SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended October 31, 2002 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from _________ to _________.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1150732
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
- ------------------------------------------ ----------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, No Par Value
-------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the of the Securities Exchange Act of 1934).
Yes No X
---- ---
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of April 30, 2002 (the last day of our most recently completed
second quarter) was $16,526,148 and as of January 14, 2003 was $8,765,558.
The number of shares of the Registrant's common stock outstanding as of January
2, 2003 was 5,583,158.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2003 Annual Meeting of Shareholders (Part III).
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
PART I
Item 1. BUSINESS
General
Hurco Companies, Inc. is an industrial technology company. We design and produce
interactive, personal computer (PC) based, computer control systems and software
and computerized machine tools for sale to the metal working industry through a
worldwide sales, service and distribution network. Our proprietary computer
control systems and software products are sold primarily as integral components
of our computerized machine tool products.
We pioneered the application of microprocessor technology and conversational
programming software for application on computer controls for machine tools and,
since our founding in 1968, have been a leader in the introduction of
interactive computer control systems that automate manufacturing processes and
improve productivity in the metal parts manufacturing industry. We have
concentrated on designing "user-friendly" computer control systems that can be
operated by both skilled and unskilled machine tool operators and yet are
capable of instructing a machine to perform complex tasks. The combination of
microprocessor technology and patented interactive, conversational programming
software in our computer control systems enables operators on the production
floor to quickly and easily create a program for machining or forming a
particular part from a blueprint or computer-aided design (CAD) and immediately
begin production of that part.
Our executive offices and principal design, engineering, and manufacturing
management operations are headquartered in Indianapolis, Indiana. Sales,
application engineering and service offices are located in Indianapolis,
Indiana; High Wycombe, England; Munich, Germany; Paris, France; Milan, Italy and
Singapore. In June 2002, we opened a representative sales office in Shanghai,
China. Distribution facilities are located in Los Angeles, California and Venlo,
the Netherlands; a manufacturing facility is located in Taichung, Taiwan.
Our strategy is to design, develop, produce and market a comprehensive line of
interactive computer controls, software and computerized machine tools using our
proprietary technology designed to enhance the user's productivity through ease
of operation and higher levels of machine performance (speed, accuracy and
surface finish quality). We use an open systems software architecture that
permits our computer control systems and software to be used with standard PC
hardware and have emphasized an operator friendly design that employs both
interactive conversational and graphical programming software.
Products
During fiscal 2002, we discontinued several under-performing product lines and
sold the related assets, to enable us to focus our resources and technology
development on our core products. Our core products consist primarily of general
purpose computerized machine tools for the metal cutting industry (principally
vertical machining centers) into which our proprietary Ultimax(R) software and
computer control systems have been fully integrated. Discontinued and sold were
the Delta(TM) series computer control and related Dynapath(TM) milling machine
product line, and related parts and service activities, along with press brake
(metal bending machine) product lines and all tooling products related to press
brake applications. We continue to produce computer control systems and related
software for press brake applications that are sold primarily as retrofit
control systems. In addition, we produce and distribute software options,
control upgrades, hardware accessories and replacement parts related to our
continuing product lines and provide operator training and support services to
our customers.
The following table sets forth the contribution of each of our product groups to
our total sales and service fees during each of the past three fiscal years:
Net Sales and Service Fees by Product Category
Year ended October 31,
------------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ------------------------- -------------------------
Continuing Products and Services
Computerized Machine Tools $ 52,056 73.9% $ 69,631 75.4% $ 65,505 68.1%
Computer Control Systems 3,194 4.5% 4,782 5.2% 7,791
and Software * 8.1%
Service Parts 7,240 10.3% 8,038 8.7% 8,701 9.0%
Service Fees 3,240 4.6% 3,749 4.1% 4,051 4.2%
----------- ----------- ----------- ---------- ----------- ----------
Total $ 65,730 93.3% $ 86,200 93.4% $ 86,048 89.4%
Discontinued Products and Services 4,756 6.7% 6,067 6.6% 10,156 10.6%
----------- ----------- ----------- ---------- ----------- ----------
Total $ 70,486 100.0% $ 92,267 100.0% $ 96,204 100.0%
=========== =========== =========== ========== =========== ==========
* Amounts shown do not include computer control systems sold as an integrated
component of computerized machine tools.
Computerized Machine Tool Products
We design and market computerized machine tools which are equipped with a fully
integrated interactive Ultimax(R) computer control system. Our Ultimax(R) twin
screen "conversational" computer control system is sold solely as a fully
integrated feature of Hurco computerized machine tools. This computer control
system enables a machine operator to create complex two-dimensional part
programs directly from blue prints or CAD. Machine operators with little or no
programming experience can successfully program parts and begin machining
operations in a short time with minimal special training. Since the initial
introduction of the Ultimax(R) computer control, we have added enhancements
related to operator programming productivity, CAD compatibility, data processing
throughput and motion control speed and accuracy. Our current Ultimax(R) 4
programming stations use a Pentium* processor featuring an operator console with
liquid crystal display screens and incorporate personal computer (PC) platform
components. This upgradeable computer control product offers enhanced
performance while ensuring access to cost effective computing hardware and
software.
Our current line of Ultimax(R) metal cutting machine tools is a complete family
of products including milling machines with an x-axis travel of 30 and 40 inches
and vertical machining centers with an x-axis travel of 24, 26, 30, 42, 50 and
64 inches. During 2002 we introduced the first model in our new VM series, the
VM1, a vertical machining center with a substantially smaller footprint and
significantly lower price than our previous entry-level vertical machining
center. We also introduced four new machine models in our high performance VMX
series vertical machining center line. These products provide different levels
of performance features for different market applications ranging in price from
$36,000 to $165,000.
Computer Control Systems and Software
The following computer control systems and software products are marketed
directly to end-users and or to original equipment manufacturers.
o Autobend(R)
Autobend(R) computer control systems are applied to metal bending press brake
machines that form parts from sheet metal and steel plate and consist of a
microprocessor-based computer control and back gauge (an automated gauging
system that determines where the bend will be made). We have manufactured and
sold the Autobend(R) product line since 1968. We currently market two models of
our Autobend(R) computer control systems for press brake machines, in
combination with six different back gauges, through distributors to end-users as
retrofit units for installation on existing or new press brake machines, as well
as to original equipment manufacturers and importers of such equipment.
o CAM and Software Products
In addition to our standard computer control features, we offer software option
products for programming two and three-dimensional parts. These products are
marketed to users of our computerized machine tools equipped with our
Pentium*-based Ultimax(R) computer control systems. In fiscal 2002, we
introduced Advanced Velocity Control (AVC) and Adaptive Surface Finish (ASF),
high performance machining software options. The AVC software option enables a
customer to increase machine throughput with advanced motion control software.
The ASF software option facilitates optimized surface finishes on complex parts.
Other products in this line are WinMax(R), a Windows** based off-line
programming system; DXF, a data file transfer software option; and UltiNet(TM),
a networking software option. The DXF software option eliminates manual data
entry of part features by transferring AutoCAD(TM) drawing files directly into
an Ultimax(R) computer control, or into our off-line programming software,
substantially increasing operator productivity. UltiNet(TM) is a networking
software option used by our customers to transfer part design and manufacturing
information to computerized machine tools at high speeds and to network
computerized machine tools within the customer's manufacturing facility.
We also offer conversational part and tool dimension probing options for
Ultimax(R) based machines. These options permit the computerized dimensional
measurement of machined parts and the associated cutting tools. This
"on-machine" technique significantly improves the throughput of the measurement
process when compared to traditional "off-machine" approaches.
Parts and Service
Our service organization provides installation, warranty, operator training and
customer support for our products on a worldwide basis. In the United States,
our principal distributors have primary responsibility for machine installation
and warranty service and support for new product sales. We also service and
support a substantial installed base of existing customers. Our service
organization also sells software options, computer controls upgrades,
accessories and replacement parts for our products. Our after-sale parts and
service business helps strengthen our customer relationships and provides
continuous information concerning the evolving requirements of end-users.
Marketing and Distribution
We sell our products through approximately 346 independent agents and
distributors in 35 countries throughout North America, Europe and Asia. We also
have our own direct sales personnel in the United States, China, England,
France, Germany, Italy and Singapore, which are among the world's principal
machine tool consuming countries. During fiscal 2002, no distributor accounted
for more than 5% of our sales and service fees. Approximately 80% of the
worldwide demand for computerized machine tools and computer control systems
comes from outside the U.S. In fiscal 2002, approximately 68% of our revenues
were from overseas customers.
The end-users of our products are precision tool, die and mold manufacturers,
independent metal parts manufacturers and specialized production applications or
prototype shops within large manufacturing corporations. Industries served
include aerospace, defense, medical equipment, energy, transportation and
computer equipment.
