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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended October 31, 1997 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
_________ to _________.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1150732
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, No
Par Value
--------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of January 22, 1998 was $42,635,522.
The number of shares of the Registrant's common stock outstanding as of January
22, 1998 was 6,559,311.
DOCUMENTS INCORPORATED BY REFERENCE: None
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
PART I
Item 1. BUSINESS
(a) General Development of Business
Hurco Companies, Inc. (the Company) is an industrial automation company that
designs and produces interactive computer numerical control (CNC) systems and
software and interactive CNC-operated machine tool systems for sale through its
own distribution network to the worldwide machine tool consuming market. The
Company's proprietary CNC systems and related software products are either sold
as an integral component of machine tools marketed by the Company or sold
separately to machine tool end users and other machine tool manufacturers who
integrate them with their own products.
The Company pioneered the application of microprocessor technology and
conversational programming software to machine tool controls and, since its
founding in 1968, has been a leader in the introduction of interactive CNC
systems that automate manufacturing processes and improve productivity in
certain segments of the metalworking industry. The Company has concentrated on
designing "user-friendly" CNC systems that can be operated by both skilled and
unskilled machine tool operators and yet are capable of instructing a machine
tool to perform complex tasks. The combination of microprocessor technology and
patented interactive, conversational software in the Company's CNC systems
enables operators on the production floor to quickly and easily create a program
for machining or forming a particular part from a blueprint or electronic design
and immediately begin production of that part.
The Company's executive offices and principal design, engineering, assembly and
distribution facilities are located in Indianapolis, Indiana. Additional product
design, assembly and warehouse facilities are located in Farmington Hills,
Michigan; and sales, application engineering and service offices are located in
High Wycombe, England; Munich, Germany; Paris, France; and Singapore.
(b) Financial Information About Industry Segments
The Company operates in one business segment, which consists of CNC systems and
software and CNC-operated machine tools for cutting and forming metals.
(c) Narrative Description of Business
General
The manufacture of metal parts for industrial and consumer products primarily
involves two major processes: metal cutting and metal forming. These processes
are performed by machine tools. Metal cutting machine tools produce parts by
milling, drilling, turning and grinding of a solid block of metal. Metal forming
machine tools fabricate parts by shearing, punching, forming and bending flat
sheets of metal.
Approximately three-fourths of the world's machine tools are made for metal
cutting applications. The milling machine is one of the most common types of
metal cutting machines. Milling machines shape a part by moving a rotating
cutting tool, such as a drill, tap or mill, across a metal block. Although a
majority of the milling machines in current use are still manually operated, an
increasing number are now operated using CNC systems such as those produced by
the Company. CNC-operated milling machines automatically and precisely shape
parts by directing the movement of a cutting tool according to a program
specifically designed for the desired part. Some CNC-operated milling machines,
referred to as machining centers, are equipped with automatic tool changers that
allow several different cutting tools to be used in a programmed sequence on the
same part without having to remove the part from the machine.
Metal forming machines include press brakes, presses, shears and punches. The
press brake is the basic machine tool used to perform simple bending operations
on a wide variety of sheet metal to create parts such as computer cabinets, door
frames, aircraft components and electrical enclosures. Each press brake uses one
or more manual or automated gauge systems that determine where the bend will be
made in the sheet metal part. Automated press brakes utilize CNC systems such as
those produced by the Company.
The Company has pursued a strategy that is focused on developing and
distributing to the worldwide machine tool market a comprehensive line of
leading-edge interactive CNC products that incorporate proprietary technology
designed to enhance the user's productivity through ease of operation and
adaptability to a wide range of manufacturing applications. As part of this
strategy, the Company has adopted an open systems architecture that permits its
CNC systems and software to be used with a variety of hardware platforms and has
emphasized an "operator friendly" design that employs interactive
"conversational" software. The Company outsources all of its machine tool
manufacturing operations and a portion of its computer control manufacturing to
certain independent contract manufacturers and is concentrating its resources on
product research, development, design, marketing, distribution and service.
Products
The Company's principal products consist of CNC-operated machine tool systems
(milling machines and machining centers) into which the Company's proprietary
CNC systems have been fully-integrated as well as CNC systems and related
software for both metal cutting machine tools and metal forming press brakes.
The Company also produces and distributes software options control upgrades,
hardware accessories and replacement parts and provides operator training and
support services to its customers.
The following table sets forth the contribution of each of these product groups
to the Company's total revenues during each of the past three fiscal years:
Year Ended October 31
(Dollars in thousands) 1997 1996 1995
---- ---- ----
CNC-Operated Machine
Tool Systems............ $61,679 (64.4%) $65,518 (65.9%) $55,711 (62.2%)
CNC Systems and Software*.........18,801 (19.6%) 17,827 (17.9%) 19,027 (21.2%)
Service Parts......................9,612 (10.1%) 10,005 (10.0%) 9,073 (10.1%)
Service Fees.......................5,637 (5.9%) 6,001 (6.2%) 5,821 ( 6.5%)
-------------------------------------------------
$ 95,729(100.0%) $99,351(100.0%) $89,632(100.0%)
================== =============== ===============
* Amounts shown do not include CNC systems sold as an integrated component of
machine tool systems.
CNC-Operated Machine Tool Systems
The Company designs and markets complete stand-alone milling machines and
machining centers, each of which is equipped with a fully-integrated interactive
Ultimax system. All of these machines are built to the Company's specifications
by independent contract manufacturers. The Company's current line of machine
tools is a complete family of products with different levels of performance
features for different market applications and ranging in price from $39,000 to
$150,000. Two series of products are offered within the product line -- the
Advantage Series and the Performance Series -- each of which is marketed within
a distinct price range and includes machines of differing sizes and power
levels, ranging from a five-horsepower milling machine with an X-axis travel of
24 inches to a twenty-horsepower machining center with 50 inches of X-axis
travel.
The Advantage Series products are equipped with the "Single Screen" version of
the Ultimax CNC system and are intended for use by the independent contract
manufacturer requiring a low-cost product with basic capabilities. The
Performance Series products employ the same machine tool frame as the Advantage
Series, but feature the more advanced Ultimax twin screen CNC system and
software desired by the precision tool, die and mold market and parts
manufacturers, where fast programming of complex parts is a key to
competitiveness.
The Company's smaller machines -- those with an X-axis travel of 30 inches or
less -- have embodied the Company's proprietary machine tool design since their
introduction in 1994. In late fiscal 1996, the Company introduced two new
machining center models with an X-axis of 40 inches that incorporate the same
proprietary design features. The larger machines -- those with an X-axis travel
of 50 inches -- incorporate a machine tool platform developed by one of the
Company's contract manufacturers. During fiscal 1997, approximately 95% of the
machine tools sold by the Company embodied its proprietary design.
In the second fiscal quarter of 1998, the Company plans to introduce two
OEM-sourced milling machine products which will incorporate the Company's Single
Screen Ultimax CNC system. These machines will have an X axis travel of 30
inches and 40 inches, respectively, and will range in price from approximately
$35,000 to $45,000.
In the first quarter of fiscal 1998, the Company introduced several new products
which represent an expansion of the Company's strategy for the metal fabrication
market. These products include 3 models of an OEM-sourced press brake (bending
machine) and an OEM-sourced combination shear/press brake system, all of which
incorporate the Company's Autobend CNC system, and which will be sold to the
North American market through the Autobend Products division's distribution
network. The Company will also offer European precision-ground tooling which
will be sold either in conjunction with a press brake or directly to end-users
of press brakes. The tooling is sourced under an exclusive distribution
agreement with an Italian manufacturer.
CNC Systems and Software
The Company's CNC systems and software are marketed under the tradenames
Ultimax(R), UltiPath(TM), Delta (TM) and Autobend(R). The Ultimax(R),
UltiPath(TM) and Delta(TM) product lines are used to control metal cutting
machine tools.
Autobend(R) CNC systems are used to control metal forming press brakes.
o Ultimax
The Company's patented Ultimax twin screen "conversational" CNC system, which
incorporates an interactive and powerful "data block" programming methodology
supported by extensive geometric and process data calculation software tools,
enables a machine tool operator to create complex two-dimensional part programs
directly from blue print inspection. Machine operators with little or no
programming experience can successfully program parts and begin cutting
operations in a short time with minimum special training. Since the initial
introduction of the Ultimax CNC in 1984, the Company has added enhancements
related to operator programming productivity, CAD compatibility, data processing
throughput and motion control speed and accuracy. In 1994, the Company
introduced the latest generation of the Ultimax CNC, the Ultimax 3/486, and in
1997 began marketing a Pentium*-based version of the Ultimax CNC. By
incorporating Industry Standard Architecture (ISA) personal computer (PC)
platform components, this CNC product offers improved performance while ensuring
access to the most effective computing hardware and software technology.
In 1995, the Company introduced a software option that interprets part programs
written for the worldwide installed base of competitors' CNCs; this software
option, which provides industry standard data format compatibility, enables
end-users to use Hurco's Ultimax CNC to run part programs initially programmed
for a substantial portion of the large installed base of competitive CNCs and is
intended to increase the Company's access to the contract machining market. In
1995, the Company developed a lower-cost "Single Screen" version of the Ultimax
CNC to facilitate the penetration of the contract machining market. In late
fiscal 1996, the Single Screen Ultimax CNC was made available on the Company's
milling machines and machining centers. The Ultimax CNC system is sold primarily
as a fully-integrated feature of a Hurco milling machine or machining center.
o UltiPath
UltiPath is a new, simple, low-cost interactive PC-based CNC system that permits
conversational programming. This control product is intended for the 2-axis and
3-axis entry level machining market and enables skilled and unskilled machine
operators to convert manual machine operations to easy-to-use CNC parts
processing. The UltiPath CNC embodies the Company's patented interactive
machining technology and its recently-patented "Object Oriented" software design
methodology. The control utilizes the Windows 95** operating system as a key
component of its executive software. The UltiPath CNC was introduced in
September 1996 and became available for shipment in the fourth quarter of fiscal
1997. The product is marketed through the Company's distributors to end-users
and to CNC control integrators and retrofitters serving the large installed base
of manual milling machines.
o Delta Series
The Company's Delta series CNCs, which feature microprocessor-based electronics
incorporating ISA computer platform components to provide enhanced performance
at lower cost, are designed for the worldwide metalworking industry and are used
on milling machines, machining centers, turning centers and punching equipment.
The Delta CNC system is based on industry standard point-to-point programming
methodology but incorporates software features that group industry standard
commands into useful part features, such as circles and frames, to simplify
programming. The Delta CNCs are designed and configured as general purpose
products, which offer flexibility, reliability and ease of integration with a
wide variety of machine designs, and are marketed to original equipment
manufacturers and retrofitters of a wide range of machine tool systems.
* Pentium is a registered trademark of Intel Corporation.
** Windows 95 is a registered trademark of Microsoft Corporation.
In fiscal 1998, the Company plans to expand its product strategy to include
marketing 2-axis and 3-axis, OEM-sourced, milling and turning machines featuring
fully-integrated Delta CNC systems. These machines systems will be sold under
the DynaPath(TM) name through the Company's subsidiary, Autocon Technologies,
Inc.
o Autobend
Autobend CNC systems are applied to press brakes that form parts from sheet
metal and consist of a microprocessor-based CNC and backgauge. The Company has
manufactured and sold the Autobend product line since 1968. It currently markets
two models of its press brake CNC systems, in combination with six different
back gauges, through distributors to end-users as retrofit units for
installation on existing or new press brakes, as well as to original equipment
manufacturers and importers of press brakes. In fiscal 1998, the Autobend CNC
system will also be sold as a fully-integrated feature of a Hurco press brake
system.
o CAM and Software Products
In addition to its CNC product lines, the Company offers metal cutting and
forming software products for programming two and three dimensional parts. Its
primary products are the Ultimax PC and PC+, off-line programming systems, and a
computer aided design (CAD)-compatible DXF (data file translation) software
option. These products are marketed to users of both Ultimax and competitive CNC
systems. Significant features of the Ultimax PC and PC+ include a CNC-compatible
user interface, CAD compatibility and the availability of a configurable post
processor. The DXF software option eliminates manual data entry of part features
by transferring AutoCAD(TM) drawing files directly into an Ultimax CNC or the
off-line programming system software, substantially increasing operator
productivity. The Company has augmented its Autobend product line with a
computer-aided manufacturing (CAM) software product, AutoBend PC(R), that
enables the user to create and manipulate CNC compatible metal forming programs
on a personal computer. In fiscal 1996, the Company's Ultimax CNC was enhanced
with a software option that provides industry standard data format
compatibility.
In fiscal 1997, the Company introduced UltiPro(TM), a high-speed machining
software product for its Pentium-based Ultimax CNC platform. The UltiPro(TM)
software enables a customer to increase machining productivity through the
purchase of a new Hurco CNC machine system or by retrofitting and upgrading an
existing 486 PC-based Ultimax system with the Company's new Pentium platform and
the UltiPro(TM) software. In fiscal 1998, the Company expects to introduce
several new software products including UltiNet(TM), a networking product for
use by Hurco customers to transfer part design and manufacturing information to
CNC machine systems at high speeds and to network CNC machining systems within a
customer's manufacturing facility.
Parts and Service
The Company's service organization provides installation, operator training and
customer support for the Company's products. During 1996, the Company
transferred to its principal distributors primary responsibility for machine
installation and warranty service and support for new product sales. Although
installation and service costs are borne by the distributor, the Company offers
a greater price discount to those distributors providing such services. The
Company's own service organization continues to service and support the
installed base of discontinued models, and support its distributors with respect
to complex service operations. The Company also provides software options,
CNC upgrades, accessories and replacement parts for its products.
