company gives its prior written consent to such use. As used herein, the term "Confidential Information" refers to all information and materials not in the public domain belonging to, used by or in the business of the Company (the "Business") relating to its business strategies, products, pricing, customers, technology, programs, costs, employee compensation, marketing plans, developmental plans, computer programs, computer systems, inventions, developments, formulae, processes, designs, -4- drawings, trade secrets of every kind and character and competitive information. "Confidential Information" also includes confidential information belonging to other companies and disclosed to the Executive by the Company. 4. Non-competition and Inventions. a. During the period of employment of Executive and for a period of one year after Executive's termination of employment for any reason, Executive shall not directly or indirectly as a principal, agent, owner, employee, consultant, advisor, trustee, beneficiary, distributor, partner, co-venturer, officer, director, stockholder or in any other capacity, nor will any entity owned by Executive: (i) divert or attempt to divert any business from the Company or engage in any act likely to cause any customer or supplier of the Company to discontinue or curtail its business with the Company or to do business with another entity, firm, business, activity or enterprise directly or indirectly competitive with the Company; or (ii) contact, sell or solicit to sell or attempt to contact, sell or solicit to sell products competitive to those sold by the Company to any customer of the Company with which Executive had contact while performing services for the Company. Notwithstanding the provisions above, Executive may acquire securities of any entity the securities of which are publicly traded, provided that the value of the securities of such entity held directly or indirectly by Executive immediately following such acquisition is less than 5% of the total value of the then outstanding class or type of securities acquired. b. Executive acknowledges and agrees that the restrictions set forth in this section 4 are founded on valuable consideration and are reasonable in duration and geographic area in view of the circumstances under which this Agreement is executed and that such restrictions are necessary to protect the legitimate interests of the Company. If, in any judicial proceeding, a court shall refuse to enforce any separate covenant set forth herein, then such unenforceable covenant shall be deemed eliminated from this section 4 for the purpose of that proceeding to the extent necessary to permit the remaining separate covenants to be enforced. c. The Executive hereby sells, transfers and assigns to the Company the entire right, title and interest of the Executive in and to all inventions, ideas, disclosures and improvements, whether patented or unpatented, and copyrightable materials, made or conceived by the Executive, solely or jointly, or in whole or in part, during the period Executive is bound by this Agreement which (i) relate to methods, apparatus, designs, products, processes or devices sold, leased, used or under construction or development by the Company or any subsidiary or (ii) otherwise relate to or pertain to the business, functions -5- or operations of the Company or any subsidiary, or (iii) arise (wholly or partly) from the efforts of the Executive during the Term hereof in connection with his performance of his duties hereunder. The Executive shall communicate promptly and disclose to the Company, in such form as the Company requests, all information, details and data pertaining to the aforementioned inventions, ideas, disclosures and improvements; and, whether during the term hereof or thereafter, the Executive shall execute and deliver to the Company such formal transfers and assignments and such other papers and documents as may be required of the Executive to permit the Company to file and prosecute the patent applications and, as to copyrightable material, to obtain copyright thereon. This provision does not relate to any invention for which (i) no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on the Executive's own time and which does not relate (A) directly to the business of the Company, or (B) to the Company's actual or demonstrably anticipated research or development; or (ii) does not result in any work performed by the Executive for the Company. 5. Miscellaneous. a. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Michigan, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. b. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive, to his address appearing on the records of the Company. If to the Company: CADE INDUSTRIES, INC. 2365 Woodlake Drive, Suite 120 Okemos, MI 48864 Attention: Board of Directors or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. c. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. -6- d. The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. e. The Executive's or the Company's failure to insist upon strict compliance with any provisions hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for cause pursuant to this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. f. The Executive and the Company acknowledge that, except as may otherwise be provided herein or under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, except in connection with or within 24 months following a Change in Control, the Executive's employment and this Agreement may be terminated by the Company at any time, in which case the Executive shall have no further rights under this Agreement. g. The Company agrees that if it breaches any payment obligation hereunder, the Company will pay all reasonable attorney fees and costs incurred by Executive in enforcing Executive's rights hereunder. h. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6. Injunctive Relief. Executive acknowledges and agrees that irreparable injury will result to the Company in the event Executive breaches any covenant contained in this Agreement and that the remedy at law for such breach will be inadequate. Therefore, if Executive engages in any act in violation of the provisions of this Agreement, the Company shall be entitled, in addition to such other remedies and damages as may be available to it by law or under this Agreement, to injunctive or other equitable relief to enforce the provisions hereof. -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. Cade Industries, Inc. By:____________________________________ John W. Sandford Chairman of the Board of Directors Lund/Stephens _______________________________________ President -8- EX-10.13 9 FORM OF EXEC. CHNG. IN CNTRL. AGMT. (OTHER OFFICERS) CHANGE IN CONTROL AGREEMENT FOR [OFFICER] This Agreement is made as of August 4, 1998 (the "Effective Date"), between [Cade](the "Company"), a wholly owned subsidiary of Cade Industries, Inc. and President of Subsidiary (the "Executive"). WHEREAS, the Executive is a valued employee of the Company; and WHEREAS, the Company desires to enter into this Change in Control Agreement with the Executive to provide the Executive with contractual assurances to induce the Executive to remain as an employee of the Company notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of Cade Industries, Inc., provided that the Executive remains in his current position at the time of a Change in Control; NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the Executive and the Company agree as follows: 1. Employment and Duties. The Company hereby employs Executive as President with all powers and authority as are customary to this position, and Executive hereby accepts employment with the Company in accordance with the terms and conditions set forth herein. Executive shall have such executive responsibilities as is customary with this position and as the Company's Board of Directors shall from time to time assign to him. Executive agrees to devote his full time (excluding annual vacation time), skill, knowledge, and attention to the business of the Company and the performance of his duties under this Agreement. 2. Termination and Severance Pay. a. As used in this Agreement, a Change in Control means: (i) a sale of over 50% of the stock of Cade Industries, Inc. measured in terms of voting power, other than in a public offering or in connection with acquisition by Cade Industries, Inc. of a business filing reports under Section 13 or 15(d) of the Securities Exchange Act of 1934; or (ii) the sale by Cade Industries, Inc. of over 50% of its business or assets in one or more transactions over a consecutive 12- month period; or (iii) a merger or consolidation of Cade Industries, Inc. with or into any other corporation or corporations such that the shareholders of Cade Industries, Inc. prior to the merger or consolidation do not own at least 50% of the surviving entity measured in terms of voting power; or (iv) the acquisition by any means of more than 25% of the voting power or common stock of Cade Industries, Inc. by any person or group of persons; or (v) the election of directors constituting a majority of the board of directors of Cade Industries, Inc. pursuant to a proxy solicitation not recommended by its board of directors. b. As used in this Agreement, a Triggering Event means: (i) a reduction in the compensation amount paid by the Company to the Executive or a reduction in the fringe benefits received by the Executive from the Company from the levels received by the Executive at the time of a Change in Control or during the 120 day period immediately preceding the Change in Control; or (ii) a material change in the Executive's position or duties, Executive's reporting responsibilities, or persons reporting to the Executive from the levels existing at the time of a Change in Control or during the 120 day period immediately preceding the Change in Control; or (iii) a change in the location or headquarters where the Executive is expected to provide services of 30 or more miles from the previous location existing at the time of the Change in Control or during the 120 day period immediately preceding the Change in Control. c. After a Change in Control and if a Triggering Event occurs within 12 months of the date of a Change in Control, the Executive may terminate his services, voluntarily or involuntarily. Upon such termination the Company shall: (i) continue to provide insurance benefits as customarily offered by the Company to the Executive at the Change in Control for a one year period after the date of termination at no cost to the Executive; and (ii) pay in one lump sum within 30 days after the termination date the total amount that would be received by the Executive over a period of one year after the termination (based upon the higher of the compensation amount paid to the Executive at the date of the Change in Control or during the 120 day period immediately preceding the Change in Control) including amounts that would be paid for bonuses during the year of the termination (provided the bonus amount shall not be less than the prior year's bonus amount paid to the Executive). d. In the event that the severance benefits payable to the Executive under this section or any other payments or benefits received or to be received by the Executive from the Company (whether payable pursuant to the terms of this Agreement, any other plan, -2- agreement or arrangement with the Company) or any corporation ("Affiliate") affiliated with the Company within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to the Executive, constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and the present value of such "parachute payments" equals or exceeds three times the average of the annual compensation payable to the Executive by the Company (or an Affiliate) and includable in the Executive's gross income for federal income tax purposes for the five calendar years preceding the year