Back to GetFilings.com
2
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended October 31, 1996 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period from
_________ to _________.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1150732
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
ONE TECHNOLOGY WAY
INDIANAPOLIS, INDIANA 46268
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of January 10, 1997 was $38,381,205.
The number of shares of the Registrant's common stock outstanding as of January
10, 1997 was 6,532,971.
DOCUMENTS INCORPORATED BY REFERENCE: None
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
3
PART I
ITEM 1. BUSINESS
(A) GENERAL DEVELOPMENT OF BUSINESS
Hurco Companies, Inc. (the Company) designs and produces computer numerical
control (CNC) systems and software and CNC-operated machine tools for sale
through its own distribution system to the worldwide machine tool industry. The
Company's proprietary CNC systems and related software products are either
integrated with machine tools marketed by the Company, sold to machine tool end
users or sold to other machine tool manufacturers who integrate them with their
own products.
The Company pioneered the application of microprocessor technology and
conversational programming software to machine tool controls and, since its
founding in 1968, has been a leader in the introduction of CNC systems that
automate manufacturing processes and improve productivity in certain segments of
the metalworking industry. The Company has concentrated on designing
"user-friendly" CNC systems that can be operated by both skilled and unskilled
machine tool operators and yet are capable of instructing a machine tool to
perform complex tasks. The combination of microprocessor technology and patented
interactive, conversational software in the Company's CNC systems enables
operators on the production floor to quickly and easily create a program for
machining or forming a particular part from a blueprint or electronic design and
immediately begin production of that part.
The Company's executive offices and principal design, engineering, assembly and
distribution facilities are located in Indianapolis, Indiana. Additional product
design, assembly and warehouse facilities are located in Farmington Hills,
Michigan; and sales, application engineering and service offices are located in
High Wycombe, England; Munich, Germany; Paris, France; and Singapore.
(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company operates in one business segment, which consists of CNC systems and
software and CNC-operated machine tools for cutting and forming metals.
(C) NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The manufacture of metal parts for industrial and consumer products primarily
involves two major processes: metal cutting and metal forming. These processes
are performed by machine tools. Metal cutting machine tools produce parts by
milling, drilling, turning and grinding of a solid block of metal. Metal forming
machine tools fabricate parts by shearing, punching, forming and bending flat
sheets of metal.
Approximately three-fourths of the world's machine tools are made for metal
cutting applications. The milling machine is one of the most common types of
metal cutting machines. Milling machines shape a part by moving a rotating
cutting tool, such as a drill, tap or mill, across a metal block. Although a
majority of the milling machines in current use are still manually operated, an
increasing number are now operated using CNC systems such as those produced by
the Company. CNC-operated milling machines automatically and precisely shape
parts by directing the movement of a cutting tool according to a program
specifically designed for the desired part. Some CNC-operated milling machines,
referred to as machining centers, are equipped with automatic tool changers that
allow several different drills, taps or mills to be used in a programmed
sequence on the same part without having to remove the part from the machine.
Metal forming machines include press brakes, presses, shears and punches. The
press brake is the basic machine tool used to perform simple bending operations
on a wide variety of sheet metal to create parts such as computer cabinets, door
frames, aircraft components and electrical enclosures. Each press brake uses one
or more manual or automated gauge systems that determine where the bend will be
made in the sheet metal part. Automated press brakes utilize CNC systems such as
those produced by the Company.
The Company has pursued a strategy that is focused on developing and
distributing to the worldwide machine tool market a comprehensive line of
leading-edge CNC products that incorporate proprietary technology designed to
enhance the user's productivity through ease of operation and adaptability to a
wide range of manufacturing applications. As part of this strategy, the Company
has adopted an open systems architecture that permits its CNC systems and
software to be used with a variety of hardware platforms and has emphasized an
"operator friendly" design that employs interactive "conversational" software.
To increase its margins and mitigate the potential adverse impact of the
recessionary cycles and other economic forces that impact the markets for
capital goods in general and machine tools in particular, the Company has
recently completed a comprehensive restructuring of its operations, as a result
of which it has outsourced almost all of its machine tool manufacturing
operations to independent contract manufacturers and is concentrating its
resources on product research, development, design, marketing, distribution and
service.
PRODUCTS
The Company's principal products consist of CNC systems and related software for
both metal cutting machine tools and metal forming press brakes as well as
complete CNC-operated milling machines and machining centers into which the
Company's own CNC systems have been fully-integrated. The Company also produces
and distributes control upgrades, accessories and replacement parts and provides
operator training and support services to its customers.
The following table sets forth the contribution of each of these product groups
to the Company's total revenues during each of the past three fiscal years:
Year Ended October 31
(Dollars in thousands) 1996 1995 1994
---- ---- ----
CNC systems and software*....$17,827 (17.9%) $19,027 (21.2%) $17,553 (24.2%)
CNC-operated milling machines
and machining centers...... 65,518 (65.9%) 55,711 (62.2%) 38,622 (53.2%)
Service parts.................10,005 (10.0%) 9,073 (10.1%) 10,422 (14.3%)
Service fees.................. 6,001 (6.2%) 5,821 ( 6.5%) 6,031 ( 8.3%)
------- -------- ------- ------- ------- --------
$99,351 (100.0%) $89,632 (100.0%)$72,628 (100.0%)
======= ======= ======= ======= ======= ========
* Amounts shown do not include CNC systems and software sold as an integrated
component of milling machines and machining centers.
CNC Systems and Software
The Company's CNC systems and software are marketed under the tradenames
Ultimax(R), UltiPath(TM), Delta (TM) and Autobend(R). The Ultimax(R),
UltiPath(TM) and Delta(TM) product lines are used to control metal cutting
machine tools.
Autobend(R) CNC systems are used to control metal forming press brakes.
o Ultimax
The Company's patented Ultimax "conversational" CNC system, which incorporates
an interactive and powerful "data block" programming methodology supported by
extensive geometric and process data calculation software tools, enables a
machine tool operator to create complex two-dimensional part programs directly
from blue print inspection. Machine operators with little or no programming
experience can successfully program parts and begin cutting operations in a
short time with minimum special training. Since the initial introduction of the
Ultimax CNC in 1984, the Company has added enhancements related to operator
programming productivity, CAD compatibility, data processing throughput and
motion control speed and accuracy. In 1994, the Company introduced the latest
generation of the Ultimax CNC, the Ultimax 3/486, and expects to begin marketing
a Pentium*-based version of the Ultimax CNC with an enhanced motion control
system beginning in the second quarter of fiscal 1997. By incorporating Industry
Standard Architecture (ISA) computer platform components, this CNC product
offers improved performance while ensuring access to the most effective
computing hardware and software technology.
In 1995, the Company introduced a software option that interprets part programs
written for the worldwide installed base of competitors' CNCs; this software
option, which provides industry standard data format compatibility, enables
end-users to use Hurco's Ultimax CNC to run part programs initially programmed
for a substantial portion of the large installed base of competitive CNCs and is
intended to increase the Company's access to the contract machining market. In
late fiscal 1996, the "Single Screen" version of the Ultimax CNC was made
available on the Company's machining centers. The Company also developed a
"Single Screen" version of its Ultimax CNC in 1995 to increase its penetration
of the CNC milling machine market. The Ultimax CNC system is sold primarily as a
fully-integrated feature of a Hurco milling machine or machining center.
o UltiPath
UltiPath is a new, simple, low-cost interactive CNC system that permits Windows
95**-based conversational programming. This control product is intended for the
2-axis entry level machining market and enables skilled and unskilled machine
operators to convert manual machine operation to easy-to-use CNC parts
processing. The UltiPath CNC embodies the Company's patented interactive
machining technology and its recently-patented "Object Oriented" software design
methodology. The UltiPath CNC was introduced in September 1996 and is expected
to be available for shipment in the second quarter of fiscal 1997. The product
will be marketed through the Company's distributors to end-users and to
retrofitters of the large installed base of manual milling machines.
* Pentium is a registered trademark of Intel Corporation.
** Windows 95 is a registered trademark of Microsoft Corporation.
o Delta Series
The Company's Delta series CNCs, which feature microprocessor-based electronics
incorporating ISA computer platform components to provide enhanced performance
at lower cost, are designed for the worldwide metalworking industry and are used
on milling machines, machining centers, turning centers and punching equipment.
The Delta CNC system is based on industry standard point-to-point programming
methodology but incorporates software features that group industry standard
commands into useful part features, such as circles and frames, to simplify
programming. The Delta CNCs are designed and configured as general purpose
products, which offer flexibility, reliability and ease of integration with a
wide variety of machine designs, and are marketed to original equipment
manufacturers and retrofitters of a wide range of metal cutting machines.
Late in fiscal 1994, the Company expanded its Delta product line with the
introduction of PrecisionScan(TM), an advanced continuous trace digitizing
system that, together with other software peripherals, is intended to meet the
needs of mold makers in the metal cutting industry. The Company further
supplemented its Delta product line with the introduction in fiscal 1996 of a
new, low-cost, two-axis lathe control with "conversational" graphics.
o Autobend
Autobend CNC systems are applied to press brakes that form parts from sheet
metal and consist of a microprocessor-based CNC and backgauge. The Company has
manufactured and sold the Autobend product line since 1968. It currently markets
two models of its press brake CNC systems, in combination with six different
back gauges, through distributors to end-users as retrofit units for
installation on existing or new press brakes, as well as to original equipment
manufacturers and importers of press brakes.
o CAM and Software Products
In addition to its CNC product lines, the Company offers metal cutting and
forming software products for programming two and three dimensional parts. Its
primary products are the Ultimax PC and PC+, off-line programming systems, and
DXF, a computer aided design (CAD)-compatible data file translation software
option. These products are marketed to users of both Ultimax and competitive CNC
systems. Significant features of the Ultimax PC and PC+ include a CNC-compatible
user interface, CAD compatibility and the availability of a configurable post
processor. DXF software eliminates manual data entry of part features by
transferring AutoCAD(TM) drawing files directly into an Ultimax CNC or the
off-line programming system software, substantially increasing operator
productivity. The Company has augmented its Autobend product line with a
computer-aided manufacturing (CAM) software product, AutoBend PC(TM), that
enables the user to create and manipulate CNC compatible metal forming programs
on a personal computer. In fiscal 1996, the Company's Ultimax CNC was enhanced
with a software option that provides industry standard data format
compatibility.
CNC Machine Tools
The Company designs and markets complete stand-alone milling machines and
machining centers, each of which is equipped with a fully-integrated Ultimax or
Delta CNC system. All of these machines are built to the Company's
specifications by independent contract manufacturers. The Company's new
Advantage(R) line of machine tools is a complete family of products with
different levels of performance features for different market applications and
ranging in price from $39,000 to $150,000. Two series of products are offered
within the Advantage(R) product line -- the Value Series and the Performance
Series -- each of which is marketed within a distinct price range and includes
machines of differing sizes and power levels, ranging from a five-horsepower
milling machine with an X-axis travel of 24 inches to a twenty-horsepower
machining center with 50 inches of X-axis travel.
The Value Series products are equipped with the Delta CNC or the "Single Screen"
version of the Ultimax CNC system and are intended for use by the independent
contract manufacturer requiring a low-cost product with basic capabilities. The
Performance Series products employ the same machine tool frame as the Value
Series, but feature the more advanced Ultimax CNC system and software desired by
the precision tool, die and mold market, where fast programming of complex parts
is a key to competitiveness.
The Company's smaller machines -- those with an X-axis travel of 30 inches or
less -- have embodied the Company's proprietary machine tool design since their
introduction in 1994. During 1996, the Company introduced two new machining
center models with an X-axis of 40 inches that incorporate the same proprietary
design features. The larger machines -- those with an X-axis travel of 45 and 50
inches -- incorporate a machine tool platform developed by one of the Company's
contract manufacturers. During fiscal 1996, approximately 85% of the machine
tools sold by the Company embodied its proprietary design. The Company expects
that during fiscal 1997 approximately 95% of the machine tools it sells will
embody its proprietary design.
Parts and Service
The Company's service organization provides installation, operator training and
customer support for the Company's products. During 1996, the Company began
transferring to its principal distributors primary responsibility for machine
installation and warranty service and support for new product sales. Although
installation and service costs are borne by the distributor, the Company offers
a greater price discount to those distributors providing such services. The
Company's own service organization will continue to service and support the
installed base of discontinued models, and support its distributors with respect
to complex service operations. The Company also provides CNC upgrades,
accessories, options and replacement parts for its products. Among the options
are software programs and additional CNC features that allow a customer to
upgrade the performance of its milling machines and machining centers. The
Company's after-sale parts and service business helps strengthen customer
relationships and provides continuous information concerning the evolving
requirements of end-users.
MARKETING AND DISTRIBUTION
The end-users of the Company's products are thousands of precision tool, die and
mold manufacturers, independent metal parts job shops and specialized production
groups within large manufacturing corporations. Industries served include
aerospace, defense, medical equipment, energy, injection molding, transportation
and computer equipment.
The Company sells its CNC systems and related products (i) to manufacturers of
new machine tools who integrate them with their own products prior to the sale
of those products to their own customers, (ii) to retrofitters of used machine
tools who integrate them with those machine tools as part of the retrofitting
operation and (iii) to end-users who have an installed base of machine tools,
either with or without related CNC systems. The Company's integrated
CNC-operated milling machines and machining centers are sold primarily to
end-users. During fiscal 1996, no single end-user of the Company's products
accounted for more than 5% of its total revenues.
