SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended October 31, 1999 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
_________ to _________.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1150732
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par
Value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of, January 11, 2000 was $20,087,524.
The number of shares of the Registrant's common stock outstanding as of January
11, 2000 was 5,951,859.
DOCUMENTS INCORPORATED BY REFERENCE: None
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 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.
PART I
Item 1. BUSINESS
(a) General Development of Business
Hurco Companies, Inc. is an industrial automation systems company. We design and
produce interactive computer numerical control (CNC) systems and software and
computerized machine systems for sale through our own distribution network to
the worldwide metal working market. Our proprietary CNC systems and related
software products are either sold as an integral component of our own
computerized machine systems or sold separately to machine tool end-users and
other machine tool manufacturers who integrate them with their own products.
We pioneered the application of microprocessor technology and conversational
programming software to machine tool controls and, since our founding in 1968,
have been a leader in the introduction of interactive CNC systems that automate
manufacturing processes and improve productivity in certain segments of the
metalworking industry. We have concentrated on designing "user-friendly" CNC
systems that can be operated by both skilled and unskilled machine tool
operators and yet are capable of instructing a machine tool to perform complex
tasks. The combination of microprocessor technology and patented interactive,
conversational programming software in our CNC systems enables operators on the
production floor to quickly and easily create a program for machining or forming
a particular part from a blueprint or electronic design and immediately begin
production of that part.
Our executive offices and principal design, engineering, and manufacturing
management operations are headquartered in Indianapolis, Indiana. Sales,
application engineering and service offices are located in Indianapolis,
Indiana; Farmington Hills, Michigan; High Wycombe, England; Munich, Germany;
Paris, France; Milan, Italy and Singapore. A United States distribution facility
is located in Long Beach, California.
(b) Financial Information About Industry Segments
We operate in one business segment, industrial automation systems, as discussed
further in Note 14 in the Consolidated Financial Statements.
(c) Narrative Description of Business
General
The manufacture of metal parts for industrial and consumer products primarily
involves two major processes: metal cutting and metal forming. These processes
are performed by machine tools. Metal cutting machine tools produce parts by
milling, drilling, turning and grinding a solid block of metal. Metal forming
machine tools fabricate parts by shearing, punching, forming and bending flat
sheets of metal.
Approximately three-fourths of the world's machine tools are made for metal
cutting applications. The milling machine is one of the most common types of
metal cutting machines. Milling machines shape a part by moving a rotating
cutting tool, such as a drill, tap or mill, across a metal block. Although a
majority of the milling machines in current use are still manually operated, an
increasing number are now operated using CNC systems such as those produced by
our company. CNC-operated milling machines automatically and precisely shape
parts by directing the movement of a cutting tool according to a program
specifically designed for the desired part. Some CNC-operated milling machines,
referred to as machining centers, are equipped with automatic tool changers that
enable several different cutting tools to be used in a programmed sequence on
the same part with little interruption time to change cutting tools.
Metal forming machines include press brakes, presses, shears and punches. The
press brake is the basic machine tool used to perform simple bending operations
on a wide variety of sheet metal to create parts such as computer cabinets, door
frames, aircraft components and electrical enclosures. Each press brake uses one
or more manual or automated gauge systems that determine where the bend will be
made in the sheet metal part. Automated press brakes utilize CNC systems such as
those we produce.
We have pursued a strategy that is focused on developing and distributing to the
worldwide metal working market a comprehensive line of interactive CNC products
that incorporate proprietary technology designed to enhance the user's
productivity through ease of operation and adaptability to a wide range of
manufacturing applications. As part of this strategy, we have adopted an open
systems architecture that permits our CNC systems and software to be used with a
variety of hardware platforms and have emphasized an "operator friendly" design
that employs interactive "conversational" programming software. We outsource
substantially all of our manufacturing operations to independent contract
manufacturers and concentrate our resources on product research, development,
design and engineering, marketing, distribution and customer service.
Products
Our principal products consist primarily of computerized machine systems
(CNC-operated milling machines, machining centers and metal forming press
brakes) into which our proprietary software and CNC systems have been fully
integrated. We also produce CNC systems and related software for both metal
cutting and metal forming machines that are sold primarily as retrofit control
systems. In addition, we produce and distribute software options, control
upgrades, hardware accessories and replacement parts and provide operator
training and support services to our customers.
The following table sets forth the contribution of each of these product groups
to our total sales and service fees during each of the past three fiscal years:
Year Ended October 31,
(Dollars in thousands) 1999 1998 1997
---- ---- ----
Computerized Machine Systems............ $63,793 (72.3%) $64,770 (69.3%) $61,679 (64.4%)
CNC Systems and Software*............... 10,623 (12.0%) 14,727 (15.8%) 19,296 (20.2%)
Service Parts........................... 9,574 (10.9%) 9,424 (10.1%) 9,612 (10.0%)
Service Fees............................ 4,248 (4.8%) 4,501 (4.8%) 5,142 (5.4%)
---------- ------ --------- --------- -------------------
$88,238 (100.0%) $93,422 (100.0%) $95,729 (100.0%)
======= ======== ======= ======== ======= ========
* Amounts shown do not include CNC systems sold as an integrated component of
computerized machine systems.
Computerized Machine Systems
Metal Cutting Systems - Ultimax(R)
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We design and market computerized machine systems which are equipped with a
fully integrated interactive Ultimax(R) CNC system. All of these machines are
built to our specifications by independent contract manufacturers utilizing our
own CNC systems. Our current line of machine tools is a complete family of
products with different levels of performance features for different market
applications ranging in price from $25,000 to $165,000.
Our computerized machine systems line consists of two milling machines with an
x-axis travel of 30 inches and 40 inches and computerized machining centers with
an x-axis travel of 24, 30, 40 and 64 inches.
Metal Cutting Systems - DynaPath(TM)
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In fiscal 1998, we expanded our product strategy to include marketing milling
machines featuring fully integrated Delta(TM) CNC systems. These machine systems
are sold under the DynaPath(TM) name through one of our subsidiaries. In fiscal
1999, we further expanded this product line to include turning machines.
Metal Forming Systems
In the first quarter of fiscal 1998, we introduced an up-acting press brake line
(bending machine) that incorporates our Autobend(R) CNC system. This product is
sold to the North American market by independent distributors and, in certain
territories, by direct sales personnel. We also began offering European style
precision-ground tooling which is sold either in conjunction with a press brake
or directly to end-users of press brakes. In November 1999, we introduced a
down-acting press brake line and American style precision ground tooling. Both
of these products are expected to impact sales and service fees in the second
half of fiscal 2000.
CNC Systems and Software
Our CNC systems and software are marketed under the tradenames Ultimax(R),
Dynapath(TM) UltiPath(TM), Delta (TM) and Autobend(R). The Ultimax(R),
UltiPath(TM) and Delta(TM) product lines are used to control metal cutting
machine tools. Autobend(R) CNC systems and Autobend PC(R) are used to control
metal forming press brakes.
o Ultimax(R)
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Our patented Ultimax(R) twin screen "conversational" CNC system, sold solely as
a fully integrated feature of a Hurco computerized machine system, incorporates
an interactive and powerful "data block" programming methodology supported by
extensive geometric and process data calculation software tools. This CNC system
enables a machine operator to create complex two-dimensional part programs
directly from blue print inspection. Machine operators with little or no
programming experience can successfully program parts and begin cutting
operations in a short time with minimum special training. Since the initial
introduction of the Ultimax(R) CNC in 1984, we have added enhancements related
to operator programming productivity, CAD compatibility, data processing
throughput and motion control speed and accuracy. In 1998, we introduced
Ultimax(R) 4 programming stations, which use a Pentium* processor featuring an
operator console with liquid crystal display screens. By incorporating Industry
Standard Architecture (ISA) personal computer (PC) platform components, this CNC
product offers
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* Pentium is a registered trademark of Intel Corporation
improved performance while ensuring access to the most effective computing
hardware and software technology.
o UltiPath(TM)
UltiPath(TM) is a low-cost, interactive PC-based CNC system that permits
conversational programming. This control product is intended for the 2-axis and
3-axis entry level machining market and enables skilled and unskilled machine
operators to convert manual machine operations to easy-to-use CNC parts
processing. The UltiPath(TM) CNC embodies our patented interactive machining
technology and our recently patented "Object Oriented" software design
methodology. The control utilizes the Windows** operating system as a key
component of its executive software. The product is marketed through
distributors to end-users and to CNC control integrators and retrofitters
serving the large installed base of manual milling machines.
o Delta(TM) Series
Our Delta(TM) series CNCs, which feature microprocessor-based electronics
incorporating ISA computer platform components, are designed for the worldwide
metalworking industry and are used on milling machines, machining centers,
turning centers and punching equipment. The Delta(TM) CNC system is based on
industry standard point-to-point programming methodology but incorporates
software features that group industry standard commands into useful part
features, such as circles and frames, to simplify programming. The Delta(TM)
CNCs are designed and configured as general-purpose products, which offer
flexibility, reliability and ease of integration with a wide variety of machine
designs. The Delta(TM) CNC System is sold either as an integrated component of
our Dynapath(TM) Machine System or to end-users of a wide range of machine tool
systems, primarily through retrofitters.
o Autobend(R)
Autobend(R) CNC systems are applied to press brakes that form parts from sheet
metal and consist of a microprocessor-based CNC and back gauge. We have
manufactured and sold the Autobend(R) product line since 1968. We currently
market two models of our press brake CNC systems, in combination with six
different back gauges, through distributors to end-users as retrofit units for
installation on existing or new press brakes, as well as to original equipment
manufacturers and importers of press brakes. The Autobend(R) CNC system is sold
as a fully integrated feature of our press brake system.
o CAM and Software Products
In addition to our CNC product lines, we offer metal cutting and forming
software products for programming two and three-dimensional parts. The primary
products in this line are the Ultimax(R) PC and PC+, off-line programming
systems and a computer aided design (CAD)-compatible DXF (data file translation)
software option. The products are marketed to users of both Ultimax(R) and
competitive CNC systems. Significant features of the Ultimax(R) PC and PC+
include a CNC-compatible user interface, CAD compatibility and the availability
of a configurable post processor. The DXF software option eliminates manual data
entry of part features by transferring AutoCAD(TM) drawing files directly into
an Ultimax(R) CNC or the off-line programming system software, substantially
increasing operator productivity. In fiscal 2000, our PC and PC+ will be
upgraded to Windows** based software and will be called WinMax. We have
augmented our Autobend(R) product line with a computer-aided manufacturing (CAM)
** Windows is a registered trademark of Microsoft Corporation
software product, Autobend PC(R), that enables the user to create and manipulate
CNC compatible metal forming programs on a personal computer.
In fiscal 1997, we introduced UltiPro(TM), a high-speed machining software
product for our Pentium*-based Ultimax(R) CNC platform. The UltiPro(TM) software
enables a customer to increase machining productivity through the purchase of
our computerized machine system or by retrofitting and upgrading an existing 486
PC-based Ultimax(R) system with our Pentium* platform and the UltiPro(TM)
software. In fiscal 1998, we introduced UltiNet(TM), a networking product for
use by our customers to transfer part design and manufacturing information to
computerized machine systems at high speeds and to network computerized machine
systems within a customer's manufacturing facility.
Parts and Service
Our in-house service organization provides installation, operator training and
customer support for our products. Our principal distributors in the United
States have primary responsibility for machine installation and warranty service
and support for new product sales. Our own service organization continues to
provide installation and warranty service and support in certain direct sales
territories. It also continues to service and support the installed base of
discontinued models and supports our distributors with respect to complex
service operations. We also provide software options, CNC upgrades, accessories
and replacement parts for our products. Among the options are software programs
and additional CNC features that allow a customer to upgrade the performance of
its Hurco machine systems. Our after-sale parts and service business helps
strengthen our customer relationships and provides continuous information
concerning the evolving requirements of end-users.
Marketing and Distribution
We continually strive to improve our global marketing and distribution network.
During fiscal 1999, 1998 and 1997, we focused on strengthening our network of
independent distributors in the United States and on improved selling programs
and training. In fiscal 1999, we converted to direct sales agents from
distributors in the United Kingdom. In November 1999, we converted two sales
territories in the Midwest United States from independent distributors to a
direct sales force. Also, in November 1999, we established a direct sales
subsidiary in Italy.
The end-users of our products are precision tool, die and mold manufacturers,
independent metal parts manufacturers and specialized production groups within
large manufacturing corporations. Industries served include aerospace, defense,
medical equipment, energy, injection molding, transportation and computer
equipment.
Our computerized machine systems (integrated CNC-operated milling machines,
machining centers and press brakes) along with software options and accessories,
are sold primarily to end-users. We sell certain CNC systems (i) to original
equipment manufacturers of new machine tools who integrate them with their own
products prior to the sale of those products to their own customers, (ii) to
retrofitters of used machine tools who integrate them with those machine tools
as part of the retrofitting operation and (iii) to end-users who have an
installed base of machine tools, either with or without related CNC systems.
During fiscal 1999, no single end-user of our products accounted for more than
5% of our total sales and service fees.
