SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X 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, 2002 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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the of the Securities Exchange Act of 1934).
Yes No X
---- ---
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of April 30, 2002 (the last day of our most recently completed
second quarter) was $16,526,148 and as of January 14, 2003 was $8,765,558.
The number of shares of the Registrant's common stock outstanding as of January
2, 2003 was 5,583,158.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2003 Annual Meeting of Shareholders (Part III).
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
General
Hurco Companies, Inc. is an industrial technology company. We design and produce
interactive, personal computer (PC) based, computer control systems and software
and computerized machine tools for sale to the metal working industry through a
worldwide sales, service and distribution network. Our proprietary computer
control systems and software products are sold primarily as integral components
of our computerized machine tool products.
We pioneered the application of microprocessor technology and conversational
programming software for application on computer controls for machine tools and,
since our founding in 1968, have been a leader in the introduction of
interactive computer control systems that automate manufacturing processes and
improve productivity in the metal parts manufacturing industry. We have
concentrated on designing "user-friendly" computer control systems that can be
operated by both skilled and unskilled machine tool operators and yet are
capable of instructing a machine to perform complex tasks. The combination of
microprocessor technology and patented interactive, conversational programming
software in our computer control 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 computer-aided design (CAD) 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; High Wycombe, England; Munich, Germany; Paris, France; Milan, Italy and
Singapore. In June 2002, we opened a representative sales office in Shanghai,
China. Distribution facilities are located in Los Angeles, California and Venlo,
the Netherlands; a manufacturing facility is located in Taichung, Taiwan.
Our strategy is to design, develop, produce and market a comprehensive line of
interactive computer controls, software and computerized machine tools using our
proprietary technology designed to enhance the user's productivity through ease
of operation and higher levels of machine performance (speed, accuracy and
surface finish quality). We use an open systems software architecture that
permits our computer control systems and software to be used with standard PC
hardware and have emphasized an operator friendly design that employs both
interactive conversational and graphical programming software.
Products
During fiscal 2002, we discontinued several under-performing product lines and
sold the related assets, to enable us to focus our resources and technology
development on our core products. Our core products consist primarily of general
purpose computerized machine tools for the metal cutting industry (principally
vertical machining centers) into which our proprietary Ultimax(R) software and
computer control systems have been fully integrated. Discontinued and sold were
the Delta(TM) series computer control and related Dynapath(TM) milling machine
product line, and related parts and service activities, along with press brake
(metal bending machine) product lines and all tooling products related to press
brake applications. We continue to produce computer control systems and related
software for press brake applications that are sold primarily as retrofit
control systems. In addition, we produce and distribute software options,
control upgrades, hardware accessories and replacement parts related to our
continuing product lines and provide operator training and support services to
our customers.
The following table sets forth the contribution of each of our product groups to
our total sales and service fees during each of the past three fiscal years:
Net Sales and Service Fees by Product Category
Year ended October 31,
------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ------------------------- -------------------------
Continuing Products and Services
Computerized Machine Tools $ 52,056 73.9% $ 69,631 75.4% $ 65,505 68.1%
Computer Control Systems 3,194 4.5% 4,782 5.2% 7,791
and Software * 8.1%
Service Parts 7,240 10.3% 8,038 8.7% 8,701 9.0%
Service Fees 3,240 4.6% 3,749 4.1% 4,051 4.2%
----------- ----------- ----------- ---------- ----------- ----------
Total $ 65,730 93.3% $ 86,200 93.4% $ 86,048 89.4%
Discontinued Products and Services 4,756 6.7% 6,067 6.6% 10,156 10.6%
----------- ----------- ----------- ---------- ----------- ----------
Total $ 70,486 100.0% $ 92,267 100.0% $ 96,204 100.0%
=========== =========== =========== ========== =========== ==========
* Amounts shown do not include computer control systems sold as an integrated
component of computerized machine tools.
Computerized Machine Tool Products
We design and market computerized machine tools which are equipped with a fully
integrated interactive Ultimax(R) computer control system. Our Ultimax(R) twin
screen "conversational" computer control system is sold solely as a fully
integrated feature of Hurco computerized machine tools. This computer control
system enables a machine operator to create complex two-dimensional part
programs directly from blue prints or CAD. Machine operators with little or no
programming experience can successfully program parts and begin machining
operations in a short time with minimal special training. Since the initial
introduction of the Ultimax(R) computer control, we have added enhancements
related to operator programming productivity, CAD compatibility, data processing
throughput and motion control speed and accuracy. Our current Ultimax(R) 4
programming stations use a Pentium* processor featuring an operator console with
liquid crystal display screens and incorporate personal computer (PC) platform
components. This upgradeable computer control product offers enhanced
performance while ensuring access to cost effective computing hardware and
software.
Our current line of Ultimax(R) metal cutting machine tools is a complete family
of products including milling machines with an x-axis travel of 30 and 40 inches
and vertical machining centers with an x-axis travel of 24, 26, 30, 42, 50 and
64 inches. During 2002 we introduced the first model in our new VM series, the
VM1, a vertical machining center with a substantially smaller footprint and
significantly lower price than our previous entry-level vertical machining
center. We also introduced four new machine models in our high performance VMX
series vertical machining center line. These products provide different levels
of performance features for different market applications ranging in price from
$36,000 to $165,000.
Computer Control Systems and Software
The following computer control systems and software products are marketed
directly to end-users and or to original equipment manufacturers.
o Autobend(R)
Autobend(R) computer control systems are applied to metal bending press brake
machines that form parts from sheet metal and steel plate and consist of a
microprocessor-based computer control and back gauge (an automated gauging
system that determines where the bend will be made). We have manufactured and
sold the Autobend(R) product line since 1968. We currently market two models of
our Autobend(R) computer control systems for press brake machines, in
combination with six different back gauges, through distributors to end-users as
retrofit units for installation on existing or new press brake machines, as well
as to original equipment manufacturers and importers of such equipment.
o CAM and Software Products
In addition to our standard computer control features, we offer software option
products for programming two and three-dimensional parts. These products are
marketed to users of our computerized machine tools equipped with our
Pentium*-based Ultimax(R) computer control systems. In fiscal 2002, we
introduced Advanced Velocity Control (AVC) and Adaptive Surface Finish (ASF),
high performance machining software options. The AVC software option enables a
customer to increase machine throughput with advanced motion control software.
The ASF software option facilitates optimized surface finishes on complex parts.
Other products in this line are WinMax(R), a Windows** based off-line
programming system; DXF, a data file transfer software option; and UltiNet(TM),
a networking software option. The DXF software option eliminates manual data
entry of part features by transferring AutoCAD(TM) drawing files directly into
an Ultimax(R) computer control, or into our off-line programming software,
substantially increasing operator productivity. UltiNet(TM) is a networking
software option used by our customers to transfer part design and manufacturing
information to computerized machine tools at high speeds and to network
computerized machine tools within the customer's manufacturing facility.
We also offer conversational part and tool dimension probing options for
Ultimax(R) based machines. These options permit the computerized dimensional
measurement of machined parts and the associated cutting tools. This
"on-machine" technique significantly improves the throughput of the measurement
process when compared to traditional "off-machine" approaches.
Parts and Service
Our service organization provides installation, warranty, operator training and
customer support for our products on a worldwide basis. In the United States,
our principal distributors have primary responsibility for machine installation
and warranty service and support for new product sales. We also service and
support a substantial installed base of existing customers. Our service
organization also sells software options, computer controls upgrades,
accessories and replacement parts for our products. Our after-sale parts and
service business helps strengthen our customer relationships and provides
continuous information concerning the evolving requirements of end-users.
Marketing and Distribution
We sell our products through approximately 346 independent agents and
distributors in 35 countries throughout North America, Europe and Asia. We also
have our own direct sales personnel in the United States, China, England,
France, Germany, Italy and Singapore, which are among the world's principal
machine tool consuming countries. During fiscal 2002, no distributor accounted
for more than 5% of our sales and service fees. Approximately 80% of the
worldwide demand for computerized machine tools and computer control systems
comes from outside the U.S. In fiscal 2002, approximately 68% of our revenues
were from overseas customers.
The end-users of our products are precision tool, die and mold manufacturers,
independent metal parts manufacturers and specialized production applications or
prototype shops within large manufacturing corporations. Industries served
include aerospace, defense, medical equipment, energy, transportation and
computer equipment.
Our computerized machine tools along with software options and accessories are
sold primarily to end-users. We sell our Autobend(R) computer control systems 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,
to retrofitters of used machine tools who integrate them with those machines as
part of the retrofitting operation and to end-users who have an installed base
of machine tools, either with or without related computer control systems.
During fiscal 2002, no single end-user of our products accounted for more than
5% of our total sales and service fees.
We believe that advances in industrial technology and the related demand for
process improvements drive demand for our products.
Other factors affecting demand include:
o the need to continuously improve productivity and shorten cycle time,
o an aging machine tool installed base that will require replacement with
more advanced and efficient technology created by shorter product life
cycles,
o the industrial development of emerging countries in Asia and Eastern
Europe, and
o the declining supply of skilled machinists,
However, demand for our 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 reduce the potential impact
on our total sales and service fees by adverse changes in economic conditions in
any particular geographic region.
Competition
We compete with many other companies in the United States and international
markets. Several of these competitors are larger and have greater financial
resources than we do. We strive to compete effectively by incorporating unique,
patented software and other proprietary features into our products that offer
enhanced productivity, greater technological capabilities and ease of use. We
offer our products in a range of prices and capabilities to target a broad
potential market. We also believe that our competitiveness is aided by our
reputation for reliability and quality, our strong international sales and
distribution organization and our extensive customer service organization.
In the United States and European metal cutting markets, major competitors
include Haas Automation, Inc., Cincinnati Machine, Deckel, Maho Gildemeister
Group (DMG), Bridgeport Machines, Ltd. and Fadal Engineering along with a large
number of foreign manufacturers including Okuma Machinery Works Ltd., Mori
Seiki Co., Ltd., Masak and Matsuura Machinery Corporation
Manufacturing
Our manufacturing strategy is based on global sourcing of components and a
network of contract suppliers and sub-contractors who manufacture our products
in accordance with our proprietary design, quality standards 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 metal cutting machine tools are manufactured to our
specifications by manufacturing contractors in Taiwan and our wholly owned
subsidiary, Hurco Manufacturing Limited (HML), which we established in fiscal
2000. This subsidiary has increased our overall capacity and reduced or
eliminated our dependence on other Taiwan contract manufacturers. We have a 24%
ownership interest in our primary contract machine manufacturer. HML and our
affiliated machine manufacturer conduct final assembly operations and are
supported by a network of sub-contract suppliers of components and
sub-assemblies.
We also have a contract manufacturing agreement for computer control systems
with a Taiwanese-based affiliate in which we have a 35% ownership interest. This
company is manufacturing our Ultimax(R) and Autobend(R) computer control systems
to our specifications, and is engaged primarily in the sourcing of industry
standard computer components and proprietary parts, final assembly and test
operations.
We work closely with our contract manufacturers to increase their production
capacity to meet the demand for our machine tool products and believe that such
capacity is sufficient to meet our current and projected demand. We also
continue to consider additional contract manufacturing resources that will
increase our long-term capacity, and we believe that alternative sources for
standard and proprietary components are available; however, any prolonged
interruption of operations or significant reduction in capacity or performance
capability of these principal manufacturing contractors would have a material
adverse effect on our operations.
Backlog
Backlog consists of firm orders received from customers and distributors but not
shipped. Backlog was $5.3 million, $9.1 million and $10.2 million as of October
31, 2002, 2001, and 2000, respectively.
Intellectual Property
We consider certain features of our products to be proprietary. We own, directly
or through a subsidiary, a number of patents that are significant to our
business.
In fiscal 2002, we acquired the core technology assets of a software development
company for $1.8 million. As part of the acquisition, we obtained ownership of
three existing patents and one pending patent related to computer control
technology, which we expect to incorporate in our proprietary computer control
system.
We own patents for an object-oriented, open architecture methodology for
computer control software. We also hold a non-exclusive license covering
features of the automatic tool changer offered with certain of our computerized
machining centers as well as a patent for a manual tool changing apparatus.
Beginning in 1995, our subsidiary, IMS Technology, Inc. (IMS) actively pursued a
program to stop infringement and license the use of certain interactive
machining patents. These patents expired in October, 2001. During the past five
fiscal years, IMS entered into agreements with approximately 40 computer control
users under which IMS granted non-exclusive licenses of its interactive
machining patents. We recorded license fee income of $163,000, $723,000, and
$5.4 million, net of legal fees and expenses, in fiscal 2002, 2001, and 2000
respectively. In addition, IMS has received a royalty-free non-exclusive license
under six patents owned by two of the licensees. We do not anticipate future
license fee income from these expired patents.
Research and Development
Research and development expenditures for new products and significant product
improvements, included as period operating expenses, were $2.4 million, $3.5
million and $3.2 million in fiscal 2002, 2001, and 2000, respectively. In
addition, we recorded expenditures of $534,000 in 2002, $665,000 in 2001 and
$706,000 in 2000 related to software development projects that were capitalized.