Among the options are software programs and additional CNC features
that allow a customer to upgrade the performance of its milling machines and
machining centers. The Company's after-sale parts and service business helps
strengthen customer relationships and provides continuous information concerning
the evolving requirements of end-users.
Marketing and Distribution
The end-users of the Company's products are thousands of precision tool, die and
mold manufacturers, independent metal parts manufacturers and specialized
production groups within large manufacturing corporations. Industries served
include aerospace, defense, medical equipment, energy, injection molding,
transportation and computer equipment.
The Company's integrated CNC-operated milling machines and machining centers,
along with software options and accessories, are sold primarily to end-users.
The Company sells its CNC systems and related products (i) to original equipment
manufacturers of new machine tools who integrate them with their own products
prior to the sale of those products to their own customers, (ii) to retrofitters
of used machine tools who integrate them with those machine tools as part of the
retrofitting operation and (iii) to end-users who have an installed base of
machine tools, either with or without related CNC systems. During fiscal 1997,
no single end-user of the Company's products accounted for more than 5% of its
total revenues.
Sales are made through over 250 independent agents and distributors in 46
countries throughout North America, Europe and Asia. The Company also has its
own direct sales personnel in the United States, England, France, Germany and
Singapore, which are considered to be among the world's principal machine tool
consuming countries. During fiscal 1997, no distributor accounted for more than
5% of total revenues. The Company has continuing agreements with each of its
distributors, but may terminate those agreements upon prior notice ranging from
30 days to 180 days. Approximately 80% of the worldwide demand for CNC-operated
machine tools and CNC systems comes from outside the U.S. and accordingly, the
Company considers its international market presence to be critical to its
operations.
The Company believes the demand for CNC systems and CNC-operated machine tools
is driven by changing industrial technology and the related need for process
improvements as well as capacity expansion. Factors affecting demand include:
(i) the declining supply of skilled machinists, (ii) the need to continuously
improve productivity and shorten cycle time, (iii) an aging machine tool
installed base that will require replacement with more advanced and efficient
technology and (iv) the industrial development of emerging countries in Asia and
Eastern Europe. However, the demand for machine tools and related products is
highly dependent upon economic conditions and the general level of business
confidence, as well as such factors as production capacity utilization and
changes in governmental policies regarding tariffs, corporate taxation and other
investment incentives. By marketing and distributing its products on a worldwide
basis, the Company attempts to reduce the potential impact on its total revenues
of adverse changes in economic conditions in any particular geographic region.
Competition
Numerous companies compete with the Company's product lines in the United States
and international markets. Many of these competitors are larger and have greater
financial resources than the Company. The Company strives to compete effectively
by designing into its products critical proprietary features that offer a
distinct value differential from comparably-priced competitive products in terms
of enhanced productivity, technological capabilities and ease of use. In
addition, by offering its products in a range of prices and capabilities, the
Company seeks to meet the needs of a broad potential market. The Company also
believes that its competitiveness is aided by its reputation for reliability and
quality, its strong international sales and distribution organization and its
extensive customer service organization.
In the world-wide industrial market, the Company is a leader in providing
interactive CNC machine tools incorporating user-friendly, conversational
programming systems. The Company's principal competitors in the CNC metal
cutting machine tool market include Bridgeport Machines Inc., Cincinnati
Milacron Inc., Fadal Engineering (a subsidiary of Giddings & Lewis Inc.), Haas
Automation, Inc., Milltronics Manufacturing Co., Republic-Lagun Machine Tool
Co., and Tree Machine Tool Co. Inc. A large number of foreign builders including
Matsuura Machinery Corporation, Mori Seiki Co., Ltd., Okuma Machinery Works
Ltd., and Yamazaki Mazak Corporation also compete with the Company.
In the worldwide CNC systems market, the Company is a leader in
providing user-friendly, "conversational" programming systems for CNC machine
tools, although its principal competitors, such as Fanuc Ltd., Mitsubishi
Machine Tools, Heidenhain Corp., Siemens Industrial Automation, Inc.
Southwestern Industries, Bridgeport Machines, Inc. and Allen-Bradley Co.,
also offer "user-friendly" programming features. Fanuc Ltd. is the world's
largest supplier of CNC systems.
The Company believes it is one of the largest domestic manufacturers of CNC
gauging systems for press brakes. Automec Inc., a CNC gauge manufacturer, and
Cybelec SA, a control manufacturer, are the Company's major competitors for
these products in the United States. The Company also competes with Cybelec in
Europe.
Manufacturing
The Company has established a manufacturing strategy which includes the
development of a global network of contract manufacturers who manufacture the
Company's products to the Company's design, quality and cost specifications.
This has enabled the Company to lower product costs, lower working capital per
sales dollar and to increase manufacturing capacity without significant
incremental investment in capital equipment or increased employment.
The Company's CNC-operated machine tools and milling machines are manufactured
to its specifications in Taiwan by three manufacturing contractors. The Company
has worked closely with its Taiwan-based contract manufacturers to increase
their production capacity to meet the rising demand for its machine tool
products and believes that such capacity is sufficient to meet the Company's
current and projected demand. During 1997, the Company entered into a contract
manufacturing agreement with a European machine tool builder to manufacture
machine tools for the Company's European subsidiaries. Although the Company is
exploring additional manufacturing sources for certain of its machine tool
products, alternative sources are not readily obtainable and any significant
reduction in capacity, or performance capability, on the part of its existing
machine tool manufacturing contractors would have a material adverse effect on
its operations.
The Company assembles and tests its CNC systems at its own facilities in
Indianapolis, Indiana and Farmington Hills, Michigan using readily available,
industry-standard personal computer components (such as hard disk drives, VGA
cards and motherboards) as well as proprietary system components that are
produced to the Company's specifications by several domestic suppliers. In
October 1996, the Company entered into a contract manufacturing agreement with
Hurco Automation Ltd. (HAL), a Taiwanese-based, affiliated company formed by the
Company and six Taiwanese investors. HAL is manufacturing certain CNC systems to
the Company's specifications, and is also supplying certain proprietary and
standard components to be used in domestic production. The Company believes that
alternative sources for the proprietary components are readily available.
Backlog
Backlog consists of firm orders received from customers and distributors.
Backlog was $7.4 million, $9.0 million and $15.3 million as of October 31, 1997,
1996, and 1995, respectively. Backlog at October 31, 1995 was higher than normal
due to strong demand during fiscal 1995 for the Company's new line of machine
tool products combined with limited product availability. The reduction of
backlog at October 31, 1996 reflects increased availability of product for
shipment. Fiscal 1997 orders were $94.8 million compared to $93.1 million for
fiscal 1996, and $98.9 million for fiscal 1995.
Intellectual Properties
The Company considers certain features of its products to be proprietary and
owns, directly or through a subsidiary, a number of patents that are significant
to its business. IMS Technology, Inc. (IMS), a wholly-owned subsidiary of the
Company, owns domestic and foreign patents (the Interactive Machining Patents)
covering the machining method practiced when a machine tool is integrated with
an interactive CNC. The Company also holds a non-exclusive license covering
features of the automatic tool changer offered with certain of its CNC machining
centers. In September 1995, the Company was awarded a new patent on an
object-oriented methodology (open architecture) for CNC software.
Since October 1995, IMS has initiated a number of infringement actions against
enterprises that it believes are employing or practicing machining methods
covered by one of the Interactive Machining Patents. These enterprises include
end users of interactive CNCs, machine tool builders employing interactive CNCs
within their products and CNC manufacturers whose control designs permit use of
interactive methods when coupled to machine tools (CNC Users). See Item 3. Legal
Proceedings.
IMS is actively pursuing a program to license the use of the Interactive
Machining Patents. During fiscal 1997 and 1996, IMS entered into agreements with
15 CNC Users under which IMS has granted a non-exclusive license to practice
methods covered by the Interactive Machining Patents in exchange for lump-sum
payments or fixed payments through fiscal 2001. The Company recorded license fee
income of $9.1 million and $590,000, net of legal fees and expenses, in fiscal
1997 and 1996, respectively. Subject to the continuing validity of the U.S.
Interactive Machining Patent, certain of the existing license agreements at
October 31, 1997 are expected to result in additional license fee income, net of
legal fees and expenses, of approximately $1.2 million through 2001. In
addition, IMS has received a royalty-free non-exclusive license (with a right of
sublicense to the Company) under six patents owned by two of the licensees.
From November 1, 1997 through January 20, 1998, IMS has entered into a number of
additional license agreements, including agreements with four CNC Users which
were defendants in the infringement actions. These agreements provide for cash
payments, substantially all of which is to be received in fiscal 1998. These
payments are expected to increase income by approximately $1.4 million, net
of legal fees and expenses, in the first quarter of fiscal 1998. In addition,
one of the agreements is with a supplier to the Company and provides for
discounts on future purchases of product by the Company through December 31,
2001. This agreement, with respect to product discounts, is expected to reduce
the cost of such future purchases by approximately $600,000.
Although settlements have been reached with a number of the defendants in the
on-going IMS patent infringement litigation which have resulted in license
agreements with IMS, the remaining defendants are continuing to contest the IMS
claims. IMS is continuing to pursue the litigation and is also engaged in
licensing discussions with other CNC Users that are not parties to the
litigation. There can be no assurance that IMS will enter into license
agreements with any of the remaining defendants, or any other CNC Users, or that
the terms of any future license agreements will be similar to those previously
entered into.
Research and Development
Research and development expenditures for new products and significant product
improvements were $1.9 million, $1.7 million and $1.4 million in fiscal 1997,
1996, and 1995, respectively. In addition, the Company capitalized expenditures
of $1.6 million in 1997, $1.3 million in 1996 and $1.2 million in 1995 related
to software development projects.
Employees
The Company had 326 employees at the end of fiscal 1997, none of whom is covered
by a collective-bargaining agreement or represented by a union. The Company has
experienced no employee-generated work stoppages or disruptions and considers
its employee relations to be satisfactory.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
The following represents a breakdown of Company sales to the indicated
geographic regions for the past three fiscal years (in thousands):
1997 1996 1995
------- ------- -------
North America............................. $46,915 $50,398 $49,005
Europe.................................... 45,725 44,014 35,434
Asia and other*........................... 3,089 4,939 5,193
--------- --------- ---------
Total....................................$ 95,729 $99,351 $89,632
========== ======= =======
* Sales to Asia, including exports in fiscal 1997 constituted only $2.2
million, or 2.3% of total sales.
Export sales from the United States were $5.3 million in fiscal 1997, $5.8
million in fiscal 1996 and $6.4 million in fiscal 1995.
Information regarding Total Sales, Operating Income and Identifiable Assets by
geographical area is shown in Note 16 to the Consolidated Financial Statements.
Item 2. PROPERTIES
The following table sets forth the location, size and principal use of each of
the Company's facilities:
Location Square Footage Principal Uses
Indianapolis, Indiana 165,000(1) Corporate headquarters, design and
engineering, product testing, CNC
assembly, sales, application
engineering and customer service.
Farmington Hills, Michigan 37,500 Design and engineering, product
testing, CNC assembly, sales,
application engineering and
customer service.
High Wycombe, England 45,000(2) Sales, application engineering,
customer service.
Paris,France 2,800
Sales,application engineering,
customer service.
Munich, Germany 10,700 Sales, application engineering,
customer service.
Singapore 1,200 Sales, application engineering
customer service
- ---------------------
(1) Approximately 65,000 square feet is available for lease in fiscal
1998. (2) Approximately 24,000 square feet have been sublet to a
subtenant since November 1995.
The Company owns the Indianapolis facility and leases the other facilities. The
leases have terms expiring at various dates ranging from March 1999 to February
2004. The Company believes that all of its facilities are well maintained and
are adequate for its needs now and in the foreseeable future. The Company does
not believe that it would experience any difficulty in replacing any of the
present facilities if any of its current leases were not renewed at expiration.
Item 3. LEGAL PROCEEDINGS
On October 10, 1995, the Company's wholly-owned subsidiary, IMS Technology, Inc.
(IMS), commenced an action in the United States District Court for the Northern
District of Illinois against a group of end-users of interactive CNCs, machine
tool manufacturers who incorporate interactive CNCs in their products and
manufacturers of CNCs (CNC Users) designed to permit use of interactive methods
when coupled to machine tools. IMS alleged that the defendants infringed the IMS
United States interactive machining patent (the Patent) and is seeking monetary
damages and an injunction against future infringement. IMS has subsequently
entered into settlements with a number of the defendants and has dismissed all
claims against them. The defendants who have not settled are: Okuma Machinery
Works, Ltd.; Okuma American Corporation; Ellison Machinery Company of the
Midwest, Inc.; and Apollo Machine & Manufacturing Company, Inc.
On January 11, 1996, IMS commenced an action in the United States District Court
for the Eastern District of Virginia (which was subsequently transferred to the
United States District Court for the Northern District of Illinois) against two
CNC Users with whom IMS has subsequently entered into settlements. On January
29, 1996, Mitsubishi Electric Corporation (Mitsubishi) was added to the action.
This action alleges infringement of the Patent and seeks monetary damages and an
injunction against future infringement.
IMS and the Company are defendants in an action pending in the United States
District Court for the Northern District of Illinois that was commenced January
29, 1996 by Mitsubishi and Mitsubishi Electric Industrial Controls. This action
seeks to have the Patent declared invalid. In September 1997, the court
dismissed Mitsubishi's claims that IMS and the Company had misused the Patent
and violated federal antitrust actions. Other claims that remain at issue are
whether IMS and the Company disparaged Mitsubishi's goods and business, made
false statements concerning the Patent, interfered with Mitsubishi's business
and violated state consumer fraud statutes. The complaint seeks unspecified
damages and injunctive relief. In a counter-claim, IMS alleges that the
plaintiffs have infringed the Patent.