Our computerized machine tools along with software options and accessories are
sold primarily to end-users. We sell our Autobend(R) computer control systems to
original equipment manufacturers of new machine tools who integrate them with
their own products prior to the sale of those products to their own customers,
to retrofitters of used machine tools who integrate them with those machines as
part of the retrofitting operation and to end-users who have an installed base
of machine tools, either with or without related computer control systems.
During fiscal 2002, no single end-user of our products accounted for more than
5% of our total sales and service fees.
We believe that advances in industrial technology and the related demand for
process improvements drive demand for our products.
Other factors affecting demand include:
o the need to continuously improve productivity and shorten cycle time,
o an aging machine tool installed base that will require replacement with
more advanced and efficient technology created by shorter product life
cycles,
o the industrial development of emerging countries in Asia and Eastern
Europe, and
o the declining supply of skilled machinists,
However, demand for our products is highly dependent upon economic conditions
and the general level of business confidence, as well as such factors as
production capacity utilization and changes in governmental policies regarding
tariffs, corporate taxation and other investment incentives. By marketing and
distributing our products on a worldwide basis, we reduce the potential impact
on our total sales and service fees by adverse changes in economic conditions in
any particular geographic region.
Competition
We compete with many other companies in the United States and international
markets. Several of these competitors are larger and have greater financial
resources than we do. We strive to compete effectively by incorporating unique,
patented software and other proprietary features into our products that offer
enhanced productivity, greater technological capabilities and ease of use. We
offer our products in a range of prices and capabilities to target a broad
potential market. We also believe that our competitiveness is aided by our
reputation for reliability and quality, our strong international sales and
distribution organization and our extensive customer service organization.
In the United States and European metal cutting markets, major competitors
include Haas Automation, Inc., Cincinnati Machine, Deckel, Maho Gildemeister
Group (DMG), Bridgeport Machines, Ltd. and Fadal Engineering along with a large
number of foreign manufacturers including Okuma Machinery Works Ltd., Mori
Seiki Co., Ltd., Masak and Matsuura Machinery Corporation
Manufacturing
Our manufacturing strategy is based on global sourcing of components and a
network of contract suppliers and sub-contractors who manufacture our products
in accordance with our proprietary design, quality standards and cost
specifications. This has enabled us to lower product costs, lower working
capital per sales dollar and increase our worldwide manufacturing capacity
without significant incremental investment in capital equipment or increased
personnel.
Our computerized metal cutting machine tools are manufactured to our
specifications by manufacturing contractors in Taiwan and our wholly owned
subsidiary, Hurco Manufacturing Limited (HML), which we established in fiscal
2000. This subsidiary has increased our overall capacity and reduced or
eliminated our dependence on other Taiwan contract manufacturers. We have a 24%
ownership interest in our primary contract machine manufacturer. HML and our
affiliated machine manufacturer conduct final assembly operations and are
supported by a network of sub-contract suppliers of components and
sub-assemblies.
We also have a contract manufacturing agreement for computer control systems
with a Taiwanese-based affiliate in which we have a 35% ownership interest. This
company is manufacturing our Ultimax(R) and Autobend(R) computer control systems
to our specifications, and is engaged primarily in the sourcing of industry
standard computer components and proprietary parts, final assembly and test
operations.
We work closely with our contract manufacturers to increase their production
capacity to meet the demand for our machine tool products and believe that such
capacity is sufficient to meet our current and projected demand. We also
continue to consider additional contract manufacturing resources that will
increase our long-term capacity, and we believe that alternative sources for
standard and proprietary components are available; however, any prolonged
interruption of operations or significant reduction in capacity or performance
capability of these principal manufacturing contractors would have a material
adverse effect on our operations.
Backlog
Backlog consists of firm orders received from customers and distributors but not
shipped. Backlog was $5.3 million, $9.1 million and $10.2 million as of October
31, 2002, 2001, and 2000, respectively.
Intellectual Property
We consider certain features of our products to be proprietary. We own, directly
or through a subsidiary, a number of patents that are significant to our
business.
In fiscal 2002, we acquired the core technology assets of a software development
company for $1.8 million. As part of the acquisition, we obtained ownership of
three existing patents and one pending patent related to computer control
technology, which we expect to incorporate in our proprietary computer control
system.
We own patents for an object-oriented, open architecture methodology for
computer control software. We also hold a non-exclusive license covering
features of the automatic tool changer offered with certain of our computerized
machining centers as well as a patent for a manual tool changing apparatus.
Beginning in 1995, our subsidiary, IMS Technology, Inc. (IMS) actively pursued a
program to stop infringement and license the use of certain interactive
machining patents. These patents expired in October, 2001. During the past five
fiscal years, IMS entered into agreements with approximately 40 computer control
users under which IMS granted non-exclusive licenses of its interactive
machining patents. We recorded license fee income of $163,000, $723,000, and
$5.4 million, net of legal fees and expenses, in fiscal 2002, 2001, and 2000
respectively. In addition, IMS has received a royalty-free non-exclusive license
under six patents owned by two of the licensees. We do not anticipate future
license fee income from these expired patents.
Research and Development
Research and development expenditures for new products and significant product
improvements, included as period operating expenses, were $2.4 million, $3.5
million and $3.2 million in fiscal 2002, 2001, and 2000, respectively. In
addition, we recorded expenditures of $534,000 in 2002, $665,000 in 2001 and
$706,000 in 2000 related to software development projects that were capitalized.
Employees
We had approximately 240 employees at the end of fiscal 2002, none of which are
covered by a collective-bargaining agreement or represented by a union. We have
experienced no employee-generated work stoppages or disruptions and we consider
our employee relations to be satisfactory.
Geographic Areas
Financial information about geographic areas is set forth in Note 14 to the
Consolidated Financial Statements.
We are subject to the risks of doing business on a global basis, including
foreign currency fluctuation risks, changes in general economic and business
conditions in the countries and markets that we serve and government actions and
initiatives including import and export restrictions and tariffs.
Availability of Reports and Other Information
Our website is www.hurco.com. We make available on this website, free of charge,
access to our annual, quarterly and current reports and other documents filed by
us with the Securities and Exchange Commission as soon as reasonably practical
after the filing date.
Item 2. PROPERTIES
The following table sets forth the location, size and principal use of each of
our facilities:
Location Square Footage Principal Uses
Indianapolis, Indiana 165,000(1) Corporate headquarters, design and
engineering, product testing, computer
control assembly, sales, application
engineering and customer service
Long Beach, California 1,100(2) Warehouse and distribution
High Wycombe, England 12,000 Sales, application engineering and
customer service
Paris, France 2,800 Sales, application engineering and
customer service
Munich, Germany 17,100 Sales, application engineering and
customer service
Milan, Italy 4,850 Sales, application engineering and
customer service
Singapore 3,000 Sales, application engineering and
customer service
Shanghai, China 1,100 Sales, application engineering and
customer service
Taichung, Taiwan 26,600 Manufacturing
- ----------------------------------------------------------------------------------------------------------------
(1) Approximately 45,000 square feet is leased to a third-party under
a lease which expires January 30, 2005.
(2) The lease expired on November 30, 2002. We entered into a lease
with an effective date of December 1, 2002 for a new 13,000 square
foot facility located in Los Angeles that also includes sales and
service facilities.
We own the Indianapolis facility and lease all other facilities. The leases have
terms expiring at various dates ranging from January 2004 to April 2008. We
believe that all of our facilities are well maintained and are adequate for our
needs now and in the foreseeable future. We do not believe that we would
experience any difficulty in replacing any of the present facilities if any of
our leases were not renewed at expiration.
Item 3. LEGAL PROCEEDINGS
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. The scope and cost of the repairs alleged by the
lessor to be required evolved throughout fiscal 2002 as investigations and
negotiations proceeded, and currently approximate $2.0 million. We do not agree
with the amount of the lessor's claim and are vigorously contesting that claim.
Our liability could be reduced by statutory limitations or by a negotiated
settlement. Based upon facts presently available to us and the current status of
our negotiations with the lessor, our best estimate of our ultimate liability is
$1.1 million and we have established a reserve in that amount.
We are involved in various other claims and lawsuits arising in the normal
course of business. We believe that it is remote that any of these claims will
have a material adverse effect on our consolidated financial position or
results of operations.
Item. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Executive Officers of the Registrant
Executive officers are elected each year by the Board of Directors at the first
board meeting following the Annual Meeting of Shareholders to serve during the
ensuing year and until their respective successors are elected and qualified.
There are no family relationships between any of the executive officers of the
Company or between any of them and any of the members of the Board of Directors.
The following information sets forth as of December 31, 2002, the name of each
executive officer, his age, tenure as an officer, principal occupation and
business experience for the last five years:
Name Age Position(s) with the Company
Michael Doar 47 Chairman of the Board and Chief Executive Officer
James D. Fabris 51 President and Chief Operating Officer
Roger J. Wolf 62 Senior Vice President, Secretary, Treasurer and Chief Financial
Officer
David E. Platts 50 Vice President, Technology
Stephen J. Alesia 36 Corporate Controller, Assistant Secretary
Michael Doar was appointed Chairman of the Board and Chief Executive Officer
on November 14, 2001. Mr. Doar had held various management positions with
Ingersoll Milling Machine Company from 1989 until 2001. Mr. Doar has been a
director of Hurco since 2000.