Employees
We had approximately 240 employees at the end of fiscal 2002, none of which 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.
Geographic Areas
Financial information about geographic areas is set forth in Note 14 to the
Consolidated Financial Statements.
We are subject to the risks of doing business on a global basis, including
foreign currency fluctuation risks, changes in general economic and business
conditions in the countries and markets that we serve and government actions and
initiatives including import and export restrictions and tariffs.
Availability of Reports and Other Information
Our website is www.hurco.com. We make available on this website, free of charge,
access to our annual, quarterly and current reports and other documents filed by
us with the Securities and Exchange Commission as soon as reasonably practical
after the filing date.
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, computer
control assembly, sales, application
engineering and customer service
Long Beach, California 1,100(2) Warehouse and distribution
High Wycombe, England 12,000 Sales, application engineering and
customer service
Paris, France 2,800 Sales, application engineering and
customer service
Munich, Germany 17,100 Sales, application engineering and
customer service
Milan, Italy 4,850 Sales, application engineering and
customer service
Singapore 3,000 Sales, application engineering and
customer service
Shanghai, China 1,100 Sales, application engineering and
customer service
Taichung, Taiwan 26,600 Manufacturing
- ----------------------------------------------------------------------------------------------------------------
(1) Approximately 45,000 square feet is leased to a third-party under
a lease which expires January 30, 2005.
(2) The lease expired on November 30, 2002. We entered into a lease
with an effective date of December 1, 2002 for a new 13,000 square
foot facility located in Los Angeles that also includes sales and
service facilities.
We own the Indianapolis facility and lease all other facilities. The leases have
terms expiring at various dates ranging from January 2004 to April 2008. 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
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. The scope and cost of the repairs alleged by the
lessor to be required evolved throughout fiscal 2002 as investigations and
negotiations proceeded, and currently approximate $2.0 million. We do not agree
with the amount of the lessor's claim and are vigorously contesting that claim.
Our liability could be reduced by statutory limitations or by a negotiated
settlement. Based upon facts presently available to us and the current status of
our negotiations with the lessor, our best estimate of our ultimate liability is
$1.1 million and we have established a reserve in that amount.
We are involved in various other claims and lawsuits arising in the normal
course of business. We believe that it is remote that any of these claims will
have a material adverse effect on our consolidated financial position or
results of operations.
Item. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Executive Officers of the Registrant
Executive officers are elected each year by the Board of Directors at the first
board meeting following the Annual Meeting of Shareholders to serve during the
ensuing year and until their respective successors are elected and qualified.
There are no family relationships between any of the executive officers of the
Company or between any of them and any of the members of the Board of Directors.
The following information sets forth as of December 31, 2002, the name of each
executive officer, his age, tenure as an officer, principal occupation and
business experience for the last five years:
Name Age Position(s) with the Company
Michael Doar 47 Chairman of the Board and Chief Executive Officer
James D. Fabris 51 President and Chief Operating Officer
Roger J. Wolf 62 Senior Vice President, Secretary, Treasurer and Chief Financial
Officer
David E. Platts 50 Vice President, Technology
Stephen J. Alesia 36 Corporate Controller, Assistant Secretary
Michael Doar was appointed Chairman of the Board and Chief Executive Officer
on November 14, 2001. Mr. Doar had held various management positions with
Ingersoll Milling Machine Company from 1989 until 2001. Mr. Doar has been a
director of Hurco since 2000.
James D. Fabris was appointed President and Chief Operating Officer on November
14, 2001. Mr. Fabris served as Executive Vice President - Operations from
November 1997 until his current appointment and previously served as a Vice
President of Hurco since February 1995.
Roger J. Wolf has been Senior Vice President, Secretary, Treasurer and Chief
Financial Officer since January 1993.
David E. Platts has been employed by Hurco since 1982, and was elected Vice
President, Technology in May 2000. Mr. Platts previously served as Vice
President of Research and Development since 1989.
Stephen J. Alesia has been the Corporate Controller since joining 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 an international public
accounting firm.
PART II
Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"HURC". The following table sets forth the high and low sales prices of the
shares of our common stock for the periods indicated, as reported by the Nasdaq
National Market.
2002 2001
--------------------- -------------------
Fiscal Quarter Ended: High Low High Low
-------------------- ------------------- -------------------
January 31.............. $2.780 $2.050 $3.875 $3.250
April 30................ 3.350 2.030 4.188 3.150
July 31................. 2.950 1.500 3.660 2.150
October 31.............. 2.220 1.450 2.990 2.080
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 408 holders of record of our common stock as of January
2, 2003.
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,
2002 2001 2000 1999 1998
--------------------------------------------------------------------
Statement of Operations Data: (In thousands, except per share amounts)
Sales and service fees (1)............ $ 70,486 $ 92,267 $ 96,204 $ 88,238 $ 93,422
Gross profit.......................... $ 15,246 $ 23,262 $ 25,377 $ 24,174 $ 27,939
Selling, general and adminis-
trative expenses.................... $ 19,658 $ 24,040 $ 23,538 $ 21,259 $ 21,786
Restructuring expense
and other expense, net.............. $ 2,755 $ 143 $ 300 $ (103) $ 1,162
Operating income (loss)............... $ (7,167) $ (921) $ 1,539 $ 3,018 $ 4,991
Interest expense...................... $ 634 $ 790 $ 939 $ 1,293 $ 876
License fee income and litigation
settlement fees, net................ $ 163 $ 723 $ 5,365 $ 304 $ 6,974
Net income (loss)..................... $ (8,263) $ (1,597) $ 5,035 $ 1,802 $ 9,254
Earnings (loss)
per common share-diluted............ $ (1.48) $ (.28) $ .84 $ .30 $ 1.39
Weighted average common
shares outstanding-diluted.......... 5,583 5,670 6,020 6,061 6,670
(1) Sales and service fees for discontinued products were $4,756, $6,067, $10,156, $7,286, and $8,152 for
the years ended 2002 through 1998, respectively.
As of October 31,
2002 2001 2000 1999 1998
---------------------------------------------------------------------
Balance Sheet Data: (Dollars in thousands)
Current assets........................ $ 41,535 $ 49,510 $49,195 $ 52,856 $ 55,143
Current liabilities................... $ 21,185 $ 18,217 $ 23,124 $ 19,580 $ 25,794
Working capital ...................... $ 20,350 $ 31,293 $ 26,071 $ 33,276 $ 29,439
Current ratio......................... 2.0 2.7 2.1 2.7 2.1
Total assets.......................... $ 57,152 $ 66,217 $ 65,024 $ 69,632 $ 71,696
Long-term obligations................. $ 7,950 $ 12,532 $ 3,009 $ 13,904 $ 8,162
Total debt............................ $ 8,885 $ 12,000 $ 3,736 $ 14,172 $ 8,358
Shareholders' equity.................. $ 28,017 $ 35,468 $ 38,891 $ 36,148 $ 37,740
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. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among others, changes in
general economic and business conditions that affect market demand for machine
tools and related computer control systems, software products, and replacement
parts, changes in manufacturing markets, adverse currency movements, innovations
by competitors, quality and delivery performance by our contract manufacturers
and 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)
2002 2001 2000 02 vs. 01 01 vs. 00
----- ----- ----- --------- ---------
Sales and service fees................ 100.0% 100.0% 100.0% (23.6%) (4.1%)
Gross profit.......................... 21.6% 25.2% 26.4% (34.5%) (8.3%)
Selling, general and
administrative expenses............. 27.9% 26.1% 24.5% (18.2%) 2.1%
Restructuring expense and
other expenses, net................. 3.9% 0.2% 0.3% 1,826% (52.3%)
Operating loss........................ (10.2%) (1.0%) 1.6% NA NA
License fee income, net............... 0.2% 0.8% 5.6% (77.4%) (86.5%)
Interest expense...................... 0.9% 0.9% 0.9% (19.7%) (15.9%)
Net income (loss)................ (11.7%) (1.7%) 5.2% NA NA
Fiscal 2002 Compared With Fiscal 2001
Our net loss for the year ended October 31, 2002, which was more than five times
greater than that reported for fiscal 2001, was due primarily to substantially
lower sales and service fees as result of a continuing decline in machine tool
orders in both the U.S. and Europe. The Association for Manufacturing
Technology, the machine tool industry's trade association, reported that in
2002, the U.S. dollar value of orders for machine tools decreased 25%, and there
was a corresponding deterioration in our European markets.
Also contributing to the loss for fiscal 2002 were restructuring and other
special charges totaling $3.8 million, which consisted primarily of: (a)
non-cash inventory write-downs of $1.1 million, which were recorded as an
increase in the cost of sales, and the write-off of capitalized software
development costs of $1.0 million, which was recorded as a restructuring
expense, (b) severance costs of $1.1 million related to personnel reductions,
and (c) a reserve of $1.1 million (of which $896,000 was recorded in the fourth
fiscal quarter) for potential expenditures that might be required pursuant to a
disputed claim regarding a terminated facility lease in the United Kingdom,
which is more fully discussed below.
During fiscal 2002, we discontinued several under-performing product lines, and
sold the related assets, to enable us to focus our resources and technology
development on our core products. These products, known as milling machines and
vertical machining centers, consist primarily of general purpose computerized
machine tools for the metal cutting industry into which our proprietary
Ultimax(R) software and computer control systems have been fully integrated.
Discontinued and sold were the Delta(TM) series computer control and related
Dynapath(TM) milling machine product line, and related parts and service
activities, along with press brake product lines and all tooling products
related to press brake applications. These discontinued product lines were
marketed exclusively in the United States.
During fiscal 2002, we also eliminated 53 domestic employee positions, which we
expect will result in annual cost reductions of approximately $3.8 million, of
which $2.1 million was realized in fiscal 2002. The positions that were
eliminated were those related to the discontinued product lines as well as some
positions associated with our realigned and consolidated domestic sales and
service operations.
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. The scope and cost of the repairs alleged by the
lessor to be required evolved throughout fiscal 2002 as investigations and
negotiations proceeded, and currently approximate $2.0 million. We do not agree
with the amount of the lessor's claim and are vigorously contesting that claim.
Our liability could be reduced by statutory limitations or by a negotiated
settlement. Based upon facts presently available to us and the current status of
our negotiations with the lessor, our best estimate of our ultimate liability is
$1.1 million, and we have established a reserve in that amount, of which
$896,000 was recorded in the fourth quarter of fiscal 2002.
The following tables set forth net sales by geographic region and product
category for the years ended October 31, 2002 and 2001 (in thousands):
Net Sales and Service Fees by Geographic Region
October 31,
---------------------------------------------------------
2002 2001
-------------------------- ---------------------------
Americas $ 24,148 34.3% $ 34,779 37.7%
Europe 44,509 63.1% 54,977 59.6%
Asia Pacific 1,829 2.6% 2,511 2.7%
------------ ---------- ------------ ----------
Total $ 70,486 100.0% $ 92,267 100.0%
============ ========== ============ ==========
Net Sales and Service Fees by Product Category
October 31,
---------------------------------------------------------
2002 2001
-------------------------- --------------------------
Continuing Products and Services
Computerized Machine Tools $ 52,056 73.9% $ 69,631 75.4%
Computer Control Systems and Software 3,194 4.5% 4,782 5.2%
Service Parts 7,240 10.3% 8,038 8.7%
Service Fees 3,240 4.6% 3,749 4.1%
------------ ---------- ------------ ---------
Total $ 65,730 93.3% $ 86,200 93.4%
Discontinued Products and Services 4,756 6.7% 6,067 6.6%
------------ ---------- ------------ ----------
Total $ 70,486 100.0% $ 92,267 100.0%
============ ========== ============ ==========
Our total sales and service fees were $70.5 million in fiscal 2002, a $21.8
million, or 24%, decline compared to fiscal 2001. Sales of computerized machine
tools (other than discontinued products) declined $17.6 million, or 25%,
compared to fiscal 2001, reflecting the continuing global weakness in industrial
equipment spending and reduced consumption of machine tools by many
manufacturing companies, with the decline comprising $6.8 million, $10.1 million
and $671,000 in the United States, Europe and Southeast Asia, respectively.
Non-machine tool revenues also declined due to reduced activity levels in our
market sectors, with the decline being most pronounced in the U.S.
The following table sets forth machine unit volume and average net selling price
for computerized machine tools by continuing and discontinued products:
Computerized Machine Tools - Units Sold 2002 2001
----------------- ---------------
Continuing Products 697 88.9% 942 92.4%
Discontinued Products 87 11.1% 77 7.6%
-------- ------- ------- ------
Total 784 100.0% 1,019 100.0%
Average Net Selling Price - Per Unit (in thousands) 2002 2001
--------- -----------
Continuing Products $ 74.7 $ 73.9
Discontinued Products $ 39.6 $ 47.5
Total $ 70.8 $ 71.9
The average net selling price per machine units of continuing products increased
due to the effect of stronger European currencies when translating foreign sales
for financial reporting purposes which more than offset the effect of increased
discounting due to weak market conditions.
