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, 1998 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
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
(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
--------------------------
(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 22, 1999 was $26,010,945.
The number of shares of the Registrant's common stock outstanding as of January
22, 1999 was 5,945,359.
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 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 machine tool consuming 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 the company's 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; 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, which consists of CNC systems and software
and computerized machine systems for metal cutting and metal forming operations.
(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 as little as a few seconds 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 machine tool 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 all
of our machine tool manufacturing operations and a portion of our computer
control manufacturing to certain 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 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 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) 1998 1997 1996
---- ---- ----
Computerized Machine Systems......$64,770 (69.3%) $61,679 (64.4%) $65,518(65.9%)
CNC Systems and Software*......... 14,727 (15.8%) 19,296 (20.2%) 18,353(18.5%)
Service Parts..................... 9,424 (10.1%) 9,612 (10.0%) 10,005(10.1%)
Service Fees...................... 4,501 (4.8%) 5,142 (5.4%) 5,475 (5.5%)
--------------------------------------------
$93,422(100.0%) $95,729(100.0%)$99,351(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
We design and market CNC-operated milling machines and vertical machining
centers, each of which is equipped with a fully-integrated interactive Ultimax
control system. All of these machines are built to our specifications by
independent contract manufacturers utilizing our CNC systems, which we
provide. 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 $35,000 to $165,000.
In the second fiscal quarter of 1998, we introduced two new milling machine
products. These machines replaced earlier models and have an X-axis travel of 30
inches and 40 inches.
From fiscal 1996 through fiscal 1998, our machining center product line
consisted primarily of a proprietary designed 30-inch X-axis travel vertical
machining center introduced in 1994 and a 40-inch X-axis travel vertical
machining center introduced in 1996. We also offer a 50-inch X-axis travel
machining center that is not our proprietary design which will be
discontinued in fiscal 1999.
In the fourth fiscal quarter of 1998, we introduced three new proprietary
vertical machining center products. The three machines have an X-axis
travel of 24 inches, 64 inches and 40 inches, respectively. The third
machine is the only machine in our product line that features a vertical
traveling column.
Metal Cutting Systems - DynaPath(TM)
In fiscal 1998, we expanded our product strategy to include marketing 2-axis and
3-axis milling machines featuring fully-integrated Delta CNC systems. These
machine systems are sold under the DynaPath(TM) name through one of our
subsidiaries. In fiscal 1999, we expect to further expand this product line to
include turning machines.
Metal Forming Systems
In the first quarter of fiscal 1998, we introduced a press brake (bending
machine) that incorporates our Autobend CNC system. This product is sold to the
North American market by our own distribution network. 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.
CNC Systems and Software
Our CNC systems and software are marketed under the tradenames Ultimax(R),
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 are used to control metal forming press brakes.
o Ultimax
Our patented Ultimax twin screen "conversational" CNC system, sold solely as a
fully-integrated feature of a Hurco milling machine or machining center,
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 tool 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 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 the latest generation of the Ultimax CNC, the Ultimax 4
programming station, which uses a Pentium* processor featuring a newly-designed
operator console with liquid crystal display screens. By incorporating Industry
Standard Architecture (ISA) personal computer (PC) platform components, this CNC
product offers improved performance while ensuring access to the most effective
computing hardware and software technology.
In 1995, we introduced a software option that interprets part programs written
for the worldwide installed base of CNCs manufactured by our competitors. This
software option, which provides industry standard data format compatibility,
enables end-users to use our Ultimax CNC to run part programs initially
programmed for a substantial portion of the large installed base of competitive
CNCs and is intended to increase our access to the contract machining market. In
1995, we developed a lower-cost "Single Screen" version of the Ultimax CNC to
facilitate the penetration of the contract machining market. In late fiscal
1996, the Single Screen Ultimax CNC was made available on our milling machines
and machining centers.
o UltiPath
UltiPath is a simple, 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 CNC embodies our patented interactive machining
technology and its recently-patented "Object Oriented" software design
methodology. The control utilizes the Windows 95** operating system as a key
component of its executive software. The UltiPath CNC was introduced in
September 1996 and became available for shipment in the fourth quarter of fiscal
1997. The product is marketed through our distributors to end-users and to CNC
control integrators and retrofitters serving the large installed base of manual
milling machines.
* Pentium is a registered trademark of Intel Corporation
** Windows 95 is a registered trademark of Microsoft Corporation
o Delta Series
Our Delta series CNCs, which feature microprocessor-based electronics
incorporating ISA computer platform components to provide enhanced performance
at lower cost, are designed for the worldwide metalworking industry and are used
on milling machines, machining centers, turning centers and punching equipment.
The Delta 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 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 CNC System is sold either as an
integrated component of our recently introduced Dynapath(TM) Machine System or
to end users of a wide range of machine tool systems, primarily through
retrofitters.
o Autobend
Autobend 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 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. In fiscal 1998, the Autobend CNC
system was 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 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 and
competitive CNC systems. Significant features of the Ultimax 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 CNC or the off-line programming system software, substantially
increasing operator productivity. We have augmented our Autobend product line
with a computer-aided manufacturing (CAM) software product, AutoBend PC(R), that
enables the user to create and manipulate CNC compatible metal forming programs
on a personal computer. In fiscal 1996, our Ultimax CNC was enhanced with a
software option that provides industry standard data format compatibility.
In fiscal 1997, we introduced UltiPro(TM), a high-speed machining software
product for our Pentium*-based Ultimax 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 system with our new 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. During 1996, we began transferring to our
principal distributors in the United States primary responsibility for machine
installation and warranty service and support for new product sales. This
program was substantially completed in fiscal 1998. Although installation and
service costs are borne by the distributor, we offer a greater price discount to
those distributors providing such services. Our own service organization
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 milling
machines and machining centers. 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
The end-users of our products are thousands of 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 our computerized machine systems and
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 1998, 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 240 independent agents and distributors in 45
countries throughout North America, Europe and Asia. We also have our own direct
sales personnel in the United States, England, France, Germany and Singapore,
which are considered to be among the world's principal computerized machine
system consuming countries. During fiscal 1998, 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 the demand for computerized machine systems and CNC systems is driven
by changing industrial technology and the related need for process improvements
as well as capacity expansion. 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 in our products 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 world-wide industrial market, we are a leader in providing interactive
CNC machine tools incorporating user-friendly, conversational programming
systems. Our principal competitors in the CNC metal cutting machine tool market
include Bridgeport Machines Inc., Cincinnati Machine (a division of Unova, Inc.,
formerly Cincinnati Milacron Inc.), Fadal Engineering (a subsidiary of Giddings
& Lewis Inc.), Haas Automation, Inc., Milltronics Manufacturing Co.,
Republic-Lagun Machine Tool Co. and Tree Machine Tool Co. Inc. A large number of
foreign builders including Matsuura Machinery Corporation, Mori Seiki Co., Ltd.,
Okuma Machinery Works Ltd. and Yamazaki Mazak Corporation also compete with us.
In the worldwide CNC systems market, we are a leader in providing
user-friendly, "conversational" programming systems for computerized
machine systems, although our principal competitors, such as Fanuc Ltd.,
Mitsubishi Machine Tools, Heidenhain Corp., Siemens Industrial Automation,
Inc. Southwestern Industries, Bridgeport Machines, Inc. and
Allen-Bradley Co., also offer "user-friendly" programming features. Fanuc
Ltd. is the world's largest supplier of CNC systems.
We believe we are one of the largest domestic manufacturers of CNC gauging
systems for press brakes. Automec Inc., a CNC gauge manufacturer, and Cybelec
SA, a control manufacturer, are our major competitors for these products in the
United States. We also compete with Cybelec in Europe.