Sales are made through over 240 independent agents and distributors in 44
countries throughout North America, Europe and Asia. The Company also has its
own direct sales forces in the United States, England, France, Germany and
Singapore, which are considered to be among the world's principal machine tool
consuming countries. During fiscal 1996, no distributor accounted for more than
5% of total revenues. The Company has continuing agreements with each of its
distributors, but may terminate those agreements upon prior notice ranging from
30 days to 180 days. Approximately 80% of the worldwide demand for CNC-operated
machine tools and CNC systems comes from outside the U.S. and accordingly, the
Company considers its international market presence to be critical to its
operations.
The Company believes the demand for CNC systems and CNC-operated machine tools
is driven by several factors: (i) the declining supply of skilled machinists,
(ii) the need to continuously improve productivity, (iii) an aging machine tool
installed base that will require replacement with more advanced and efficient
technology and (iv) the industrial development of emerging countries in Asia and
Eastern Europe. However, the demand for machine tools and related products is
highly dependent upon economic conditions and the general level of business
confidence, as well as such factors as production capacity utilization and
changes in governmental policies regarding tariffs, corporate taxation and other
investment incentives. By marketing and distributing its products on a worldwide
basis, the Company attempts to reduce the potential impact on its total revenues
of adverse changes in economic conditions in any particular geographic region.
COMPETITION
Numerous companies compete with the Company's product lines in the United States
and international markets. Many of these competitors are larger and have greater
financial resources than the Company. The Company strives to compete effectively
by designing into its products critical proprietary features that offer a
distinct value differential from comparably-priced competitive products in terms
of enhanced productivity, technological capabilities and ease of use. In
addition, by offering its products in a range of prices and capabilities, the
Company seeks to meet the needs of a broad potential market. The Company also
believes that its competitiveness is aided by its reputation for reliability and
quality, its strong international sales and distribution organization and its
extensive customer service organization.
In the worldwide CNC systems market, the Company is a leader in
providing user-friendly, "conversational" programming systems for CNC machine
tools, although its principal competitors, such as Fanuc Ltd., Mitsubishi
Machine Tools, Heidenhain Corp., Siemens Industrial Automation, Inc.
Southwestern Industries, Bridgeport Machines, Inc. and Allen-Bradley Co.,
also offer "user-friendly" programming features. Fanuc Ltd. is the world's
largest supplier of CNC systems.
The Company believes it is one of the largest domestic manufacturers of CNC
gauging systems for press brakes. Automec Inc., a CNC gauge manufacturer, and
Cybelec SA, a control manufacturer, are the Company's major competitors for
these products in the United States. The Company also competes with Cybelec in
Europe.
In the U.S. market for CNC milling machines, the Company's principal
competitors include Bridgeport Machines Inc., Tree Machine Tool Co. Inc.,
Miltronics Manufacturing Co. and Republic-Lagun Machine Tool Co. Competition
in the United States with respect to CNC machining centers comes from Fadal
Engineering (a subsidiary of Giddings & Lewis Inc.), Haas Automation, Inc. and
Cincinnati Milacron Inc. A large number of foreign builders, including
Okuma Machinery Works Ltd., Yamazaki Mazak Corporation, Mori Seiki Co., Ltd.
and Matsuura Machinery Corporation, also compete with the Company in the United
States as well as in international markets.
MANUFACTURING
The Company assembles and tests its CNC systems at its own facilities in
Indianapolis, Indiana and Farmington Hills, Michigan using readily available,
industry-standard personal computer components (such as hard disk drives,
VGA cards and motherboards) as well as proprietary system components that
are produced to the Company's specifications by several domestic suppliers.
In October 1996, the Company entered into a contract manufacturing agreement
with Hurco Automation Ltd. (HAL), a Taiwanese-based company formed by the
Company and six Taiwanese investors. HAL will manufacture certain CNC
systems to the Company's specifications, beginning in fiscal 1997 and will also
supply certain proprietary and standard components to be used in domestic
production. The Company believes that alternative sources for the
proprietary components are readily available.
The Company's CNC-operated machine tools and milling machines are manufactured
to its specifications in Taiwan by three independent contractors. The Company
has worked closely with its Taiwan-based contractors to increase their
production capacity to meet the rising demand for its machine tool products and
believes that such capacity is sufficient to meet the Company's current and
projected demand. Although the Company is exploring additional manufacturing
sources for certain of its machine tool products, alternative sources are not
readily obtainable and any significant reduction in capacity on the part of its
existing machine tool manufacturing contractors would have a material adverse
effect on its operations.
BACKLOG
Backlog consists of firm orders received from customers and distributors.
Backlog was $9.0 million, $15.3 million and $7.0 million as of October 31, 1996,
1995, and 1994, respectively. Backlog at October 31, 1995 was higher than
normal due to strong demand during fiscal 1995 for the Company's Advantage
series machine tool line combined with limited product availability. The
reduction of backlog at October 31, 1996 reflects increased availability of
product for shipment. Fiscal 1996 orders were $93.1 million compared to $98.9
million for fiscal 1995, and $71.9 million for fiscal 1994.
INTELLECTUAL PROPERTIES
The Company considers certain features of its products to be proprietary and
owns, directly or through a subsidiary, a number of patents that are significant
to its business. The Company holds a non-exclusive license covering features of
the automatic tool changer offered with certain of its CNC machining centers.
IMS Technology, Inc. (IMS), a wholly-owned subsidiary of the Company, owns
various domestic and foreign patents covering the machining method practiced
when a machine tool is integrated with an interactive CNC (the Interactive
Machining Patents). In September 1995, the Company was awarded a new patent on
an object-oriented methodology for CNC software.
In October 1995, IMS initiated infringement actions against a number of
enterprises that it believes are employing or practicing machining methods
covered by the Interactive Machining Patents. These enterprises include end
users of interactive CNCs, machine tool builders employing interactive CNCs
within their products and CNC manufacturers whose control designs permit use of
interactive methods when coupled to machine tools. See Item 3. Legal
Proceedings.
IMS is actively pursuing a program to license the use of the Interactive
Machining Patents. During fiscal 1996, IMS entered into agreements with two CNC
manufacturers and various of their subsidiaries, none of which is a defendant in
the IMS patent infringement actions, under which IMS has granted a non-exclusive
license to use the Interactive Machining Patents in exchange for certain fixed
payments which began in fiscal 1996 and continue through fiscal 2001. Unless the
Interactive Machining Patents are subsequently found to be invalid, the 1996
license agreements are expected to result in license fee income, net of legal
fees and expenses, of approximately $1.4 million from fiscal years 1997 through
2001. In addition, IMS has received a royalty-free non-exclusive license (with a
right of sublicense to the Company) under four patents owned by one of the
licensees. There can be no assurance that IMS will enter into additional license
agreements or that the terms of any future license agreements will be similar to
those of the license agreements discussed above.
RESEARCH AND DEVELOPMENT
The Company's engineering, research and development expenditures (including
amounts funded by third parties) were $5.0 million in fiscal 1996, $4.3 million
in fiscal 1995 and $4.0 million in fiscal 1994. These activities include
development of new software and machine tool products, efforts to reduce costs
and improve quality for current products and routine product support.
Research and development expenditures for new products and significant product
improvements (inclusive of amounts funded or reimbursed by third parties)
were $1.7 million, $1.4 million and $1.0 million in fiscal 1996, 1995,
and 1994, respectively. In addition, the Company capitalized $1.3 million
in 1996, $1.2 million in 1995 and $.8 million in 1994 related to software
development projects.
EMPLOYEES
The Company had 358 employees at the end of fiscal 1996, none of whom is covered
by a collective-bargaining agreement or represented by a union. The Company has
experienced no employee-generated work stoppages or disruptions and considers
its employee relations to be satisfactory .
(D)FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The following represents a breakdown of Company sales to the indicated
geographic regions for the past three fiscal years (in thousands):
1996 1995 1994
------- ------- -------
North America...................... $50,398 $49,005 $46,430
Europe............................. 44,014 35,434 23,692
Asia and other..................... 4,939 5,193 2,506
--------- --------- ---------
Total............................. $99,351 $89,632 $72,628
======= ======= =======
Export sales from the United States were $5.8 million in fiscal 1996, $6.4
million in fiscal 1995 and $5.7 million in fiscal 1994.
Information regarding Total Sales, Operating Income (Loss) and Identifiable
Assets by geographical area is shown in Note 16 to the Consolidated Financial
Statements.
ITEM 2. PROPERTIES
The following table sets forth the location, size and principal use of each of
the Company's facilities:
Location Square Footage Principal Uses
Indianapolis, Indiana 165,000(1) Corporate headquarters, design and
engineering, product testing, CNC
assembly, sales, application
engineering and customer service.
Farmington Hills, Michigan 37,500 Design and engineering, product
testing, CNC assembly, sales,
application engineering and
customer service.
High Wycombe, England 45,000(2) Sales, application engineering,
customer service.
Paris,France 2,800 Sales,application engineering,
customer service.
Munich, Germany 10,700 Sales, application engineering,
customer service.
Singapore 1,200 Sales, application engineering
customer service
- ---------------------
(1)Approximately 65,000 square feet will be available for lease in fiscal 1997.
(2)Approximately 24,000 square feet have been sublet to a subtenant since
November 1995.
The Company owns the Indianapolis facility and leases the other facilities. The
leases have terms expiring at various dates ranging from February 1997 to
February 2004. The Company believes that all of its facilities are well
maintained and are adequate for its needs now and in the foreseeable future. The
Company does not believe that it would experience any difficulty in replacing
any of the present facilities if any of its current leases were not renewed at
expiration.
ITEM 3. LEGAL PROCEEDINGS
On October 10, 1995, the Company's wholly-owned subsidiary, IMS Technology, Inc.
(IMS), commenced an action in the United States District Court for the Northern
District of Illinois against a group of end-users of interactive CNCs, machine
tool manufacturers who incorporate interactive CNCs in their products and
manufacturers of CNCs designed to permit use of interactive methods when coupled
to machine tools. IMS has alleged that the defendants have infringed one of the
Interactive Machining Patents (the "Patent") and is seeking monetary damages
from, and injunction against future infringement by, each of the defendants. The
defendants in this action presently include Okuma Machinery Works, Ltd.; Okuma
American Corporation; Ellison Machinery Company of the Midwest, Inc.; Apollo
Machine & Manufacturing Company, Inc.; Arpac Corporation; American Control
Technology, Inc.; Nissan Motor Co. Ltd.; Nissan Motor Car Carrier Co., Ltd.;
Nissan Motor Corp. USA, Inc.; and Fanuc, Ltd.
On January 11, 1996 IMS commenced an action in the United States District Court
for the Eastern District of Virginia (which was subsequently transferred to the
United States District Court for the Northern District of Illinois) against
Southwestern Industries, Inc. ("Southwestern"); Bridgeport Machines, Inc. and
Mitsubishi Electric Corporation ("Mitsubishi"). This action also alleges
infringement of the Patent.
IMS and the Company are defendants in a third action pending in the United
States District Court for the Northern District of Illinois that was commenced
January 29, 1996 by Mitsubishi and Mitsubishi Electric Industrial Controls. This
action seeks to have the patent declared invalid and alleges that the Company
and IMS violated federal antitrust laws in connection with the acquisition of
the Patent. In a counter-claim, IMS alleges that the plaintiffs and various
other defendants have infringed the Patent.
All three of the Illinois actions are being coordinated under local court rules.
Discovery is currently in process. IMS and the Company have filed a motion to
dismiss the antitrust claims in the third Illinois action which currently is
pending.
In addition to the three Illinois actions, IMS was a defendant in an action
commenced on November 30, 1995 by Southwestern in the United States District
Court for the Central District of California seeking to have the Patent declared
invalid. In May, 1996, the court transferred this action to the United States
District Court in Virginia (which action is now one of the three Illinois
actions described above); however, Southwestern has appealed the court's ruling.
The appeal is currently pending.
Although IMS believes that the Patent is valid and its claims of patent
infringement have substantial merit, it is unable to predict the outcome of any
of these actions.
The Company is involved in various other claims and lawsuits arising in the
normal course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on its consolidated financial
position or results of operations.
ITEM. 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the NASDAQ National Market System under
the symbol "HURC". The following table sets forth the high and low sales prices
of the shares of Common Stock for the periods indicated, as reported by NASDAQ.
1996 1995
------------- -------------
Fiscal Quarter Ended:.......... High Low High Low
- -------------------- ------------- -------------
January 31..................... $7-1/4 $4-1/4 $4-1/2 $3-3/4
April 30...................... 4-5/8 3-1/4 4-3/8 2-3/4
July 31....................... 7 4-1/8 4-1/4 3-3/8
October 31.................... 6-1/2 4-1/2 7-1/8 3-1/2
The Company does not currently pay dividends on its Common Stock and intends to
retain earnings for working capital, capital expenditures and debt reduction. In
addition, the Company's agreements with its principal lenders restrict its
ability to pay cash dividends.
The Company had approximately 657 holders of record of its Common Stock as of
October 31, 1996.