New order bookings for continuing products in fiscal 2002 were $62.2 million
compared to $83.3 million in fiscal 2001, a 25% decline. New orders for
computerized machine tools (other than discontinued products) declined 27% in
U.S. dollars worldwide. The decline, which was experienced in all of our
geographic markets, reflected a sharp decrease in orders for vertical machining
centers, our primary product line. Backlog was $5.3 million at October 31, 2002,
compared to $9.1 million at October 31, 2001.
Gross margin for fiscal 2002, exclusive of inventory write-downs recorded in
cost of sales, declined to 23.2%, from 25.2% in fiscal 2001, due to the decline
in our sales of vertical machining centers and our sale of approximately $4.8
million in discontinued products at discounted prices. Gross margin did improve
in the last three quarters of fiscal 2002 compared to the immediately preceding
quarter, although the improvement was due primarily to the cost reductions
implemented over the preceding eighteen months.
Selling, general and administrative expenses for fiscal 2002 of $19.7 million
were $4.4 million, or 18%, lower than those for fiscal 2001, due to our cost
reduction programs. We expect operating expenses to be lower in 2003 as we
experience a full year's benefit of cost reductions initiated in fiscal 2002.
Non-operating items consisted of interest expense of $634,000 in fiscal 2002,
which was $156,000, or 20%, lower than in fiscal 2001, primarily due to reduced
borrowings. License fee income and litigation settlement fees in fiscal 2002 and
2001 consisted of several licenses that were granted during the year. The
licensing program that resulted in these fees was effectively completed in the
first quarter of fiscal 2002 and we do not expect additional license fee income
in the foreseeable future. Earnings from equity investments are from our two
affiliates which are accounted for using the equity method. Other expense in
fiscal 2002 was not significant and in fiscal 2001, consisted primarily of the
costs of typhoon-related flood damage at our manufacturing facility in Taiwan.
The provision for income taxes is related to the earnings of two foreign
subsidiaries.
Fiscal 2001 Compared With Fiscal 2000
Net loss for the fiscal year ended October 31, 2001 was $1.6 million, or $.28
per share, on a diluted basis, compared to net income of $5.0 million, or $.84
per share, reported for the preceding year. The change in our year-to-year
results was due primarily to a significant decline in license fee income in
fiscal 2001 from that reported in fiscal 2000, and to a lesser extent, to a
decrease in sales.
The following tables set forth net sales by geographic region and product
category for the years ended October 31, 2001 and 2000 (in thousands):
Net Sales and Service Fees by Geographic Region
October 31,
---------------------------------------------------------
2001 2000
-------------------------- --------------------------
Americas $ 34,779 37.7% $ 44,607 46.4%
Europe 54,977 59.6% 46,129 47.9%
Asia Pacific 2,511 2.7% 5,468 5.7%
----------- ----------- ----------- -----------
Total $ 92,267 100.0% $ 96,204 100.0%
=========== =========== =========== ===========
Net Sales and Service Fees by Product Category
October 31,
----------------------------------------------------------
2001 2000
--------------------------- ---------------------------
Computerized Machine Tools $ 73,286 79.4% $ 71,708 74.5%
Computer Control Systems and Software 5,716 6.2% 9,605 10.0%
Service Parts 9,516 10.3% 10,649 11.1%
Service Fees 3,749 4.1% 4,242 4.4%
------------- ---------- ----------- -----------
Total $ 92,267 100.0% $ 96,204 100.0%
============= ========== =========== ===========
Sales and service fees were $92.3 million, for fiscal 2001, a decrease of 4.1%
from the $96.2 million reported for fiscal 2000. The decline in sales was due in
major part to the adverse effects of a stronger U.S. dollar when translating
foreign sales for financial reporting purposes, and by a decrease in domestic
sales. When measured at constant exchange rates, sales for fiscal 2001 would
have been essentially the same as 2000. Domestic sales in fiscal 2001 declined
by $9.8 million, or 22.0%, as a result of a slowing economy in most industrial
sectors that began near the end of the first fiscal quarter, while sales in
Europe increased $8.8 million in spite of the strong dollar. Sales in Southeast
Asia declined by $3.0 million, or 54.1%, due to weak economic conditions in that
area during fiscal 2001.
Net sales of computerized machine tools increased in fiscal 2001 by $4.8 million
compared to the prior year when measured in constant dollars but was offset by a
$3.5 million decline in sales of stand-alone control systems. Net sales of
computerized machine tools in the U.S. declined 17% for the full fiscal year
2001. In contrast, sales of computerized machine tools in Europe, measured in
constant dollars, increased 30% for the full year. Parts and service fee
revenues declined by $1.6 million, or 10.9%. The decrease was exclusively in the
United States and further reflects the weakening economic environment.
International sales, including export sales from the United States, approximated
64.3% of consolidated sales and service fees for fiscal 2001 compared to 57.5%
for fiscal 2000.
New order bookings for fiscal 2001 were $89.4 million, compared to $100.7
million for the prior year period, a decrease of 11.3%. Orders were $28.1
million in the first quarter of fiscal 2001 but declined to $21.1 million, $19.2
and $21.0 million during the second, third and fourth quarter, respectively. The
decline in orders from the first quarter was the result of weak economic
conditions in most industrial market sectors in the U.S. along with a softening
in the German economy. The decline in orders was most pronounced in the United
States where computerized machine tool orders declined 30.4% in dollars. This
was partially offset by a 19% increase in computerized machine tool orders in
Europe, measured in constant dollars. We experienced a further decline in orders
in the first quarter of fiscal 2002 reflecting the recessionary environment in
our primary markets. Backlog was $9.1 million at October 31, 2001, compared to
$10.2 million at October 31, 2000.
Gross profit margin declined in fiscal 2001 to 25.2% from 26.4% in fiscal 2000,
due primarily to the unfavorable effects of the stronger U.S. dollar.
Operating expenses increased 2.1% to $24.0 million in fiscal 2001 from $23.5
million in fiscal 2000, due primarily to increased costs for enhanced product
development activities associated with our next generation computer control
technology. The increased operating expense for the full fiscal year combined
with reduced sales and gross profit margins, resulted in an operating loss of
$921,000 for fiscal 2001 as compared to an operating profit of $1.5 million in
the prior year.
Restructuring expense of $143,000 in fiscal 2001 included a reversal of $328,000
primarily related to sub-letting space in a leased facility for which a reserve
was provided as part of a previous restructuring plan. In addition, a
restructuring charge of $471,000 was recorded for severance costs related to
reductions in our domestic operations. In fiscal 2000, we recorded a
restructuring charge of $300,000 for severance costs related to the termination
of employees at our Farmington Hills facility in connection with the
consolidation of this operation into our North American sales and service
business.
License fee income and litigation settlement fees in fiscal 2001 consisted of
several licenses that were granted during the year, while the substantial
license fees reported in fiscal 2000 were primarily the result of the settlement
of a long-standing patent infringement claim. The licensing program that
resulted in the license and litigation settlement fees has effectively been
completed and we do not expect significant license fees in fiscal 2002.
Other expense in fiscal 2001 was $215,000 compared to $395,000 in fiscal 2000
and consisted primarily of typhoon-related flood damage at our manufacturing
facility in Taiwan of which our insurers have denied coverage. Fiscal 2000 other
expense consisted primarily of realized and unrealized currency losses
associated with accounts receivable denominated in foreign currencies, primarily
those linked to the Euro, which for the most part, were not hedged during fiscal
2000. In fiscal 2001, these accounts receivable were fully hedged.
The provision for foreign income tax in both fiscal 2001 and fiscal 2000
consists mostly of income tax expense related to the earnings of our foreign
subsidiaries.
Foreign Currency Risk Management
We manage our foreign currency exposure through the use of foreign currency
forward exchange contracts (see the discussion following Item 7a). We enter into
foreign currency forward exchange contracts periodically to hedge certain
forecasted inter-company sales and forecasted inter-company and third party
purchases denominated in foreign currencies (primarily the Pound Sterling, Euro
and New Taiwan Dollar). We also enter into foreign currency forward exchange
contracts to protect against the effects of foreign currency fluctuations on
receivables and payables denominated in foreign currencies. 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.
Liquidity and Capital Resources
At October 31, 2002, we had cash and cash equivalents of $4.4 million compared
to $3.5 million at October 31, 2001. Cash generated from operations totaled $6.2
million in fiscal 2002, compared to cash used by operations of $3.5 million in
fiscal 2001.
Working capital, excluding short-term debt, was $21.7 million at October 31,
2002, compared to $31.5 million at October 31, 2001. The decrease in working
capital is attributable to a decrease in inventory of $7.7 million and a
decrease in accounts receivable of $1.6 million. The decrease in inventory
related primarily to a planned reduction in vertical machining center units
along with the reduction of discontinued models that were sold off at discounted
prices. Accounts receivable decreased due to the reduction in sales combined
with improved collections.
Capital investments during the year consisted of normal expenditures for
software development projects and purchases of equipment. In addition, during
the fourth quarter of fiscal 2002, we purchased patented technology for $1.8
million that will be incorporated in our proprietary computer control system.
Cash used for investments was reduced by a $1.0 million resulting from repayment
of an investment as a result of the termination of certain agreements. We funded
these expenditures with cash flow from operations except for the acquisition of
the patented technology, which was financed by the seller. On October 24, 2002,
we issued a secured promissory note for $1,350,000 to the seller of the patented
technology as partial payment for the purchase. The note bears interest at 2.75%
per annum and is due in four equal installments of $337,500 on March 31, 2003,
June 30, 2003, July 31, 2003 and December 31, 2003.
As of October 31, 2002, we amended our domestic bank credit agreement, extending
the maturity date to December 15, 2003, reducing the bank's commitment to $7.0
million and revising some of the financial covenants. We must maintain a
tangible net worth, exclusive of Accumulated Other Comprehensive Income (as set
forth in our consolidated balance sheet), of not less than $32.3 million at
October 31, 2002, $30.0 million at January 31, 2003, April 30, 2003 and July 31,
2003 and $30.5 million at October 31, 2003. Our adjusted EBITDA, as defined, for
the twelve consecutive months then ending cannot be less than negative $2.15
million on October 31, 2002, negative $1.75 million on January 31, 2003,
negative $600,000 on April 30, 2003, positive $280,000 on July 31, 2003 and
positive $1.8 million on October 31, 2003. Other financial covenants were
extended unchanged to December 15, 2003. A facility fee of $50,000 previously
payable March 31, 2003 has been reduced to $35,000, payable June 30, 2003,
unless we have obtained a replacement financing arrangement by then. There were
no borrowings outstanding under this facility at October 31, 2002 and
outstanding letters of credit were $1.1 million.
On April 30, 2002, we obtained a $4.5 million first mortgage loan on our
Indianapolis corporate headquarters. The loan bears interest at a rate of 7?%
and matures in April 2009. We are required to make principal payments over the
seven-year term of the loan, based on a twenty-year amortization schedule. The
proceeds from the first mortgage loan were used to repay bank debt.
On January 8, 2002 we entered into a 3.0 million Euro credit facility with a
European bank, which matures November 30, 2003. Interest on the facility is
payable at 7.16% per annum or, at the Company's option, 1.75% above EURIBOR for
fixed rate borrowings. Although the facility is uncollaterlized, the bank
reserves the right to require collateral in the event of increased risk
evaluation. Borrowings outstanding under this facility at October 31, 2002 were
$2.5 million.
Total debt at October 31, 2002 was $8.9 million representing 24% of total
capitalization, compared to $12.0 million, or 25% of total capitalization, at
October 31, 2001. We were in compliance with all loan covenants and had unused
credit availability of $6.5 million at October 31, 2002.
Based on our business plan and financial projections for fiscal 2003, we believe
that cash flow from operations and borrowings available to us under our credit
facilities will be sufficient to meet our anticipated cash requirements in
fiscal 2003. Although we believe that the assumptions underlying our 2003
business plan are reasonable and achievable, there are risks related to further
declines in market demand and reduced sales in the U.S. and Europe and adverse
currency movements that could cause our actual results to differ from our
business plan. We are also currently in discussions with lenders to replace our
existing credit facility (expires December 2003) with a long-term credit
facility in conjunction with assessing our liquidity needs for fiscal 2004 and
beyond. While we believe we will be able to obtain a replacement facility under
acceptable terms, no such assurance can be given.
Contractual Obligations and Commitments
The following is a table of contractual obligations and commitments as of
October 31, 2002 (all amounts in thousands):
Payments Due by Period
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
----- ------ ----- -----
Long-Term Debt $8,885 $ 1,313 $ 3,437 $ 262 $3,873
Operating Leases 2,664 964 1,136 512 52
Letters of Credit 1,100 1,100 - - -
----------- ------------ ----------- ---------- -----------
Total $12,649 $ 3,377 $ 4,573 $ 774 $3,925
=========== ============ =========== ========== ===========
In addition to the contractual obligations and commitments disclosed above, we
also have a variety of other contractual agreements related to the procurement
of materials and services and other commitments. With respect to these
agreements, we are not subject to any contracts which commit us to material
non-cancelable commitments. While some of these contractual agreements are
long-term supply agreements, we are not committed under these agreements to
accept or pay for requirements which are not needed to meet production needs. We
have no material minimum purchase commitments or "take-or-pay" type agreements
or arrangements.