James D. Fabris was appointed President and Chief Operating Officer on November
14, 2001. Mr. Fabris served as Executive Vice President - Operations from
November 1997 until his current appointment and previously served as a Vice
President of Hurco since February 1995.
Roger J. Wolf has been Senior Vice President, Secretary, Treasurer and Chief
Financial Officer since January 1993.
David E. Platts has been employed by Hurco since 1982, and was elected Vice
President, Technology in May 2000. Mr. Platts previously served as Vice
President of Research and Development since 1989.
Stephen J. Alesia has been the Corporate Controller since joining Hurco in June
1996 and was elected an executive officer in September 1996. Prior to joining
Hurco, Mr. Alesia was employed for seven years by an international public
accounting firm.
PART II
Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"HURC". The following table sets forth the high and low sales prices of the
shares of our common stock for the periods indicated, as reported by the Nasdaq
National Market.
2002 2001
--------------------- -------------------
Fiscal Quarter Ended: High Low High Low
-------------------- ------------------- -------------------
January 31.............. $2.780 $2.050 $3.875 $3.250
April 30................ 3.350 2.030 4.188 3.150
July 31................. 2.950 1.500 3.660 2.150
October 31.............. 2.220 1.450 2.990 2.080
We do not currently pay dividends on our common stock and intend to continue to
retain earnings for working capital, capital expenditures and debt reduction.
There were approximately 408 holders of record of our common stock as of January
2, 2003.
During the period covered by this report, we did not sell any equity securities
that were not registered under the Securities Act of 1933, as amended.
Item 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented below have been derived from our
Consolidated Financial Statements for the years indicated and should be read in
conjunction with the Consolidated Financial Statements and related notes set
forth elsewhere herein.
Year Ended October 31,
2002 2001 2000 1999 1998
--------------------------------------------------------------------
Statement of Operations Data: (In thousands, except per share amounts)
Sales and service fees (1)............ $ 70,486 $ 92,267 $ 96,204 $ 88,238 $ 93,422
Gross profit.......................... $ 15,246 $ 23,262 $ 25,377 $ 24,174 $ 27,939
Selling, general and adminis-
trative expenses.................... $ 19,658 $ 24,040 $ 23,538 $ 21,259 $ 21,786
Restructuring expense
and other expense, net.............. $ 2,755 $ 143 $ 300 $ (103) $ 1,162
Operating income (loss)............... $ (7,167) $ (921) $ 1,539 $ 3,018 $ 4,991
Interest expense...................... $ 634 $ 790 $ 939 $ 1,293 $ 876
License fee income and litigation
settlement fees, net................ $ 163 $ 723 $ 5,365 $ 304 $ 6,974
Net income (loss)..................... $ (8,263) $ (1,597) $ 5,035 $ 1,802 $ 9,254
Earnings (loss)
per common share-diluted............ $ (1.48) $ (.28) $ .84 $ .30 $ 1.39
Weighted average common
shares outstanding-diluted.......... 5,583 5,670 6,020 6,061 6,670
(1) Sales and service fees for discontinued products were $4,756, $6,067, $10,156, $7,286, and $8,152 for
the years ended 2002 through 1998, respectively.
As of October 31,
2002 2001 2000 1999 1998
---------------------------------------------------------------------
Balance Sheet Data: (Dollars in thousands)
Current assets........................ $ 41,535 $ 49,510 $49,195 $ 52,856 $ 55,143
Current liabilities................... $ 21,185 $ 18,217 $ 23,124 $ 19,580 $ 25,794
Working capital ...................... $ 20,350 $ 31,293 $ 26,071 $ 33,276 $ 29,439
Current ratio......................... 2.0 2.7 2.1 2.7 2.1
Total assets.......................... $ 57,152 $ 66,217 $ 65,024 $ 69,632 $ 71,696
Long-term obligations................. $ 7,950 $ 12,532 $ 3,009 $ 13,904 $ 8,162
Total debt............................ $ 8,885 $ 12,000 $ 3,736 $ 14,172 $ 8,358
Shareholders' equity.................. $ 28,017 $ 35,468 $ 38,891 $ 36,148 $ 37,740
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein. Certain statements made in this report may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. These forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among others, changes in
general economic and business conditions that affect market demand for machine
tools and related computer control systems, software products, and replacement
parts, changes in manufacturing markets, adverse currency movements, innovations
by competitors, quality and delivery performance by our contract manufacturers
and governmental actions and initiatives including import and export
restrictions and tariffs.
Results of Operations
The following table presents, for the fiscal years indicated, selected items
from the Consolidated Statements of Operations expressed as a percentage of
worldwide sales and service fees and the year-to-year percentage changes in the
dollar amounts of those items.
Percentage of Revenues Year-to-Year % Change
Increase (Decrease)
2002 2001 2000 02 vs. 01 01 vs. 00
----- ----- ----- --------- ---------
Sales and service fees................ 100.0% 100.0% 100.0% (23.6%) (4.1%)
Gross profit.......................... 21.6% 25.2% 26.4% (34.5%) (8.3%)
Selling, general and
administrative expenses............. 27.9% 26.1% 24.5% (18.2%) 2.1%
Restructuring expense and
other expenses, net................. 3.9% 0.2% 0.3% 1,826% (52.3%)
Operating loss........................ (10.2%) (1.0%) 1.6% NA NA
License fee income, net............... 0.2% 0.8% 5.6% (77.4%) (86.5%)
Interest expense...................... 0.9% 0.9% 0.9% (19.7%) (15.9%)
Net income (loss)................ (11.7%) (1.7%) 5.2% NA NA
Fiscal 2002 Compared With Fiscal 2001
Our net loss for the year ended October 31, 2002, which was more than five times
greater than that reported for fiscal 2001, was due primarily to substantially
lower sales and service fees as result of a continuing decline in machine tool
orders in both the U.S. and Europe. The Association for Manufacturing
Technology, the machine tool industry's trade association, reported that in
2002, the U.S. dollar value of orders for machine tools decreased 25%, and there
was a corresponding deterioration in our European markets.
Also contributing to the loss for fiscal 2002 were restructuring and other
special charges totaling $3.8 million, which consisted primarily of: (a)
non-cash inventory write-downs of $1.1 million, which were recorded as an
increase in the cost of sales, and the write-off of capitalized software
development costs of $1.0 million, which was recorded as a restructuring
expense, (b) severance costs of $1.1 million related to personnel reductions,
and (c) a reserve of $1.1 million (of which $896,000 was recorded in the fourth
fiscal quarter) for potential expenditures that might be required pursuant to a
disputed claim regarding a terminated facility lease in the United Kingdom,
which is more fully discussed below.
During fiscal 2002, we discontinued several under-performing product lines, and
sold the related assets, to enable us to focus our resources and technology
development on our core products. These products, known as milling machines and
vertical machining centers, consist primarily of general purpose computerized
machine tools for the metal cutting industry into which our proprietary
Ultimax(R) software and computer control systems have been fully integrated.
Discontinued and sold were the Delta(TM) series computer control and related
Dynapath(TM) milling machine product line, and related parts and service
activities, along with press brake product lines and all tooling products
related to press brake applications. These discontinued product lines were
marketed exclusively in the United States.
During fiscal 2002, we also eliminated 53 domestic employee positions, which we
expect will result in annual cost reductions of approximately $3.8 million, of
which $2.1 million was realized in fiscal 2002. The positions that were
eliminated were those related to the discontinued product lines as well as some
positions associated with our realigned and consolidated domestic sales and
service operations.
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. The scope and cost of the repairs alleged by the
lessor to be required evolved throughout fiscal 2002 as investigations and
negotiations proceeded, and currently approximate $2.0 million. We do not agree
with the amount of the lessor's claim and are vigorously contesting that claim.
Our liability could be reduced by statutory limitations or by a negotiated
settlement. Based upon facts presently available to us and the current status of
our negotiations with the lessor, our best estimate of our ultimate liability is
$1.1 million, and we have established a reserve in that amount, of which
$896,000 was recorded in the fourth quarter of fiscal 2002.