During the period covered by this report, the Company has not sold any equity
securities that were not registered under the Securities Act of 1933, as
amended.
ITEM 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented below have been derived from the
Consolidated Financial Statements of the Company for the years indicated and
should be read in conjunction with the Consolidated Financial Statements and
related notes set forth elsewhere herein.
Year Ended October 31,
1996 1995 1994 1993 1992
------------------------------------------
Statement of Operations Data: (Dollars in thousands,except per share amounts)
Sales and service fees.......... $99,351 $89,632 $72,628 $72,230 $87,828
Gross profit.................... $28,421 $23,470 $15,565 $11,079 $21,926
Selling, general and adminis-
tration expenses.............. $21,343 $19,002 $18,129 $22,001 $24,213
Restructuring charge........... $ -- $ -- $ -- $6,750 $1,070
Operating income (loss)........ $7,078 $4,468 $(2,564) $(18,323) $(3,633)
Interest expense.............. $3,211 $4,250 $3,301 $2,828 $2,722
Net income (loss)............. $4,264 $204 $(5,791) $(21,144) $(5,789)
Earnings (loss)
per common share.............. $ .72 $.04 $(1.07) $(3.89) $(1.05)
Common stock dividends
per share.................... $ -- $-- $ -- $-- $.14
Weighted average common
shares outstanding.................5,907 5,536 5,407 5,438 5,492
As of October 31,
1996 1995 1994 1993 1992
----------------------------------------------------
Balance Sheet Data: (Dollars in thousands)
Current assets....... $44,108 $46,356 $43,096 $49,314 $61,532
Current liabilities.. $23,336 $26,479 $16,985 $16,312 $15,349
Working capital ..... $20,772 $19,877 $26,111 $33,002 $46,183
Current ratio........ 1.9 1.8 2.5 3.0 4.0
Total assets......... $59,750 $61,421 $59,558 $67,287 $84,332
Long-term obligations $20,273 $27,459 $35,245 $37,888 $34,285
Total debt........... $22,110 $33,599 $34,813 $37,540 $35,515
Shareholders' equity. $16,141 $ 7,483 $ 7,328 $13,087 $34,698
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Consolidated Financial Statements and Notes thereto
appearing elsewhere herein. Certain statements made in this report may
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company or the machine
tool industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, (i) changes in general economic and business
conditions that affect demand for CNC control systems, machine tools and
software products; (ii) changes in manufacturing markets; (iii) innovations by
competitors and (iv) governmental actions and initiatives.
RESULTS OF OPERATIONS
The following table presents, for the fiscal years indicated, selected items
from the Consolidated Statements of Operations expressed as a percentage of
worldwide revenues and the year-to-year percentage changes in the dollar amounts
of those items.
Percentage of Revenues Year-to-Year % Change
Increase (Decrease)
1996 1995 1994 96 vs. 95 95 vs. 94
---- ----- ----- --------- ---------
Sales and service fees.........100.0% 100.0% 100.0% 10.8% 23.4%
Gross profit................... 28.6 26.2 21.5 21.0 50.8
Selling, general and
administrative expenses........ 21.5 21.2 25.0 12.4 4.8
Operating income (loss)........ 7.1 5.0 (3.5) 58.4 274.3
Interest expense............... 3.2 4.8 4.5 (24.4) 28.8
Net income (loss).............. 4.3 .2 (8.0) 1,990.2 103.5
Fiscal 1996 compared with Fiscal 1995
Total sales and service fees of $99.4 million in fiscal 1996 increased $9.7
million, or 10.8%, over fiscal 1995, inclusive of a $1.0 million decrease
attributable to weaker European currencies when converting foreign currency
revenues into U.S. dollars for financial reporting purposes. On a worldwide
basis, sales of CNC-operated machine tools totaled $65.5 million, an increase of
$9.8 million, or 17.6%, over fiscal 1995, and sales of CNC systems and software
(which do not include systems and software sold as an integrated part of
CNC-operated machine tools) totaled $17.8 million, a decrease of $1.2 million,
or 6.3%, from fiscal 1995. The increase in the CNC-operated machine tool product
line reflected the continued strength of the world's principal machine tool
markets, strong demand in Europe for the Company's Advantage series of machine
tools, (which was introduced in that market in mid 1995) and enhanced
availability of the Company's products for shipment as a result of capacity
increases on the part of its contract manufacturers. The decrease in CNC systems
and software sales was primarily the result of decreased shipments of Autobend
products to original equipment manufacturers, some of whom have developed their
own CNC systems. Revenues attributable to sales of parts and service fees
increased $1.1 million, or 7.5%, from fiscal 1995 levels, primarily as a result
of increased part sales to support the increase in the installed machine base.
In the United States, sales and service fees in fiscal 1996 increased $.6
million, or 1.1%, over fiscal 1995 reflecting a slight increase in shipments of
machine tool products. Increased shipments of Delta series control systems for
metal cutting machine tools, primarily to original equipment manufacturers, were
offset by decreased shipments of Autobend control products to the metal
fabrication equipment market.
European sales and service fees in fiscal 1996 increased $8.6 million, or 26.5%,
over fiscal 1995, inclusive of the effects of currency translation for financial
reporting purposes. European sales measured in local currency increased 29.4%.
The improvement was primarily attributable to an increase in unit shipments,
without a significant change in margins or average selling prices, aided by a
full year of sales of the Advantage series product line, continued strength of
the European machine tool market and increased availability of products for
shipment.
International sales increased to approximately 44.9% of total consolidated
sales for fiscal 1996 compared to 39.6% for fiscal 1995.
Worldwide new order bookings for fiscal 1996 were $93.1 million, a decrease of
$5.8 million, or 5.9%, from fiscal 1995. While international orders increased
$2.7 million, or 6.8%, in spite of lower foreign currency translation rates,
domestic orders declined $8.5 million, or 14.5%. The decline in domestic
bookings was due almost entirely to the fact that domestic machine tool bookings
during the first half of fiscal 1995 reflected unusually high demand for the
just introduced Advantage series machine tool line fueled, in part, by
distributor anticipation of limited product availability. The increasing
availability of Advantage series products for shipment in the second half of
fiscal 1995 and first half of fiscal 1996 enabled the Company to assure its
domestic customers shorter delivery times, which, along with somewhat slower
machine tool demand, contributed to a decline in the order rates. Domestic order
bookings in the second half of fiscal 1996 approximated that of the comparable
period in fiscal 1995 due in part to the introduction of new machine tool
products in September 1996. Consolidated backlog at October 31, 1996 was $9.0
million compared to $15.3 million at October 31, 1995, reflecting increased
availability of products for shipment.
Gross profit margin as a percentage of revenues increased to 28.6% in fiscal
1996 from 26.2% in fiscal 1995 despite the unfavorable impact of foreign
currency translations for financial reporting purposes. The increase is the
result of an increased percentage of higher-margin products in the total sales
mix along with the increase in the percentage of total sales attributable to
higher-margin international sales.
Selling, general and administrative (SG&A) expenses in fiscal 1996 increased
$2.3 million, or 12.4%, over fiscal 1995 net of unfavorable currency translation
effects. The increase reflects a $.5 million increase in product development
expenses, expenditures related to the bi-annual International Manufacturing
Technology Show (IMTS) and increased selling expenses associated with increased
unit volume.
The improvement in operating income in fiscal 1996 continues the Company's trend
of improved profitability over the past three years as a result of its completed
restructuring program, the introduction of new higher-margin products and an
improved machine tool market worldwide.
Interest expense in fiscal 1996 decreased $1.0 million, or 24.4%, from fiscal
1995. The decrease is the result of a $11.5 million reduction of debt, reduced
interest rates on the Company's variable rate bank borrowings, and reduced
incremental fees paid to the Company's lenders. The incremental fees, which are
non-recurring, amounted to $240,000 in fiscal 1996 and $400,000 in fiscal 1995.
License fee income in fiscal 1996 of $590,000, net of legal fees and expenses,
results from two separate licensing agreements entered into by the Company's
wholly-owned subsidiary, IMS Technology, Inc., with respect to its interactive
machining patents. Under the terms of the agreements, additional fees of
approximately $1.4 million, net of legal fees and expenses, are expected to be
received in annual installments through fiscal 2001, of which approximately
$386,000 is expected to be included in income in fiscal 1997.
The provision for income taxes of $94,000 in fiscal 1996 relates to the earnings
of a foreign subsidiary. The income tax liability incurred in the United States
and certain other jurisdictions was offset by the reversal of valuation
allowance reserves against the Company's net operating loss carryforwards. Net
operating loss carryforwards available to offset pre-tax income in future
periods are set forth in Note 6 to the Consolidated Financial Statements.
Fiscal 1995 Compared with Fiscal 1994
Total sales and service fees of $89.6 million in fiscal 1995 represented an
increase of $17.0 million over fiscal 1994, inclusive of $2.5 million
attributable to the effect of stronger European currencies when converting
foreign currency revenues into U.S. dollars for financial reporting purposes. On
a worldwide basis, sales of CNC-operated machine tools totaled $55.7 million, an
increase of $17.1 million, or 44%, over fiscal 1994, and sales of CNC systems
and software totaled $19.0 million, an increase of $1.5 million, or 8%, over
fiscal 1994. While the increases in both product lines reflected improvements in
the world's principal machine tool markets, particularly Germany, the
significantly greater percentage increase associated with the sales of
CNC-operated machine tools was attributable to the strong demand for the
Company's new Advantage series of machine tools as well as the enhanced
availability of products for shipment as a result of capacity increases on the
part of contract manufacturers. Revenues attributable to sales of parts and
service fees declined $1.6 million, or 9%, from fiscal 1994 levels, primarily as
a result of reduced sales of parts for discontinued machine tool models.
In the United States, sales and service fees in fiscal 1995 increased $3.5
million, or 7%, over fiscal 1994, reflecting increases of $4.0 million, or 18%,
in sales of CNC-operated machine tools and $1.4 million, or 9%, in sales of CNC
systems and software, offset by a decrease of $1.9 million, or 14%, in revenue
from service parts and fees. The improved sales were primarily attributable to
increases in unit volume, rather than pricing, due to enhanced demand for and
availability of the Company's Advantage product line and general strengthening
of the markets for both fully-integrated machine tools and CNC systems.
In Europe, sales and service fees in fiscal 1995 increased $11.3 million, or
52%, over fiscal 1994, inclusive of the effects of currency conversion for
financial reporting purposes. Net of currency-translation effects, the
improvement was primarily attributable to a 25% increase in unit volume and a
17% increase in average unit prices realized for the Company's CNC-operated
machine tools, reflecting the introduction of the new Advantage series in the
second half of fiscal 1995 as well as a significant strengthening of the
European machine tool markets. In Asia, sales and service fees increased to $2.6
million in fiscal 1995 from $400,000 recorded for fiscal 1994, reflecting the
Company's more competitive pricing of the new Advantage series product line in
that market. On a combined basis, European and Asian sales and service fees in
fiscal 1995, exclusive of currency-translation effects, accounted for 38% of
total worldwide revenues, compared with 30% in fiscal 1994, due primarily to the
more significant year-to-year change in general market conditions in Europe than
in the United States, as well as improvements in the Company's foreign sales and
marketing operations.
Demand for the Company's products during fiscal 1995 was strong. Worldwide new
order bookings for fiscal 1995 increased $26.9 million, or 37%, over 1994,
primarily due to the introduction of the new Advantage series of machine tool
products and the increased production capacity of the Company's contract
manufacturers. Backlog as of October 31, 1995, was $15.3 million compared to
$7.0 million as of October 31, 1994. The Company is continuing to work with its
contract manufacturers to further increase their production capacity.
Gross profit margin as a percentage of revenues increased from 21.5% in fiscal
1994 to 26.2% in 1995. As reflected in Note 13 to the Consolidated Financial
Statements, gross profit margins have steadily increased from 18.5% in the first
quarter of fiscal 1994 to 27.2% in the fourth quarter of fiscal 1995, reflecting
cost reductions achieved through the Company's restructuring program as well as
the incremental phase-in of higher-margin products. Also contributing to the
enhancement of gross profit margins was an improved mix of higher-margin
European sales as a percentage of total worldwide sales, as well as the
favorable currency-translation effects associated with foreign sales.
Selling, general and administrative (SG&A) expenses in fiscal 1995 increased
$873,000, or 5%, over fiscal 1994 primarily because of foreign currency
translation effects of $502,000 and increased selling expenses associated with
increased unit volume. SG&A expenses, as a percentage of sales and service fees,
was 21% in fiscal 1995 compared to 25% in fiscal 1994.
The Company generated $4.5 million of operating income in fiscal 1995 compared
to a $2.5 million operating loss in fiscal 1994, a $7.0 million improvement.
This return to operating profitability after three years of losses reflects the
benefits of the Company's restructuring program, the phase-in of new
higher-margin products and improved market conditions worldwide.
Interest expense in fiscal 1995 increased $949,000, or 29%, over fiscal 1994.
Included in interest expense for fiscal 1995 is a $400,000 incremental fee
payable to the Company's lenders under its credit agreements, which provide for
additional fees when certain gross profit levels are achieved. As of October 31,
1995, the maximum fee became fully due. The remaining $240,000 incremental fee
payable to the lenders as of October 31, 1995, will be amortized to expense
during fiscal 1996. The remainder of the increase in interest expense reflects
the impact of higher interest rates on the Company's floating rate bank
borrowings, despite a $1.2 million reduction in total debt during the year.
