SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended July 31, 1999
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 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
--------------
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 the past 90 days:
Yes X No
The number of shares of the Registrant's common stock outstanding as of August
31, 1999 was 5,950,859.
<PAGE>
HURCO COMPANIES, INC.
July 1999 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Page
Item 1. Condensed Financial Statements
Condensed Consolidated Statement of Operations -
Three months and nine months ended
July 31, 1999 and 1998..................................3
Condensed Consolidated Balance Sheet -
As of July 31, 1999 and October 31, 1998..................4
Condensed Consolidated Statement of Cash Flows -
Three months and nine months ended
July 31, 1999 and 1998..................................5
Condensed Consolidated Statement of Changes
in Shareholders' Equity -Nine months
ended July 31, 1999 and 1998............................6
Notes to Condensed Consolidated Financial Statements..........7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...14
Part II - Other Information
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders..........15
Item 6. Exhibits and Reports on Form 8-K.............................16
Signature..................................................................16
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per-share data)
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------ --------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
(unaudited) (unaudited)
Sales and service fees......... $ 20,783 $ 23,444 $ 63,463 $ 67,106
Cost of sales and service...... 14,868 16,464 45,686 47,716
---------- ---------- ---------- ---------
Gross profit.............. 5,915 6,980 17,777 19,390
Selling, general and
administrative expenses........ 5,152 5,573 15,839 15,951
Restructuring credit........... -- -- (103) --
---------- ---------- ---------- ---------
Operating income ......... 763 1,407 2,041 3,439
License fee income and litigation
settlement fees, net........... 73 1,025 242 6,810
Interest expense............... 333 149 973 633
Other expense, net............. 9 72 115 97
---------- ---------- ---------- ---------
Income before taxes....... 494 2,211 1,195 9,519
Income tax expense............. 94 381 66 1,233
---------- ---------- ---------- ---------
Net income.....................$ 400 $ 1,830 $ 1,129 $ 8,286
========== ========== ========== =========
Earnings per common share
Basic.....................$ .07 $ .28 $ .19 $ 1.27
========= ========== ========= =========
Diluted...................$ .07 $ .27 $ .19 $ 1.23
========= ========== ========= =========
Weighted average common
shares outstanding
Basic...................... 5,947 6,472 5,989 6,528
========= ========== ========= =========
Diluted.................... 6,044 6,664 6,076 6,720
========= ========== ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
July 31, October 31,
1999 1998
ASSETS (Unaudited) (Audited)
Current assets:
Cash and temporary investments.............. $ 3,182 $ 3,276
Accounts receivable......................... 14,600 18,896
Inventories................................. 33,151 30,817
Other....................................... 1,811 2,154
---------- ---------
Total current assets.................... 52,744 55,143
---------- ---------
Long-term license fees receivable................ 622 797
---------- ---------
Property and equipment:
Land .................................... 761 761
Building.................................... 7,141 7,067
Machinery and equipment..................... 10,967 11,184
Leasehold improvements...................... 1,043 1,107
Less accumulated depreciation and
amortization........................... (10,943) (11,037)
--------- ---------
8,969 9,082
---------- ---------
Software development costs, less amortization..... 4,320 4,231
Other assets ..................................... 3,301 2,443
---------- ---------
$ 69,956 $ 71,696
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................$ 11,870 $ 15,791
Accrued expenses............................. 7,141 8,217
Current portion of long-term debt............ 1,786 1,786
---------- ---------
Total current liabilities................ 20,797 25,794
---------- ---------
Non-current liabilities:
Long-term debt............................... 12,263 6,572
Deferred credits and other obligations....... 1,532 1,590
---------- ---------
Total non-current liabilities......... 13,795 8,162
---------- ---------
Shareholders' equity:
Preferred stock: no par value per share; 1,000,000
shares authorized; no shares issued........ -- --
Common stock: no par value; $.10 stated value per
share; 12,500,000 shares authorized; and
5,950,459 and 6,340,111 shares issued and