We sell our products through over 260 independent agents and distributors in 58
countries throughout North America, Europe and Asia. We also have our own direct
sales personnel in the
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* Pentium is a registered trademark of Intel Corporation
United States, England, France, Germany, Italy and Singapore, which are
considered to be among the world's principal computerized machine system
consuming countries. During fiscal 1999, no distributor accounted for more than
5% of our sales and service fees. We have continuing agreements with all of our
distributors, but may terminate those agreements upon prior notice ranging from
30 days to 180 days. Approximately 80% of the worldwide demand for computerized
machine systems and CNC systems comes from outside the U.S. and accordingly, we
consider our international market presence to be critical to our operations.
We believe changing industrial technology and the related need for process
improvements and also capacity expansion drives the demand for computerized
machine systems and CNC systems. Factors affecting demand include: (i) the
declining supply of skilled machinists, (ii) the need to continuously improve
productivity and shorten cycle time, (iii) an aging machine tool installed base
that will require replacement with more advanced and efficient technology and
(iv) the industrial development of emerging countries in Asia and Eastern
Europe. However, the demand for computerized machine systems and related
products is highly dependent upon economic conditions and the general level of
business confidence, as well as such factors as production capacity utilization
and changes in governmental policies regarding tariffs, corporate taxation and
other investment incentives. By marketing and distributing our products on a
worldwide basis, we attempt to reduce the potential impact on our total sales
and service fees by adverse changes in economic conditions in any particular
geographic region.
Competition
Numerous companies compete with our product lines in both the United States and
international markets. Many of these competitors are larger and have greater
financial resources than we do. We strive to compete effectively by designing
into our products critical proprietary features that offer a distinct value
differential from comparably priced competitive products in terms of enhanced
productivity, technological capabilities and ease of use. In addition, by
offering our products in a range of prices and capabilities, we seek to meet the
needs of a broad potential market. We also believe that our competitiveness is
aided by our reputation for reliability and quality, our strong international
sales and distribution organization and our extensive customer service
organization.
In the United States and European metal cutting markets, major competitors
include Haas Automation, Inc., Cincinnati Machine, Bridgeport Machines, Inc. and
Fadal Engineering along with a large number of foreign manufacturers including
Okuma Machinery Works Ltd., Mori Seiki Co., Ltd. and Matsuura Machinery
Corporation. The largest competitors with respect to our computerized forming
machine systems include Amada Co. Ltd. and Trumph.
We believe we are one of the largest domestic manufacturers of CNC gauging
systems for press brakes. In the United States CNC gauging systems market for
press brakes, we compete with Automec, Inc., a CNC gauge manufacturer, and
Cybelec SA, a control manufacturer. We also compete with Cybelec in Europe.
Manufacturing
We have established a manufacturing strategy that includes the development of a
global network of contract manufacturers who manufacture our products in
accordance with our design, quality and cost specifications. This has enabled us
to lower product costs, lower working capital per sales dollar and increase our
worldwide manufacturing capacity without significant incremental investment in
capital equipment or increased personnel.
Our computerized machine systems are manufactured to our specifications by
manufacturing contractors in Taiwan and in Europe. We have worked closely with
our contract manufacturers to increase their production capacity to meet the
rising demand for our machine tool products and believe that such capacity is
sufficient to meet our current and projected demand. Although we are exploring
additional manufacturing sources for certain of our computerized machine
systems, alternative sources are not readily obtainable and any significant
reduction in capacity or performance capability of our principal manufacturing
contractors would have a material adverse effect on our operations.
We have a contract manufacturing agreement with a Taiwanese-based affiliate in
which we have a 35% ownership interest. This company is manufacturing most of
our CNC systems to our specifications and supplies certain proprietary and
standard components for use in our domestic production. We believe that
alternative sources for the proprietary components are readily available.
Backlog
Backlog consists of firm orders received from customers and distributors but not
shipped. Backlog was $8.5 million, $7.5 million and $7.4 million as of October
31, 1999, 1998 and 1997, respectively.
Intellectual Property
We consider certain features of our products to be proprietary and we own,
directly or through a subsidiary, a number of patents that are significant to
our business. IMS Technology, Inc. (IMS), a wholly owned subsidiary, owns
domestic and foreign patents covering the machining method practiced when a
machine tool is integrated with an interactive CNC (these patents are
collectively referred to as the "Interactive Machining Patents"). We also hold a
non-exclusive license covering features of the automatic tool changer offered
with certain of our CNC machining centers. We also own a patent on an
object-oriented, open architecture methodology for CNC software.
Beginning in October 1995, IMS initiated a number of infringement actions
against enterprises that it believed were employing or practicing machining
methods covered by one of the Interactive Machining Patents. These enterprises
included end-users of interactive CNCs, machine tool builders employing
interactive CNCs within their products and CNC manufacturers whose control
designs permit use of interactive methods when coupled to machine tools (CNC
Users). At the present date, all but one action has been settled through
licensing arrangements or litigation settlements. See Item 3. Legal Proceedings.
IMS has actively pursued a program to license the use of the Interactive
Machining Patents. During the past three fiscal years, IMS entered into
agreements with approximately 40 CNC Users under which IMS has granted a
non-exclusive license to practice methods covered by the Interactive Machining
Patents in exchange for lump-sum payments or fixed payments through fiscal 2001.
We recorded license fee income of $.3 million, $6.3 million and $9.1 million,
net of legal fees and expenses, in fiscal 1999, 1998 and 1997, respectively.
Subject to the continuing validity of the U.S. Interactive Machining Patent,
certain of the existing license agreements at October 31, 1999 are expected to
result in additional license fee income, net of legal fees and expenses, of
approximately $873,000 through fiscal 2001. In addition, IMS has received a
royalty-free non-exclusive license under six patents owned by two of the
licensees. There are a limited number of remaining CNC users that IMS has
identified as potential licensees.
Research and Development
Research and development expenditures for new products and significant product
improvements, included as period operating expenses, were $2.1 million, $2.0
million and $1.9 million in fiscal 1999, 1998 and 1997, respectively. In
addition, we recorded expenditures of $1.0 million in 1999, $1.3 million in 1998
and $1.6 million in 1997 related to software development projects that were
capitalized.
Employees
We had approximately 280 employees at the end of fiscal 1999, none of whom are
covered by a collective-bargaining agreement or represented by a union. We have
experienced no employee-generated work stoppages or disruptions and we consider
our employee relations to be satisfactory.
(d) Financial Information About Geographic Areas
Financial information about geographic areas is set forth in Note 14 to the
Consolidated Financial Statements.
We are subject to the risks of doing business on a global basis, including
foreign currency fluctuation risks, changes in general economic and business
conditions in the countries and markets that we serve and government actions and
initiatives including import and export restrictions and tariffs.
Item 2. PROPERTIES
The following table sets forth the location, size and principal use of each of
our facilities:
Location Square Footage Principal Uses
Indianapolis, Indiana 165,000(1) Corporate headquarters, design and
engineering, product testing, CNC
assembly, sales, application engineering
and customer service.
Long Beach, California 3,000 United States Distribution.
Farmington Hills, Michigan 37,500(2) Design and engineering, product
testing, CNC assembly, sales,
application engineering and
customer service.
High Wycombe, England 45,000(3) Sales, application engineering and
customer service.
Paris, France 2,800 Sales, application engineering and
customer service.
Munich, Germany 10,700 Sales, application engineering and
customer service.
Singapore 1,200 Sales, application engineering and
customer service.
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(1) Approximately 45,000 square feet is available for sublease in fiscal 2000.
(2) Approximately 24,000 square feet is under sublease through fiscal 2001.
(3) Approximately 24,000 square feet have been sublet to a subtenant since
November 1995.
We own the Indianapolis facility and lease all other facilities. The leases have
terms expiring at various dates ranging from January 2000 to February 2004. We
believe that all of our facilities are well maintained and are adequate for our
needs now and in the foreseeable future. We do not believe that we would
experience any difficulty in replacing any of the present facilities if any of
our leases were not renewed at expiration.
Item 3. LEGAL PROCEEDINGS
As previously reported, Hurco and IMS have been parties to a number of
proceedings which involved alleged infringement of one of the Interactive
Machining Patents. At the present date, all but one action has been settled
through licensing arrangements or litigation settlements. The only remaining
action is described below.
On July 3, 1997, IMS commenced an action in the United States District Court of
Virginia against Haas Automation, Inc. and its owner (collectively, Haas) and
certain other end-users and manufacturers of computerized machine tool systems.
The action sought monetary damages and an injunction against future
infringement. IMS subsequently entered into settlements with all defendants
other than Haas and dismissed claims against them. As previously reported, on
October 2, 1998 the trial court granted summary judgment in favor of Haas and
dismissed the action, finding that there was no infringement by Haas based on
the court's claim interpretation and its finding that a floppy disk is not the
equal of a cassette tape. Haas' affirmative defenses challenging the validity of
the IMS patent were also dismissed. IMS subsequently filed an appeal to the
United States Court of Appeals for the Federal Circuit. The appeal seeks relief
from the trial court's order regarding claim interpretation of the IMS patent,
the order granting defendant's motion for summary judgment and the final
judgment in favor of Haas. Haas has filed a cross-appeal to the same court from
the trial court's order regarding claim construction of the IMS patent. Oral
argument was held before the United States Court of Appeals for the Federal
Circuit in August 1999; however, the court has not yet ruled on the appeal.
Although management continues to believe that the IMS claims of patent
infringement have substantial merit, it is unable to predict the outcome of this
matter.
Item. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS
Our Common Stock is traded on the Nasdaq National Market under the symbol
"HURC". The following table sets forth the high and low sales prices of the
shares of Common Stock for the periods indicated, as reported by the Nasdaq
National Market.
1999 1998
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Fiscal Quarter Ended: High Low High Low
-------------------- ------------------- --------------------
January 31.............................. $6-3/8 $4-5/32 $8-31/32 $6-1/4
April 30................................ 5 3-7/8 9-1/4 6-1/4
July 31................................. 6-5/8 4-1/4 9 6-7/8
October 31.............................. 4-1/2 3-3/8 7-1/8 6-1/4
We do not currently pay dividends on our Common Stock and intend to continue to
retain earnings for working capital, capital expenditures and debt reduction.
There were approximately 481 holders of record of our Common Stock as of January
11, 2000.
During the period covered by this report, we did not sell any equity securities
that were not registered under the Securities Act of 1933, as amended.
Item 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented below have been derived from our
Consolidated Financial Statements for the years indicated and should be read in
conjunction with the Consolidated Financial Statements and related notes set
forth elsewhere herein.
Year Ended October 31,
1999 1998 1997 1996 1995
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Statement of Operations Data: (In thousands, except per share amounts)
Sales and service fees................ $88,238 $ 93,422 $ 95,729 $ 99,351 $ 89,632
Gross profit.......................... $24,174 $ 27,939 $ 27,773 $ 28,421 $ 23,470
Selling, general and adminis-
tration expenses.................... $21,259 $ 21,786 $ 21,047 $ 21,343 $ 19,002
Restructuring charge (credit)......... $ (103) $ 1,162 $ -- $ -- $ --
Operating income...................... $ 3,018 $ 4,991 $ 6,726 $ 7,078 $ 4,468
Interest expense...................... $ 1,293 $ 876 $ 1,938 $ 3,211 $ 4,250
License fee income and litigation
settlement fees, net................ $ 304 $ 6,974 $ 10,095 $ 590 $ --
Net income............................ $1,802 $ 9,254 $ 13,804 $ 4,264 $ 204
Earnings
per common share-diluted............ $ .30 $ 1.39 $ 2.06 $ .72 $ .04
Weighted average common
shares outstanding-diluted.......... 6,061 6,670 6,704 5,907 5,536
As of October 31,
1999 1998 1997 1996 1995
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Balance Sheet Data: (Dollars in thousands)
Current assets........................ $52,856 $ 55,143 $ 42,222 $ 44,108 $ 46,356
Current liabilities................... $19,580 $ 25,794 $ 19,370 $ 23,336 $ 26,479
Working capital ...................... $33,276 $ 29,349 $ 22,852 $ 20,772 $ 19,877
Current ratio......................... 2.7 2.1 2.2 1.9 1.8
Total assets.......................... $69,632 $ 71,696 $ 58,748 $ 59,750 $ 61,421
Long-term obligations................. $13,904 $ 8,162 $ 9,602 $ 20,273 $ 27,459
Total debt............................ $14,172 $ 8,358 $ 10,043 $ 22,110 $ 33,599
Shareholders' equity.................. $36,148 $ 37,740 $ 29,776 $ 16,141 $ 7,483
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -------------------------------------------------------------
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The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein. Certain statements made in this report may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
our actual results, performance or achievements or the machine tool industry to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, (i) changes in general economic and business conditions that
affect demand for Computer Numeric Control (CNC) systems, machine tools and
software products, (ii) changes in manufacturing markets, (iii) innovations by
competitors, (iv) quality and delivery performance by our contract manufacturers
and (v) governmental actions and initiatives including import and export
restrictions and tariffs.
Results of Operations
The following table presents, for the fiscal years indicated, selected items
from the Consolidated Statements of Operations expressed as a percentage of
worldwide sales and service fees and the year-to-year percentage changes in the
dollar amounts of those items.