With respect to capital expenditures, we expect capital spending in fiscal 2003
to approximate $1.5 million.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting. Under SFAS 142, amortization of goodwill will cease and the goodwill
carrying values will be tested periodically for impairment. We are required to
adopt SFAS 142, effective November 1, 2002 for goodwill and intangible assets
acquired prior to July 1, 2001. Goodwill and intangible assets acquired after
June 30, 2001 were subject immediately to the goodwill non-amortization and
intangible provisions of this statement. We do not expect that the adoption of
this standard will have a material effect on the Consolidated Financial
Statements.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which is effective for the fiscal year beginning November 1, 2002. SFAS
144 establishes a single model to account for impairment of assets to be held or
disposed of, incorporating guidelines for accounting and disclosure of
discontinued operations. We do not expect that the adoption of this standard
will have a material effect on the Consolidated Financial Statements.
In July 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
Standard, which is effective for disposal activities initiated after December
31, 2002, addresses significant issues regarding the recognition, measurement
and reporting of costs associated with exit and disposal activities. We will
comply with the provisions of the Standard with respect to exit and disposal
activities initiated after the effective date, but do not expect adoption to
have any material impact on the Consolidated Financial Statements.
In November 2002, the Financial Accounting Standards Board ("FASB" or the
"Board") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements
of FASB Statement No. 5, Accounting for Contingencies, relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. The disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods that end after December 15, 2002.
However, the provisions for initial recognition and measurement are effective on
a prospective basis for guarantees that are issued or modified after December
31, 2002, irrespective of a guarantor's year-end. We do not expect the impact of
adopting the interpretation to have a material effect on the Consolidated
Financial Statements.
Critical Accounting Policies
Our accounting policies, including those described below, require management to
make significant estimates and assumptions using information available at the
time the estimates are made. Such estimates and assumptions significantly affect
various reported amounts of assets, liabilities, revenues and expenses. If our
future experience differs materially from these estimates and assumptions, our
results of operations and financial condition could be affected.
Revenue Recognition - We recognize product revenue at the time of shipment
because ownership and risk of loss passes to the customer at that time and
payment terms are fixed. Our computerized machine tools are general-purpose
computer controlled machine tools that are typically used in stand-alone
operations. Transfer of ownership and risk of loss are not contingent upon
contractual customer acceptance. Prior to shipment, we test each machine to
ensure the machine's compliance with standard operating specifications as listed
in our sales literature.
Depending upon geographic location, the machine installation at the end user may
be completed by a distributor, independent contractor or Hurco service
technician. In most instances where a machine is sold through a distributor, we
have no installation involvement. If sales are direct or through sales agents,
we will typically complete the machine installation. The machine installation
consists of the reassembly of certain parts that were removed for shipping and
the re-testing of the machine to ensure that it is performing with the standard
specifications. We consider the machine installation process inconsequential and
perfunctory.
Service fees from maintenance contracts are deferred and recognized in earnings
on a pro rata basis over the term of the contract. Sales related to software
products are recognized when shipped in conformity with American Institute of
Certified Public Accountants' Statement of Position 97-2 Software Revenue
Recognition.
Inventories - We must determine at each balance sheet date how much, if any, of
our inventory may ultimately prove to be unsaleable or unsaleable at its
carrying cost. Reserves are established to effectively adjust any such inventory
to net realizable value. To determine the appropriate level of valuation
reserves, we evaluate current stock levels in relation to historical and
expected patterns of demand for all of our products. Management evaluates the
need for changes to valuation reserves based on market conditions, competitive
offerings and other factors on a regular basis.
Deferred Tax Asset Valuation - As of October 31, 2002, we have deferred tax
assets of $5.3 million for which we have recorded a valuation allowance of 100%
resulting in zero net deferred tax asset on our balance sheet. These future tax
benefits relate primarily to net operating loss carryforwards in the United
States and certain foreign jurisdictions as well as Federal business tax credits
carried forward in the United States. Some of these carryforward benefits expire
at certain dates and utilization of certain others is limited to specific
amounts each year. Realization of those benefits is entirely dependent upon
generating sufficient future taxable earnings in the specific tax jurisdictions
before they expire. Due to the recent losses in the United States and the
applicable foreign tax jurisdictions, there is substantial uncertainty whether
these tax benefits can be utilized before they expire. Therefore, we have
established a full valuation allowance. The need for this allowance is reviewed
periodically, and if reduced in future periods, the associated tax benefits will
be recorded in future operations as a reduction of income tax expense.
Capitalized Software Development Costs - Costs incurred to develop new computer
software products and significant enhancements to software features of existing
products are capitalized as required by SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed", and amortized
over the estimated product life of the related software. The determination as to
when in the product development cycle technological feasibility has been
established, and the expected product life, require judgments and estimates by
management and can be affected by technological developments, innovations by
competitors and changes in market conditions affecting demand. We capitalized
$534,000 in fiscal 2002, $665,000 in fiscal 2001 and $706,000 in fiscal
2000 related to software development projects. Also in fiscal 2002 we wrote off
$1.0 million of previously capitalized costs related to a discontinued product
line. At October 31, 2002 we have an asset of $1.6 million for capitalized
software development projects, a significant portion of which relates to
projects currently in process and subject to development risk and market
acceptance. We periodically review the carrying values of these assets and make
judgments as to ultimate realization considering the above mentioned risk
factors.
Derivative Financial Instruments - Critical aspects of our accounting policy for
derivative financial instruments include conditions which require that critical
terms of a hedging instrument are essentially the same as a hedged forecasted
transaction. Another important element of the policy demands that formal
documentation be maintained as required by the Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Failure to comply with these conditions would result in a
requirement to recognize changes in market value of hedge instruments in
earnings. We routinely monitor significant estimates, assumptions, and judgments
associated with derivative instruments, and compliance with formal documentation
requirements.
Stock Compensation - We apply the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation;
therefore, no compensation expense has been recognized for stock options as
options are granted at fair market value. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" provides an
alternative method of accounting for stock options based on an option-pricing
model, such as Black-Scholes. We have adopted the disclosure requirements of
SFAS No. 123. Information and assumptions regarding compensation expense under
the alternative method is provided in Note 8 to the Consolidated Financial
Statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Our earnings are affected by changes in interest expense on our outstanding
debt, all of which is subject to floating rates, either LIBOR or Prime. If
market interest rates on our outstanding variable rate borrowings were to have
increased by one percentage point (1%) (or 100 basis points) over the actual
rates paid in that year, interest expense would have increased by $90,000 in
fiscal 2002 and $110,000 in fiscal 2001. This sensitivity analysis assumes no
changes in other factors affecting our financial statements that might result
from changes in the economic environment which impact interest rates. Refer to
Note 4 of the Consolidated Financial Statements for a discussion of the interest
rates related to our current credit facilities. At October 31, 2002, outstanding
borrowings under our bank credit facilities were $2.5 million and our total
indebtedness was $8.9 million.
Foreign Currency Exchange Risk
In fiscal 2002, approximately 68% of our sales and service fees, including
export sales, were derived from foreign markets. All of our computerized machine
tools and computer control systems, as well as certain proprietary service
parts, are sourced by our U.S.-based engineering and manufacturing division and
re-invoiced to our foreign sales and service subsidiaries, primarily in their
functional currencies.
Our products are sourced from foreign suppliers or built to our specifications
by either our wholly-owned subsidiary in Taiwan, or overseas contract
manufacturers. These purchases are predominantly in foreign currencies and in
some cases our arrangements with these suppliers include foreign currency risk
sharing agreements, which reduce (but do not eliminate) the effects of currency
fluctuations on product costs. The predominant portion of our exchange rate risk
associated with product purchases relates to the New Taiwan Dollar.
We enter into foreign currency forward exchange contracts from time to time to
hedge the cash flow risk related to forecast inter-company sales, and forecast
inter-company and third party purchases denominated in, or based on, foreign
currencies. We also enter into foreign currency forward exchange contracts to
protect against the effects of foreign currency fluctuations on receivables and
payables denominated 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 or purchase of foreign currencies as of October
31, 2002 which are designated as cash flow hedges under SFAS No. 133 were as
follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
Forward in Foreign Forward Contract Ocotber 31, Maturity
Contracts Currency Rate Date 2002 Dates
--------- -------- ---- ------- ------- --------
Sale Contracts:
Euro 5,700,000 $ .9830 $5,603,100 $5,621,043 Nov 2002-March 2003
Sterling 600,000 $1.5421 $925,260 $935,697 Nov 2002-Feb 2003
Purchase Contracts:
New Taiwan Dollar 175,000,000 33.95* $5,154,639 $5,058,159 Nov 2002-Apr 2003
Forward contracts for the sale of foreign currencies as of October 31, 2002
which were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables denominated in foreign currencies were
as follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
Forward in Foreign Forward Contract October 31, Maturity
Contracts Currency Rate Date 2002 Dates
--------- -------- ---- ------- -------- ---------
Sale Contracts:
Euro 1,938,989 $ .9805 $1,901,179 $1,913,155 Nov 2002-Jan 2003
Singapore Dollar 1,525,337 $ .5644 $860,900 $862,494 Nov 2002 -Jan 2003
Sterling 742,830 $1.5491 $1,150,718 $1,158,640 Nov 2002-Jan2003
Purchase Contracts:
New Taiwan Dollar 50,000,000 34.63* $1,443,835 $1,442,658 Nov 2002
* NT Dollars per U.S. dollars
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Hurco Companies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 47 present fairly, in all material
respects, the financial position of Hurco Companies, Inc. and its subsidiaries
at October 31, 2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule for the year ended October 31, 2002 listed in the
index appearing under Item 15(a)(2) on page 47 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements and
financial statement schedule of Hurco Companies, Inc. as of October 31, 2001,
and for each of the two years in the period ended October 31, 2001, were audited
by other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements and
financial statement schedule in their report dated January 15, 2002.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 15, 2003
Report of Independent Public Accountants
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.
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, 2001 and 2000*,
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, 2001. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2001 and 2000*, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States.
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 part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in our audits 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,
January 15, 2002.
*The 2000 consolidated balance sheet is not required to be presented in the 2002
annual report.