outstanding, respectively .............. 595 634
Additional paid-in capital................... 46,337 48,662
Accumulated deficit.......................... (6,021) (7,150)
Foreign currency translation adjustment...... (5,547) (4,406)
---------- ---------
Total shareholders' equity ................. 35,364 37,740
---------- ---------
$69,956 $71,696
========== =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
<PAGE>
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- ------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income ............................$ 400 $ 1,830 $ 1,129 $ 8,286
Adjustments to reconcile net income to net
cash provided by (used for) operating
activities: Depreciation and
amortization...................... 522 531 1,505 1,603
Change in assets and liabilities:
(Increase) decrease in accounts
receivable........................ 1,286 (1,505) 3,317 (65)
(Increase) decrease in license fee
receivables.......................... -- (36) 175 (376)
(Increase) decrease in inventories... (1,490) (4,342) (3,191) (5,203)
Increase (decrease) in accounts
payable......................... 2,971 3,934 (3,831) 6,817
Increase (decrease) in accrued expenses 536 (211) (708) (641)
Other................................ (542) 201 71 (500)
------- ------- ------- -------
Net cash provided by (used for)
operating activities............... 3,683 402 (1,533) 9,921
------- ------- ------- -------
Cash flows from investing activities:
Proceeds from sale of equipment........ 19 3 91 13
Purchase of property and equipment..... (269) (177) (913) (716)
Software development costs............. (247) (442) (779) (822)
Other investments...................... (9) (24) (220) (220)
------- ------- ------- -------
Net cash provided by (used for)
investing activities................. (506) (640) (1,821) (1,745)
------- ------- ------- -------
Cash flows from financing activities:
Advances on bank credit facilities..... 13,840 752 54,890 9,252
Repayment on bank credit facilities ...(17,632) (752) (47,401) (11,152)
Repayment of term debt ................ -- -- (1,786) (1,786)
Proceeds from exercise of common
stock options........................ 13 18 15 100
Purchase of common stock............... -- (720) (2,379) (998)
------- ------- -------- --------
Net cash provided by (used for)
financing activities................. (3,779) (702) 3,339 (4,584)
------- ------- -------- --------
Effect of exchange rate changes on cash... 90 39 (79) 58
------- ------- -------- --------
Net increase (decrease) in cash and
temporary investments................ (512) (901) (94) 3,650
Cash and temporary investments
at beginning of period............... 3,694 7,922 3,276 3,371
------- ------- -------- --------
Cash and temporary investments
at end of period.....................$ 3,182 $ 7,021 $ 3,182 $ 7,021
======== ======= ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
<PAGE>
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months ended July 31, 1999 and 1998
(Dollars in thousands)
Accumulated
Other
Comprehensive
Income (Loss):
Common Stock
------------------------- Foreign
Shares Additional Currency
Issued & Paid-In Accumulated Translation
Outstanding Amount Capital Deficit Adjustment Total
Balances,
October 31 1997 6,544,831 $654 $50,349 $(16,404) $(4,823) $29,776
- ---------------
(Unaudited)
Net income........... -- -- -- 8,286 -- 8,286
Translation of foreign
currency financial
statements -- -- -- -- (292) (292)
-------
Comprehensive income 7,994
-------
Exercise of Common
Stock Options 41,280 4 108 -- -- 112
Purchase of Common Stock (125,000) (12) (998) -- -- (1,010)
---------- ------ ------- ------- -------- --------
Balances, July 31, 1998 6,461,111 $646 $49,459 $(8,118) $(5,115) $36,872
- ----------------------- ========== ====== ========= ======== ======== ========
Balances,
October, 31 1998 6,340,111 $634 $48,662 $(7,150) $(4,406) $37,740
- ----------------------- --------
(Unaudited)
Net income............. -- -- -- 1,129 -- 1,129
Translation of foreign currency
financial statements -- -- -- -- (1,141) (1,141)
--------
Comprehensive income (loss) (12)
--------
Exercise of Common
Stock Options......... 6,100 -- 15 -- -- 15
Purchase of Common Stock (395,752) (39) (2,340) -- -- (2,379)
---------- ------ -------- ------- ------- -------
Balances, July 31, 1999 5,950,459 595 46,337 (6,021) (5,547) 35,364
- ----------------------- ========== ====== ======== ======= ======= =======
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The unaudited Condensed Consolidated Financial Statements include the accounts
of Hurco Companies, Inc. and its consolidated subsidiaries (collectively, "the
Company"). The Company is an industrial automation company that designs and
produces interactive computer controls, software and computerized machine
systems for the worldwide metal cutting and metal forming industries.