Percentage of Revenues Year-to-Year % Change
Increase (Decrease)
1999 1998 1997 99 vs. 98 98 vs. 97
----- ----- ----- --------- ---------
Sales and service fees................ 100.0% 100.0% 100.0% (5.6%) (2.4%)
Gross profit.......................... 27.4% 29.9% 29.0% (13.5%) 0.6%
Selling, general and
administrative expenses............. 24.1% 23.3% 22.0% (2.4%) 3.5%
Restructuring charge (credit)......... (0.1%) 1.2% -- (108.9%) --
Operating income...................... 3.4% 5.3% 7.0% (39.5%) (25.8%)
Interest expense...................... 1.5% 0.9% 2.0% (47.6%) (54.8%)
Net income............................ 2.0% 9.9% 14.4% (80.5%) (33.0%)
Fiscal 1999 Compared With Fiscal 1998
Net income for the fiscal year ending October 31, 1999 was $1.8 million, or $.30
per share, on a diluted basis, compared to $9.3 million, or $1.39 per share, for
the preceding year. Results for fiscal 1999 are not comparable to the preceding
period because fiscal 1998 results include a $1.2 million restructuring charge
and $6.3 million of license fees and litigation settlements net of expenses and
foreign withholding taxes. As discussed below, net license fee income and
litigation settlements fees for fiscal 1999 were $304,000.
Sales and service fees were $88.2 million for fiscal 1999, a decrease of 5.6%
from the $93.4 million reported in fiscal 1998. The decrease in sales was due in
part to the negative impact of a stronger U.S. dollar when converting foreign
sales to U.S. dollars for financial reporting purposes. At constant exchange
rates, net sales and service fees for fiscal 1999 would have been $89.2 million.
Sales of computerized machine systems, before foreign currency translation
effects were substantially unchanged from the prior year and accounted for 72.3%
of our annual sales and service fees. Domestic sales of computerized machine
systems in fiscal 1999 decreased by $3.2 million, or 13.2%, reflecting very weak
market conditions that have existed since the third quarter of fiscal 1998.
Sales of computerized machine systems in Europe increased $1.7 million, or 4.3%,
in fiscal 1999 on a constant dollar basis, while sales in Southeast Asia
increased $1.3 million. The increase in international sales was offset in part
by approximately $1.0 million negative effect from foreign currency translation.
Sales of stand-alone CNC systems and software declined by $4.1 million, or
27.9%. The decline in stand-alone CNC systems was primarily the result of an
anticipated reduction in shipments to original equipment manufacturers (OEMs)
and retrofit dealers of stand-alone CNC systems, primarily related to our
DeltaTM Series CNC systems, as we have repositioned these products as components
of integrated machine systems.
International sales, including export sales from the United States, increased to
approximately 58.4% of consolidated sales and service fees for fiscal 1999
compared to 54.5% for fiscal 1998.
Orders for the year were $89.9 million compared to $92.4 million in the prior
year, a $2.5 million, or 2.7%, decrease. Computerized machine system orders
increased $1.5 million, or 2.3%, while stand-alone CNC system orders decreased
$2.9 million, or 23.1%. Computerized machine system unit orders in Europe
increased 7.2% while orders in the United States declined 10.5%. Offsetting the
increase in computerized machine system orders in Europe was a decline in
stand-alone CNC system unit orders of 32.3%. The decline in orders for
stand-alone CNC systems is the result of our repositioning these products for
marketing as components of integrated computerized machine systems.
Backlog was $8.5 million at October 31, 1999 and $7.5 million at October 31,
1998.
Gross profit margin as a percentage of sales decreased to 27.4% in fiscal 1999
compared to 29.9% in the prior year. The decrease was primarily the result of
lower service margin and the effects of a stronger dollar relative to foreign
currencies.
Interest expense for fiscal 1999 increased $417,000 or 47.6% from the amount
reported for the corresponding period in fiscal 1998, primarily due to increased
borrowing to support an increase in finished product inventory which began in
the second half of fiscal 1998.
License fee income and litigation settlement fees for fiscal 1999 were $304,000
compared to $7.0 million in the prior year. As previously reported, there are a
limited number of CNC users that are not already licensed and most of the
licenses previously granted provided for a single lump sum payment at the time
of grant. As a result, license fee income and litigation settlement fees in
fiscal 1999 were not expected to equal that recorded in fiscal 1998. For further
information, refer to Note 10 to the Consolidated Financial Statements.
The provision for income taxes in fiscal 1999 is primarily related to the
earnings of a foreign subsidiary which no longer has the benefit of net
operating loss carryforwards to offset taxable income. The fiscal 1999 provision
was favorably impacted by a $377,000 tax asset recorded by a foreign subsidiary
due to a change in its tax status. The provision for foreign income taxes in
fiscal 1998 consisted of $640,000 of foreign withholding taxes resulting from
license fee income and litigation settlement fees and approximately $1.2 million
related to the earnings of foreign subsidiaries. Net operating loss
carryforwards available to offset pre-tax income in future periods are set forth
in Note 6 to the Consolidated Financial Statements.
A German tax examiner has contested our transfer of net operating losses between
two of our German subsidiaries that merged in fiscal 1996. The contingent tax
liability resulting from this issue is approximately $1.4 million. We have
protested this matter and have not yet received a ruling from the German tax
authorities on the tax examiner's finding and our protest. In the event an
unfavorable ruling is received from the German tax authorities, we will consider
whether to appeal to the German Federal Tax Court. No provision for the
contingency has been recorded.
Fiscal 1998 Compared With Fiscal 1997
Net income for the fiscal year ending October 31, 1998 was $9.3 million, or
$1.39 per share, on a diluted basis, compared to $13.8 million, or $2.06 per
share, for the preceding year. Included in 1998 results was a $1.2 million
restructuring charge (which is more fully discussed below and in Note 15 to the
Consolidated Financial Statements). Net income in fiscal 1998 and 1997 also
included $6.3 million and $9.1 million, respectively, of license fees and
litigation settlements net of expenses and foreign withholding taxes. Excluding
the restructuring charge and net license fee and litigation settlements, net
income in fiscal 1998 would have been $4.1 million, or $.61 per share, on a
diluted basis, compared to $4.7 million, or $.70 per share, in fiscal 1997. In
addition, the provision for income taxes in fiscal 1998 increased by $906,000,
or 88%, primarily the result of the earnings of a foreign subsidiary which no
longer has the benefit of net operating loss carryforwards to offset taxable
income.
Sales and service fees were $93.4 million for fiscal 1998, a decrease of 2.4%
from the $95.7 million reported in fiscal 1997. The decrease in sales for the
fiscal year was due in part to the negative impact of a stronger U.S. dollar
during the first three fiscal quarters, when converting foreign sales to U.S.
dollars for financial reporting purposes. At constant exchange rates, net sales
and service fees for the fiscal year would have been $95.0 million.
Sales of computerized machine systems, before foreign currency translation
effects, increased $4.6 million, or 7.5%, for fiscal 1998 and accounted for
69.3% of our annual sales and service fees. Domestic sales of computerized
machine systems in fiscal 1998 approximated the fiscal 1997 level while sales in
the United Kingdom, which experienced unfavorable economic conditions, declined
$2.6 million, or 24.1%. Sales of computerized machine systems in continental
Europe, primarily Germany and France, increased $6.6 million, or 26.2%, in
fiscal 1998. Also contributing to the increase in computerized machine systems
was our offering of a new milling machine featuring a fully integrated Delta(TM)
CNC system sold under the DynaPath(TM) name and our press brake system sold with
a fully integrated Autobend(R) CNC system. Both computerized machine systems
were released for sale in the second half of fiscal 1998.
The increase in sales of computerized machine systems was offset by a $4.8
million, or 27.4%, decline in sales of stand-alone CNC systems. The decline in
stand-alone CNC systems was the result of reduced shipments to original
equipment manufacturers (OEMs) and retrofit dealers of stand-alone CNC systems,
primarily related to our Delta(TM) Series CNC systems, as we reposition these
products for marketing as components of integrated machine systems.
Service income declined by approximately $600,000, or 12.1%, as a result of our
on-going transfer of customer servicing responsibility to certain of our
distributors as well as improved quality of the computerized machine systems.
International sales, including export sales from the United States, increased to
approximately 54.5% of consolidated sales and service fees for fiscal 1998
compared to 51.4% for fiscal 1997. Orders for the year were $92.4 million
compared to $94.8 million in the prior year, a $2.4 million, or 2.5%, decrease.
Computerized machine system orders increased $2.4 million, or 4.8%, while
stand-alone CNC system orders decreased $3.7 million, or 24.0%. Computerized
machine system unit orders in continental Europe (principally Germany & France)
increased 23.7% while orders in the United States and England declined 5.8%
reflecting weaker demand in those markets. Offsetting the increase in
computerized machine system orders was a decline in stand-alone CNC system
orders units of 26.4%. The decline in orders for stand-alone CNC systems is the
result of our repositioning these products for marketing as components of
integrated computerized machine systems.
Backlog was $7.5 million at October 31, 1998 and $7.4 million at October 31,
1997.
Gross profit margin as a percentage of sales increased to 29.9% in fiscal 1998
compared to 29.0% in the prior year. The increase was primarily the result of
reduced costs of computerized machine systems produced by our contract
manufacturers in Taiwan due to the weakening of the New Taiwan dollar in fiscal
1998. Also contributing to the improved margin was an increased mix of
higher-margin European sales.
As disclosed in Note 15 to the Consolidated Financial Statements, we recorded a
restructuring charge in the fourth quarter of fiscal 1998 totaling $1.2 million
related to our subsidiary Autocon Technologies, Inc. (ATI). ATI historically
marketed its Delta(TM) series of CNC systems to OEMs and through retro-fit
dealers. Throughout fiscal 1998, we repositioned ATI to market its CNC products
as components of fully integrated computerized machine systems under the
DynaPath(TM) brand name. The first of several planned models of the DynaPath(TM)
machine systems product line was successfully launched in fiscal 1998 resulting
in sales of $500,000. The decline in OEM controls sales, concurrent with a
decline in demand for retro-fit CNC systems and inventory write-downs, resulted
in operating losses related to ATI, before restructuring charges, of $1.2
million for the fiscal year ended October 31, 1998.
As discussed above, in October 1998, we initiated a more comprehensive
restructuring of ATI's business to include consolidation of operations, contract
manufacturing of CNC systems in Taiwan, simplification of the CNC product
offering and cancellation of certain product development projects, as well as
rationalizing the sales and customer service activities. This restructuring
program, which was in the first half of fiscal 1999, resulted in a $1.2 million
restructuring charge. The restructuring charge was comprised of approximately
$600,000 of reserves for the write down of fixed assets and $600,000 of accrued
liabilities for employee severance costs and obligations under lease of
manufacturing and office space that will no longer be used.
Interest expense for fiscal 1998 decreased approximately $1.1 million, or 54.8%,
from the amount reported for the corresponding period in fiscal 1997, primarily
due to debt reduction in fiscal 1998 combined with the full year effect of the
$12.1 million debt reduction that occurred in fiscal 1997.
License fee income and litigation settlement fees for fiscal 1998, represented
62.3% of income before taxes compared to 68.1% in fiscal 1997 and was
attributable almost entirely to licenses entered into during the year by IMS. As
of October 31, 1998, license fees of approximately $797,000, net of legal fees
and expenses, have been deferred and are expected to be recognized through
fiscal 2001. There are a limited number of remaining CNC users that IMS has
identified as potential licensees. Accordingly, we believe that it is unlikely
that future license fee income and litigation settlement fees will equal that
recorded in fiscal 1998. For further information, refer to Note 10 to the
Consolidated Financial Statements.
The provision for income taxes in fiscal 1998 consisted of approximately
$640,000 of foreign withholding taxes resulting from license fee income and
litigation settlement fees and approximately $1.2 million related to the
earnings of a foreign subsidiary which no longer has the benefit of net
operating loss carryforwards to offset taxable income. The provision for foreign
income taxes in fiscal 1997 consisted almost entirely of foreign withholding
taxes resulting from license fee income and litigation settlement fees. Net
operating loss carryforwards available to offset pre-tax income in future
periods are set forth in Note 6 to the Consolidated Financial Statements.
EURO Currency
Many of the countries in which we sell our products and services are Member
States of the Economic and Monetary Union ("EMU"). Beginning January 1, 1999,
Member States of the EMU were permitted to begin trading in either their local
currencies or the Euro, the official currency of EMU participating Member
States. Parties are free to choose the unit they prefer in contractual
relationships during the transitional period, beginning January 1999 and ending
June 2002. Our computer system contains the functionality to process
transactions in either a country's local currency or the Euro. We have not
incurred and do not anticipate incurring any material adverse effects on our
operations related to the EMU's conversion to the Euro. However, there can be no
assurance that the conversion of EMU Member States to the Euro will not have a
material adverse effect on our operations.
Foreign Currency Risk Management
We manage our foreign currency exposure through the use of foreign currency
forward exchange contracts. We do not speculate in the financial markets and,
therefore, do not enter into these contracts for trading purposes. We also
moderate our currency risk related to significant purchase commitments with
certain foreign vendors through price adjustment agreements that provide for a
sharing of, or otherwise limit, the risk of currency fluctuations on the costs
of purchased products. The results of these programs achieved our objectives in
fiscal 1999 and fiscal 1998. See Note 1 to the Consolidated Financial
Statements.
Year 2000 Compliance
We did not experience any interruptions in our operations from Y2K related
matters. The amount spent on Y2K testing and remediation was not material.
Liquidity and Capital Resources
At October 31, 1999, we had cash and cash equivalents of $3.5 million compared
to $3.3 million at October 31, 1998. Cash used for operations totaled $827,000
in fiscal 1999, compared to cash provided by operations of $5.9 million in
fiscal 1998. Cash flow from operations in fiscal 1998 was enhanced by receipts
of approximately $6.3 million of license fees, net of legal fees and taxes.