No income tax expense has been provided for fiscal 1995. The income tax
liability incurred in certain tax jurisdictions was offset by the reversal of
valuation allowance reserves against the Company's net operating loss
carryforwards. Net operating loss carryforwards available to offset pre-tax
income in future periods are discussed in Note 6 to the Consolidated Financial
Statements.
FOREIGN CURRENCY RISK MANAGEMENT
The Company manages its foreign currency exposure through the use of foreign
currency forward exchange contracts as described in Note 1 to the Consolidated
Financial Statements. The Company does not speculate in the financial markets
and, therefore, does not enter into these contracts for trading purposes. The
Company also moderates its currency risk related to significant purchase
commitments with certain foreign vendors through price adjustment agreements
that provide for a sharing of, or otherwise limit, the potential adverse effect
of currency fluctuations on the costs of purchased products. The results of
these programs achieved management's objectives for both fiscal 1996 and fiscal
1995. See Note 1 to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, the Company had cash and cash equivalents of $1.9 million
compared to $2.1 million at October 31, 1995. Cash flow from operations for
fiscal 1996 was $8.5 million, compared to $3.7 million for fiscal 1995,
primarily due to increased net income and reduced working capital requirements.
On July 3, 1996 the Company issued and sold 1,085,389 shares of common stock at
a price of $4.63 per share pursuant to a subscription rights offering. The net
proceeds of approximately $4.8 million were used to prepay $3.1 million of
outstanding indebtedness otherwise due on July 31, 1996. Of the amount prepaid,
$1.4 million consisted of bank debt bearing interest at a variable rate and $1.7
million represented an installment payment on the Company's Senior Notes. The
balance of the net proceeds was used to reduce outstanding revolving credit
borrowings. Since the beginning of fiscal 1996, total indebtedness has been
reduced by $11.5 million, or 34%. Approximately $3.1 million of term loan
payments are due and payable during fiscal 1997.
Working capital was $20.8 million at October 31, 1996, compared to $19.9 million
at October 31, 1995. The ratio of current assets to current liabilities was 1.9
to 1 at October 31, 1996, compared to 1.8 to 1 at October 31, 1995. As of
October 31, 1996, the Company had unutilized credit facilities of $10.9 million
available for either direct borrowings or commercial letters of credit.
Management believes that cash flow from operations and available borrowings
under the Company's bank credit facilities will be sufficient to enable the
Company to meet its anticipated cash requirements, including scheduled term loan
payments, for the next twelve months.
Effective January 22, 1997, the agreements governing the Company's bank
indebtedness were amended to extend the due date of the revolving credit
facility from November 1, 1997 to May 1, 1998 and to provide an alternative
LIBOR-based interest rate that is expected to be approximately .75% lower than
the prime-based rate otherwise payable. The Company is currently negotiating a
new multi-year credit agreement with the bank and expects those negotiations to
be concluded during the second quarter of fiscal 1997. See Note 4 to the
Consolidated Financial Statements.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and
Board of Directors of
Hurco Companies, Inc.
We have audited the accompanying consolidated balance sheets of Hurco Companies,
Inc. (an Indiana corporation) and subsidiaries as of October 31, 1996 and 1995,
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, 1996. These financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hurco Companies,
Inc. and subsidiaries as of October 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1996 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) 2 is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana December 5, 1996 except with respect to matters discussed
in Note 4 as to which the date is January 22, 1997.
21
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31,
1996 1995 1994
(Dollars in thousands, except per share amounts)
SALES AND SERVICE FEES........ $ 99,351 $ 89,632 $ 72,628
Cost of sales and service .... 70,930 66,162 57,063
-------- ------ ------
GROSS PROFIT................. 28,421 23,470 15,565
Selling, general and
administrative expenses....... 21,343 19,002 18,129
------ ------ ------
OPERATING INCOME (LOSS)....... 7,078 4,468 (2,564)
Interest expense.............. 3,211 4,250 3,301
License fee (income).......... (590) -- --
Other (income) expense, net... 99 14 (74)
-------- ---------- --------
Income (loss) before income taxes 4,358 204 (5,791)
Provision for income taxes..... 94 -- --
-------- ----------- ---------
NET INCOME (LOSS).............. $4,264 $204 $(5,791)
======= ======== =======
EARNINGS (LOSS)PER COMMON SHARE $ .72 $.04 $(1.07)
======= ======== =======
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING......... 5,907 5,536 5,407
========= ========= ========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31,
1996 1995
CURRENT ASSETS: (Dollars in thousands, except per share amounts)
Cash and cash equivalents................... $1,877 $ 2,072
Accounts receivable, less
allowance for doubtful accounts
of $785 in 1996 and $1,070 in 1995......... 17,162 17,809
Inventories ................................ 24,215 25,238
Other....................................... 854 1,237
--------- -------
Total current assets...................... 44,108 46,356
------- ------
LONG-TERM LICENSE FEE RECEIVABLES (NOTE 14).... 1,040 --
-------- ----------
PROPERTY AND EQUIPMENT:
Land........................................ 761 761
Building.................................... 7,095 7,122
Machinery and equipment..................... 12,662 13,489
Leasehold improvements...................... 1,002 996
-------- --------
21,520 22,368
Less accumulated depreciation
and amortization of......................... (11,714) (11,739)
------- ------
9,806 10,629
SOFTWARE DEVELOPMENT COSTS, LESS ACCUMULATED
AMORTIZATION OF $1,039
IN 1996 AND $864 IN 1995...................... 3,792 3,513
OTHER ASSETS.................................. 1,004 923
------- --------
$59,750 $61,421
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................$ 11,407 $ 10,570
Accrued expenses............................. 7,454 8,161
Accrued warranty expenses.................... 1,425 1,391
Current portion of long-term debt ........... 3,050 6,357
-------- -------
Total current liabilities.................. 23,336 26,479
------- ------
NON-CURRENT LIABILITIES:
Long-term debt .............................. 19,060 27,242
Deferred credits and other obligations....... 1,213 217
-------- --------
20,273 27,459
COMMITMENTS AND CONTINGENCIES (NOTES 10, 11 AND 13)
SHAREHOLDERS' EQUITY:
Preferred stock: $100 par value per share;
40,000 shares authorized; no shares issued.. -- --
Common stock: no par value; $.10 stated
value per share; 7,500,000 shares authorized;
6,531,871 and 5,425,302 shares issued and
outstanding in 1996 and 1995, respectively.... 653 543
Additional paid-in capital.................... 50,312 45,573
Accumulated deficit........................... (30,208) (34,472)
Foreign currency translation adjustment....... (4,616) (4,161)
------ -------
Total shareholders' equity.................. 16,141 7,483
------ -------
$59,750 $ 61,421
====== ======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
22
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31,
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES: (Dollars in thousands)
Net income (loss).................. $4,264 $204 $(5,791)
Adjustments to reconcile net
income(loss)to net cash provided
by (used for)operating activities:
Depreciation and amortization....... 2,677 2,861 3,019
Unrealized (gain) loss on foreign
currency transactions............... 267 (59) (361)
Change in asset/liabilities
(Increase) decrease in accounts
receivable........................ 356 (3,148) 893
(Increase) decrease in
inventories....................... 959 1,004 6,528
Increase (decrease) in accounts
payable........................... 856 2,118 2,095
Increase (decrease) in accrued
expenses.......................... (534) 902 (1,634)
Other.............................. (346) (156) (795)
------- ------ ------
NET CASH PROVIDED BY OPERATING
ACTIVITIES......................... 8,499 3,726 3,954
------ ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment...... 34 99 327
Purchase of property and equipment... (561) (551) (408)
Software development costs........... (1,318) (1,066) (853)
Other investments.................... (181) 134 (152)
Loss on foreign currency
contracts............................ -- (48) (388)
-------- ------- ------
NET CASH (USED FOR) INVESTING
ACTIVITIES.......................... (2,026) (1,432) (1,474)
------ ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on bank credit facilities 49,985 68,625 39,275
Repayments of bank credit facilities (55,008) (69,997) (42,283)
Repayments of long-term borrowings (6,342) -- --
Proceeds from exercise of common
stock options...................... 47 29 41
Proceeds from stock rights offering,
net ............................. 4,802 -- --
------- ------- --------
NET CASH (USED FOR) FINANCING
ACTIVITIES.......................... (6,516) (1,343) (2,967)
------ ----- -----
EFFECT OF EXCHANGE RATE CHANGES
ON CASH............................. (152) 20 102
------- ------- ------
NET INCREASE (DECREASE) IN CASH..... (195) 971 (385)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR................... 2,072 1,101 1,486
------ ----- -----
CASH AND CASH EQUIVALENTS AT
END OF YEAR......................... $ 1,877 $2,072 $1,101
====== ===== =====
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Interest....................... $ 2,759 $ 3,656 $ 3,814
Income taxes................... -- -- --
The accompanying notes are an integral part of the Consolidated Financial
Statements.
23
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
SHARES ISSUED PAID-IN ACCUMULATED TRANSLATION
& OUTSTANDING AMOUNT CAPITAL DEFICIT ADJUSTMENT
(Dollars in thousands)
BALANCES,
OCTOBER 31, 1993... 5,399,399 $540 $45,517 $(28,885) $(4,085)
Net loss............ -- -- -- (5,791) --
Translation of
foreign currency
financial statements -- -- -- -- 2
Exercise of common
stock options ...... 14,283 1 29 -- --
---------- ------ -------- -------- ---------
BALANCES,
OCTOBER 31, 1994.... 5,413,682 $541 $45,546 $(34,676) $(4,083)
Net income.......... -- -- -- $204 --
Translation of
foreign currency
financial statements -- -- -- -- (78)
Exercise of common
stock options....... 11,620 2 27 -- --
---------- ------ -------- -------- ----------
BALANCES,
OCTOBER 31, 1995.... 5,425,302 $543 $45,573 $(34,472) $(4,161)
Net income.......... -- -- -- $4,264 --
Stock Rights
Offering............ 1,085,389 108 4,694 -- --
Translation of
foreign currency
financial statements -- -- -- -- (455)
Exercise of common
stock options....... 21,180 2 45 -- --
---------- ----- ------- -------- ------
BALANCES,
OCTOBER 31, 1996.... 6,531,871 $653 $50,312 $(30,208) $(4,616)
========== ===== ======= ======== ======
The accompanying notes are an integral part of the Consolidated Financial
Statements.
27
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of
Hurco Companies, Inc. (an Indiana corporation) and its wholly-owned and
controlled subsidiaries (the Company). A 15% ownership interest in an affiliate
recorded at cost and an 18% ownership interest in an affiliate recorded using
the equity method are included in Other Assets on the accompanying Consolidated
Balance Sheets. Intercompany accounts and transactions have been eliminated.
Statements of Cash Flows. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents. Cash
flows from hedges are classified consistent with the items being hedged.
Translation of Foreign Currencies. All balance sheet accounts of non-U.S.
subsidiaries are translated at the exchange rate as of the end of the year.
Income and expenses are translated at the average exchange rates during the
year. Foreign currency translation adjustments are recorded as a separate
component of shareholders' equity. Foreign currency transaction gains and losses
are recorded as income or expense as incurred.
Hedging. The Company enters into foreign currency forward exchange contracts
periodically to provide a hedge against the effect of foreign currency
fluctuations on receivables denominated in foreign currencies and net
investments in foreign subsidiaries. Gains and losses related to contracts
designated as hedges of receivables denominated in foreign currencies are
accrued as exchange rates change and are recognized as "Other (income) expense,
net" in the Consolidated Statements of Operations. Gains and losses related to
contracts designated as hedges of net investments in foreign subsidiaries are
accrued as exchange rates change and are recognized in the "Foreign currency
translation adjustment" portion of Shareholders' equity on the Consolidated
Balance Sheets.
The Company also enters into foreign currency forward exchange contracts to
hedge certain firm intercompany sale commitments denominated in foreign
currencies (primarily pound sterling and German marks) for which the Company has
firm purchase commitments. The purpose of these instruments is to protect the
Company from the risk that the U.S. dollar net cash inflows resulting from the
sales denominated in foreign currencies will be adversely affected by changes in
exchange rates. Gains and losses on these hedge contracts are deferred and
recognized as an adjustment to the related sales transactions.
The U.S. dollar equivalent notional amount of outstanding foreign currency
forward exchange contracts was approximately $12,645,000 as of October 31, 1996
($10,074,000 related to firm intercompany sales commitments) and $18,879,000 as
of October 31, 1995 ($16,833,000 related to firm intercompany sales
commitments). Deferred losses related to hedges of these future sales
transactions were approximately $61,000 and $265,000 as of October 31, 1996 and
1995, respectively. Contracts outstanding at October 31, 1996, mature at various
times through March 27, 1997. All contracts are for the sale of currency. The
Company does not enter into these contracts for trading purposes.
Inventories. Inventories are stated at the lower of cost or market,
with cost determined using the first-in, first-out method.