The condensed consolidated financial information as of July 31, 1999 and 1998 is
unaudited but includes all adjustments which we consider necessary for a fair
presentation of the Company's financial position at those dates and results of
operations and cash flows for the three months and nine months then ended. It is
suggested that those condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in our
Annual Report on Form 10-K for the year ended October 31, 1998.
2. LICENSE FEE INCOME AND LITIGATION SETTLEMENT FEES, NET
From time to time, our wholly owned subsidiary, IMS Technology, Inc. (IMS)
enters into agreements for the licensing of its interactive computer numerical
control (CNC) patents. License fees received or receivable under a fully paid-up
license, for which there are no future performance requirements or
contingencies, and payments received or receivable to settle litigation related
to the patents, are recognized in income, net of legal fees and expenses, if
any, at the time the license agreement is executed. License fees received in
periodic installments that are contingent upon the continuing validity of a
licensed patent are recognized in income, net of legal fees and expenses, if
any, over the life of the licensed patent.
3. HEDGING
We seek to hedge our exposure to fluctuations in foreign currency exchange rates
through the use of foreign currency forward exchange contracts. The U.S. dollar
equivalent notional amount of outstanding foreign currency forward exchange
contracts was approximately $3.8 million as of July 31, 1999 ($2.4 million
related to firm intercompany sales commitments) and $13.5 million as of October
31, 1998 ($8.7 million related to firm intercompany sales commitments). Deferred
gains related to hedges of future sales transactions were approximately $69,000
as of July 31, 1999, compared to deferred losses of $434,000 as of October 31,
1998. Contracts outstanding at July 31, 1999 mature at various times through
October 18, 1999. All contracts are for the sale of currency. We do not enter
into these contracts for trading purposes.
4. EARNINGS PER SHARE
Basic and diluted earnings per common share are based on the weighted average
number of common shares outstanding. Diluted earnings per common share give
effect to outstanding stock options using the treasury method. Common stock
equivalents totaled approximately 97,000 shares as of July 31, 1999.
5. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $744,000 as of July 31, 1999 and
$769,000 as of October 31, 1998.
<PAGE>
6. INVENTORIES
Inventories, priced at the lower of cost (first-in, first-out method) or market
are summarized below (in thousands):
July 31, 1999 October 31, 1998
------------- ----------------
Purchased parts and sub-assemblies $ 10,422 $ 11,749
Work-in-process 1,240 1,774
Finished goods 21,489 17,294
--------- --------
$ 33,151 $ 30,817
========= ========
7. RESTRUCTURING CREDIT
In fiscal 1998, we recorded a reserve for anticipated costs associated with the
restructuring of a subsidiary. The reserve included $500,000 for carrying costs
of estimated excess space in a leased building, net of estimated sublease rental
income. On April 30, 1999, the excess building space was subleased, effective
June 15, 1999 through July 31, 2001. The reserve was adjusted to reflect the
terms of the sublease resulting in a restructuring credit of approximately
$103,000. At July 31, 1999, the balance in the restructuring reserve was
approximately $400,000 and consisted of the following:
Balance Charges to Balance
Description 10/31/98 Accrual Adjustment 7/31/99
----------- -------- ------- ---------- -------
Excess Building Capacity $500,000 $110,615 $103,486 $285,899
Equipment Leases 101,187 17,856 -- 83,331
Severance Costs 89,574 58,540 -- 31,034
-------- -------- -------- --------
$690,761 $187,011 $103,486 $400,264
======= ======= ======= =======
8. TAX CONTINGENCY
A German tax examiner has challenged a 1996 transfer of net operating losses
between two of our German subsidiaries that merged in fiscal 1996. The
contingent tax liability resulting from this issue is approximately $1.4
million. We are contesting the claim and no formal decision or assessment has
been rendered by the tax authority. As of July 31, 1999, no provision for the
contingency has been recorded.