** The schedule is listed in Item 15(a) 2 in the 2002 annual report.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
----------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands, except per share amounts)
Sales and service fees........................................ $ 70,486 $92,267 $96,204
Cost of sales and service..................................... 54,157 69,005 70,827
Cost of sales - restructuring................................. 1,083 -- --
--------- --------- ---------
Gross profit............................................. 15,246 23,262 25,377
Selling, general and administrative expenses.................. 19,658 24,040 23,538
Restructuring expense and other expense, net (Note 15)........ 2,755 143 300
--------- ---------- --------
Operating income (loss).................................. (7,167) (921) 1,539
Interest expense.............................................. 634 790 939
License fee income and litigation settlement fees, net
(Note 10 and 12)......................................... 163 723 5,365
Earnings from equity investments.............................. 25 383 36
Other expense, net............................................ 61 215 395
--------- --------- ----------
Income (loss) before income taxes........................ (7,674) (820) 5,606
Provision for income taxes (Note 6)........................... 589 777 571
--------- --------- --------
Net income (loss) ............................................ $ (8,263) $ (1,597) $ 5,035
========= ========== ========
Earnings (loss) per common share - basic...................... $ (1.48) $ (.28) $ .85
=========== ========== ========
Weighted average common shares outstanding - basic............ 5,583 5,670 5,952
=========== ========== ========
Earnings (loss) per common share - diluted.................... $ (1.48) $ (.28) $ .84
=========== ========== =========
Weighted average common shares outstanding - diluted.......... 5,583 5,670 6,020
=========== ========== =========
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31,
2002 2001
Current assets: (Dollars in thousands, except per share amounts)
Cash and cash equivalents..................................................... $ 4,358 $ 3,523
Accounts receivable, less allowance for doubtful accounts
of $689 in 2002 and $907 in 2001............................................. 13,425 14,436
Inventories .................................................................. 22,548 30,319
Other......................................................................... 1,204 1,232
--------- ---------
Total current assets........................................................ 41,535 49,510
Property and equipment:
Land.......................................................................... 761 761
Building...................................................................... 7,203 7,187
Machinery and equipment....................................................... 10,144 11,410
Leasehold improvements........................................................ 396 1,059
--------- ---------
18,504 20,417
Less accumulated depreciation and amortization................................ (9,696) (11,653)
-------- ---------
8,808 8,764
Software development costs, less accumulated amortization........................ 1,604 3,066
Investments and other assets..................................................... 5,205 4,877
--------- ---------
$ 57,152 $ 66,217
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 8,752 $ 7,601
Accounts payable-related parties.............................................. 1,104 2,335
Accrued expenses and other.................................................... 9,430 7,289
Accrued warranty expenses..................................................... 586 792
Current portion of long-term debt............................................. 1,313 200
--------- ---------
Total current liabilities................................................... 21,185 18,217
Non-current liabilities:
Long-term debt ............................................................... 7,572 11,800
Deferred credits and other ................................................... 378 732
--------- ---------
7,950 12,532
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Preferred stock: no par value per share; 1,000,000 shares
authorized; no shares issued................................................ -- --
Common stock: no par value; $.10 stated value per share; 12,500,000
shares authorized; 5,583,158 and 5,580,658 shares issued and
outstanding in 2002 and 2001, respectively.................................. 558 558
Additional paid-in capital.................................................... 44,717 44,714
Accumulated deficit........................................................... (10,173) (1,910)
Accumulated other comprehensive income (loss)................................. (7,085) (7,894)
---------- ----------
Total shareholders' equity.................................................. 28,017 35,468
--------- ---------
$ 57,152 $ 66,217
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
2002 2001 2000
Cash flows from operating activities: (Dollars in thousands)
Net income (loss)....................................................... $ (8,263) $(1,597) $5,035
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Provision for doubtful accounts....................................... 133 547 185
Equity in income of affiliates........................................ (25) (383) (36)
Depreciation and amortization......................................... 1,929 2,196 2,519
Restructuring charge (credit) ........................................ 2,250 (195) 300
Change in assets/liabilities
(Increase) decrease in accounts receivable........................... 1,615 3,113 (2,286)
(Increase) decrease in inventories................................... 7,720 (4,018) 2,717
Increase (decrease) in accounts payable.............................. (141) (3,521) 2,917
Increase (decrease) in accrued expenses.............................. 1,228 558 1,023
Other................................................................ (245) (182) 476
---------- -------- --------
Net cash provided by (used for) operating activities.............. 6,201 (3,482) 12,850
--------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment............................ 154 38 36
Purchase of property and equipment...................................... (1,184) (1,253) (1,193)
Software development costs.............................................. (534) (665) (706)
Purchase of intellectual property....................................... (500) -- --
Other proceeds (investments)............................................ 1,037 (829) (138)
-------- --------- --------
Net cash (used for) investing activities.......................... (1,027) (2,709) (2,001)
-------- --------- --------
Cash flows from financing activities:
Advances on bank credit facilities...................................... 28,369 44,300 28,500
Repayments of bank credit facilities.................................... (37,251) (34,050) (37,150)
Repayments of term debt................................................. (200) (1,986) (1,786)
Proceeds from first mortgage............................................ 4,500 -- --
Repayment of first mortgage............................................. (39) -- --
Proceeds from exercise of common stock options.......................... 4 35 8
Purchase of common stock................................................ -- (1,706) --
--------- --------- --------
Net cash provided by (used for) financing activities.............. (4,617) 6,593 (10,428)
-------- -------- --------
Effect of exchange rate changes on cash.................................... 278 (263) (532)
-------- --------- --------
Net increase (decrease) in cash................................... 835 139 (111)
Cash and cash equivalents at beginning of year............................. 3,523 3,384 3,495
-------- -------- ---------
Cash and cash equivalents at end of year................................... $4,358 $3,523 $ 3,384
========= ======== ========
Supplemental disclosures:
Cash paid for:
Interest............................................................. $ 519 $ 682 $ 834
Income taxes......................................................... $ 442 $ 501 $ 739
Supplemental schedule of noncash investing and financial activities:
We purchased patented technology for $1.85 million. In connection therewith we
issued a secured promissory note for $1.35 million.
Fair value of asset acquired...................................... $ 1,850
Cash paid.................................................... 500
---------
Promissory note issued............................................ $ 1,350
=========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
Common Stock Additional Comprehensive
Shares Issued Paid-In Accumulated Income
& Outstanding Amount Capital Deficit (Loss) Total
(Dollars in thousands)
Balances, October 31, 1999........................... 5,951,859 $ 595 $46,340 $(5,348) $(5,439) $36,148
---------- ------ ------- -------- --------- --------
Net income........................................... -- -- -- 5,035 -- 5,035
Translation of foreign currency financial
statements........................................ -- -- -- -- (2,300) (2,300)
-------
Comprehensive Income................................. 2,735
Exercise of common stock options..................... 3,500 1 7 -- -- 8
--------- ------- ------- --------- ----------- ------
Balances, October 31, 2000........................... 5,955,359 $ 596 $ 46,347 $(313) $(7,739) $38,891
========= ======= ========= ====== ======== =======
Net loss............................................. -- -- -- (1,597) -- (1,597)
Translation of foreign currency financial
statements........................................ -- -- -- -- 315 315
Unrealized loss of derivative instruments............ -- -- -- -- (470) (470)
------
Comprehensive loss................................... (1,752)
Exercise of common stock options..................... 16,400 1 34 -- -- 35
Repurchase of common stock........................... (391,101) (39) (1,667) -- -- (1,706)
--------- ---- ------- ---------- ------ -----
Balances, October 31, 2001.............................. 5,580,658 $558 $44,714 $(1,910) $(7,894) $35,468
========= ======= ========= ======== ======== =======
Net income loss...................................... -- -- -- (8,263) -- (8,263)
Translation of foreign currency financial
statements........................................ -- -- -- -- 981 981
Unrealized loss of derivative instruments............ -- -- -- -- (172) (172)
------
Comprehensive loss................................... (7,454)
Exercise of common stock options........... 2,500 -- 3 -- -- 3
------- ------ ----- ---------- -------- ------
Balances, October 31, 2002.............................. 5,583,158 $ 558 $ 44,717 $(10,173) $(7,085) $28,017
========= ======= ========= ======== ====== ======
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. We have a 35% and 24% ownership interest in two
affiliates accounted for using the equity method. Our combined investments are
approximately $1.6 million and 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. Cumulative foreign currency translation adjustments of $6.4 million are
included in Accumulated Other Comprehensive Income in shareholders' equity.
Foreign currency transaction gains and losses are recorded as income or expense
as incurred.
Hedging. On November 1, 2001, we adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In accordance with the provisions of SFAS No. 133, we recorded a
transition adjustment upon the adoption of the standard to recognize the
difference between the fair value of the derivative instruments recorded on the
balance sheet and the previous carrying amount of those derivatives. The effect
of this transition adjustment was insignificant and is reflected in the Other
Income (Expense) in the Condensed Consolidated Statement of Operations. We also
recorded a transition adjustment of approximately $129,000 in Accumulated Other
Comprehensive Income to recognize previously deferred net losses on derivatives
designated as cash flow hedges.
We enter into foreign currency forward exchange contracts periodically to hedge
certain forecasted inter-company sales and forecasted inter-company and third
party purchases denominated in foreign currencies (primarily the Pound Sterling,
Euro and New Taiwan Dollar). The purpose of these instruments is to mitigate the
risk that the U.S. Dollar net cash inflows and outflows resulting from sales and
purchases denominated in foreign currencies will be adversely affected by
changes in exchange rates. These forward contracts have been designated as cash
flow hedge instruments, and are recorded in the Consolidated Balance Sheet at
fair value in Other Current Assets and Accrued Liabilities and Other. Gains and
losses resulting from changes in the fair value of these hedge contracts are
deferred in Accumulated Other Comprehensive Income and recognized as an
adjustment to the related sale or purchase transaction in the period that the
transaction occurs. Net losses on cash flow hedge contracts which we
reclassified from Other Comprehensive Income to Cost of Sales in the fiscal
years ended October 31, 2002 and 2001 were $617,000, and $261,000, respectively.
At October 31, 2002 we had $645,000 of realized and unrealized losses related to
cash flow hedges deferred in Other Comprehensive Income, which we expect to
recognize in Cost of Sales within the next twelve months. Cash flow hedge
contracts mature at various dates through April 2003.
We also enter into foreign currency forward exchange contracts to protect
against the effects of foreign currency fluctuations on receivables and payables
denominated in foreign currencies. These derivative instruments are not
designated as hedges under SFAS 133 and as a result, changes in fair value are
reported currently as Other Income (Expense) in the Consolidated Statement of
Operations consistent with the transaction gain or (loss) on the related foreign
denominated receivable or payable. Such net
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
transaction gains and (losses) were $(209,000), ($50,000) and ($638,000) for the
years ended October 31, 2002, 2001, and 2000, respectively.
Inventories. Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out method.
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
Total depreciation expense for the year ended October 31, 2002, was
$1.1 million. Any impairment would be recognized based on an assessment of
future operations (including cash flows) to insure that assets are
appropriately valued.
Revenue Recognition. We recognize product revenue at the time of shipment
because ownership and risk of loss passes to the customer at that time and
payment terms are fixed. Our computerized machine tools are general-purpose
computer controlled machine tools that are typically used in stand-alone
operations. Transfer of ownership and risk of loss are not contingent upon
contractual customer acceptance. Prior to shipment, we test each machine to
ensure the machine's compliance with standard operating specifications as listed
in our sales literature.
Depending upon geographic location, the machine installation at the end user may
be completed by a distributor, independent contractor or Hurco service
technician. In most instances where a machine is sold through a distributor, we
have no installation involvement. If sales are direct or through sales agents,
we will typically complete the machine installation. The machine installation
consists of the reassembly of certain parts that were removed for shipping and
the re-testing of the machine to ensure that it is performing with the standard
specifications. We consider the machine installation process inconsequential and
perfunctory.
Service fees from maintenance contracts are deferred and recognized in earnings
on a pro rata basis over the term of the agreement. Sales related to software
products are recognized when shipped in conformity with American Institute of
Certified Public Accountants' Statement of Position 97-2 Software Revenue
Recognition.
License Fee Income, Net. From time to time, our wholly owned subsidiary, IMS
Technology, Inc. (IMS) enters into agreements for the licensing of its
interactive computer control 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 were recognized in income, net
of legal fees and expenses, if any, over the life of the licensed patent, which
expired in October 2001. As a result, we have no deferred license fee income at
October 31, 2002 and do not expect any significant license fee income in the
foreseeable future.
Product Warranty. Expected future product warranty expense is recorded when the
product is sold.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Research and Development Costs. The costs associated with research and
development programs for new products and significant product improvements are
expensed as incurred and are included in Selling, General and Administrative
expenses. Research and development expenses totaled $2.4 million, $3.5 million
and $3.2 million in fiscal 2002, 2001, and 2000, respectively.
Costs incurred to develop computer software products and significant
enhancements to software features of existing products to be sold or otherwise
marketed are capitalized, after technological feasibility is established.
Software development costs are amortized to Cost of Sales on a straight-line
basis over the estimated product life of the related software, which ranges from
three to five years. We capitalized $534,000 in 2002, $665,000 in 2001 and
$706,000 in 2000 related to software development projects. Amortization expense
was $719,000, $925,000, and $1.3 million for the years ended October 31, 2002,
2001, and 2000, respectively. Any impairment could be recognized based on an
assessment of future operations (including cash flows) to insure that assets are
appropriately valued.
Earnings Per Share. Basic and diluted earnings per common share are based on the
weighted average number of our shares of common stock outstanding. Diluted
earnings per common share give effect to outstanding stock options using the
treasury method. The impact of 12,000 potentially issuable shares for the year
ended October 31, 2002 was excluded from the computation of diluted earnings per
share because their effect would be anti-dilutive.
Income Taxes. We record income taxes under 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.
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 control systems and software
and computerized machine tools for sale through our own distribution system to
the worldwide machine tool industry.
The end market for our products consists primarily of precision tool, die and
mold manufacturers, independent job shops and specialized short-run production
applications within large manufacturing operations. Industries served include:
aerospace, defense, medical equipment, energy, transportation and computer
industries. Our products are sold through independent agents and distributors in
countries throughout North America, Europe and Asia. We also maintain direct
sales operations in the United States, England, France, Germany, Italy 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. 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.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Manufacturing Risk. We contract with manufacturing contractors located in Taiwan
for the manufacture and assembly of computerized machine tool systems, based on
our designs and/or specifications. Any interruption from these sources would
restrict the availability of our computerized machine tool systems and would
affect operating results adversely.
3. INVENTORIES
Inventories as of October 31, 2002 and 2001 are summarized below (in thousands):
2002 2001
---------- ----------
Purchased parts and sub-assemblies.... $ 6,677 $ 7,853
Work-in-process....................... 2,251 1,256
Finished goods........................ 13,620 21,210
--------- ------
$ 22,548 $ 30,319
========= ======
4. DEBT AGREEMENTS
Long-term debt as of October 31, 2002 and 2001, consisted of (in thousands):
2002 2001
-------- --------
Domestic bank revolving credit facility...................................... $ -- $ 11,200
European bank credit facility................................................ 2,475 --
First Mortgage............................................................... 4,460 --
Installment Promissory Note.................................................. 1,350 --
Economic Development Revenue Bonds, Series 1990.............................. 600 800
--------- ---------
8,885 12,000
Less current portion......................................................... 1,313 200
--------- ---------
$ 7,572 $ 11,800
========= =========
As of October 31, 2002, long-term debt was payable as follows (in thousands):
Fiscal 2003........................................ $ 1,313
Fiscal 2004........................................ 3,120
Fiscal 2005........................................ 317
Fiscal 2006........................................ 126
Fiscal 2007 ....................................... 136
Thereafter....................................... 3,873
-------------
$ 8,885
Domestic Bank Credit Facility. As of October 31, 2002 and 2001, we had $1.1
million and $2.1 million, respectively, of outstanding letters of credit issued
to non-U.S. suppliers for inventory purchase commitments. As of October 31,
2002, we had unutilized credit facilities of $6.5 million available for either
direct borrowings or commercial letters of credit.