The following tables set forth net sales by geographic region and product
category for the years ended October 31, 2002 and 2001 (in thousands):
Net Sales and Service Fees by Geographic Region
October 31,
---------------------------------------------------------
2002 2001
-------------------------- ---------------------------
Americas $ 24,148 34.3% $ 34,779 37.7%
Europe 44,509 63.1% 54,977 59.6%
Asia Pacific 1,829 2.6% 2,511 2.7%
------------ ---------- ------------ ----------
Total $ 70,486 100.0% $ 92,267 100.0%
============ ========== ============ ==========
Net Sales and Service Fees by Product Category
October 31,
---------------------------------------------------------
2002 2001
-------------------------- --------------------------
Continuing Products and Services
Computerized Machine Tools $ 52,056 73.9% $ 69,631 75.4%
Computer Control Systems and Software 3,194 4.5% 4,782 5.2%
Service Parts 7,240 10.3% 8,038 8.7%
Service Fees 3,240 4.6% 3,749 4.1%
------------ ---------- ------------ ---------
Total $ 65,730 93.3% $ 86,200 93.4%
Discontinued Products and Services 4,756 6.7% 6,067 6.6%
------------ ---------- ------------ ----------
Total $ 70,486 100.0% $ 92,267 100.0%
============ ========== ============ ==========
Our total sales and service fees were $70.5 million in fiscal 2002, a $21.8
million, or 24%, decline compared to fiscal 2001. Sales of computerized machine
tools (other than discontinued products) declined $17.6 million, or 25%,
compared to fiscal 2001, reflecting the continuing global weakness in industrial
equipment spending and reduced consumption of machine tools by many
manufacturing companies, with the decline comprising $6.8 million, $10.1 million
and $671,000 in the United States, Europe and Southeast Asia, respectively.
Non-machine tool revenues also declined due to reduced activity levels in our
market sectors, with the decline being most pronounced in the U.S.
The following table sets forth machine unit volume and average net selling price
for computerized machine tools by continuing and discontinued products:
Computerized Machine Tools - Units Sold 2002 2001
----------------- ---------------
Continuing Products 697 88.9% 942 92.4%
Discontinued Products 87 11.1% 77 7.6%
-------- ------- ------- ------
Total 784 100.0% 1,019 100.0%
Average Net Selling Price - Per Unit (in thousands) 2002 2001
--------- -----------
Continuing Products $ 74.7 $ 73.9
Discontinued Products $ 39.6 $ 47.5
Total $ 70.8 $ 71.9
The average net selling price per machine units of continuing products increased
due to the effect of stronger European currencies when translating foreign sales
for financial reporting purposes which more than offset the effect of increased
discounting due to weak market conditions.
New order bookings for continuing products in fiscal 2002 were $62.2 million
compared to $83.3 million in fiscal 2001, a 25% decline. New orders for
computerized machine tools (other than discontinued products) declined 27% in
U.S. dollars worldwide. The decline, which was experienced in all of our
geographic markets, reflected a sharp decrease in orders for vertical machining
centers, our primary product line. Backlog was $5.3 million at October 31, 2002,
compared to $9.1 million at October 31, 2001.
Gross margin for fiscal 2002, exclusive of inventory write-downs recorded in
cost of sales, declined to 23.2%, from 25.2% in fiscal 2001, due to the decline
in our sales of vertical machining centers and our sale of approximately $4.8
million in discontinued products at discounted prices. Gross margin did improve
in the last three quarters of fiscal 2002 compared to the immediately preceding
quarter, although the improvement was due primarily to the cost reductions
implemented over the preceding eighteen months.
Selling, general and administrative expenses for fiscal 2002 of $19.7 million
were $4.4 million, or 18%, lower than those for fiscal 2001, due to our cost
reduction programs. We expect operating expenses to be lower in 2003 as we
experience a full year's benefit of cost reductions initiated in fiscal 2002.
Non-operating items consisted of interest expense of $634,000 in fiscal 2002,
which was $156,000, or 20%, lower than in fiscal 2001, primarily due to reduced
borrowings. License fee income and litigation settlement fees in fiscal 2002 and
2001 consisted of several licenses that were granted during the year. The
licensing program that resulted in these fees was effectively completed in the
first quarter of fiscal 2002 and we do not expect additional license fee income
in the foreseeable future. Earnings from equity investments are from our two
affiliates which are accounted for using the equity method. Other expense in
fiscal 2002 was not significant and in fiscal 2001, consisted primarily of the
costs of typhoon-related flood damage at our manufacturing facility in Taiwan.
The provision for income taxes is related to the earnings of two foreign
subsidiaries.
Fiscal 2001 Compared With Fiscal 2000
Net loss for the fiscal year ended October 31, 2001 was $1.6 million, or $.28
per share, on a diluted basis, compared to net income of $5.0 million, or $.84
per share, reported for the preceding year. The change in our year-to-year
results was due primarily to a significant decline in license fee income in
fiscal 2001 from that reported in fiscal 2000, and to a lesser extent, to a
decrease in sales.
The following tables set forth net sales by geographic region and product
category for the years ended October 31, 2001 and 2000 (in thousands):
Net Sales and Service Fees by Geographic Region
October 31,
---------------------------------------------------------
2001 2000
-------------------------- --------------------------
Americas $ 34,779 37.7% $ 44,607 46.4%
Europe 54,977 59.6% 46,129 47.9%
Asia Pacific 2,511 2.7% 5,468 5.7%
----------- ----------- ----------- -----------
Total $ 92,267 100.0% $ 96,204 100.0%
=========== =========== =========== ===========
Net Sales and Service Fees by Product Category
October 31,
----------------------------------------------------------
2001 2000
--------------------------- ---------------------------
Computerized Machine Tools $ 73,286 79.4% $ 71,708 74.5%
Computer Control Systems and Software 5,716 6.2% 9,605 10.0%
Service Parts 9,516 10.3% 10,649 11.1%
Service Fees 3,749 4.1% 4,242 4.4%
------------- ---------- ----------- -----------
Total $ 92,267 100.0% $ 96,204 100.0%
============= ========== =========== ===========
Sales and service fees were $92.3 million, for fiscal 2001, a decrease of 4.1%
from the $96.2 million reported for fiscal 2000. The decline in sales was due in
major part to the adverse effects of a stronger U.S. dollar when translating
foreign sales for financial reporting purposes, and by a decrease in domestic
sales. When measured at constant exchange rates, sales for fiscal 2001 would
have been essentially the same as 2000. Domestic sales in fiscal 2001 declined
by $9.8 million, or 22.0%, as a result of a slowing economy in most industrial
sectors that began near the end of the first fiscal quarter, while sales in
Europe increased $8.8 million in spite of the strong dollar. Sales in Southeast
Asia declined by $3.0 million, or 54.1%, due to weak economic conditions in that
area during fiscal 2001.
Net sales of computerized machine tools increased in fiscal 2001 by $4.8 million
compared to the prior year when measured in constant dollars but was offset by a
$3.5 million decline in sales of stand-alone control systems. Net sales of
computerized machine tools in the U.S. declined 17% for the full fiscal year
2001. In contrast, sales of computerized machine tools in Europe, measured in
constant dollars, increased 30% for the full year. Parts and service fee
revenues declined by $1.6 million, or 10.9%. The decrease was exclusively in the
United States and further reflects the weakening economic environment.
International sales, including export sales from the United States, approximated
64.3% of consolidated sales and service fees for fiscal 2001 compared to 57.5%
for fiscal 2000.
New order bookings for fiscal 2001 were $89.4 million, compared to $100.7
million for the prior year period, a decrease of 11.3%. Orders were $28.1
million in the first quarter of fiscal 2001 but declined to $21.1 million, $19.2
and $21.0 million during the second, third and fourth quarter, respectively. The
decline in orders from the first quarter was the result of weak economic
conditions in most industrial market sectors in the U.S. along with a softening
in the German economy. The decline in orders was most pronounced in the United
States where computerized machine tool orders declined 30.4% in dollars. This
was partially offset by a 19% increase in computerized machine tool orders in
Europe, measured in constant dollars. We experienced a further decline in orders
in the first quarter of fiscal 2002 reflecting the recessionary environment in
our primary markets. Backlog was $9.1 million at October 31, 2001, compared to
$10.2 million at October 31, 2000.
Gross profit margin declined in fiscal 2001 to 25.2% from 26.4% in fiscal 2000,
due primarily to the unfavorable effects of the stronger U.S. dollar.
Operating expenses increased 2.1% to $24.0 million in fiscal 2001 from $23.5
million in fiscal 2000, due primarily to increased costs for enhanced product
development activities associated with our next generation computer control
technology. The increased operating expense for the full fiscal year combined
with reduced sales and gross profit margins, resulted in an operating loss of
$921,000 for fiscal 2001 as compared to an operating profit of $1.5 million in
the prior year.
Restructuring expense of $143,000 in fiscal 2001 included a reversal of $328,000
primarily related to sub-letting space in a leased facility for which a reserve
was provided as part of a previous restructuring plan. In addition, a
restructuring charge of $471,000 was recorded for severance costs related to
reductions in our domestic operations. In fiscal 2000, we recorded a
restructuring charge of $300,000 for severance costs related to the termination
of employees at our Farmington Hills facility in connection with the
consolidation of this operation into our North American sales and service
business.
License fee income and litigation settlement fees in fiscal 2001 consisted of
several licenses that were granted during the year, while the substantial
license fees reported in fiscal 2000 were primarily the result of the settlement
of a long-standing patent infringement claim. The licensing program that
resulted in the license and litigation settlement fees has effectively been
completed and we do not expect significant license fees in fiscal 2002.
