SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
(Mark One)
  X   Annual report  pursuant to section 13 or 15(d) of the Securities  Exchange
      Act of 1934 [Fee  Required]  for the fiscal year ended October 31, 19992000 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 11, 20002, 2001 was $20,087,524.$20,693,873.
The number of shares of the Registrant's  common stock outstanding as of January
11, 20002, 2001 was 5,951,859.5,693,758.
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.  X


                                     PART I

Item 1.  BUSINESS

(a)    General Development of Business

Hurco Companies, Inc. is an industrial automation systems company. We design and
produce interactive,  personal computer numerical(PC) based, computer control (CNC) systems and
software and  computerized  machine systems for sale through our owna worldwide  sales,
service and distribution  network to
the worldwide  metal working  market.network.  Our proprietary CNCcomputer control systems and related
software  products  are  either  sold  primarily  as an  integral  component  of our own
computerized  machine  systems or sold  separatelysystems.  We also sell computer control models to machine
toolsystem end-users and other machine toolsystem  manufacturers who integrate them with
their own products.

We pioneered the  application of  microprocessor  technology and  conversational
programming  software tofor application on machine toolsystem  computer  controls and,
since  our  founding  in  1968,  have  been  a  leader  in the  introduction  of
interactive CNCcomputer control systems that automate  manufacturing  processes and
improve productivity in certain segments of the metalworkingparts manufacturing industry. We
have concentrated on designing "user-friendly" CNCcomputer control 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  programming
software in our CNCcomputer  control  systems  enables  operators on the production
floor to  quickly  and  easily  create a  program  for  machining  or  forming a
particular part from a blueprint or electroniccomputer-aided  design (CAD) and immediately
begin production of that part.

During fiscal 2000, we enhanced and expanded our product line with new software,
upgraded  computer controls and higher  performing  computerized  machine system
products.  We increased  manufacturing  capacity with the establishment of Hurco
Manufacturing Ltd., a wholly owned subsidiary, in Taiwan, which will manufacture
a significant number of our computerized  machine systems. We expanded our sales
and  distribution  network  with  the  establishment  of  a  sales  and  service
subsidiary in Milan, Italy for the Italian market,  newly expanded facilities in
Singapore and Munich,  Germany and a centralized  distribution  operation in the
Netherlands.  Finally,  during  fiscal  2000,  we settled a  significant  patent
infringement  action,  which we  believe  substantially  completes  the  license
program we began in 1995.

Our  executive  offices and principal  design,  engineering,  and  manufacturing
management  operations  are  headquartered  in  Indianapolis,   Indiana.  Sales,
application  engineering  and  service  offices  are  located  in  Indianapolis,
Indiana;  Farmington Hills, Michigan;  High Wycombe,  England;  Munich, Germany;
Paris, France; Milan, Italy and Singapore. A United States distribution facility is located in
Long Beach,  California.California  and a  manufacturing  facility is located in  Taichung,
Taiwan.

(b)      Financial Information About Industry Segments

We operate in one business segment,  industrial automation systems, as discussed
further in Note 14 in the Consolidated Financial Statements.
(c)      Narrative Description of Business

General


The  manufacture of metal parts for industrialOur strategy is to design,  develop,  produce 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 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
our 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
enable several  different  cutting tools to be used in a programmed  sequence on
the same part with little interruption time to change cutting tools.

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 we produce.

We have pursued a strategy that is focused on developing and distributing to the
worldwide metal working market a comprehensive line of
interactive  CNC products
that  incorporatecomputer controls,  software and computerized machine systems using
our proprietary  technology designed to enhance the user's productivity  through
ease of operation and adaptabilityhigher levels of machine performance (speed and accuracy).
We market these systems to a wide range ofthe worldwide  parts  manufacturing  applications.  As part of this strategy,  wemarket.  We have
adopted an open systems software  architecture that permits our CNCcomputer control
systems and software to be used with a
variety ofstandard PC hardware platforms and have  emphasized
an "operator  friendly"operator  friendly design that employs both  interactive  "conversational"conversational  and
graphical  programming  software.  We outsource
substantially  all ofhave a  well-established  global  contract
manufacturing  network that  supplies the  computerized  machine  systems to our
manufacturing  operations  to  independent  contract
manufacturers  and concentrate our resources on product  research,  development,
design and engineering, marketing, distribution and customer service.selling divisions.