The three actions described above are being coordinated under local court rules.
Discovery is currently in process.
On July 3, 1997, IMS commenced an action in the United States District Court of
Virginia against a number of CNC Users alleging infringement of the Patent. This
action seeks monetary damages and an injunction against future infringement. IMS
has subsequently entered into settlements with a number of the defendants and
has dismissed all claims against them. The only defendant who has not settled is
Haas Automation, Inc.
On September 29, 1997, IMS commenced an action in the United States District
Court for the Eastern District of Virginia against a number of CNC Users
alleging infringement of the Patent. This action sought monetary damages and an
injunction against future infringement. All of the defendants in this action
have settled with the Company.
Although IMS believes that the Patent is valid and its claims of patent
infringement have substantial merit, it is unable to predict the outcome of any
of these actions.
In addition, the Company is involved in various other claims and lawsuits
arising in the normal course of business. None of these claims, in the opinion
of management, is expected to have a material adverse effect on its consolidated
financial position or results of operations.
Item. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the National Market tier of the NASDAQ
Stock Market under the symbol "HURC". The following table sets forth the high
and low sales prices of the shares of Common Stock for the periods indicated, as
reported by the Stock Market.
1997 1996
--------------------- --------------------
Fiscal Quarter Ended:..... High Low High Low
- -------------------- --------------------- --------------------
January 31...............$ 6-1/4 $ 4-1/2 $ 7-1/4 $ 4-1/4
April 30................. 6-1/4 4-3/4 4-5/8 3-1/4
July 31.................. 6-3/16 5-1/4 7 4-1/8
October 31............... 9-7/16 5-3/4 6-1/2 4-1/2
The Company does not currently pay dividends on its Common Stock and intends to
retain earnings for working capital, capital expenditures and debt reduction.
The Company had approximately 556 holders of record of its Common Stock as of
January 12, 1998.
During the period covered by this report, the Company 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 the
Consolidated Financial Statements of the Company 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,
1997 1996 1995 1994 1993
-----------------------------------------------
Statement of Operations Data: (Dollars in thousands, except per share amounts)
Sales and service fees......... $95,729 $99,351 $89,632 $72,628 $72,230
Gross profit................... $27,773 $28,421 $23,470 $15,565 $11,079
Selling, general and adminis-
tration expenses..............$21,047 $21,343 $19,002 $18,129 $22,652
Restructuring charge............$ -- $ -- $ -- $ -- $ 6,750
Operating income (loss).........$ 6,726 $ 7,078 $ 4,468 $(2,564)$(18,323)
Interest expense................$ 1,938 $ 3,211 $ 4,250 $ 3,301 $ 2,828
Net income (loss)...............$13,804 $ 4,264 $ 204 $(5,791)$(21,144)
Earnings (loss)
per common share-primary......$ 2.06 $ .72 $ .04 $ (1.07) $ (3.89)
Weighted average common
shares outstanding-primary......6,704 5,907 5,536 5,407 5,438
As of October 31,
1997 1996 1995 1994 1993
------------------------------------------------
Balance Sheet Data: (Dollars in thousands)
Current assets.............$42,222 $44,108 $46,356 $43,096 $49,314
Current liabilities........$19,370 $23,336 $26,479 $16,985 $16,312
Working capital ...........$22,852 $20,772 $19,877 $26,111 $33,002
Current ratio.............. 2.2 1.9 1.8 2.5 3.0
Total assets...............$58,748 $59,750 $61,421 $59,558 $67,287
Long-term obligations......$9,602 $ 20,273 $27,459 $35,245 $37,888
Total debt.................$10,043 $22,110 $33,599 $34,813 $37,540
Shareholders' equity.......$29,776 $16,141 $ 7,483 $ 7,328 $13,087
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein. Certain statements made in this report may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company or the machine
tool industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, (i) changes in general economic and business
conditions that affect demand for CNC control systems, machine tools and
software products, (ii) changes in manufacturing markets, (iii) innovations by
competitors, (iv) quality and delivery performance by the Company's contract
manufacturers and (v) governmental actions and initiatives.
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 revenues and the year-to-year percentage changes in the dollar amounts
of those items.
Percentage of Revenues Year-to-Year % Change
Increase (Decrease)
1997 1996 1995 97 vs. 96 96 vs. 95
---- ----- ----- --------- ---------
Sales and service fees......100.0% 100.0% 100.0% (3.6%) 10.8%
Gross profit................ 29.0% 28.6% 26.2% (2.3%) 21.0%
Selling, general and
administrative expenses... 22.0% 21.5% 21.2% (1.4%) 12.4%
Operating income............ 7.0% 7.1% 5.0% (5.0%) 58.4%
Interest expense............ 2.0% 3.2% 4.8% (39.6%) (24.4%)
Net income.................. 14.4% 4.3% .2% 223.7% 1,990.2%
Fiscal 1997 Compared With Fiscal 1996
Sales and service fees in fiscal 1997 decreased $3.6 million, or 3.6%, compared
with fiscal 1996. Of the total decrease, $2.6 million reflected the net effects
of translating foreign currency revenues into U.S. dollars for financial
reporting purposes.
Sales of CNC-operated machine tools, which totaled $61.7 million in fiscal 1997,
were 5.9% below the $65.5 million recorded during fiscal 1996. The decrease
occurred in the U.S. market, with a decline of $2.4 million, or 8.9%, as well as
in S. E. Asia, where the decline of $1.9 million, or 69.9%, was most pronounced
and reflected the economic turmoil in that region. Sales of CNC-operated machine
tools in Europe increased $523,000, or 1.5%, in spite of the adverse impact of
foreign currency translation. In comparing the fiscal 1997 and 1996 results, it
also should be recognized that the first half of fiscal 1996 was marked by an
unusually high level of shipments, as the increasing availability of products
from the Company's contract manufacturers permitted an accelerated reduction of
the higher than normal backlog that existed at the end of fiscal 1995. Sales of
CNC systems and software (which do not include systems that are sold as an
integral part of a machine tool) increased during fiscal 1997 by $974,000, or
5.5%, primarily due to increased shipments of Autobend(R) control products in
response to improved worldwide market demand. Sales of service parts and service
fees decreased by $757,000, or 4.7%, compared to fiscal 1996, which is
attributable to improvements in recent years in the quality of the Company's
products along with a transfer to the Company's distributors in the United
States of responsibility for certain servicing activities. International sales,
including exports from the United States, increased to approximately 51% of
consolidated sales for fiscal 1997 compared to 49% for fiscal 1996.
Worldwide new order bookings during fiscal 1997 were $94.8 million, an increase
of 1.8% from the $93.1 million reported for fiscal 1996, in spite of the
unfavorable effect of weaker foreign currencies. New order bookings would have
been $97.4 million, an increase of 4.6% measured at average fiscal 1996 exchange
rates (constant U.S.
dollars).
New orders for CNC-operated machine tools increased 7.5% in units and 11.1% in
constant U.S. dollars. Domestic U.S. machine tool orders increased 9.3% in units
and 16.1% in dollars which was attributable primarily to demand for the
Company's proprietary-designed 40 inch axis machining center models introduced
in late fiscal 1996. Machine tool orders in Europe increased 15.3% in units and
14.3% in constant U.S. dollars, also due in large part to demand for the new 40
inch axis models. These increases were partially offset by a decline in machine
tool orders in South East Asia of $1.9 million, or 69.9%, to less than $1.0
million in fiscal 1997. The Company does not expect market conditions in South
East Asia to improve in the near future.
New orders for CNC systems and software, exclusive of CNC systems and software
sold as an integrated component of machine tools, declined $1.3 million, or
7.1%, due primarily to reduced orders for the Delta series controls from OEM
customers. In fiscal 1998, the Company plans to expand its product strategy to
include marketing 2-axis and 3-axis, OEM-sourced milling and turning machines
featuring fully-integrated Delta CNC systems. These machine systems will be sold
under the DynaPath(TM) name through the Company's subsidiary, Autocon
Technologies, Inc.
Backlog at October 31, 1997 was $7.4 million compared to $9.0 million at October
31, 1996.
Gross profit percentage, as a percentage of sales, increased to 29.0% in fiscal
1997, compared to 28.6% for fiscal 1996 net currency translation effects. The
improvement in margin is attributable to the combined effects of an increased
percentage of higher-margin European shipments in the total sales mix and
increased domestic and European shipments of higher-margin products introduced
in the latter part of fiscal 1996.
Selling, general and administrative (SG&A) expense in fiscal 1997 decreased by
approximately $300,000, or 1.4%, from fiscal 1996 and is primarily the result of
translating operating expenses of foreign subsidiaries into U.S.
dollars for financial reporting purposes.
Interest expense for fiscal 1997 decreased approximately $1.3 million, or 39.6%,
from the amount reported for the corresponding period in fiscal 1996, primarily
due to a $12.1 million reduction in outstanding borrowings and the payment
during fiscal 1996 of $240,000 of nonrecurring fees to the Company's lenders.
License fee income, net for fiscal 1997, represented approximately 68.1% of
income before taxes compared to 13.5% in fiscal 1996 and was attributable almost
entirely to 13 agreements entered into during the year by the Company's
wholly-owned subsidiary, IMS Technology, Inc. (IMS), pursuant to which IMS
granted fully paid-up licenses of its interactive CNC patents in exchange for
cash payments by the licensees, substantially all of which was received
concurrently with the license grants. Further, under a license agreement with a
principal supplier to the Company, approximately $500,000 is expected to be
received in future periods in the form of discounts on purchases by the Company,
which will be reflected as a reduction of the cost of such purchases. As of
October 31, 1997, additional license fees of approximately $1.2 million, net of
legal fees and expenses, related to future payments under completed license
agreements have been deferred and are expected to be recognized in income over
the four-year remaining life of the licensed patent.
From November 1, 1997 through January 20, 1998, IMS has entered into a number of
additional license agreements, including agreements with four CNC Users which
were defendants in the infringement actions brought by IMS concerning the U.S.
IMS interactive machining patent (the Patent). These agreements provide for cash
payments, substantially all of which is to be received in fiscal 1998. These
payments are expected to increase income by approximately $1.4 million, net
of legal fees and expenses, in the first quarter of fiscal 1998. In addition,
one of the agreements is with a supplier to the Company and provides for
discounts on future purchases of product by the Company through December 31,
2001. This agreement, with respect to product discounts, is expected to reduce
the cost of such future purchases by approximately $600,000.
Excluding those CNC Users that are defendants in the patent infringement
actions, there are a limited number of remaining CNC Users that IMS has
identified as potential licensees for the Patent. Accordingly, management
believes it is unlikely that future license fee income from such other potential
licensees would equal that recorded in fiscal 1997.
For further information, refer to Note 10 to the Consolidated Financial
Statements.
The provision for income taxes is almost entirely the result of foreign
withholding taxes related to license payments received during the fiscal year.
The income tax liability incurred in the United States and certain other
jurisdictions was offset by the reversal of valuation allowance reserves against
the Company's net operating loss carryforwards. Net operating loss carryforwards
available to offset pre-tax income in future periods are set forth in Note 6 to
the Consolidated Financial Statements.
Primarily as a result of the substantial licensing fee income received during
the period, net income for fiscal 1997 increased by approximately $9.5 million
compared to fiscal 1996. The increase also reflected the benefits of improved
margins and the substantial reduction in interest expense.
Fiscal 1996 compared with Fiscal 1995
Total sales and service fees of $99.4 million in fiscal 1996 increased $9.7
million, or 10.8%, over fiscal 1995, inclusive of a $1.0 million decrease
attributable to weaker European currencies when converting foreign currency
revenues into U.S. dollars for financial reporting purposes. On a worldwide
basis, sales of CNC-operated machine tools totaled $65.5 million, an increase of
$9.8 million, or 17.6%, over fiscal 1995, and sales of CNC systems and software
(which do not include systems and software sold as an integrated part of
CNC-operated machine tools) totaled $17.8 million, a decrease of $1.2 million,
or 6.3%, from fiscal 1995. The increase in the CNC-operated machine tool product
line reflected the continued strength of the world's principal machine tool
markets, strong demand in Europe for the Company's Advantage series of machine
tools, (which was introduced in that market in mid 1995) and enhanced
availability of the Company's products for shipment as a result of capacity
increases on the part of its contract manufacturers. The decrease in CNC systems
and software sales was primarily the result of decreased shipments of Autobend
products to original equipment manufacturers, some of whom have developed their
own CNC systems. Revenues attributable to sales of parts and service fees
increased $1.1 million, or 7.5%, from fiscal 1995 levels, primarily as a result
of increased part sales to support the increase in the installed machine base.
In the United States, sales and service fees in fiscal 1996 increased $.6
million, or 1.1%, over fiscal 1995 reflecting a slight increase in shipments of
machine tool products. Increased shipments of Delta series control systems for
metal cutting machine tools, primarily to original equipment manufacturers, were
offset by decreased shipments of Autobend control products to the metal
fabrication equipment market.
European sales and service fees in fiscal 1996 increased $8.6 million, or 26.5%,
over fiscal 1995, inclusive of the effects of currency translation for financial
reporting purposes. European sales measured in local currency increased 29.4%.
The improvement was primarily attributable to an increase in unit shipments,
without a significant change in margins or average selling prices, aided by a
full year of sales of the Advantage series product line, continued strength of
the European machine tool market and increased availability of products for
shipment.