<PAGE>
9. SUBSEQUENT EVENT
Effective August 17, 1999, the company's bank credit agreement was amended. The
principal terms of the agreement, as amended, are set forth below:
Our bank credit agreement provides for a revolving, unsecured credit facility
expiring May 1, 2002, which permits borrowings, at any one time outstanding, of
up to $25.0 million (inclusive of outstanding letters of credit of up to $15.0
million). Of such borrowings, up to $5.0 million may be drawn in designated
European currencies. Interest on all outstanding borrowings is payable at Libor
plus an applicable Eurodollar rate margin ranging from 1.0% to 2.0% based on a
prescribed formula, or at our option, the greater of the prime rate or 1.0% plus
the Federal Funds Rate. An additional margin of .25% may be charged if our fixed
charge coverage ratio falls below 1.25 to 1. The agreement requires us to
maintain a specified minimum net worth and establishes maximum leverage and
fixed charge coverage ratios. We are required to maintain consolidated tangible
net worth (as defined) of not less than $30.0 million plus (i) 50% of cumulative
net income subsequent to May 1, 1999 and (ii) 75% of proceeds from sales of
capital stock after April 30, 1999. Total consolidated debt may not exceed 50%
of consolidated capitalization (defined as total debt plus consolidated tangible
net worth). Our fixed charge coverage ratio requirement varies within a range of
1.0 - 1.25 to 1 during the term of the agreement.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
Certain statements made in this report relating to trends in our operations or
financial results, as well as other statements, including words such as
"anticipate", "believe", "plan", "estimate", "expect", "intend", and other
similar expressions, constitute forward-looking statements under the Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
subject to known and unknown risks, uncertainties and other factors which could
cause actual results to be materially different from those contemplated by the
forward-looking statements, including, among others, changes in general economic
and business conditions that affect demand for computerized machine systems,
computer control systems and software products, innovations by competitors,
quality and delivery performance by our contract manufacturers and governmental
actions and initiatives.
RESULTS OF OPERATIONS
Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998
Net income for the third quarter ended July 31, 1999 was $400,000, or $.07 per
share, on a diluted basis, which compares to $1.8 million, or $.27 per share,
reported for the corresponding period a year ago. The decline is primarily
attributable to a substantial reduction in license fee income and litigation
settlement fees, which had been anticipated. Net income also was adversely
affected by decreased sales as discussed below.
<PAGE>
Sales and service fees for the third quarter of fiscal 1999 declined $2.7
million, or 11.3% from the prior year level. On a worldwide basis, sales of
computerized machine systems decreased by $1.4 million, or 8.7%. Domestic sales
of computerized machine systems decreased by $2.3 million, or 36.9%, as
weak market conditions continue to persist, but were offset somewhat by a
$930,000, or 9.4%, increase in foreign sales. Sales of stand-alone computer
control systems declined $834,000, or 26.4%, compared to the fiscal 1998
period, reflecting the previously announced repositioning of the product
line. Revenues from service fees and parts declined approximately 234,000,
or 6.5%, as a result of reduced levels of customer activity and continued
improvement of product quality.
New order bookings for the third quarter of fiscal 1999 were $20.4 million,
compared to $22.1 million for the corresponding 1998 period, a decrease of 7.4%.
