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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, 2003 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 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.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 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, 2003 (the last day of our most recently completed
second quarter) was $8,430,569.
The number of shares of the Registrant's common stock outstanding as of January
2, 2004 was 5,609,360.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2004 Annual Meeting of Shareholders (Part III).
Disclosure Concerning Forward-looking Statements
Certain statements made in this annual report on form 10-K 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, performance of our contract manufacturers, governmental actions
and initiatives, including import and export restrictions and tariffs, and
developments in the relations among the U.S., China and Taiwan.
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;
Singapore and Taichung, Taiwan. We also have 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
computerized machine tools for the global metal working market, which
incorporates our proprietary interactive computer control technology. This
technology is 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 system 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. We discontinued and sold
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,
------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- ------------------------- -------------------------
Continuing Products and Services
Computerized Machine Tools $60,977 80.7% $ 52,056 73.9% $ 69,631 75.4%
Computer Control Systems 3,044 4.0% 3,194 4.5% 4,782 5.2%
and Software *
Service Parts 7,616 10.1% 7,240 10.3% 8,038 8.7%
Service Fees 3,460 4.6% 3,240 4.6% 3,749 4.1%
----------- ----------- ------------ ---------- ----------- ----------
Total $75,097 99.4% $ 65,730 93.3% $ 86,200 93.4%
Discontinued Products and Services 435 0.6% 4,756 6.7% 6,067 6.6%
----------- ----------- ------------ ---------- ----------- ----------
Total $75,532 100.0% $ 70,486 100.0% $ 92,267 100.0%
=========== =========== ============ ========== =========== ==========
* Amounts shown do not include computer control systems sold as an integrated
component of computerized machine tools.
Computerized Machine Tool Products
We design, manufacture 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 tool operator to create a complex
two-dimensional machining program directly from a blue print or CAD. An operator
with little or no programming experience can successfully create a program and
begin the machining of a part 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, which include vertical machining centers with an x-axis travel of
24, 26, 30, 40, 42, 50 and 64 inches. During fiscal 2002 we introduced the first
model in our new VM series, the VM1, a vertical machining center with a 26 inch
x-axis travel, a substantially smaller footprint and significantly lower price
than our previous entry-level vertical machining center. In fiscal 2003, we
introduced the VM2, a vertical machining center with a 40 inch x-axis travel.
The VM2 has a smaller footprint and lower price than our vertical machining
center with an x-axis travel of 42 inches. We also introduced four new
higher-performance machine models in our 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. Our Advanced Velocity
Control (AVC) and Adaptive Surface Finish (ASF), high performance machining
software options enable a customer to increase machine throughput using higher
cutting feed rates. The ASF software option facilitates optimized surface
finishes on complex parts using faster high resolution part data transfers.
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 200 independent agents and
distributors in approximately 40 countries throughout North America, Europe and
Asia. We also have our own direct sales personnel in England, France, Germany,
Italy, Singapore and China, which are among the world's principal machine tool
consuming countries. During fiscal 2003, no distributor accounted for more than
5% of our sales and service fees. Approximately 89% of the worldwide demand for
computerized machine tools and computer control systems comes from outside the
U.S. In fiscal 2003, approximately 70% 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 tool 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 2003, 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, primarily by our wholly owned subsidiary in Taiwan, 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. In addition, we have a 24%
ownership interest in a contract machine manufacturer that produces certain of
our models. 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 source one of the proprietary Ultimax(R) computer components
(PCB) from a sole domestic supplier with whom we have had a long-term
relationship.
We work closely with our manufacturing subsidiary and affiliates 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, except for the
sole-sourced PCB, 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 Taiwan-based
manufacturing facilities or the PCB supplier 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 $8.2 million, $5.3 million and $9.1 million as of October
31, 2003, 2002, and 2001, 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 $1.9 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.
Research and Development
Research and development expenditures for new products and significant product
improvements, included as period operating expenses, were $1.8 million, $2.4
million and $3.5 million in fiscal 2003, 2002, and 2001, respectively. In
addition, we recorded expenditures of $679,000 in 2003, $534,000 in 2002, and
$665,000 in 2001 related to software development projects that were capitalized.
Employees
We had 232 employees at the end of fiscal 2003, 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 15 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
Los Angeles, California 13,000 Warehouse, distribution, sales, application
engineering and customer service
High Wycombe, England 12,000 Sales, application engineering and
customer service
Paris, France 4,800 Sales, application engineering and
customer service
Munich, Germany 19,600 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 65,333 Manufacturing
- -------------------------------------------------------------------------------------------------------------------
(1) Approximately 45,000 square feet is leased to a third-party under a lease
which expires January 30, 2005.