Manufacturing
We have established a manufacturing strategy which 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 in
Taiwan by three manufacturing contractors. We have worked closely with our
Taiwan-based 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. We have also
entered into contract manufacturing agreements with two European machine tool
builders. 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 existing manufacturing contractors would have a material adverse effect
on our operations.
In October 1996, we entered into a contract manufacturing agreement with a
Taiwanese-based affiliate that is owned by our Company and a group of Taiwanese
investors. This company is manufacturing certain 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.
We assemble and test our CNC systems at our own facilities in Indianapolis,
Indiana using readily available, industry-standard personal computer components
(such as hard disk drives, VGA cards and motherboards) as well as proprietary
system components that are produced to our specifications by several domestic
suppliers. We expect substantially all remaining domestic CNC system assembly
will be transferred to our Taiwan affiliate in fiscal 1999.
Backlog
Backlog consists of firm orders received from customers and distributors
but not shipped. Backlog was $7.5 million, $7.4 million
and $9.0 million as of October 31, 1998, 1997, and 1996, 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 of our
company, 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. In September 1995, we
were awarded a new 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 $6.3 million, $9.1 million and $590,000, net
of legal fees and expenses, in fiscal 1998, 1997 and 1996, respectively. Subject
to the continuing validity of the U.S. Interactive Machining Patent, certain of
the existing license agreements at October 31, 1998 are expected to result in
additional license fee income, net of legal fees and expenses, of approximately
$797,000 through fiscal 2001. Under a license agreement with a principal
supplier, approximately $534,000 is expected to be realized in the form of
discounts on future purchases. In addition, IMS has received a royalty-free
non-exclusive license under six patents owned by two of the licensees.
Research and Development
Research and development expenditures for new products and significant product
improvements were $2.0 million, $1.9 million and $1.7 million in fiscal 1998,
1997 and 1996, respectively. In addition, we recorded expenditures of $1.3
million in 1998, $1.6 million in 1997 and $1.3 million in 1996 related to
software development projects which were capitalized.
Employees
We had approximately 300 employees at the end of fiscal 1998, 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 Foreign and Domestic Operations and Export Sales
The following represents a breakdown of our sales and service fees to the
indicated geographic regions for the past three fiscal years (in thousands):
1998 1997 1996
------- ------- -------
North America........ $ 43,867 $46,915 $50,398
Europe............... 46,515 45,725 44,014
Asia and other*...... 3,040 3,089 4,939
-------- ----- -----
Total................$ 93,422 $95,729 $99,351
========== ======= =======
* Sales to Asia, including exports in fiscal 1998 constituted only $2.4
million, or 2.5% of total sales.
Export sales from the United States were $4.5 million in fiscal 1998, $5.3
million in fiscal 1997 and $5.8 million in fiscal 1996.
Information regarding Total Sales and Service Fees, Operating Income and
Identifiable Assets by geographical area is shown in Note 15 to the Consolidated
Financial Statements.
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,
customer service.
Paris,France 2,800 Sales, application engineering,
customer service.
Munich, Germany 10,700 Sales, application engineering,
customer service.
Singapore 1,200 Sales, application engineering
customer service
- ---------------------
(1) Approximately 65,000 square feet is available for lease in fiscal 1999.
(2) Approximately 24,000 square feet is available for lease in fiscal 1999.
(3) Approximately 24,000 square feet have been sublet to a subtenant since
November 1995.
We own the Indianapolis facility and lease the other facilities. The leases have
terms expiring at various dates ranging from March 1999 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 defendants' 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. The
appeal and cross-appeal are currently pending. 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 Stock 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 Stock Market.
1998 1997
--------------------- ---------------------
Fiscal Quarter Ended: High Low High Low
-------------------- ------------------- --------------------
January 31..............$8-31/32 $ 6-1/4 $ 6-1/4 $ 4-1/2
April 30................ 9-1/4 6-1/4 6-1/4 4-3/4
July 31................. 9 6-7/8 6-3/16 5-1/4
October 31.............. 7-1/8 6-1/4 9-7/16 5-3/4
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 504 holders of record of our Common Stock as of January
5, 1999.
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,
1998 1997 1996 1995 1994
-----------------------------------------------
Statement of Operations Data: (In thousands, except per share amounts)
Sales and service fees......... $93,422 $95,729 $99,351 $89,632 $72,628
Gross profit................... $27,939 $27,773 $28,421 $23,470 $15,565
Selling, general and adminis-
tration expenses.............. $21,786 $21,047 $21,343 $19,002 $18,129
Restructuring charge........... $ 1,162 $ -- $ -- $ -- $ --
Operating income (loss)........ $ 4,991 $ 6,726 $ 7,078 $ 4,468 $(2,564)
Interest expense............... $ 876 $ 1,938 $ 3,211 $ 4,250 $ 3,301
License fee income and
litigation settlement
fees, net..................... $ 6,974 $10,095 $ 590 $ -- $ --
Net income (loss).............. $ 9,254 $13,804 $ 4,264 $ 204 $(5,791)
Earnings (loss)
per common share-diluted...... $ 1.39 $ 2.06 $ .72 $ .04 $ (1.07)
Weighted average common
shares outstanding-diluted.... 6,670 6,704 5,907 5,536 5,407
As of October 31,
1998 1997 1996 1995 1994
----------------------------------------------
Balance Sheet Data: (Dollars in thousands)
Current assets............. $55,143 $42,222 $44,108 $46,356 $43,096
Current liabilities........ $25,794 $19,370 $23,336 $26,479 $16,985
Working capital ........... $29,349 $22,852 $20,772 $19,877 $26,111
Current ratio.............. 2.1 2.2 1.9 1.8 2.5
Total assets............... $71,696 $58,748 $59,750 $61,421 $59,558
Long-term obligations...... $ 8,162 $ 9,602 $20,273 $27,459 $35,245
Total debt................. $ 8,358 $10,043 $22,110 $33,599 $34,813
Shareholders' equity....... $37,740 $29,776 $16,141 $ 7,483 $ 7,328
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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)
1998 1997 1996 98 vs. 97 97 vs. 96
---- ----- ----- --------- ---------
Sales and service fees.... 100.0% 100.0% 100.0% (2.4%) (3.6%)
Gross profit.............. 29.9% 29.0% 28.6% 0.6% (2.3%)
Selling, general and
administrative expenses. 23.3% 22.0% 21.5% 3.5% (1.4%)
Restructuring charge...... 1.2% -- -- -- --
Operating income.......... 5.3% 7.0% 7.1% (25.8%) (5.0%)
Interest expense.......... 0.9% 2.0% 3.2% (54.8%) (39.6%)
Net income................ 9.9% 14.4% 4.3% (33.0%) 223.7%
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 16 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 the fiscal year 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 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 (OEM's) and retrofit dealers of stand-alone CNC systems,
primarily related to our Delta 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 16 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 series of CNC systems to OEM's and through retro-fit dealers.
Throughout fiscal 1998, we have been repositioning 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.
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 is expected to be
completed during 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.
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 the German tax authorities are expected to rule on the
tax examiner's finding in the first half of fiscal 1999. In the event an
unfavorable ruling is received from the German tax authorities, we will appeal
to the German Federal Tax Court. No provision for the contingency has been
recorded.
Fiscal 1997 Compared With Fiscal 1996
Sales and service fees in fiscal 1997 decreased $3.6 million, or 3.6%, compared
with fiscal 1996. Of the total decrease, $2.6 million reflected the net effects
of translating foreign currency revenues into U.S. dollars for financial
reporting purposes.