in which a Change in Control of the Company occurred ("Base Amount"), such Severance Benefits shall be reduced to an amount the present value of which (when combined with the present value of any other payments or benefits otherwise received or to be received by the Executive from the Company (or an Affiliate) that are deemed "parachute payments") is equal to $1 less than the Base Amount, notwithstanding any other provision to the contrary in this Agreement. The Severance Benefits shall not be reduced to the extent that (A) the Executive shall have effectively waived his receipt or enjoyment of any such payment or benefit which triggered the applicability of this section, or (B) in the opinion of tax counsel, the Severance Benefits (in their full amount or as partially reduced, as the case may be) plus all other payments or benefits which constitute "parachute payments" within the meaning of Section 280G(b)(2) of the Code are reasonable compensation for services actually rendered, within the meaning of Section 280G(b)(4) of the Code, and such payments are deductible by the Company. The Base Amount shall include every type and form of compensation includable in the Executive's gross income in respect of his employment by the Company (or an Affiliate), except to the extent otherwise provided in temporary or final regulations promulgated under Section 280G(b) of the Code. For purposes of this section only, a Change in Control shall have the meaning of a "change in ownership or control" as set forth in Section 280G(b) of the Code and any temporary or final regulations promulgated thereunder. The present value of any non-cash benefit or any deferred cash payment shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(b)(3) and (4) of the Code. e. The Executive shall have the right to request that the Company obtain a ruling from the Internal Revenue Service ("Service") as to whether any or all payments or benefits determined by such tax counsel are, in the view of the Service, "parachute payments" under Section 280G. If a ruling is sought pursuant to the Executive's request, no Severance Benefits payable under this Agreement shall be made to the Executive until after 15 days from the date of such ruling. For purposes of this section, the Executive and the Company agree to be bound by the Service's ruling as to whether payments constitute "parachute payments" under Section 280G. If the Service declines, for any reason, to provide the ruling requested, the tax counsel's opinion provided in this section with respect to what payments or benefits constitute "parachute payments" shall control, and the period during which the Severance Benefits may be deferred shall be extended to a date 15 days from the date of the Service's notice indicating that no ruling would be forthcoming. -3- In the event that Section 280G, or any successor statute, is repealed, this Section shall cease to be effective on the effective date of such repeal. The parties to this Agreement recognize that final regulations under Section 280G of the Code may affect the amounts that may be paid under this Agreement and agree that, upon issuance of such final regulations, this Agreement may be modified as in good faith deemed necessary in light of the provisions of such regulations to achieve the purposes of this Agreement, and that consent to such modifications shall not be unreasonably withheld. f. Notwithstanding any provision herein, no amounts will be due under this Agreement in the event the Executive's employment is terminated by the Company for cause. The term "for cause" shall mean solely the following events: (i) Executive has been convicted of a felony which has adversely affected the Company's reputation; (ii) Executive has materially misappropriated Company funds, property or opportunities; or (iii) Executive has materially breached any of the provisions of this Agreement having been provided by written notice a reasonable opportunity (not less than 15 business days) to cure such breach. 3. Confidential Information. Executive acknowledges that all Confidential Information is and shall continue to be the exclusive proprietary property of the Company, whether or not disclosed to or entrusted to the custody of Executive. Executive will not, either during the term hereof or at any time thereafter, disclose any Confidential Information, in whole or in part, to any person or entity other than to employees or affiliates of the Company, for any reason or purpose, unless the Company gives its prior written consent to such disclosure or is required to carry out the duties. Executive also will not, either during the term hereof or at any time thereafter, use in any manner any Confidential Information for his own purposes or for the benefit of any person or entity except the Company and its affiliates whether such use consists of duplication, removal, oral communication, disclosure, transfer or other unauthorized use thereof, unless the Company gives its prior written consent to such use. As used herein, the term "Confidential Information" refers to all information and materials not in the public domain belonging to, used by or in the business of the Company (the "Business") relating to its business strategies, products, pricing, customers, technology, programs, costs, employee compensation, marketing plans, developmental plans, computer programs, computer systems, inventions, developments, formulae, processes, designs, drawings, trade secrets of every kind and character and competitive information. "Confidential Information" also includes confidential information belonging to other companies and disclosed to the Executive by the Company. -4- 4. Non-competition and Inventions. a. During the period of employment of Executive and for a period of one year after Executive's termination of employment for any reason, Executive shall not directly or indirectly as a principal, agent, owner, employee, consultant, advisor, trustee, beneficiary, distributor, partner, co-venturer, officer, director, stockholder or in any other capacity, nor will any entity owned by Executive: (i) divert or attempt to divert any business from the Company or engage in any act likely to cause any customer or supplier of the Company to discontinue or curtail its business with the Company or to do business with another entity, firm, business, activity or enterprise directly or indirectly competitive with the Company; or (ii) contact, sell or solicit to sell or attempt to contact, sell or solicit to sell products competitive to those sold by the Company to any customer of the Company with which Executive had contact while performing services for the Company. Notwithstanding the provisions above, Executive may acquire securities of any entity the securities of which are publicly traded, provided that the value of the securities of such entity held directly or indirectly by Executive immediately following such acquisition is less than 5% of the total value of the then outstanding class or type of securities acquired. b. Executive acknowledges and agrees that the restrictions set forth in this section 4 are founded on valuable consideration and are reasonable in duration and geographic area in view of the circumstances under which this Agreement is executed and that such restrictions are necessary to protect the legitimate interests of the Company. If, in any judicial proceeding, a court shall refuse to enforce any separate covenant set forth herein, then such unenforceable covenant shall be deemed eliminated from this section 4 for the purpose of that proceeding to the extent necessary to permit the remaining separate covenants to be enforced. c. The Executive hereby sells, transfers and assigns to the Company the entire right, title and interest of the Executive in and to all inventions, ideas, disclosures and improvements, whether patented or unpatented, and copyrightable materials, made or conceived by the Executive, solely or jointly, or in whole or in part, during the period Executive is bound by this Agreement which (i) relate to methods, apparatus, designs, products, processes or devices sold, leased, used or under construction or development by the Company or any subsidiary or (ii) otherwise relate to or pertain to the business, functions or operations of the Company or any subsidiary, or (iii) arise (wholly or partly) from the efforts of the Executive during the Term hereof in connection with his performance of his duties hereunder. The Executive shall communicate promptly and disclose to the Company, in such form as the Company requests, all information, details and data pertaining to the -5- aforementioned inventions, ideas, disclosures and improvements; and, whether during the term hereof or thereafter, the Executive shall execute and deliver to the Company such formal transfers and assignments and such other papers and documents as may be required of the Executive to permit the Company to file and prosecute the patent applications and, as to copyrightable material, to obtain copyright thereon. This provision does not relate to any invention for which (i) no equipment, supplies, facilities or trade secret information of the Company was used and which was developed entirely on the Executive's own time and which does not relate (A) directly to the business of the Company, or (B) to the Company's actual or demonstrably anticipated research or development; or (ii) does not result in any work performed by the Executive for the Company. 5. Miscellaneous. a. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Minnesota, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. b. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive, to his address appearing on the records of the Company. If to the Company: CENTRAL ENGINEERING COMPANY 2930 Anthony Lane Minneapolis, MN 55418 Attention: Board of Directors or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. c. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. d. The Company may withhold from any amounts payable under this Agreement such federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. -6- e. The Executive's or the Company's failure to insist upon strict compliance with any provisions hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for cause pursuant to this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. f. The Executive and the Company acknowledge that, except as may otherwise be provided herein or under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, except in connection with or within 12 months following a Change in Control, the Executive's employment and this Agreement may be terminated by the Company at any time, in which case the Executive shall have no further rights under this Agreement. g. The Company agrees that if it breaches any payment obligation hereunder, the Company will pay all reasonable attorney fees and costs incurred by Executive in enforcing Executive's rights hereunder. h. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 6. Injunctive Relief. Executive acknowledges and agrees that irreparable injury will result to the Company in the event Executive breaches any covenant contained in this Agreement and that the remedy at law for such breach will be inadequate. Therefore, if Executive engages in any act in violation of the provisions of this Agreement, the Company shall be entitled, in addition to such other remedies and damages as may be available to it by law or under this Agreement, to injunctive or other equitable relief to enforce the provisions hereof. -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. Central Engineering Company By: -------------------------------- A Director [Officer] -------------------------------- President -8- EX-10.14 10 SECOND AMEND. TO SUBLEASE DATED 8/4/1998 SECOND AMENDMENT TO SUBLEASE THIS SECOND AMENDMENT TO SUBLEASE is made and entered into as of this 4th day of August, 1998, by and between SCIENTIFIC-ATLANTIC, INC., a Georgia Corporation ("Sublessor") and CADE COMPOSITES, INC., a California corporation ("Sublessee"). WITNESSETH: WHEREAS, Sublessor and Sublessee have entered into a Sublease dated March 29, 1991 ("Sublease"), with respect to that portion of Lot 26 of the city of San Diego Industrial Park Unit NO. 7, Map 6658, identified as Parcel No. 2; and WHEREAS, Sublease was amended pursuant to the FIRST AMENDMENT TO SUBLEASE dated April 24, 1991; and WHEREAS, Sublessor and Sublessee desire to amend Sublease as provided herein. NOW, THEREFORE, for and in consideration of ten dollars ($10.00) paid by Sublessor and Sublessee to one another, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Sublessor and Sublessee, Sublessor and Sublessee hereby amend said Sublease as follows: 1. Article III. TERM: "January 31, 1999" is hereby deleted and replaced with "November 12, 2003." 