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 are involved in various claims and lawsuits arising in the normal course of
business. We do not expect any of these claims, individually or in the
aggregate, to 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 our executive officers or
between any of them and any of the members of the Board of Directors.
The following information sets forth as of December 31, 2003, 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 48 Chairman of the Board and Chief
Executive Officer
James D. Fabris 52 President and Chief Operating Officer
Roger J. Wolf 63 Senior Vice President, Secretary,
Treasurer and Chief Financial
Officer
David E. Platts 51 Vice President, Technology
Stephen J. Alesia 37 Corporate Controller, Assistant
Secretary
Michael Doar was elected 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 elected 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.
2003 2002
---------- -- --------- --------- --- ------------
Fiscal Quarter Ended: High Low High Low
- --------------------
---------- --------- --------- ------------
January 31................................. $2.030 $1.300 $2.780 $2.050
April 30................................... 1.670 1.400 3.350 2.030
July 31.................................... 3.150 1.520 2.950 1.500
October 31................................. 2.740 2.100 2.220 1.450
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 294 holders of record of our common stock as of January
2, 2004.
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.
The disclosure under the caption "Equity Compensation Plan Information" in Item
12 of this report is incorporated by reference in response to this item.
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
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ------------- --------- ----------- -----------
Statement of Operations Data: (In thousands, except per share amounts)
Sales and service fees (1)......... $ 75,532 $ 70,486 $ 92,267 $ 96,204 $ 88,238
Gross profit....................... 20,822 15,246 (2) 23,262 25,377 24,174
Selling, general and
administrative expenses......... 18,749 19,658 24,040 23,538 21,259
Restructuring expense (credit)
and other expense, net.......... (124) 2,755 143 300 (103)
Operating income (loss)............ 2,197 (7,167) (921) 1,539 3,018
Interest expense................... 658 634 790 939 1,293
License fee income and
litigation settlement fees, net. -- 163 723 5,365 304
Net income (loss).................. 462 (8,263) (1,597) 5,035 1,802
Earnings (loss)
per common share-diluted........ 0.08 (1.48) (.28) .84 .30
Weighted average common
shares outstanding-diluted...... 5,582 5,583 5,670 6,020 6,061
(1) Sales and service fees for discontinued products were $435, $4,756, $6,067, $10,156, and $7,286, for the
years ended 2003 through 1999, respectively.
(2) Includes $1,083 of inventory write-down provision.
As of October 31
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ----------- ----------- ----------- -----------
Balance Sheet Data: (Dollars in thousands)
Current assets................... $42,390 $ 41,535 $ 49,510 $ 49,195 $52,856
Current liabilities.............. 20,154 21,185 18,217 23,124 19,580
Working capital.................. 22,236 20,350 31,293 26,071 33,276
Current ratio.................... 2.1 2.0 2.7 2.1 2.7
Total assets..................... 57,958 57,152 66,217 65,024 69,632
Non-current liabilities.......... 9,063 7,950 12,532 3,009 13,904
Total debt....................... 9,222 8,885 12,000 3,736 14,172
Shareholders' equity............. 28,741 28,017 35,468 38,891 36,148
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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
------------------------------------------- ------------------------------
2003 2002 2001 Increase (Decrease)
----------- ------------ ------------ ------------------------------
03 vs. 02 02 vs. 01
------------- ------------
Sales and service fees.......... 100.0% 100.0% 100.0% 7.2% (23.6%)
Gross profit.................... 27.6% 21.6% 25.2% 36.6% (34.5%)
Selling, general and
Administrative expenses...... 24.8% 27.9% 26.1% (4.6%) (18.2%)
Restructuring expense and
Other expenses, net.......... (0.2%) 3.9% 0.2% N/A N/A
Operating income (loss)......... 2.9% (10.2%) (1.0%) N/A N/A
License fee income, net......... -- 0.2% 0.8% -- (77.4%)
Interest expense................ 0.9% 0.9% 0.9% 3.8% (19.7%)
Net income (loss)............... 0.6% (11.7%) (1.7%) N/A N/A
Fiscal 2003 Compared With Fiscal 2002
Net income for fiscal 2003 was $462,000, or $.08 per share, compared to a net
loss of $8.3 million in the prior year. We attribute our return to profitability
to incremental sales from a new, entry-level machine model (the VM1) introduced
in late fiscal 2002, strengthening European currencies in relation to the U.S.
Dollar and the implementation of restructuring and cost reduction actions over
the past 18 months. Results for fiscal 2002 were adversely impacted by $3.8
million of restructuring expense.