Orders for computerized machine systems, which constituted 70% of total new
orders, declined $.8 million, or 5.3%. In Europe, the company experienced a 17%
decline in order value, reflecting a 14% reduction in unit orders and a 2%
decline in the value of local currencies in relation to the U.S. dollar.
Although order rates improved in the United Kingdom, weaker market conditions
prevailed in Germany, France and Italy. Despite very weak market conditions that
have persisted since the third quarter of fiscal 1998, orders for computerized
machine systems in the United States increased 6%, reflecting continued market
acceptance of new products introduced by the company late in fiscal 1998.
Although orders for stand-alone computer control systems continued to be lower
than in the corresponding 1998 period due to product repositioning, orders for
these products improved 12% over the second quarter of fiscal 1999. Backlog was
$8.6 million at July 31, 1999 compared to $9.1 million at April 30, 1999 and
$7.5 million at the end of fiscal 1998.
Gross profit as a percentage of sales was 28.5% compared to 29.8% for the
corresponding period in the prior year. The decline was primarily attributed to
lower service revenues and the effects of a stronger U.S. dollar relative to
foreign currencies. The percentage is expected to decline further in the fourth
quarter as a result of competitive pricing pressures and continued weakening of
foreign currencies relative to the U.S. dollar.
Selling, general and administrative expenses, which include research and
development expenses, decreased by $421,000, or 7.6%, as a result of cost
reduction actions executed during fiscal 1999 combined with expenses in fiscal
1998 related to new product launches and the bi-annual manufacturing trade show
held in September 1998.
Interest expense was $333,000 during the third quarter of fiscal 1999 compared
to $149,000 in the corresponding period of fiscal 1998, due to increased
borrowings to support an increase in inventory beginning in the second half of
fiscal 1998.
Income tax expense was $94,000 in the third fiscal quarter compared $381,000 in
the same period in the prior year. The decrease is the result of reduced
profitability and a lower effective tax rate of a foreign subsidiary.
<PAGE>
Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998
Sales and service fees for the first nine months of fiscal 1999 were $63.5
million compared to $67.1 million in the same period one year ago, a $3.6
million, or 5.4%, decrease. The overall decrease in sales and service fees was
due primarily to a decline of $3.5 million, or 33.5%, in sales of stand-alone
computer control systems, which are being repositioned. On a worldwide basis,
sales of computerized machine systems increased by $605,000, or 1.3%. Domestic
sales of computerized machine systems decreased by $2.8 million, or 16.1%, while
foreign sales increased by $3.4 million, or 12.5%.
New order bookings for the first nine months of fiscal 1999 were $65.2 million
compared to $70.3 million in the prior year, a 7.3% decrease. Orders for
computerized machine systems decreased by approximately $1.8 million, or 3.6%,
primarily the result of reduced order rates in the United States. Orders for
stand-alone computer controls declined $2.7 million, or 26.9%, reflecting the
repositioning of these products.
Gross profit as a percentage of sales was 28.0% compared to 28.9% for the
corresponding period in the prior year. The decline was primarily attributed to
lower service revenues and the effects of a stronger U.S. dollar relative to
foreign currencies.
Selling, general and administrative expenses were essentially unchanged from the
prior year, as normal salary and wage increases and new spending projects
earlier in the year were offset by cost reductions in the third fiscal quarter.
Interest expense was $973,000, during the first nine months of fiscal 1999
compared to $633,000 in the corresponding period of fiscal 1998, due to
increased borrowings to support an increase in inventory beginning in the second
half of fiscal 1998.
Income tax expense was $66,000 during the first nine months of fiscal 1999
compared to $1.2 million in the corresponding period of fiscal 1998. The
decrease is the result of a $325,000 deferred tax asset recorded by a foreign
subsidiary in fiscal 1999 due to a change in its tax status and $640,000 of
foreign withholding taxes recorded in fiscal 1998 resulting from license fees
and litigation settlement fees.
