<PAGE>
FORM 10-Q
- ---------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
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Cade Industries, Inc.
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1371038
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2365 Woodlake Drive, Suite 120, Okemos, Michigan 48864
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(Address of principal executive offices)
(Zip Code)
(517) 347-1333
--------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal
year, if changed since last report)
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 periods 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, $0.001 Par Value - 21,818,627 shares as of November 10, 1998
<PAGE>
INDEX
CADE INDUSTRIES, INC.
---------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income for the
three months ended September 30, 1998 and 1997 3
Condensed Consolidated Statements of Income for the
nine months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
<PAGE>
PART I, ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
CADE INDUSTRIES, INC.
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997*
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 695,276 $ 1,093,176
Trade accounts receivable - net 14,669,557 12,687,969
Costs and estimated earnings in excess
of billings on uncompleted contracts 2,329,352 2,053,922
Inventories:
Finished goods and work in progress 8,426,604 7,227,176
Materials and supplies 7,289,629 6,571,791
----------- -----------
15,716,233 13,798,967
Deferred income taxes 1,154,000 1,154,000
Prepaid expenses and other current assets 906,178 413,132
----------- -----------
TOTAL CURRENT ASSETS 35,470,596 31,201,166
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 737,365 737,365
Buildings 7,600,989 6,934,411
Machinery and equipment 12,776,898 11,430,507
Tooling 13,242,419 12,447,568
----------- -----------
34,357,671 31,549,851
Less accumulated depreciation and amortization 15,321,446 13,887,690
----------- -----------
19,036,225 17,662,161
INTANGIBLE AND OTHER ASSETS
Goodwill - net 5,381,029 5,552,849
Other assets 223,406 153,715
----------- -----------
5,604,435 5,706,564
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$60,111,256 $54,569,891
=========== ===========
</TABLE>
(Continued)
1
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
CADE INDUSTRIES, INC.
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997*
------------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 2,820,000 $ 1,460,000
Current portion of long-term debt 3,392,289 3,012,998
Trade accounts payable 4,721,879 5,190,782
Employee compensation and amounts withheld 2,303,600 2,471,638
Billings in excess of costs and estimated
earnings on uncompleted contracts 7,464,389 5,626,388
Accrued expenses 2,689,470 1,609,611
Accrued income taxes 486,396 395,088
----------- -----------
TOTAL CURRENT LIABILITIES 23,878,023 19,766,505
LONG-TERM DEBT 9,155,009 10,682,554
DEFERRED INCOME TAXES 788,000 788,000
SHAREHOLDERS' EQUITY
Preferred Stock, 10% cumulative, non-voting,
stated value $300 per share; authorized 500
shares, none issued
Common Stock, par value $.001 per share;
authorized 100,000,000 shares, issued
22,348,859 shares (22,238,859 shares in 1997) 22,349 22,239
Additional paid-in capital 9,491,975 9,360,968
Retained earnings 17,586,661 14,475,571
----------- -----------
27,100,985 23,858,778
Less cost of Common Stock in treasury
(410,232 and 350,055 shares in 1998 and
1997, respectively) 810,761 525,946
----------- -----------
26,290,224 23,332,832
----------- -----------
$60,111,256 $54,569,891
=========== ===========
</TABLE>
* The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CADE INDUSTRIES, INC.
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Sales $25,501,933 $13,477,498
Operating expenses:
Cost of sales 20,057,461 10,602,610
Selling, general and administrative expenses 3,602,117 1,782,374
----------- -----------
23,659,578 12,384,984
----------- -----------
INCOME FROM OPERATIONS 1,842,355 1,092,514
Interest expense - net 294,389 202,929
----------- -----------
INCOME BEFORE INCOME TAXES 1,547,966 889,585
Income taxes 435,000 263,000
----------- -----------
NET INCOME $ 1,112,966 $ 626,585
=========== ===========
NET INCOME PER SHARE
Basic $ 0.05 $ 0.03
Diluted 0.05 0.03
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
CADE INDUSTRIES, INC.