We developed the VM1 to improve our competitiveness in the entry-level machining
center market. The VM1 has been successful in both the domestic and
international markets. In the United States, we have obtained an approximate 20%
market share in the entry-level machining center market. In fiscal 2003, we
shipped 285 VM1 units worldwide, which resulted in approximately $11.0 million
of incremental machine sales.
Our operating results for fiscal 2003 were also favorably impacted by changes in
foreign currency exchange rates, particularly the Euro, in relation to the U.S.
Dollar when translating foreign sales and service fees into U.S. Dollars for
financial reporting purposes. As noted in the following table, approximately
63.9% of our net sales and service fees in fiscal 2003 were derived from
European markets. The weighted average exchange rate for the Euro during fiscal
2003 was $1.10, as compared to $.93 for fiscal 2002, an increase of 18%.
Net Sales and Service Fees by Geographic Region
The following tables set forth net sales by geographic region for the years
ended October 31, 2003 and 2002 (in thousands):
October 31,
-------------------------------------------------
2003 2002
------------------------ ----------------------
Americas $ 24,313 32.2% $ 24,148 34.3%
Europe 48,277 63.9% 44,509 63.1%
Asia Pacific 2,942 3.9% 1,829 2.6%
---------- ---------- ---------- --------
Total $ 75,532 100.0% $ 70,486 100.0%
========== ========== ========== ========
Total sales and service fees on a worldwide basis were $75.5 million in fiscal
2003, compared to $70.5 million in the prior fiscal year, a $5.0 million, or 7%,
increase. However, on a constant dollar basis, sales and service fees were $68.7
million, a $1.8 million decrease.
In the Americas, sales and service fees from continuing products and services
increased $4.5 million, or 23%, due primarily to the successful introduction of
the VM1, in late fiscal 2002. This increase was offset by a decrease of $4.3
million in sales of discontinued products, the liquidation of which was
substantially completed in fiscal 2002.
In Europe, sales and service fees increased by $3.8 million as a result of the
favorable effect of stronger European currencies. However, when measured at
constant exchange rates, sales and service fees in Europe decreased $3.0
million, or 7%, reflecting the continuing weakness in industrial equipment
spending and reduced consumption of machine tools by many manufacturing
companies, particularly in Germany.
Sales and service fees in Asia Pacific were not significantly affected by
currency rates, but reflect improved activity in Asian markets.
In the fourth quarter of fiscal 2003, sales and service fees improved over the
first three fiscal quarters, reflecting an improvement in worldwide computerized
machine tool demand from the depressed levels of the past three years.
Net Sales and Service Fees by Product Category
The following table sets forth net sales and service fees by product category
for years ended October 31, 2003 and 2002 (in thousands):
October 31,
---------------------------------------------------------
2003 2002
-------------------------- --------------------------
Continuing Products and Services
Computerized Machine Tools $ 60,977 80.7% $ 52,056 73.9%
Computer Control Systems and Software 3,044 4.0% 3,194 4.5%
Service Parts 7,616 10.1% 7,240 10.3%
Service Fees 3,460 4.6% 3,240 4.6%
------------ ---------- ------------ ----------
Total $ 75,097 99.4% $ 65,730 93.3%
Discontinued Products and Services* 435 0.6% 4,756 6.7%
------------ ---------- ------------ ----------
Total $ 75,532 100.0% $ 70,486 100.0%
============ ========== ============ ==========
* Discontinued product sales were made solely in the United States.
Sales of continuing machine tool products increased $8.9 million, or 17%, of
which $6.1 million was attributable to the favorable effects of foreign currency
translation. Unit shipments of continuing machine tool models increased 23%, as
sales of the VM1 more than offset a decline in the balance of the product line.
The average net selling price per unit of continuing machine tool models
decreased approximately 5% due to product mix and discounting, the effects of
which were partially offset by the favorable effects of currency translation.
When measured at constant exchange rates, the average net selling price per
continuing unit declined approximately 16%.
New order bookings for fiscal 2003 were $77.9 million, an increase of 16% as
compared to $67.0 million recorded in fiscal 2002. When measured at constant
exchange rates, new order bookings increased $3.5 million, or 5%. New order
bookings for continuing products and services increased $7.8 million, or 12%,
when measured at constant exchange rates. The increase in orders for continuing
products in constant U.S. Dollars was attributable to orders for the VM1 model,
which more than offset the effect of weak order rates in the first nine months
of fiscal 2003 related to the balance of the product line. New order bookings
increased significantly in the fourth quarter of fiscal 2003 and were $13.9
million, $20.6 million, $18.9 million and $24.5 million for each of the four
quarters in fiscal 2003. Backlog was $8.2 million at October 31, 2003 compared
to $5.3 million at October 31, 2002.