Other expense in fiscal 2001 was $215,000 compared to $395,000 in fiscal 2000
and consisted primarily of typhoon-related flood damage at our manufacturing
facility in Taiwan of which our insurers have denied coverage. Fiscal 2000 other
expense consisted primarily of realized and unrealized currency losses
associated with accounts receivable denominated in foreign currencies, primarily
those linked to the Euro, which for the most part, were not hedged during fiscal
2000. In fiscal 2001, these accounts receivable were fully hedged.
The provision for foreign income tax in both fiscal 2001 and fiscal 2000
consists mostly of income tax expense related to the earnings of our foreign
subsidiaries.
Foreign Currency Risk Management
We manage our foreign currency exposure through the use of foreign currency
forward exchange contracts (see the discussion following Item 7a). We enter into
foreign currency forward exchange contracts periodically to hedge certain
forecasted inter-company sales and forecasted inter-company and third party
purchases denominated in foreign currencies (primarily the Pound Sterling, Euro
and New Taiwan Dollar). We also enter into foreign currency forward exchange
contracts to protect against the effects of foreign currency fluctuations on
receivables and payables denominated in foreign currencies. We do not speculate
in the financial markets and, therefore, do not enter into these contracts for
trading purposes. We also moderate our currency risk related to significant
purchase commitments with certain foreign vendors through price adjustment
agreements that provide for a sharing of, or otherwise limit, the risk of
currency fluctuations on the costs of purchased products.
Liquidity and Capital Resources
At October 31, 2002, we had cash and cash equivalents of $4.4 million compared
to $3.5 million at October 31, 2001. Cash generated from operations totaled $6.2
million in fiscal 2002, compared to cash used by operations of $3.5 million in
fiscal 2001.
Working capital, excluding short-term debt, was $21.7 million at October 31,
2002, compared to $31.5 million at October 31, 2001. The decrease in working
capital is attributable to a decrease in inventory of $7.7 million and a
decrease in accounts receivable of $1.6 million. The decrease in inventory
related primarily to a planned reduction in vertical machining center units
along with the reduction of discontinued models that were sold off at discounted
prices. Accounts receivable decreased due to the reduction in sales combined
with improved collections.
Capital investments during the year consisted of normal expenditures for
software development projects and purchases of equipment. In addition, during
the fourth quarter of fiscal 2002, we purchased patented technology for $1.8
million that will be incorporated in our proprietary computer control system.
Cash used for investments was reduced by a $1.0 million resulting from repayment
of an investment as a result of the termination of certain agreements. We funded
these expenditures with cash flow from operations except for the acquisition of
the patented technology, which was financed by the seller. On October 24, 2002,
we issued a secured promissory note for $1,350,000 to the seller of the patented
technology as partial payment for the purchase. The note bears interest at 2.75%
per annum and is due in four equal installments of $337,500 on March 31, 2003,
June 30, 2003, July 31, 2003 and December 31, 2003.
As of October 31, 2002, we amended our domestic bank credit agreement, extending
the maturity date to December 15, 2003, reducing the bank's commitment to $7.0
million and revising some of the financial covenants. We must maintain a
tangible net worth, exclusive of Accumulated Other Comprehensive Income (as set
forth in our consolidated balance sheet), of not less than $32.3 million at
October 31, 2002, $30.0 million at January 31, 2003, April 30, 2003 and July 31,
2003 and $30.5 million at October 31, 2003. Our adjusted EBITDA, as defined, for
the twelve consecutive months then ending cannot be less than negative $2.15
million on October 31, 2002, negative $1.75 million on January 31, 2003,
negative $600,000 on April 30, 2003, positive $280,000 on July 31, 2003 and
positive $1.8 million on October 31, 2003. Other financial covenants were
extended unchanged to December 15, 2003. A facility fee of $50,000 previously
payable March 31, 2003 has been reduced to $35,000, payable June 30, 2003,
unless we have obtained a replacement financing arrangement by then. There were
no borrowings outstanding under this facility at October 31, 2002 and
outstanding letters of credit were $1.1 million.
On April 30, 2002, we obtained a $4.5 million first mortgage loan on our
Indianapolis corporate headquarters. The loan bears interest at a rate of 7?%
and matures in April 2009. We are required to make principal payments over the
seven-year term of the loan, based on a twenty-year amortization schedule. The
proceeds from the first mortgage loan were used to repay bank debt.
On January 8, 2002 we entered into a 3.0 million Euro credit facility with a
European bank, which matures November 30, 2003. Interest on the facility is
payable at 7.16% per annum or, at the Company's option, 1.75% above EURIBOR for
fixed rate borrowings. Although the facility is uncollaterlized, the bank
reserves the right to require collateral in the event of increased risk
evaluation. Borrowings outstanding under this facility at October 31, 2002 were
$2.5 million.
Total debt at October 31, 2002 was $8.9 million representing 24% of total
capitalization, compared to $12.0 million, or 25% of total capitalization, at
October 31, 2001. We were in compliance with all loan covenants and had unused
credit availability of $6.5 million at October 31, 2002.
Based on our business plan and financial projections for fiscal 2003, we believe
that cash flow from operations and borrowings available to us under our credit
facilities will be sufficient to meet our anticipated cash requirements in
fiscal 2003. Although we believe that the assumptions underlying our 2003
business plan are reasonable and achievable, there are risks related to further
declines in market demand and reduced sales in the U.S. and Europe and adverse
currency movements that could cause our actual results to differ from our
business plan. We are also currently in discussions with lenders to replace our
existing credit facility (expires December 2003) with a long-term credit
facility in conjunction with assessing our liquidity needs for fiscal 2004 and
beyond. While we believe we will be able to obtain a replacement facility under
acceptable terms, no such assurance can be given.
Contractual Obligations and Commitments
The following is a table of contractual obligations and commitments as of
October 31, 2002 (all amounts in thousands):
Payments Due by Period
Less than 1-3 4-5 After 5
Total 1 Year Years Years Years
----- ------ ----- -----
Long-Term Debt $8,885 $ 1,313 $ 3,437 $ 262 $3,873
Operating Leases 2,664 964 1,136 512 52
Letters of Credit 1,100 1,100 - - -
----------- ------------ ----------- ---------- -----------
Total $12,649 $ 3,377 $ 4,573 $ 774 $3,925
=========== ============ =========== ========== ===========
In addition to the contractual obligations and commitments disclosed above, we
also have a variety of other contractual agreements related to the procurement
of materials and services and other commitments. With respect to these
agreements, we are not subject to any contracts which commit us to material
non-cancelable commitments. While some of these contractual agreements are
long-term supply agreements, we are not committed under these agreements to
accept or pay for requirements which are not needed to meet production needs. We
have no material minimum purchase commitments or "take-or-pay" type agreements
or arrangements.
With respect to capital expenditures, we expect capital spending in fiscal 2003
to approximate $1.5 million.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method of
accounting. Under SFAS 142, amortization of goodwill will cease and the goodwill
carrying values will be tested periodically for impairment. We are required to
adopt SFAS 142, effective November 1, 2002 for goodwill and intangible assets
acquired prior to July 1, 2001. Goodwill and intangible assets acquired after
June 30, 2001 were subject immediately to the goodwill non-amortization and
intangible provisions of this statement. We do not expect that the adoption of
this standard will have a material effect on the Consolidated Financial
Statements.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which is effective for the fiscal year beginning November 1, 2002. SFAS
144 establishes a single model to account for impairment of assets to be held or
disposed of, incorporating guidelines for accounting and disclosure of
discontinued operations. We do not expect that the adoption of this standard
will have a material effect on the Consolidated Financial Statements.
In July 2002, the Financial Accounting Standards Board issued Statement No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities". This
Standard, which is effective for disposal activities initiated after December
31, 2002, addresses significant issues regarding the recognition, measurement
and reporting of costs associated with exit and disposal activities. We will
comply with the provisions of the Standard with respect to exit and disposal
activities initiated after the effective date, but do not expect adoption to
have any material impact on the Consolidated Financial Statements.
In November 2002, the Financial Accounting Standards Board ("FASB" or the
"Board") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements
of FASB Statement No. 5, Accounting for Contingencies, relating to the
guarantor's accounting for, and disclosure of, the issuance of certain types of
guarantees. The disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods that end after December 15, 2002.
However, the provisions for initial recognition and measurement are effective on
a prospective basis for guarantees that are issued or modified after December
31, 2002, irrespective of a guarantor's year-end. We do not expect the impact of
adopting the interpretation to have a material effect on the Consolidated
Financial Statements.
Critical Accounting Policies
Our accounting policies, including those described below, require management to
make significant estimates and assumptions using information available at the
time the estimates are made. Such estimates and assumptions significantly affect
various reported amounts of assets, liabilities, revenues and expenses. If our
future experience differs materially from these estimates and assumptions, our
results of operations and financial condition could be affected.