International sales, including export sales, increased to approximately 49% of
total consolidated sales for fiscal 1996 compared to 45% for fiscal 1995.
Worldwide new order bookings for fiscal 1996 were $93.1 million, a decrease of
$5.8 million, or 5.9%, from fiscal 1995. While international orders increased
$2.7 million, or 6.8%, in spite of lower foreign currency translation rates,
domestic orders declined $8.5 million, or 14.5%. The decline in domestic
bookings was due almost entirely due to the fact that domestic machine tool
bookings during the first half of fiscal 1995 reflected unusually high demand
for the just introduced Advantage series machine tool line fueled, in part, by
distributor anticipation of limited product availability. The increasing
availability of Advantage series products for shipment in the second half of
fiscal 1995 and first half of fiscal 1996 enabled the Company to assure its
domestic customers shorter delivery times, which, along with somewhat slower
machine tool demand, contributed to a decline in the order rates. Domestic order
bookings in the second half of fiscal 1996 approximated that of the comparable
period in fiscal 1995 due in part to the introduction of new machine tool
products in September 1996. Consolidated backlog at October 31, 1996 was $9.0
million compared to $15.3 million at October 31, 1995, reflecting increased
availability of products for shipment.
Gross profit margin as a percentage of revenues increased to 28.6% in fiscal
1996 from 26.2% in fiscal 1995 despite the unfavorable impact of foreign
currency translations for financial reporting purposes. The increase is the
result of an increased percentage of higher-margin products in the total sales
mix along with the increase in the percentage of total sales attributable to
higher-margin international sales.
Selling, general and administrative (SG&A) expenses in fiscal 1996 increased
$2.3 million, or 12.4%, over fiscal 1995 net of unfavorable currency translation
effects. The increase reflects a $500,000 increase in product development
expenses, expenditures related to the bi-annual International Manufacturing
Technology Show (IMTS) and increased selling expenses associated with increased
unit volume.
The improvement in operating income in fiscal 1996 continues the Company's trend
of improved profitability over the past three years as a result of its completed
restructuring program, the introduction of new higher-margin products and an
improved machine tool market worldwide.
Interest expense in fiscal 1996 decreased $1.0 million, or 24.4%, from fiscal
1995. The decrease is the result of a $11.5 million reduction of debt, reduced
interest rates on the Company's variable rate bank borrowings, and reduced
incremental fees paid to the Company's lenders. The incremental fees, which are
non-recurring, amounted to $240,000 in fiscal 1996 and $400,000 in fiscal 1995.
License fee income in fiscal 1996 of $590,000, net of legal fees and expenses,
results from two separate licensing agreements entered into by the Company's
wholly-owned subsidiary, IMS Technology, Inc., with respect to its interactive
machining patents. Under the terms of the agreements, additional fees of
approximately $1.4 million, net of legal fees and expenses, are expected to be
received in annual installments through fiscal 2001, of which approximately
$386,000 is expected to be included in income in fiscal 1997.
The provision for income taxes of $94,000 in fiscal 1996 relates to the earnings
of a foreign subsidiary. The income tax liability incurred in the United States
and certain other jurisdictions was offset by the reversal of valuation
allowance reserves against the Company's net operating loss carryforwards. Net
operating loss carryforwards available to offset pre-tax income in future
periods are set forth in Note 6 to the Consolidated Financial Statements.
Year 2000 Issue
The Company has assessed and continues to assess the impact of the Year 2000
Issue on its reporting systems and operations. The Year 2000 Issue exists
because many computer systems and applications currently use two digit field
codes to designate a year. As the century date occurs, date sensitive systems
will recognize the year 2000 as 1900 or not at all. An inability to recognize
or properly treat the year 2000 could cause the Company's systems or those of
the Company's suppliers to process critical financial and operational
information incorrectly. The Company is not aware of any Year 2000 Issue that
would have a material adverse effect on its operations.
Foreign Currency Risk Management
The Company manages its foreign currency exposure through the use of foreign
currency forward exchange contracts. The Company does not speculate in the
financial markets and, therefore, does not enter into these contracts for
trading purposes. The Company also moderates its currency risk related to
significant purchase commitments with certain foreign vendors through price
adjustment agreements that provide for a sharing of, or otherwise limit, the
risk of currency fluctuations on the costs of purchased products. The results of
these programs achieved management's objectives in fiscal 1997 and fiscal 1996.
See Note 1 to the Condensed Consolidated Financial Statements.
Liquidity and Capital Resources
At October 31, 1997, the Company had cash and cash equivalents of $3.4 million
compared to $1.9 million at October 31, 1996. Cash provided by operations
totaled $16.0 million in fiscal 1997, compared to $8.5 million in fiscal 1996.
Cash flow from operations in fiscal 1997 was enhanced by receipts of
approximately $9.1 million of license fees, net of legal fees and taxes received
during fiscal 1997, compared to $590,000 in fiscal 1996.
Working capital was $22.9 million at October 31, 1997, compared to $20.8 million
at October 31, 1996. The working capital increase is attributable to an increase
of cash of $1.5 million along with a $1.2 million reduction in the current
portion of long-term debt. Accounts receivable decreased $1.0 million as a
result of the decrease in sales and improved collection efforts. Inventory
declined $2.1 million, primarily in purchased parts inventory and is attributed
to the Company's contract manufacturing program. The favorable impact on working
capital resulting from the reduction in inventory and accounts receivable was
almost entirely offset by decreases in accounts payable and accruals. The ratio
of current assets to current liabilities was 2.2 to 1 at October 31, 1997
compared to 1.9 to 1 at October 31, 1996.
Capital investments for fiscal 1997 consisted principally of expenditures for
property, equipment and software development projects. Other investments
included $190,000 in the second fiscal quarter with respect to Hurco Automation,
Ltd. (HAL). As of October 31, 1997, the Company has a commitment to invest an
additional amount of approximately $370,000 in HAL through fiscal 1999. The
Company's investment activities were funded through cash flow from operations.
Effective September 8, 1997, the Company's Bank Credit Agreement and Senior
Notes Agreement were amended and restated. The principal terms of those
agreements as amended and restated are set forth below:
a) Bank Credit Agreement
The Company's bank credit agreement provides for a revolving, unsecured
credit facility expiring May 1, 2000, which permits borrowings, at any
one time outstanding, of up to $22.5 million (inclusive of outstanding
letters of credit of up to $12.0 million). Of such borrowings, up to
$5.0 million may be drawn in designated European currencies. Interest
on all outstanding borrowings will be payable at LIBOR plus an amount
ranging from .75% to 2.0% based on a prescribed formula, or at the
Company's option, prime.
The agreement requires the Company to maintain a specified minimum net
worth and establishes maximum leverage and fixed charge coverage
ratios. Cash dividends and redemptions of capital stock are permitted
subject to certain limitations. The Company is required to maintain
consolidated tangible net worth (as defined) of not less than $20.0
million plus (i) 50% of cumulative net income subsequent to April 30,
1997 and (ii) 75% of the net proceeds from sales of capital stock.
Total consolidated debt may not exceed 50% of consolidated
capitalization (defined as total debt plus consolidated tangible net
worth).
b) Senior Notes
At October 31, 1997, the Company had outstanding approximately $7.1
million of unsecured Senior Notes, bearing an interest rate of 10.37%,
of which approximately $1.8 million is due on December 1, 1997 and the
balance is due in equal annual installments through 2000.
Effective September 8, 1997, the agreement governing the Senior Notes
was amended and restated on an unsecured basis. In connection
therewith, the interest rate on the Senior Notes was reduced to 10.37%
from 10.87% and the financial covenants were amended to conform to
those contained in the Company's amended and restated bank credit
agreement.
Outstanding borrowings under the Company's bank credit facilities and Senior
Notes were reduced by $12.1 million during fiscal 1997, primarily as a result of
repayments made with cash flow from operations, including license fees.
Management believes that cash flow from operations and borrowings under its
credit facilities will be sufficient to meet the Company's working capital needs
for the foreseeable future.
The Company was in compliance with all loan covenants at October 31, 1997.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Public Accountants
To the Shareholders and
Board of Directors of
Hurco Companies, Inc.
We have audited the accompanying consolidated balance sheets of Hurco Companies,
Inc. (an Indiana corporation) and subsidiaries as of October 31, 1997 and 1996,
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, 1997. These financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hurco Companies,
Inc. and subsidiaries as of October 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) 2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana
December 5, 1997.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
1997 1996 1995
(Dollars in thousands, except per share amounts)
Sales and service fees.......... $ 95,729 $ 99,351 $ 89,632
Cost of sales and service ...... 67,956 70,930 66,162
------ ------ ------
Gross profit............... 27,773 28,421 23,470
Selling, general and
administrative expenses......... 21,047 21,343 19,002
------ ------ ------
Operating income .......... 6,726 7,078 4,468
License fee income, net (Note 14) 10,095 590 --
Interest expense................ 1,938 3,211 4,250
Other income (expense), net..... (51) (99) (14)
------- --------- --------
Income before income taxes. 14,832 4,358 204
Provision for income taxes (Note 6) 1,028 94 --
------- --------- --------
Net income .................... $13,804 $ 4,264 $ 204
======== ========= ========
Earnings per common
share - primary................ $ 2.06 $ .72 $ .04
======== ========= ========
Weighted average common shares
outstanding - primary.......... 6,704 5,907 5,536
======== ========= ========
Earnings per common share -
fully diluted.................. $ 2.04 $ .72 $ .04
======== ========= ========
Weighted average common shares
outstanding -fully diluted...... 6,776 5,907 5,582
======== ========= ========
The accompanying notes are an integral part of the
Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31,
1997 1996
Current assets: (Dollars in thousands, except per share amounts)
Cash and cash equivalents..................... $ 3,371 $ 1,877
Accounts receivable, less
allowance for doubtful accounts
of $757 in 1997 and $785 in 1996............. 15,687 17,162
Inventories .................................. 21,752 24,215
Other......................................... 1,412 854
------- -------
Total current assets........................ 42,222 44,108
------ ------
Long-term license fee
receivables (Note 14)............................ 1,178 1,040
------- --------
Property and equipment:
Land.......................................... 761 761
Building...................................... 7,067 7,095
Machinery and equipment....................... 11,463 12,662
Leasehold improvements........................ 1,121 1,002
------- --------
20,412 21,520
Less accumulated depreciation
and amortization of........................... (11,218) (11,714)
------ ------
9,194 9,806
------- ------
Software development costs,
less accumulated amortization
of $4,692 in 1997 and $3,752
in 1996.......................................... 4,447 3,792
Other assets..................................... 1,707 1,004
------- --------
$ 58,748 $ 59,750
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................. $ 7,448 $ 9,715
Accounts payable-related parties.............. 1,798 1,692
Accrued expenses.............................. 6,886 7,454
Accrued warranty expenses..................... 1,452 1,425
Current portion of long-term debt............. 1,786 3,050
------- -------
Total current liabilities................... 19,370 23,336
------ ------
Non-current liabilities:
Long-term debt ............................... 8,257 19,060
Deferred credits and other ................... 1,345 1,213
------- --------
9,602 20,273
Commitments and contingencies
(Notes 10, 11 and 13)
Shareholders' equity:
Preferred stock: no par value per
share; 1,000,000 shares
authorized; no shares issued.................. -- --
Common stock: no par value; $.10
stated value per share; 12,500,000
shares authorized; 6,544,831 and
6,531,871 shares issued and
outstanding in 1997 and 1996, respectively.. 654 653
Additional paid-in capital.................... 50,349 50,312
Accumulated deficit........................... (16,404) (30,208)
Foreign currency translation adjustment....... (4,823) (4,616)
------- -------
Total shareholders' equity.................. 29,776 16,141
------ -------
$ 58,748 $ 59,750
====== ======
The accompanying notes are an integral part of the Consolidated
Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
1997 1996 1995
---- ---- ----
Cash flows from operating activities: (Dollars in thousands)
Net income ........................... $ 13,804 $ 4,264 $ 204
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization....... 2,078 2,677 2,861
Unrealized (gain) loss on foreign
currency transactions............... 294 267 (59)
Change in asset/liabilities
(Increase) decrease in accounts
receivable........................ 1,043 356 (3,148)
Decrease in inventories............ 2,107 959 1,004
Increase (decrease) in accounts payable (2,096) 856 2,118
Increase (decrease) in accrued expenses (681) (534) 902
Other.............................. (525) (346) (156)
------- ------ ------
Net cash provided by operating
activities...................... 16,024 8,499 3,726
------- ----- -----
Cash flows from investing activities:
Proceeds from sale of equipment....... 126 34 99
Purchase of property and equipment.... (640) (561) (551)
Software development costs............ (1,595) (1,318) (1,066)
Other ................................ (418) (181) 86
--------- ------ -------
Net cash (used for) investing
activities...................... (2,527) (2,026) (1,432)
------- ----- -----
Cash flows from financing activities:
Advances on bank credit facilities..... 30,173 49,985 68,625
Repayments of bank credit facilities... (39,154) (55,088) (69,997)
Repayments of term loan................ (3,036) (6,342) --
Proceeds from exercise of common stock
options.......................... 38 47 29
Proceeds from stock rights offering, net -- 4,802 --
------- ------ --------
Net cash (used for) financing
activities....................... (11,979) (6,516) (1,343)
------- ----- -----
Effect of exchange rate changes on cash... (24) (152) 20
------- -------- -----
Net increase (decrease) in cash.. 1,494 (195) 971
Cash and cash equivalents at beginning
of year........................... 1,877 2,072 1,101
------- ----- -----
Cash and cash equivalents at end of year.. $3,371 $ 1,877 $ 2,072
===== ===== =====
Supplemental disclosures:
Cash paid for:
Interest............................ $ 1,828 $ 2,759 $ 3,656
Income taxes........................ $ 1,234 -- --
The accompanying notes are an integral part of the Consolidated
Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Foreign
Common Stock Additional Currency
Shares Issued Paid-In Accumulated Translation
& Outstanding Amount Capital Deficit Adjustment
(Dollars in thousands)
Balances, October 31, 1994.....5,413,682 $541 $ 45,546 $(34,676) $(4,083)
Net income..................... -- -- -- $ 204 --
Translation of foreign currency
financial statements........... -- -- -- -- (78)
Exercise of common stock options 11,620 2 27 -- --
---------- ------ -------- -------- ----------
Balances, October 31, 1995.....5,425,302 $ 543 $45,573 $(34,472) $(4,161)
Net income..................... -- -- -- $ 4,264 --
Stock Rights Offering..........1,085,389 108 4,694 -- --
Translation of foreign currency
financial statements........... -- -- -- -- (455)
Exercise of common stock options..21,180 2 45 -- --
---------- ----- ------- -------- ------
Balances, October 31, 1996.....6,531,871 $ 653 $ 50,312 $ (30,208) $(4,616)
========== ===== ======= ======== ======
Net income..................... -- -- -- $13,804 --
Translation of foreign currency
financial statements........... -- -- -- -- (207)
Exercise of common stock options 12,960 1 37 -- --
------------------------------------------------
Balances, October 31, 1997.... 6,544,831 $ 654 $50,349 $(16,404) $(4,823)
========= ==== ====== ======= ======
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 its wholly-owned and
controlled subsidiaries (the Company). A 24% ownership interest in an affiliate
recorded using the equity method and a 15% ownership interest in an affiliate
recorded at cost are included in Other Assets on the accompanying Consolidated
Balance Sheets. Intercompany accounts and transactions have been eliminated.