Sales of computerized machine systems, which totaled $61.7 million in fiscal
1997, were 5.9% below the $65.5 million recorded during fiscal 1996. The
decrease occurred in the U.S. market, with a decline of $2.4 million, or 8.9%,
as well as in S. E. Asia, where the decline of $1.9 million, or 69.9%, was most
pronounced and reflected the economic turmoil in that region. Sales of
computerized machine systems in Europe increased $523,000, or 1.5%, in spite of
the adverse impact of foreign currency translation. The first half of fiscal
1996 was marked by an unusually high level of shipments, as the increasing
availability of products from our contract manufacturers permitted an
accelerated reduction of the higher than normal backlog that existed at the end
of fiscal 1995. Sales of CNC systems and software (which do not include systems
that are sold as an integral part of a machine tool) increased during fiscal
1997 by $974,000, or 5.5%, primarily due to increased shipments of Autobend(R)
control products in response to improved worldwide market demand. Sales of
service parts and service fees decreased by $757,000, or 4.7%, compared to
fiscal 1996, which is attributable to improvements in recent years in the
quality of our products along with a transfer of responsibility to our
distributors in the United States for certain servicing activities.
International sales, including exports from the United States, increased to
approximately 51.4% of consolidated sales for fiscal 1997 compared to 44.9% for
fiscal 1996.
Worldwide new order bookings during fiscal 1997 were $94.8 million, an increase
of 1.8% from the $93.1 million reported for fiscal 1996, in spite of the
unfavorable effect of weaker foreign currencies. New order bookings would have
been $97.4 million, an increase of 4.6% measured at average fiscal 1996 exchange
rates (constant U.S. dollars).
New orders for computerized machine systems increased 7.5% in units and 11.1% in
constant U.S. dollars. Domestic U.S. computerized machine systems orders
increased 9.3% in units and 16.1% in dollars which was attributable primarily to
demand for our proprietary-designed 40- inch axis machining center models
introduced in late fiscal 1996. Computerized machine system orders in Europe
increased 15.3% in units and 14.3% in constant U.S. dollars, due in large part
to demand for the new 40-inch axis models. These increases were partially offset
by a decline in computerized machine systems orders in South East Asia of $1.9
million, or 69.9%, to less than $1.0 million in fiscal 1997.
New orders for CNC systems and software, exclusive of CNC systems and software
sold as an integrated component of machine tools, declined $1.3 million, or
7.1%, due primarily to reduced orders for the Delta series controls from OEM
customers.
Backlog at October 31, 1997 was $7.4 million compared to $9.0 million at October
31, 1996.
Gross profit percentage, as a percentage of sales, increased to 29.0% in fiscal
1997, compared to 28.6% for fiscal 1996 net of currency translation effects. The
improvement in margin is attributable to the combined effects of an increased
percentage of higher-margin European shipments in the total sales mix and
increased domestic and European shipments of higher-margin products introduced
in the latter part of fiscal 1996.
Selling, general and administrative (SG&A) expense in fiscal 1997 decreased by
approximately $300,000, or 1.4%, from fiscal 1996 and is primarily the result of
translating operating expenses of foreign subsidiaries into U.S. dollars for
financial reporting purposes.
Interest expense for fiscal 1997 decreased approximately $1.3 million, or 39.6%,
from the amount reported for the corresponding period in fiscal 1996, primarily
due to a $12.1 million reduction in outstanding borrowings and the payment
during fiscal 1996 of $240,000 of nonrecurring fees to our lenders.
License fee income, net for fiscal 1997, represented approximately 68.1% of
income before taxes compared to 13.5% in fiscal 1996 and was attributable almost
entirely to licenses entered into during the year by IMS.
The provision for income taxes is almost entirely the result of foreign
withholding taxes related to license payments received during the fiscal year.
The income tax liability incurred in the United States and certain other
jurisdictions was offset by the reversal of valuation allowance reserves against
our net operating loss carryforwards.
Primarily as a result of the substantial licensing fee income received
during the period, net income for fiscal 1997 increased by approximately
$9.5 million compared to fiscal 1996. The increase also reflected the benefits
of improved margins and the substantial reduction in interest expense.
Year 2000 Compliance
The Year 2000 Problem. Many information technology ("IT") hardware and software
systems ("IT Systems") and Non-IT Systems containing embedded technology, such
as microcontrollers and micro processors ("Non-IT Systems"), can only process
dates with six digits (e.g., 06/26/98), instead of eight digits (e.g.,
06/26/1998). This limitation may cause IT Systems and Non-IT Systems to
experience problems processing information with dates after December 31, 1999
(e.g., 01/01/00 could be processed as 01/01/2000 or 01/01/1900) or with other
dates, such as September 9, 1999, which was a date traditionally used as a
default date by computer programmers. These problems may cause IT Systems and
Non-IT Systems to suffer miscalculations, malfunctions or disruptions. These
problems are commonly referred to as "Year 2000" or "Y2K" problems.
Our State of Readiness. We have begun to implement a plan to ensure that the IT
Systems and material Non-IT Systems that we control are Y2K compliant before
January 1, 2000. In the first phase of the plan, which has been completed, we
assessed the potential exposure of our IT Systems and material Non-IT Systems to
Y2K problems. In the second phase, which we have also completed, we designed a
procedure to remediate our exposure to Y2K problems in the IT Systems and
material Non-IT Systems that we control. We are currently in the third phase,
which involves the actual remediation and enhancements of the IT Systems and
material Non-IT Systems that we control. After we complete the third phase, we
will begin the fourth and final phase of testing the remediation and
enhancements to the IT Systems and material Non-IT Systems that we control to
ensure Y2K compliance.
We believe that we have identified all IT Systems and material Non-IT Systems
that we control that may require Y2K remediation. We have assigned nine people
(both employees and outside consultants) to complete the remediation and
enhancements to our IT Systems that we control. We plan to complete the
remediation, enhancements and testing by June 30, 1999.
We have assigned three employees to either remediate or cause the remediation of
material Non-IT Systems that we control and that we have identified as
possessing a Y2K problem. We plan to complete the remediation of these Non-IT
Systems by June 30, 1999. We have acquired some of these Non-IT Systems during
the past few years and we believe that a substantial number of these newer
systems do not possess a Y2K problem. In addition, the vendors of some of these
newer Non-IT Systems have warranted them to be Y2K compliant. We have contacted
the third parties who control our other material Non-IT Systems (including,
without limitation, communication systems, security systems, electrical systems
and HVAC systems) to assess whether any of these systems possess a Y2K problem
that could adversely affect our operations if a malfunction occurred. We have
also implemented procedures to help ensure that any new Non-IT Systems that we
acquire or utilize are Y2K compliant.
We have completed Year 2000 testing on our CNC products and have prepared
technical bulletins that describe the products tested and the impact Year 2000
will have on those products. These technical bulletins are available upon
request or can be obtained from our web site (Hurco.com). We believe that our
CNC products will continue to function in Year 2000 with only some models
experiencing a minor file dating issue. We are developing a policy for providing
software updates to those products that will have the dating issue.
The Costs to Address the Company's Year 2000 Issues. Our costs through October
31, 1998 to identify and remediate our Year 2000 problems have not been
material. Our costs to complete the Year 2000 project are not expected to be
material either.
The Risks Associated With Our Year 2000 Issues. Our Year 2000 compliance effort
has not identified any worst case scenarios that we believe are reasonably
likely to occur. We do not expect Year 2000 issues to interrupt our business
unless disruption occurs as a result of year 2000 problems involving basic
infrastructure outside of our control.
Our computerized machine systems are manufactured primarily by three contract
manufacturers in Taiwan. An interruption in supply from the contract
manufacturer could have a material adverse effect on our operations. We have
received assurances from all contract manufacturers that Year 2000 will not
cause delays in production. Although we have not identified any specific Year
2000 issues that are reasonably likely to impact the production of the contract
manufacturers, because of the uncertainty of the year 2000 issue, some risk of
disruption in production does exist.