Year 2000 Compliance
The Year 2000 Problem. Many information technology ("IT") hardware and software
systems ("IT Systems") and Non-IT Systems containing embedded technology, such
as microcontrollers and micro processors ("Non-IT Systems"), can only process
dates with six digits (e.g., 06/26/98), instead of eight digits (e.g.,
06/26/1998). This limitation may cause IT Systems and Non-IT Systems to
experience problems processing information with dates after December 31, 1999
(e.g., 01/01/00 could be processed as 01/01/2000 or 01/01/1900) or with other
dates, such as September 9, 1999, which was a date traditionally used as a
default date by computer programmers. These problems may cause IT Systems and
Non-IT Systems to suffer miscalculations, malfunctions or disruptions. These
problems are commonly referred to as "Year 2000" or "Y2K" problems.
<PAGE>
Our State of Readiness. We have substantially completed a plan to ensure that
the IT Systems and material Non-IT Systems that we control are Y2K compliant. In
the first phase of the plan, we assessed the potential exposure of our IT
Systems and material Non-IT Systems to Y2K problems. In the second phase, we
designed a procedure to remediate our exposure to Y2K problems in the IT Systems
and material Non-IT Systems that we control. The third phase, involved the
actual remediation and enhancements of the IT Systems and material Non-IT
Systems that we control. We have recently completed the fourth and final phase
of testing which involves the remediation and enhancements to the IT Systems and
material Non-IT Systems that we control to ensure Y2K compliance.
We believe that we have identified all IT Systems and material Non-IT Systems
that we control that may require Y2K remediation. We assigned nine people (both
employees and outside consultants) to complete the remediation and enhancements
to our IT Systems that we control. We have completed the remediation,
enhancements and testing as of July 31, 1999.
We assigned three employees to either remediate or cause the remediation of
material Non-IT Systems that we control and that we identified as possessing a
Y2K problem. We have completed the remediation of these Non-IT Systems as of
July 31, 1999. We have acquired some of these Non-IT Systems during the past few
years and we know that a substantial number of these newer systems do not
possess a Y2K problem. In addition, the vendors of some of these newer Non-IT
Systems have warranted them to be Y2K compliant. We contacted the third parties
who control our other material Non-IT Systems (including, without limitation,
communication systems, security systems, electrical systems and HVAC systems)
and asked them to assess whether any of these systems possess a Y2K problem that
could adversely affect our operations if a malfunction occurred. We also
implemented procedures to help ensure that any new Non-IT Systems that we
acquire or utilize are Y2K compliant.
We have completed Year 2000 testing on our computer numerical controls ("CNC")
products and have prepared technical bulletins that describe the products tested
and the impact Year 2000 will have on these products. The technical bulletins
are available upon request or can be obtained from our web site (Hurco.com). We
believe that our CNC products will continue to function in Year 2000 with only
some models experiencing a minor file dating issue. We are developing a policy
for providing software updates to those products that will have the dating
issue.
The Costs to Address the Company's Year 2000 Issues. Our costs through July 31,
1999 to identify and complete remediation of our Year 2000 problems have not
been material.
The Risks Associated With Our Year 2000 Issues. Our Year 2000 compliance effort
has not identified any worst case scenarios that we believe are reasonably
likely to occur. We do not expect Year 2000 issues to interrupt our business
unless disruption occurs as a result of year 2000 problems involving basic
infrastructure outside of our control.
<PAGE>
Our computerized machine systems are manufactured primarily by three contract
manufacturers in Taiwan. An interruption in supply from the contract
manufacturer could have a material adverse effect on our operations. We have
received assurances from all contract manufacturers that Year 2000 will not
cause delays in production. Although we have not identified any specific Year
2000 issues that are reasonably likely to impact the production of the contract
manufacturers, because of the uncertainty of the year 2000 issue, some risk of
disruption in production does exist.
Contingency Plan. We will continue to evaluate the impact Year 2000 will have on
our contract manufacturers. We expect to have sufficient inventories of finished
product available at December 31, 1999, to mitigate the effect of temporary
production interruptions by our contract manufacturers that might occur.