Property and Equipment. Property and equipment are carried at cost, which
includes capitalized interest incurred during the construction period of
the asset. No interest was capitalized during the three years ended
October 31, 1996. Depreciation and amortization of assets are provided primarily
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
under the straight-line method over the shorter of the estimated useful lives or
the lease terms as follows:
Number of Years
Building 40
Machines 10
Shop and office equipment 5
Leasehold improvements 5
Revenue Recognition. Sales of products and services are recorded when products
are shipped or services are performed. Revenue from maintenance contracts is
deferred and recognized in earnings on a pro rata basis over the period of the
agreement.
License Fees. The Company's policy is to recognize license fee income
related to patent infringement settlements, net of legal fees and expenses, over
the life of the agreements. The portion of the settlements attributable to
prior infringement are recorded in income in the period that the agreement is
finalized.
Product Warranty. Expected future product warranty expense is recorded when
the product is sold.
Research and Development Costs. The costs associated with research and
development programs for new products and significant product improvements are
expensed as incurred and included in Selling, general and administrative
expenses. Expenditures and related third-party reimbursements for
the last three years were (in thousands):
Year Ended October 31,
1996 1995 1994
---- ---- ----
Research and development expenditures......$1,689 $1,362 $1,001
Less: amounts reimbursed by third parties.. 58 354 14
-------- ------ ------
Net research and development expenses..... $1,631 $1,008 $987
======== ===== =====
Costs incurred to develop computer software to be sold or otherwise marketed are
capitalized, after technological feasibility is established, and are amortized
to Cost of sales on a straight-line basis over the estimated product life of
the related software which ranges from three to five years. Amortization
expense was $1,039,000, $864,000 and $749,000, respectively, for the three
years ended October 31, 1996.
Earnings Per Share. Earnings per share of common stock are based on the weighted
average number of common shares outstanding, which includes the effects of
outstanding stock options computed using the treasury method. Such common stock
equivalents totaled 121,000 and 118,000 for the twelve month periods ended
October 31, 1996 and 1995, respectively. Fully diluted earnings per share are
the same as primary earnings per share for 1996 and 1995. No effect has been
given to options outstanding for 1994 as no dilution would have resulted from
their exercise.
Income Taxes. The Company records income taxes under Statement of Accounting
Standards (SFAS) 109 "Accounting for Income Taxes". SFAS 109 utilizes the
liability method for computing deferred income taxes and requires that the
benefit of certain loss carryforwards be recorded as an asset and that a
valuation allowance be established against the asset to the extent it is "more
likely than not" that the benefit will not be realized.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. BUSINESS OPERATIONS
Nature of Business. The Company designs and produces computer numerical control
(CNC) systems and software and CNC-operated machine tools for sale through its
own distribution system to the worldwide machine tool industry. The Company's
proprietary CNC systems and related software products are either integrated with
machine tools marketed by the Company, sold to machine tool end users or sold to
other machine tool manufacturers who integrate them with their own products.
The end market for the Company's products consists primarily of precision tool,
die and mold manufacturers, independent job shops and specialized production
applications within large manufacturing operations. Industries served include:
aerospace, defense, medical equipment, energy, transportation and computer
industries. The Company's products are sold through over 240 independent agents
and distributors in 44 countries throughout North America, Europe and Asia. The
Company also maintains direct sales forces in the United States, England,
France, Germany and Singapore.
Credit Risk. The Company sells products to customers located throughout the
world. The Company performs ongoing credit evaluations of customers and
generally does not require collateral. Allowances are maintained for potential
credit losses, and such losses have been within management's expectations.
Concentration of credit risk with respect to trade accounts receivable is
limited due to the large number of customers and their dispersion across many
geographic areas. Although a significant amount of trade receivables are with
distributors primarily located in the United States, no single distributor or
region represents a significant concentration of credit risk.
Reliance on Contract Manufacturers. The Company contracts principally with
three machine tool builders located in Taiwan for the manufacture and assembly
of CNC machine tool systems, based on the Company's designs and
specifications, utilizing CNC systems provided by the Company. Any
interruption from these sources would restrict the availability of the
Company's machine tools, which would affect operating results adversely.
The Company has negotiations in process with other manufacturing sources to
increase its capacity and continuously evaluates alternative sources of
supply.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. INVENTORIES
Inventories as of October 31, 1996 and 1995 are summarized below (in thousands):
1996 1995
---------- ----------
Purchased parts and sub-assemblies..... $12,354 $17,380
Work-in-process........................ 1,942 3,523
Finished goods......................... 9,919 4,335
--------- ---------
$24,215 $25,238
========= =========
4. DEBT AGREEMENTS
Long-term debt as of October 31, 1996 and 1995, consisted of (in thousands):
1996 1995
-------- --------
Bank revolving credit facilities....... $10,931 $16,078
Bank term loan......................... 1,250 3,996
Senior Notes........................... 8,929 12,402
Economic Development Revenue Bonds,
Series 1990............................ 1,000 1,000
Other.................................. -- 123
--------- --------
22,110 33,599
Less current portion................... 3,050 6,357
--------- -------
$19,060 $27,242
====== =========
As of October 31, 1996, long-term debt was payable as follows (in thousands):
Fiscal 1997.............................. $ 3,050
Fiscal 1998.............................. 13,702
Fiscal 1999.............................. 1,786
Fiscal 2000.............................. 1,786
Fiscal 2001.............................. 1,786
-------
$22,110
53
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
As of October 31, 1996, the Company had unutilized credit facilities of $10.9
million available for either direct borrowings or commercial letters of credit.
As of October 31, 1996 and 1995, the Company had $7,716,000 and $6,648,000,
respectively, of outstanding letters of credit issued to non-U.S. suppliers for
inventory purchase commitments.
Interest was payable at 8.25% and 9.0% on the domestic bank revolving credit
facility and term loan as of October 31, 1996 and 1995, respectively. Interest
was payable on the European credit authorization at rates ranging from 6.8% to
9.8% as of October 31, 1996 and from 7.3% to 9.4% as of October 31, 1995.
Interest was payable on the Senior Notes at 10.87% and 11.12% at October 31,
1996 and 1995, respectively.
The Company's obligations to its lending banks, as well as its obligations to
the holders of its outstanding Senior Notes, are secured by substantially all of
the Company's assets.
Effective January 26, 1996, the agreements governing the Company's bank
indebtedness and Senior Notes were amended. Effective January 22, 1997,
the agreements governing the Company's bank indebtedness were further
amended to extend the maturity date of the bank revolving credit facility
and to provide an alternative reduced basis for interest charges on all
outstanding bank indebtedness. The principal terms of those agreements,
as so amended, are set forth below.
(a) Bank Indebtedness.
The Company's bank agreements provide for a revolving credit
facility expiring May 1, 1998 permitting borrowings at any one time
outstanding of up to $27.0 million (inclusive of outstanding
letters of credit of up to $9.5 million). Of such borrowings, up to
$5.0 million may be drawn in designated European currencies. In
addition, the agreements permit the Company to obtain up to $2.0
million of additional letters of credit without reduction of the
borrowing limit. The agreements also provide for a term loan of
$4.0 million, of which $1.25 million is outstanding and due on
September 30, 1997. Effective January 22, 1997, interest on all
outstanding borrowings is payable on a rate based on LIBOR for 30,
60 or 90 day periods (5.44% to 5.56% at January 22, 1997) plus 2.0%
or, at the Company's option, prime (8.25% at January 22, 1997).
The agreements condition the banks' lending obligations on the
Company's maintenance of a prescribed working capital borrowing
base and require the Company to maintain a specified minimum net
worth. The agreements also establish maximum leverage and fixed
charge coverage ratios, restrict capital expenditures and
investments and prohibit the payment of cash dividends or the
redemption of capital stock. The net worth covenant requires that
Consolidated Tangible Net Worth (as defined) be not less than
$6.75 million plus (i) 50% of cumulative net income subsequent
to November 1, 1995 and (ii) 85% of the net proceeds of any equity
or subordinated debt financings subsequent to November 1, 1995.
The ratio of total consolidated indebtedness to Consolidated
Tangible Net Worth may not exceed 3.55-to-1 from October 31, 1996
through January 30, 1997, 3.0-to-1 from January 31, 1997
through October 30, 1997 and 2.5-to-1 thereafter. At October
31, 1996, Consolidated Tangible Net Worth was $16.4 million
which was $3.4 million in excess of the requirement. The
Company was in compliance with all bank covenants at October 31,
1996.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(b)Senior Notes.
At October 31, 1996, the Company had outstanding approximately $8.9
million of Senior Notes, of which approximately $1.8 million was
repaid on December 1, 1996. Of the remaining $7.1 million,
approximately $1.8 million is due in equal annual installments on
December 1, 1997 through December 1, 2000. Interest is payable
monthly and was reduced from 11.12% per annum to 10.87% per annum
beginning September 1, 1996. Until October 31, 1997, the financial
covenants with respect to the Senior Notes are identical to those
applicable to the Company's bank indebtedness. Commencing November
1, 1997, certain covenants, unless otherwise modified, will become
more restrictive.
The agreements in effect at October 31, 1995 provided for a contingent fee (not
to exceed $500,000 to the banks and a pro-rata amount to the senior note
holders) based on the amount, by which the Company's actual gross profit
exceeded projected amounts in fiscal years 1995 through 1997. As of October 31,
1995, the maximum fee became fully due and payable in December 1995. Of this
fee, $400,000 was included in interest expense for fiscal 1995 ($360,000 in the
fourth quarter) and the remainder of $240,000 was recognized as interest expense
in fiscal 1996.
The Economic Development Revenue Bonds are payable in five equal annual
installments beginning on September 1, 2001 and are secured by a letter of
credit issued in the amount of $1,060,000 by the bank. The letter of credit
renews annually and expires in September 1997. If the letter of credit is not
renewed, the bank agreements provide for deferral of the reimbursement
obligation under the letter of credit until the maturity date of the revolving
credit facility. Accordingly, the $1,000,000 has been classified as payable in
fiscal 1998. The Bonds' interest rates adjust weekly and, as of October 31,
1996, interest was accruing at a rate of 3.8% (4.0% as of October 31, 1995).
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. FINANCIAL INSTRUMENTS
The carrying amounts for trade receivables and payables are considered to be
their fair values. The carrying amounts and fair values of the Company's other
recorded financial instruments at October 31, 1996 are as follows (in
thousands):
October 31, 1996
Carrying Fair
Amount Value (1)
Long-Term Debt:
Bank revolving credit facilities....... $10,931 $10,931
Bank term loan......................... 1,250 1,250
Senior Notes........................... 8,929 8,993
Economic Development Revenue Bonds..... 1,000 1,000
(1) The estimated fair values of Long-Term Debt are based on
discounted future cash flows using current interest rates
available to the Company with the same remaining maturities.
The Company also has off-balance sheet financial instruments in the form of
foreign currency forward exchange contracts as described in Note 1 to the
Consolidated Financial Statements. The U.S. dollar equivalent notional amount
and fair value of these contracts were $12,644,900 and $12,766,300,
respectively, at October 31, 1996. Current market prices were used to estimate
the fair value of the foreign currency forward exchange contracts.
The future value of the foreign currency forward exchange contracts and the
related currency positions are subject to offsetting market risk resulting from
foreign currency exchange rate volatility. The counterparties to these contracts
are substantial and creditworthy financial institutions. Neither the risks of
counterparty non-performance nor the economic consequences of counterparty
non-performance associated with these contracts are considered by the Company to
be material.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
6. INCOME TAXES
Deferred income taxes reflect the effect of temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets and
liabilities for financial reporting purposes. Deferred income taxes also reflect
the value of net operating losses and an off-setting valuation allowance. The
Company's total deferred tax assets and corresponding valuation allowance at
October 31, 1996 and October 31, 1995, consisted of the following (in
thousands):
October 31,
1996 1995
Tax effects of future tax deductible
items related to:
Accrued inventory reserves........... $715 $671
Accrued warranty expenses............ 370 360
Other accrued expenses............... 922 1,024
--------- -------
Total deferred tax assets........ 2,007 2,055
--------- -------
Tax effects of future taxable differences
related to:
Accelerated tax deduction and
other tax over book deductions
related to property, equipment
and software................... (1,476) (257)
Other.......................... (575) (577)
--------- --------
Total deferred tax liabilities..... (2,051) (834)
--------- --------
Net tax effects of temporary
differences........................ (44) 1,221
--------- -------
Tax effects of carryforward benefits:
U.S. federal net operating loss
carryforwards,expiring 2001-2010...... 9,909 10,319
Foreign net tax benefit carryforwards
with no expiration.................. 1,862 2,612
U.S. federal general business tax credits,
expiring 2001-2010 and alternative
minimum tax credit with no expiration. 1,543 1,555
--------- -------
Tax effects of carryforwards ..... 13,314 14,486
--------- ------
Tax effects of temporary differences
and carryforwards................. 13,270 15,707
Less valuation allowance.......... (13,270) (15,707)
------- -------
Net deferred tax asset............ $ -- $ --
========= =========
The Company's carryforwards expire at specific future dates and utilization of
certain carryforwards is limited to specific amounts each year and further
limitations may be imposed if an "ownership change" would occur. Realization is
entirely dependent upon generating sufficient future earnings in specific tax
jurisdictions prior to the expiration of the loss carryforwards. Due to the
uncertain nature of their ultimate realization based upon past performance and
expiration dates, the Company has established a full valuation allowance against
these carryforward benefits and is recognizing the benefits only as reassessment
demonstrates they are realizable. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of the
Company's income tax expense.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Income (loss) before income taxes (in thousands):
Year Ended October 31,
1996 1995 1994
Domestic.......................$(625) $(1,786) $(3,240)
Foreign........................4,983 1,990 (2,551)
-------- -------- -------
$4,358 $204 $(5,791)
======== ========= =======
Differences between the effective
tax rate and U.S. federal income tax
rate were (in thousands):
Tax (benefit) at U.S. Statutory Rate $1,525 $71 $(2,027)
Effect of International operations
tax rates in excess of U.S.
statutory rates............ 254 -- --
Effect of losses without a current
year tax benefit........... -- 625 2,027
Utilization of net operating loss
carryforwards............... (1,685) (696) --
------- ------- ---------
Provision for income tax.... $94 $ -- $ --
======== ========= =========
7. EMPLOYEE RETIREMENT BENEFITS
The Company has defined contribution plans that include a majority of its
employees worldwide, under which Company contributions are discretionary. The
purpose of these plans is generally to provide additional financial security
during retirement by providing employees with an incentive to save throughout
their employment. Company contributions to the plans are based on employee
contributions or compensation. These Company contributions totaled $252,000,
$213,000, and $214,000 for the years ended October 31, 1996, 1995, and 1994,
respectively.