Contingency Plan. We will continue to evaluate the impact Year 2000 will have on
our contract manufacturers. If Year 2000 issues are identified that we believe
could reasonably disrupt production of the contract manufacturers, we will delay
our fiscal 1999 finished goods inventory reduction program and maintain finished
goods inventory at a level to protect against anticipated production delays. We
will continue monitoring the Year 2000 issue and will develop a contingency plan
if a reasonably likely risk is identified.
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 may 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 do not currently anticipate 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 1998 and fiscal 1997. See Note 1 to the Consolidated Financial
Statements.
Liquidity and Capital Resources
At October 31, 1998, we had cash and cash equivalents of $3.3 million compared
to $3.4 million at October 31, 1997. Cash provided by operations totaled $5.9
million in fiscal 1998, compared to $16.0 million in fiscal 1997. Cash flow from
operations in fiscal 1998 was enhanced by receipts of approximately $7.0 million
of license fees, net of legal fees and taxes, received during fiscal 1998,
compared to $9.1 million in fiscal 1997.
Working capital was $29.3 million at October 31, 1998, compared to $22.9 million
at October 31, 1997. The working capital increase is attributable to an increase
in inventory of $8.8 million and accounts receivable of $2.8 million offset by a
$6.9 increase in accounts payable.
The increase in inventories relates primarily to finished product available for
shipment along with components to support current production schedules. The
increase is attributable to planned increases in production by our contract
manufacturers for the latter half of fiscal 1998, combined with lower than
expected demand. We anticipate an additional increase in finished product
inventory during the first half of fiscal 1999, which is expected to be absorbed
during the second half of the fiscal year as reduced supplier delivery schedules
take effect.
The increase in accounts receivable is entirely attributable to the timing of
shipments in the fourth fiscal quarter. Days sales outstanding were 48 days at
October 31, 1998 and 1997. The increase in accounts payable relates to the
increased shipments from contract manufacturers late in the fiscal year under
terms which generally range from 60 to 120 days. Accounts payable are expected
to decrease during the second half of fiscal 1999 commensurate with reduced
inventory purchases.
Capital investments for the fiscal year ended October 31, 1998 consisted
principally of expenditures for software development projects and purchases of
equipment. Cash used for investing activities during the year were funded by
cash flow from operations.
We repurchased 254,500 shares of our common stock through October 31, 1998,
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, 1998 was $8.4 million, representing 18.1% of total
capitalization, compared to $10.0 million, or 25.2%, of total capitalization
at October 31, 1997.
Our bank credit agreement was amended on December 19, 1998 to permit borrowings,
at any one time outstanding, of up to $25.0 million (inclusive of letter of
credits of $15.0 million). All other terms under the agreement remained
unchanged. We were in compliance with all loan covenants at October 31, 1998. 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 $2.0 million outstanding under
our bank line of credit at October 31, 1998 and the effect of interest rate
changes would 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 1998, approximately 54.5% of our sales and service fees, including
export sales, were derived from overseas 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, 1998:
Notional Amount Weighted Avg. Market Value
in Foreign Forward Rate Notional Amount October 31,
Foreword Contracts Currency in U.S. $ 1998
--------- -------- ------ ------- ---------
Maturity Dates
Deutsche Mark 9,800,000 1.6878 5,806,420 5,924,100
Nov '98-Mar '99
French Franc 11,000,000 5.8242 1,888,200 1,983,300
Nov '98-Jan '99
Sterling 3,450,000 1.6869 5,819,510 5,706,990
Nov '98-Jan '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, 1998 and 1997,
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, 1998. 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 and schedule 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, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1998, 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
Commission's rules and is not a required part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in our audit of the basic financial statements and, in our opinion,
is fairly stated in all material respects in relation to the basic financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
December 2, 1998.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
1998 1997 1996
(Dollars in thousands, except per share amounts)
Sales and service fees......... $ 93,422 $ 95,729 $ 99,351
Cost of sales and service ..... 65,483 67,956 70,930
------- --------- --------
Gross profit.............. 27,939 27,773 28,421
Selling, general and
administrative expenses........ 21,786 21,047 21,343
Restructuring charge
(Note 16)...................... 1,162 -- --
-------- --------- --------
Operating income ......... 4,991 6,726 7,078
License fee income and
litigation settlement fees,
net(Note 13)................... 6,974 10,095 590
Interest expense............... 876 1,938 3,211
Other income(expense),net...... 99 (51) (99)
------- --------- -----------
Income before income
taxes.................. 11,188 14,832 4,358
Provision for income taxes
(Note 6)....................... 1,934 1,028 94
------- --------- -----------
Net income .................... $ 9,254 $ 13,804 $ 4,264
======== ========= ========
Earnings per common share
- basic....................... $ 1.42 $ 2.11 $ .74
======== ========= ========
Weighted average common
shares outstanding - basic..... 6,498 6,536 5,786
======== ========= =========
Earnings per common share
- - diluted...................... $ 1.39 $ 2.06 $ .72
======== ========= ========
Weighted average common
shares outstanding - diluted... 6,670 6,704 5,907
======== ========= ========
The accompanying notes are an integral part of the
Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31,
1998 1997
Current assets:
(Dollars in thousands, except per share amounts)
Cash and cash equivalents...................... $ 3,276 $ 3,371
Accounts receivable, less allowance
for doubtful accounts
of $769 in 1998 and $757 in 1997.............. 18,896 15,687
Inventories ................................... 30,817 21,752
Other.......................................... 2,154 1,412
--------- ---------
Total current assets......................... 55,143 42,222
--------- ---------
Long-term license fee receivables
(Note 13)..................................... 797 1,178
--------- ---------
Property and equipment:
Land........................................... 761 761
Building....................................... 7,067 7,067
Machinery and equipment........................ 11,184 11,463
Leasehold improvements......................... 1,107 1,121
--------- ---------
20,119 20,412
Less accumulated depreciation
and amortization of............................ (11,037) (11,218)
--------- --------
9,082 9,194
--------- --------
Software development costs, less
accumulated amortization of $6,014
in 1998 and $4,692 in 1997...................... 4,231 4,447
Other assets....................................... 2,443 1,707
--------- --------
$ 71,696 $ 58,748
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 13,235 $ 7,448
Accounts payable-related parties................ 2,556 1,798
Accrued expenses................................ 7,157 6,886
Accrued warranty expenses....................... 1,060 1,452
Current portion of long-term debt............... 1,786 1,786
--------- -------
Total current liabilities..................... 25,794 19,370
--------- -------
Non-current liabilities:
Long-term debt ................................. 6,572 8,257
Deferred credits and other ..................... 1,590 1,345
--------- -------
8,162 9,602
--------- -------
Commitments and contingencies (Notes 10, 11 and 13)
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; 6,340,111 and
6,544,831 shares issued and outstanding in 1998
and 1997, respectively......................... 634 654
Additional paid-in capital....................... 48,662 50,349
Accumulated deficit.............................. (7,150) (16,404)
Foreign currency translation adjustment.......... (4,406) (4,823)
--------- --------
Total shareholders' equity..................... 37,740 29,776
--------- --------
$ 71,696 $ 58,748
======== ======
The accompanying notes are an integral part of the Consolidated
Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
1998 1997 1996
---- ---- ----