Gross profit margin increased in fiscal 2003 to 27.6% from 21.6% (23.2%
excluding a $1.1 million restructuring charge) in fiscal 2002, due in part to
strengthening European currencies as well as previously reported employee cost
reductions and fewer sales of discontinued products, which were liquidated at
discounted prices.
Selling, general and administrative ("SG&A") expenses for fiscal 2003 of $18.7
million declined $900,000, or 5%, from those of the corresponding 2002 period.
When measured at constant exchange rates, SG&A expenses decreased $2.1 million,
or 11%, from fiscal 2002, as a result of previously reported employee cost
reductions, lower research and development expenses, and reduced sales and
marketing expenditures. The decrease was offset, in part, by the effects of a
weaker U.S. Dollar when translating expenses incurred outside the United States
for financial reporting purposes.
Other expense, net includes $51,000 related to certain stock options which are
subject to variable plan accounting as described in Note 8 to the Consolidated
Financial Statements. Expense for this item in future periods will be directly
impacted by changes in the price of our common stock until the options are
exercised. Other expense, net in fiscal 2003 also includes currency exchange
losses on inter-company receivables and payables denominated in foreign
currencies, net of gains or losses on related forward contracts, and other
non-operating income and expense items.
The provision for income taxes is related to the earnings of two foreign
subsidiaries. In the United States and certain other foreign jurisdictions, we
have net operating loss carryforwards for which we have a 100% valuation reserve
at October 31, 2003. The provision for income tax increased in fiscal 2003
because of increased earnings from our taxable foreign subsidiaries.
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 continuing core 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 and 2003 as investigations
and negotiations proceeded. On September 30, 2003, we settled this claim with
the lessor for (pound)684,000 (approximately $1.2 million), which we had
previously accrued. The settlement payment was due and paid in the first quarter
of fiscal 2004.
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 unit 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.
Liquidity and Capital Resources
At October 31, 2003, we had cash and cash equivalents of $5.3 million, exclusive
of $622,000 restricted cash related to derivative instruments, compared to $4.4
million at October 31, 2002. Cash generated from operations totaled $2.3 and
$6.2 million at October 31, 2003 and 2002, respectively.
The weakening of the U.S. dollar in relation to European currencies subsequent
to October 31, 2003, will result in a temporary increase in restricted cash
related to derivative instruments, pending the liquidation of forward contracts
in the normal course during fiscal 2004. Anticipated cash losses on these
forward contracts will be funded by the increased U.S. dollar value of the
related inter-company sales which are being hedged and; as a result, we do not
expect cash flow from operations to be adversely affected.
Working capital, excluding short-term debt, was $21.6 million at October 31,
2003, approximately the same as at October 31, 2002. Cash flow from operations
benefited $1.3 million in fiscal 2003 from accelerated collections of accounts
receivable and $1.5 million from planned reductions of finished machines in
inventory. These amounts were substantially offset by reductions in accounts
payable and accrued expenses due principally to timing of payments related to
prior year foreign taxes and other operating items. We expect our operating
working capital requirements to increase in fiscal 2004, commensurate with any
increase in sales and service fees. Any such increase will be funded by cash
flow from operation and borrowings under our bank credit facilities.
Capital investments during the year consisted of normal expenditures for
software development projects and purchases of equipment. We funded these
expenditures with cash flow from operations. On October 24, 2002, we issued a
secured promissory note for $1.3 million to the seller of certain patent rights
as partial payment for the purchase of those rights. The note had an interest
rate of 2.75% per annum and was payable in four quarterly installments of
$337,500, the last of which was paid on December 31, 2003.
Effective December 1, 2003, we amended and restated our credit agreement with
our domestic bank, which extended the maturity date to December 1, 2006 and
increased the maximum amount of the facility from $7.0 million to $8.0 million.
The credit agreement provides the lender with a security interest in
substantially all domestic assets, exclusive of the assets subject to the first
mortgage, and 66% of the common stock of our U.S. holding companies, which own
our foreign subsidiaries. Borrowings may be made in U.S. Dollars, Euros or
Pounds Sterling. Interest on all outstanding borrowings is payable at LIBOR for
the respective currency plus an applicable margin, or, at our option, prime rate
plus a specified margin based on funded debt to EBITDA (earnings before
interest, taxes, depreciation and amortization) ratio, as follows:
Total Funded Debt/EBITDA ratio LIBOR Margin Prime Margin
- ------------------------------------------------------------- ------------------- ------------------
- ------------------------------------------------------------- ------------------- ------------------
Greater than 3.0 2.75% 0%
Greater than 2.5 and less than or equal to 3.0 2.0% (.25%)
Greater than 2.0 and less than or equal to 2.5 1.5% (.50%)
Less than or equal to 2.0 1.0% (.75%)
Prior to March 1, 2004, the applicable margin is determined based on the total
funded debt/EBITDA ratio being greater than 2.5 and less than or equal to 3.0.