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales $71,513,689 $38,785,940
Operating expenses:
Cost of sales 55,447,508 29,805,030
Selling, general and administrative expenses 10,731,573 6,035,953
----------- -----------
66,179,081 35,840,983
----------- -----------
INCOME FROM OPERATIONS 5,334,608 2,944,957
Interest expense - net 948,518 578,986
----------- -----------
INCOME BEFORE INCOME TAXES 4,386,090 2,365,971
Income taxes 1,275,000 730,000
----------- -----------
NET INCOME $ 3,111,090 $ 1,635,971
=========== ===========
NET INCOME PER SHARE
Basic $ 0.14 $ 0.08
Diluted 0.14 0.07
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
CADE INDUSTRIES, INC
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY (USED IN):
OPERATING ACTIVITIES $ 2,809,300 $ 2,937,297
INVESTING ACTIVITIES
Additions to property, plant and equipment (3,286,847) (1,892,546)
Other (37,655)
----------- -----------
(3,286,847) (1,930,201)
FINANCING ACTIVITIES
Increase (decrease) in note payable to bank 1,360,000 (165,000)
(Payments) of long-term debt - net of new
borrowing proceeds (1,148,254) (266,940)
Exercise of stock options 93,125 3,828
Purchase of common stock for treasury (312,218) (127,268)
Other 86,994 63,722
----------- -----------
79,647 (491,658)
----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (397,900) 515,438
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 1,093,176 21,606
----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 695,276 $ 537,044
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CADE INDUSTRIES, INC.
SEPTEMBER 30, 1998
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The condensed consolidated financial statements as of and for the three and
nine-month periods ended September 30, 1998 and 1997, have been prepared by the
Company without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, such condensed
consolidated financial statements reflect all adjustments necessary (consisting
only of normal recurring accruals) for a fair presentation. The results for the
three or nine month period may not be necessarily indicative of the results for
the full year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1997.
NOTE B - EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share - income
available to common shareholders $ 1,112,966 $ 626,585 $ 3,111,090 $ 1,635,971
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 21,977,921 21,657,967 21,997,532 21,683,602
Effect of dilutive stock options -
potential common shares 594,294 514,311 620,287 382,579
----------- ----------- ----------- -----------
Denominator for diluted earnings per
share - adjusted weighted-average
shares 22,572,215 22,172,278 22,617,819 22,066,181
=========== =========== =========== ===========
Basic Earnings Per Share $ 0.05 $ 0.03 $ 0.14 $ 0.08
=========== =========== =========== ===========
Diluted Earnings Per Share $ 0.05 $ 0.03 $ 0.14 $ 0.07
=========== =========== =========== ===========
</TABLE>
6
<PAGE>
NOTE C - SHAREHOLDER RIGHTS PLAN
- --------------------------------
On August 4, 1998 the Board of Directors of the Company adopted a shareholder
rights plan and declared a rights dividend of one common stock purchase right
for each share of common stock outstanding on August 7,1998 and provided that
one right would be issued with each share of common stock thereafter issued. The
shareholder rights plan provides that in the event a person or group acquires or
seeks to acquire 15% or more of the outstanding common stock of the Company, the
rights, subject to certain limitations, will become exercisable. Each right,
once exercisable, initially entitles the holder thereof (other than the
acquiring person whose rights are canceled) to purchase from the Company one
share of common stock at an initial exercise price of $15, subject to
adjustment, or, upon the occurrence of certain events, common stock of the
Company or common stock of an acquiring company having a market value equivalent
to two times the exercise price. Subject to certain conditions, the rights are
redeemable by the Board of Directors for $.0001 per right and are exchangeable
for shares of common stock. The rights have no voting power and expire on August
3, 2008. The Company filed a Form 8-K with the Securities and Exchange
Commission on August 7, 1998, which provides a full description of the plan.
NOTE D - NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income," which is
effective for financial statements issued after December 15, 1997, and requires
all items of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Other
comprehensive income may include foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. The accumulated balance of other comprehensive
income must be displayed separately from retained earnings and additional paid-
in capital in the equity section of a statement of financial position. The
Company has adopted this accounting standard effective January 1, 1998, as
required, and currently there are no items that qualify as "other comprehensive
income." Accordingly, no separate statement has been presented herein.
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This Statement establishes standards for
the way public companies report information about operating segments and
requires select information be reported in both interim and annual reports. The
Statement is effective for fiscal years beginning after December 15, 1997, but
need not be applied to interim financial statements in the initial year of
application, although restatement of interim periods presented is required in
subsequent interim reports. The Company is required to adopt this standard for
the year ended December 31, 1998.
In February 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits." This Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans. This Statement
standardizes the disclosure requirements for pensions and other postretirement
benefits to the extent practicable, requires additional information on changes
in the benefit obligations and fair values of plan assets that will facilitate
financial analysis, and
7
<PAGE>
eliminates certain disclosures. Restatement of disclosures for earlier periods
is required. This Statement is effective for the Company's financial statements
for the year ending December 31, 1998.