Interest on the bank credit facility was payable at rates ranging from 4.28% to
5.25% at October 31, 2002 and from 3.5% to 5.5% at October 21, 2001.
As of October 31, 2002, our domestic bank credit agreement was amended,
extending the maturity date to December 15, 2003 and reducing the bank's
commitment to $7.0 million. Interest on all outstanding borrowings is payable at
Libor, plus an applicable Eurodollar rate margin, or at our option, prime rate
plus a specified margin, as follows:
Libor margin Prime margin
----------------- -------------------
----------------- -------------------
November 1, 2002 - June 30, 2003 3.5% 1.5%
June 30, 2003 - December 15, 2003 4.0% 2.0%
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Our domestic credit agreement requires that we maintain a tangible net worth,
exclusive of Accumulated Other Comprehensive Income (as set forth in our
consolidated balance sheet), of not less than $32.3 million at October 31, 2002,
$30.0 million at January 31, 2003, April 30, 2003 and July 31, 2003 and $30.5
million at October 31, 2003. Our adjusted EBITDA , as defined, for the twelve
consecutive months then ending cannot be less than negative $2.15 million on
October 31, 2002, negative $1.75 million on January 31, 2003, negative $600,000
on April 30, 2003, positive $280,000 on July 31, 2003 and positive $1.8 million
on October 31, 2003. Other financial covenants were extended unchanged to
December 15, 2003. A facility fee of $50,000 previously payable March 31, 2003
has been reduced to $35,000, payable June 30, 2003, unless we have obtained a
replacement financing arrangement by then. The credit agreement provides the
lender with a security interest in substantially all domestic assets and 67% of
the common stock of our U.S. holding companies, which own our foreign
subsidiaries. At October 31, 2002, our ability to repurchase shares of our
common stock and pay cash dividends were restricted under the bank credit
agreement. We were in compliance with all loan covenants at October 31, 2002. We
are currently in discussion with other lenders for a long-term domestic credit
facility, and while we believe that we will be able to obtain a replacement
facility in fiscal 2003 under acceptable terms, no such assurance can be given.
Promissory Note. On October 24, 2002, we issued a secured promissory note for
$1,350,000 to the seller of patented technology that we purchased. The note
bears interest at 2.75% per annum and is due in four equal installments of
$337,500 on March 31, 2003, June 30, 2003, July 31, 2003 and December 31, 2003.
First Mortgage. On April 30, 2002, we obtained a $4.5 million first mortgage
loan on our Indianapolis corporate headquarters. The loan bears interest at a
rate of 7?% and matures in April 2009. We are required to make principal
payments over the seven-year term of the loan, based on a twenty-year
amortization schedule. The proceeds from the first mortgage loan, together with
other available cash, were used to repay bank debt.
European Bank Credit Facility. On January 8, 2002 we entered into a 3.0 million
Euro credit facility with a European bank, which currently matures November 30,
2003. Interest on the facility is payable at 7.16% per annum or, at the
Company's option, 1.75% above EURIBOR for fixed rate borrowings. Although the
facility is uncollateralized, the bank reserves the right to require
collateralin the event of increased risk evaluation. Borrowings outstanding
under this facility at October 31, 2002 were $2.5 million.
Economic Development Revenue Bonds. The Economic Development Revenue Bonds are
payable in three remaining equal annual installments due on September 1, 2003
thru 2005 and are secured by a letter of credit issued by our domestic bank.
Interest rates on the bonds adjust weekly and, as of October 31, 2002 and 2001,
interest was accruing at a rate of 2.10% and 2.40%, respectively.
5. FINANCIAL INSTRUMENTS
The carrying amounts for trade receivables and payables approximate their fair
values. At October 31, 2002, the carrying amounts and fair values of our
financial instruments, which include bank revolving credit facilities, senior
notes and Economic Development Revenue Bonds, are not materially different. The
fair value of long-term debt, including the current portion, is estimated based
on quoted market prices for similar issues or on current rates offered to us for
debt of the similar terms and maturities.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
We also have 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 of these contracts was
$17.0 million at October 31, 2002. The net fair value of these derivative
instruments recorded in accrued expenses at October 31, 2002 was $147,000.
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. We do not consider
either the risk of counterparty non-performance or the economic consequences of
counterparty non-performance as material risks.
6. INCOME TAXES
Deferred income taxes reflect the effect of temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets and
liabilities for financial reporting purposes. Deferred income taxes also reflect
the value of net operating losses and an offsetting valuation allowance. Our
total deferred tax assets and corresponding valuation allowance at October 31,
2002 and 2001, consisted of the following (in thousands):
October 31,
2002 2001
---- ----
Tax effects of future tax deductible items related to:
Accrued inventory reserves................................................. $ 623 $ 758
Accrued warranty expenses.................................................. 121 211
Deferred compensation ..................................................... 213 359
Other accrued expenses..................................................... 521 669
--------- ------
Total deferred tax assets.............................................. 1,478 1,997
--------- -------
Tax effects of future taxable differences related to:
Accelerated tax deduction and other tax over book
deductions related to property, equipment and software................... (968) (1,422)
Other...................................................................... (698) (669)
-------- ---------
Total deferred tax liabilities........................................... (1,666) (2,091)
-------- -------
Net tax effects of temporary differences................................. (188) (94)
--------- ----------
Tax effects of carryforward benefits:
U.S. federal net operating loss carryforwards, expiring 2022............... 2,745 1,182
Foreign tax benefit carryforwards, expiring 2003-2007...................... 326 296
Foreign tax benefit carryforwards, with no expiration...................... 1,435 852
U.S. federal general business tax credits,
expiring 2004-2012....................................................... 1,017 828
U.S. Alternative Minimum Tax Credit with no expiration..................... -- 426
--------- ---------
Tax effects of carryforwards .......................................... 5,523 3,584
--------- ---------
Tax effects of temporary differences and carryforwards, net............ 5,335 3,490
Less valuation allowance............................................... (5,335) (3,064)
------- ------
Net deferred tax asset................................................. $ -- $ 426
========= =========
Except as indicated above, our carryforwards expire at specific future dates and
utilization of certain carryforwards is limited to specific amounts each year
and further limitations may be imposed if an "ownership change" would occur.
Realization is entirely dependent upon generating sufficient future earnings in
specific tax jurisdictions prior to the expiration of the loss carryforwards.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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. 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.
Income (loss) before income taxes (in thousands): Year Ended October 31,
----------------------
2002 2001 2000
---------- --------- -----------
Domestic............................................... $ (7,238) $ (2,980) $ 5,459
Foreign................................................ (436) 2,160 147
-------- ---------- ---------
$ (7,674) $ (820) $ 5,606
========= ========== =========
Differences between the effective tax rate and
U.S. federal income tax rate were (in thousands):
Tax at U.S. statutory rate.................................... $ (2,686) $ (287) $ 1,962
Federal tax................................................... (95) 95 --
Foreign withholding taxes..................................... -- -- 19
German tax settlement (Note 10)............................... -- -- 275
Effect of tax rates of international jurisdictions
in excess of U.S. statutory rates........................... 97 155 39
State income taxes............................................ (6) -- 46
Effect of losses without current year benefit................. 3,279 1,043 --
Utilization of net operating loss carryforwards............... -- (229) (1,770)
-------- --------- ---------
Provision for income taxes.................................... $ 589 $ 777 $ 571
======== ========= =========
Foreign withholding taxes are the result of foreign dividends received during
2000. Our provision for income taxes in fiscal 2002, 2001 and 2000 represents
taxes currently payable.
We have not provided any U.S. income taxes on the undistributed earnings of our
foreign subsidiaries or equity method investments based upon our determination
that such earnings will be indefinitely reinvested.
7. EMPLOYEE BENEFITS
We have defined contribution plans that include a majority of our employees
worldwide, under which our contributions are discretionary. The purpose of these
plans is generally to provide additional financial security during retirement by
providing employees with an incentive to save throughout their employment. Our
contributions to the plans are based on employee contributions or compensation.
Our contributions totaled $263,640, $344,811, and $321,422 for the years ended
October 31, 2002, 2001 and 2000, respectively.
We also have split-dollar life insurance agreements with our executive 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
values 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. The 1997 Plan was amended in fiscal 2000 to increase the number of
shares of common stock that may be issued from 500,000 to 750,000 and to
increase the maximum number of shares of common stock that may be granted to any
individual during the term of the 1997 Plan from 100,000 to 200,000 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 at the time of grant. The
option price of options intended to qualify as incentive stock options 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, 2002, options to purchase 663,000 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 could be issued under options and related rights, was 500,000. There was
no annual limit on the number of such shares with respect to which options and
rights could be granted. Options granted under the 1990 Plan are exercisable for
a period up to ten years after date of grant and vested in equal installments
over a period of three to five years from the date of grant. The option price
could 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 could 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, 2002, 2001 and 2000 and the related activity for the year is as
follows:
Shares under Weighted average exercise
Balance October 31, 1999 671,680 $5.07
Granted 180,600 3.76
Cancelled (22,120) 6.15
Expired - -
Exercised (3,500) 2.13
- ----------------------------------------------- -------------------- ----------------------------
Balance October 31, 2000 826,660 $4.77
Granted 57,000 3.67
Cancelled (82,000) 5.23
Expired (20,000) 7.15
Exercised (16,400) 2.14
- ----------------------------------------------- -------------------- ----------------------------
Balance October 31, 2001 765,260 4.63
Granted 342,000 2.14
Cancelled (266,900) 4.18
Expired (7,700) 2.13
Exercised (2,500) 2.13
- ----------------------------------------------- -------------------- ----------------------------
Balance October 31, 2002 830,160 3.78
=============================================== ==================== ============================
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock options outstanding and exercisable on October 31, 2002 are as follows:
Weighted average Weighted average remaining
Range of exercise prices Shares under exercise price per share contractual life in years
per share option
- --------------------------- ------------------ ------------------------- ------------------------------
- --------------------------- ------------------ ------------------------- ------------------------------
Outstanding
$2.125-5.125 596,660 $2.84 7.0
5.813-8.250 233,500 6.16 5.4
- --------------------------- ------------------ ------------------------- ------------------------------
- --------------------------- ------------------ ------------------------- ------------------------------
$2.125-8.250 830,160 $3.78 6.2
=========================== ================== ========================= ==============================
=========================== ================== ========================= ==============================
Exercisable
$2.125-5.125 331,567 $3.15 -
5.813-8.250 155,100 6.29 -
- --------------------------- ------------------ ------------------------- ------------------------------
- --------------------------- ------------------ ------------------------- ------------------------------
$2.125-8.250 486,667 $4.15 -
=========================== ================== ========================= ==============================
=========================== ================== ========================= ==============================
We apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees" (APB25), and related interpretations in accounting for the plans,
and, therefore, no compensation expense has been recognized for stock options
issued under the plans. For companies electing to continue the use of APB25,
SFAS No. 123 "Accounting for Stock-Based Compensation", requires pro forma
disclosures determined through the use of an option-pricing model as if the
provisions of SFAS No. 123 had been adopted.
The weighted average fair value at date of grant for options granted during
fiscal 2002, 2001, and 2000 was $1.43, $2.07, and $2.72 per share, respectively.
The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions:
2002 2001 2000
- ------------------------------------------- ---------- ------------ -----------
- ------------------------------------------- ---------- ------------ -----------
Expected dividend yield 0.00% 0.00% 0.00%
Expected volatility 53.71% 56.00% 56.33%
Risk-free interest rate 4.99% 5.18% 6.20%
Expected term in years 9.05 10 10
- ------------------------------------------ ---------- ------------ -----------
If we had adopted the provisions of SFAS No. 123, net income (loss) and earnings
(loss) per share would have been as follows:
2002 2001 2000
- ---------------------------------------------- -------- ------------ -----------
- ---------------------------------------------- -------- ------------- ----------
Net income (loss) (in thousands) ($8,628) ($1,928) $4,726
Earnings (loss) per share:
Basic ($1.55) ($.34) $.79
Diluted ($1.55) ($.34) $.79
- ---------------------------------------------- -------- ------------ -----------
As of October 31, 2002, there were outstanding non-qualified options that had
been granted outside of the 1990 and 1997 plans to current and former outside
members of the Board of Directors to purchase 50,000 and 75,000 shares at $5.13
and $5.81 per share, respectively. These shares are exercisable as of October
31, 2002. The options expire at various dates between 2002 and 2008.
9. RELATED PARTY TRANSACTIONS
We own approximately 24% of one of our Taiwanese-based contract manufacturers.