Working capital was $33.3 million at October 31, 1999, compared to $29.3 million
at October 31, 1998. The working capital increase is attributable to a decrease
in accounts payable of $4.8 million and accrued expenses of $928,000 offset by a
decrease in accounts receivable of $1.0 million.
The decrease in accounts payable relates primarily to payments made to our
contract manufacturers for inventory purchases that occurred in late fiscal 1998
under terms that generally range from 60 to 120 days. Accounts payable at
October 31, 1998 reflected a higher-than-normal level of shipments from our
contract manufacturers in the fourth fiscal quarter.
Capital investments for the fiscal year ended October 31, 1999 consisted
principally of expenditures for software development projects and purchases of
equipment. Cash used for investing activities during the year was funded by cash
flow from operations and bank credit facilities.
We repurchased 395,752 and 254,500 shares of our common stock during fiscal 1999
and 1998, respectively, under our previously announced stock repurchase program.
These shares are reflected as a reduction of common stock outstanding in
calculating basic and diluted earnings per common share.
Total debt at October 31, 1999 was $14.2 million, representing 28.2% of total
capitalization, compared to $8.4 million, or 18.1%, of total capitalization at
October 31, 1998.
We were in compliance with all loan covenants at October 31, 1999. We believe
that anticipated cash flow from operations and available borrowings under credit
facilities will be sufficient to meet our anticipated cash requirements in the
foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Our bank line of credit is affected by the general level of U.S. and European
interest rates and/or Libor. However, we only had $9.6 million outstanding under
our bank line of credit at October 31, 1999 and the effect of interest rate
changes would likely not be significant.
Foreign Currency Exchange Risk
A significant portion of our product content is sourced from foreign suppliers
or built to our specifications by contract manufacturers overseas. Our
contractual arrangements with those suppliers typically include foreign currency
risk sharing agreements which reduce the effects of currency fluctuations on
product cost. The predominant portion of foreign currency exchange rate risk
regarding product cost relates to the New Taiwan Dollar.
In Fiscal 1999, approximately 58.4% of our sales and service fees, including
export sales, were derived from foreign markets. All computerized machine
systems, CNC systems and certain proprietary service parts are sourced by a
central engineering and manufacturing division of the U.S. parent company and
re-invoiced to our foreign sales and service subsidiaries, primarily in their
functional currencies. The parent company enters into forward foreign exchange
contracts from time to time to hedge the cash flow risk related to inter-company
sales and inter-company accounts receivable in foreign currencies. We do not
speculate in the financial markets and, therefore, do not enter into these
contracts for trading purposes.
Forward contracts for the sale of foreign currencies as of October 31, 1999:
Notional Amount Weighted Avg. Market Value
in Foreign Forward Rate Notional Amount October 31,
Forward Contracts Currency in U.S. $ 1999 Maturity Dates
--------- -------- ------ ---- --------------
Sterling 2,060,000 1.6532 3,391,310 3,389,318 Nov '99-Jan `00
Euro 1,028,000 1.0776 1,107,805 1,084,540 Nov'99
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
To the Shareholders and
Board of Directors of
Hurco Companies, Inc.
We have audited the accompanying consolidated balance sheets of Hurco Companies,
Inc. (an Indiana corporation) and subsidiaries as of October 31, 1999 and 1998,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended October
31, 1999. These financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hurco Companies,
Inc. and subsidiaries as of October 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1999, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) 2 is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
December 1, 1999.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
----------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands, except per share amounts)
Sales and service fees........................................ $ 88,238 $ 93,422 $ 95,729
Cost of sales and service .................................... 64,064 65,483 67,956
-------- -------- --------
Gross profit............................................. 24,174 27,939 27,773
Selling, general and administrative expenses.................. 21,259 21,786 21,047
Restructuring charge (credit) (Note 15)....................... (103) 1,162 --
--------- --------- --------
Operating income ........................................ 3,018 4,991 6,726
License fee income and litigation settlement fees, net
(Note 12)................................................ 304 6,974 10,095
Interest expense.............................................. 1,293 876 1,938
Other income (expense), net................................... 25 99 (51)
-------- --------- --------
Income before income taxes............................... 2,054 11,188 14,832
Provision for income taxes (Note 6)........................... 252 1,934 1,028
-------- --------- --------
Net income ................................................... $ 1,802 $ 9,254 $ 13,804
======== ========= ========
Earnings per common share - basic............................. $ .30 $ 1.42 $ 2.11
======== ========= ========
Weighted average common shares outstanding - basic............ 5,980 6,498 6,536
======== ========= ========
Earnings per common share - diluted........................... $ .30 $ 1.39 $ 2.06
======== ========= ========
Weighted average common shares outstanding - diluted.......... 6,061 6,670 6,704
======== ========= ========
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31,
1999 1998
---- ----
(Dollars in thousands, except per share amounts)
Current assets:
Cash and cash equivalents..................................................... $ 3,495 $ 3,276
Accounts receivable, less allowance for doubtful accounts
of $687 in 1999 and $769 in 1998............................................. 17,154 18,896
Inventories .................................................................. 30,767 30,817
Other......................................................................... 1,440 2,154
--------- ---------
Total current assets........................................................ 52,856 55,143
--------- ---------
Long-term license fee receivables (Note 12)...................................... 434 797
--------- ---------
Property and equipment:
Land.......................................................................... 761 761
Building...................................................................... 7,168 7,067
Machinery and equipment....................................................... 11,182 11,184
Leasehold improvements........................................................ 1,005 1,107
--------- ---------
20,116 20,119
Less accumulated depreciation and amortization................................ (11,165) (11,037)
--------- ----------
8,951 9,082
--------- ---------
Software development costs, less accumulated amortization of $5,174
in 1999 and $6,014 in 1998.................................................... 3,951 4,231
Other assets..................................................................... 3,440 2,443
--------- ---------
$ 69,632 $ 71,696
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 8,519 $ 13,235
Accounts payable-related parties.............................................. 2,372 2,556
Accrued expenses.............................................................. 5,935 7,157
Accrued warranty expenses..................................................... 968 1,060
Current portion of long-term debt............................................. 1,786 1,786
--------- ---------
Total current liabilities................................................... 19,580 25,794
--------- ---------
Non-current liabilities:
Long-term debt ............................................................... 12,386 6,572
Deferred credits and other ................................................... 1,518 1,590
--------- ---------
13,904 8,162
--------- ---------
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Preferred stock: no par value per share; 1,000,000 shares
authorized; no shares issued................................................ -- --
Common stock: no par value; $.10 stated value per share; 12,500,000 shares authorized; 5,951,859 and
6,340,111 shares issued and outstanding in 1999 and 1998, respectively...... 595 634
Additional paid-in capital.................................................... 46,340 48,662
Accumulated deficit........................................................... (5,348) (7,150)
Foreign currency translation adjustment....................................... (5,439) (4,406)
--------- ---------
Total shareholders' equity.................................................. 36,148 37,740
--------- ---------
$ 69,632 $ 71,696
========= =========
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
1999 1998 1997
---- ---- ----
(Dollars in thousands)
Cash flows from operating activities:
Net income ............................................................. $ 1,802 $ 9,254 $ 13,804
Adjustments to reconcile net income to
net cash provided by (used for) operating activities:
Depreciation and amortization......................................... 2,428 2,138 2,078
Restructuring charge (credit) ........................................ (103) 1,162 --
Unrealized (gain) loss on foreign currency transactions............... 671 (219) 294
Change in assets/liabilities
(Increase) decrease in accounts receivable........................... 974 (2,808) 1,043
(Increase) decrease in inventories................................... (801) (8,775) 2,107
Increase (decrease) in accounts payable.............................. (4,825) 6,864 (2,096)
Decrease in accrued expenses......................................... (928) (994) (681)
Other................................................................ (45) (712) (525)
------- ----- -------
Net cash provided by (used for) operating activities.............. (827) 5,910 16,024
------- ----- -------
Cash flows from investing activities:
Proceeds from sale of equipment......................................... 69 93 126
Purchase of property and equipment...................................... (1,176) (1,013) (640)
Software development costs.............................................. (981) (1,315) (1,595)
Other .................................................................. (288) (411) (418)
------- ------ -------
Net cash (used for) investing activities.......................... (2,376) (2,646) (2,527)
------- ------ ------
Cash flows from financing activities:
Advances on bank credit facilities...................................... 61,920 15,053 30,173
Repayments of bank credit facilities.................................... (54,320) (14,953) (39,154)
Repayments of term debt................................................. (1,786) (1,786) (3,036)
Proceeds from exercise of common stock options.......................... 18 120 38
Purchase of common stock................................................ (2,379) (1,827) --
------- ------ -----------
Net cash provided by (used for) financing activities.............. 3,453 (3,393) (11,979)
------- ------ -------
Effect of exchange rate changes on cash.................................... (31) 34 (24)
------- ------- -------
Net increase (decrease) in cash................................... 219 (95) 1,494
Cash and cash equivalents at beginning of year............................. 3,276 3,371 1,877
------- ----- -----
Cash and cash equivalents at end of year................................... $3,495 $3,276 $3,371
===== ====== ======
Supplemental disclosures:
Cash paid for:
Interest............................................................. $ 1,016 $ 702 $ 1,828
Income taxes......................................................... $ 1,003 $ 1,818 $ 1,234
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
Comprehensive
Income (loss):
Foreign
Common Stock Additional Currency
Shares Issued Paid-In Accumulated Translation
& Outstanding Amount Capital Deficit Adjustment Total
(Dollars in thousands)
Balances, October 31, 1996 6,531,871 $ 653 $50,312 $(30,208) $(4,616) $16,141
Net income........................................... -- -- -- 13,804 -- 13,804
Translation of foreign currency financial
statements........................................ -- -- -- -- (207) (207)
-------
Comprehensive Income................................ 13,597
Exercise of common stock options..................... 12,960 1 37 -- -- 38
--------- ------ -------- ------- ------- -----
Balances, October 31, 1997........................... 6,544,831 $ 654 $50,349 $(16,404) $(4,823) $29,776
--------- ------ -------- ------- ------- ------
Net income........................................... -- -- -- 9,254 -- 9,254
Translation of foreign currency financial
statements........................................ -- -- -- -- 417 417
------
Comprehensive Income................................. 9,671
Exercise of common stock options..................... 49,780 5 115 -- -- 120
Purchase of common stock............................. (254,500) (25) (1,802) -- -- (1,827)
-------- ------ -------- ------- ------ -------
Balances, October 31, 1998........................... 6,340,111 $ 634 $48,662 $(7,150) $(4,406) $37,740
------- ----- -------- ------- ------ ------
Net income........................................... -- -- -- 1,802 -- 1,802
Translation of foreign currency financial
statements........................................ -- -- -- -- (1,033) (1,033)
------
Comprehensive Income................................. 769
Exercise of common stock options..................... 7,500 1 17 -- -- 18
Purchase of common stock............................. (395,752 ) (40) (2,339) -- -- (2,379)
--------- ------ ------ ------- ------- -------
Balances, October 31, 1999........................... 5,951,859 $ 595 $46,340 $(5,348) $(5,439) $36,148
========= ====== ======= ======== ======== =======
The accompanying notes are an integral part of the
Consolidated Financial Statements.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of
Hurco Companies, Inc. (an Indiana corporation) and our wholly owned and
controlled subsidiaries. A 35% ownership interest in an affiliate recorded using
the equity method and a 15% ownership interest in an affiliate recorded at cost
are included in Other Assets on the accompanying Consolidated Balance Sheets.
Intercompany accounts and transactions have been eliminated.
Statements of Cash Flows. We consider all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents. Cash flows from
hedges are classified consistent with the items being hedged.
Translation of Foreign Currencies. All balance sheet accounts of non-U.S.
subsidiaries are translated at the exchange rate as of the end of the year.
Income and expenses are translated at the average exchange rates during the
year. Foreign currency translation adjustments are recorded as a separate
component of shareholders' equity. Foreign currency transaction gains and losses
are recorded as income or expense as incurred.
Hedging. We enter into foreign currency forward exchange contracts to hedge
certain firm intercompany sale commitments denominated in foreign currencies
(primarily pound sterling and Euro) for which we have firm purchase commitments.
The purpose of these instruments is to protect us from the risk that the U.S.
dollar net cash inflows resulting from the sales denominated in foreign
currencies will be adversely affected by changes in exchange rates. Gains and
losses on these hedge contracts are deferred and recognized as an adjustment to
the related sales transactions.
We enter into foreign currency forward exchange contracts periodically to
provide a hedge against the effect of foreign currency fluctuations on
receivables denominated in foreign currencies. Gains and losses related to
contracts designated as hedges of receivables denominated in foreign currencies
are accrued as exchange rates change and are recognized as "Other income
(expense), net" in the Consolidated Statements of Operations.
The U.S. dollar equivalent notional amount of outstanding foreign currency
forward exchange contracts was approximately $4.5 million as of October 31, 1999
($2.1 million related to firm intercompany sales commitments) and $13.5 million
as of October 31, 1998 ($8.7 million related to firm intercompany sales
commitments). Deferred losses related to hedges of future sales transactions
were approximately $48,000 and $434,000 as of October 31, 1999 and 1998,
respectively. Contracts outstanding at October 31, 1999 mature at various times
through January 2000. All contracts are for the sale of foreign currency. We do
not enter into these contracts for trading purposes.