2. ARTICLE IV. RENT: Fixed Rental commencing February 1, 1999 shall be as follows: From June 1, 1998 through January 31, 1999 $30,944 per month. From February 1, 1999 through January 31, 2000: $29,175 per month. From February 1, 2000 through January 31, 2001: $30,342 per month. From February 1, 2001 through January 31, 2002: $31,556 per month. From February 1, 2002 through January 31, 2003: $32,818 per month. From February 1, 2003 through November 12, 2003: $34,131 per month. 3. ARTICLE VI. OPTION TO EXTEND: Is hereby deleted in its entirety. 4. ARTICLE IX. TENANT IMPROVEMENTS AND ALLOWANCE: Sub-article (d) remains in full force and effect. All other sub-articles are hereby deleted in their entirety. 5. ARTICLE XXVIII. NOTICES AND WAIVERS: "Charles R. Smith" is hereby deleted, and replaced with "Kevin L. Best." 6. This amendment shall be binding upon and insure to the benefit of the parties hereto, their respective guarantors, successors and assigns. 7. Sublease is hereby modified and shall remain in full force and effect as amended by this Amendment. IN WITNESS WHEREOF, Sublessor and Sublessee have executed and delivered this Amendment under seal on the day and year first written above. SUBLESSOR: SUBLESSEE: - --------- --------- SCIENTIFIC-ATLANTA, INC., a CADE COMPOSITES, INC., a Georgia corporation California corporation By:/s/ By:/s/ Robert A. Spring -------------------------------- ------------------------------- Title: Senior Vice President and Title: President Chief Financial Officer EX-13 11 ANNUAL REPORT TO SHAREHOLDERS 1998 [LOGO OF CADE INDUSTRIES, INC.] 1998 annual report Table of Contents - -------------------- 3 To Our Shareholders 5 Selected Financial Highlights 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Report of Independent Auditors 12 Consolidated Balance Sheets 13 Consolidated Statements of Income 14 Consolidated Statements of Cash Flows 15 Consolidated Statements of Changes in Shareholders' Equity 16 Notes to Consolidated Financial Statements Corporate Overview - -------------------- Cade Industries is a leading supplier of products and services to the aerospace and air transport industries. Cade designs, develops, manufactures, overhauls and repairs high technology composite components for the aerospace and air transport industries, and is a global leader in the design and manufacture of jet engine test facilities and related ground testing equipment. PRODUCTS Cade's core products include molded and bonded composite jet engine components, metal fabricated and bonded composite airframe components and the repair and overhaul of commercial and military gas turbine engine and airframe components as well as flight nacelle structures and engine test facilities, related computer software and data acquisition systems, and associated equipment. 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, both 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. Cade Industries employs approximately 690 employees with manufacturing facilities located in San Diego, California; Minneapolis, Minnesota; Lansing, Michigan; and Dallas, Texas. Dear Shareholders Cade Industries enjoyed another year of record earnings and revenues for 1998, and has recorded a three-year annual growth in earnings per share of greater than 100 percent. These results reflect strong performance throughout the company, highlighted by improving margins, significant gains in revenue from our overhaul and repair services, increased revenues from test facilities and equipment and sustained growth in OEM products. Although we are pleased with these results, we are disappointed that our market valuation decreased by 6 percent for the year. While this is a disappointment to all of us who are shareholders, I assure you that we are actively addressing this with the investment community. Towards this end we repurchased 250,000 shares of outstanding stock in 1998, with additional plans to acquire up to 5% of the outstanding shares in 1999. We continued to focus on the operations and strategies that create shareholder value, including the successful integration of our acquisition of Central Engineering, solid internal growth in our core products and longer-term strategies designed to benefit fully from the sound industry and economic fundamentals underlying our businesses. Key to our future success is a strategic growth plan centered on product diversification, strategic acquisitions and attainment of world class quality standards. Throughout 1998, your company's management initiated and executed successful strategies that are reflected in your company's record results. Net income for the year increased 80 percent, to $4.2 million, on a 72 percent gain in revenue to $95.8 million. Earnings per share rose 73 percent, to 19 cents per share. Cade generated $8.0 million of cash from operations and EBITDA of $10.5 million or 48 cents per share, which was used to fund our growth and pay down debt. Our debt to equity ratio was a favorable 31 percent, well below industry standards and an important advantage in potential acquisitions. These record results were attributable primarily to the strength of the aerospace industry combined with the ongoing success of our diversification strategy, as we widen our product offerings and build a more diversified domestic and international customer base. Our success will continue to depend on diversification, and we are working aggressively to further expand our after-market services sector to 50%-60% of the company's total revenue. Your Company generated approximately 40 percent of its 1998 revenue directly from worldwide airlines and repair facilities, and the share of the company's total revenues from our international business alone grew to 39.7 percent in 1998 up from 21.5 percent in 1997. Cade's customer base has truly become international in its scope, a factor that will add stability as well as expansion opportunities. More important, the solid 1998 results were a continuation of a positive growth trend. Based upon your company's performance over the past three years, Cade was listed as the 33rd fastest growing company in Fortune Magazine's annual ranking of America's Top 100 companies. The criteria for inclusion in Fortune's prestigious and widely respected ranking were our annual earnings per share growth of 103 percent, revenue growth of 40 percent, and three-year annualized return of 57 percent on Cade's share valuation. The management team is proud of this record, and are committed to pursuing continued strong growth trends. Among the initiatives we have already undertaken, or that have been identified as critical to our plans for continued growth into the 21st Century are the following: o Continued development and strengthening of the management team. o Expanding and upgrading design and manufacturing capabilities. o Investment of $3 million in new facilities for overhaul and repair, including installation of new automated manufacturing equipment to improve efficiency. o Focus on customer satisfaction through on-time delivery and high quality products at competitive prices. o Meeting world class quality standards for all our products and services. Two of our four facilities are now ISO 9002 certified, and one has been certified ASO9000 in 1999. o Installation of a computer based, fully integrated management information system at each Subsidiary. o Achieve full Y2K compliance. o Strategic acquisitions. Successful implementation of these initiatives will strengthen the foundation that supports our growth, and help us realize our ambitious goals. 3 1999 Outlook Cade entered 1999 with strong business fundamentals, and is positioned to build on its 1998 accomplishments. We will allocate our resources to after-market products and services, test facilities and equipment services, and will expand our product development in the utilization of engineered composites. These strategies are designed to increase revenues for our higher margin overhaul and repair services. We expect to see a favorable shift in our test equipment services from lower margin subcontract work to data acquisition and software sales, and increase our market share in engine components. Our goal is to push margins beyond 5% in 1999 through more profitable products and services, together with improvements in operating efficiencies and an improved cost structure. We are pleased with our record 1998 results and look forward to 1999 with optimism, fully aware of the challenges presented by the softening in commercial aircraft production rates. Cade closed 1998 with an order backlog of $75 million and expectations that economic conditions should stabilize and benefit our customers. Our increased emphasis on after-market and test equipment, coupled with strict cost controls, will help offset the projected softness in commercial aircraft production by balancing our product mix and improving our margins. Based upon these factors, we have targeted double digit earnings growth in 1999. Your Cade management team recognizes the importance of alerting the investment community to the company's activities and its prospects, and creating value for our fellow shareholders. We are working to increase the investment community's awareness of the value of Cade and are dedicated to reviewing all our options of enhancing the value of your investment. We will be working hard in 1999 to meet your expectations and merit your continued support. /s/ Richard A. Lund Richard A. Lund President and CEO /s/ John W. Sandford John W. Sandford Chairman of the Board 4 Selected Financial Highlights
Year Ended December 31 ----------------------------------------------------------------------------------- 1998 1997 (1) 1996 1995 1994 (2) ----------------------------------------------------------------------------------- (In thousands of dollars, except per share data) Selected Operating Data Sales $95,792 $55,804 $34,867 $30,445 $20,461 Net income (loss) 4,242 2,353 1,058 (382) 159 Net income (loss) per share (3): Basic 0.19 0.11 0.05 (0.02) 0.01 Diluted 0.19 0.11 0.05 (0.02) 0.01 Selected Balance Sheet Data Current assets 37,729 31,201 17,147 13,653 14,534 Total assets 62,275 54,570 35,304 32,685 32,937 Current liabilities 26,242 19,766 9,148 6,592 7,969 Working capital 11,487 11,435 7,999 7,061 6,565 Long-term obligations 8,979 11,471 5,473 6,433 4,930 Shareholders' equity 27,054 23,333 20,683 19,660 20,038
(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) 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 24, 1999 was 1,508. 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 1994 through 1998. 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 1998 and 1997. 1998 1997 --------------------------------------------- High Low High Low --------------------------------------------- First Quarter $ 3 5/32 $2 10/32 $1 16/32 $1 7/32 Second Quarter 4 4/32 2 25/32 1 20/32 1 9/32 Third Quarter 3 15/32 1 30/32 3 15/32 1 15/32 Fourth Quarter 2 22/32 2 4/32 3 16/32 2 8/32 5 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 Income expressed as a percentage of 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.