Products

Our  principal  products  consist  primarily  of  computerized  machine  systems
(CNC-operated  milling(milling  machines,  machining centers and metal forming press
brakes)systems) into which our
proprietary software and CNCcomputer control systems have been fully integrated. We
also  produce  CNCcomputer  control  systems  and related  software  for both metal
cutting  and metal  forming  machinesmachine  applications  that are sold  primarily  as
retrofit  control  systems.  In  addition,  we produce and  distribute  software
options,  control  upgrades,  hardware  accessories  and  replacement  parts and
provide operator training and support services to our customers.

The following table sets forth the  contribution of each of these product groups
to our total sales and service fees during each of the past three fiscal years:

                                                                  Year Ended October 31,
                                           ---------------------------------------------------------------------
(Dollars in thousands)                                2000                    1999                    1998                    1997
                                                      ----                    ----                    ----
                                                                                     
Computerized Machine Systems............      $71,708   (74.5%)       $63,793   (72.3%)       $64,770   (69.3%)
$61,679   (64.4%)
CNCComputer Control
  Systems and Software*................................        9,605   (10.0%)        10,623   (12.0%)        14,727   (15.8%)
19,296   (20.2%)
Service Parts...........................       10,649   (11.1%)         9,574   (10.9%)         9,424   (10.1%)
9,612   (10.0%)
Service Fees............................        4,242    (4.4%)         4,248    (4.8%)         4,501    (4.8%)
                                              5,142    (5.4%)
                                           -----------------    ------       --------- ---------     --------------------------  --------       -------  --------
                                              $96,204   (100.0%)      $88,238  (100.0%)       $93,422  (100.0%)
                                              $95,729  (100.0%)
                                              =======    ========       =======  ==============       =======  ========       * Amounts  shown do not include CNC=======  ========
* Amounts shown do not include Computer Control systems sold as an integrated component of computerized machine systems. Computerized Machine Systems Metal CuttingComputerized Machine Systems - Ultimax(R) - -------------------------------Metal Cutting Applications We design and market computerized machine systems which are equipped with a fully integrated interactive Ultimax(R) CNCcomputer control system. All of these machines are built to our specifications by independent contract manufacturers utilizing our own CNC systems. Our current line of machine tools is a complete family of products with different levels of performance features for different market applications ranging in price from $25,000 to $165,000. Our computerized machine systems line consists of two milling machines with an x-axis travel of 30 inches and 40 inches and computerized machining centers with an x-axis travel of 24, 30, 40 and 64 inches. Metal Cutting Systems - DynaPath(TM) - -------------------------------- In fiscal 1998, we expanded our product strategy to include marketing milling machines featuring fully integrated Delta(TM) CNC systems. These machine systems are sold under the DynaPath(TM) name through one of our subsidiaries. In fiscal 1999, we further expanded this product line to include turning machines. Metal Forming Systems In the first quarter of fiscal 1998, we introduced an up-acting press brake line (bending machine) that incorporates our Autobend(R) CNC system. This product is sold to the North American market by independent distributors and, in certain territories, by direct sales personnel. We also began offering European style precision-ground tooling which is sold either in conjunction with a press brake or directly to end-users of press brakes. In November 1999, we introduced a down-acting press brake line and American style precision ground tooling. Both of these products are expected to impact sales and service fees in the second half of fiscal 2000. CNC Systems and Software Our CNC systems and software are marketed under the tradenames Ultimax(R), Dynapath(TM) 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 and Autobend PC(R) are used to control metal forming press brakes. o Ultimax(R) ------- Our patented Ultimax(R) twin screen "conversational" CNCcomputer control system is sold solely as a fully integrated feature of a Hurco computerized machine system, incorporates an interactive and powerful "data block" programming methodology supported by extensive geometric and process data calculation software tools.system. This CNCcomputer control system enables a machine operator to create complex two-dimensional part programs directly from blue print inspection.prints or CAD. Machine operators with little or no programming experience can successfully program parts and begin cuttingmachining operations in a short time with minimumminimal special training. Since