Statements of Cash Flows. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. Cash
flows from hedges are classified consistent with the items being hedged.
Translation of Foreign Currencies. All balance sheet accounts of non-U.S.
subsidiaries are translated at the exchange rate as of the end of the year.
Income and expenses are translated at the average exchange rates during the
year. Foreign currency translation adjustments are recorded as a separate
component of shareholders' equity. Foreign currency transaction gains and losses
are recorded as income or expense as incurred.
Hedging. The Company enters into foreign currency forward exchange contracts to
hedge certain firm intercompany sale commitments denominated in foreign
currencies (primarily pound sterling and German marks) for which the Company has
firm purchase commitments. The purpose of these instruments is to protect the
Company from the risk that the U.S. dollar net cash inflows resulting from the
sales denominated in foreign currencies will be adversely affected by changes in
exchange rates. Gains and losses on these hedge contracts are deferred and
recognized as an adjustment to the related sales transactions.
The Company enters into foreign currency forward exchange contracts periodically
to provide a hedge against the effect of foreign currency fluctuations on
receivables denominated in foreign currencies. Gains and losses related to
contracts designated as hedges of receivables denominated in foreign currencies
are accrued as exchange rates change and are recognized as "Other income
(expense), net" in the Consolidated Statements of Operations. Gains and losses
related to contracts designated as hedges of net investments in foreign
subsidiaries are accrued as exchange rates change and are recognized in the
"Foreign currency translation adjustment" portion of shareholders' equity on the
Consolidated Balance Sheets.
The U.S. dollar equivalent notional amount of outstanding foreign currency
forward exchange contracts was approximately $19.0 million as of October 31,
1997 ($17.8 related to firm intercompany sales commitments) and $12.6 million as
of October 31, 1996 ($10.1 million related to firm intercompany sales
commitments). Deferred losses related to hedges of future sales transactions
were approximately $408,000 and $61,000 as of October 31, 1997 and 1996,
respectively. Contracts outstanding at October 31, 1997, mature at various times
through July 21, 1998. All contracts are for the sale of currency. The Company
does not enter into these contracts for trading purposes.
Inventories. Inventories are stated at the lower of cost or market, with
cost determined using the first-in,
first-out method.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Property and Equipment. Property and equipment are carried at cost. Depreciation
and amortization of assets are provided primarily under the straight-line method
over the shorter of the estimated useful lives or the lease terms as follows:
Number of Years
Building 40
Machines 10
Shop and office equipment 5
Leasehold improvements 5
Revenue Recognition. Sales of products and services are recorded when products
are shipped or services are performed. Revenue from maintenance contracts is
deferred and recognized in earnings on a pro rata basis over the period of the
agreement. Revenue related to software products is recognized when shipped in
conformity with American Institute of Certified Accountants' Statement of
Position 97-2 Software Revenue Recognition.
License Fee Income, Net. From time to time, the Company's wholly-owned
subsidiary, IMS Technology, Inc. ("IMS") enters into agreements for the
licensing of its interactive computer numerical control (CNC) patents. License
fees received or receivable under a fully paid-up license, for which there are
no future performance requirements or contingencies, are recognized in income,
net of legal fees and expenses, if any, at the time the license agreement is
executed. License fees received in periodic installments that are contingent
upon the continuing validity of a licensed patent are recognized in income, net
of legal fees and expenses, if any, over the life of the licensed patent.
Product Warranty. Expected future product warranty expense is recorded when the
product is sold.
Research and Development Costs. The costs associated with research and
development programs for new products and significant product improvements are
expensed as incurred and included in selling, general and administrative
expenses. Expenditures and related third-party reimbursements for the last three
years were (in thousands):
Year Ended October 31,
1997 1996 1995
---- ---- ----
Research and development expenditures.......$ 1,870 $ 1,689 $ 1,362
Less: amounts reimbursed by third parties... -- 58 354
-------- ------ ------
Net research and development expenses..$ 1,870 $1,631 $ 1,008
======== ===== =======
Costs incurred to develop computer software products and significant
enhancements to software features of existing products to be sold or otherwise
marketed are capitalized, after technological feasibility is established, and
are amortized to Cost of Sales on a straight-line basis over the estimated
product life of the related software which ranges from three to five years. The
Company capitalized $1.6 million in 1997, $1.3 million in 1996 and $1.2 million
in 1995 related to software development projects. Amortization expense was
$940,000, $1.0 million and $864,000, respectively, for the three years ended
October 31, 1997.
Earnings Per Share. Earnings per share of common stock are based on the weighted
average number of common shares outstanding, which includes the effects of
outstanding stock options computed using the treasury method.
Income Taxes. The Company records income taxes under Statement of Accounting
Standards (SFAS) 109 "Accounting for Income Taxes". SFAS 109 utilizes the
liability method for computing deferred income taxes and requires that the
benefit of certain loss carryforwards be recorded as an asset and that a
valuation allowance be established against the asset to the extent it is "more
likely than not" that the benefit will not be realized.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management 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. The Company designs and produces computer numerical control
(CNC) systems and software and CNC-operated machine tools for sale through its
own distribution system to the worldwide machine tool industry. The Company's
proprietary CNC systems and related software products are either integrated with
machine tools marketed by the Company, sold to machine tool end users or sold to
other machine tool manufacturers who integrate them with their own products.
The end market for the Company's 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. The Company's products are sold through over 250
independent agents and distributors in 46 countries throughout North America,
Europe and Asia. The Company also maintains direct sales operations in the
United States, England, France, Germany and Singapore.
Credit Risk. The Company sells products to customers located throughout the
world. The Company performs ongoing credit evaluations of customers and
generally does not require collateral. Allowances are maintained for potential
credit losses, and such losses have been within management's expectations.
Concentration of credit risk with respect to trade accounts receivable is
limited due to the large number of customers and their dispersion across many
geographic areas. Although a significant amount of trade receivables are with
distributors primarily located in the United States, no single distributor or
region represents a significant concentration of credit risk.
Reliance on Contract Manufacturers. The Company contracts principally with three
machine tool builders located in Taiwan for the manufacture and assembly of CNC
machine tool systems, based on the Company's designs and specifications,
utilizing CNC systems provided by the Company. During 1997, the Company entered
into a contract manufacturing agreement with a European machine tool builder to
manufacture machine tools for the European subsidiaries. Any interruption from
these sources would restrict the availability of the Company's machine tools,
which would affect operating results adversely.
3. INVENTORIES
Inventories as of October 31, 1997 and 1996 are summarized below (in thousands):
1997 1996
---------- ----------
Purchased parts and sub-assemblies............ $ 9,749 $ 12,354
Work-in-process............................... 1,578 1,942
Finished goods................................ 10,425 9,919
--------- ---------
$ 21,752 $ 24,215
========= =========
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. DEBT AGREEMENTS
Long-term debt as of October 31, 1997 and 1996, consisted of (in thousands):
1997 1996
-------- --------
Bank revolving credit facilities...........$ 1,900 $ 10,931
Bank term loan............................. -- 1,250
Senior Notes............................... 7,143 8,929
Economic Development Revenue Bonds,
Series 1990.............................. 1,000 1,000
------- -------
10,043 22,110
Less current portion...................... 1,786 3,050
--------- -------
$ 8,257 $ 19,060
========= =========
As of October 31, 1997, long-term debt was payable as follows (in thousands):
Fiscal 1998.............................. $1,786
Fiscal 1999.............................. 1,786
Fiscal 2000.............................. 3,686
Fiscal 2001.............................. 2,785
-------
$10,043
As of October 31, 1997, the Company had unutilized credit facilities of $13.9
million available for either direct borrowings or commercial letters of credit.
As of October 31, 1997 and 1996, the Company had $6.2 million and $7.7 million,
respectively, of outstanding letters of credit issued to non-U.S. suppliers for
inventory purchase commitments.
As of October 31, 1997, $1.0 million of the domestic bank revolving credit
facility was payable at a LIBOR based rate of 6.8%, and the remaining
portion of the domestic bank revolving credit facility was payable at 8.5%. As
of October 31, 1996, interest was payable at 8.25% on the domestic bank
revolving credit facility and bank term loan. Interest was payable on the
European credit authorization at rates ranging from 6.25% to 9.5% as of
October 31, 1997, and from 6.8% to 9.8% as of October 31, 1996. Interest was
payable on the Senior Notes at 10.37% and 10.87%
at October 31, 1997and 1996, respectively.
Effective September 8, 1997, the Company's Bank Credit Agreement and Senior
Notes Agreement were amended and restated. The principal terms of those
agreements, as amended and restated, are set forth below:
a) Bank Credit Agreement
The Company's bank credit agreement provides for a revolving, unsecured
credit facility expiring May 1, 2000, which permits borrowings, at any
one time outstanding, of up to $22.5 million (inclusive of outstanding
letters of credit of up to $12.0 million). Of such borrowings, up to
$5.0 million may be drawn in designated European currencies. Interest
on all outstanding borrowings will be payable at LIBOR plus an amount
ranging from .75% to 2.0% based on a prescribed formula, or at the
Company's option, prime.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The agreement requires the Company to maintain a specified minimum net
worth and establishes maximum leverage and fixed charge coverage
ratios. Cash dividends and redemptions of capital stock are permitted
subject to certain limitations. The Company is required to maintain
consolidated tangible net worth (as defined) of not less than $20.0
million plus (i) 50% of cumulative net income subsequent to April 30,
1997 and (ii) 75% of the net proceeds from sales of capital stock.
Total consolidated debt may not exceed 50% of consolidated
capitalization (defined as total debt plus consolidated tangible net
worth).
b) Senior Notes
At October 31, 1997, the Company had outstanding approximately $7.1
million of unsecured Senior Notes, bearing an interest rate of 10.37%,
of which approximately $1.8 million is due on December 1, 1997, and the
balance is due in equal annual installments through 2000.
Effective September 8, 1997, the agreement governing the Senior Notes
was amended and restated on an unsecured basis. In connection
therewith, the interest rate on the Senior Notes was reduced to 10.37%
from 10.87% and the financial covenants were amended to conform to
those contained in the Company's amended and restated bank credit
agreement.
The Economic Development Revenue Bonds are payable in five equal annual
installments beginning on September 1, 2001, and are secured by a letter of
credit issued in the amount of $1.1 million by the bank. The Bonds' interest
rates adjust weekly and, as of October 31, 1997 and 1996, interest was accruing
at a rate of 3.8%.
5. FINANCIAL INSTRUMENTS
The carrying amounts for trade receivables and payables approximate their fair
values. At October 31, 1997, the carrying amounts and fair values of the
Company's financial instruments, which includes bank revolving credit
facilities, senior notes, and Economic Development Bonds are not materially
different.
The Company also has off-balance sheet financial instruments in the form of
foreign currency forward exchange contracts as described in Note 1 to the
Consolidated Financial Statements. The U.S. dollar equivalent notional amount
and fair value of these contracts were $19.0 million and $20.2 million,
respectively, at October 31, 1997. Current market prices were used to estimate
the fair value of the foreign currency forward exchange contracts.