This investment of $504,054 is accounted for using the equity method and is
included in Other Assets on the Consolidated Balance Sheet. Purchases of product
from this contract manufacturer totaled $5.9 million, $12.2 million and $8.6
million for the years ended October 31, 2002, 2001 and 2000, respectively.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Trade payables to this contract manufacturer were $1.0 million at October 31,
2002, and $2.2 million at October 31, 2001. Trade receivables were $43,000 at
October 31, 2002.
As of October 31, 2002, we owned 35% of Hurco Automation, Ltd. (HAL), a Taiwan
based company. HAL's scope of activities includes the design, manufacture, sales
and distribution of industrial automation products, software systems and related
components, including control systems and components manufactured under contract
for sale exclusively to us. We are accounting for this investment using the
equity method. The investment of $1.1 million at October 31, 2002 is included in
Other Assets on the Consolidated Balance Sheet. Purchases of product from this
supplier amounted to $4.1 million, $4.1 million and $4.2 million in 2002, 2001
and 2000, respectively. Trade payables to HAL were $145,000 and $200,000 at
October 31, 2002 and 2001, respectively. Trade receivables from HAL were
$311,000 and $173,000 at October 31, 2002 and 2001, respectively.
Summary financial information for the two affiliates accounted for using the
equity method of accounting are as follows:
(000's) 2002 2001 2000
------------ ----------- ----------
------------ ----------- ----------
Net Sales $25,751 $42,691 $33,850
Gross Profit 4,296 7,305 6,303
Operating Income 130 2,047 2,179
Net Income 438 1,609 1,005
Current Assets $12,915 $14,345 $16,025
Non-current Assets 1,766 1,535 1,490
Current Liabilities 9,514 11,335 14,249
10. CONTINGENCIES AND LITIGATION
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. The scope and cost of the repairs alleged by the
lessor to be required evolved throughout fiscal 2002 as investigations and
negotiations proceeded, and currently approximate $2.0 million. We do not agree
with the amount of the lessor's claim and are vigorously contesting that claim.
Our liability could be reduced by statutory limitations or by a negotiated
settlement. Based upon facts presently available to us and the current status of
our negotiations with the lessor, our best estimate of our ultimate liability is
$1.1 million and we have established a reserve in that amount.
Hurco and its subsidiary IMS Technology, Inc. (IMS) have been parties to a
number of legal proceedings, which involved alleged infringement of a United
States interactive machining patent (the Patent) owned by IMS. All actions have
been settled through licensing arrangements or litigation settlements. On August
8, 2000, Hurco and IMS agreed to a settlement of the last major claim resulting
in a one-time payment to IMS. We reported license fee income and litigation
settlement fees, net of expenses, of approximately $5.4 million in the fourth
quarter of fiscal 2000 primarily resulting from this settlement.
In the fourth quarter of fiscal 2000, we paid approximately $275,000, to settle
a contested tax liability of our German subsidiary.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
We are involved in various other claims and lawsuits arising in the normal
course of business. We believe it is remote that any of these claims will have a
material adverse effect on our consolidated financial position or results of
operations.
11. OPERATING LEASES
We lease facilities, certain equipment and vehicles under operating leases that
expire at various dates through 2007. Future payments required under operating
leases as of October 31, 2002, are summarized as follows (in thousands):
2003................................................ $ 964
2004................................................ 701
2005................................................ 435
2006................................................ 256
2007................................................ 256
Thereafter.......................................... 52
-----------
Total............................................ $ 2,664
========
Rent expense for the years ended October 31, 2002, 2001, and 2000 was $1.8
million, $1.6 million and $1.7 million, respectively.
12. LICENSE FEE INCOME AND LITIGATION SETTLEMENT FEES, NET
License fee income and litigation settlement fees, net for fiscal 2002, 2001 and
2000 were attributable to agreements entered into by IMS, pursuant to which IMS
granted fully paid-up licenses of its interactive patents in exchange for cash
and other consideration. License fee payments received that were contingent upon
the continued validity of the patent were deferred and recognized over the life
of the patent, which expired in October 2001. As a result, we have no deferred
license fee income at October 31, 2002 and do not expect any significant license
fee income in the foreseeable future.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
13. QUARTERLY HIGHLIGHTS (Unaudited)
2002 (In thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service fees............................... $ 18,520 $ 14,995 $ 18,204 $ 18,767
Gross profit......................................... 4,003 1,883(a) 4,381 4,979
Gross profit margin percentage....................... 21.6% 12.6%(a) 24.1% 26.5%
Restructuring expense and other expense, net (Note 15) 356 1,395 -- 1,004
Selling, general and administrative expenses......... 5,214 4,535 4,672 5,237
Operating loss....................................... (1,567) (4,047) (291) (1,262)
Net loss............................................. (1,614) (4,211) (651) (1,760)
Loss per common share - basic........................ $ (.29) $ (.75) $ (.12) $ (.32)
Loss per common share - diluted...................... $ (.29) $ (.75) $ (.12) $ (.32)
2001 (In thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service fees...............................$ 25,933 $ 23,432 $ 21,678 $ 21,224
Gross profit......................................... 6,615 5,972 5,287 5,388
Gross profit margin percentage....................... 25.5% 25.5% 24.4% 25.4%
Restructuring expense and other expense, net (Note 15) -- (328) 395 76
Selling, general and administrative expenses......... 6,086 5,959 5,896 6,099(b)
Operating income (loss).............................. 529 341 (1,004) (787)
Net income .......................................... 567 323 (1,329) (1,158)
Earnings per common share - basic....................$ .10 $ .06 $ (.24) $ (.21)
Earnings per common share - diluted..................$ .10 $ .06 $ (.24) $ (.21)
a. Includes $1.1 million restructuring charge to inventory write-downs
related to under-performing product lines that were discontinued.
b. Includes $550,000 of fourth quarter adjustments related to write down
of product development assets no longer being used, increased
provisions for uncollectable accounts, reserves for termination of a
European sales agent, vacating a leased facility and a health insurance
claim.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. SEGMENT INFORMATION
We operate in a single segment: industrial automation equipment. We design and
produce interactive computer control systems and software and computerized
machine tools for sale through our own distribution network to the worldwide
metal working market. We also provide software options, control upgrades,
accessories and replacement parts for our products, as well as customer service
and training support.
Our computerized metal cutting machine tools are manufactured to our
specifications by manufacturing contractors in Taiwan including our wholly owned
subsidiary, Hurco Manufacturing Limited (HML). Our executive offices and
principal design, engineering, and manufacturing management operations are
headquartered in Indianapolis, Indiana. We sell our products through
approximately 346 independent agents and distributors in 35 countries throughout
North America, Europe and Asia. We also have our own direct sales and service
organizations in the United States, England, France, Germany, Italy and
Singapore. During fiscal 2002, no customer accounted for more than 5% of our
sales and service fees.
The following table sets forth the contribution of each of our product groups to
our total sales and service fees during each of the past three fiscal years (in
thousands):
Net Sales and Service Fees by Product Category
Year Ended October 31,
--------------------------------------------
2002 2001 2000
----------- ----------- -----------
Computerized Machine Tools ............... $ 55,503 $ 73,286 $ 71,708
Computer Control Systems 3,632 5,716 9,605
and Software * ..........................
Service Parts ................................... 8,111 9,516 10,649
Service Fees ................................... 3,240 3,749 4,242
----------- ----------- -----------
Total ....................................... $ 70,486 $ 92,267 $ 96,204
=========== =========== ===========
*Amounts shown do not include CNC systems sold as an integrated component of
computerized machine systems.
Revenues by geographic area, based on customer location, for each of the past
three fiscal years were (in thousands):
Year Ended October 31,
------------------------------------------
2002 2001 2000
------- ------- -------
United States........................................ $22,782 $32,935 $40,920
------- ------- -------
Germany.............................................. 22,863 28,452 23,654
United Kingdom....................................... 7,387 8,814 10,128
Other Europe......................................... 14,142 17,847 12,932
------ ------ ------
Total Europe....................................... 44,392 55,113 46,714
Asia and Other....................................... 3,312 4,219 8,570
------- -------- -------
Total Foreign...................................... 47,704 59,332 55,284
------- ------ ------
$70,486 $92,267 $96,204
======= ======= =======
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Long-lived assets by geographic area were (in thousands):
October 31,
2002 2001
---------- ----------
United States..................... $ 13,824 $ 14,725
Foreign countries................. 1,793 1,556
---------- ----------
. $ 15,617 $ 16,281
========= ========
15. RESTRUCTURING EXPENSE AND OTHER EXPENSE, NET
In the fourth quarter of fiscal 2000, we recorded a charge of $300,000 for
severance costs related to the termination of employees. Fourteen employees
received notice on October 31, 2000 that their positions were being eliminated
in fiscal 2001. All employee severance related to the October 31, 2000 reserve
has been paid.
Restructuring expense in fiscal 2001 included a reversal of a of $328,000
reserve for sub-letting the final year of the excess building space of a
subsidiary and finding alternative uses for a previously reserved asset. Also,
in fiscal 2001, a provision of $471,000 was recorded for severance costs related
to a domestic cost reduction program in which 59 positions were eliminated. All
employee severance related to the October 31, 2001 reserve has been paid.
During fiscal 2002, we discontinued several under-performing product lines, sold
the related assets and discontinued a software development project to enable us
to focus our resources and technology development on our core products, which
consist primarily of general purpose computerized machine tools for the metal
cutting industry (vertical machining centers) into which our proprietary
Ultimax(R) software and computer control systems have been fully integrated. As
a result of these actions, we recorded restructuring charges totaling $3.1
million consisting primarily of: (a) non-cash write downs of inventories of $1.1
million recorded in cost of sales and capitalized software development costs of
$1.0 million recorded as restructuring expense, and (b) severance costs of
$934,000, related to personnel reductions.
Also included in restructuring expense and other expense, net is a $1.1 million
provision for potential expenditures related to a disputed claim in the United
Kingdom, regarding a terminated facility lease (Note 10) and a $277,000 credit
due to a refund of software development fees resulting from the termination of a
software development agreement during the second fiscal quarter (Note 17).
The severance accrual of $264,000 at October 31, 2002 represents costs related
to employees that will be paid in future periods. The severance provision
represents 53 positions that have been eliminated or will be eliminated in
fiscal 2003. At October 31, 2002, 38 employees had been paid the full amount of
their severance while the remaining 15 employees will be paid at various times
through the second quarter of fiscal 2003.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Balance Provision Charges to Balance
Description 10/31/99 (Credit) Accrual 10/31/00
- -----------
------------- ------------- --------------- ------------
------------- ------------- --------------- ------------
Excess Building Capacity $ 286 $ -- $ -- $ 286
Equipment Leases 77 -- (23) 54
Severance Costs -- 300 -- 300
------------- ------------- --------------- ------------
------------- ------------- --------------- ------------
$ 363 $ 300 ($ 23) $ 640
============= ============= =============== ============
============= ============= =============== ============
Balance Provision Charges to Balance
Description 10/31/00 (Credit) Accrual 10/31/01
- -----------
------------- ------------- --------------- ------------
------------- ------------- --------------- ------------
Excess Building Capacity $ 286 ($ 286) $ -- $ --
Equipment Leases 54 (42) (12) --
Severance Costs 300 471 (637) 133
------------- ------------- --------------- ------------
------------- ------------- --------------- ------------
$ 640 $143 ($ 649) $ 133
============= ============= =============== ============
============= ============= =============== ============
Balance Provision Charges to Balance
Description 10/31/01 (Credit) Accrual 10/31/02
- -----------
------------- ------------- --------------- ------------
------------- --------------- ------------
Cost of sales - restructuring:
Inventory write-down $-- $1,083 $1,083 $ --
Restructuring expense:
Capitalized software development cost write-off -- 1,036 1,036 --
Severance costs 133 934 803 264
Other expense (credit):
Foreign lease termination liability (Note10) 51 1,062 -- 1,113
Termination of software development agreement
(Note 17) -- (277) (277) --
------------- ------------- --------------- ------------
------------- ------------- --------------- ------------
Total restructuring and other expense, net 184 2,755 1,562 1,377
------------- ------------- --------------- ------------
------------- ------------- --------------- ------------
Total $184 $3,838 $2,645 $1,377
============= ============= =============== ============
16. STOCK REPURCHASE
In fiscal 2001, we repurchased 391,101 shares of our common stock for
approximately $1.7 million of which 278,001 were purchased from a related party
for $1.2 million. The repurchase of shares is reflected as a reduction in common
stock.
17. SOFTWARE DEVELOPMENT AGREEMENTS AND LOAN AGREEMENT
During fiscal 2001, we entered into agreements with a private software company
to fund development costs related to the integration of patented, open
architecture technology into our computer control products. We agreed to fund an
aggregate of $405,000, over a fifteen-month period ending in July 2002 of which
$180,000 was paid and recorded as a research and development expense in fiscal
2001. We also agreed to fund a secured term loan payable in installments through
February 2002, of $1.0 million which is due April 1, 2003. In addition, the
company granted us warrants to purchase an equity interest, which were
exercisable on or before December 31, 2002, and 2003.