Thereafter, the applicable margin will be adjusted on the first day of the month
following the month after each quarter end.
Availability under the facility is limited to the greater of the commitment or a
borrowing base, as defined in the agreement, which measured as of October 31,
2003, aggregated $7.5 million. The agreement requires that we maintain
Consolidated Net Worth of $32.0 million plus an amount equal to 75% of positive
consolidated net income for the fiscal year ended October 31, 2004, and for each
fiscal year thereafter. Consolidated Net Worth is defined as total Shareholders'
Equity excluding Accumulated Other Comprehensive Income. Our consolidated total
debt as compared to consolidated total debt plus Consolidated Net Worth ratio
cannot be greater than 0.35 to 1.0 and our fixed charge coverage ratio cannot be
less than 1.10 to 1.0. The fixed charge coverage ratio is the ratio of
consolidated EBITDA minus taxes, unfunded capital expenditures and redemptions
of capital stock to principal payments of indebtedness plus consolidated
interest expense.
Effective January 15, 2004, we entered into an agreement with our principal
domestic bank which provides our U.K. subsidiary with a revolving credit and
overdraft facility. The facility includes a maximum commitment aggregating
(pound)1.0 million (approximately $1.7 million) and matures January 31, 2007.
Borrowings will be secured by liens on substantially all of the assets of our
U.K. subsidiary. Interest on outstanding borrowings will be based on LIBOR for
fixed rate loans and a base rate for overdrafts, in each case, plus a margin
based on consolidated funded debt to EBITDA equivalent to that of our domestic
bank facility.
We have a 3.0 million Euro credit facility with a European bank. On December 1,
2003, the maturity date of the facility was extended until November 30, 2004.
Interest on the facility is payable at 7.16% per annum or, at our option, 1.75%
above EURIBOR for fixed rate borrowings. Although the facility is
uncollateralized, the bank reserves the right to require collateral in the event
of increased risk evaluation. Borrowings outstanding under this facility at
October 31, 2003 were $1.3 million.
During the fourth quarter of fiscal 2003, we settled a disputed claim in the
United Kingdom regarding a terminated facility lease for $1.2 million, which had
been previously accrued. The settlement payment was due in two equal
installments, which where paid in the first quarter of fiscal 2004. The
settlement payments were funded through cash flow from operations and borrowings
available from bank credit facilities.
Total debt at October 31, 2003 was $9.2 million representing 24% of total
capitalization, compared to $8.9 million, or 24% of total capitalization, at
October 31, 2002. We were in compliance with all loan covenants and had unused
credit availability of $6.4 million at October 31, 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 2004.
Contractual Obligations and Commitments
The following is a table of contractual obligations and commitments as of
October 31, 2003 (all amounts in thousands):
Payments Due by Period
Less than 1-3 3-5 More than 5
Total 1 Year Years Years Years
----------- ------------ ---------- ---------- ------------
Long-Term Debt........................ $ 9,222 $ 645 $ 4,703 $ 145 $ 3,729
Operating Leases...................... 2,770 1,185 1,371 199 15
Deferred Credits and Other............ 486 -- -- -- 486
----------- ------------ ---------- ---------- ------------
----------- ------------ ---------- ---------- ------------
Total............................. $ 12,478 $ 1,830 $ 6,074 $ 344 $4,230
=========== ============ ========== ========== ============
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 2004,
exclusive of capitalized software development costs, to approximate $1.5
million, which includes discretionary items.
Off Balance Sheet Arrangements
From time to time, our German subsidiary guarantees third party lease financing
residuals in connection with the sale of certain machines in Europe. At October
31, 2003 there were 26 third party guarantees totaling approximately $1.4
million. A retention of title clause allows our Germany subsidiary to obtain the
machine if the customer defaults on its lease. We believe that the proceeds
obtained from liquidation of the machine would cover any payments required under
the guarantee.