Cash flows from operating activities: (Dollars in thousands)
Net income .............................. $ 9,254 $ 13,804 $ 4,264
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........... 2,138 2,078 2,677
Restructuring charge.......................1,162 -- --
Unrealized (gain) loss on foreign currency
transactions............... (219) 294 267
Change in assets/liabilities
(Increase) decrease in accounts receivable(2,808) 1,043 356
(Increase) decrease in inventories........(8,775) 2,107 959
Increase (decrease) in accounts payable....6,864 (2,096) 856
Decrease in accrued expenses................(994) (681) (534)
Other...................................... (712) (525) (346)
------- ------- -------
Net cash provided by operating activities.5,910 16,024 8,499
------- ------ ------
Cash flows from investing activities:
Proceeds from sale of equipment................. 93 126 34
Purchase of property and equipment...........(1,013) (640) (561)
Software development costs...................(1,315) (1,595) (1,318)
Other ....................................... (411) (418) (181)
------- ------ -------
Net cash (used for) investing
activities............................(2,646) (2,527) (2,026)
------- ------ ------
Cash flows from financing activities:
Advances on bank credit facilities...........15,053 30,173 49,985
Repayments of bank credit facilities....... (14,953) (39,154) (55,008)
Repayments of term debt......................(1,786) (3,036) (6,342)
Proceeds from exercise of common stock options 120 38 47
Proceeds from stock rights offering, net........ -- -- 4,802
Purchase of common stock.................... (1,827) -- --
---------------------------------------
Net cash (used for) financing activities.(3,393) (11,979) (6,516)
------- ------- ------
Effect of exchange rate changes on cash.............34 (24) (152)
------- -------- -------
Net increase (decrease) in cash.............(95) 1,494 (195)
Cash and cash equivalents at beginning of year...3,371 1,877 2,072
------- ----- -----
Cash and cash equivalents at end of year....... $3,276 $ 3,371 $ 1,877
===== ========= =====
Supplemental disclosures:
Cash paid for:
Interest................................$ 702 $ 1,828 $ 2,759
Income taxes............................$ 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
Foreign
Common Stock Additional Currency
Shares Issued Paid in Accumulated Translation
& Outstanding Amount Capital Deficit Adjustment
(Dollars in thousands)
Balances, October 31, 1995... .5,425,302 $ 543 $45,573 $(34,472) $(4,161)
Net income....................... -- -- -- 4,264 --
Stock Rights Offering...........1,085,389 108 4,694 -- --
Translation of foreign currency financial
statements........................-- -- -- -- (455)
Exercise of common stock options...21,180 2 45 -- --
---------- ----- -------- -------- ------
Balances, October 31, 1996......6,531,871 $ 653 $ 50,312 $ (30,208) $(4,616)
---------- ----- -------- -------- ------
Net income............................-- -- -- 13,804 --
Translation of foreign currency financial
statements.........................-- -- -- -- (207)
Exercise of common stock options...12,960 1 37 -- --
-------------------------------------------------
Balances, October 31, 1997......6,544,831 $ 654 $ 50,349 $(16,404) $(4,823)
--------- ---- -------- ------- ------
Net income..........................-- -- -- 9,254 --
Translation of foreign currency financial
statements.......................-- -- -- -- 417
Exercise of common stock options.. 49,780 5 115 -- --
Purchase of common stock.........(254,500) (25) (1,802) -- --
-------- ------ ------ --------- ------
Balances, October 31, 1998......6,340,111 $ 634 $ 48,662 $ (7,150) $(4,406)
========= ===== ======== ======== ======
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 27% 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 German marks) 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 $13.5 million as of October 31,
1998 ($8.7 million related to firm intercompany sales commitments) and $19.0
million as of October 31, 1997 ($17.8 million related to firm intercompany sales
commitments). Deferred losses related to hedges of future sales transactions
were approximately $434,000 and $408,000 as of October 31, 1998 and 1997,
respectively. Contracts outstanding at October 31, 1998, mature at various times
through March, 1999. 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. Expenditures and related third-party reimbursements for the last three
years were (in thousands):
Year Ended October 31,
1998 1997 1996
---- ---- ----
Research and development expenditures $1,959 $1,870 $1,689
Less: amounts reimbursed by third parties -- -- 58
-------- ------- ------
Net research and development expenses $1,959 $1,870 $1,631
======== ===== =====
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, and
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 $1.3 million in 1998, $1.6 million in 1997 and $1.3 million in 1996
related to software development projects. Amortization expense was $1.1 million,
$940,000 and $1.0 million, for the three years ended October 31, 1998, 1997 and
1996 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 over 240 independent agents and
distributors in 45 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 principally with three machine
tool builders located in Taiwan for the manufacture and assembly of computerized
machine systems, based on our designs and specifications, utilizing CNC systems
provided by us. We also have a contract manufacturing agreement with two
European machine tool builders to manufacture machine tools for the European
market. 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, 1998 and 1997 are summarized below (in thousands):
1998 1997
---------- ----------
Purchased parts and sub-assemblies........$ 11,749 $ 9,749
Work-in-process................................1,774 1,578
Finished goods............................... 17,294 10,425
--------- ------
$ 30,817 $ 21,752
========= ======
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. DEBT AGREEMENTS
Long-term debt as of October 31, 1998 and 1997, consisted of (in thousands):
1998 1997
-------- --------
Bank revolving credit facilities.................$ 2,000 $ 1,900
Senior Notes..........................................5,358 7,143
Economic Development Revenue Bonds, Series 1990.......1,000 1,000
------- -------
8,358 10,043
Less current portion..................................1,786 1,786
--------- -------
$ 6,572 $ 8,257
========= =========
As of October 31, 1998, long-term debt was payable as follows (in thousands):
Fiscal 1999................................1,786
Fiscal 2000................................3,786
Fiscal 2001 and thereafter.................2,786
-----
$ 8,358
=====
As of October 31, 1998, we had unutilized credit facilities of $6.6 million
available for either direct borrowings or commercial letters of credit. As of
October 31, 1998 and 1997, we had $11.4 million and $6.2 million, respectively,
of outstanding letters of credit issued to non-U.S. suppliers for inventory
purchase commitments.
As of October 31, 1998, $2.0 million of the domestic bank revolving credit
facility was payable at a prime rate of 8.0%. Interest was payable on the Senior
Notes at 10.37% at October 31, 1998 and 1997, respectively. Interest was payable
on the European credit authorization at rates ranging from 6.25% to 9.5% as of
October 31, 1998 and 1997.
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, 2000, which permits borrowings, at any one
time outstanding, of up to $20.0 million as of October 31, 1998
(inclusive of outstanding letters of credit of 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 will be payable at
LIBOR plus an amount ranging from .75% to 2.0% based on a prescribed
formula, or at our option, prime.
The agreement requires us to maintain a specified minimum net worth and
establishes maximum leverage and fixed charge coverage ratios. Cash
dividends and redemptions of capital stock are permitted subject to
certain limitations. We are required to maintain consolidated tangible
net worth (as defined) of not less than $20.0 million plus (i) 50% of
cumulative net income subsequent to April 30, 1997 and (ii) 75% of the
net proceeds from sales of capital stock. Total consolidated debt may
not exceed 50% of consolidated capitalization (defined as total debt
plus consolidated tangible net worth).
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
b) Senior Notes
At October 31, 1998, we had outstanding approximately $5.4 million of
unsecured Senior Notes, bearing an interest rate of 10.37%, of which
approximately $1.8 million is due on December 1, 1998, and the balance
is due in equal annual installments through 2000. The financial
covenants 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 the bank. The Bonds' interest
rates adjust weekly and, as of October 31, 1998 and 1997, interest was accruing
at a rate of 3.4% and 3.8% respectively.