During 1996, the Company initiated a non-qualified deferred compensation plan
for certain executives of the Company. The purpose of this defined contribution
plan is to provide executives with an additional mechanism to save throughout
their employment. The Company made no contributions to the deferred compensation
plan during fiscal 1996.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
8. STOCK OPTIONS
Stock options may be granted to key employees to purchase shares of common stock
at a price not less than the fair market value at the date of grant. Vesting
periods are determined at the discretion of the Board of Directors and currently
range from 3 to 5 years. Stock option activity during 1996, 1995 and 1994 is
summarized below (number of shares):
Year Ended October 31,
1996 1995 1994
Outstanding at beginning of year.........380,700 354,900 330,717
Granted.............................104,800 62,700 171,500
Canceled............................(32,700) (19,080) (48,534)
Expired............................. -- (6,200) (84,500)
Exercised...........................(21,180) (11,620) (14,283)
------- ------- --------
Outstanding at end of year...............431,620 380,700 354,900
======= ======= =======
Exercisable at end of year...............204,151 138,600 101,720
======= ======= =======
Available for future grants.............. 12,814 84,914 131,534
======== ======== =======
The range of option prices per share for outstanding options and the prices at
which options were exercised during 1996, 1995 and 1994 are summarized below:
Year Ended October 31,
1996 1995 1994
Option price.................$2.13 - $7.50 $2.13 - $7.50 $2.13-$7.50
Exercise price...............$2.13 - $3.88 $2.13 - $2.88 $2.13
As of October 31, 1996 and 1995, the Company had outstanding options for certain
members of the Board of Directors to purchase 75,000 and 25,000 shares of the
Company's common stock, respectively, at prices ranging from $5.13 to $7.00 per
share. All were exercisable as of October 31, 1996 and 1995. The options expire
at various dates between 2002 and 2006.
9. RELATED PARTY TRANSACTIONS
The Company and Air Express International Corporation (AEI) are related parties
because a common group of shareholders holds a substantial ownership interest in
both companies. AEI provides freight forwarding and shipping services for the
Company. The cost of these freight services are negotiated on an arms length
basis and amounted to $1,773,000, $1,438,000 and $323,000 for the years ended
October 31, 1996, 1995 and 1994, respectively. Trade payables to AEI were
$208,000, $27,000 and $3,000 at October 31, 1996 and 1995, and 1994,
respectively.
The Company owns an approximate 15% interest in one of its Taiwanese-based
suppliers. This investment is carried at cost and is included in Other Assets.
Purchases of product from this supplier are negotiated on an arms length basis
and totaled $8,616,000, $4,369,000 and $1,178,000 for the years ended October
31, 1996, 1995 and 1994, respectively. Trade payables to this supplier at
October 31, 1996, were $1,484,000, of which $1,112,000 was supported by letters
of credit that will be funded by the Company's bank through December 31, 1996.
Trade payables to this supplier at October 31, 1995 and 1994 were $1,519,000 and
$195,000, respectively.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
10. LITIGATION AND CONTINGENCIES
On October 10, 1995, the Company's wholly-owned subsidiary, IMS Technology, Inc.
(IMS), commenced an action in the United States District Court for the Northern
District of Illinois against a group of end-users of interactive CNCs, machine
tool manufacturers who incorporate interactive CNCs in their products and
manufacturers of CNCs designed to permit use of interactive methods when coupled
to machine tools. IMS alleges that the defendants have infringed one of the
Interactive Machining Patents (the "Patent") and is seeking monetary damages
from, and injunction against future infringement by, each of the defendants. The
defendants in this action presently include Okuma Machinery Works, Ltd.; Okuma
American Corporation; Ellison Machinery Company of the Midwest, Inc.; Apollo
Machine & Manufacturing Company, Inc.; Arpac Corporation; American Control
Technology, Inc.; Nissan Motor Co. Ltd.; Nissan Motor Car Carrier Co., Ltd.;
Nissan Motor Corp. USA, Inc.; and Fanuc, Ltd.
On January 11, 1996 IMS commenced an action in the United States District Court
for the Eastern District of Virginia (which was subsequently transferred to the
United States District Court for the Northern District of Illinois) against
Southwestern Industries, Inc. ("Southwestern"); Bridgeport Machines, Inc. and
Mitsubishi Electric Corporation ("Mitsubishi"). This action also alleges
infringement of the Patent.
IMS and the Company are defendants in a third action pending in the United
States District Court for the Northern District of Illinois that was commenced
January 29, 1996 by Mitsubishi and Mitsubishi Electric Industrial Controls. This
action seeks to have the patent declared invalid and alleges that the Company
and IMS violated federal antitrust laws in connection with the acquisition of
the Patent. In a counter-claim, IMS alleges that the plaintiffs and various
other defendants have infringed the Patent:
All three of the Illinois actions are being coordinated under local court ruling
and discovery is currently in process. IMS and the Company have filed a motion
to dismiss the antitrust claims in the third action, which currently is pending.
In addition to the three Illinois actions, IMS was a defendant in an action
commenced on November 30, 1995 by Southwestern in the United States District
Court for the Central District of California seeking to have the Patent declared
invalid. In May, 1996, the court transferred this action to the United States
District Court in Virginia (which action is now one of the three Illinois
actions described above); however, Southwestern has appealed the court's ruling.
The appeal is currently pending.
Although IMS believes that the Patent is valid and its claims of patent
infringement have substantial merit, it is unable to predict the outcome of any
of these actions.
The Company is involved in various other claims and lawsuits arising in the
normal course of business, none of which, in the opinion of management, is
expected to have a material adverse effect on its consolidated financial
position or results of operations.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
11. OPERATING LEASES
The Company leases facilities and vehicles under operating leases that expire at
various dates through 2002. Future payments required under operating leases as
of October 31, 1996, are summarized as follows (in thousands):
1997.....................................$ 1,671
1998..................................... 1,325
1999..................................... 1,064
2000..................................... 831
2001..................................... 665
2002..................................... 401
--------
Total................................... $ 5,957
========
Rental payments for the years ended October 31, 1996, 1995, and 1994 was
$1,940,000, $1,976,000, and $1,820,000, respectively.
12. RIGHTS OFFERING
On July 3, 1996 the Company issued and sold 1,085,389 shares of common stock at
a price of $4.63 per share pursuant to a subscription rights offering. The net
proceeds of approximately $4.8 million were used to prepay $3.1 million of
installments of the Company's outstanding indebtedness to its senior lenders
that were due on July 31, 1996. Of the amount prepaid, $1.4 million consisted of
bank debt bearing interest at a variable rate and $1.7 million represented an
installment payment on the Company's Senior Notes. The balance of the net
proceeds was used to reduce outstanding revolving credit borrowings. Since the
beginning of fiscal 1996, total indebtedness has been reduced by $11.5 million,
or 34%.
13. HURCO AUTOMATION, LTD.
In October 1996, the Company entered into an agreement with six Taiwanese
investors for the purpose of forming a company, Hurco Automation, Ltd. (HAL).
HAL's scope of activities will include the design, manufacture, sales and
distribution of industrial automated products, software systems and related
components, including CNC systems and components manufactured under contract for
sale exclusively to Hurco. At October 31, 1996, Hurco had invested $200,000 in
the joint venture which results in 18% ownership. Hurco has committed to invest
an additional $564,000 in three installments through fiscal 1999 which will
result in 35% ownership. Hurco is also committed to purchasing a defined number
of CNC systems from HAL between February 1, 1997 and July 31, 1999. Hurco will
account for the investment using the equity method. The investment of $200,000
at October 31, 1996 is included in Other Assets on the balance sheet. HAL plans
to begin production in the first quarter of fiscal 1997.
14. PATENT SETTLEEMENT AGREEEMENT
During 1996, the Company's wholly-owned subsidiary, IMS Technology, Inc. (IMS),
entered into two settelment agreements for the licensing of its interactive
machining patents which resulted in license fee income of $590,000, net of
legal fees and expenses. Under the terms of the 1996 settlement agreements,
license fees of approximately $1.4 million, net of legal fees and expenses, are
to be received from fiscal 1997 through 2001, the remaining term of the
agreements, unless the Interactive Machining Patents are declared invalid.
The licensees were not defendants in the IMS patent infringement
litigation discussed elsewhere in this report.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
15. QUARTERLY HIGHLIGHTS (UNAUDITED)
1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service
fees..................$ 23,224 $ 26,095 $ 23,039 $ 26,993
Gross profit.......... 6,475 7,231 6,988 7,727
Gross profit margin
percentage............ 27.9% 27.7% 30.3% 28.6%
Selling, general and
administrative
expenses.............. 5,049 5,363 5,223 5,708
Operating income...... 1,426 1,868 1,765 2,019
Net income............ 572 1,031 957 1,704
Earnings per common
share................. $ .10 $ .19 $ .16 $ .26
1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
First Quarter Second Quarter Third Quarter Fourth Quarter
Sales and service
fees.................$ 18,872 $ 20,687 $ 22,764 $ 27,309
Gross profit......... 4,658 5,389 5,986 7,437
Gross profit margin
percentage........... 24.7% 26.1% 26.3% 27.2%
Selling, general and
administrative expenses 4,246 4,616 4,558 5,582
Operating income..... 412 773 1,428 1,855
Net income (loss).... (473) (239) 428 488
Earnings (loss) per
common share......... $ (.09) $ (.04) $ .08 $ .09
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
16. BUSINESS SEGMENT AND INTERNATIONAL OPERATIONS
The Company operates in one business segment which consists of computer
numerical control (CNC) systems and software and CNC-operated machine tools for
cutting and forming metals. Summarized is information regarding Total Sales,
Operations Income (Loss) and Identifiable Assets by geographical areas (in
thousands):
United States Europe Asia Eliminations Consolidated
1996
Sales to unaffiliated
customers............. $54,760 $41,528 $3,063 $ -- $99,351
Transfers between
geographic areas...... 26,921 3,790 33 (30,744) --
--------- -------- -------- --------- ----------
Total sales........... $81,681 $45,318 $3,096 $(30,744) $99,351
======== ========= ======== ---------- ==========
Operating income...... $ 2,184 $ 4,348 $ 546 $ 7,078
========= ========= ======== ==========
Identifiable assets
as of October 31, 1996 $ 42,779 $14,763 $2,208 $ 59,750
========= ========= ======== ==========
1995
Sales to unaffiliated
customers............. $54,172 $32,881 $2,579 $ -- $89,632
Transfers between
geographic areas.......... 18,374 880 -- (19,254) --
-------- ------- -------- ------- -----------
Total sales...............$ 72,546 $33,761 $2,579 $(19,254) $89,632
========= ======== ======== ======= ==========
Operating income..........$ 2,570 $ 1,607 $ 291 $ 4,468
========= ========= ======== ==========
Identifiable assets as
of October 31, 1995..... $ 45,255 $15,404 $ 762 $ 61,421
========= ========= ======== ==========
1994
Sales to unaffiliated
customers............. $ 50,682 $21,584 $ 362 $ -- $72,628
Transfers between
geographic areas.......... 10,013 1,744 -- (11,757) --
-------- --------- ------- ------- -------------
Total sales..............$ 60,695 $23,328 $ 362 $(11,757) $72,628
======== ======== ======== ======= ==========
Operating loss.......... $ (346) $(2,057) $ (161)$(2,564)
========= ========= ======== =========
Identifiable assets as
of October 31, 1994..... $ 44,490 $14,641 $ 427 $ 59,558
======== ========= ======= ==========
17. NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," was issued. The statement must be adopted by the Company in the
first quarter of fiscal 1997. Under provision of the statement, impairments,
measured using fair market value, are recognized whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable and the future undiscounted cash flows attributable to the asset are
less than its carrying value. The statement is not expected to have a material
impact on the Company's results of operations or financial position.