We will continue monitoring the Year 2000 issue and will develop a contingency
plan if a reasonably likely risk is identified.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, we had cash and temporary investments of $3.2 million compared
to $3.3 million at October 31, 1998. Cash provided by operations totaled
approximately $3.7 million in the third quarter of fiscal 1999, compared to cash
provided by operations of $402,000 for the same period of fiscal 1998.
For the nine months ended July 31, 1999, approximately $1.5 million of cash was
used for operations compared to $9.9 million cash provided by operations in the
comparable prior year period, of which $6.9 million in the prior year period was
attributable to license fee income and litigation settlement fees received, net
of expenses and foreign taxes withheld.
Net working capital was $31.9 million at July 31, 1999, compared to $29.3
million at October 31, 1998. The increase was attributable to an increase in
inventory of $3.2 million, a decrease in accounts payable of $3.8 million and a
$700,000 decrease in accrued expenses, offset by a $3.5 million decrease in
accounts receivable. The ratio of current assets to current liabilities was 2.5
to 1 at July 31, 1999 and 2.1 to 1 at October 31, 1998.
The increase in inventories relates primarily to finished products available for
shipment. The increase is attributable to planned increases in production by our
contract manufacturers during the latter half of fiscal 1998, combined with
lower than expected demand in fiscal 1999. Inventories of finished
product are expected to remain high through the end of our fiscal year
and are expected to be absorbed during the first half of fiscal 2000 as reduced
supplier delivery schedules take effect.
The decrease in accounts payable relates to payments made to our contract
manufacturers for inventory purchases that occurred in late fiscal 1998 under
terms that generally range from 60 to 120 days. Accounts payable at October 31,
1998 reflected a higher-than-average level of shipments from our contract
manufacturers in the fourth fiscal quarter.
The decrease in accrued expenses is the result of seasonal payments related to
1998 operations and a decrease in accrued income tax primarily related to a
foreign subsidiary. The decrease in accounts receivable is primarily
attributed to decreased shipments in the third quarter of 1999 compared to
the higher level of shipments at the end of fiscal 1998 for which payments were
received in fiscal 1999.
Capital investments for the quarter and nine months ended July 31, 1999
consisted principally of expenditures for software development projects and
purchases of equipment. Cash used for investing activities during the quarter
and year to date were funded by cash flow from operations and by bank credit
facilities.
We purchased 395,752 shares of our common stock during the first quarter of
fiscal 1999 at a cost of approximately $2.4 million under our previously
announced stock repurchase program. These shares are reflected as a reduction of
common stock outstanding in calculating basic and diluted earnings per common
share.
Effective August 17, 1999, the company's bank credit agreement was amended. The
principal terms of the amended agreement are summarized in Note 9 to the
accompanying unaudited condensed consolidated financial statements. We are in
compliance with all loan covenants at July 31, 1999. We believe that
anticipated cash flow from operations and available borrowings under the credit
facilities will be sufficient to meet out anticipated cash requirements in the
foreseeable future.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
Interest on our bank line of credit is affected by the general level of U.S. and
European interest rates and/or Libor. The interest rates on the Libor portion of
our bank credit facilities are based upon a ratio of total indebtedness to cash
flow for the preceding twelve month period and are payable at Libor plus an
amount ranging from 1.0% to 2.0% based upon a prescribed formula. At July 31,
1999, outstanding borrowings were $9.5 million on our bank credit facilities and
total indebtedness was $14.0 million. Based upon this level of borrowings, the
interest rate on the Libor portion of our bank debt will be Libor plus 1.75%
effective November 1, 1999.
Foreign Currency Exchange Risk
A significant portion of our product content is sourced from foreign suppliers
or built to our specifications by contract manufacturers overseas. Our
contractual arrangements with those suppliers typically include foreign currency
risk sharing agreements which reduce the effects of currency fluctuations on
product cost. The predominant portion of foreign currency exchange rate risk
regarding product cost relates to the New Taiwan Dollar.