5. FINANCIAL INSTRUMENTS
The carrying amounts for trade receivables and payables approximate their fair
values. At October 31, 1998, 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 $13.5 million and $13.6 million, respectively, at
October 31, 1998. 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
The provision for income taxes in fiscal 1998 and 1997 includes $640,000 and
$1.0 million, respectively, of foreign withholding taxes related to certain
license fee payments received in those fiscal years. 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 off-setting valuation allowance. Our total deferred
tax assets and corresponding valuation allowance at October 31, 1998 and 1997,
consisted of the following (in thousands):
October 31,
1998 1997
Tax effects of future tax deductible items related to:
Accrued inventory reserves..................... $ 710 $ 707
Accrued warranty expenses.............................276 311
Other accrued expenses..............................1,171 858
--------- ---------
Total deferred tax assets.......................2,157 1,876
--------- -------
Tax effects of future taxable differences related to:
Accelerated tax deduction and other tax over book
deductions related to property, equipment and
software................... (1,883) (1,876)
Other............................................... (575) (575)
--------- --------
Total deferred tax liabilities................. (2,458) (2,451)
--------- --------
Net tax effects of temporary differences...........(301) (575)
--------- --------
Tax effects of carryforward benefits:
U.S. federal net operating loss carryforwards,
expiring 2008-2013................................2,170 5,869
Foreign net tax benefit carryforwards
with various expiration years.....................1,174 941
U.S. federal general business tax credits,
expiring 2008-2013................................1,367 1,545
U.S. Alternative Minimum Tax Credit with no
expiration..........................................412 221
--------- ---------
Tax effects of carryforwards .................. 5,123 8,576
--------- ---------
Tax effects of temporary differences and
carryforwards.......................... 4,822 8,001
Less valuation allowance...................... (4,410) (7,780)
---------- ---------
Net deferred tax asset..................... $ 412 $ 221
========= =========
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 and is recognizing the benefits only
as reassessment demonstrates they are realizable. 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,
1998 1997 1996
Domestic........... $ 8,809 $ 10,303 $ (625)
Foreign.................2,379 4,529 4,983
------- -------- -------
$ 11,188 $ 14,832 $ 4,358
======== ========= =========
Differences between the effective tax rate and
U.S. federal income tax rate were (in thousands):
Tax at U.S. statutory rate.$ 3,915 $ 5,191 $ 1,525
Foreign withholding taxes........640 1,012 --
Effect of tax rates of international jurisdictions
in excess of U.S. statutory
rates..........................563 342 254
State income taxes................35 16 --
Utilization of net operating loss
carryforwards...............(3,219) (5,533) (1,685)
------- ------ ------
Provision for income taxes.$ 1,934 $ 1,028 $ 94
======== ========= =========
Foreign withholding taxes are the result of withholding taxes on certain license
fee payments received during fiscal 1998 and 1997. Our provision for income
taxes in fiscal 1998, 1997 and 1996 represents taxes currently payable.
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 $357,000, $307,000 and $252,000 for the years ended
October 31, 1998, 1997 and 1996, respectively.
During 1996, we initiated a non-qualified deferred compensation plan for certain
of our executives. The purpose of this plan is to provide executives with an
additional mechanism to save throughout their employment. Our contractual
obligations to the executives under this plan are fully funded through separate
investment accounts.
During 1997, we initiated 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 my 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, 1998, 31,000 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, 1998, 1997 and 1996 and the related activity for the year is as
follows:
Year Ended October 31,
1998 1997 1996
Outstanding at beginning of year.......421,860 431,620 380,700
Granted............................26,000 5,000 104,800
Canceled...........................(4,000) (1,800) (32,700)
Expired............................ -- -- --
Exercised.........................(49,780) (12,960) (21,180)
------- ------- --------
Outstanding at end of year.............394,080 421,860 431,620
======= ======= =======
Exercisable at end of year.............309,079 283,416 204,151
======= ======= =======
Available for future grants............481,814 507,814 12,814
======= ======== ========
The range of option prices per share for outstanding options and the prices at
which options were exercised during 1998, 1997 and 1996 are summarized
below:
Year Ended October 31,
1998 1997 1996
Option price.............$2.13 - $8.25 $2.13 - $7.50 $2.13-$7.50
Exercise price...........$2.13 - $5.13 $2.13 - $5.13 $2.13-$3.88
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of October 31, 1998 and 1997, there were outstanding options held by certain
members of the Board of Directors to purchase 75,000 shares of our common stock
at $5.13 per share and 25,000 shares at $7.00 per share. All were exercisable as
of October 31, 1998 and 1997. The options expire at various dates between 2002
and 2006.
In October 1995, SFAS No. 123, "Stock Based Compensation," was issued. This
statement requires the Company to choose between two different methods of
accounting for stock options. The statement defines a fair-value-based method of
accounting for stock options but allows an entity to continue to measure
compensation cost for stock options using the accounting prescribed by APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Use of the
APB 25 accounting method results in no compensation cost being recognized if
options are granted at an exercise price at the current market value of the
stock. We will continue to use the method prescribed under APB 25, but we are
required by SFAS 123 to make proforma disclosures of net income and earnings per
share as if the fair value method had been applied, if material. Application of
the fair value method would not have a material impact if it had been applied in
the financial statements for the year ended October 31, 1998.
9. RELATED PARTY TRANSACTIONS
Hurco and Air Express International Corporation (AEI) are related parties
because a common group of shareholders holds a substantial 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 $4.1 million, $2.6 million and $1.8 million for the years ended
October 31, 1998, 1997 and 1996, respectively. Trade payables to AEI were
$217,000, $30,000 and $208,000 at October 31, 1998, 1997 and 1996, respectively.
We own approximately 15% of one of our Taiwanese-based suppliers. This
investment is carried at cost and is included in Other Assets. Purchases of
product from this supplier are negotiated on an arms length basis and totaled
$7.4 million, $8.2 million and $8.6 million for the years ended October 31,
1998, 1997 and 1996, respectively. Trade payables to this supplier were $1.7
million, $1.8 million, and $1.5 million at October 31, 1998, 1997 and 1996,
respectively.
In October 1996, we entered into an agreement with a group of Taiwanese
investors for the purpose of forming a company, Hurco Automation, Ltd. (HAL).
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. At October 31, 1998, we had invested $525,000 in HAL
which results in 27% ownership. We have committed to invest an additional amount
of approximately $150,000 in fiscal 1999 which will result in 35% ownership. We
are also committed to purchasing a defined number of CNC systems from HAL
between February 1, 1997 and July 31, 1999. We are accounting for the investment
using the equity method. The investment of $575,000 at October 31, 1998 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 $3.1
million in 1998. Trade payables to HAL were $668,000 at October 31, 1998.
10. LITIGATION AND CONTINGENCIES
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 defendants' 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. The appeal and cross-appeal are currently
pending. 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 the matter and the German tax authorities are
expected to rule on the tax examiner's finding in the first half of fiscal 1999.
In the event an unfavorable ruling is received from the German tax authorities,
we will 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 required under operating leases as of
October 31, 1998, are summarized as follows (in thousands):
1999....................................$1,803
2000.....................................1,110
2001.......................................847
2002.......................................477
2003........................................38
--------
Total.................................$ 4,275
========
Rental payments for the years ended October 31, 1998, 1997 and 1996 was $1.8
million, $1.9 million and $1.9 million, respectively.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
12. RIGHTS OFFERING
On July 3, 1996, we issued and sold 1,085,389 shares of common stock at a price
of $4.63 per share pursuant to a subscription rights offering. The net proceeds
of approximately $4.8 million were used to pay $3.1 million of installments of
our outstanding indebtedness to its senior lenders that were due on July 31,
1996. Of the amount paid, $1.4 million consisted of an installment payment on
the bank term loan bearing interest at a variable rate and $1.7 million
represented an installment payment on our Senior Notes. The balance of the net
proceeds was used to reduce outstanding revolving credit borrowings.