8
<PAGE>
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CADE INDUSTRIES, INC.
RESULTS OF OPERATIONS
---------------------
SALES
- -----
The Company's net sales of $25,502,000 in the third quarter of 1998 represented
an increase of 89.2% or $12,025,000 from the same quarter of 1997, while net
sales of $71,514,000 for the nine months ended September 30, 1998, represented
an increase of $32,728,000 or 84.4% compared to the same nine-month period of
the prior year. The higher sales for both the third quarter and nine-month
periods primarily reflect increased demand for aircraft products, the Company's
continued product diversification and increased sales of jet engine test
facilities and related ground testing equipment as a result of the October 1997
acquisition of Central Engineering Company ("Cenco"). This acquisition
contributed revenues of $9.7 million and $25.0 million for the three and nine
month periods, respectively. The Company's operations, excluding Cenco, had
increased revenues of 17.6% and 22.0% from the three and nine-month periods
ended September 30, 1997, respectively, resulting from higher sales of engine
and airframe components, engine test equipment and repair and overhaul services.
At September 30, 1998, the Company's backlog was $81.0 million ($41.9 million at
September 30, 1997) which 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. Cenco's order backlog was $31.1 million of the Company's September 30,
1998 total backlog. Overhaul and repair orders are not included in the order
backlog due to their very short lead times. These sales currently represent
about 20% of the Company's total annual sales.
COST OF SALES
- -------------
Cost of sales for the third quarter of 1998 increased $9,455,000 or 89.2% from
the same quarter of 1997 and for the nine-months ended September 30, 1998,
increased $25,642,000 or 86.0% from the comparable period in 1997. The increases
for both the quarter and nine-month periods were primarily due to the higher
sales (including subcontract revenue) in 1998. Cost of sales as a percent of
sales in the third quarter of 1998 was flat at 78.6% compared to the prior
year's quarter of 78.7% and for the nine-months ended September 30, 1998,
increased to 77.5% from 76.8% in the comparable period of 1997. Material cost of
sales as a percent of sales increased in both the three and nine-month periods
of 1998 due to the inclusion of the operations of Cenco, the Company's newest
subsidiary, which manufactures jet engine test facilities and certain related
ground testing equipment. A portion of Cenco's revenues are derived from
contracts to manufacture engine test facilities that involve building
construction by subcontractors. These subcontract costs, which are expensed as
material costs, are passed on to customers at margins substantially below
historical manufacturing results. The increase in the material cost percentage
for both the 1998 three and nine-month periods was partially offset by decreases
in overhead and tooling amortization costs as a percent of sales. The largest
percentage decrease was in overhead cost of sales, which resulted from continued
cost containment efforts and the spreading of fixed manufacturing costs over a
larger revenue base. Direct labor costs as a percent of sales were relatively
unchanged from prior periods for both the three and nine-month periods.
9
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses ("administrative expenses") as a
percent of sales were 14.1% and 13.2% for the third quarters of 1998 and 1997,
respectively, and 15.0% and 15.6% for the nine months ended September 30, 1998
and 1997, respectively. The percentages of administrative expenses to sales for
both the three and nine-month periods were impacted by higher commission and
royalty expenses. Sales commissions and royalties are directly related to the
sales mix of products and/or customers. For the 1998 periods, the higher
commission and royalty payments primarily result from the continued growth in
repair and overhaul sales and test equipment sales subject to commission and/or
royalty. Partially offsetting this 1998 third quarter percentage increase and
fully offsetting the 1998 nine-month period percentage increase was the effect
of the significant increase in sales and the corresponding spreading of the
administrative costs over a larger sales base.
Actual amounts expended in the three and nine month periods of 1998 increased by
$1,820,000 ($757,000 attributable to Cenco) and $4,696,000 ($2,327,000
attributable to Cenco), respectively from the same periods in 1997. 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, and travel-related costs incurred to support the
higher current and expected sales volumes.
NET INTEREST EXPENSE
- --------------------
Net interest expense as a percent of sales was approximately 1.2% for both the
third quarter of 1998 and the nine-month period ended September 30, 1998, and
was approximately 1.5% for the 1997 third quarter and nine-month period ended
September 30, 1997. Actual interest expense for the third quarter of 1998
increased by $91,000 to $294,000 and for the nine months ended September 30,
1998 increased by $370,000 to $949,000. The increases in the net amount of
interest expense were due to the additional debt associated with the acquisition
of Cenco, which were partially offset by reduced interest expense on short-term
borrowings as a result of decreased line of credit usage.