The future value of the foreign currency forward exchange contracts and the
related currency positions are subject to offsetting market risk resulting from
foreign currency exchange rate volatility. The counterparties to these contracts
are substantial and creditworthy financial institutions. Neither the risks of
counterparty non-performance nor the economic consequences of counterparty
non-performance associated with these contracts are considered by the Company to
be material.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
6. INCOME TAXES
The provision for income taxes in fiscal 1997 includes $1.0 million of foreign
withholding taxes related to certain license fee payments received in fiscal
1997. Deferred income taxes reflect the effect of temporary differences between
the tax basis of assets and liabilities and the reported amounts of those assets
and liabilities for financial reporting purposes. Deferred income taxes also
reflect the value of net operating losses and an off-setting valuation
allowance. The Company's total deferred tax assets and corresponding valuation
allowance at October 31, 1997 and 1996, consisted of the following (in
thousands):
October 31,
1997 1996
Tax effects of future tax
deductible items related to:
Accrued inventory reserves ......................$ 707 $ 715
Accrued warranty expenses ....................... 311 370
Other accrued expenses .......................... 858 922
-------- --------
Total deferred tax assets ................... 1,876 2,007
-------- --------
Tax effects of future taxable differences
related to:
Accelerated tax deduction and other
tax over book
deductions related to property,
equipment and software ........................ (1,876) (1,476)
Other ........................................... (575) (575)
-------- --------
Total deferred tax liabilities ................ (2,451) (2,051)
-------- --------
Net tax effects of temporary
differences ................................... (575) (44)
-------- --------
Tax effects of carryforward benefits:
U.S. federal net operating loss
carryforwards,expiring 2008-2012 .............. 5,869 9,909
Foreign net tax benefit carryforwards
with various expiration years ................. 941 1,862
U.S. federal general business tax credits,
expiring 2008-2012 ............................ 1,545 1,543
U.S. Alternative Minimum Tax Credit
with no expiration .............................. 221 --
-------- --------
Tax effects of carryforwards ................ 8,576 13,314
-------- --------
Tax effects of temporary differences
and carryforwards ........................... 8,001 13,270
Less valuation allowance .................... (7,780) (13,270)
-------- --------
Net deferred tax asset ......................$ 221 $ --
======== ========
The Company's carryforwards expire at specific future dates and utilization of
certain carryforwards is limited to specific amounts each year and further
limitations may be imposed if an "ownership change" would occur. Realization is
entirely dependent upon generating sufficient future earnings in specific tax
jurisdictions prior to the expiration of the loss carryforwards. Due to the
uncertain nature of their ultimate realization based upon past performance and
expiration dates, the Company has established a full valuation allowance against
carryforward benefits with expiration dates and is recognizing the benefits only
as reassessment demonstrates they are realizable. Alternative minimum tax
credits may be carried forward indefinitely and as a result, are not provided
with a valuation allowance. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of the
Company's income tax expense.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Income (loss) before income taxes (in thousands):
Year Ended October 31,
1997 1996 1995
Domestic..................... $ 10,303 $ (625) $ (1,786)
Foreign...................... 4,529 4,983 1,990
-------- -------- -------
$ 14,832 $ 4,358 $ 204
======== ========= =======
Differences between the effective
tax rate and
U.S. federal income tax rate were
(in thousands):
Tax (benefit) at U.S. Statutory
Rate.......................... $ 5,191 $ 1,525 $ 71
Foreign Withholding Taxes.......... 1,012 -- --
Effect of International operations
tax rates in excess of U.S.
statutory rates.................... 342 254 --
State Income Tax (benefit)......... 16 -- --
Effect of losses without a current
year tax benefit........... -- -- 625
Utilization of net operating loss
carryforwards............... (5,533) (1,685) (696)
------- --------- --------
Provision for income taxes....... $ 1,028 $ 94 $ --
======== ========= =========
Foreign withholding taxes are the result of withholding taxes on certain license
fee payments received during fiscal 1997. The Company's provision for income tax
in fiscal 1997 and 1996 represents taxes currently payable.
7. EMPLOYEE BENEFITS
The Company has defined contribution plans that include a majority of its
employees worldwide, under which Company 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. Company contributions to the plans are based on employee
contributions or compensation. These Company contributions totaled $307,000,
$252,000, and $213,000 for the years ended October 31, 1997, 1996, and 1995,
respectively.
During 1996, the Company initiated a non-qualified deferred compensation plan
for certain executives of the Company. The purpose of this defined contribution
plan is to provide executives with an additional mechanism to save throughout
their employment. The Company has made only minor contributions to the deferred
compensation plan during fiscal 1997 and 1996.
During 1997, the Company initiated Split-Dollar Life Insurance Agreements with
certain officers of the Company. Under the terms of the agreements, the Company
pays all of the premiums on behalf of the officers. The Company will be repaid
the premiums from the policies' cash surrender value when the policies are
terminated in accordance with the provisions of the agreements.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. STOCK OPTIONS
In March 1997, the Company adopted the 1997 Stock Option and Incentive Plan (the
1997 Plan) which allows the Company to grant awards of options to purchase
shares of the Company's common stock, stock appreciation rights, restricted
shares and performance shares. Under the provisions of the 1997 Plan, the
maximum number of shares of common stock that my be issued is 500,000. The total
number of shares of common stock which may be granted to any individual during
the term of the 1997 Plan may not exceed 100,000 shares. Options granted under
the 1997 Plan are excercisable for a period up to ten years after date of grant
and vest in equal annual installments as specified by the Compensation Committee
of the Company's Board of Directors (the Committee) as the Committee determines
at the time of grant. The option price may not be less than 100% of the fair
market value of a share of common stock on the date of grant. As of October 31,
1997, 5,000 shares had been granted under the 1997 Plan.
In 1990, the Company adopted the 1990 Stock Option Plan (the 1990 Plan) which
allowed the Company to grant options to purchase shares of the Company's common
stock and related stock appreciation rights and limited rights to officers and
key employees of the Company. Under the provisions of the 1990 Plan, the maximum
number of shares of common stock which may be issued under options and related
rights is 500,000.There is no annual limit on the number of such shares with
respect to which options and rights may be granted. Options granted under the
1990 Plan are exercisable for a period up to ten years after date of grant and
vest in equal installments over a period of three to five years from the date of
grant. The option price may not be less than 100% of the fair market value of a
share of common stock on the date of grant and no options or rights may be
granted under the 1990 Plan after April 30, 2000.
A summary of the status of the options under the 1990 and 1997 Plans as of
October 31, 1997, 1996 and 1995 and the related
activity for the year is as follows:
Year Ended October 31,
1997 1996 1995
Outstanding at beginning of year.. 431,620 380,700 354,900
Granted...................... 5,000 104,800 62,700
Canceled..................... (1,800) (32,700) (19,080)
Expired...................... -- -- (6,200)
Exercised.................... (12,960) (21,180) (11,620)
------- ------- --------
Outstanding at end of year........ 421,860 431,620 380,700
======= ======= =======
Exercisable at end of year........ 283,416 204,151 138,600
======= ======= =======
Available for future grants....... 507,814 12,814 84,914
======== ======== ========
The range of option prices per share for outstanding options and the prices at
which options were exercised during 1997, 1996
and 1995 are summarized below:
Year Ended October 31,
1997 1996 1995
Option price............... $2.13 - $7.50 $2.13 - $7.50 $2.13-$7.50
Exercise price............. $2.13 - $5.13 $2.13 - $3.88 $2.13-$2.88
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
As of October 31, 1997 and 1996, there were outstanding options held by certain
members of the Board of Directors to purchase 75,000 shares of the Company's
common stock at $5.13 per share and 25,000 shares at $7.00 per share. All were
exercisable as of October 31, 1997 and 1996. The options expire at various dates
between 2002 and 2006.
In October 1995, SFAS No. 123, "Stock Based Compensation," was issued. This
statement requires the Company to choose between two different methods of
accounting for stock options. The statement defines a fair-value-based method of
accounting for stock options but allows an entity to continue to measure
compensation cost for stock options using the accounting prescribed by APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Use of the
APB 25 accounting method results in no compensation cost being recognized if
options are granted at an exercise price at the current market value of the
stock. The Company will continue to use the method prescribed under APB 25, but
is required by SFAS 123 to make proforma disclosures of net income and earnings
per share as if the fair value method had been applied, if material. Application
of the fair value method would not have a material impact if it had been applied
in the financial statements for the year ended October 31, 1997.
9. RELATED PARTY TRANSACTIONS
The Company and Air Express International Corporation (AEI) are related parties
because a common group of shareholders holds a substantial ownership interest in
both companies. AEI provides freight forwarding and shipping services for the
Company. The cost of these freight services are negotiated on an arms length
basis and amounted to $2,554,000, $1,773,000 and $1,438,000 for the years ended
October 31, 1997, 1996 and 1995, respectively. Trade payables to AEI were
$30,000, $208,000 and $27,000 at October 31, 1997, 1996 and 1995, respectively.
The Company owns an approximate 15% interest in one of its Taiwanese-based
suppliers. This investment is carried at cost and is included in Other Assets.
Purchases of product from this supplier are negotiated on an arms length basis
and totaled $8,196,000, $8,616,000 and $4,369,000 for the years ended October
31, 1997, 1996 and 1995, respectively. Trade payables to this supplier were
$1,768,000, $1,484,000 and $1,519,000 at October 31, 1997, 1996 and 1995,
respectively.
Refer to Note 13 for a description of Hurco Automation, Ltd. (HAL).
Transactions with HAL during fiscal 1997 were not
material.
10. LITIGATION AND CONTINGENCIES
On October 10, 1995, the Company's wholly-owned subsidiary, IMS Technology, Inc.
(IMS), commenced an action in the United States District Court for the Northern
District of Illinois against a group of end-users of interactive CNCs, machine
tool manufacturers who incorporate interactive CNCs in their products and
manufacturers of CNCs (CNC Users) designed to permit use of interactive methods
when coupled to machine tools. IMS alleged that the defendants infringed the IMS
United States interactive machining patent (the Patent) and is seeking monetary
damages and an injunction against future infringement. IMS has subsequently
entered into settlements with a number of the defendants and has dismissed all
claims against them. The defendants who have not settled are: Okuma Machinery
Works, Ltd.; Okuma American Corporation; Ellison Machinery Company of the
Midwest, Inc. and Apollo Machine & Manufacturing Company, Inc.
On January 11, 1996, IMS commenced an action in the United States District
Court for the Eastern District of Virginia (which
was subsequently transferred to the United States District Court for the
Northern District of Illinois) against two CNC Users
with whom IMS has subsequently entered into settlements. On January
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
29, 1996, Mitsubishi Electric Corporation (Mitsubishi) was added to the action.
This action alleges infringement of the Patent and seeks monetary damages and an
injunction against future infringement.
IMS and the Company are defendants in an action pending in the United States
District Court for the Northern District of Illinois that was commenced January
29, 1996 by Mitsubishi and Mitsubishi Electric Industrial Controls. This action
seeks to have the Patent declared invalid. In September 1997, the court
dismissed Mitsubishi's claims that IMS and the Company had misused the Patent
and violated federal antitrust actions. Other claims that remain at issue are
whether IMS and the Company disparaged Mitsubishi's goods and business, made
false statements concerning the Patent, interfered with Mitsubishi's business
and violated state consumer fraud statutes. The complaint seeks unspecified
damages and injunctive relief. In a counter-claim, IMS alleges that the
plaintiffs have infringed the Patent.
The three actions described above are being coordinated under local court rules.
Discovery is currently in process.
On July 3, 1997, IMS commenced an action in the United States District Court of
Virginia against a number of CNC Users alleging infringement of the Patent. This
action seeks monetary damages and an injunction against future infringement. IMS
has subsequently entered into settlements with a number of the defendants and
has dismissed all claims against them. The only defendant in this action who has
not settled is Haas Automation, Inc.
On September 29, 1997, IMS commenced an action in the United States District
Court for the Eastern District of Virginia against a number of CNC Users
alleging infringement of the Patent. This action sought monetary damages and an
injunction against future infringement. All of the defendants in this action
have settled with the Company.
Although IMS believes that the Patent is valid and its claims of patent
infringement have substantial merit, it is unable to predict the outcome of any
of these actions.
In addition, the Company is involved in various other claims and lawsuits
arising in the normal course of business. None of these claims, in the opinion
of management, is expected to have a material adverse effect on its consolidated
financial position or results of operations.
11. OPERATING LEASES
The Company leases facilities and vehicles under operating leases that expire at
various dates through 2002. Future payments required under operating leases as
of October 31, 1997, are summarized as follows (in thousands):
1998................................. $1,942
1999................................. 1,285
2000................................. 902
2001................................. 696
2002................................. 417
--------
Total................................ $ 5,242
========
Rental payments for the years ended October 31, 1997, 1996 and 1995 was $1.9
million, $1.9 million, and $2.0 million, respectively.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
12. RIGHTS OFFERING
On July 3, 1996, the Company issued and sold 1,085,389 shares of common stock at
a price of $4.63 per share pursuant to a subscription rights offering. The net
proceeds of approximately $4.8 million were used to pay $3.1 million of
installments of the Company's outstanding indebtedness to its senior lenders
that were due on July 31, 1996. Of the amount paid, $1.4 million consisted of an
installment payment on the bank term loan bearing interest at a variable rate
and $1.7 million represented an installment payment on the Company's Senior
Notes. The balance of the net proceeds was used to reduce outstanding revolving
credit borrowings.
13. HURCO AUTOMATION, LTD.
In October 1996, the Company entered into an agreement with six Taiwanese
investors for the purpose of forming a company, Hurco Automation, Ltd. (HAL).
HAL's scope of activities includes the design, manufacture, sales and
distribution of industrial automated products, software systems and related
components, including CNC systems and components manufactured under contract for
sale exclusively to the Company. At October 31, 1997, the Company had invested
$394,000 in the HAL which results in 24% ownership. The Company has committed to
invest an additional amount of approximately $370,000 in two installments
through fiscal 1999 which will result in 35% ownership. The Company is also
committed to purchasing a defined number of CNC systems from HAL between
February 1, 1997 and July 31, 1999. The Company is accounting for the
investment using the equity method. The investment of $374,000 at October 31,
1997 is included in Other Assets on the Consolidated Balance Sheet.