Percentage of Sales Percent Increase in Dollar Amounts ------------------------------------------------------------------ 1998 1997 1996 1998 vs. 1997 1997 vs. 1996 ------------------------------------------------------------------ Sales 100.0% 100.0% 100.0% 71.7% 60.0% Costs and Expenses Cost of Sales 77.8% 77.9% 76.6% 71.3% 62.8% Selling, General and Administrative Expense 14.8% 14.5% 17.5% 75.5% 32.9% Net Interest Expense 1.0% 1.5% 2.1% 13.7% 14.2% ------ ------- ------ Total Costs and Expenses 93.6% 93.9% 96.2% 71.0% 57.2% ------ ------- ------ Income Before Income Taxes 6.4% 6.1% 3.8% * * Income Tax Expense 2.0% 1.9% 0.8% * * ------- ------- ------ Net Income 4.4% 4.2% 3.0% ======= ======= ======
*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, metal fabricated and bonded composite airframe components and the repair and overhaul of commercial and military gas turbine engine and airframe components as well as flight nacelle structures ("Engine and Airframe Products and Services") and engine test facilities, related computer software and data acquisition systems, and associated equipment ("Test Facilities and Equipment"). Engine and airframe products and services include engine inlets and cases, acoustical liners, fairings, auxiliary power unit enclosures, various control surface products, access doors, wing tips, interior structures and repair and overhaul services. Test facilities and equipment are used in the ground testing and overhaul of major commercial jet engines and related ground support 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, U.S. Government and overhaul facilities. For 1998, 1997, and 1996, sales of Engine and Airframe Products and Services and Test Facilities and Equipment as a percentage of total sales were as follows: Percentage of Total Sales ----------------------------- 1998 1997** 1996** ----------------------------- Engine and airframe products and services 52.7% 76.3% 77.5% Test Facilities and Equipment 47.0% 23.6% 19.2% ----- ----- ----- 99.7% 99.9% 96.7% ===== ===== ===== ** Certain of the 1997 and 1996 classification and amounts have been reclassified to conform to the 1998 presentation 6 The large shift in percentage relationships from 1997 to 1998 primarily reflect the inclusion of the sales of Cenco, whose products classify as Test Facilities and Equipment, for all of 1998. OUTLOOK AND BACKLOG At December 31, 1998, the Company's backlog of orders was $75.0 million ($79.4 million at December 31, 1997). The 1998 year-end backlog included only the first two years of scheduled orders ($25.8 million) under long-term agreements; $70.0 million is scheduled for shipment in 1999. 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. The decrease in order backlog at 1998 year-end compared to 1997 primarily reflects the reduction in subcontract expense content of engine test facility and equipment contracts. Excluding the effect of the subcontract expense, order backlog increased approximately 6.3% from 1997 to 1998 year-end. Overhaul and repair orders, representing 23.8% of total 1998 sales, are excluded from the Company's order backlog due to their very short lead times. 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 internal sales growth in 1999. 1998 COMPARED TO 1997 Sales in 1998 of $95,792,000 increased $39,988,000 or 71.7% from 1997 and included sales from Cenco, acquired as of October 31, 1997, of $34,582,000 and $4,420,000 for 1998 and 1997, respectively. The remaining $9,826,000 of the sales increase, representing 19.1% of 1997 sales, reflects higher sales in gas turbine engine components, engine test equipment and overhaul and repair services. Cost of sales increased 71.3% or $30,998,000 (13.2% or $5,253,000 without regard to Cenco) in 1998 from 1997. Cost of sales as a percent of sales in 1998 of 77.8% was relatively unchanged from 1997. Excluding subcontract costs, cost of sales as a percent of sales was 74.8% for 1998, down from 77.6% in 1997. A portion of Cenco's revenues were derived from contracts to manufacture engine test facilities that involve building construction by subcontractors. These subcontract costs, which were expensed as material costs, were passed on to customers at margins substantially below historical manufacturing results. As adjusted for subcontract costs, cost of sales components as a percent of sales were below 1997 percents except for direct labor costs reflecting increased sales of engine test equipment and repair and overhaul services. Direct labor content in engine test equipment was above historical percents due to the inclusion of labor costs related to data acquisition software at Cenco. Material costs as a percent of sales were below 1997 percents primarily as a result of the previously discussed change in product mix while the reduction in the overhead cost of sales percent reflects the continued emphasis on cost containment and the spreading of fixed manufacturing costs over a larger revenue base. Selling, general and administrative expenses ("administrative expenses") as a percent of sales were 14.8% and 14.5% in 1998 and 1997, respectively (17.4% and 14.8%, respectively, excluding subcontract revenue). The increased percentages in 1998 were primarily the result of higher marketing, commission and royalty expenses. Sales commissions and royalties are directly related to the sales mix of products and/or customers. For 1998, the increased expenses resulted primarily from the continued growth in sales of repair and overhaul services and engine test equipment subject to commission and/or royalty. Partially offsetting the percentage increase was the effect of spreading the administrative expenses over a larger sales base in 1998. Actual amounts expended in 1998 increased $6,119,000 ($2,855,000 attributable to Cenco). Factors contributing to the higher dollar level of administrative expenditures (excluding Cenco) were increased marketing costs, commission and royalty expense, professional and consulting fees relating to development of enterprise resource planning systems, public relations efforts and various tax matters, and travel and certain other costs incurred to support the higher current and expected sales volume. Net interest expense as a percent of sales decreased to 1.0% in 1998 from 1.5% in 1997, while the actual amount increased $114,000 to $947,000. The increase in the net amount of interest expense was due to a full year's interest on the debt associated with the acquisition of Cenco and additional debt incurred related to certain capital asset expansion projects undertaken in 1998. Partially offsetting this increased debt service cost were debt reductions due to scheduled repay- 7 ments, interest received as part of a state tax settlement and lower overall short-term interest rates as a result of borrowing during the year at Eurodollar-based interest rates. Income tax expense was $1,906,000 or 2.0% of sales in 1998, compared to $1,037,000 or 1.9% of sales in 1997. The effective tax rate was lower than the statutory rate, due mainly to the lower tax rate applicable to the Company's foreign sales corporation. The Company had net income of $4,242,000 in 1998, compared to $2,353,000 in 1997, as a result of the factors discussed above. 1997 COMPARED TO 1996 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 acquisition of Cenco. The remaining $16,517,000 of the sales increase, representing 47.3% of 1996 sales, reflected 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 sales. Cost of sales as a percent of 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 resulted, in part, from the inclusion for part of the year of Cenco's operations, whose material cost percentages were 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. 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 resulted 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. The higher sales commissions in 1997 resulted primarily from 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. LIQUIDITY AND CAPITAL RESOURCES The Company has historically 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 250,000 shares of its common stock. Capital has principally been used to fund the 8 Company's inventory and accounts receivable and its plant, equipment and tooling expenditures. During 1998, the Company invested, mainly through long-term bank financing, approximately $610,000 in additional manufacturing capacity, about one half of which was previously leased, for its AutoAir subsidiary in order to meet increased repair and overhaul production requirements. Management expects to reduce its present level of investment in accounts receivable, inventory, production equipment and tooling and to increase its investment in production and information system technology. The Company will also continue to seek acquisition opportunities to expand and/or diversify its products. During 1998 management undertook a company-wide project for the improvement of its business and manufacturing information systems through the purchase of enterprise resource planning software ("ERP") from Baan Systems. The ERP software will serve as the common base platform for the integration of the manufacturing, financial, sales and procurement systems of each of the Company's operations, replacing primarily dissimilar manually-driven systems. This new system is scheduled for completion by end of third quarter 1999. The Company acquires shares of its stock on an ongoing basis when market conditions and cash position warrant. For 1999 management is authorized to purchase up to one million shares under specified conditions. This amount reflects an increase in the repurchase authorization. During 1998, the Company acquired 250,000 shares of its common stock for approximately $680,000. Under the Company's amended and restated loan agreement with a bank, the Company has a $9,000,000 unsecured line of credit, $8,593,000 of which was available at December 31, 1998, after consideration of actual line of credit usage and credit line commitments to support foreign exchange contracts and letters of credit. At December 31, 1998, the Company also had outstanding, approximately $11,119,000 of secured term debt and $661,000 of subordinated notes. Management believes that expected increased revenues and continued emphasis on working capital management will provide positive cash flow from operations. As a result, the Company's cash flow from operations, its current credit facilities and available financing opportunities are felt to be adequate to finance its operations and capital expenditure requirements at present and forecasted levels. OTHER MATTERS Contingency During the third quarter, the Company became aware the design intended to reduce certain acoustic emissions at an engine test facility sold by Cenco for delivery in April 1998, had failed to achieve contract specifications in certain respects. The original acoustic design and installation work had been performed for Cenco under subcontract by a French company which filed for protection under French bankruptcy law in early 1998 prior to completion. Cenco has provided certain remedial work in an attempt to bring the acoustic emissions within contract specifications. Cenco, along with engineering services believed to be reliable, has identified other possible solutions aimed at remedying the acoustic emissions problem. Cenco is in the process of modifying the facility's acoustic design and expects to have the remedial work completed in mid 1999. Subject to completion of an agreement with the customer, Cenco will fund the cost of the remedial work and certain costs incurred by the customer in connection with the interim use of alternative test facilities prior to the time the facility becomes operational. The Company estimates the total cost of completion of remedial work and engine test to range from $6 million to $8 million. The Company believes that these costs are for the most part covered under a combination of a policy of insurance guaranteeing the design work of the subcontractor, an errors and omissions insurance policy covering damages resulting from Cenco design and engineering deficiencies and by warranty and other reserves established by the Company. The subcontractor has asserted a claim against Cenco in the French bankruptcy action and Cenco has filed an action against the subcontractor's insurer in England. It is not possible at this time to estimate the full extent of Cenco's liability for the actual costs of modifications to the facility, or the outcome of the French bankruptcy or English arbitration proceeding. However, the Company believes that up to $13 million of potential insurance recoveries may be available to Cenco for the costs of modifications to the facility and for the interim use of alternative test facilities, although the actual extent of the Company's recoveries cannot yet be determined. Year 2000 Many computer systems and other systems with embedded chip technology process dates based on two digits for the year of a transaction rather 9 than a full four digits. These systems are unable to process properly dates in the year 2000 and beyond. The Company has developed a Year 2000 Action Plan ("Action Plan") to address the issue of computer programs, information technology and embedded computer chips being unable to distinguish between the year 1900 and the year 2000. The Action Plan consists of three major sections: 1) information technology ("IT") systems, which includes the company-wide ERP project previously discussed; 2) non-IT systems; and 3) third-party communications. Phases common to each of the three major sections are: inventory of all equipment and software; assessment of Year 2000 compliance of inventoried equipment and software with prioritization of non compliant items determined to be material to the Company; repair or replacement of material, non compliant items; testing of material items; and development and implementation of contingency plans in the event of material system failures. The Company utilizes a number of computer systems across its operations and has identified its significant software coding issues related to the year 2000 date recognition for key financial and operational systems. The Company has resolved some year 2000 issues at its various operations and plans to continue resolving the matter through either replacement of existing systems with new year 2000 compatible systems or reprogramming existing systems. In 1998, the Company incurred costs, including the ERP project, of less than $425,000 related to its year 2000 efforts. The additional costs, including the ERP project, to be incurred on reprogramming of existing systems, and of replacement equipment, hardware and software are estimated to be less than $800,000. Completion of all reprogramming and replacement of equipment, hardware and software is expected by the end of third quarter 1999. All costs related to the reprogramming of existing systems and the identification of replacement systems for the year 2000 issue are expensed as incurred while new equipment, hardware and software replacement costs will be capitalized. Based on the Company's efforts to date, management believes that its systems will be year 2000 compliant. The Company is working with its key customers and suppliers to obtain assurances that their systems are year 2000 compliant. However, the Company does not have any control over these third parties and, as a result, cannot currently determine to what extent future operating results may be adversely affected by the failure of these third parties to address successfully their year 2000 issues. In addition, the Company operates across the world in countries at various stages of economic development and is dependent on systems operated by governments, financial institutions, utilities, communications suppliers and others in each of these countries. The failure of any of such infrastructural systems to be year 2000 compliant could disrupt the Company's business for a period of time and if not quickly resolved could have a material adverse effect on the Company. The Company has not yet developed formal contingency plans in the event of a Year 2000 failure by any of its suppliers. Effects of Inflation The Company has entered into multi-year sales agreements with fixed prices in its core businesses 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. Forward - Looking Statements The Company's officers may, when appropriate, make public statements that contain forward looking information as to industry conditions and the Company's sales and earnings. Statements in this annual report as to future sales, earnings, cash flow, operating margins, potential insurance recoveries, and economic and industry conditions are forward looking information. Forward looking information is subject to risks and uncertainties that may significantly impact expected results. Among the factors that could cause actual results to differ materially from those which are anticipated are the following: business conditions generally and conditions specifically in the aircraft and aerospace industries; timing of receipt and delivery of orders; the timing and satisfactory completion of engine test facilities; price fluctuations for raw materials and labor; competitive factors, including price competition from other suppliers of similar prod- 10 ucts and overhaul and repair services; risk of obsolescence of tooling inventory before full amortization on project costs; cancellation of orders; foreign currency exchange rates, the ability to obtain effective hedges against fluctuations in currency exchange rates; foreign trade and fiscal policies; insurance recoveries; and unexpected developments while implementing the modifications necessary to mitigate Year 2000 compliance issues, including the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, the indirect impacts of third parties with whom we do business and who do not mitigate their Year 2000 compliance problems and similar unforeseen consequences of the Year 2000 issue. New Accounting Pronouncements In June 1998 the Financial Accounting Standards Board issued Statement No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities", which is effective for years beginning after June 15, 1999. The Company has not completed its evaluation of the effect of adopting SFAS 133, therefore, it is unable to disclose the impact on its financial position and results of operations of such statement adoption. Independent Auditors' Report Shareholders and Board of Directors Cade Industries, Inc. and Subsidiaries Okemos, Michigan We have audited the accompanying consolidated balance sheets of Cade Industries, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Lansing, Michigan February 9, 1999 11 Consolidated Balance Sheets