Revenue Recognition - We recognize product revenue at the time of shipment
because ownership and risk of loss passes to the customer at that time and
payment terms are fixed. Our computerized machine tools are general-purpose
computer controlled machine tools that are typically used in stand-alone
operations. Transfer of ownership and risk of loss are not contingent upon
contractual customer acceptance. Prior to shipment, we test each machine to
ensure the machine's compliance with standard operating specifications as listed
in our sales literature.
Depending upon geographic location, the machine installation at the end user may
be completed by a distributor, independent contractor or Hurco service
technician. In most instances where a machine is sold through a distributor, we
have no installation involvement. If sales are direct or through sales agents,
we will typically complete the machine installation. The machine installation
consists of the reassembly of certain parts that were removed for shipping and
the re-testing of the machine to ensure that it is performing with the standard
specifications. We consider the machine installation process inconsequential and
perfunctory.
Service fees from maintenance contracts are deferred and recognized in earnings
on a pro rata basis over the term of the contract. Sales related to software
products are recognized when shipped in conformity with American Institute of
Certified Public Accountants' Statement of Position 97-2 Software Revenue
Recognition.
Inventories - We must determine at each balance sheet date how much, if any, of
our inventory may ultimately prove to be unsaleable or unsaleable at its
carrying cost. Reserves are established to effectively adjust any such inventory
to net realizable value. To determine the appropriate level of valuation
reserves, we evaluate current stock levels in relation to historical and
expected patterns of demand for all of our products. Management evaluates the
need for changes to valuation reserves based on market conditions, competitive
offerings and other factors on a regular basis.
Deferred Tax Asset Valuation - As of October 31, 2002, we have deferred tax
assets of $5.3 million for which we have recorded a valuation allowance of 100%
resulting in zero net deferred tax asset on our balance sheet. These future tax
benefits relate primarily to net operating loss carryforwards in the United
States and certain foreign jurisdictions as well as Federal business tax credits
carried forward in the United States. Some of these carryforward benefits expire
at certain dates and utilization of certain others is limited to specific
amounts each year. Realization of those benefits is entirely dependent upon
generating sufficient future taxable earnings in the specific tax jurisdictions
before they expire. Due to the recent losses in the United States and the
applicable foreign tax jurisdictions, there is substantial uncertainty whether
these tax benefits can be utilized before they expire. Therefore, we have
established a full valuation allowance. The need for this allowance is reviewed
periodically, and if reduced in future periods, the associated tax benefits will
be recorded in future operations as a reduction of income tax expense.
Capitalized Software Development Costs - Costs incurred to develop new computer
software products and significant enhancements to software features of existing
products are capitalized as required by SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed", and amortized
over the estimated product life of the related software. The determination as to
when in the product development cycle technological feasibility has been
established, and the expected product life, require judgments and estimates by
management and can be affected by technological developments, innovations by
competitors and changes in market conditions affecting demand. We capitalized
$534,000 in fiscal 2002, $665,000 in fiscal 2001 and $706,000 in fiscal
2000 related to software development projects. Also in fiscal 2002 we wrote off
$1.0 million of previously capitalized costs related to a discontinued product
line. At October 31, 2002 we have an asset of $1.6 million for capitalized
software development projects, a significant portion of which relates to
projects currently in process and subject to development risk and market
acceptance. We periodically review the carrying values of these assets and make
judgments as to ultimate realization considering the above mentioned risk
factors.
Derivative Financial Instruments - Critical aspects of our accounting policy for
derivative financial instruments include conditions which require that critical
terms of a hedging instrument are essentially the same as a hedged forecasted
transaction. Another important element of the policy demands that formal
documentation be maintained as required by the Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Failure to comply with these conditions would result in a
requirement to recognize changes in market value of hedge instruments in
earnings. We routinely monitor significant estimates, assumptions, and judgments
associated with derivative instruments, and compliance with formal documentation
requirements.
Stock Compensation - We apply the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation;
therefore, no compensation expense has been recognized for stock options as
options are granted at fair market value. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" provides an
alternative method of accounting for stock options based on an option-pricing
model, such as Black-Scholes. We have adopted the disclosure requirements of
SFAS No. 123. Information and assumptions regarding compensation expense under
the alternative method is provided in Note 8 to the Consolidated Financial
Statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Our earnings are affected by changes in interest expense on our outstanding
debt, all of which is subject to floating rates, either LIBOR or Prime. If
market interest rates on our outstanding variable rate borrowings were to have
increased by one percentage point (1%) (or 100 basis points) over the actual
rates paid in that year, interest expense would have increased by $90,000 in
fiscal 2002 and $110,000 in fiscal 2001. This sensitivity analysis assumes no
changes in other factors affecting our financial statements that might result
from changes in the economic environment which impact interest rates. Refer to
Note 4 of the Consolidated Financial Statements for a discussion of the interest
rates related to our current credit facilities. At October 31, 2002, outstanding
borrowings under our bank credit facilities were $2.5 million and our total
indebtedness was $8.9 million.
Foreign Currency Exchange Risk
In fiscal 2002, approximately 68% of our sales and service fees, including
export sales, were derived from foreign markets. All of our computerized machine
tools and computer control systems, as well as certain proprietary service
parts, are sourced by our U.S.-based engineering and manufacturing division and
re-invoiced to our foreign sales and service subsidiaries, primarily in their
functional currencies.
Our products are sourced from foreign suppliers or built to our specifications
by either our wholly-owned subsidiary in Taiwan, or overseas contract
manufacturers. These purchases are predominantly in foreign currencies and in
some cases our arrangements with these suppliers include foreign currency risk
sharing agreements, which reduce (but do not eliminate) the effects of currency
fluctuations on product costs. The predominant portion of our exchange rate risk
associated with product purchases relates to the New Taiwan Dollar.
We enter into foreign currency forward exchange contracts from time to time to
hedge the cash flow risk related to forecast inter-company sales, and forecast
inter-company and third party purchases denominated in, or based on, foreign
currencies. We also enter into foreign currency forward exchange contracts to
protect against the effects of foreign currency fluctuations on receivables and
payables denominated in foreign currencies. We do not speculate in the financial
markets and, therefore, do not enter into these contracts for trading purposes.
Forward contracts for the sale or purchase of foreign currencies as of October
31, 2002 which are designated as cash flow hedges under SFAS No. 133 were as
follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
Forward in Foreign Forward Contract Ocotber 31, Maturity
Contracts Currency Rate Date 2002 Dates
--------- -------- ---- ------- ------- --------
Sale Contracts:
Euro 5,700,000 $ .9830 $5,603,100 $5,621,043 Nov 2002-March 2003
Sterling 600,000 $1.5421 $925,260 $935,697 Nov 2002-Feb 2003
Purchase Contracts:
New Taiwan Dollar 175,000,000 33.95* $5,154,639 $5,058,159 Nov 2002-Apr 2003
Forward contracts for the sale of foreign currencies as of October 31, 2002
which were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables denominated in foreign currencies were
as follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
Forward in Foreign Forward Contract October 31, Maturity
Contracts Currency Rate Date 2002 Dates
--------- -------- ---- ------- -------- ---------
Sale Contracts:
Euro 1,938,989 $ .9805 $1,901,179 $1,913,155 Nov 2002-Jan 2003
Singapore Dollar 1,525,337 $ .5644 $860,900 $862,494 Nov 2002 -Jan 2003
Sterling 742,830 $1.5491 $1,150,718 $1,158,640 Nov 2002-Jan2003
Purchase Contracts:
New Taiwan Dollar 50,000,000 34.63* $1,443,835 $1,442,658 Nov 2002
* NT Dollars per U.S. dollars
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Accountants
To the Shareholders and
Board of Directors of
Hurco Companies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) on page 47 present fairly, in all material
respects, the financial position of Hurco Companies, Inc. and its subsidiaries
at October 31, 2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion, the
financial statement schedule for the year ended October 31, 2002 listed in the
index appearing under Item 15(a)(2) on page 47 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial statements and
financial statement schedule of Hurco Companies, Inc. as of October 31, 2001,
and for each of the two years in the period ended October 31, 2001, were audited
by other independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements and
financial statement schedule in their report dated January 15, 2002.
PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 15, 2003
Report of Independent Public Accountants
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.
To the Shareholders and
Board of Directors of
Hurco Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Hurco Companies,
Inc. (an Indiana corporation) and subsidiaries as of October 31, 2001 and 2000*,
and the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended October
31, 2001. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hurco Companies,
Inc. and subsidiaries as of October 31, 2001 and 2000*, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) 2** is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 15, 2002.
*The 2000 consolidated balance sheet is not required to be presented in the 2002
annual report.