Inventories. Inventories are stated at the lower of cost or market, with
cost determined using the first-in, first-out method.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property and Equipment. Property and equipment are carried at cost. Depreciation
and amortization of assets are provided primarily under the straight-line method
over the shorter of the estimated useful lives or the lease terms as follows:
Number of Years
Building 40
Machines 10
Shop and office equipment 5
Leasehold improvements 5
Revenue Recognition. Sales of products and services are recorded when products
are shipped or services are performed. Service fees from maintenance contracts
are deferred and recognized in earnings on a pro rata basis over the period of
the agreement. Sales related to software products are recognized when shipped in
conformity with American Institute of Certified Accountants' Statement of
Position 97-2 Software Revenue Recognition.
License Fee Income and Litigation Settlement Fees, Net. From time to time, our
wholly owned subsidiary, IMS Technology, Inc. (IMS) enters into agreements for
the licensing of its interactive computer numerical control (CNC) patents.
License fees received or receivable under a fully paid-up license, for which
there are no future performance requirements or contingencies and litigation
settlement fees, are recognized in income, net of legal fees and expenses, if
any, at the time the related agreement is executed. License fees received in
periodic installments that are contingent upon the continuing validity of a
licensed patent are recognized in income, net of legal fees and expenses, if
any, over the life of the licensed patent.
Product Warranty. Expected future product warranty expense is recorded when the
product is sold.
Research and Development Costs. The costs associated with research and
development programs for new products and significant product improvements are
expensed as incurred and included in selling, general and administrative
expenses. Research and development expenses totaled $2.1 million, $2.0 million
and $1.9 million in fiscal 1999, 1998 and 1997, respectively.
Costs incurred to develop computer software products and significant
enhancements to software features of existing products to be sold or otherwise
marketed are capitalized, after technological feasibility is established.
Software development costs are amortized to Cost of Sales on a straight-line
basis over the estimated product life of the related software, which ranges from
three to five years. We capitalized $1.0 million in 1999, $1.3 million in 1998
and $1.6 million in 1997 related to software development projects. Amortization
expense was $1.3 million, $1.1 million and $940,000, for the three years ended
October 31, 1999, 1998 and 1997 respectively.
Earnings Per Share. Earnings per share of common stock are based on the weighted
average number of common shares outstanding, which, for diluted purposes,
includes the effects of outstanding stock options computed using the treasury
method.
Income Taxes. We record income taxes under Statement of Accounting Standards
(SFAS) 109 "Accounting for Income Taxes". SFAS 109 utilizes the liability method
for computing deferred income taxes and requires that the benefit of certain
loss carryforwards be recorded as an asset and that a valuation allowance be
established against the asset to the extent it is "more likely than not" that
the benefit will not be realized.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
2. BUSINESS OPERATIONS
Nature of Business. We design and produce computer numerical control (CNC)
systems and software and computerized machine systems for sale through our own
distribution system to the worldwide machine tool industry.
The end market for our products consists primarily of precision tool, die and
mold manufacturers, independent job shops and specialized short-run production
applications within large manufacturing operations. Industries served include:
aerospace, defense, medical equipment, energy, transportation and computer
industries. Our products are sold through independent agents and distributors in
countries throughout North America, Europe and Asia. We also maintain direct
sales operations in the United States, England, France, Germany and Singapore.
Credit Risk. We sell products to customers located throughout the world. We
perform ongoing credit evaluations of customers and generally do not require
collateral. Allowances are maintained for potential credit losses, and such
losses have been within our expectations.
Concentration of credit risk with respect to trade accounts receivable is
limited due to the large number of customers and their dispersion across many
geographic areas. Although a significant amount of trade receivables are with
distributors primarily located in the United States, no single distributor or
region represents a significant concentration of credit risk.
Reliance on Contract Manufacturers. We contract with manufacturing contractors
located in Taiwan and Europe for the manufacture and assembly of computerized
machine systems, based on our designs and specifications. Any interruption from
these sources would restrict the availability of our computerized machine
systems, which would affect operating results adversely.
3. INVENTORIES
Inventories as of October 31, 1999 and 1998 are summarized below (in thousands):
1999 1998
---------- ----------
Purchased parts and sub-assemblies................................... $ 9,104 $ 11,749
Work-in-process...................................................... 1,070 1,774
Finished goods....................................................... 20,593 17,294
--------- ------
$ 30,767 $ 30,817
========= ======
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. DEBT AGREEMENTS
Long-term debt as of October 31, 1999 and 1998, consisted of (in thousands):
1999 1998
-------- --------
Bank revolving credit facilities............................................. $ 9,600 $ 2,000
Senior Notes................................................................. 3,572 5,358
Economic Development Revenue Bonds, Series 1990.............................. 1,000 1,000
-------- ---------
14,172 8,358
Less current portion......................................................... 1,786 1,786
--------- ---------
$ 12,386 $ 6,572
========= =========
As of October 31, 1999, long-term debt was payable as follows (in thousands):
Fiscal 2000.................................................................. 1,786
Fiscal 2001.................................................................. 1,986
Fiscal 2002.................................................................. 9,800
Fiscal 2003.................................................................. 200
Fiscal 2004 and thereafter................................................... 400
--------
$14,172
As of October 31, 1999 and 1998, we had $7.2 million and $11.4 million,
respectively, of outstanding letters of credit issued to non-U.S. suppliers for
inventory purchase commitments. As of October 31, 1999, we had unutilized credit
facilities of $8.2 million available for either direct borrowings or commercial
letters of credit.
As of October 31, 1999 and 1998, the domestic bank revolving credit facility was
payable at interest rates ranging from 6.9% to 8.25%. Interest was payable on
the Senior Notes at 10.37% at October 31, 1999 and 1998.
The principal terms of the Bank Credit Agreement and Senior Notes Agreement are
set forth below:
a) Bank Credit Agreement
Our bank credit agreement provides for a revolving, unsecured credit
facility expiring May 1, 2002, which permits borrowings, at any one
time outstanding, of up to $25.0 million (inclusive of outstanding
letters of credit up to $15.0 million). Of such borrowings, up to $5.0
million may be drawn in designated European currencies. Interest on all
outstanding borrowings is payable at Libor plus an applicable Euro
dollar rate margin ranging from 1.0% to 2.0% based on a prescribed
formula, or at our option, the greater of the prime rate or 1.0% plus
the Federal Funds Rate. An additional margin of .25% may be charged if
our fixed charge coverage ratio falls below 1.25 to 1. The agreement
requires us to maintain a specified minimum net worth and establishes
maximum leverage and fixed charge coverage ratios. We are required to
maintain consolidated tangible net worth (as defined) of not less than
$30.0 million plus (i) 50% of cumulative net income subsequent to May
1, 1999 and (ii) 75% of proceeds from sales of capital stock after
April 30, 1999. Total consolidated debt may not exceed 50% of
consolidated capitalization (defined as total debt plus consolidated
tangible net worth). Our fixed charge coverage ratio requirement varies
within a range of 1.0-1.25 to 1 during the term of the agreement.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
b) Senior Notes
At October 31, 1999, we had outstanding approximately $3.6 million of
unsecured Senior Notes, bearing an interest rate of 10.37%, of which
approximately $1.8 million is due on December 1, 1999, and the balance
is due in fiscal 2000. The financial covenants substantially conform to
those contained in our bank credit agreement.
The Economic Development Revenue Bonds are payable in five equal annual
installments beginning on September 1, 2001 and are secured by a letter of
credit issued in the amount of $1.1 million by a bank. The Bonds' interest rates
adjust weekly and, as of October 31, 1999 and 1998, interest was accruing at a
rate of 3.7% and 3.4% respectively.
We were in compliance with all loan covenants at October 31, 1999.
5. FINANCIAL INSTRUMENTS
The carrying amounts for trade receivables and payables approximate their fair
values. At October 31, 1999 the carrying amounts and fair values of our
financial instruments, which includes bank revolving credit facilities, senior
notes and Economic Development Bonds are not materially different.
We also have off-balance sheet financial instruments in the form of foreign
currency forward exchange contracts as described in Note 1 to the Consolidated
Financial Statements. The U.S. dollar equivalent notional amount and fair value
of these contracts were both $4.5 million at October 31, 1999. Current market
prices were used to estimate the fair value of the foreign currency forward
exchange contracts.
The future value of the foreign currency forward exchange contracts and the
related currency positions are subject to offsetting market risk resulting from
foreign currency exchange rate volatility. The counterparties to these contracts
are substantial and creditworthy financial institutions. Neither the risks of
counterparty non-performance nor the economic consequences of counterparty
non-performance associated with these contracts are considered by us to be
material.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. INCOME TAXES
Deferred income taxes reflect the effect of temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets and
liabilities for financial reporting purposes. Deferred income taxes also reflect
the value of net operating losses and an offsetting valuation allowance. Our
total deferred tax assets and corresponding valuation allowance at October 31,
1999 and 1998, consisted of the following (in thousands):
October 31,
1999 1998
Tax effects of future tax deductible items related to:
Accrued inventory reserves................................................. $ 824 $ 710
Accrued warranty expenses.................................................. 249 276
Deferred Compensation ..................................................... 310 194
Other accrued expenses..................................................... 745 977
--------- ------
Total deferred tax assets.............................................. 2,128 2,157
--------- -------
Tax effects of future taxable differences related to:
Accelerated tax deduction and other tax over book
deductions related to property, equipment and software................... (1,774) (1,883)
Other...................................................................... (575) (575)
--------- --------
Total deferred tax liabilities........................................... (2,349) (2,458)
--------- --------
Net tax effects of temporary differences................................. (221) (301)
--------- --------
Tax effects of carryforward benefits:
U.S. federal net operating loss carryforwards,
expiring 2008-2013....................................................... 1,636 2,170
Foreign net tax benefit carryforwards with various expiration years........ 1,339 1,174
U.S. federal general business tax credits,
expiring 2008-2013....................................................... 1,001 1,367
U.S. Alternative Minimum Tax Credit with no expiration..................... 426 412
--------- ---------
Tax effects of carryforwards .......................................... 4,402 5,123
--------- ---------
Tax effects of temporary differences and carryforwards................. 4,181 4,822
Less valuation allowance............................................... (3,755) (4,410)
--------- ---------
Net deferred tax asset................................................. $ 426 $ 412
========= =========
Except as indicated above, our carryforwards expire at specific future dates and
utilization of certain carryforwards is limited to specific amounts each year
and further limitations may be imposed if an "ownership change" would occur.
Realization is entirely dependent upon generating sufficient future earnings in
specific tax jurisdictions prior to the expiration of the loss carryforwards.
Due to the uncertain nature of their ultimate realization based upon past
performance and expiration dates, we have established a full valuation allowance
against carryforward benefits with expiration dates. Alternative minimum tax
credits may be carried forward indefinitely and as a result, are not provided
with a valuation allowance. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of our income
tax expense.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Income (loss) before income taxes (in thousands):
Year Ended October 31,
----------------------
1999 1998 1997
---------- ------------ ---------
Domestic............................................... $ 1,848 $ 8,809 $ 10,303
Foreign................................................ 206 2,379 4,529
------- -------- ------
$ 2,054 $ 11,188 $ 14,832
======== ========= =========
Differences between the effective tax rate and
U.S. federal income tax rate were (in thousands):
Tax at U.S. statutory rate.................................... $ 719 $ 3,915 $ 5,191
Foreign withholding taxes..................................... 4 640 1,012
Effect of tax rates of international jurisdictions
in excess of U.S. statutory rates........................... 209 563 342
State income taxes............................................ 41 35 16
Utilization of net operating loss carryforwards............... (721) (3,219) (5,533)
------- ------ ------
Provision for income taxes.................................... $ 252 $ 1,934 $ 1,028
======== ========= =========
Foreign withholding taxes are the result of foreign dividends received during
fiscal 1999 and certain license fee payments received during fiscal 1998 and
1997. Our provision for income taxes in fiscal 1999, 1998 and 1997 represents
taxes currently payable with the exception of the $377,000 tax asset recorded in
1999 by a foreign subsidiary due to a change in its tax status.
We have not provided any U.S. income taxes on the undistributed earnings of our
foreign subsidiaries based upon our determination that such earnings will be
indefinitely reinvested.
7. EMPLOYEE BENEFITS
We have defined contribution plans that include a majority of our employees
worldwide, under which our contributions are discretionary. The purpose of these
plans is generally to provide additional financial security during retirement by
providing employees with an incentive to save throughout their employment. Our
contributions to the plans are based on employee contributions or compensation.
Our contributions totaled $331,605, $357,000 and $307,000 for the years ended
October 31, 1999, 1998 and 1997, respectively.
We also have Split-Dollar Life Insurance Agreements with certain of our
officers. Under the terms of the agreements, we pay all of the premiums on
behalf of the officers. We will be repaid the premiums from the policies' cash
surrender value when the policies are terminated in accordance with the
provisions of the agreements.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. STOCK OPTIONS
In March 1997, we adopted the 1997 Stock Option and Incentive Plan (the 1997
Plan) which allows us to grant awards of options to purchase shares of our
common stock, stock appreciation rights, restricted shares and performance
shares. Under the provisions of the 1997 Plan, the maximum number of shares of
common stock that may be issued is 500,000. The total number of shares of common
stock which may be granted to any individual during the term of the 1997 Plan
may not exceed 100,000 shares. Options granted under the 1997 Plan are
exercisable for a period up to ten years after date of grant and vest in equal
annual installments as specified by the Compensation Committee of our Board of
Directors (the Committee) as the Committee determines at the time of grant. The
option price may not be less than 100% of the fair market value of a share of
common stock on the date of grant. As of October 31, 1999, 305,500 shares had
been granted under the 1997 Plan.