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 upon delivery to the
customer, which is normally 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, 2003, we have deferred tax
assets of $5.6 million for which we have recorded a full valuation allowance,
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 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
$679,000 in fiscal 2003, $534,000 in fiscal 2002, and $665,000 in fiscal 2001
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, 2003 we have an asset of $1.9 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, except
for certain shares subject to variable plan accounting, 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 $62,000 in
fiscal 2003 and $90,000 in fiscal 2002. 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. Note 4 of
the Consolidated Financial Statements has a discussion of the interest rates
related to our current credit facilities. At October 31, 2003, outstanding
borrowings under our bank credit facilities were $4.1 million and our total
indebtedness was $9.2 million.
Foreign Currency Exchange Risk
In fiscal 2003, approximately 70% 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 (primarily the Euro, Pound Sterling 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.
Forward contracts for the sale or purchase of foreign currencies as of October
31, 2003 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 October 31, Maturity
Contracts Currency Rate Date 2003 Dates
- --------------------- ---------------- --------- ---------- ---------- ---------------
Sale Contracts:
Euro 14,800,000 $ 1.1057 $ 16,364,360 $ 17,047,507 Nov 2003-Oct 2004
Sterling 1,960,000 $ 1.6241 $ 3,183,236 $ 3,278,948 Nov 2003-Sept 2004
Forward contracts for the sale of foreign currencies as of October 31, 2003
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 2003 Dates
- --------------------- ---------------- --------- ---------- ---------- ---------------
Sale Contracts:
Euro 4,671,837 $ 1.1650 $5,442,690 $5,399,671 Nov 2003-Dec 2003
Singapore Dollar 2,601,353 $ .5733 $1,491,356 $1,496,295 Nov 2003 -Jan 2004
Sterling 522,374 $ 1.6723 $873,566 $882,615 Nov 2003-Dec 2003
Purchase Contracts:
New Taiwan Dollar 36,800,000 33.66* $1,093,286 $1,085,478 Nov 2003-Dec 2003
* NT Dollars per U.S. dollars
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
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) present fairly, in all material respects, the
financial position of Hurco Companies, Inc. and its subsidiaries at October 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the two years in the period ended October 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the index
appearing under Item 15(a) (2) present 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 schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits 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
audits provide a reasonable basis for our opinion. The financial statements and
financial statement schedule of Hurco Companies, Inc. for the year 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 in their report dated January 15, 2002.
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
December 9, 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.
/s/ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 15, 2002.
*The 2001 and 2000 consolidated balance sheets are not required to be presented
in the 2003 annual report.
** The schedule to which this paragraph refers has not been included in this
Form 10-K as these disclosures of 2001 and 2000 information are not required to
be presented in the 2003 annual report.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31
--------------------------------------------
2003 2002 2001
----------- ------------ -------------
(Dollars in thousands, except per share amounts)
Sales and service fees......................................... $ 75,532 $ 70,486 $ 92,267
Cost of sales and service...................................... 54,710 54,157 69,005
Cost of sales - restructuring.................................. -- 1,083 --
----------- ------------ -------------
Gross profit................................................ 20,822 15,246 23,262
Selling, general and administrative expenses................... 18,749 19,658 24,040
Restructuring expense (credit) and other expense, net (Note 16) (124) 2,755 143
----------- ------------ -------------
Operating income (loss)..................................... 2,197 (7,167) (921)
Interest expense............................................... 658 634 790
License fee income and litigation settlement fees, net
(Note 10 and 13)............................................ -- 163 723
Earnings from equity investments............................... 202 25 383
Other expense, net............................................. 321 61 215
----------- ------------ -------------
Income (loss) before income taxes........................... 1,420 (7,674) (820)
Provision for income taxes (Note 6)............................ 958 589 777
----------- ------------ -------------
Net income (loss).............................................. $ 462 $ (8,263) $ (1,597)
=========== ============ =============
Earnings (loss) per common share - basic....................... $ 0.08 $ (1.48) $ (.28)
=========== ============ =============
Weighted average common shares outstanding - basic............. 5,582 5,583 5,670
=========== ============ =============
Earnings (loss) per common share - diluted..................... $ 0.08 $ (1.48) $ (.28)
=========== ============ =============
Weighted average common shares outstanding - diluted........... 5,582 5,583 5,670
=========== ============ =============
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31
----------------------------------------
2003 2002
--------------- ------------------
Current assets: (Dollars in thousands, except per share amounts)
Cash and cash equivalents.......................................... $ 5,289 $ 4,358
Cash - restricted.................................................. 622 --
Accounts receivable, less allowance for doubtful accounts
of $630 in 2003 $689 in 2002.................................... 12,823 13,425