the initial introduction of the Ultimax(R) CNC in 1984,computer control, we have added enhancements related to operator programming productivity, CAD compatibility, data processing throughput and motion control speed and accuracy. In 1998, we introducedOur current Ultimax(R) 4 programming stations which use a Pentium* processor featuring an operator console with liquid crystal display screens. By incorporating Industry Standard Architecture (ISA)screens and incorporates personal computer (PC) platform components, this CNCcomponents. This upgradeable computer control product offers improved performance while ensuring access to the most cost effective computing hardware and software technology available. In September 2000, we introduced a new feature set on the entire Ultimax(R) based line of products which increases the machine system performance and provides greater customer benefits and market differentiation. Specifically, the cubic workspace area in the machines was increased, the cutting speeds were increased and the control software and hardware were upgraded with new unique productivity features. All of these improvements were made without increasing the market price to the customer. In fiscal 2000, we also expanded our product line to include a computerized machine system with x-axis travel of 50-inches, which increases our available market. Our current line of machine systems is a complete family of products including milling machines with an x-axis travel of 30 and 40 inches and computerized machining centers with an x-axis travel of 24, 30, 40, 50 and 64 inches. These products provide different levels of performance features for different market applications ranging in price from $25,000 to $165,000. Computerized Machine Systems - Dynapath(TM) - Metal Cutting Applications Our Dynapath(TM) product line includes two computerized milling machines and two turning machines featuring our fully integrated Delta(TM) computer control systems. These products are designed for and marketed to the lower-priced entry level market segment. Computerized Machine Systems - Autobend(R) - Metal Forming Applications In fiscal 1998, we introduced a new computerized machine product line system for metal bending applications that incorporates our Autobend(R) computer control system. In addition, we introduced new European style precision-ground tooling products which are sold either in conjunction with a computerized metal forming system or directly to end-users of metal forming systems. In fiscal 2000, we introduced a high performance computerized metal forming system line with advanced technology features, for high-accuracy performance and improved productivity. This new product line incorporates a third-party computer control system. Additionally, in fiscal 2000, we expanded the precision-ground tooling with the introduction of American style precision-ground tooling which is also sold either in conjunction with a metal forming system or directly to end-users of metal forming systems. These products are sold in the North American market by independent distributors and, in certain territories, by our direct sales - ------------- * Pentium is a registered trademark of the Intel Corporation improvedpersonnel. The products provide different levels of performance while ensuring accessfeatures for different market applications ranging in price from $30,000 to the most effective computing hardware$300,000. Computer Control Systems and Software The following computer control systems and software technology. o UltiPath(TM) UltiPath(TM) is a low-cost, interactive PC-based CNC system that permits conversational programming. This control product is intended for the 2-axis and 3-axis entry level machining market and enables skilled and unskilled machine operators to convert manual machine operations to easy-to-use CNC parts processing. The UltiPath(TM) CNC embodies our patented interactive machining technology and our recently patented "Object Oriented" software design methodology. The control utilizes the Windows** operating system as a key component of its executive software. The product isproducts are marketed through distributorsdirectly to end-users and or to CNC control integrators and retrofitters serving the large installed base of manual milling machines.original equipment manufacturers. o Delta(TM) Series Our Delta(TM) series CNCs,computer control systems, which feature microprocessor-based electronics incorporating ISAindustry standard computer platform components, are designed for the lower-priced entry level segment of the worldwide metalworkingparts manufacturing industry, and are used on milling machines, machining centers, turning centers and punching equipment. The Delta(TM) CNCcomputer control 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(TM) CNCs arecomputer control system is designed and configured as a general-purpose products,product, which offer flexibility, reliability and ease of integration with a wide variety of machine designs. The Delta(TM) CNC Systemcomputer control system is sold either as an integrated component of our Dynapath(TM) Machine System or thru retro-fitters to end-users of a wide range of entry level machine tool systems primarily through retrofitters.In fiscal 2000, the software on the Delta(TM) computer control system was enhanced and the microprocessor was upgraded to Pentium