13. LICENSE FEE INCOME AND LITIGATION SETTLEMENT FEES, NET
License fee income and litigation settlement fees, net for fiscal 1998, 1997 and
1996 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. Under a license agreement with a principal
supplier, approximately $534,000 is expected to be received in future periods in
the form of discounts on purchases, which will be reflected as a reduction of
the cost of such purchases. As of October 31, 1998, additional license fees of
approximately $797,000, net of legal fees and expenses, related to future
payments under completed license agreements have been deferred and are expected
to be recognized in income over the four-year remaining life of the licensed
patent.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. QUARTERLY HIGHLIGHTS (Unaudited)
1998 (In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Sales and service fees......$ 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............. -- -- -- 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
1997 (In thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
Sales and service fees......$ 22,278 $ 22,580 $ 24,637 $ 26,234
Gross profit....................6,482 6,846 7,175 7,270
Gross profit margin percentage...29.1% 30.3% 29.1% 27.7%
Selling, general and
administrative expenses......5,046 5,216 5,352 5,433
Operating income................1,436 1,630 1,823 1,837
Net income .....................1,016 6,201 2,534 4,053
Earnings per common share -
basic......................$ .16 $ .95 $ .39 $ .62
Earnings per common share -
diluted.................. $ .15 $ .93 $ .38 $ .60
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
We operate in one business segment which consists of CNC systems and software
and computerized machine systems for metal cutting and metal forming. Summarized
is information regarding Total Sales and Service Fees, Operating Income and
Identifiable Assets by geographical areas (in thousands):
United States(1) Europe Asia Eliminations Consolidated
1998
Sales and service fees
to unaffiliated
customers...............$ 47,007 $ 45,729 $ 686 $ -- $ 93,422
Transfers between
geographic areas..........32,101 879 15 (32,995) --
--------- --------- -------- ----------- ----------
Total sales.............$ 79,108 $ 46,608 $ 701 $ (32,995) $ 93,422
========= ========= ======== ========== ==========
Operating income (loss) $ 2,791 $ 2,444 $ (244) $ 4,991
========= ========= ======== ==========
Identifiable assets as of
October 31, 1998...$ 47,956 $ 22,703 $ 1,037 $ 71,696
========= ========= ======== ==========
1997
Sales and service fees
to unaffiliated
customers...............$ 51,823 $ 42,910 $ 996 $ -- $ 95,729
Transfers between
geographic areas..........26,435 2,013 75 (28,523) --
--------- --------- -------- ----------- ----------
Total sales........... $ 78,258 $ 44,923 $1,071 $(28,523) $ 95,729
========= ========= ======== ========== ==========
Operating income (loss) $ 2,390 $ 4,558 $ (222) $ 6,726
========= ========= ======== ==========
Identifiable assets as of
October 31, 1997...$ 42,525 $ 15,895 $ 328 $ 58,748
========= ========= ======== ==========
1996
Sales and service fees
to unaffiliated
customers.............. $ 54,760 $ 41,528 $3,063 $ -- $ 99,351
Transfers between
geographic areas..........26,921 3,790 33 (30,744) --
--------- --------- -------- --------- --------
Total sales........... $ 81,681 $ 45,318 $3,096 $(30,744) $ 99,351
========= ========= ======== ========= ========
Operating income $ 2,184 $ 4,348 $ 546 $ 7,078
========= ========= ======== ========
Identifiable assets as of
October 31, 1996.. $ 42,779 $ 14,763 $2,208 $ 59,750
========= ========= ======== ========
(1) Includes export sales
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
16. RESTRUCTURING CHARGE
In October 1998, we initiated a restructuring of the business of our subsidiary,
Autocon Technologies, Inc., to convert its operations from manufacturing
computer controls to sales and service of computerized machine systems. This
restructuring program, which is expected to be completed during the first half
of fiscal 1999, has 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
17. 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.
18. SUBSEQUENT EVENT (unaudited)
Effective December 19, 1998, the bank credit agreement was amended to permit
borrowings, at any one time outstanding, of up to $25.0 million (inclusive of
outstanding letters of credit of up to $15.0 million). All other terms under the
agreement remained unchanged.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
The following information sets forth the name of each director, his age, tenure
as a director, principal occupation and business experience for the last five
years:
Served as a
Name Age Director Since
Hendrik J. Hartong, Jr. 59 1986
Andrew L. Lewis IV 42 1988
Brian D. McLaughlin 56 1987
E. Keith Moore 76 1990
Richard T. Niner 59 1986
O. Curtis Noel 63 1993
Charles E. Mitchell Rentschler 59 1986
Hendrik J. Hartong, Jr. has been a general partner of Brynwood Management,
the general partner of Brynwood Partners Limited Partnership, since 1984.
Mr. Hartong has also served as Chairman of the Board of Air Express
International Corporation since 1985.
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.
Brian D. McLaughlin has been President and Chief Executive Officer of Hurco
since December, 1987.
E. Keith Moore has served as President of Hurco International, Inc., a
subsidiary of Hurco, since April 1988. Mr. Moore is also a director of Met-Coil
Systems Corporation.
Richard T. Niner has been a general partner of Brynwood Management, the
general partner of Brynwood Partners Limited Partnership, since 1984.
Mr. Niner is also a director of Air Express International Corporation,
Arrow International, Inc. and Case, Pomeroy & Company, Inc.
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.
Charles E. Mitchell Rentschler has served as President and Chief Executive
Officer of The Hamilton Foundry & Machine Co. since 1985.
Each director of Hurco serves for a term of one year, which expires at the next
annual meeting of shareholders of Hurco when his successor has been elected.
There are no family relationships between any of the directors or executive
officers of Hurco.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive officers of
Hurco as of January 5, 1999:
Name Age Position(s) with the Company
Brian D. McLaughlin 56 President and Chief Executive Officer
Roger J. Wolf 58 Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
James D. Fabris 47 Executive Vice President - Operations
Richard Blake 40 Vice President of the Company and
President Hurco Machine Tool Products
Division
David E. Platts 46 Vice President, Research and
Development
Stephen J. Alesia 32 Corporate Controller
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.
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 and Vice President, 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, Vice President of Hurco in January 1996, and Managing Director,
Hurco Europe, Ltd., a subsidiary of Hurco, in December 1993. 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.
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 its fiscal year ending October 31, 1998,
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 $100,000 during fiscal 1998.
Summary Compensation Table
Long-Term All Other
Annual Compensation Compensation Compen-
Name and Fiscal Salary BonusOtherAnnual SecuritiesUnderlying sation
Principal Position Year ($) ($)(1)Compensation($) Options(2) ($) (3)
- ------------------ ------ ------ ----------------- ------------ ---------
Brian D. McLaughlin 1998 $258,077 $75,000 -- -- $52,206
President and CEO 1997 250,000 125,000 -- -- 51,726
1996 238,133 80,000 -- 15,000 3,325
Roger J. Wolf 1998 160,039 50,000 -- -- 48,064
Sr. VP, Secretary 1997 156,000 60,000 -- -- 47,086
Treasurer and CFO 1996 148,500 75,000 -- 3,000 2,880
James D. Fabris 1998 156,154 65,000 -- -- 24,054
Executive Vice 1997 140,000 60,000 -- -- 23,504
President - Operations 1996 122,500 50,000 -- 10,000 3,199
Richard Blake 1998 128,124 40,000 -- -- 1,791
V.P. of the Company and 1997 108,550 41,750 -- -- 4,633
President Hurco Machine 1996 87,373 46,311 -- 15,000 3,841
Tool Products Division
David E. Platts 1998 104,038 10,000 -- -- 15,436
Vice President of 1997 100,000 45,000 -- -- 13,153
Research & Development 1996 93,917 20,000 -- 5,000 --
- ---------------------------
(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 $49,406
Roger J. Wolf 5,299 42,765
James D. Fabris 4,870 19,184
Richard Blake 1,791 --
David E. Platts 3,222 12,214
Stock Options
The following table sets forth information related to options exercised during
fiscal 1998 and options held at fiscal year-end by the Named Executive Officers.
We do not have any outstanding SARs.