December 31 --------------------------------- 1998 1997 --------------------------------- Assets Current assets Cash and cash equivalents $ 274,831 $ 1,093,176 Trade accounts receivable 13,172,191 12,687,969 Costs and estimated earnings in excess of billings on uncompleted contracts 3,923,693 2,053,922 Inventories 17,084,921 13,798,967 Deferred income taxes 2,184,000 1,154,000 Prepaid expenses and other assets 780,685 413,132 ----------- ----------- Total current assets 37,728,979 31,201,166 Property, plant, and equipment 19,196,668 17,662,161 Intangible and other assets Goodwill 5,130,957 5,552,849 Other assets 218,227 153,715 ----------- ----------- 5,349,184 5,706,564 Liabilities and Shareholders' Equity $62,274,831 $54,569,891 Current liabilities Note payable to bank $ 150,000 $ 1,460,000 Current portion of long-term debt 3,467,066 3,012,998 Trade accounts payable 7,034,214 5,190,782 Employee compensation and amounts withheld 2,446,571 2,471,638 Billings in excess of costs and estimated earnings on uncompleted contracts 9,600,327 5,626,388 Accrued expenses 2,591,998 1,609,611 Accrued income taxes 951,337 395,088 ----------- ----------- Total current liabilities 26,241,513 19,766,505 Long-term debt 8,313,322 10,582,554 Deferred income taxes 666,000 788,000 Contingencies 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 22,348,859 shares (22,236,859 shares in 1997) 22,349 22,239 Additional paid-in capital 9,491,975 9,360,968 Retained earnings 18,717,424 14,475,571 ----------- ----------- 28,231,748 23,858,778 Less cost of common stock in treasury (550,232 and 350,055 shares in 1998 and 1997, respectively) 1,177,752 525,946 ----------- ----------- 27,053,998 23,332,832 ----------- ----------- See accompanying notes. $62,274,831 $54,569,891 =========== ===========
12 Consolidated Statements of Income
Year Ended December 31 ------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------------------------------------------------------- Sales $95,792,417 $55,803,761 $34,867,072 Cost of Sales 74,478,593 43,480,918 26,704,927 ----------- ----------- ----------- 21,313,824 12,322,843 8,162,145 Selling, general and administrative expenses 14,218,774 8,099,595 6,097,363 ----------- ----------- ----------- Income from operations 7,095,050 4,223,248 2,064,782 Interest expense - net (947,197) (832,973) (729,290) ----------- ----------- ----------- Income before income taxes 6,147,853 3,390,275 1,335,492 Income tax expense 1,906,000 1,037,000 277,000 Net income $ 4,241,853 $ 2,353,275 $ 1,058,492 =========== =========== =========== Net income per common share: Basic $ 0.19 $ 0.11 $ 0.05 Diluted $ 0.19 $ 0.11 $ 0.05 Average number of common equivalent shares outstanding Basic 21,957,000 21,720,000 21,693,000 Diluted 22,545,000 22,166,000 21,880,000
See accompanying notes. 13 Consolidated Statements of Cash Flows
Year Ended December 31 ------------------------------------------------------------------------------ 1998 1997 1996 ------------------------------------------------------------------------------ Operating activities Net income $ 4,241,853 $ 2,353,275 $ 1,058,492 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,372,108 2,898,254 2,626,109 Provision for deferred income taxes (benefit) (952,000) (115,000) 91,000 (Gain) Loss on sale of equipment and other (30,184) 10,529 13,520 Changes in operating assets and liabilities: Trade accounts receivable (484,222) (2,020,716) (1,915,207) Billings in excess of costs and estimated earning on uncompleted contracts - net 254,168 993,793 Inventories (3,288,954) (3,440,390) (1,995,635) Prepaid expenses and other current assets (367,553) (166,461) 317,826 Trade accounts payable 1,843,432 784,240 1,202,970 Other current liabilities 3,363,569 2,100,701 (149,865) ----------- ----------- ----------- Net Cash provided by operating activities 7,952,217 3,396,225 1,249,210 Investing activities Additions to property, plant and equipment (4,657,306) (2,683,143) (1,764,166) Acquisition of Cenco (5,197,106) Other - net (83,345) (37,780) (2,261) ----------- ----------- ----------- Net Cash used in investing activities (4,740,651) (7,918,029) (1,766,427) Financing activities Proceeds from long-term debt 2,220,473 11,470,134 507,316 Payments and refinancing of long-term debt (4,114,037) (4,171,983) (1,831,021) Increase (decrease) in note payable to bank (1,310,000) (1,550,000) 1,710,000 Purchases of common stock for treasury (679,208) (203,957) (92,469) Exercise of stock options and other 158,519 49,180 57,512 ----------- ----------- ----------- Net Cash provided by (used in) financing activities (3,724,253) 5,593,374 351,338 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents (512,687) 1,071,570 (165,879) Cash and cash equivalents at beginning of year 1,093,176 21,606 187,485 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 580,489 $ 1,093,176 $ 21,606 =========== =========== =========== Cash paid (received) during the year for: Interest $ 1,164,308 $ 730,647 $ 772,257 Income taxes, net of refunds received 2,293,200 900,072 (39,415) Supplemental schedule of noncash investing and financing activities: $ 507,316 Capital leases $ 70,873 $ 248,706 Fair market value of common stock Issued for acquisition 451,000
See accompanying notes. 14 Consolidated Statements of Changes in Shareholders' Equity
Common Stock Additional ------------ Paid-In Number of Shares Par Value Amount Capital Retained Earnings Treasury Stock ---------------- ---------------- ---------- ----------------- -------------- Balance at January 1, 1996 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) Stock options exercised 110,000 110 93,015 Purchase of 250,000 shares of common stock (679,208) Employee stock awards 37,992 27,402 Net income for the year 4,241,853 ----------- ---------- ------------ ----------- ------------ Balance at December 31, 1998 22,348,859 $ 22,349 $ 9,491,975 $18,717,424 $ (1,177,752) ========== ========== ============ =========== ============
See accompanying notes. 15 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): Cade AutoAir, Inc. (AutoAir); Cade Composites, Inc. (CCI); Cade International, Inc. (CI); Cade Cenco, Inc. (Cenco); Cade Europe, Inc. (CE) and Pollux Acquisition Corporation (Pollux) and its wholly-owned subsidiary, Cade HAC, Inc. (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. 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 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. Goodwill Goodwill is being amortized over 30 to 40 years using the straight-line method. Accumulated amortization was $969,000 and $768,000 at December 31, 1998 and 1997, 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. 16 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 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 the dilutive effects of stock options (588,000, 446,000 and 187,000 shares in 1998, 1997 and 1996, respectively). 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 Management continually reviews long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and long-lived assets and certain identifiable intangibles to be disposed of for impairment. Management has determined that there has been no 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. 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, which has been extended pending mediation of certain claims, requiring the escrow of $400,000 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. Cenco designs and manufactures engine test cell facilities and related ground test equipment. 17 The acquisition of Cenco has been accounted for using the purchase method of accounting. 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 2,341,000 734,000 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
December 31 ------------------------------------------ 1998 1997 ------------------------------------------ Uncompleted contracts consists of: Costs incurred on uncompleted contracts $72,283,327 $ 58,740,285 Estimated earnings 6,377,140 5,684,123 ------------ ------------ 78,660,467 64,424,408 Less billings to date 84,337,101 67,996,874 ------------ ------------ $ (5,676,634) $ (3,572,466) ============ ============ Included in the accompanying consolidated balance sheets under the following captions: Costs and estimated earnings in excess of billings on uncompleted contracts $ 3,923,693 $ 2,053,922 Billings in excess of costs and estimated earnings on uncompleted contracts (9,600,327) (5,626,388) ------------ ------------ $ (5,676,634) $ (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 ------------------------------------------ 1998 1997 ------------------------------------------ Finished goods $ 377,000 $ 882,378 Work-in-progress 8,176,672 6,344,798 Raw materials and supplies 8,671,324 6,571,791 ------------- ------------- $ 17,087,921 $ 13,798,967 ============= ============= 18 Note 5. Property, Plant, and Equipment Property, plant and equipment are stated at cost and consist of:
December 31 ------------------------------------ 1998 1997 Estimated Useful Life ------------------------------------ Land and improvements $ 803,365 $ 737,365 25-31.5 years Buildings 7,766,606 6,934,411 3-12 years Machinery and equipment 13,489,504 11,430,507 See below Tooling 13,336,445 12,447,568 ----------- ----------- 35,395,920 31,549,851 Accumulated depreciation and amortization 16,199,252 13,887,690 ----------- ----------- $19,196,668 $17,662,161 =========== ===========
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). Note 6. Leases Future minimum lease payments, by year and in the aggregate for noncancelable operating leases with initial or remaining terms of one year or more, consisted of the following at December 31, 1998: 1999 $ 596,813 2000 491,557 2001 495,853 2002 497,808 2003 458,903 Thereafter 648,598 ----------- Total minimum lease payments $ 3,189,532 =========== Rent expense for 1998, 1997, and 1996 totaled $521,000, $537,000, and $560,000, respectively. Note 7. Note Payable and Long-Term Debt Note payable to bank of $150,000 at December 31, 1998 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% (7.25% at December 31, 1998) 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, 1998) for fixed periods not to exceed 90 days. Up to $3,500,000 ($257,000 at December 31, 1998) 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 year ended December 31, 1998 was 7.6% and was 7.8% for 1997 and 1996. 19 Long-term debt consists of:
December 31 ----------------------------- 1998 1997 ----------------------------- Term Note A payable to bank in quarterly installments of $178,571, commencing January 1998 $ 2,857,143 $ 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 2,871,197 4,000,000 Term Note C payable to bank in quarterly installments of $270,833, commencing January 1998 2,166,667 3,250,000 Term Note D payable to bank in quarterly installments of $100,000 commencing October 1998 900,000 Subordinated notes payable in four equal annual payments beginning November 1996, interest at 6% payable semi-annually 661,260 1,430,520 Term note payable to bank in monthly installments commencing February 1999 600,000 Note payable to bank in monthly installments to July 2005 514,649 542,209 Mortgage note payable to bank in monthly installments commencing April 1997 to February 2001 with unpaid balance due March 2002 330,000 370,000 Mortgage note payable to bank in monthly installments commencing October 1998 to August 2003 with unpaid balance due September 2003 549,461 Capital lease obligations, interest rates ranging from 7.75% to 12.71%, due through March 2002 330,011 531,394 ---------- ----------- 11,780,388 13,695,552 Current maturities 3,467,066 3,012,998 ---------- ----------- $ 8,313,322 $10,682,554 ========== ===========
20 o 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 1997 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, 1998), 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. o 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% (7.25% at December 31, 1998), 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%. o Term Note D is secured by substantially all of the Company's and subsidiaries tangible assets and bears interest at 7.88%. Proceeds of Term Note D were used to refinance a portion of Term Note B. o 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. o The note payable to bank is secured by certain HAC real estate and equipment items, bearing interest at 2.75% plus the prime lending rate, as defined (10.5% at December 31, 1998). o The mortgage notes payable to bank are secured by certain Auto-Air real estate, bear interest at 8.45% and 7.76%, respectively, and are guaranteed by the Company. o The term note payable to bank is secured by the machinery and equipment of the Company and its subsidiaries and is guaranteed by each subsidiary. Aggregate annual maturities of long-term debt, including capital leases, for periods subsequent to December 31, 1998 are approximately as follows: 1999--$3,467,000; 2000--$2,834,000; 2001--$1,395,000; 2002--$3,234,000; 2003--$548,000; and thereafter--$302,000. Note 8. 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 $336,000 in 1998, $277,000 in 1997, and $198,000 in 1996. Bargaining unit employees of one subsidiary participate in a union sponsored multi-employer defined benefit plan. Company cost and contributions were $247,000, $176,000 and $145,000 in 1998, 1997 and 1996, 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 significant. Note 9. Shareholders' Equity In August 1998, the Company's Board of Directors adopted a shareholder rights plan and declared a rights dividend of one common stock purchase right for each share of common stock then outstanding. The shareholder rights plan becomes operative upon certain events involving the acquisition of 15% or more of the Company's outstanding common stock by any person or group in a transaction not approved by the Company's Board of Directors. Upon the occurrence of such an event, each right, unless redeemed by the Board, entitles its holder (other than the acquiring person or group whose rights are canceled) to purchase for $15 an amount of common stock of the Company, or in certain circumstances the acquirer, having a $30 market value. The rights have no voting power and expire on August 3, 2008. 21 Note 10. Stock Options Options activity during the years ended December 31, 1998, 1997, and 1996 is as follows:
Number of Exercise Weighted Number Shares Price Average Exercise of Shares Exercisable Per Share Price Per Share --------- ----------- ------------ ---------------- Outstanding at January 1, 1996 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 1,017,000 886,000 .67 - 2.19 1.07 Options granted: Under 1990 Plan 228,000 2.38 2.38 Directors 50,000 2.50 2.50 Options exercised (110,000) .67 - 1.70 .85 Options canceled (50,000) .72 .72 ---------- Outstanding at December 31, 1998 1,135,000 867,600 .67 - 2.50 1.43 ==========
At the Company's Annual Meeting of Shareholders held in May 1998, the shareholders approved the 1998 Omnibus Incentive Stock Plan ("1998 Plan"). The 1998 Plan replaces the Company's existing 1990 Nonqualified Stock Option Plan ("1990 Plan"), although options granted under that plan will remain in effect until they have been exercised or have expired and such options shall be administered in accordance with their terms and the plan under which they were granted. The 1998 Plan provides for the issuance of up to 2 million shares of the Company's common stock . Under the 1998 Plan, nonqualified stock options and restricted stock (each, an "award") may be granted. Stock options ("options") granted under the plan: are intended to represent non-qualified stock options; carry an exercise price not less than fair market value of the common stock on the date of the grant; expire no longer than ten years from date of grant, and become exercisable based on the same timetable, unless otherwise provided in the applicable stock option agreement, as applies to the 1990 Plan as described below. Restricted stock granted under the plan: cannot be disposed of in any way while restrictions apply; provide the recipient all the rights of a shareholder of the Company with respect to the restricted shares; shall be forfeited, unless otherwise provided in the applicable restricted stock agreement, upon termination of employment, and, unless terms to the contrary are expressly provided in a grant of restricted stock, will become unrestricted at a rate of 20% per year beginning one year from date of grant. Awards may be granted under the 1998 Plan up to May 5, 2008. During 1998, no awards were granted under the 1998 Plan. The 1990 Nonqualified Stock Option Plan provided 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. No additional options will be granted under the 1990 Plan as a result of its replacement by the 1998 Plan. Members of the Board of Directors hold options to purchase 650,000 (300,000 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 2008. 22 The outstanding stock options at December 31, 1998 have a weighted average contractual life of 6.5 years and a weighted average exercise price of $1.43 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 net income and income per share for 1998, 1997 and 1996 would not have been material. The weighted average fair value of the stock options granted during 1998 and 1997 was $1.68 and $0.89, respectively. 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 1998 and 1997, respectively: no dividend yield in either year; risk free interest rate of 4.75% and 5.75%; expected life of 8.8 years and 8.5 years, and expected volatility of 61% and 50%. Note 11. Income Taxes Significant components of the Company's deferred tax assets (liabilities) as of December 31, 1998 and 1997 are as follows: 1998 1997 -------------------------- Current Uniform inventory capitalization $ 174,000 $ 117,000 Uniform tooling capitalization 102,000 73,000 Expense and loss accruals 1,708,000 764,000 Net Operating loss carryforwards 200,000 200,000 ----------- ----------- Total current deferred tax assets $ 2,184,000 $ 1,154,000 =========== =========== Long-term $ 444,000 $ 557,000 Net Operating loss carryforwards 101,000 101,000 ----------- ----------- Tax credit carryforwards 545,000 658,000 Total long-term deferred tax assets (210,000) (410,000) ----------- ----------- Valuation allowance 335,000 248,000 Net long-term deferred tax assets Tax over book depreciation (1,050,000) (1,088,000) Other - net 49,000 52,000 ----------- ----------- Total long-term deferred tax liabilities (1,001,000) (1,036,000) ----------- ----------- Net long-term deferred tax liabilities $ (666,000) $ (788,000) =========== =========== 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 for income taxes consisted of the following: 1998 1997 1996 --------------------------------------- Current (credit): Federal $ 2,758,000 $ 1,123,000 $ 207,000 State and local 100,000 29,000 (21,000) ----------- ----------- ---------- Total current 2,858,000 1,152,000 186,000 Deferred (credit): Federal (952,000) (115,000) 91,000 ----------- ----------- ---------- $ 1,906,000 $ 1,037,000 $ 277,000 =========== =========== ========== 23 The reconciliation of income tax computed at the U.S. federal statutory tax rate to income tax expense is:
1998 1997 1996 ------------------------------------- Tax at U.S. federal statutory rate $2,090,000 $1,153,000 $ 454,000 State and local income taxes (net of federal tax benefit) 66,000 19,000 (14,000) Non-deductible amortization 68,000 42,000 37,000 Lower effective income tax of foreign sales corporation (367,000) (171,000) (55,000) Adjustment of estimated liabilities (24,000) (150,000) Other 49,000 18,000 5,000 ---------- ---------- ---------- $1,906,000 $1,037,000 $ 277,000 ========== ========== ==========