In October 1995, SFAS No. 123, "Stock Based Compensation," was issued. This
statement will require the Company to choose between two different methods of
accounting for stock options. The statement defines a fair-value-based method of
accounting for stock options but allows an entity to continue to measure
compensation cost for stock options using the accounting prescribed by APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Use of the
APB 25 accounting method results in no compensation cost being recognized if
options are granted at an exercise price at the current market value of the
stock. The Company will continue to use the method prescribed under APB 25 but
will be required by SFAS 123 to make pro forma disclosures of net income and
earnings per share as if the fair value method had been applied in its financial
statements for the year ended October 31, 1997.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF THE REGISTRANT
The following information sets forth the name of each director, his age, tenure
as a director, principal occupation and business experience for the last five
years:
Served as a
Name Age Director Since
Hendrik J. Hartong, Jr. 57 1986
Andrew L. Lewis IV 40 1988
Brian D. McLaughlin 54 1987
E. Keith Moore 74 1990
Richard T. Niner 57 1986
O. Curtis Noel 61 1993
Charles E. Mitchell Rentschler 57 1986
Hendrik J. Hartong, Jr. has been a general partner of Brynwood Management,
the general partner of Brynwood Partners Limited Partnership, since 1984. Mr.
Hartong has also served as Chairman of the Board of Air Express International
Corporation since 1985.
Andrew L. Lewis IV has served as Chief Executive Officer of KRR Partners,
L.P. since July 1993. Beginning in 1990, Mr. Lewis has also been a consultant
for USPCI of Pennsylvania, Inc. Mr. Lewis is also a director of Air
Express International Corporation.
Brian D. McLaughlin has been President and Chief Executive Officer of the
Company since December, 1987.
E. Keith Moore has served as President of Hurco International, Inc., a
subsidiary of the Company, since April 1988. Mr. Moore is also a director of
Met-Coil Systems Corporation.
Richard T. Niner has been a general partner of Brynwood Management, the
general partner of Brynwood Partners Limited Partnership, since 1984. Mr.
Niner is also a director of Air Express International Corporation and Arrow
International, Inc.
O. Curtis Noel has been an independent business consultant for more than
ten years specializing in market and industry studies, competitive analysis
and corporate development programs with clients in the U.S. and abroad.
Charles E. Mitchell Rentschler has served as President and Chief Executive
Officer of The Hamilton Foundry & Machine Co. since 1985.
Each director of the Company serves for a term of one year, which expires at the
next annual meeting of shareholders of the Company when his successor has been
elected. There are no family relationships between any of the directors or
executive officers of the Company.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information with respect to the executive officers of
the Company:
Name Age Position(s) with the Company
Brian D. McLaughlin 54 President and Chief Executive Officer
Roger J. Wolf 56 Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
David E. Platts 44 Vice President, Research and
Development
James D. Fabris 45 Vice President of the Company and
President, Hurco Machine Tool Products
(a division)
Richard Blake 38 Vice President of the Company and
Managing Director, Hurco Europe, Ltd.
Stephen J. Alesia 30 Corporate Controller
Brian D. McLaughlin has been President and Chief Executive Officer of the
Company since December 1987. From 1982 to 1987, he was employed as President and
General Manager of various divisions of Ransburg Corporation, an international
manufacturer of factory automation equipment. Previously, he was employed in
general management and marketing management positions with Eaton Corporation.
Roger J. Wolf has been Senior Vice President, Secretary, Treasurer and Chief
Financial Officer since January 1993. Prior to joining the Company, Mr. Wolf was
Executive Vice President of a privately-owned investment and service business
for over seven years. Previously, he served as Vice President, Corporate
Controller and Vice President, Treasurer of Ransburg Corporation, an
international manufacturer of factory automation equipment.
David E. Platts has been employed by the Company since 1982, and was elected
Vice President, Research and Development in 1989. Prior to joining the Company,
Mr. Platts was a Research Engineer at the Delco Remy Division of General Motors.
James D. Fabris was elected Vice President of the Company in February 1995 and
named President of Hurco Machine Tool Products (previously Hurco Manufacturing
Company), a division of the Company, in November 1993. He served as President of
Acroloc, Inc., a subsidiary of the Company, from July 1991 to October 1993 and
as Vice President of Operations of Hurco Manufacturing Company from 1988 to
1991. Prior to joining the Company, he was employed in general management and
manufacturing management positions at various divisions of Ransburg Corporation.
Richard Blake was elected Vice President of the Company in January 1996, and
Managing Director, Hurco Europe, Ltd., a subsidiary of the Company, in December
1993. He served as U.K. Marketing Manager for Hurco Europe, Ltd. from January
1993 to November 1993 and as a Sales Manager for Hurco Manufacturing Company
from September 1989 to December 1992. Prior to joining Hurco Europe, Ltd. as a
sales engineer in October 1987, he worked for Hitachi Seiki as a technical sales
engineer for machine tool products.
Stephen J. Alesia joined the Company in June 1996 and was elected an executive
officer in September 1996. Prior to joining the Company, Mr. Alesia was employed
for seven years by Arthur Andersen LLP, an international public accounting firm.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than ten percent
(10%) of the Company's common stock, to file initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company with the Securities and Exchange Commission.
To the Company's knowledge, based solely upon a review of copies of such reports
furnished to the Company during and pertaining to its most recent fiscal year,
and certain written representations, all Section 16(a) filings applicable to the
Company's executive officers, directors and greater than ten percent (10%)
beneficial owners were made on a timely basis during the most recent fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth all compensation paid or accrued during each of
the last three fiscal years to the Chief Executive Officer and each of the other
most highly compensated executive officers of the Company based on salaries and
bonuses earned during fiscal 1996 (the Named Executive Officers). No other
executive officer earned more than $100,000 in salary and bonuses during fiscal
1996.
SUMMARY COMPENSATION TABLE
Long-Term All Other
Annual Compensation Compensation Compen-
Name and Fiscal Salary Bonus Other Annual Securities Underlying sation
Principal Position Year ($) ($) (1)Compensation($) Option (2) ($) (3)
- ------------------------------------------------------- ---------- -----------
Brian D. McLaughlin 1996 $238,133 $80,000 15,000 $3,325
President and CEO 1995 226,936 75,000 -- 10,000 3,234
1994 220,000 -- -- 70,000 (4) 2,302
Roger J. Wolf 1996 148,500 75,000 3,000 2,880
Sr. VP, Secretary 1995 139,731 45,000 -- 15,000 3,063
Treasurer and CFO 1994 135,000 7,000 $16,308 (5) 7,000 1,934
James D. Fabris 1996 122,500 50,000 10,000 3,199
V. P. of the Company1995 107,885 45,000 -- 5,000 2,210
and President Hurco 1994 98,335 -- -- 13,000 1,295
Machine Tool Products
David E. Platts 1996 93,917 20,000 5,000
Vice President 1995 87,834 15,000 -- 10,000
Research&Development
Richard Blake 1996 87,373 46,311 -- 15,000 3,841
V. P. of the Company
and Managing Director
Hurco Europe Ltd.
- ---------------------------
(1) Represents cash bonuses earned and paid in the subsequent year.
(2) Represents options granted under the stock option plan related to the
prior year's performance, other than specified below. The Company has
not granted any Stock Appreciation Rights (SARs).
(3) Represents the Company's contribution to defined contribution plans.
(4) Represents options granted under the stock option plan to replace options
that had expired during the fiscal year. (5) Represents amounts reimbursed
during the fiscal year for the payment of taxes related to relocation expenses.
STOCK OPTIONS
The following table sets forth information related to options granted to the
Named Executive Officers during the 1996 fiscal year. The Company has not
granted any Stock Appreciation Rights (SARs).
OPTION GRANTS DURING 1996 FISCAL YEAR
Individual Grants Potential
% of Total Realizable Value at
Number of Options Assumed Annual
Securities Granted to Rates of Stock Price
Underlying Employees Exercise Appreciation for
Options in Fiscal Price Expiration Option Term (1)
--------------------
Name Granted Year ($/SH) Date 5% ($) 10%($)
- ---- ------- ---- ------ ---- ------ ------
Brian D. McLaughlin 10,000 (2) 9.5% $5.125 7/08/06 $32,231 $81,679
Roger J. Wolf 3,000 (2) 2.9% $5.125 7/08/06 $9,669 $24,504
James D. Fabris 10,000 (3) 9.5% $5.125 7/08/06 $32,231 $81,679
David E. Platts 5,000 (3) 4.8% $5.125 7/08/06 $16,116 $40,839
Richard Blake 10,000 (3) 9.5% $5.063 12/15/05 $31,840 $80,690
5,000 (3) 4.8% $5.125 7/08/06 $16,116 $40,839
- ----------------------------
(1)The potential realizable value illustrates value that might be realized
upon the exercise of the options immediately prior to the expiration of
their terms, assuming the specified compounded rates of appreciation on
the Company's common stock from the date of grant through the term of
the options. These numbers do not take into account provisions that may
result in termination of the options following termination of
employment or the vesting periods of three years.
(2)Options may be exercised in three equal annual installments, or parts
thereof, commencing on the first anniversary date of the grant.
(3)Options may be exercised in five equal annual installments, or parts
thereof, commencing on the first anniversary
date of the grant.
The following table sets forth information related to options exercised during
the 1996 fiscal year and options held at fiscal year-end by the Named Executive
Officers. The Company does not have any outstanding SARs.
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND YEAR-END OPTION VALUES
Value of
Number of Unexercised
Shares Securities Underlying In-the-Money
Acquired Unexercised Options Options
on Value at FY-End (#) at FY-End ($) (1)
Exercise Realized Exer- Unexer- Exer- Unexer-
Name (#) ($) cisable cisable cisable cisable
- ---- ------------------ ------- ------- ------- -------
Brian D. McLaughlin -- -- 81,999 43,001 $101,665 $54,585
Roger J. Wolf -- -- 24,667 25,333 $13,667 $12,458
James D. Fabris -- -- 14,900 25,100 $35,050 $30,075
David E. Platts -- -- 16,000 14,000 $36,500 $ 8,500
Richard Blake -- -- 2,400 18,600 $ 5,850 $ 8,775
- -----------------------------------------
(1)Value is calculated based on the closing market price of the common stock on
October 31, 1996 ($4.625) less the
option exercise price.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives a fee of $1,000 for
each meeting of the Board of Directors attended, and each such director also
receives $3,000 per quarter. Directors are also entitled to receive
reimbursement for travel and other expenses incurred in attending such
meetings. Employee directors receive no fees. Mr. Niner received annual
compensation of $72,000 and a $25,000 bonus for his services as Chairman of the
Executive Committee of the Board of Directors. On July 8, 1996, each director
was granted 10,000 options each.
EMPLOYMENT CONTRACTS
Brian D. McLaughlin entered into an employment contract on December 14, 1987.
The contract term is month-to-month. Mr. McLaughlin's salary and bonus
arrangements are set annually by the Board of Directors. Other compensation,
such as stock option grants, is awarded periodically at the discretion of the
Board of Directors. As part of that contract, Mr. McLaughlin is entitled to 12
months' salary if his employment is terminated for any reason other than gross
misconduct.
Roger J. Wolf entered into an employment contract on January 8, 1993. The
contract term is unspecified. Mr. Wolf's salary and bonus arrangements are set
annually by the Board of Directors. Other compensation, such as stock option
grants, is awarded periodically at the discretion of the Board of Directors. As
part of that contract, Mr. Wolf is entitled to 12 months' salary if his
employment is terminated without just cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1996 the members of the Compensation Committee were Hendrik J.
Hartong, Jr., O. Curtis Noel and Charles E. Mitchell Rentschler. None of the
Committee members is a current or former officer or employee of the Company
or any of its subsidiaries. Mr. Hartong is a director of AEI. Mr. Hartong is
also a general partner of Brynwood Management, which is the general partner
of Brynwood Partners Limited Partnership, which has substantial ownership
interest in AEI. AEI provides freight forwarding and shipping services for
the Company. The cost of these freight services are negotiated on an
arms-length basis and amounted to $1,773,000 for the fiscal year ended
October 31, 1996. None of the Committee members are involved in any other
relationships requiring disclosure as an interlocking officer / director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of January 10, 1997, regarding
beneficial ownership of the Company's common stock by each director and named
executive officer, by all directors and executive officers as a group, and by
certain other beneficial owners of more than 5% of the common stock. Each such
person has sole voting and investment power with respect to such securities,
except as otherwise noted.
Shares Beneficially Owned
Name and Address Number Percent
Other Beneficial Owners
Brynwood Partners Limited Partnership 1,390,001 21.3%
Two Soundview Avenue
Greenwich, Connecticut 06830
Wellington Management Co. 573,600 (1) 8.8%
75 State Street
Boston, Massachusetts 02109
The TCW Group, Inc. 508,200 7.8%
865 South Figueroa Street
Los Angeles, California 90017
Directors and Executive Officers
Hendrik J. Hartong, Jr. 1,685,572 (2,3,4) 25.8%
Andrew L. Lewis IV 14,000 (3) 0.2%
Brian D. McLaughlin 118,475 (5,6) 1.8%
E. Keith Moore 37,810 (7) 0.5%
Richard T. Niner 1,697,362 (2,3) 26.0%
O. Curtis Noel 5,000 (3) 0.1%
Charles E. Mitchell Rentschler 30,000 (3,8) 0.5%
Roger J. Wolf 30,059 (9) 0.5%
James D. Fabris 15,400 (10) 0.2%
Executive officers and directors 1,985,776 (2,11) 30.4%
as a group (12 persons)
(1) Wellington Management Co. (WMC), a registered investment advisor, is
deemed to have beneficial ownership of 573,600 shares of the Company's
common stock, which is owned by various advisory clients of WMC. WMC
has no voting power for 84,000 shares, shared voting power for 403,200
shares and sole voting power for 86,400 shares. WMC has shared
investment power for all shares.