** The schedule is listed in Item 15(a) 2 in the 2002 annual report.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
----------------------
2002 2001 2000
---- ---- ----
(Dollars in thousands, except per share amounts)
Sales and service fees........................................ $ 70,486 $92,267 $96,204
Cost of sales and service..................................... 54,157 69,005 70,827
Cost of sales - restructuring................................. 1,083 -- --
--------- --------- ---------
Gross profit............................................. 15,246 23,262 25,377
Selling, general and administrative expenses.................. 19,658 24,040 23,538
Restructuring expense and other expense, net (Note 15)........ 2,755 143 300
--------- ---------- --------
Operating income (loss).................................. (7,167) (921) 1,539
Interest expense.............................................. 634 790 939
License fee income and litigation settlement fees, net
(Note 10 and 12)......................................... 163 723 5,365
Earnings from equity investments.............................. 25 383 36
Other expense, net............................................ 61 215 395
--------- --------- ----------
Income (loss) before income taxes........................ (7,674) (820) 5,606
Provision for income taxes (Note 6)........................... 589 777 571
--------- --------- --------
Net income (loss) ............................................ $ (8,263) $ (1,597) $ 5,035
========= ========== ========
Earnings (loss) per common share - basic...................... $ (1.48) $ (.28) $ .85
=========== ========== ========
Weighted average common shares outstanding - basic............ 5,583 5,670 5,952
=========== ========== ========
Earnings (loss) per common share - diluted.................... $ (1.48) $ (.28) $ .84
=========== ========== =========
Weighted average common shares outstanding - diluted.......... 5,583 5,670 6,020
=========== ========== =========
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31,
2002 2001
Current assets: (Dollars in thousands, except per share amounts)
Cash and cash equivalents..................................................... $ 4,358 $ 3,523
Accounts receivable, less allowance for doubtful accounts
of $689 in 2002 and $907 in 2001............................................. 13,425 14,436
Inventories .................................................................. 22,548 30,319
Other......................................................................... 1,204 1,232
--------- ---------
Total current assets........................................................ 41,535 49,510
Property and equipment:
Land.......................................................................... 761 761
Building...................................................................... 7,203 7,187
Machinery and equipment....................................................... 10,144 11,410
Leasehold improvements........................................................ 396 1,059
--------- ---------
18,504 20,417
Less accumulated depreciation and amortization................................ (9,696) (11,653)
-------- ---------
8,808 8,764
Software development costs, less accumulated amortization........................ 1,604 3,066
Investments and other assets..................................................... 5,205 4,877
--------- ---------
$ 57,152 $ 66,217
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 8,752 $ 7,601
Accounts payable-related parties.............................................. 1,104 2,335
Accrued expenses and other.................................................... 9,430 7,289
Accrued warranty expenses..................................................... 586 792
Current portion of long-term debt............................................. 1,313 200
--------- ---------
Total current liabilities................................................... 21,185 18,217
Non-current liabilities:
Long-term debt ............................................................... 7,572 11,800
Deferred credits and other ................................................... 378 732
--------- ---------
7,950 12,532
Commitments and contingencies (Notes 10 and 11)
Shareholders' equity:
Preferred stock: no par value per share; 1,000,000 shares
authorized; no shares issued................................................ -- --
Common stock: no par value; $.10 stated value per share; 12,500,000
shares authorized; 5,583,158 and 5,580,658 shares issued and
outstanding in 2002 and 2001, respectively.................................. 558 558
Additional paid-in capital.................................................... 44,717 44,714
Accumulated deficit........................................................... (10,173) (1,910)
Accumulated other comprehensive income (loss)................................. (7,085) (7,894)
---------- ----------
Total shareholders' equity.................................................. 28,017 35,468
--------- ---------
$ 57,152 $ 66,217
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
2002 2001 2000
Cash flows from operating activities: (Dollars in thousands)
Net income (loss)....................................................... $ (8,263) $(1,597) $5,035
Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating activities:
Provision for doubtful accounts....................................... 133 547 185
Equity in income of affiliates........................................ (25) (383) (36)
Depreciation and amortization......................................... 1,929 2,196 2,519
Restructuring charge (credit) ........................................ 2,250 (195) 300
Change in assets/liabilities
(Increase) decrease in accounts receivable........................... 1,615 3,113 (2,286)
(Increase) decrease in inventories................................... 7,720 (4,018) 2,717
Increase (decrease) in accounts payable.............................. (141) (3,521) 2,917
Increase (decrease) in accrued expenses.............................. 1,228 558 1,023
Other................................................................ (245) (182) 476
---------- -------- --------
Net cash provided by (used for) operating activities.............. 6,201 (3,482) 12,850
--------- --------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment............................ 154 38 36
Purchase of property and equipment...................................... (1,184) (1,253) (1,193)
Software development costs.............................................. (534) (665) (706)
Purchase of intellectual property....................................... (500) -- --
Other proceeds (investments)............................................ 1,037 (829) (138)
-------- --------- --------
Net cash (used for) investing activities.......................... (1,027) (2,709) (2,001)
-------- --------- --------
Cash flows from financing activities:
Advances on bank credit facilities...................................... 28,369 44,300 28,500
Repayments of bank credit facilities.................................... (37,251) (34,050) (37,150)
Repayments of term debt................................................. (200) (1,986) (1,786)
Proceeds from first mortgage............................................ 4,500 -- --
Repayment of first mortgage............................................. (39) -- --
Proceeds from exercise of common stock options.......................... 4 35 8
Purchase of common stock................................................ -- (1,706) --
--------- --------- --------
Net cash provided by (used for) financing activities.............. (4,617) 6,593 (10,428)
-------- -------- --------
Effect of exchange rate changes on cash.................................... 278 (263) (532)
-------- --------- --------
Net increase (decrease) in cash................................... 835 139 (111)
Cash and cash equivalents at beginning of year............................. 3,523 3,384 3,495
-------- -------- ---------
Cash and cash equivalents at end of year................................... $4,358 $3,523 $ 3,384
========= ======== ========
Supplemental disclosures:
Cash paid for:
Interest............................................................. $ 519 $ 682 $ 834
Income taxes......................................................... $ 442 $ 501 $ 739
Supplemental schedule of noncash investing and financial activities:
We purchased patented technology for $1.85 million. In connection therewith we
issued a secured promissory note for $1.35 million.
Fair value of asset acquired...................................... $ 1,850
Cash paid.................................................... 500
---------
Promissory note issued............................................ $ 1,350
=========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Other
Common Stock Additional Comprehensive
Shares Issued Paid-In Accumulated Income
& Outstanding Amount Capital Deficit (Loss) Total
(Dollars in thousands)
Balances, October 31, 1999........................... 5,951,859 $ 595 $46,340 $(5,348) $(5,439) $36,148
---------- ------ ------- -------- --------- --------
Net income........................................... -- -- -- 5,035 -- 5,035
Translation of foreign currency financial
statements........................................ -- -- -- -- (2,300) (2,300)
-------
Comprehensive Income................................. 2,735
Exercise of common stock options..................... 3,500 1 7 -- -- 8
--------- ------- ------- --------- ----------- ------
Balances, October 31, 2000........................... 5,955,359 $ 596 $ 46,347 $(313) $(7,739) $38,891
========= ======= ========= ====== ======== =======
Net loss............................................. -- -- -- (1,597) -- (1,597)
Translation of foreign currency financial
statements........................................ -- -- -- -- 315 315
Unrealized loss of derivative instruments............ -- -- -- -- (470) (470)
------
Comprehensive loss................................... (1,752)
Exercise of common stock options..................... 16,400 1 34 -- -- 35
Repurchase of common stock........................... (391,101) (39) (1,667) -- -- (1,706)
--------- ---- ------- ---------- ------ -----
Balances, October 31, 2001.............................. 5,580,658 $558 $44,714 $(1,910) $(7,894) $35,468
========= ======= ========= ======== ======== =======
Net income loss...................................... -- -- -- (8,263) -- (8,263)
Translation of foreign currency financial
statements........................................ -- -- -- -- 981 981
Unrealized loss of derivative instruments............ -- -- -- -- (172) (172)
------
Comprehensive loss................................... (7,454)
Exercise of common stock options........... 2,500 -- 3 -- -- 3
------- ------ ----- ---------- -------- ------
Balances, October 31, 2002.............................. 5,583,158 $ 558 $ 44,717 $(10,173) $(7,085) $28,017
========= ======= ========= ======== ====== ======
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of
Hurco Companies, Inc. (an Indiana corporation) and our wholly owned and
controlled subsidiaries. We have a 35% and 24% ownership interest in two
affiliates accounted for using the equity method. Our combined investments are
approximately $1.6 million and are included in Other Assets on the accompanying
Consolidated Balance Sheets. Intercompany accounts and transactions have been
eliminated.
Statements of Cash Flows. We consider all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents. Cash flows from
hedges are classified consistent with the items being hedged.
Translation of Foreign Currencies. All balance sheet accounts of non-U.S.
subsidiaries are translated at the exchange rate as of the end of the year.
Income and expenses are translated at the average exchange rates during the
year. Cumulative foreign currency translation adjustments of $6.4 million are
included in Accumulated Other Comprehensive Income in shareholders' equity.