Inventories........................................................ 22,247 22,548
Other.............................................................. 1,409 1,204
--------------- ------------------
Total current assets............................................ 42,390 41,535
--------------- ------------------
Property and equipment:
Land............................................................... 761 761
Building........................................................... 7,239 7,203
Machinery and equipment............................................ 10,568 10,144
Leasehold improvements............................................. 544 396
--------------- ------------------
19,112 18,504
Less accumulated depreciation and amortization..................... (10,730) (9,696)
--------------- ------------------
8,382 8,808
--------------- ------------------
Software development costs, less accumulated amortization............. 1,922 1,604
Investments and other assets.......................................... 5,264 5,205
--------------- ------------------
$ 57,958 $ 57,152
=============== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 9,249 $ 8,752
Accounts payable-related parties................................... 212 1,104
Accrued expenses and other......................................... 9,032 9,013
Accrued warranty expenses.......................................... 1,016 1,003
Current portion of long-term debt.................................. 645 1,313
--------------- ------------------
Total current liabilities....................................... 20,154 21,185
--------------- ------------------
Non-current liabilities:
Long-term debt..................................................... 8,577 7,572
Deferred credits and other......................................... 486 378
--------------- ------------------
9,063 7,950
--------------- ------------------
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, 5,575,987 and 5,583,158 shares issued and
outstanding in 2003 and 2002, respectively...................... 557 558
Additional paid-in capital......................................... 44,695 44,717
Accumulated deficit................................................ (9,711) (10,173)
Accumulated other comprehensive income (loss)...................... (6,800) (7,085)
--------------- ------------------
Total shareholders' equity...................................... 28,741 28,017
--------------- ------------------
$ 57,958 $ 57,152
=============== ==================
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31
-------------------------------------------
2003 2002 2001
----------- ------------ -----------
Cash flows from operating activities: (Dollars in thousands)
Net income (loss)........................................... $ 462 $ (8,263) $ (1,597)
Adjustments to reconcile net income (loss) to
Net cash provided by (used for) operating activities:
Provision for doubtful accounts.......................... 421 133 547
Equity in income of affiliates........................... (202) (25) (383)
Depreciation and amortization............................ 1,429 1,929 2,196
Restructuring charge (credit)............................ -- 2,250 (195)
Change in assets/liabilities
(Increase) decrease in accounts receivable............. 1,348 1,615 3,113
(Increase) decrease in inventories..................... 1,465 7,720 (4,018)
Increase (decrease) in accounts payable................ (687) (141) (3,521)
Increase (decrease) in accrued expenses................ (1,760) 1,228 558
Other.................................................. (200) (245) (182)
----------- ------------ -----------
Net cash provided by (used for) operating activities. 2,276 6,201 (3,482)
----------- ------------ -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment................ 14 154 38
Purchase of property and equipment.......................... (536) (1,184) (1,253)
Software development costs.................................. (679) (534) (665)
Purchase of intellectual property........................... -- (500) --
Change in restricted cash................................... (622) -- --
Other proceeds (investments)................................ (25) 1,037 (829)
----------- ------------ -----------
Net cash used for investing activities................... (1,848) (1,027) (2,709)
----------- ------------ -----------
Cash flows from financing activities:
Advances on bank credit facilities.......................... 55,731 28,369 44,300
Repayments on bank credit facilities........................ (54,418) (37,251) (34,050)
Repayments of term debt..................................... (1,211) (200) (1,986)
Proceeds from first mortgage................................ -- 4,500 --
Repayment of first mortgage................................. (108) (39) --
Proceeds from exercise of common stock options.............. -- 4 35
Purchase of common stock.................................... (23) -- (1,706)
----------- ------------ -----------
Net cash provided by (used for) financing activities..... (29) (4,617) 6,593
----------- ------------ -----------
Effect of exchange rate changes on cash........................ 532 278 (263)
----------- ------------ -----------
Net increase (decrease) in cash.......................... 931 835 139
Cash and cash equivalents at beginning of year................. 4,358 3,523 3,384
----------- ------------ -----------
Cash and cash equivalents at end of year....................... $ 5,289 $ 4,358 $ 3,523
=========== ============ ===========
Supplemental disclosures:......................................
Cash paid for:
Interest................................................. $ 595 $ 519 $ 682
Income taxes............................................. $ 468 $ 442 $ 501
Supplemental schedule of noncash investing and financial activities:
In fiscal 2002, 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
Common Stock Other
-------------------------- Additional Comprehensive
Shares Issued Paid-In Accumulated Income
& Outstanding Amount Capital Deficit (Loss) Total
-------------- --------- ------------ ------------ ------------- ---------
(Dollars in thousands)
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 -- -- -- -- 315 315
statements.................................