During the first nine months of fiscal 1999, approximately 58.0% of our sales
and service fees, including export sales, were derived from overseas markets.
All computerized machine systems, computer numerical control systems and certain
proprietary service parts are sourced by a central engineering and manufacturing
division of the U.S. parent company and re-invoiced to our foreign sales and
service subsidiaries, primarily in their functional currencies. The parent
company enters into forward foreign exchange contracts from time to time to
hedge the cash flow risk related to inter-company sales and inter-company
accounts receivable in foreign currencies. We do not speculate in the financial
markets and, therefore, do not enter into these contracts for trading purposes.
Forward contracts for the sale of foreign currencies as of July 31, 1999 were as
follows:
Weighted
Notional Amount Avg. Notional
Forward Contracts in Foreign Forward Amount in Market Value Maturity
Currency Rate U.S. $ in US$ Dates
-------- ---- ------ ------ ---------
Euro 2,321,000 1.0287 2,387,610 2,485,791 August 1999
Sterling 900,000 1.6112 1,450,052 1,460,430 August-
October 1999
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As reported in our Annual Report on Form 10-K for the year ended
December 31, 1998, our subsidiary, IMS Technology, Inc. (IMS) is a party to a
pending legal proceeding involving Haas Automation, Inc., and its owner
(collectively, Haas). IMS has alleged that Haas infringed one of its Interactive
Computer Numerical Control patents. In October 1998, the trial court granted
summary judgment in favor of Haas, dismissing the action. IMS filed an appeal
and Haas filed a cross-appeal. Oral argument was held before the United States
Court of Appeals for the Federal Circuit in early August; however, the court has
not yet ruled on the appeals. Although we continue to believe that the IMS
claims of patent infringement have substantial merit, we are unable to predict
the outcome of this matter at this time.
We are involved in various other claims and lawsuits arising in the
ordinary course of business, none of which, in our opinion, is expected to have
a material adverse effect on our consolidated financial position or results of
operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on May 26, 1999,
the following individuals were elected to the Board of Directors by the
following votes cast at the meeting:
Abstentions and Broker
For Withheld Non-Votes
Hendrick J. Hartong, Jr. 5,302,891 1,450 51,818
Andrew L. Lewis IV 5,303,841 500 51,818
Brian D. McLaughlin 5,300,538 3,803 51,818
E. Keith Moore 5,300,841 3,500 51,818
Richard T. Niner 5,205,198 99,143 51,818
O. Curtis Noel 5,302,541 1,800 51,818
Charles E. M. Rentschler 5,304,341 0 51,818
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Statement re: Computation of Per Share Earnings.
27 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: None
SIGNATURE
Pursuant to the requirements 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.
HURCO COMPANIES, INC.
By: /s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President and
Chief Financial Officer
By: /s/ Stephen J. Alesia
Stephen J. Alesia
Corporate Controller and
Principal Accounting Officer
September 13, 1999
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------------- ----------------------------
1999 1998 1999 1998
--------------------------- ----------------------------
(in thousands, except per share amount)
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
------------- ------------- ------------- --------------
Net Income $400 $400 $1,830 $1,830 $1,129 $1,129 $8,286 $8,286
Weighted average shares
outstanding 5,947 5,947 6,472 6,472 5,989 5,989 6,528 6,528
Assumed issuances under
stock option plans - 97 - 192 - 87 - 192
----- ----- ----- ----- ----- ----- ----- -----
5,947 6,044 6,472 6,664 5,989 6,076 6,528 6,720
Earnings per common
share $0.07 $0.07 $0.28 $0.27 $0.19 $0.19 $1.27 $1.23
===== ====== ====== ===== ===== ===== ===== =====
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT 10-Q FOR THE PERIOD ENDED JULY 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCING TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> SONJA MCCLELLAND
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