INCOME TAX EXPENSE
- ------------------
Income taxes were $435,000 or an effective tax rate of 28.1% in the 1998 third
quarter, compared to $263,000 or an effective tax rate of 29.6% for the same
quarter of 1997. Income taxes for the nine month period ended September 30, 1998
increased by $545,000 to $1,275,000 from the comparable period of the prior year
and the effective tax rates were 29.1% and 30.9%, respectively. The effective
tax rate is lower than the statutory rate due primarily to the lower tax rate of
the Company's foreign sales corporation.
10
<PAGE>
NET INCOME
- ----------
Net income of $1,113,000 in the 1998 third quarter represents an increase in
after-tax earnings of $486,000 or 78%, from the 1997 third quarter. Net income
of $3,111,000 for the first nine months of 1998 represents an increase in after-
tax earnings of $1,475,000, or 90%, from the comparable period of 1997. Factors
contributing to these changes were 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
1997 acquisition of Cenco with long-term bank debt and the issuance of 250,000
shares of its common stock.
During the first nine months of 1998, capital was used principally to fund the
Company's inventory and accounts receivable. Management expects to reduce its
present level of investment in both accounts receivable and inventory during
1998 and to increase its present level of investment in production and
information system technology, tooling and equipment for improved manufacturing
efficiency and quality enhancement. During the third quarter of 1998, the
Company invested, mainly through long-term bank financing, approximately
$610,000 in additional manufacturing capacity for its Auto-Air Composites
subsidiary in order to meet increased production requirements. About one half of
this manufacturing facility had previously been leased by Auto-Air. The Company
will also continue to seek acquisition opportunities to expand and/or diversify
its markets.
At the end of the quarter, the Company maintained a $9,000,000 unsecured credit
line with a bank, $5,273,000 of which was available at September 30, 1998, after
consideration of actual line of credit usage and credit line commitments to
support foreign exchange contracts and letters of credit. The Company also had
outstanding approximately $11,224,000 of secured term debt, and $1,323,000 of
subordinated notes.
Management believes that expected increased revenues and on-going emphasis on
working capital management will provide adequate 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 anticipated
levels.
Year 2000 Update
- ----------------
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. In early
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 and is expected
to make approximately 80% of the Company's business computer systems Year 2000
compliant. Implementation of the ERP system is on schedule and approximately 25%
complete through September 30, 1998. The Company has developed a
11
<PAGE>
contingency plan to make the programs that are scheduled to be replaced by the
ERP system Year 2000 compliant, if necessary. Remaining business software
programs are expected to be made Year 2000 compliant through the Action Plan,
including those supplied by vendors, or they will be retired.
The Action Plan consists of three major sections: 1) information technology
("IT") systems; 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.
At September 30, 1998, the inventory and assessment phases of the IT system
section of the Action Plan was approximately 75% complete. The IT systems
section includes both hardware and systems software as well as applications
software. Non compliance in this section may be corrected through full
replacements or supplemental corrective solutions to the extent they are
available from vendors and are reliable. The testing phase of this section,
scheduled for completion by mid-1999, is on going as hardware or system software
is remediated, upgraded or replaced. Contingency planning for this section is
scheduled to begin in first quarter of 1999, and be completed by mid-1999.
The non IT systems section includes the hardware, software and related embedded
computer chips that are used in the operation of all Company facilities and
associated systems. At September 30, 1998, the inventory and assessment phases
of the non-IT system section were approximately 50% complete. The Company
estimates the repair and testing of non-IT systems to be approximately 25%
complete, with all repair and testing scheduled to be completed by mid-1999.
Contingency planning for this section is scheduled to begin in first quarter
1999 and be completed by mid-1999.
The third party communications section includes: the identification and
prioritization of suppliers and customers where material relationships exist,
including direct interface; and communications with them regarding their plans
and progress in addressing the Year 2000 issue. Communications and detailed
evaluations of the most critical suppliers and customers are scheduled for
completion by mid-1999, as is the development of contingency plans based on the
detailed evaluations. The Company estimates that this phase was on schedule at
September 30, 1998.