In 1990, we adopted the 1990 Stock Option Plan (the 1990 Plan) which allowed us
to grant options to purchase shares of our common stock and related stock
appreciation rights and limited rights to officers and our key employees. Under
the provisions of the 1990 Plan, the maximum number of shares of common stock
which may be issued under options and related rights is 500,000. There is no
annual limit on the number of such shares with respect to which options and
rights may be granted. Options granted under the 1990 Plan are exercisable for a
period up to ten years after date of grant and vest in equal installments over a
period of three to five years from the date of grant. The option price may not
be less than 100% of the fair market value of a share of common stock on the
date of grant and no options or rights may be granted under the 1990 Plan after
April 30, 2000.
A summary of the status of the options under the 1990 and 1997 Plans as of
October 31, 1999, 1998 and 1997 and the related activity for the year is as
follows:
Shares under Weighted average exercise
option price per share
- ----------------------------------------------- -------------------- ----------------------------
- ----------------------------------------------- -------------------- ----------------------------
Balance October 31, 1996 431,620 $4.01
Granted 5,000 8.25
Cancelled (1,800) 3.79
Expired - -
Exercised (12,960) 3.63
- ----------------------------------------------- -------------------- ----------------------------
- ----------------------------------------------- -------------------- ----------------------------
Balance October 31, 1997 421,860 4.07
Granted 26,000 8.25
Cancelled (4,000) 5.13
Expired - -
Exercised (49,780) 2.43
- ----------------------------------------------- -------------------- ----------------------------
- ----------------------------------------------- -------------------- ----------------------------
Balance October 31, 1998 394,080 4.54
Granted 305,500 5.68
Cancelled (20,400) 4.91
Expired - -
Exercised (7,500) 2.42
- ----------------------------------------------- -------------------- ----------------------------
- ----------------------------------------------- -------------------- ----------------------------
Balance October 31, 1999 671,680 $5.07
=============================================== ==================== ============================
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock options outstanding and exercisable on October 31, 1999 are as follows:
Weighted average Weighted average remaining
Range of exercise prices Shares under option exercise price per share contractual life in years
per share
- --------------------------- --------------------- ------------------------- -------------------------------
- --------------------------- --------------------- ------------------------- -------------------------------
Outstanding
$2.125-5.125 294,180 $3.49 5.3
5.813-8.250 377,500 6.31 7.7
- --------------------------- --------------------- ------------------------- -------------------------------
- --------------------------- --------------------- ------------------------- -------------------------------
$2.125-8.250 671,680 $5.07 6.6
=========================== ===================== ========================= ===============================
=========================== ===================== ========================= ===============================
Exercisable
$2.125-5.125 245,544 $3.27 -
5.813-8.250 139,100 6.82 -
- --------------------------- --------------------- ------------------------- -------------------------------
- --------------------------- --------------------- ------------------------- -------------------------------
$2.125-8.250 384,644 $4.55 -
=========================== ===================== ========================= ===============================
=========================== ===================== ========================= ===============================
We apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" (APB25), and related interpretations in accounting for the Plans,
and, therefore, no compensation expense has been recognized for stock options
issued under the Plans. For companies electing to continue the use of APB25,
SFAS No. 123 "Accounting for Stock-Based Compensation", requires pro forma
disclosures determined through the use of an option-pricing model as if the
provisions of SFAS No. 123 had been adopted.
The weighted average fair value at date of grant for options granted during
fiscal 1999, 1998 and 1997 was $3.99, $6.10 and $6.11 per share, respectively.
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
1999 1998 1997
- ---------------------------------- ----------- ----------- -----------
- ---------------------------------- ----------- ----------- -----------
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 55.31% 58.16% 57.88%
Risk-free interest rate 4.70% 5.83% 6.04%
Expected term in years 10 10 10
- ---------------------------------- ----------- ----------- -----------
If we had adopted the provisions of SFAS No. 123, the impact of reported net
income and earnings per share would have been as follows:
1999 1998 1997
- ------------------------------------ -------- ----------- ---------
- ------------------------------------ -------- ----------- ---------
Net income (in thousands) $1,613 $9,181 $13,752
Earnings per share:
Basic $.27 $1.41 $2.10
Diluted $.27 $1.38 $2.05
- ------------------------------------ --------- ----------- --------
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of October 31, 1999, there were outstanding non-qualified options that had
been granted outside of the 1990 and 1997 plans to outside members of the Board
of Directors to purchase 50,000 and 75,000 shares at $5.13 and $5.81 per share,
respectively. The 50,000 shares are exercisable while the 75,000 shares become
exercisable on December 15, 1999. The options expire at various dates between
2002 and 2008.
9. RELATED PARTY TRANSACTIONS
Hurco and Air Express International Corporation (AEI) are related parties
because a common group of shareholders holds a significant ownership interest in
both companies. AEI provides freight forwarding and shipping services for us.
The cost of these freight services are negotiated on an arms length basis and
amounted to $4.3 million, $4.1 million and $2.6 million for the years ended
October 31, 1999, 1998 and 1997, respectively. Trade payables to AEI were
$200,000, $217,000 and $30,000 at October 31, 1999, 1998 and 1997, respectively.
We own approximately 15% of one of our Taiwanese-based suppliers. This
investment is carried at cost and is included in Other Assets on the
Consolidated Balance Sheet. Purchases of product from this supplier are
negotiated on an arms length basis and totaled $7.8 million, $7.4 million and
$8.2 million for the years ended October 31, 1999, 1998 and 1997, respectively.
Trade payables to this supplier were $1.5 million, $1.7 million, and $1.8
million at October 31, 1999, 1998 and 1997, respectively.
As of October 31, 1999, we own 35% of Hurco Automation, Ltd. (HAL), a Taiwan
based company. HAL's scope of activities includes the design, manufacture, sales
and distribution of industrial automated products, software systems and related
components, including CNC systems and components manufactured under contract for
sale exclusively to us. We are accounting for the investment using the equity
method. The investment of $732,929 at October 31, 1999 is included in Other
Assets on the Consolidated Balance Sheet. Purchases of product from this
supplier are negotiated on an arms length basis and amounted to $3.6 and $3.1
million in 1999 and 1998, respectively. Trade payables to HAL were $672,000 and
$668,000 at October 31, 1999 and 1998, respectively.
10. LITIGATION AND CONTINGENCIES
As previously reported, Hurco and its subsidiary IMS Technology, Inc. (IMS) have
been parties to a number of proceedings which involved alleged infringement of
one of the Interactive Machining Patents. At the present date, all but one
action has been settled through licensing arrangements or litigation
settlements. The only remaining action is described below.
On July 3, 1997, IMS commenced an action in the United States District Court of
Virginia against Haas Automation, Inc. and its owner (collectively, Haas) and
certain other end-users and manufacturers of computerized machine tool systems.
The action sought monetary damages and an injunction against future
infringement. IMS subsequently entered into settlements with all defendants
other than Haas and dismissed claims against them. As previously reported, on
October 2, 1998 the trial court granted summary judgment in favor of Haas and
dismissed the action, finding that there was no infringement by Haas based on
the court's claim interpretation and its finding that a floppy disk is not the
equal of a cassette tape. Haas' affirmative defenses challenging the validity of
the IMS patent were also dismissed. IMS subsequently filed an appeal to the
United States Court of Appeals for the Federal Circuit. The appeal seeks relief
from the trial court's order regarding claim interpretation of the IMS patent,
the order granting defendant's motion for summary judgment and the final
judgment in favor of Haas. Haas has filed a cross-appeal to the same court from
the trial court's order regarding claim construction of the IMS patent. Oral
argument was held before the United States Court of Appeals for the Federal
Circuit in August 1999; however, the court has not yet ruled on the appeal.
Although management continues to believe that the IMS claims of patent
infringement have substantial merit, it is unable to predict the outcome of this
matter.
A German tax examiner has contested our transfer of net operating losses between
two of our German subsidiaries that merged in fiscal 1996. The contingent tax
liability resulting from this issue is approximately $1.4 million. We have
protested this matter and have not yet received a ruling from the German tax
authorities on the tax examiner's finding and our protest. In the event an
unfavorable ruling is received from the German tax authorities, we will consider
whether to appeal to the German Federal Tax Court. No provision for the
contingency has been recorded.
In addition, we are involved in various other claims and lawsuits arising in the
normal course of business. None of these claims, in our opinion, are expected to
have a material adverse effect on our consolidated financial position or results
of operations.
11. OPERATING LEASES
We lease facilities and vehicles under operating leases that expire at various
dates through 2003. Future payments, exclusive of amounts reflected in the
balance sheet, required under operating leases as of October 31, 1999, are
summarized as follows (in thousands):
2000..............................................$ 1,350
2001.............................................. 801
2002.............................................. 537
2003.............................................. 77
2004.............................................. 1
--------
Total.............................................$ 2,766
========
Rent expense for the years ended October 31, 1999, 1998 and 1997 was $1.7
million, $1.8 million and $1.9 million, respectively.
12. LICENSE FEE INCOME AND LITIGATION SETTLEMENT FEES, NET
License fee income and litigation settlement fees, net for fiscal 1999, 1998 and
1997 were attributable to agreements entered into by IMS, pursuant to which IMS
granted fully paid-up licenses of its interactive CNC patents in exchange for
cash and other consideration. As of October 31, 1999, additional license fees of
approximately $873,000, net of legal fees and expenses, related to future
payments under completed license agreements have been deferred and are expected
to be recognized in income over the two-year remaining life of the licensed
patent.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13. QUARTERLY HIGHLIGHTS (Unaudited)
1999 (In thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service fees............................... $ 21,147 $21,532 $20,783 $24,776
Gross profit......................................... 6,004 5,858 5,915 6,397
Gross profit margin percentage....................... 28.4% 27.2% 28.5% 25.8%
Selling, general and administrative expenses........ 5,335 5,352 5,152 5,420
Restructuring charge (credit)........................ -- (103) -- --
Operating income..................................... 669 609 763 977
Net income .......................................... 175 554 400 673
Earnings per common share - basic.................... $ .03 $ .09 $ .07 $ .11
Earnings per common share - diluted.................. $ .03 $ .09 $ .07 $ .11
1998 (In thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service fees............................... $ 22,120 $ 21,542 $ 23,444 $ 26,316
Gross profit......................................... 6,123 6,286 6,980 8,550
Gross profit margin percentage....................... 27.7% 29.2% 29.8% 32.5%
Selling, general and administrative expenses......... 5,024 5,354 5,573 5,835
Restructuring charge (credit)........................ -- -- -- 1,162
Operating income..................................... 1,099 932 1,407 1,553
Net income .......................................... 2,186 4,270 1,830 968
Earnings per common share - basic.................... $ .33 $ .65 $ .28 $ .15
Earnings per common share - diluted.................. $ .32 $ .63 $ .27 $ .15
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. SEGMENT INFORMATION
We operate in a single segment: industrial automation systems. We design and
produce interactive computer numerical control (CNC) systems and software and
computerized machine systems for sale through our own distribution network to
the worldwide metal working market. We also provide software options, CNC
upgrades, accessories and replacement parts for our products, as well as
customer service and training support.
Substantially all of our machine systems and CNC systems are manufactured
to our specifications by contract manufacturing companies in Taiwan and Europe.
Our executive offices and principal design, engineering, and manufacturing
management operations are headquartered in Indianapolis, Indiana. We sell our
products through over 240 independent agents and distributors in 45 countries
throughout North America, Europe and Asia. We also have our own direct sales and
service organizations in the United States, England, France, Germany, Italy and
Singapore, which are considered to be among the world's principal computerized
machine system consuming countries. During fiscal 1999, no customer accounted
for more than 5% of our sales and service fees.
The following table sets forth the contribution of each of our product groups to
our total sales and service fees during each of the past three fiscal years (in
thousands):
Year Ended October 31,
1999 1998 1997
------- ------- -------
Computerized Machine Systems........................ $63,793 $64,770 $61,679
CNC Systems and Software*............................ 10,623 14,727 19,296
Service Parts........................................ 9,574 9,424 9,612
Services Fees........................................ 4,248 4,501 5,142
------- ------- -------
. $88,238 $93,422 $95,729
======= ======= =======
- --------------
*Amounts shown do not include CNC systems sold as an integrated component of
computerized machine systems.