14. LICENSE FEE INCOME, NET
License fee income, net for fiscal 1997 was attributable almost entirely to 13
agreements entered into during the year by the Company's wholly-owned
subsidiary, IMS Technology, Inc. (IMS), pursuant to which IMS granted fully
paid-up licenses of its interactive CNC patents in exchange for cash payments by
the licensees, substantially all of which was received concurrently with the
license grants. Further, under a license agreement with a principal supplier to
the Company, approximately $500,000 is expected to be received in future periods
in the form of discounts on purchases by the Company, which will be reflected as
a reduction of the cost of such purchases. As of October 31, 1997, additional
license fees of approximately $1.2 million, net of legal fees and expenses,
related to future payments under completed license agreements have been deferred
and are expected to be recognized in income over the four-year remaining life of
the licensed patent.
Although settlements have been reached with a number of the defendants in the
on-going IMS patent infringement litigation which have resulted in license
agreements with IMS, the remaining defendants are continuing to contest the IMS
claims. IMS is continuing to pursue the litigation and is also engaged in
licensing discussions with other CNC Users that are not parties to the
litigation. There can be no assurance that IMS will enter into license
agreements with any of the remaining defendants, or any other CNC Users, or that
the terms of any future license agreements will be similar to those previously
entered into.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. QUARTERLY HIGHLIGHTS (Unaudited)
1997 (In thousands, except per share
data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service fees............ $22,278 $22,580 $24,637 $26,234
Gross profit...................... 6,482 6,846 7,175 7,270
Gross profit margin percentage.... 29.1% 30.3% 29.1% 27.7%
Selling, general and administrative
expenses........ 5,046 5,216 5,352 5,433
Operating income................. 1,436 1,630 1,823 1,837
Net income ...................... 1,016 6,201 2,534 4,053
Earnings per common
share - primary.................. $ .15 $ .93 $ .38 $ .60
1996 (In thousands, except per
share data)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service fees...........$ 23,224 $ 26,095 $ 23,039 $ 26,993
Gross profit..................... 6,475 7,231 6,988 7,727
Gross profit margin percentage... 27.9% 27.7% 30.3% 28.6%
Selling, general and
administrative expenses........ 5,049 5,363 5,223 5,708
Operating income............... 1,426 1,868 1,765 2,019
Net income..................... 572 1,031 957 1,704
Earnings per common
share - primary................. $ .10 $ .19 $ .16 $ .26
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
16. BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
The Company operates in one business segment which consists of computer
numerical control (CNC) systems and software and CNC-operated machine tools for
cutting and forming metals. Summarized is information regarding Total Sales,
Operating Income and Identifiable Assets by geographical areas (in
thousands):
United States Europe Asia Eliminations Consolidated
1997
Sales to unaffiliated
customers............. $51,823 $42,910 $996 $ -- $95,729
Transfers between geographic
areas.......... 26,435 2,013 75 (28,523) --
--------- ------- --- ------- ----------
Total sales................. $78,258 $44,923 $1,071 $(28,523) $95,729
========= ======= ====== ======== ==========
Operating income............$ 2,390 $ 4,558 $(222) $ 6,726
======== ======= ====== ==========
Identifiable assets as of
October 31, 1997.......$ 42,525 $15,895 $ 328 $58,748
========= ======= ====== ==========
1996
Sales to unaffiliated
customers............. $ 54,760 $ 41,528 $3,063 $ -- $99,351
Transfers between geographic
areas.......... 26,921 3,790 33 (30,744) --
--------- -------- ------- ------- --------
Total sales................$ 81,681 $ 45,318 $3,096 $(30,744) $99,351
========= ================= ======== ==========
Operating income...........$ 2,184 $ 4,348 $ 546 $ 7,078
========= ================= ==========
Identifiable assets as of
October 31, 1996......$ 42,779 $ 14,763 $2,208 $59,750
========= ================= ==========
1995
Sales to unaffiliated
customers............. $ 54,172 $ 32,881 $2,579 $ -- $89,632
Transfers between geographic
areas.......... 18,374 880 -- (19,254) --
-------- ----------------- -------------------
Total sales........... $ 72,546 $ 33,761 $2,579 $(19,254) $89,632
========== ================ ======== ========
Operating income...... $ 2,570 $ 1,607 $ 291 $ 4,468
========= ================ ==========
Identifiable assets as of
October 31, 1995.... $ 45,255 $ 15,404 $ 762 $61,421
========= ======== ====== ==========
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
17. NEW ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board released Statement
of Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which changes
the method of computation of earnings per share (EPS). SFAS 128 replaces Primary
EPS with Basic EPS and replaces Fully Diluted EPS with Diluted EPS. Basic EPS,
unlike Primary EPS, does not consider dilution for potentially dilutive
securities. Diluted EPS uses an average share price for the period whereas Fully
Diluted EPS uses the greater of the average share price or end-of-period share
price. SFAS 128 is effective for fiscal 1998 and earlier adoption is not
permitted. Basic EPS computed under SFAS 128 for the three and twelve months
ended October 31, 1997 was $.62 and $2.11, respectively. Diluted EPS computed
under SFAS 128 for the three and twelve months ended October 31, 1997 was $.60
and $2.06, respectively.
18. SUBSEQUENT EVENT (Unaudited)
From November 1, 1997 through January 20, 1998, IMS has entered into a number of
additional license agreements, including agreements with four CNC Users which
were defendants in the infringement actions brought by IMS concerning the U.S.
IMS interactive machining patent. These agreements provide for cash payments,
substantially all of which is to be received in fiscal 1998. These payments are
expected to increase income by approximately $1.4 million, net of legal fees
and expenses, in the first quarter of fiscal 1998. In addition, one of the
agreements is with a supplier to the Company and provides for discounts on
future purchases of product by the Company through December 31, 2001. This
agreement, with respect to product discounts, is expected to reduce the cost of
such future purchases by approximately $600,000.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors of the Registrant
The following information sets forth the name of each director, his age, tenure
as a director, principal occupation and business experience for the last five
years:
Served as a
Name Age Director Since
Hendrik J. Hartong, Jr. 58 1986
Andrew L. Lewis IV 41 1988
Brian D. McLaughlin 55 1987
E. Keith Moore 75 1990
Richard T. Niner 58 1986
O. Curtis Noel 62 1993
Charles E. Mitchell Rentschler 58 1986
Hendrik J. Hartong, Jr. has been a general partner of Brynwood Management,
the general partner of Brynwood Partners Limited Partnership, since 1984. Mr.
Hartong has also served as Chairman of the Board of Air Express International
Corporation since 1985.
Andrew L. Lewis IV has served as Chief Executive Officer of KRR Partners,
L.P. since July 1993. Mr. Lewis was a consultant for USPCI of Pennsylvania,
Inc. from 1991 to 1993. Mr. Lewis is also a director of Air Express
International Corporation.
Brian D. McLaughlin has been President and Chief Executive Officer of the
Company since December, 1987.
E. Keith Moore has served as President of Hurco International, Inc., a
subsidiary of the Company, since April 1988. Mr. Moore is also a director of
Met-Coil Systems Corporation.
Richard T. Niner has been a general partner of Brynwood Management, the
general partner of Brynwood Partners Limited
Partnership, since 1984. Mr. Niner is also a director of Air Express
International Corporation, Arrow International, Inc.
and Case, Pomeroy & Company, Inc.
O. Curtis Noel has been an independent business consultant for more than ten
years specializing in market and industry studies, competitive analysis and
corporate development programs with clients in the U.S. and abroad.
Charles E. Mitchell Rentschler has served as President and Chief Executive
Officer of The Hamilton Foundry & Machine Co.
since 1985.
Each director of the Company serves for a term of one year, which expires at the
next annual meeting of shareholders of the Company when his successor has been
elected. There are no family relationships between any of the directors or
executive officers of the Company.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive officers of
the Company as of January 5, 1998:
Name Age Position(s) with the Company
Brian D. McLaughlin 55 President and Chief Executive Officer
Roger J. Wolf 57 Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
David E. Platts 45 Vice President, Research and Development
James D. Fabris 46 Executive Vice President - Operations
Richard Blake 39 Vice President of the Company and
President Hurco Machine Tool Products
Division
Stephen J. Alesia 31 Corporate Controller
Brian D. McLaughlin has been President and Chief Executive Officer of the
Company since December 1987. From 1982 to 1987, he was employed as President and
General Manager of various divisions of Ransburg Corporation, an international
manufacturer of factory automation equipment. Previously, he was employed in
general management and marketing management positions with Eaton Corporation.
Roger J. Wolf has been Senior Vice President, Secretary, Treasurer and Chief
Financial Officer since January 1993. Prior to joining the Company, Mr. Wolf was
Executive Vice President of a privately-owned investment and service business
for over seven years. Previously, he served as Vice President, Corporate
Controller and Vice President, Treasurer of Ransburg Corporation, an
international manufacturer of factory automation equipment.
David E. Platts has been employed by the Company since 1982, and was elected
Vice President, Research and Development in 1989.
James D. Fabris was elected Executive Vice President - Operations in November
1997 and Vice President of the Company in February 1995. Jim was President of
Hurco Machine Tool Products Division from November 1993 to December 1997. He
served as President of Acroloc, Inc., a subsidiary of the Company, from July
1991 to October 1993 and as Vice President of Operations of Hurco Manufacturing
Company from 1988 to 1991.
Richard Blake was named President of Hurco Machine Tool Products Division in
November 1997, Vice President of the Company in January 1996, and Managing
Director, Hurco Europe, Ltd., a subsidiary of the Company, in December 1993. He
served as U.K. Marketing Manager for Hurco Europe, Ltd. from January 1993 to
November 1993 and as a Sales Manager for Hurco Manufacturing Company from
September 1989 to December 1992.
Stephen J. Alesia joined the Company in June 1996 and was elected an executive
officer in September 1996. Prior to joining the Company, Mr. Alesia was employed
for seven years by Arthur Andersen LLP, an international public accounting firm.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of the Company's common stock, to file initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company with the Securities and Exchange Commission.
To the Company's knowledge, based solely upon a review of copies of such reports
furnished to the Company during and pertaining to its most recent fiscal year,
and certain written representations, all Section 16(a) filings applicable to the
Company's executive officers, directors and greater than ten percent (10%)
beneficial owners were made on a timely basis during the most recent fiscal
year.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth all compensation paid or accrued during each of
the last three fiscal years to the Chief Executive Officer and each of the other
four executive officers of the Company (the Named Executive Officers) whose
salary and bonus exceeded $100,000 during fiscal 1997.
Summary Compensation Table
Long-Term All Other
Annual Compensation Compensation Compen-
Name and Fiscal Salary Bonus OtherAnnual SecuritiesUnderlying sation
Principal Position Year ($) ($)(1)Compensation($)Option(2) ($)(3)
- ------------------ ------ ------ --------------------------------------
Brian D. McLaughlin 1997 $250,000 $125,000 -- -- $51,726
President and CEO 1996 238,133 80,000 -- 15,000 3,325
1995 226,936 75,000 -- 10,000 3,234
Roger J. Wolf 1997 156,000 60,000 -- -- 47,086
Sr. VP, Secretary 1996 148,500 75,000 -- 3,000 2,880
Treasurer and CFO 1995 139,731 45,000 -- 15,000 3,063
James D. Fabris 1997 140,000 60,000 -- -- 23,504
Executive Vice 1996 122,500 50,000 -- 10,000 3,199
President - Operations 1995 107,885 45,000 -- 5,000 2,210
David E. Platts 1997 100,000 45,000 -- -- 13,153
Vice President 1996 93,917 20,000 -- 5,000 --
Research&Development 1995 87,834 15,000 -- 10,000 --
Richard Blake 1997 108,550 41,750 -- -- 4,633
V.P. of the Company and 1996 87,373 46,311 -- 15,000 3,841
President Hurco Machine 1995 61,932 39,700 -- -- 2,699
Tool Products Division
- ---------------------------
(1) Represents cash bonuses earned and paid in the subsequent year.
(2) Represents options granted under the stock option plan related to the
prior year's performance, other than specified below. The Company has
not granted any Stock Appreciation Rights (SARs).
(3) Represents the Company's contribution to defined contribution plans and
split dollar life insurance premiums. During fiscal 1997, the Company
initiated Split-Dollar Life Insurance Agreements with certain officers
of the Company. Under the terms of the agreements, the Company pays all
of the premiums on behalf of the officers. The Company will be repaid
the premiums from the policies' cash surrender value when the policies
are terminated in accordance with the provisions of the agreements.
Defined Contribution Plan Company paid Split-Dollar
Named Officer Company Match Life Insurance Premiums
Brian D. McLaughlin $4,320 $47,406
Roger J. Wolf 4,320 42,766
James D. Fabris 4,320 19,184
David E. Platts 938 12,215
Richard Blake 4,633 --
Stock Options
The following table sets forth information related to options exercised during
fiscal 1997 and options held at fiscal year-end by the Named Executive Officers.
The Company does not have any outstanding SARs.