The Company believes that the cost of its Year 2000 identification, assessment,
remediation and testing efforts, as well as currently anticipated costs to be
incurred by the Company with respect to Year 2000 issues of third parties, will
not exceed $250,000, which expenditures will be funded from operating cash
flows. As of September 30, 1998, no material amount had been expended on Year
2000 issues. The costs of implementing the ERP system are not included in these
cost estimates.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could have a material, adverse affect on the Company's
results of operations, liquidity and financial condition. The Company is
currently unable to determine whether the effects of Year 2000 failures will
have a material impact on the Company's results of operations, liquidity or
financial condition due to the overall uncertainty inherent in the Year 2000
problem, particularly the uncertainty about the Year 2000
12
<PAGE>
readiness of material customers and suppliers. The Year 2000 Action Plan is
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 issue, especially about the Year 2000 compliance and readiness of its
material third party agents. The Company believes that, with the implementation
of the new business system and completion of the Action Plan as scheduled, the
likelihood of major interruptions of normal operations should be reduced.
Certain of the information contained in Item 2 is of a forward looking nature
and is subject to various uncertainties. See Item 5.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as described below in Item 5, the Company is not involved in any
material pending legal proceedings other than ordinary routine litigation
incidental to its business.
ITEM 5. OTHER INFORMATION
During the third quarter, the Company became aware that modifications designed
to reduce certain acoustic emissions at an engine test facility sold by the
Company's Central Engineering subsidiary ("Cenco") to General Electric Aircraft
Equipment Services ("GEAES") in Cardiff, Wales for delivery in April 1998, had
failed to achieve contract specifications. The original acoustic design and
installation work had been performed for Cenco under subcontract by Boet
Stopson, a French company which filed for protection under French bankruptcy law
in early 1998.
Cenco has provided certain remedial work in an attempt to bring the acoustic
emissions within contract specifications, but the initial remedial work proved
insufficient to achieve contract specifications. Cenco is obtaining estimates of
the cost to remedy the acoustic emissions problem from engineering services
believed to be reliable. Subject to completion of a letter agreement, Cenco will
reimburse GEAES for certain costs incurred by GEAES in connection with the
interim use of alternative test facilities prior to the time the Wales facility
becomes operational, which is expected to be June 1999. The Company's estimate
of total cost for completion of the remedial work ranges from $6.0M to $7.5M.
The Company believes that these costs are covered under a policy of insurance
guaranteeing the design and installation work of Boet and by warranty and other
reserves established by the Company.
Boet has asserted a claim against Cenco in the French bankruptcy action and
Cenco has filed an arbitration claim against Boet in England. It is not possible
at this time to estimate the extent of Cenco's liability to GEAES, the actual
costs of modifications to the facility, or the outcome of the French bankruptcy
or English arbitration proceeding, although the Company believes that up to $8
million of insurance proceeds should be available to Cenco for the costs of
modifications to the facility.
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. 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 products 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; 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.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
Exhibit 27. Financial Data Schedule
a The Company filed a Current Report on Form 8-K dated August 4, 1998 to
report in Item 5 the adoption of a Shareholder Rights Plan under which was
declared a dividend distribution of one common stock purchase right for
each outstanding share of common stock, par value $.001, to shareholders of
record at the close of business on August 7, 1998.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements 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.
---------------------
November 12, 1998
By /s/ Edward B. Stephens
-----------------------------
Edward B. Stephens
Vice President, Treasurer and
Chief Financial Officer
16
<PAGE>
CADE INDUSTRIES, INC.
* * *
EXHIBIT INDEX
TO
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN FILED
NUMBER DESCRIPTION BY REFERENCE TO: HEREWITH
- ------ ----------- ---------------- --------
<C> <S> <C> <C>
27 Financial Data Schedule X
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CADE INDUSTRIES, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 695,276
<SECURITIES> 0
<RECEIVABLES> 14,951,557
<ALLOWANCES> 282,000
<INVENTORY> 15,716,233
<CURRENT-ASSETS> 35,470,596
<PP&E> 34,357,671
<DEPRECIATION> 15,321,446
<TOTAL-ASSETS> 60,111,256
<CURRENT-LIABILITIES> 23,878,023
<BONDS> 9,155,009
0
0
<COMMON> 22,349
<OTHER-SE> 26,267,875
<TOTAL-LIABILITY-AND-EQUITY> 60,111,256
<SALES> 71,513,689
<TOTAL-REVENUES> 71,513,689
<CGS> 55,447,508
<TOTAL-COSTS> 55,447,508
<OTHER-EXPENSES> 10,731,573
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 948,518
<INCOME-PRETAX> 4,386,090
<INCOME-TAX> 1,275,000
<INCOME-CONTINUING> 3,111,090
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,111,090
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