Revenues by geographic area, based on customer location, for each of the past three fiscal years were (in thousands):
Year Ended October 31,
----------------------------------------
1999 1998 1997
------- ------- -------
United States......................................... $36,730 $42,486 $46,535
------- ------- -------
Germany.............................................. 25,388 24,949 20,320
United Kingdom....................................... 9,567 9,454 13,280
Other Europe......................................... 12,087 12,112 12,125
-------- ------- --------
Total Europe....................................... 47,042 46,515 45,725
Asia and Other....................................... 4,466 4,421 3,469
-------- ------- --------
Total Foreign...................................... 51,508 50,936 49,194
-------- ------ --------
$88,238 $93,422 $95,729
======== ======= =======
Long-lived assets by geographic area were (in thousands):
October 31,
1999 1998
---------- ----------
United States........................................................ $ 13,528 $ 13,836
Foreign Countries.................................................... 686 528
---------- ----------
. $ 14,214 $ 14,364
========== ==========
15. RESTRUCTURING CHARGE
In fiscal 1998, we recorded a reserve for anticipated costs associated with the
restructuring of a subsidiary to convert its operations from manufacturing
computer controls to sales and service of computerized machine systems. This
restructuring program, which was completed during the first half of fiscal 1999,
resulted in a special charge to operations of $1.2 million consisting of the
following components:
Excess building capacity $ 500,000
Discontinued capitalized software projects 300,714
Fixed asset impairments 170,245
Equipment leases 101,187
Severance costs 89,574
-----------
$1,161,720
Of the $1.2 million provision, $690,761 was charged to the restructuring reserve
while the remainder was used for asset impairments. On April 30, 1999, the
excess building space was subleased, effective June 15, 1999 through July 31,
2001. The reserve was adjusted to reflect the terms of the sublease resulting in
a restructuring credit of approximately $103,000. At October 31, 1999, the
restructuring reserve balance was approximately $400,000 and consisted of the
following:
Balance Charges to Balance
Description 10/31/98 Accrual Adjustment 10/31/99
----------- -------- ------- ---------- --------
Excess Building Capacity $500,000 $ 10,615 $103,486 $285,899
Equipment Leases 101,187 23,808 -- 77,379
Severance Costs 89,574 89,574 -- --
-------- -------- -------- --------
$690,761 $223,997 $103,486 $363,278
======= ======= ======= =======
16. NEW ACCOUNTING PROUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivatives Instruments and Hedging Instruments. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The statement is effective in fiscal
2000. We have not yet determined the impact of adopting this statement on our
financial position or results of operations.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
- ---------------------
Not applicable.
PART III
Item 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following information sets forth the name of each executive officer and
director, his age, tenure as a director, principal occupation and business
experience for the last five years:
Name Age Position(s) with the Company
Brian D. McLaughlin 57 President, Chief Executive Officer and Director
Roger J. Wolf 59 Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
James D. Fabris 48 Executive Vice President - Operations
Richard Blake 41 Vice President of the Company and
President Hurco Machine Tool Products Division
David E. Platts 47 Vice President, Research and Development
Stephen J. Alesia 33 Corporate Controller
Hendrik J. Hartong, Jr. 60 Director
Andrew L. Lewis IV 43 Director
E. Keith Moore 77 Director
Richard T. Niner 60 Director
O. Curtis Noel 64 Director
Charles E. Mitchell Rentschler 60 Director
Brian D. McLaughlin has been President and Chief Executive Officer of Hurco
since December 1987. From 1982 to 1987, he was employed as President and General
Manager of various divisions of Ransburg Corporation, an international
manufacturer of factory automation equipment. Previously, he was employed in
general management and marketing management positions with Eaton Corporation.
Mr. McLaughlin has been a director since 1987.
Roger J. Wolf has been Senior Vice President, Secretary, Treasurer and Chief
Financial Officer since January 1993. Prior to joining Hurco, Mr. Wolf was
Executive Vice President of a privately owned investment and service business
for over seven years. Previously, he served as Vice President, Corporate
Controller, Vice President and Treasurer of Ransburg Corporation, an
international manufacturer of factory automation equipment.
James D. Fabris was elected Executive Vice President - Operations in November
1997 and Vice President of Hurco in February 1995. Mr. Fabris was President of
Hurco Machine Tool Products Division from November 1993 to December 1997 and
previously served various operating capacities since being employed by Hurco in
1988.
Richard Blake was named President of Hurco Machine Tool Products Division
in November 1997 and Vice President of Hurco in January 1996. Mr. Blake also
served as Managing Director of Hurco Europe, Ltd., a subsidiary of Hurco, from
December 1993 until October 1998. Mr. Blake previously served in several sales
and marketing capacities since being employed by Hurco in 1989.
David E. Platts has been employed by Hurco since 1982, and was elected Vice
President, Research and Development in 1989.
Stephen J. Alesia joined Hurco in June 1996 and was elected an executive officer
in September 1996. Prior to joining Hurco, Mr. Alesia was employed for seven
years by Arthur Andersen LLP, an international public accounting firm.
Hendrik J. Hartong, Jr. is a general partner of Brynwood Management III and
Brynwood Management IV, L.P., the general partner of Brynwood Partners III and
Brynwood Partners IV, L.P. Mr. Hartong is also a general partner of Brynwood
Management II, L.P., the general partner of Brynwood Partners II, L.P., and
until December 31, 1998, was a general partner of Brynwood Management, the
general partner of Brynwood Partners Limited Partnership. Mr. Hartong has served
as a director of Lincoln Snacks since June 1998. Mr. Hartong has also served as
a director and Chairman of the Board of Air Express International Corporation
since 1985. Mr. Hartong has been a director since 1986.
Andrew L. Lewis IV has served as Chief Executive Officer of KRR Partners,
L.P. since July 1993. Mr. Lewis was a consultant for USPCI of Pennsylvania, Inc.
from 1991 to 1993. Mr. Lewis is also a director of Air Express International
Corporation. Mr. Lewis has been a director since 1988.
E. Keith Moore has served as President of Hurco International, Inc., a
subsidiary of the Hurco, from April 1988 until December 1999. Mr. Moore is also
a director of Met-Coil Systems Corporation. Mr. Moore has been a director since
1990.
Richard T. Niner was elected Chairman of the Board of Directors on March 9,
1999. Mr. Niner is a general partner of Wind River Associates. Mr. Niner is also
a general partner of Brynwood Management II, L.P., the general partner of
Brynwood Partners II, L.P., and until December 31, 1998, was a general partner
of Brynwood Management, the general partner of Brynwood Partners Limited
Partnership. Mr. Niner is also a director of Air Express International
Corporation, Arrow International, Inc. and Case, Pomeroy & Company, Inc. Mr.
Niner has been a director since 1986.
O. Curtis Noel has been an independent business consultant for more than
ten years specializing in market and industry studies, competitive analysis and
corporate development programs with clients in the U.S. and abroad. Mr. Noel has
been a director since 1993.
Charles E. Mitchell Rentschler has served as President and Chief Executive
Officer of The Hamilton Foundry & Machine Co. since 1985. Mr. Rentschler has
been a director since 1986.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than 10% of our common stock, to
file reports of ownership with the Securities and Exchange Commission and
Nasdaq. Such persons are also required to furnish us with copies of all Section
16(a) forms they file.
Based solely on our review of the copies of such forms received or written
representations from certain reporting persons that they were not required to
file a Form 5 to report previously unreported ownership or changes in ownership,
we believe that, during our fiscal year ending October 31, 1999, our officers,
directors and greater than 10% beneficial owners complied with all filing
requirements under Section 16(a).
Item 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth all compensation paid or accrued during each of
the last three fiscal years to the Chief Executive Officer and each of the other
four executive officers of Hurco (the Named Executive Officers) whose salary and
bonus exceeded $100,000 during fiscal 1999.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------------------------------ ------------ All Other
Name and Fiscal Salary Bonus Other Annual Securities Underlying Compensation
Principal Position Year ($) ($)(1) Compensation ($) Options(2) ($) (3)
- ------------------ ------ ------ ------ ---------------- ---------- -------
Brian D. McLaughlin 1999 $268,077 -- -- 50,000 $52,206
President and CEO 1998 258,077 75,000 -- -- 52,206
1997 250,000 125,000 -- -- 51,726
Roger J. Wolf 1999 $165,946 -- 25,000 $47,566
Sr. VP, Secretary 1998 160,039 50,000 -- -- 48,064
Treasurer and CFO 1997 156,000 60,000 -- -- 47,086
James D. Fabris 1999 $165,904 -- -- 35,000 $23,984
Executive Vice 1998 156,154 65,000 -- -- 24,054
President - Operations 1997 140,000 60,000 -- -- 23,504
Richard Blake 1999 $135,268 -- -- -- --
V.P. of Hurco and 1998 128,124 40,000 -- -- $1,791
President Hurco Machine 1997 108,550 41,750 -- -- 4,633
Tool Products Division
David E. Platts 1999 $105,000 -- -- 10,000 $14,802
Vice President of 1998 104,038 10,000 -- -- 15,436
Research & Development 1997 100,000 45,000 -- -- 13,153
- ---------------------------
(1) Represents cash bonuses earned and paid in the subsequent year.
(2) Represents shares of common stock underlying grants of options made during the year. We have not granted any Stock
Appreciation Rights (SARs).
(3) Represents our contribution to defined contribution plans and split
dollar life insurance premiums. During fiscal 1997, we initiated
Split-Dollar Life Insurance Agreements with certain officers of Hurco.
Under the terms of the agreements, we pay all of the premiums on behalf
of the officers. We will be repaid the premiums from the policies' cash
surrender value when the policies are terminated in accordance with the
provisions of the agreements.
Defined Contribution Plan Company paid Split-Dollar
Name Company Match Life Insurance Premiums
Brian D. McLaughlin $4,800 $47,406
Roger J. Wolf 4,800 42,766
James D. Fabris 4,800 19,184
David E. Platts 2,587 12,215
Stock Options
The following table sets forth information related to options exercised during
fiscal 1999 and options held at fiscal year-end by the Named Executive Officers.
We do not have any outstanding SARs.
Option Grants During Fiscal 1999 Fiscal Year
% of Total Potential Realizable
Number of Options Value at Assumed Annual
Securities Granted to Rates of Stock Price
Underlying Employees Exercise Appreciation for Option
Options in Fiscal Price Expiration Term1
Name Granted2 Year ($/SH) Date 5%($) 10%($)
- ---- -------- ---- ------ ---- ----- -------
Brian D. McLaughlin 50,000 16.4% $5.813 12/15/08 182,788 463,221
Roger J. Wolf 25,000 8.2% $5.813 12/15/08 231,611
James D. Fabris 35,000 11.5% $5.813 12/15/08 127,952 324,255
David E. Platts 10,000 3.3% $5.813 12/15/08 36,558 92,644
1 The potential realizable value illustrates value that might be realized upon
the exercise of the options immediately prior to the expiration of their terms,
assuming the specified compounded rates of appreciation of Hurco's common stock
from the date of grant through the term of the options.
2 Options may be exercised in five annual installments commencing on the first
anniversary of the date of grant.
Aggregated Option Exercises in Fiscal 1999 and Year-End Option Values
Value of
Number of Unexercised
Shares Securities Underlying In-the-Money
Acquired Unexercised Options Options
on Value at FY-End (#) at FY-End ($) (1)
------------------------ ---------------------
Exercise Realized Exer- Unexer- Exer- Unexer-
Name (#) ($) cisable cisable cisable cisable
- ---- --------- --------- ------- ------- ------- -------
Brian D. McLaughlin -- -- 125,000 50,000 $70,000 --
Roger J. Wolf -- -- 50,000 25,000 7,000 --
James D. Fabris -- -- 36,000 39,000 33,250 --
Richard Blake -- -- 17,000 4,000 7,875 --
David E. Platts -- -- 28,000 12,000 20,625 --
- -----------------------------------------
(1) Value is calculated based on the closing market price of the common stock
on October 31, 1999 ($ 3.50) less the option exercise price.
Compensation of Directors
During 1999, each director who is not a full-time employee of Hurco received a
fee of $1,500 for each meeting of the Board of Directors attended and each such
director also received $5,000 per quarter. Directors are also entitled to
receive reimbursement for travel and other expenses incurred in attending such
meetings. Mr. Niner received annual compensation of $72,000 for his services as
Chairman of the Executive Committee of the Board of Directors.
Employment Contracts
Brian D. McLaughlin entered into an employment contract on December 14, 1987.
The contract term is month-to-month. Mr. McLaughlin's salary and bonus
arrangements are set annually by the Board of Directors. Other compensation,
such as stock option grants, is awarded periodically at the discretion of the
Board of Directors. As part of that contract, Mr. McLaughlin is entitled to 12
months' salary if his employment is terminated for any reason other than gross
misconduct.
Roger J. Wolf entered into an employment contract on January 8, 1993. The
contract term is unspecified. Mr. Wolf's salary and bonus arrangements are set
annually by the Board of Directors. Other compensation, such as stock option
grants, is awarded periodically at the discretion of the Board of Directors. As
part of that contract, Mr. Wolf is entitled to 12 months' salary if his
employment is terminated without just cause.
James D. Fabris entered into an employment contract on November 18, 1997. The
contract term is unspecified. Mr. Fabris' salary and bonus arrangement are set
annually by the Board of Directors. Other compensation, such as stock option
grants, is awarded periodically at the discretion of the Board of Directors. As
part of the contract, Mr. Fabris is entitled to 12 months' salary if his
employment is terminated for any reason other than gross misconduct.
Richard Blake entered into an employment contract on April 21, 1999 which
extends through December 31, 2000. Mr. Blake's salary and bonus arrangements are
set annually by the Board of Directors. Other compensation, such as stock option
grants, is awarded periodically at the discretion of the Board of Directors. As
part of the contract, Mr. Blake is entitled to continuation of base salary
through December 31, 2000, if his employment is terminated without cause. Mr.
Blake may voluntarily resign in which case Hurco has no further obligation.