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 -- -- -- -- 981 981
statements.................................
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 $ 4,717 $ (10,173) $ (7,085) $28,017
============== ========= ============ ============ ============ ========
Net income loss............................ -- -- -- 462 -- 462
Translation of foreign currency financial
statements................................. -- -- -- -- 1,454 1,454
Unrealized loss of derivative instruments.. -- -- -- -- (1,169) (1,169)
--------
Comprehensive income....................... 747
Repurchase of common stock................. (7,171) (1) (22) -- -- (23)
-------------- --------- ------------ ------------ -------------- -------
Balances, October 31, 2003................. 5,575,987 $ 557 $ 44,695 $ (9,711) $ (6,800) $28,741
============== ========= ============ ============ ============== =======
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 in
affiliates are approximately $1.8 million and are included in Investments and
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.
Restricted Cash. Restricted cash results from hedging arrangements that require
cash to be on deposit with an institution based on open positions.
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 $5.0 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 No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). 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
Expense, Net in the 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 forecast inter-company sales and forecast inter-company and third-party
purchases of product denominated in foreign currencies (primarily 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 the 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 Expenses. 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 cost of sales in the period that the sale of the related hedged
item is recognized, thereby providing an offsetting economic impact against the
corresponding change in the U.S. dollar value of the inter-company sale or
purchase item being hedged.
At October 31, 2003, we had $1,814,000 of losses related to cash flow hedges
deferred in Accumulated Other Comprehensive Income. Of this amount, $778,000
represents unrealized losses related to future cash flow hedge instruments that
remain subject to currency fluctuation risk. These deferred losses will be
recorded as an adjustment to cost of sales in the periods through October 31,
2004, in which the sale of the related hedged item is recognized, as described
above. At October 31, 2002, we had $645,000 of losses related to cash flow
hedges deferred in Accumulated Other Comprehensive Income. Net losses on cash
flow hedge contracts which we reclassified from Other Comprehensive Income to
Cost of Sales
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
in the years ended October 31, 2003, 2002 and 2001 were $1,430,000, $617,000,
and $261,000, respectively.
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, "Accounting Standards for Derivative
Instruments and Hedging Activities" (SFAS 133), and, as a result, changes in
fair value are reported currently as Other Expense, Net in the Consolidated
Statement of Operations consistent with the transaction gain or loss on the
related foreign denominated receivable or payable. Such net transaction losses
were $(154,000), $(209,000) and $(50,000) for the years ended October 31, 2003,
2002 and 2001, 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 years ended October 31, 2003, 2002 and 2001
was $1.0 million, $1.1 million and $1.3 million, respectively. 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 upon delivery to the customer,
which is normally 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) entered into agreements for the licensing of its
interactive computer control patents. License fees received under a fully
paid-up license, for which there are no future performance requirement or
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
contingency, and litigation settlement fees were recognized in income, net of
legal fees and expenses, if any, at the time the related agreement was executed.
License fees received in periodic installments that were 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. We have no deferred license fee income at October 31, 2003 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.
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 $1.8 million, $2.4 million,
and $3.5 million in fiscal 2003, 2002, and 2001, 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 $679,000 in 2003, $534,000 in 2002, and
$665,000 in 2001 related to software development projects. Amortization expense
was $361,000, $719,000, and $925,000, for the years ended October 31, 2003,
2002, and 2001, respectively. Accumulated amortization at October 31, 2003 and
2002 was $8.8 million and $8.4 million, respectively. Any impairment of the
carrying value of the capitalized software development costs could be recognized
based on an assessment of future operations (including cash flows) to insure
that assets are appropriately valued.
Estimated amortization expense for the existing amortizable intangible assets
for the years ended October 31, is as follows:
Amortization Expense
Fiscal Year
2004 $372
2005 380
2006 367
2007 367
2008 367
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 potentially issuable shares for the years ended
October 31, 2002 and 2001 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. It also requires that the benefit of certain loss carryforwards be
recorded as an asset and that a valuation allowance be established against the
asset when it is "more likely than not" 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.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
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 England, France, Germany, Italy, Singapore and China.
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.
Manufacturing Risk. Our computerized machine tools and integrated computer
controls are manufactured primarily in Taiwan by our wholly-owned subsidiary and
our affiliated contract manufacturers. We also source one of the proprietary
Ultimax(R) computer components from a sole domestic supplier. 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, 2003 and 2002 are summarized below (in thousands):
2003 2002
------------ ------------
Purchased parts and sub assemblies....... $ 5,729