Aggregated Option Exercises in Fiscal 1998 and Year-End Option Values
Value of
Number of Unexercised
Shares Securities Underlying In-the-Money
Acquired Unexercised Options Options
on Value at FY-End (#) at FY-End ($)(1)
Exercise Realized Exer- Unexer- Exer- Unexer-
Name (#) ($) cisable cisable cisable cisable
- ---- --------- --------- ------- ------- ------- -------
Brian D. McLaughlin -- -- 121,666 3,334 $277,543 $3,127
Roger J. Wolf -- -- 49,000 1,000 57,761 938
James D. Fabris -- -- 29,400 10,600 97,627 20,018
Richard Blake -- -- 13,800 7,200 30,416 7,527
David E. Platts -- -- 23,000 7,000 74,074 11,566
- -----------------------------------------
(1) Value is calculated based on the closing market price of the common
stock on October 31, 1998 ($6.063) less the option exercise price.
Compensation of Directors
During 1998, each director who is not a full-time employee of Hurco received a
fee of $1,000 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 January 1, 1998. The
contract term is thirty-six months and shall continue month-to-month thereafter.
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 12 months' salary if his employment is
terminated for any reason other than gross misconduct.
Compensation Committee Interlocks and Insider Participation
During fiscal 1998 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 the Company
or any of its subsidiaries.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of January 25, 1999, 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. 464,600 7.8%
865 South Figueroa Street
Los Angeles, California 90017
Brynwood Partners II L.P., et al 405,715 (2) 6.5%
Two Soundview Avenue
Greenwich, Connecticut 06830
Wellington Trust Company, NA 371,400 (3) 6.3%
75 State Street
Boston, Massachusetts 02109
FMR Corporation 364,028 (4) 6.1%
82 Devonshire Street
Boston, Massachusetts 02109
Directors and Executive Officers
Hendrik J. Hartong, Jr. 330,913 (1,5) 5.6%
Andrew L. Lewis IV 24,875 (5) 0.4%
Brian D. McLaughlin 158,142 (6,7) 2.7%
E. Keith Moore 38,010 (8) 0.6%
Richard T. Niner 352,803 (1,5) 5.9%
O. Curtis Noel 10,000 (5) 0.2%
Charles E. Mitchell Rentschler 35,000 (5,9) 0.6%
Roger J. Wolf 54,392 (10) 0.9%
James D. Fabris 29,900 (11) 0.5%
Richard Blake 13,800 (12) 0.2%
David E. Platts 26,700 (13) 0.5%
Executive officers and directors 798,534 (14) 13.4%
as a group (12 persons)
(1) According to a Schedule 13G dated December 31, 1997, Wellington
Management Co. has shared voting power for all shares.
(2) According to an amended Schedule 13D dated January 25, 1999, 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 are
the beneficial owners of the shares indicated in the table. Brynwood
Management II has shared voting and dispositive power over 278,001
shares; Mr. Hartong has sole voting and dispositive power over 52,912
shares and shared voting and dispositive power over 278,001 shares; Mr.
Niner has sole voting and dispositive power over 74,802 shares and
shared voting and dispositive power over 278,001 shares.
(3) According to a Schedule 13G dated December 31, 1997, Wellington Trust
Company has shared voting power for all shares.
(4) According to a Schedule 13G dated December 31, 1997, FMR Corporation
has no voting power for any of the shares.
(5) Includes 10,000 shares subject to options that are exercisable within
60 days.
(6) Includes 121,666 subject to options held by Mr. McLaughlin that are
exercisable within 60 days.
(7) Includes 10,876 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 6,000 shares owned by Mr. Rentschler's wife, as to which he
may be deemed to have beneficial ownership.
(10) Includes 49,000 shares subject to options that are exercisable within
60 days.
(11) Includes 29,400 shares subject to options that are exercisable within
60 days.
(12) Includes 13,800 shares subject to options that are exercisable within
60 days.
(13) Includes 25,000 shares subject to options that are exercisable within
60 days.
(14) Includes 296,186 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 substantial ownership interest in both companies
during fiscal 1998. 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 $4.1 million during fiscal 1998.
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................................23
Consolidated Statements of Operations - years
ended October 31, 1998, 1997 and 1996...........................24
Consolidated Balance Sheets - as of October 31, 1998 and 1997.....25
Consolidated Statements of Cash Flows - years
ended October 31, 1998, 1997 and 1996...........................26
Consolidated Statements of Changes in Shareholders' Equity -
years ended October 31, 1998, 1997 and 1996.....................27
Notes to Consolidated Financial Statements........................28
2. Financial Statement Schedules. The following financial statement
schedule is included in this Item.
Page
Schedule II - Valuation and Qualifying
Accounts and Reserves...........................................51
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,
1998.
(c) Exhibits
Exhibits are filed with this Form 10-K or incorporated herein by reference
as listed on Pages 52-53.
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended October 31, 1998, 1997 and 1996
(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, 1998 $ 757 $ 280 $ -- $ 268 3 $ 769
======== ======= ======= ======== ========
October 31, 1997 $ 785 $ 73 $ -- $ 101 2 $ 757
======== ======= ======= ======== ========
October 31, 1996 $ 1,070 $ (63) $ -- $ 222 1 $ 785
======== ======= ======= ======== ========
Accrued warranty expenses for the year ended:
October 31, 1998 $ 1,452 $ 503 $ -- $ 895 $ 1,060
======== ======= ======= ======== ========
October 31, 1997 $ 1,425 $ 1,321 $ -- $ 1,294 $ 1,452
======== ======= ======= ======== ========
October 31, 1996 $ 1,391 $ 1,544 $ -- $ 1,510 $ 1,425
======== ======= ======= ======== ========
Accrued restructuring expenses for the year ended
October 31, 1998 $ -- $ 1,162 $ 471 $ -- $ 691
======== ======= ======= ======== ========
1 Receivable write-offs of $228,000, net of cash recoveries on accounts
previously written off of $6,000. 2 Receivable write-offs of $106,000, net of
cash recoveries on accounts previously written off of $5,000. 3 Receivable
write-offs of $280,000, net of cash recoveries on accounts previously written
off of $12,000.
EXHIBITS INDEX
Exhibits Filed. The following exhibits are filed with this report:
10.17 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.
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 Employment agreement between the Registrant and Richard Blake
dated January 1, 1998, incorporated by reference as exhibit 10.16
to the Registrant's Quarterly Report of Form 10-Q for the quarter
ended January 31, 1998.
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,
1999.
HURCO COMPANIES, INC.
By:/s/ ROGER J. WOLF
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
/s/ BRIAN D. McLAUGHLIN January 27, 1999
- ----------------------------------
Brian D. McLaughlin, Director,
President and Chief Executive Officer
of Hurco Companies, Inc.
(Principal Executive Officer)
/s/ ROGER J. WOLF January 27, 1999
- -------------------------------------------
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
of Hurco Companies, Inc.
(Principal Financial Officer)
/s/ STEPHEN J. ALESIA January 27, 1999
- ---------------------------------------
Stephen J. Alesia
Corporate Controller
of Hurco Companies, Inc.
(Principal Accounting Officer)
/s/ HENDRIK J. HARTONG, JR. January 27, 1999
- ----------------------------------
Hendrik J. Hartong, Jr., Director
/s/ ANDREW L. LEWIS IV January 27, 1999
- --------------------------------------
Andrew L. Lewis, IV, Director
/s/ E. KEITH MOORE January 27, 1999
- ------------------------------------------
E. Keith Moore, Director
/s/ RICHARD T. NINER January 27, 1999
- -----------------------------------------
Richard T. Niner, Director
/s/ O. CURTIS NOEL January 27, 1999
- ----------------------------------------------
O. Curtis Noel, Director
/s/ CHARLES E. M. RENTSCHLER January 27, 1999
Charles E. M. Rentschler, Director