As of October 31, 2001, our combined investment in the secured loan and warrants
was $672,000, and is reflected in Investments and Other Assets in the
accompanying consolidated balance sheet.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During fiscal 2002, we terminated these agreements. In connection therewith, we
received repayment of our investment in a secured loan and warrants. We were
also reimbursed for software development fees previously paid and expensed,
resulting in a credit of $277,000 which is reflected in Restructuring Expense
and Other Expense. Neither party has any future obligations to the other under
the termination agreement.
We had an agreement with another private software company to fund $683,000 of
development costs, which was recorded as a research and development expense in
fiscal 2002 and fiscal 2001. In October 2002, we exercised an option to purchase
the core technology owned by the software company for $1.8 million which is
recorded in Investments and Other Assets at October 31, 2002. The core
technology consists of patented software-based computer control technology that
will be incorporated in our proprietary computer control system.
18. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting. Under SFAS 142, amortization of goodwill will cease and the goodwill
carrying values will be tested periodically for impairment. We are required to
adopt SFAS 142, effective November 1, 2002 for goodwill and intangible assets
acquired prior to July 1, 2001. Goodwill and intangible assets acquired after
June 30, 2001 were subject immediately to the goodwill non-amortization and
intangible provisions of this statement. We do not expect that the adoption of
this standard will have a material effect on the Consolidated Financial
Statements.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which is effective for the fiscal year beginning November 1, 2002. SFAS
144 establishes a single model to account for impairment of assets to be held or
disposed of, incorporating guidelines for accounting and disclosure of
discontinued operations. We do not expect that the adoption of this standard
will have a material effect on the Consolidated Financial Statements.
In July 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
Standard, which is effective for disposal activities initiated after December
31, 2002, addresses significant issues regarding the recognition, measurement
and reporting of costs associated with exit and disposal activities. We will
comply with the provisions of the Standard with respect to exit and disposal
activities initiated after the effective date, but do not expect adoption to
have any material impact on the Consolidated Financial Statements.
In November 2002, the Financial Accounting Standards Board ("FASB" or the
"Board") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and
107 and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the
requirements of FASB Statement No. 5, Accounting for Contingencies, relating to
the guarantor's accounting for, and disclosure of, the issuance of certain types
of guarantees. The disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods that end after December 15, 2002.
However, the provisions for initial recognition and measurement are effective on
a prospective basis for guarantees that are issued or modified after December
31, 2002, irrespective of a guarantor's year-end.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
We do not expect the impact of adopting the interpretation to have a material
effect on the Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not Applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference from
our definitive proxy statement for our 2003 annual meeting of shareholders
except that the information required by Item 10 regarding Executive Officers is
included herein under a separate caption at the end of Part I.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference from
the definitive proxy statement for our 2003 annual meeting of shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except for the information concerning equity compensation plans, the information
required by this item is hereby incorporated by reference from the definitive
proxy statement for our 2003 annual meeting of shareholders.
The following table gives information about our common stock that may be issued
upon the exercise of options, warrants and rights under all of our existing
equity compensation plans as of October 31, 2002, including the 1997 Stock
Option and Incentive Plan and the 1990 Stock Option Plan.
Number of securities
Number of remaining available
securities to be for future issuance
issued upon Weighted-average under equity
exercise of exercise price of compensation plans
outstanding outstanding (excluding securities
options, warrants options, warrants reflected in column
Plan Category and rights (a) (#) and rights (b) ($) (a)) (c) (#)
- -------------------------------------- --------------------- ------------------- -----------------------
- -------------------------------------- --------------------- ------------------- -----------------------
Equity compensation plans approved 830,160 $3.78 83,500
by security holders
Equity compensation plans not
approved by security holders 1 125,000 5.54 --
--------------------- ------------------- -----------------------
--------------------- ------------------- -----------------------
Total 955,160 $4.01 83,500
===================== =================== =======================
1 Represents non-qualified options granted to the Board of Directors in 1996 and 1998.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference from
the definitive proxy statement for our 2003 annual meeting of shareholders.
Item 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an evaluation
under the supervision and with participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, our management, including
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the evaluation date.
There were no significant changes in the internal controls or in other factors
that could significantly affect these controls subsequent to the evaluation
date.
PART IV
Item 15. 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..............................22 - 23
Consolidated Statements of Operations - years
ended October 31, 2002, 2001, and 2000 ....................... 24
Consolidated Balance Sheets - as of October 31, 2002 and 2001... 25
Consolidated Statements of Cash Flows - years
ended October 31, 2002, 2001, and 2000........................ 26
Consolidated Statements of Changes in Shareholders' Equity -
years ended October 31, 2002, 2001, and 2000.................. 27
Notes to Consolidated Financial Statements...................... 28
2. Financial Statement Schedule. The following financial statement
schedule is included in this Item.
Page
Schedule II - Valuation and Qualifying
Accounts and Reserves......................................... 48
All other financial statement schedules are omitted because they are not
applicable or the required information is included in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended October 31,
2002.
(c) Exhibits
Exhibits are filed with this Form 10-K or incorporated herein by reference
as listed on pages 49 and 50.
Item 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is hereby incorporated by reference from
the definitive proxy statement for our 2003 annual meeting of shareholders.
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended October 31, 2002, 2001, and 2000
(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, 2002 $ 907 $ 133 $ -- $ 350 1 $ 689
======== ======== ====== ======== ======
October 31, 2001 $ 741 $ 547 $ -- $ 381 2 $ 907
======== ======== ====== ======== ======
October 31, 2000 $ 687 $ 185 $ -- $ 131 3 $ 741
======== ======== ====== ======== ======
Accrued warranty expenses for the year ended:
October 31, 2002 $ 792 $ 672 $ -- $ 878 $ 586
======== ========= ======= ======= ======
October 31, 2001 $ 831 $ 661 $ -- $ 700 $ 792
======== ========= ======= ======= ======
October 31, 2000 $ 968 $ 430 $ -- $ 567 $ 831
======== ========= ======= ======= ======
1 Receivable write-offs of $359,000, net of cash recoveries on accounts
previously written off of $9,000. 2 Receivable write-offs of $384,000, net of
cash recoveries on accounts previously written off of $4,000. 3 Receivable
write-offs of $140,000, net of cash recoveries on accounts previously written
off of $9,000.
EXHIBITS INDEX
Exhibits Filed. The following exhibits are filed with this report:
- --------------
10.1 The Fourth Amendment to the Second Amended and Restated Credit
Agreement and Amendment to Reimbursement Agreement dated October 31,
2002 between the Registrant and Bank One, Indiana, N.A.
10.2 Promissory Note dated October 24, 2002 between the Registrant and
CIMplus, Inc.
11 Statement re: computation of per share earnings
21 Subsidiaries of the Registrant
23 Consent of Arthur Andersen LLP (omitted pursuant to Rule 437a of the
Securities Act of 1933)
23.2 Consent of PricewaterhouseCoopers LLP
99.1 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Financial Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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 Report
on Form 10-Q for the quarter ended July 31, 2000.
3.2 Amended and Restated By-Laws of the Registrant dated November 14,
2001, incorporated by reference to Exhibit 3.2 to the Registrant's
Report on Form 10-K for the year ended October 31, 2001.
10.3 Second Amended and Restated Credit Agreement and Amendment to
Reimbursement Agreement dated October 31, 2001 between the Registrant
and Bank One, Indiana, N.A. (incorporated by reference to Exhibit
10.2 to the Registrant's Report on Form 10-K for the year ended
October 31, 2001).
10.4 Fourth Amendment to European Facility dated October 31, 2001 between
the Registrant and Bank One, N.A. (incorporated by reference to
Exhibit 10.2 to the Registrant's Report on Form 10-K for the year
ended October 31, 2001).
10.5 Second Amendment to the Second Amended and Restated Credit Agreement
and Amendment to Reimbursement Agreement dated April 30, 2002 between
the Registrant and Bank One (incorporated by reference to Exhibit
10.1 to the Registrant's Report on Form 10-Q for the quarter ended
April 30, 2002).
10.6* 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 Report on Form 10-K for the year
ended October 31, 1993.
10.7* Employment Agreement between the Registrant and Roger J. Wolf dated
January 8, 1993, incorporated by reference to Exhibit 10.45 to the
Registrant's Report on Form 10-K for the year ended October 31, 1993.
10.8* Form of Director Non-qualified Stock Option Agreement between the
Registrant and Richard T. Niner, O. Curtis Noel and Charles E.
Mitchell Rentschler, incorporated by reference as Exhibit 10.4 to the
Registrant's Form 10-K for the year ended October 31, 1999.
10.9* 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.
10.10* 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.
10.11* 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.
10.12* Amended 1997 Stock Option and Incentive Plan, incorporated by
reference as Exhibit 10.1 to the Registrant's Report on Form 10-Q
for the quarter ended July 31, 2000.
10.13* Employment Agreement between the Registrant and James D. Fabris dated
November 18, 1997, incorporated by reference as Exhibit 10.15 to the
Registrant's Report on Form 10-Q for the quarter ended January 31,
1998.
10.14 Mortgage dated April 30, 2002 between the Registrant and American
Equity Investment Life Insurance Company incorporated by reference as
exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter
ended April 30, 2002.
10.15* Employment Agreement between the Registrant and Michael Doar dated
November 13, 2001 incorporated by reference as Exhibit 10.2 to the
Registrant's Report on Form 10-Q dated January 31, 2002
- ----------------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be listed by Item 601 of Regulation S-K.
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 16th day of January
2003.
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/ Michael Doar January 16, 2003
- --------------------------------------
Michael Doar, Director,
Chief Executive Officer
of Hurco Companies, Inc.
(Principal Executive Officer)
/s/ Roger J. Wolf January 16, 2003
- --------------------------------------
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
of Hurco Companies, Inc.
(Principal Financial Officer)
/s/ Stephen J. Alesia January 16, 2003
- ---------------------------------------
Stephen J. Alesia
Corporate Controller
of Hurco Companies, Inc.
(Principal Accounting Officer)
/s/ Robert W. Cruickshank January 16, 2003
- ------------------------------------------
Robert W. Cruickshank, Director
/s/ Richard T. Niner January 16, 2003
- --------------------------------------------
Richard T. Niner, Director
/s/ O. Curtis Noel January 16, 2003
- --------------------------------------------
O. Curtis Noel, Director
/s/ Charles E. M. Rentschler January 16, 2003
- --------------------------------------------
Charles E. M. Rentschler, Director
/s/ Gerald V. Roch January 16, 2003
- --------------------------------------------
Gerald V. Roch, Director
CERTIFICATIONS
I, Michael Doar, certify that:
1. I have reviewed this annual report on Form 10-K of Hurco Companies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of Hurco's board of directors (or persons performing
the equivalent functions):
a. All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
January 15, 2003
I, Roger J. Wolf, certify that:
1. I have reviewed this annual report on Form 10-K of Hurco Companies,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c. Presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of Hurco's board of directors (or persons performing
the equivalent functions):
d. All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
January 15, 2003
Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
Exhibit 11
Statement Re: Computation of Per Share Earnings
Three Months Ended Twelve Months Ended
October 31, October 31,
----------------------------------------------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------------------------------------------
(in thousands, except per share amount)
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
----------------------------------------------------------------------------------------
Net loss $(1,760) $(1,760) $ (1,158) $ (1,158) $ (8,263) $ (8,263) $ (1,597) $(1,597)
Weighted average shares
outstanding 5,583 5,583 5,581 5,581 5,583 5,583 5,670 5,670
Assumed issuances under
stock options plans -- -- -- -- -- -- -- --
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
5,583 5,583 5,581 5,581 5,583 5,583 5,670 5,670
Loss per common share $ (0.32) $ (0.32) $(0.21) $(0.21) $(1.48) $(1.48) $ (0.28) $ (0.28)
========================================================================================
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21
SUBSIDIARIES OF HURCO COMPANIES, INC.
Jurisdiction
Name of Incorporation
Hurco B.V. the Netherlands
Hurco Europe Limited United Kingdom
Hurco GmbH Federal Republic of Germany
Hurco Manufacturing Ltd. Taiwan R.O.C.
Hurco S.a.r.l. France
Hurco S.r.l. Italy
Hurco (S.E. Asia) Pte Ltd. Singapore
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
PricewaterhouseCoopers LLP
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-48204) of Hurco Companies, Inc. of our report
dated January, 15, 2003, relating to the financial statements and financial
statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 16, 2003
exhibit 99.1
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Hurco Companies, Inc., (the "Company")
on Form 10-K for the year ending October 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Michael Doar,
Chairman and Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
January 15, 2003
exhibit 99.2
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Hurco Companies, Inc., (the "Company")
on Form 10-K for the year ending October 31, 2002 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Roger J. Wolf,
Senior Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
January 15, 2003
- --------
* Pentium is a registered trademark of the Intel Corporation * Pentium is a
registered trademark of the Intel Corporation ** Windows is a registered
trademark of the Microsoft Corporation.