Note 12. Foreign Currency Contracts During 1998 and 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, 1998 and 1997, the Company had forward currency contracts, all with a maturity of less than one year, to exchange British pounds, Thai bahts, Singapore dollars and German marks for U.S. dollars in the amounts of $553,000 ($4,175,000 - 1997), $361,000 ($6,066,000 - 1997), $533,000 ($3,383,000 - 1997) and $1,123,000, respectively. There were no significant unrealized gains or losses related to foreign currency contracts at December 31, 1998. Note 13. Business Segments Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products and services, geographic areas, and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Cade's chief operating decision maker is its Chief Executive Officer. Cade's reportable operating segments ("product segments") are Engine and Airframe Products and Services and Test Facilities and Equipment. Engine and Airframe Products and Services consists of molded and bonded composite jet engine components; metal fabricated and bonded composite airframe components; and the repair and overhaul of commercial and military gas turbine engine and airframe components as well as flight nacelle structures. Engine and airframe products and services are sold worldwide to commercial and military engine and airframe manufacturers, commercial airlines and government agencies. Test Facilities and Equipment includes engine test facilities, computer software and data acquisition systems, and related equipment used in the ground testing and overhaul of major commercial jet engines and related ground support equipment sold worldwide to engine manufacturers, commercial airlines and overhaul facilities. Other includes certain unallocated assets, goodwill amortization and corporate administration expenses not allocated to other internal reporting entities. The accounting policies of the product segments are the same as those described in the summary of significant accounting policies except that the disaggregated financial results for the product segments have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. Generally, Cade evaluates performance based on stand-alone product segment operating income. Net sales are attributed to geographic areas based on the location of the customer. 24 Financial information segregated by reportable product segments is as follows:
For the Years Ended December 31 ---------------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------- Sales Engine and airframe products and services $50,731,000 $42,601,000 $28,184,000 Test facilities and equipment 45,061,000 13,203,000 6,683,000 ----------- ----------- ----------- Consolidated Sales $95,792,000 $55,804,000 $34,867,000 =========== =========== =========== Operating income (loss) Engine and airframe products and services $ 5,553,000 $ 3,662,000 $ 2,132,000 Test facilities and equipment 3,547,000 1,069,000 (192,000) Other (2,005,000) (508,000) 125,000 ----------- ----------- ----------- Consolidated Operating Income $ 7,095,000 $ 4,223,000 $ 2,065,000 =========== =========== =========== Depreciation and Amortization Engine and airframe products and services $ 2,125,000 $ 3,662,000 $ 2,132,000 Test facilities and equipment 1,096,000 1,069,000 (192,000) Other 151,000 135,000 120,000 ----------- ----------- ----------- Consolidated Depreciation and Amortization $ 3,372,000 $ 2,898,000 $ 2,626,000 =========== =========== ===========
Total Assets & Asset Additions December 31, 1998 December 31, 1997 Total Asset Total Asset Assets Additions Assets Additions ----------- ---------- ----------- ---------- Engine and airframe products and services $35,647,000 $2,813,000 $30,319,000 $1,483,000 Test facilities and equipment 23,562,000 1,382,000 21,932,000 1,166,000 Other 3,066,000 462,000 2,319,000 34,000 ----------- ---------- ----------- ---------- Consolidated $62,275,000 $4,657,000 $54,570,000 $2,683,000 =========== ========== =========== ==========
Information concerning principal geographic areas is set forth below:
For the Years Ended December 31 --------------------------------------------------------------------- 1998 1997 1996 --------------------------------------------------------------------- Sales by Geographic Areas United States $ 50,736,000 $ 43,802,000 $ 28,643,000 Far East: Thailand 15,008,000 614,000 Other Far East 10,126,000 2,246,000 2,228,000 Europe 7,189,000 5,925,000 323,000 Americas - other 4,799,000 2,430,000 2,233,000 Other Areas 934,000 787,000 1,240,000 ------------ ------------ ------------ Consolidated $ 95,792,000 $ 55,804,000 $ 34,867,000 ============ ============ ============
Sales to Pratt & Whitney, Rolls Royce, General Electric and Boeing/McDonnell Douglas, with which the Company has long-standing customer relations, amounted to 18%, 18%, 13% and 4% of 1998 consolidated sales, respectively (25%, 3%, 5% and 11% in 1997, 25%, 0%, 4% and 10% in 1996). Export sales by the Company's domestic subsidiaries were $38,056,000, $12,002,000, and $6,024,000, for the years 1998, 1997, and 1996, respectively and accounts receivable relating to foreign revenues as of December 31, 1998 and 1997 were $6,926,000 and $7,638,000, respectively. 25 Note 14. Contingencies The Company provides multi-year warranty periods on certain engine test products. To provide adequate recognition of potential warranty liabilities, the Company has established reserves to cover issues related to warranty and other costs associated with performance guarantees. The Company has remedial work-in-process at a certain engine test facility. This remedial work is expected to be completed by mid 1999. The Company estimates the total cost of this remedial work to range from $6 million to $8 million. The Company believes that these costs are for the most part covered under a combination of potential insurance proceeds, and by warranty and other reserves established by the Company. Note 15. Quarterly Results (Unaudited)
1998 Three Months Ended March 31 June 30 September 30 December 31 Total ------------------------------------------------------------------------- Sales $21,913,348 $24,098,408 $25,501,933 $24,278,728 $95,792,417 Cost of Sales 16,637,336 18,752,711 20,057,461 19,031,085 74,478,593 Net Income 918,437 1,079,687 1,112,966 1,130,763 4,241,853 Net income per common share Basic 0.04 0.05 0.05 0.05 0.19 Diluted 0.04 0.05 0.05 0.05 0.19 Weighted average common shares outstanding Basic 21,980,000 22,035,000 21,978,000 21,835,000 21,957,000 Diluted 22,536,000 22,745,000 22,572,000 22,328,000 22,545,000 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
* The first three quarters of 1997 earnings per share amounts have been restated to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." ** The sum of the quarterly net income per share amounts 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. 26 Corporate Information Corporate Headquarters General Counsel 2365 Woodlake Drive - Suite 120 Quarles & Brady Okemos, MI 48864 411 E. Wisconsin Avenue Phone: (517) 347-1333 Milwaukee, WI 53202-4497 Fax: (517) 347-6185 Corporate Auditors Deloitte & Touche LLP Suite 800 120 N. Washington Square Lansing, MI 48933-1681 Board of Directors Molly F. Cade Conrad G. Goodkind William T. Gross Richard A. Lund Educator Partner Consultant President Quarles & Brady and Chief Executive Officer Terrell L. Ruhlman John W. Sandford Joseph R. O'Gorman Consultant Chairman of the Board Former Chairman, President and Chief Executive Officer Reno Air Corporate Officers John W. Sandford Richard A. Lund Edward B. Stephens Chairman of the Board President Vice President, Chief Financial and Chief Executive Officer, Treasurer and Officer Assistant Secretary Richard A. Joseph Conrad G. Goodkind Vice President Secretary Subsidiaries Cade AutoAir, Inc. Cade Composites, Inc. 5640 Enterprise Drive 4075 Ruffin Road Lansing, MI 48911 San Diego, CA 92123 Phone: (517) 393-4040 Phone: (619) 571-5220 John F. Scanlon, President Robert C. Spring, President Cade International, Inc. Cade HAC, Inc. 2365 Woodlake Drive - Suite 120 537 Camden Drive Okemos, MI 48864 Grand Prairie, TX 75051 Phone: (517) 347-1333 Phone: (972) 263-4387 Richard A. Lund, President John E. Haran, President Cade Europe, Inc. Cade Cenco, Inc. Lomeshaye Business Village 2930 Anthony Lane Nelson, Lancashire, Minneapolis, MN 55418 BB9 7DR Phone: (612) 781-6557 England John H. Nicholson, President Phone: (01282) 617788 Peter J. Clarke, Director European Sales 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 and Other Information Cade's Annual Meeting of Shareholders will be held on Tuesday, May 4, 1999, 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: sheryl.mull@cade-industries.com 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) [LOGO OF CADE INDUSTRIES, INC.] Woodlake Drive - Suite 120 Okemos, MI 48864 Phone: (517) 347-1333 Fax: (517) 347-6185 www.cade-industries.com.doc EX-21.1 12 SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Cade 1998 10-K SUBSIDIARIES OF CADE INDUSTRIES, INC. Name of Subsidiary Jurisdiction of Incorporation - ------------------ ----------------------------- Cade AutoAir, Inc. Michigan Cade Composites, Inc. California Cade International, Inc. Barbados Cade Commercial Composites, Inc. Wisconsin Cade Cenco, Inc. Minnesota Cade HAC, Inc. Delaware Pollux Acquisition Corporation Wisconsin Cade Europe, Inc. Minnesota EX-23.1 13 CONSENT OF DELOITTE AND TOUCHE LLP Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-37911, 333-03033 and 333-61331 of Cade Industries, Inc. on Form S-8 of our report dated February 9, 1999, 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, 1998. /s/ DELOITTE & TOUCHE LLP March 25, 1999 Lansing, Michigan EX-27 14 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, 1998 and is qualified in its entirety by reference to such financial statements. YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 580,489 0 13,437,230 265,039 17,087,927 37,728,979 35,395,920 16,199,252 62,274,831 26,241,513 8,313,322 0 0 22,349 27,031,647 62,274,831 95,792,417 95,792,417 74,478,593 74,478,593 14,218,774 0 947,197 6,147,853 1,906,000 4,241,853 0 0 0 4,241,853 .19 .19
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