(2) Includes 1,390,001 shares owned by Brynwood Partners Limited
Partnership, of which the sole general partner is Brynwood Management,
a general partnership and 278,001 shares owned by Brynwood Partners II,
L.P., private investment partnerships. Mr. Hartong and Mr. Niner are
general partners of the general partner of each of these partnerships
and may be deemed to have beneficial ownership of these shares.
(3) Includes 5,000 shares subject to options that are exercisable within
60 days.
(4) Includes 100 shares owned by Mr. Hartong's wife, which
shares may be deemed to have beneficial ownership; also includes
3,000 shares which have shared voting and investment power.
(5) Includes 81,999 shares subject to options held by Mr. McLaughlin that
are exercisable within 60 days; excludes
43,001 shares subject to options that are not exercisable within the
next 60 days.
(6) Includes 10,876 shares owned by Mr. McLaughlin's wife and children,
which shares he may be deemed to have beneficial
ownership.
(7) Includes 10,800 shares subject to options held by Mr. Moore that are
exercisable within 60 days; excludes 200 shares
subject to options that are not exercisable within the next 60 days.
(8) Includes 6,000 shares owned by Mr. Rentschler's wife, which he may be
deemed to have beneficial ownership.
(9) Includes 24,667 shares subject to options that are exercisable within
60 days; excludes 25,333 shares subject to options that are not
exercisable within the next 60 days.
(10) Includes 14,900 shares subject to options that are exercisable within
60 days; excludes 25,100 shares subject to options that are not
exercisable within the next 60 days.
(11) Includes 175,766 shares subject to options that are exercisable within
60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Air Express International (AEI) are related parties because
Brynwood Partners Limited Partnership holds a substantial ownership interest in
both companies. Two of the Company's directors, Hendrik J. Hartong, Jr. and
Richard T. Niner, are general partners of Brynwood Management, which is the
general partner of Brynwood Partners Limited Partnership. AEI provides freight
forwarding and shipping services for the Company. The cost of these freight
services are negotiated on an arms length basis and amounted to $1,773,000 the
year ended October 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements. The following consolidated financial
statements of Registrant are included herein under Item 8 of Part II:
Page
Reports of Independent Accountants..........................................19
Consolidated Statements of Operations - years
ended October 31, 1996, 1995 and 1994........................... 20
Consolidated Balance Sheets - as of October 31, 1996 and 1995......21
Consolidated Statements of Cash Flows - years
ended October 31, 1996, 1995 and 1994........................... 22
Consolidated Statements of Changes in Shareholders' Equity -
years ended October 31, 1996, 1995 and 1994..................... 23
Notes to Consolidated Financial Statements.........................24
2. Financial Statement Schedules. The following financial statement
schedule is included in this Item.
Page
Schedule II - Valuation and Qualifying
Accounts and Reserves........................................... 48
All other financial statement schedules are omitted because they are not
applicable or the required information is included in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended October 31,
1996.
(c) Exhibits
Exhibits are filed with this Form 10-K or incorporated herein by reference
as listed on Pages 49-51.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of Period
Allowance for doubtful
accounts for the year
ended:
October 31, 1996 $1,070 $(63) $ -- $222 1 $785
======== ======= ======= ======== ========
October 31, 1995 $1,046 $ 31 $ -- $ 7 2 $1,070
======== ======= ======= ======== ========
October 31, 1994 $ 979 $ 78 $ -- $ 11 3 $1,046
======== ======= ======= ======== ========
Accrued warranty expenses for the year ended:
October 31, 1996 $1,391 $1,544 $-- $1,510 $1,425
======== ======= ======= ======== ========
October 31, 1995 $1,170 $1,541 $-- $1,320 $1,391
======== ======= ======= ======== ========
October 31, 1994 $1,084 $1,539 $-- $1,453 $1,170
======== ======= ======= ======== ========
1 Receivable write-offs of $228,000, net of cash recoveries on accounts
previously written off of $6,000.
2 Receivable write-offs of $42,000, net of cash recoveries on accounts
previously written off of $35,000.
3 Receivable write-offs of $20,000, net of cash recoveries on accounts
previously written off of $9,000.
EXHIBITS INDEX
Exhibits Filed. The following exhibits are filed with this Report:
10.47 Non-qualified Stock Option Agreement between the Registrant and Hendrik
J. Hartong, Jr., effective July 8, 1996.
10.48 Non-qualified Stock Option Agreement between the Registrant and Andrew
L. Lewis IV, effective July 8, 1996.
10.49 Non-qualified Stock Option Agreement between the Registrant and Richard
T. Niner, effective July 8, 1996.
10.50 Non-qualified Stock Option Agreement between the Registrant and O.
Curtis Noel, effective July 8, 1996.
10.51 Non-qualified Stock Option Agreement between the Registrant and Charles
E. Mitchell Rentschler, effective July
8, 1996.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants - Arthur Andersen LLP.
27 Financial Data Schedule (electronic filing only).
Exhibits Incorporated by Reference. The following exhibits are incorporated
into this Report:
3.1 Amended and Restated Articles of Incorporation of the Registrant,
incorporated by reference, as Exhibit 3.1, to the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1989.
3.2 Amended and Restated By-Laws of the Registrant, incorporated by reference,
as Exhibit 3.2, to the Registrant's
Annual Report on Form 10-K for the year ended October 31, 1990.
3.3 Amended and Restated By-Laws of the Registrant dated September 12,
1995, incorporated by reference, as Exhibit 3.3, to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1996.
10.13 The Underlease between Dikappa (Number 220) Limited and Northern &
London Investment Trust limited dated December 2, 1982,
incorporated by reference, as Exhibit 10.13, to its Registration
Statement on Form S-1, No.2-82804 dated April 1, 1983.
10.20.1 Term Loan Agreement dated September 9, 1991, between the
Registrant and NBD Bank, N.A., incorporated by reference, as
Exhibit 10.20.1, to the Registrant's Annual Report on Form 10-K
for the year ended October 31, 1991.
10.20.5 Letter Agreement (European Facility) dated June 17, 1993, between
the Registrant's subsidiaries and NBD Bank, N.A., incorporated by
reference, as Exhibit 10.20.5, to the Registrant's Annual Report
on Form 10-K for the year ended October 31, 1993.
10.20.9 Amendment to Letter Agreement (European Facility) dated March 24,
1994, between the Registrant's foreign subsidiaries and NBD Bank,
N.A., incorporated by reference, as Exhibit 10.20.9, to the
Registrant's Report on Form 8-K dated August 1, 1994.
10.20.11 Security Agreement dated March 24, 1994, between the Registrant
and NBD Bank, N.A. as collateral agent, incorporated by reference,
as Exhibit 10.20.11, to the Registrant's Report on Form 8-K dated
August 1, 1994.
10.20.13 Guaranty Agreement dated March 24, 1994, between Autocon
Technologies, Inc. and NBD Bank, N.A., incorporated by reference,
as Exhibit 10.20.13, to the Registrant's Report on Form 8-K dated
August 1, 1994.
10.20.14 Pledge Agreement dated March 24, 1994, between the Registrant and
NBD Bank, N.A. as collateral agent, incorporated by reference, as
Exhibit 10.20.14, to the Registrant's Report on Form 8-K dated
August 1, 1994.
10.20.16 Second Amendment to Letter Agreement (European Facility), dated
January 31, 1995, among the Registrant's foreign subsidiaries and
NBD Bank, incorporated by reference, as Exhibit 10.20.16, to the
Registrant's Report on Form 10-K for the year ended October 31,
1995.
10.20.19 Third Amendment to Letter Agreement (European Facility), dated May
31, 1995, among the Registrant's foreign subsidiaries and NBD
Bank, incorporated by reference, as Exhibit 10.20.19, to the
Registrant's Report on Form 10-K for the year ended October 31,
1995.
10.20.22 Fourth Amendment to Letter Agreement (European Facility), dated
August 1, 1995, among the Registrant's foreign subsidiaries and
NBD Bank, incorporated by reference, as Exhibit 10.20.22, to the
Registrant's Report on Form 10-K for the year ended October 31,
1995.
10.20.26 Amended and Restated Credit Agreement and Amendment to Term Loan
Agreement, dated January 26, 1996, between the Registrant and NBD
Bank, incorporated by reference, as Exhibit 10.20.26,to the
Registrant's Report on Form 10-Q for the quarter ended January 31,
1996.
10.20.27 Fifth Amendment to Letter Agreement (European Facility), dated
January 26, 1996, among the Registrant's foreign subsidiaries and
NBD Bank, incorporated by reference, as Exhibit 10.20.27, to the
Registrant's Report on Form 10-Q for the quarter ended January 31,
1996.
10.20.28 Amended and Restated Intercreditor, Agency and Sharing Agreement,
dated January 26, 1996, among the Registrant, NBD Bank, Principal
Mutual Life Insurance Company and NBD Bank as Agent, incorporated
by reference as Exhibit 10.20.28, to the Registrant's Report on
Form 10-Q for the quarter ended January 31, 1996.
10.34 Employment Agreement between the Registrant and Brian D.
McLaughlin, dated December 14, 1987, incorporated by reference, as
Exhibit 10.34, to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1987.
10.42.2 Amended and Restated Note Agreement dated March 24, 1994, between
the Registrant and Principal Mutual Life Insurance Company,
incorporated by reference, as Exhibit 10.42.2, to the Registrant's
Report on Form 8-K dated August 1, 1994.
10.42.3 Guaranty Agreement dated March 24, 1994, between Autocon
Technologies, Inc. and Principal Mutual Life Insurance Company,
incorporated by reference, as Exhibit 10.42.3, to the Registrant's
Report on Form 8-K dated August 1, 1994.
10.42.4 Amendment and Notes Modification Agreement, dated January 31,
1995, between the Registrant and Principal Mutual Life Insurance
Company, incorporated by reference, as Exhibit 10.42.4, to the
Registrant's Report on 10-K for the year ended October 31, 1995.
10.42.5 Amendment to Amended and Restated Note Agreement, dated May 31,
1995, between the Registrant and Principal Mutual Life Insurance
Company, incorporated by reference, as Exhibit 10.42.5, to the
Registrant's Report on Form 10-K for the year ended October 31,
1995.
10.42.6 Third Amendment to Amended and Restated Note Agreement, dated July
31, 1995, between the Registrant and Principal Mutual Life
Insurance Company, incorporated by reference, as Exhibit 10.42.6,
to the Registrant's Report on Form 10-K for the year ended October
31, 1995.
10.42.7 Fourth Amendment to Amended and Restated Note Agreement, dated
January 26, 1996, between the Registrant and Principal Mutual Life
Insurance, incorporated by reference, as Exhibit 10.42.7, to the
Registrant's Report on Form 10-Q for the quarter ended January 31,
1996.
10.44 Non-Qualified Stock Option Agreement between the Registrant and O.
Curtis Noel effective, March 3, 1993, incorporated by reference,
as Exhibit 10.44, to the Registrant's Annual Report on Form 10-K
for the year ended October 31, 1993.
10.45 Employment Agreement between the Registrant and Roger J. Wolf
dated January 8, 1993, incorporated by reference, as Exhibit
10.45, to the Registrant's Annual Report on Form 10-K for the year
ended October 31, 1993.
10.46 Standby Purchase Agreement between the Registrant and Brynwood Partners
II L.P. dated June 6, 1996, incorporated by reference as Exhibit 1, on
Form S-3 (Registration No. 333-5295) as filed with the Commission on June
6, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 28 day of January,
1996.
HURCO COMPANIES, INC.
By:/s/ ROGER J. WOLF
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature and Title(s) Date
/s/ BRIAN D. McLAUGHLIN January 28, 1997
Brian D. McLaughlin, Director,
President and Chief Executive Officer
of Hurco Companies, Inc.
(Principal Executive Officer)
/s/ ROGER J. WOLF January 28, 1997
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
of Hurco Companies, Inc.
(Principal Financial Officer)
/s/ STEPHEN J. ALESIA January 28, 1997
Stephen J. Alesia
Corporate Controller
of Hurco Companies, Inc.
(Principal Accounting Officer)
/s/ HENDRIK J. HARTONG, JR.
Hendrik J. Hartong, Jr., Director January 28, 1997
/s/ ANDREW L. LEWIS IV January 28, 1997
Andrew L. Lewis, IV, Director
/s/ E. KEITH MOORE January 28, 1997
E. Keith Moore, Director
/s/ RICHARD T. NINER January 28, 1997
Richard T. Niner, Director
/s/ O. CURTIS NOEL January 28, 1997
O. Curtis Noel, Director
/s/ CHARLES E. M. RENTSCHLER January 28, 1997
Charles E.M. Rentschler, Director