Compensation Committee Interlocks and Insider Participation
During fiscal 1999, the members of the Compensation Committee were Hendrik
J. Hartong, Jr., O. Curtis Noel and Charles E. Mitchell Rentschler. None of the
Committee members is a current or former officer or employee of Hurco or any of
its subsidiaries.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of January 15, 2000, regarding
beneficial ownership of our common stock by each director and Named Executive
Officer, by all directors and executive officers as a group, and by certain
other beneficial owners of more than 5% of the common stock. Each such person
has sole voting and investment power with respect to such securities, except as
otherwise noted.
Shares Beneficially Owned
Name and Address Number Percent
Other Beneficial Owners
Wellington Management Co. 646,900 (1) 10.9%
75 State Street
Boston, Massachusetts 02109
The Prudential Insurance Company of America 489,364 8.2%
4 Gateway Center
Newark, New Jersey 07102
The TCW Group, Inc. 324,800 (2) 5.5%
865 South Figueroa Street
Los Angeles, California 90017
Brynwood Partners II L.P., et al 762,561 (3) 12.0%
Two Soundview Avenue
Greenwich, Connecticut 06830
Dimensional Fund Advisors 380,700 6.4%
1299 Ocean Avenue
Santa Monica, CA 90401
FMR Corporation 379,028 (4) 6.4%
82 Devonshire Street
Boston, Massachusetts 02109
Directors and Executive Officers
Hendrik J. Hartong, Jr. 346,013 (3,5) 5.4%
Andrew L. Lewis IV 34,000 (5) 0.5%
Brian D. McLaughlin 183,586 (6,7) 2.9%
E. Keith Moore 38,010 (8) 0.6%
Richard T. Niner 694,549 (3,5) 10.9%
O. Curtis Noel 25,000 (5) 0.4%
Charles E. Mitchell Rentschler 45,000 (5,9) 0.7%
Roger J. Wolf 68,492 (10) 1.1%
James D. Fabris 43,500 (11) 0.7%
Richard Blake 18,000 (12) 0.3%
David E. Platts 31,700 (13) 0.5%
Executive officers and directors 1,254,849 (14) 19.7%
as a group (12 persons)
(1) According to the most recent public filings, Wellington Management Co.
has shared voting power for all shares.
(2) According to the most recent public filings, the TCW Group, Inc. has
shared voting power for all shares.
(3) Represents shares owned by a group, consisting of Brynwood Partners II
L.P. ("Brynwood II"), its general partner, Brynwood Management II, L.P.
("Brynwood Management II"), and the partners of Brynwood Management,
Hendrik J. Hartong, Jr., and Richard T. Niner. Brynwood Management II
has shared voting and dispositive power over 278,001 shares; Mr.
Hartong has sole voting and dispositive power over 68,012 (including
25,000 shares subject to the exercise of non-qualified options) shares
and shared voting and dispositive power over 278,001 shares; Mr. Niner
has sole voting and dispositive power over 416,548 (including 25,000
shares subject to the exercise of non-qualified options) shares and
shared voting and dispositive power over 278,001 shares. The shares in
the table for Mr. Hartong and Mr. Niner include those shares over which
they have voting and investment power.
(4) According to most recent public filings, FMR Corporation has no voting
power for any of the shares.
(5) Includes 25,000 shares subject to the exercise of non-qualified options
that are exercisable within 60 days.
(6) Includes 135,000 subject to options held by Mr. McLaughlin that are
exercisable within 60 days.
(7) Includes 10,986 shares owned by Mr. McLaughlin's wife and
children, as to which he may be deemed to have beneficial
ownership.
(8) Includes 11,000 shares subject to options that are exercisable within
60 days.
(9) Includes 1,000 shares owned by Mr. Rentschler's wife, as to which he
may be deemed to have beneficial ownership.
(10) Includes 55,000 shares subject to options that are exercisable within
60 days.
(11) Includes 43,000 shares subject to options that are exercisable within
60 days.
(12) Includes 17,000 shares subject to options that are exercisable within
60 days.
(13) Includes 30,000 shares subject to options that are exercisable within
60 days.
(14) Includes 421,000 shares subject to options that are exercisable within
60 days.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Hurco and Air Express International (AEI) are related parties because a common
group of shareholders held a significant ownership interest in both companies
during fiscal 1999. AEI provides freight forwarding and shipping services for
us. The cost of these freight services are negotiated on an arms length basis
and amounted to $4.3 million during fiscal 1999.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements. The following consolidated financial
statements of Registrant are included herein under
Item 8 of Part II:
---------------------
Page
Reports of Independent Accountants...............................20
Consolidated Statements of Operations - years
ended October 31, 1999, 1998 and 1997..........................21
Consolidated Balance Sheets - as of October 31, 1999 and 1998....22
Consolidated Statements of Cash Flows - years
ended October 31, 1999, 1998 and 1997..........................23
Consolidated Statements of Changes in Shareholders' Equity -
years ended October 31, 1999, 1998 and 1997....................24
Notes to Consolidated Financial Statements.......................25
2. Financial Statement Schedules. The following financial statement
schedule is included in this Item.
-----------------------------
Page
Schedule II - Valuation and Qualifying
Accounts and Reserves..........................................48
All other financial statement schedules are omitted because they are not
applicable or the required information is included in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended October 31,
1999.
(c) Exhibits
Exhibits are filed with this Form 10-K or incorporated herein by reference
as listed on Pages 49 and 50.
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended October 31, 1999, 1998 and 1997
(Dollars in thousands)
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
- ----------- ---------- ----------- -------- ---------- ---------
Allowance for doubtful accounts for the year ended:
October 31, 1999 $ 769 $ 231 $ -- $ 313 3 $ 687
======== ======= ======= ======== ========
October 31, 1998 $ 757 $ 280 $ -- $ 268 2 $ 769
======== ======= ======= ======== ========
October 31, 1997 $ 785 $ 73 $ -- $ 101 1 $ 757
======== ======== ======= ======== ========
Accrued warranty expenses for the year ended:
October 31, 1999 $ 1,060 $ 533 $ -- $ 625 $ 968
======== ======= ======= ======== ========
October 31, 1998 $ 1,452 $ 503 $ -- $ 895 $ 1,060
======== ======= ======= ======== ========
October 31, 1997 $ 1,425 $ 1,321 $ -- $ 1,294 $ 1,452
======== ======= ======= ======== ========
Accrued restructuring expenses for the year ended:
October 31, 1999 $ 690 $ (103) $ -- $ 224 $ 363
======== ======= ======== ======== ========
October 31, 1998 $ -- $ 1,162 $ 471 $ -- $ 690
======== ======= ======== ======== =========
1 Receivable write-offs of $106,000, net of cash recoveries on accounts
previously written off of $5,000. 2 Receivable write-offs of $280,000, net of
cash recoveries on accounts previously written off of $12,000. 3 Receivable
write-offs of $337,000, net of cash recoveries on account previously written off
of $24,000.
EXHIBITS INDEX
Exhibits Filed. The following exhibits are filed with this report:
- --------------
10.1 The third amendment to the amended and restated credit agreement
and amendment to reimbursement agreement between the
Registrant and Bank One, Indiana National Association and Bank
One, Michigan (formerly known as NBD Bank) dated August
17, 1999.
10.2 Third amendment to European facility between the Registrant and
The First National Bank of Chicago dated August 17, 1999.
10.3 Employment agreement between the Registrant and Richard Blake
dated April 21, 1999.
10.4 Form of Director Non-Qualified Stock Option Agreement between
the Registrant and Hendrick J. Hartong, Jr., Andrew L.
Lewis IV, Richard T. Niner, O. Curtis Noel and Charles E. Mitchell
Rentschler.
11 Statement re: computation of per share earnings
21 Subsidiaries of the Registrant
23 Consent of the Independent Public Accountants - Arthur Andersen
LLP.
27 Financial Data Schedule (electronic filing only)
Exhibits Incorporated by Reference.
- -----------------------------------
The following exhibits are incorporated into this report:
3.1 Amended and Restated Articles of Incorporation of the
Registrant, incorporated by reference to Exhibit 3.1, to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1997.
3.2 Amended and Restated By-Laws of the Registrant dated September
12, 1995, incorporated by reference to Exhibit 3.3, to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 31, 1996.
10.1 The Underlease between Dikappa (Number 220) Limited and
Northern & London Investment Trust Limited dated December 2,
1982, incorporated by reference to Exhibit 10.13, to its
Registration Statement on Form S-1, No.2-82804 dated April 1,
1983.
10.2 Non-Qualified Stock Option Agreement between the Registrant and O.
Curtis Noel effective, March 3, 1993, incorporated by reference to
Exhibit 10.44, to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1993.
10.3 Employment Agreement between the Registrant and Roger J. Wolf
dated January 8, 1993, incorporated by reference to
Exhibit 10.45, to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1993.
10.4 Non-qualified Stock Option Agreement between the Registrant
and Hendrik J. Hartong, Jr., effective July 8, 1996
incorporated by reference to Exhibit 10.47 to the Registrant's
Report on Form 10-K for the year ended October 31, 1996.
10.5 Non-qualified Stock Option Agreement between the Registrant and
Andrew L. Lewis IV, effective July 8, 1996 incorporated by
reference to Exhibit 10.48 to the Registrant's Report on Form 10-K
for the year ended October 31, 1996.
10.6 Non-qualified Stock Option Agreement between the Registrant and
Richard T. Niner, effective July 8, 1996 incorporated by
reference to Exhibit 10.49 to the Registrant's Report on Form 10-K
for the year ended October 31, 1996.
10.7 Non-qualified Stock Option Agreement between the Registrant and
O. Curtis Noel, effective July 8, 1996 incorporated by
reference to Exhibit 10.50 to the Registrant's Report on Form 10-K
for the year ended October 31, 1996.
10.8 Non-qualified Stock Option Agreement between the Registrant and
Charles E. Mitchell Rentschler, effective July 8, 1996
incorporated by reference to Exhibit 10.51 to the Registrant's
Report on Form 10-K for the year ended October 31, 1996.
10.9 1997 Stock Option and Incentive Plan, effective May 29, 1997,
incorporated by reference to Exhibit 10.52 in Form 10-Q
for the quarter ended July 31, 1997.
10.10 Amended and Restated Credit Agreement and Amendment to
Reimbursement Agreement, effective September 8, 1997 between the
Registrant and NBD Bank, N.A. and NBD Bank incorporated by
reference to Exhibit 10.10 in Form 10-K for the year ended October
31, 1997.
10.11 Second Amended and Restated Senior Note Agreement between the
Registrant and Principal Mutual Life Insurance Company effective
September 8, 1997 incorporated by reference to Exhibit 10.11 in
Form 10-K for the year ended October 31, 1997.
10.12 Letter Agreement (European Facility) dated September 8, 1997,
between Registrant's subsidiaries and The First National Bank of
Chicago incorporated by reference to Exhibit 10.12 in Form 10-K
for the year ended October 31, 1997.
10.13 Guaranty Agreement dated September 8, 1997, between the Registrant
and The First National Bank of Chicago incorporated by reference
to Exhibit 10.13 in Form 10-K for the year ended October 31, 1997.
10.14 Guaranty Agreement dated September 8, 1997, between Autocon
Technologies, Inc. and The First National Bank of Chicago
incorporated by reference to Exhibit 10.14 in Form 10-K for the
year ended October 31, 1997.
10.15 Employment agreement between the Registrant and James D. Fabris
dated November 18, 1997, incorporated by reference as exhibit
10.15 to the Registrant's Quarterly Report of Form 10-Q for the
quarter ended January 31, 1998.
10.16 The first amendment to the amended and restated credit agreement
and amendment to reimbursement agreement between the Registrant
and NBD Bank N.A. dated September 29, 1998, incorporated by
reference as Exhibit 10.1 to the Registrant's Annual Report on
Form 10-K for the year ended October 31, 1998.
10.17 The second amendment to the amended and restated credit agreement
and amendment to reimbursement agreement between the Registrant
and NBD Bank N.A. dated December 19, 1998, incorporated by
reference as Exhibit 10.1 to the Registrant's Quarterly Report of
Form 10Q for the quarter ended January 31, 1999.
10.18 Sublease between Autocon Technologies, Inc. and Robert Bosch
Corporation dated April 30, 1999, incorporated by reference
as Exhibit 10.1 to the Registrant's Annual Report on Form 10-Q for
the quarter ended April 30, 1999.
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, this 27th day of January,
2000.
HURCO COMPANIES, INC.
By:_____________________
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature and Title(s) Date
______________________________ January 27, 2000
Brian D. McLaughlin, Director,
President and Chief Executive Officer
of Hurco Companies, Inc.
(Principal Executive Officer)
_________________ January 27, 2000
- -------------------------------------------
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
of Hurco Companies, Inc.
(Principal Financial Officer)
_____________________ January 27, 2000
- --------------------------------------
Stephen J. Alesia
Corporate Controller
of Hurco Companies, Inc.
(Principal Accounting Officer)
____________________________ January 27, 2000
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Hendrik J. Hartong, Jr., Director
______________________ January 27, 2000
- --------------------------------------
Andrew L. Lewis, IV, Director
__________________ January 27, 2000
- ------------------------------------------
E. Keith Moore, Director
____________________ January 27, 2000
- -----------------------------------------
Richard T. Niner, Director
_________________ January 27, 2000
- ---------------------------------------------
O. Curtis Noel, Director
____________________________ January 27, 2000
- ---------------------------------
Charles E. M. Rentschler, Director