Foreign currency transaction gains and losses are recorded as income or expense
as incurred.
Hedging. On November 1, 2001, we adopted Statement of Financial Accounting
Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In accordance with the provisions of SFAS No. 133, we recorded a
transition adjustment upon the adoption of the standard to recognize the
difference between the fair value of the derivative instruments recorded on the
balance sheet and the previous carrying amount of those derivatives. The effect
of this transition adjustment was insignificant and is reflected in the Other
Income (Expense) in the Condensed Consolidated Statement of Operations. We also
recorded a transition adjustment of approximately $129,000 in Accumulated Other
Comprehensive Income to recognize previously deferred net losses on derivatives
designated as cash flow hedges.
We enter into foreign currency forward exchange contracts periodically to hedge
certain forecasted inter-company sales and forecasted inter-company and third
party purchases denominated in foreign currencies (primarily the Pound Sterling,
Euro and New Taiwan Dollar). The purpose of these instruments is to mitigate the
risk that the U.S. Dollar net cash inflows and outflows resulting from sales and
purchases denominated in foreign currencies will be adversely affected by
changes in exchange rates. These forward contracts have been designated as cash
flow hedge instruments, and are recorded in the Consolidated Balance Sheet at
fair value in Other Current Assets and Accrued Liabilities and Other. Gains and
losses resulting from changes in the fair value of these hedge contracts are
deferred in Accumulated Other Comprehensive Income and recognized as an
adjustment to the related sale or purchase transaction in the period that the
transaction occurs. Net losses on cash flow hedge contracts which we
reclassified from Other Comprehensive Income to Cost of Sales in the fiscal
years ended October 31, 2002 and 2001 were $617,000, and $261,000, respectively.
At October 31, 2002 we had $645,000 of realized and unrealized losses related to
cash flow hedges deferred in Other Comprehensive Income, which we expect to
recognize in Cost of Sales within the next twelve months. Cash flow hedge
contracts mature at various dates through April 2003.
We also enter into foreign currency forward exchange contracts to protect
against the effects of foreign currency fluctuations on receivables and payables
denominated in foreign currencies. These derivative instruments are not
designated as hedges under SFAS 133 and as a result, changes in fair value are
reported currently as Other Income (Expense) in the Consolidated Statement of
Operations consistent with the transaction gain or (loss) on the related foreign
denominated receivable or payable. Such net
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
transaction gains and (losses) were $(209,000), ($50,000) and ($638,000) for the
years ended October 31, 2002, 2001, and 2000, respectively.
Inventories. Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out method.
Property and Equipment. Property and equipment are carried at cost. Depreciation
and amortization of assets are provided primarily under the straight-line method
over the shorter of the estimated useful lives or the lease terms as follows:
Number of Years
Building 40
Machines 10
Shop and office equipment 5
Leasehold improvements 5
Total depreciation expense for the year ended October 31, 2002, was
$1.1 million. Any impairment would be recognized based on an assessment of
future operations (including cash flows) to insure that assets are
appropriately valued.
Revenue Recognition. We recognize product revenue at the time of shipment
because ownership and risk of loss passes to the customer at that time and
payment terms are fixed. Our computerized machine tools are general-purpose
computer controlled machine tools that are typically used in stand-alone
operations. Transfer of ownership and risk of loss are not contingent upon
contractual customer acceptance. Prior to shipment, we test each machine to
ensure the machine's compliance with standard operating specifications as listed
in our sales literature.
Depending upon geographic location, the machine installation at the end user may
be completed by a distributor, independent contractor or Hurco service
technician. In most instances where a machine is sold through a distributor, we
have no installation involvement. If sales are direct or through sales agents,
we will typically complete the machine installation. The machine installation
consists of the reassembly of certain parts that were removed for shipping and
the re-testing of the machine to ensure that it is performing with the standard
specifications. We consider the machine installation process inconsequential and
perfunctory.
Service fees from maintenance contracts are deferred and recognized in earnings
on a pro rata basis over the term of the agreement. Sales related to software
products are recognized when shipped in conformity with American Institute of
Certified Public Accountants' Statement of Position 97-2 Software Revenue
Recognition.
License Fee Income, Net. From time to time, our wholly owned subsidiary, IMS
Technology, Inc. (IMS) enters into agreements for the licensing of its
interactive computer control patents. License fees received or receivable under
a fully paid-up license, for which there are no future performance requirements
or contingencies, and litigation settlement fees are recognized in income, net
of legal fees and expenses, if any, at the time the related agreement is
executed. License fees received in periodic installments that are contingent
upon the continuing validity of a licensed patent were recognized in income, net
of legal fees and expenses, if any, over the life of the licensed patent, which
expired in October 2001. As a result, we have no deferred license fee income at
October 31, 2002 and do not expect any significant license fee income in the
foreseeable future.
Product Warranty. Expected future product warranty expense is recorded when the
product is sold.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Research and Development Costs. The costs associated with research and
development programs for new products and significant product improvements are
expensed as incurred and are included in Selling, General and Administrative
expenses. Research and development expenses totaled $2.4 million, $3.5 million
and $3.2 million in fiscal 2002, 2001, and 2000, respectively.
Costs incurred to develop computer software products and significant
enhancements to software features of existing products to be sold or otherwise
marketed are capitalized, after technological feasibility is established.
Software development costs are amortized to Cost of Sales on a straight-line
basis over the estimated product life of the related software, which ranges from
three to five years. We capitalized $534,000 in 2002, $665,000 in 2001 and
$706,000 in 2000 related to software development projects. Amortization expense
was $719,000, $925,000, and $1.3 million for the years ended October 31, 2002,
2001, and 2000, respectively. Any impairment could be recognized based on an
assessment of future operations (including cash flows) to insure that assets are
appropriately valued.
Earnings Per Share. Basic and diluted earnings per common share are based on the
weighted average number of our shares of common stock outstanding. Diluted
earnings per common share give effect to outstanding stock options using the
treasury method. The impact of 12,000 potentially issuable shares for the year
ended October 31, 2002 was excluded from the computation of diluted earnings per
share because their effect would be anti-dilutive.
Income Taxes. We record income taxes under SFAS 109 "Accounting for Income
Taxes". SFAS 109 utilizes the liability method for computing deferred income
taxes and requires that the benefit of certain loss carryforwards be recorded as
an asset and that a valuation allowance be established against the asset to the
extent it is "more likely than not" that the benefit will not be realized.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
2. BUSINESS OPERATIONS
Nature of Business. We design and produce computer control systems and software
and computerized machine tools for sale through our own distribution system to
the worldwide machine tool industry.
The end market for our products consists primarily of precision tool, die and
mold manufacturers, independent job shops and specialized short-run production
applications within large manufacturing operations. Industries served include:
aerospace, defense, medical equipment, energy, transportation and computer
industries. Our products are sold through independent agents and distributors in
countries throughout North America, Europe and Asia. We also maintain direct
sales operations in the United States, England, France, Germany, Italy and
Singapore.
Credit Risk. We sell products to customers located throughout the world. We
perform ongoing credit evaluations of customers and generally do not require
collateral. Allowances are maintained for potential credit losses. Concentration
of credit risk with respect to trade accounts receivable is limited due to the
large number of customers and their dispersion across many geographic areas.
Although a significant amount of trade receivables are with distributors
primarily located in the United States, no single distributor or region
represents a significant concentration of credit risk.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Manufacturing Risk. We contract with manufacturing contractors located in Taiwan
for the manufacture and assembly of computerized machine tool systems, based on
our designs and/or specifications. Any interruption from these sources would
restrict the availability of our computerized machine tool systems and would
affect operating results adversely.
3. INVENTORIES
Inventories as of October 31, 2002 and 2001 are summarized below (in thousands):
2002 2001
---------- ----------
Purchased parts and sub-assemblies.... $ 6,677 $ 7,853
Work-in-process....................... 2,251 1,256
Finished goods........................ 13,620 21,210
--------- ------
$ 22,548 $ 30,319
========= ======
4. DEBT AGREEMENTS
Long-term debt as of October 31, 2002 and 2001, consisted of (in thousands):
2002 2001
-------- --------
Domestic bank revolving credit facility...................................... $ -- $ 11,200
European bank credit facility................................................ 2,475 --
First Mortgage............................................................... 4,460 --
Installment Promissory Note.................................................. 1,350 --
Economic Development Revenue Bonds, Series 1990.............................. 600 800
--------- ---------
8,885 12,000
Less current portion......................................................... 1,313 200
--------- ---------
$ 7,572 $ 11,800
========= =========
As of October 31, 2002, long-term debt was payable as follows (in thousands):
Fiscal 2003........................................ $ 1,313
Fiscal 2004........................................ 3,120
Fiscal 2005........................................ 317
Fiscal 2006........................................ 126
Fiscal 2007 ....................................... 136
Thereafter....................................... 3,873
-------------