Aggregated Option Exercises in Fiscal 1997and Year-End Option Values
Value of
Number of Unexercised
Shares Securities Underlying In-the-Money
Acquired Unexercised Options Options
on Value at FY-End (#) at FY-End ($) (1)
Exercise Realized Exer- Unexer- Exer- Unexer-
Name (#) ($) cisable cisable cisable cisable
- ---- --------- ---------------- ------- ------- -------
Brian D. McLaughlin -- -- 114,999 10,001 $482,704 $36,671
Roger J. Wolf -- -- 37,998 12,002 $86,121 $22,505
James D. Fabris -- -- 22,300 17,700 $127,200 $72,925
David E. Platts -- -- 20,000 10,000 $115,000 $40,000
Richard Blake -- -- 5,600 15,400 $28,899 $59,596
- -----------------------------------------
(1) Value is calculated based on the closing market price of the common
stock on October 31, 1997 ($8.375) less the
option exercise price.
Compensation of Directors
Each director who is not a full-time employee of the Company receives a fee of
$1,000 for each meeting of the Board of Directors attended, and each such
director also receives $4,000 per quarter. Directors are also entitled to
receive reimbursement for travel and other expenses incurred in attending such
meetings. Mr. Niner received annual compensation of $72,000 for his services as
Chairman of the Executive Committee of the Board of Directors.
Employment Contracts
Brian D. McLaughlin entered into an employment contract on December 14, 1987.
The contract term is month-to-month. Mr. McLaughlin's salary and bonus
arrangements are set annually by the Board of Directors. Other compensation,
such as stock option grants, is awarded periodically at the discretion of the
Board of Directors. As part of that contract, Mr. McLaughlin is entitled to 12
months' salary if his employment is terminated for any reason other than gross
misconduct.
Roger J. Wolf entered into an employment contract on January 8, 1993. The
contract term is unspecified. Mr. Wolf's salary and bonus arrangements are set
annually by the Board of Directors. Other compensation, such as stock option
grants, is awarded periodically at the discretion of the Board of Directors. As
part of that contract, Mr. Wolf is entitled to 12 months' salary if his
employment is terminated without just cause.
James D. Fabris entered into an employment contract on November 18, 1997. The
contract term is unspecified. Mr. Fabris' salary and bonus arrangement are set
annually by the Board of Directors. Other compensation, such as stock option
grants, is awarded periodically at the discretion of the Board of Directors. As
part of the contract, Mr. Fabris is entitled to 12 months' salary if his
employment is terminated for any reason other than gross misconduct.
Richard Blake entered into an employment contract on January 1, 1998. The
contract term is thirty-six months and shall continue month-to-month thereafter.
Mr. Blake's salary and bonus arrangements are set annually by the Board of
Directors. Other compensation, such as stock option grants, is awarded
periodically at the discretion of the Board of Directors. As part of the
contract, Mr. Blake is entitled to 12 months' salary if his employment is
terminated for any reason other than gross misconduct.
Compensation Committee Interlocks and Insider Participation
During fiscal 1997 the members of the Compensation Committee were Hendrik
J. Hartong, Jr., O. Curtis Noel and Charles E. Mitchell Rentschler. None of
the Committee members is a current or former officer or employee of the
Company or any of its subsidiaries. Mr. Hartong is a director of AEI. Mr.
Hartong is also a general partner of Brynwood Management, which is the
general partner of Brynwood Partners Limited Partnership, which has
substantial ownership interest in AEI. AEI provides freight forwarding and
shipping services for the Company. The cost of these freight services
are negotiated on an
arms-length basis and amounted to $2,554,000 for the fiscal year ended
October 31, 1997. None of the Committee members are involved in any other
relationships requiring disclosure as an interlocking officer / director.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of January 5, 1998, regarding
beneficial ownership of the Company's common stock by each director and Named
Executive Officer, by all directors and executive officers as a group, and by
certain other beneficial owners of more than 5% of the common stock. Each such
person has sole voting and investment power with respect to such securities,
except as otherwise noted.
Shares Beneficially Owned
Name and Address Number Percent
Other Beneficial Owners
Brynwood Partners Limited Partnership 1,390,001 21.2%
Two Soundview Avenue
Greenwich, Connecticut 06830
Wellington Management Co. 646,900 (1) 9.9%
75 State Street
Boston, Massachusetts 02109
The TCW Group, Inc. 464,600 7.1%
865 South Figueroa Street
Los Angeles, California 90017
Fidelity Management & Research Co. 359,028(2) 5.5%
One Federal Street
Boston, Massachusetts 02109
Directors and Executive Officers
Hendrik J. Hartong, Jr. 1,695,492 (3,4) 25.9%
Andrew L. Lewis IV 24,000 (4) 0.4%
Brian D. McLaughlin 151,475 (5,6) 2.3%
E. Keith Moore 48,010 (7) 0.7%
Richard T. Niner 1,707,362 (3,4) 26.0%
O. Curtis Noel 15,000 (4) 0.2%
Charles E. Mitchell Rentschler 40,000 (4,8) 0.6%
Roger J. Wolf 43,390 (9) 0.7%
James D. Fabris 22,800 (10) 0.4%
David E. Platts 21,700 (11) 0.3%
Richard Blake 5,600 (12) 0.1%
Executive officers and directors 2,107,827 (3,13) 32.1%
as a group (12 persons)
(1) Wellington Management Co. (WMC), a registered investment advisor, is
deemed to have beneficial ownership of 646,900 shares of the Company's
common stock, which is owned by various advisory clients of WMC. WMC
has shared voting power for 371,400 shares and sole voting power for
275,500 shares.
(2) Fidelity Management and Research Co. has no voting power for any of the
shares.
(3) Includes 1,390,001 shares owned by Brynwood Partners Limited
Partnership and 278,001 shares owned by Brynwood Partners II, L.P.
Brynwood Management is the general partner of each entity and Mr.
Hartong and Mr. Niner are general partners of Brynwood Management and,
accordingly, may be deemed to have beneficial ownership of these
shares.
(4) Includes 1,500 shares subject to options that are exercisable within 60
days.
(5) Includes 114,999 subject to options held by Mr. McLaughlin that are
exercisable within 60 days.
(6) Includes 10,876 shares owned by Mr. McLaughlin's wife and children, as
to which he may be deemed to have beneficial
ownership.
(7) Includes 21,000 shares subject to options that are exercisable within
60 days.
(8) Includes 6,000 shares owned by Mr. Rentschler's wife, as to which he
may be deemed to have beneficial ownership.
(9) Includes 37,998 shares subject to options that are exercisable within
60 days.
(10) Includes 22,300 shares subject to options that are exercisable within
60 days.
(11) Includes 20,000 shares subject to options that are exercisable within
60 days.
(12) Includes 5,600 shares subject to options that are exercisable within
60 days.
(13) Includes 296,897 shares subject to options that are exercisable within
60 days.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Air Express International (AEI) are related parties because
Brynwood Partners Limited Partnership holds a substantial ownership interest in
both companies. Two of the Company's directors, Hendrik J. Hartong, Jr. and
Richard T. Niner, are general partners of Brynwood Management, which is the
general partner of Brynwood Partners Limited Partnership. AEI provides freight
forwarding and shipping services for the Company. The cost of these freight
services are negotiated on an arms length basis and amounted to $2,554,000
during fiscal 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. The following consolidated financial
statements of Registrant are included herein under Item 8 of Part II:
Page
Reports of Independent Accountants.......................................21
Consolidated Statements of Operations - years
ended October 31, 1997, 1996 and 1995..................................22
Consolidated Balance Sheets - as of October 31, 1997 and 1996............23
Consolidated Statements of Cash Flows - years
ended October 31, 1997, 1996 and 1995..................................24
Consolidated Statements of Changes in Shareholders' Equity -
years ended October 31, 1997, 1996 and 1995............................25
Notes to Consolidated Financial Statements...............................26
2. Financial Statement Schedules. The following financial statement
schedule is included in this Item.
Page
Schedule II - Valuation and Qualifying
Accounts and Reserves.........................................49
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,
1997.
(c) Exhibits
Exhibits are filed with this Form 10-K or incorporated herein by reference
as listed on Pages 50-51.
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended October 31, 1997, 1996 and 1995
(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, 1997 $ 785 $ 74 $ -- $ 101 3 $ 757
======== ======= ======= ======== ========
October 31, 1996 $ 1,070 $ (63) $ -- $ 222 1 $ 785
======== ======= ======= ======== ========
October 31, 1995 $ 1,046 $ 31 $ -- $ 7 2 $ 1,070
======== ======= ======= ======== ========
Accrued warranty
expenses for the year
ended:
October 31, 1997 $ 1,425 $ 1,321 $ - $ 1,294 $ 1,452
======== ======= ======= ======== ========
October 31, 1996 $ 1,391 $ 1,544 $ -- $ 1,510 $ 1,425
======== ======= ======= ======== ========
October 31, 1995 $ 1,170 $ 1,541 $ -- $ 1,320 $ 1,391
======== ======= ======= ======== ========
1 Receivable write-offs of $228,000, net of cash recoveries on accounts
previously written off of $6,000. 2 Receivable write-offs of $42,000, net of
cash recoveries on accounts previously written off of $35,000. 3 Receivable
write-offs of $106,000, net of cash recoveries on accounts previously written
off of $5,000.
EXHIBITS INDEX
3.1 Amended and Restated Articles of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1, to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 31, 1997.
3.2 Amended and Restated By-Laws of the Registrant, incorporated
by reference to Exhibit 3.2, to the Registrant's
Annual Report on Form 10-K for the year ended October 31, 1990.
3.3 Amended and Restated By-Laws of the Registrant dated September
12, 1995, incorporated by reference to Exhibit
3.3, to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1996.
10.1 The Underlease between Dikappa (Number 220) Limited and
Northern & London Investment Trust limited dated
December 2, 1982, incorporated by reference to Exhibit 10.13,
to its Registration Statement on Form S-1,
No.2-82804 dated April 1, 1983.
10.2 Non-Qualified Stock Option Agreement between the Registrant
and O. Curtis Noel effective, March 3, 1993,
incorporated by reference to Exhibit 10.44, to the Registrant's
Annual Report on Form 10-K for the year ended
October 31, 1993.
10.3 Employment Agreement between the Registrant and Roger J. Wolf
dated January 8, 1993, incorporated by reference to Exhibit 10.45,
to the Registrant's Annual Report on Form 10-K for the year ended
October 31, 1993.
10.4 Non-qualified Stock Option Agreement between the Registrant and
Hendrik J. Hartong, Jr., effective July 8, 1996
incorporated by reference to Exhibit 10.47 to the Registrant's
Report on Form 10-K for the year ended October
31, 1996.
10.5 Non-qualified Stock Option Agreement between the Registrant
and Andrew L. Lewis IV, effective July 8, 1996
incorporated by reference to Exhibit 10.48 to the Registrant's
Report on Form 10-K for the year ended October
31, 1996.
10.6 Non-qualified Stock Option Agreement between the Registrant
and Richard T. Niner, effective July 8, 1996
incorporated by reference to Exhibit 10.49 to the Registrant's
Report on Form 10-K for the year ended October
31, 1996.
10.7 Non-qualified Stock Option Agreement between the Registrant
and O. Curtis Noel, effective July 8, 1996
incorporated by reference to Exhibit 10.50 to the Registrant's
Report on Form 10-K for the year ended October
31, 1996.
10.8 Non-qualified Stock Option Agreement between the Registrant and
Charles E. Mitchell Rentschler, effective July
8, 1996 incorporated by reference to Exhibit 10.51 to the
Registrant's Report on Form 10-K for the year ended
October 31, 1996.
10.9 1997 Stock Option and Incentive Plan, effective May 29, 1997,
incorporated by reference to Exhibit 10.52 in Form
10-Q for the quarter ended July 31, 1997.
10.10 Amended and Restated Credit Agreement and Amendment to
Reimbursement Agreement, effective September 8, 1997
between the Registrant and NBD Bank, N.A. and NBD Bank.
10.11 Second Amended and Restated Senior Note Agreement between the
Registrant and Principal Mutual Life Insurance Company effective
September 8, 1997.
10.12 Letter Agreement (European Facility) dated September 8, 1997,
between Registrant's subsidiaries and The First National Bank of
Chicago.
10.13 Guaranty Agreement dated September 8, 1997, between the Registrant
and The First National Bank of Chicago.
10.14 Guaranty Agreement dated September 8, 1997, between Autocon
Technologies, Inc. and The First National Bank of
Chicago.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants - Arthur Andersen LLP.
27 Financial Data Schedule (electronic filing only).
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 26th day of January,
1998.
HURCO COMPANIES, INC.
By:/s/ ROGER J. WOLF
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature and Title(s) Date
/s/ BRIAN D. McLAUGHLIN January 26, 1998
- ----------------------------------
Brian D. McLaughlin, Director,
President and Chief Executive Officer
of Hurco Companies, Inc.
(Principal Executive Officer)
/s/ ROGER J. WOLF January 26, 1998
- -------------------------------------------
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
of Hurco Companies, Inc.
(Principal Financial Officer)
/s/ STEPHEN J. ALESIA January 26, 1998
- ---------------------------------------
Stephen J. Alesia
Corporate Controller
of Hurco Companies, Inc.
(Principal Accounting Officer)
/s/ HENDRIK J. HARTONG, JR. January 26, 1998
- ----------------------------------
Hendrik J. Hartong, Jr., Director
/s/ ANDREW L. LEWIS IV January 26, 1998
- --------------------------------------
Andrew L. Lewis, IV, Director
/s/ E. KEITH MOORE January 26, 1998
- ------------------------------------------
E. Keith Moore, Director
/s/ RICHARD T. NINER January 26, 1998
- -----------------------------------------
Richard T. Niner, Director
/s/ O. CURTIS NOEL January 26, 1998
- ----------------------------------------------
O. Curtis Noel, Director
/s/ CHARLES E. M. RENTSCHLER January 26, 1998
- ---------------------------------
Charles E.M. Rentschler, Director