o Autobend(R) Autobend(R) CNCcomputer control systems are applied to press brakesmetal forming machines that form parts from sheet metal and steel plate and consist of a microprocessor-based CNCcomputer control and back gauge.gauge (an automated gauging system that determines where the bend will be made). We have manufactured and sold the Autobend(R) product line since 1968. We currently market two models of our press brake CNCAutobend(R) computer control systems for metal forming machines, in combination with six different back gauges, through distributors to end-users as retrofit units for installation on existing or new press brakes,metal forming systems, as well as to original equipment manufacturers and importers of press brakes.metal forming systems. The Autobend(R) CNCcomputer control system is also sold as a fully integrated feature ofon our press brakeup-acting metal forming system. o CAM and Software Products In addition to our CNCcomputer control product lines, we offer metal cutting and forming software products for programming two and three-dimensional parts. These products are marketed to users of Ultimax(R) computer control systems. The primary products in this line are the Ultimax(R) PC and PC+WinMax(R), a Windows** based off-line programming systemssystem, released in fiscal 2000, and a computer aided design (CAD)-compatible DXF (datadata file translation)transfer (DXF) software option. The products are marketed to users of both Ultimax(R) and competitive CNC systems. Significant features of the Ultimax(R) PC and PC+ include a CNC-compatible user interface, CAD compatibility and the availability of a configurable post processor. The DXF software option eliminates manual data entry of part features by transferring AutoCAD(TM) drawing files directly into an Ultimax(R) CNCcomputer control or the off-line programming system software, substantially increasing operator productivity. In fiscal 2000, our PC and PC+ will be upgraded to Windows** based software and will be called WinMax. We have augmented our Autobend(R) product line with a computer-aided manufacturing (CAM) ** Windows is a registered trademark of Microsoft Corporation software product, Autobend PC(R), that enables the user to create and manipulate CNCcomputer control compatible metal forming programs on a personal computer. In fiscal 1997, we introduced UltiPro(TM), is a high-speed machining software productoption for our Pentium*-based Ultimax(R) CNCcomputer control platform. The UltiPro(TM) software enables a - -------- * Pentium is a registered trademark of the Intel Corporation ** Windows is a registered trademark of the Microsoft Corporation. customer to increase machining productivity through the purchase of our computerized machine throughput by upgrading computer control system or by retrofittingperformance with a high speed Pentium* CPU and upgrading an existing 486 PC-based Ultimax(R) system with our Pentium* platform and the UltiPro(TM)advanced motion control software. In fiscal 1998, we introduced UltiNet(TM), is a networking productsoftware option for usethe Ultimax computer control used by our customers to transfer part design and manufacturing information to computerized machine systems at high speeds and to network computerized machine systems within a customer's manufacturing facility. In fiscal 2000 we introduced a conversational part and tool dimension probing option for Ultimax(R) based machines. This option permits the dimensional measurement of machined parts and the associated cutting tools. This "on-machine" technique significantly improves the throughput of the measurement process when compared to traditional "off-machine" approaches. Parts and Service Our in-houseglobal service organization provides installation, warranty, operator training and customer support for our products. Our principal distributors inproducts worldwide. In the United States, our principal distributors have primary responsibility for machine installation and warranty service and support for new product sales. Our own service organization continues to provide installation and warrantysales only. We also service and support in certain direct sales territories. It also continues to service and support thea substantial installed base of discontinued models and supports our distributors with respect to complexexisting customers. Our service operations. Weorganization also providesells software options, CNCcomputer controls upgrades, accessories and replacement parts for our products. Among the options are software programs and additional CNC features that allow a customer to upgrade the performance of its Hurco machine systems. Our after-sale parts and service business helps strengthen our customer relationships and provides continuous information concerning the evolving requirements of end-users. Marketing and Distribution We continually strive to improvesell our global marketingproducts through over 260 independent agents and distribution network. During fiscal 1999, 1998distributors in 58 countries throughout North America, Europe and 1997, we focused on strengtheningAsia. We also have our network of independent distributorsown direct sales personnel in the United States, England, France, Germany, Italy and on improved selling programsSingapore, which are considered to be among the world's principal computerized machine system consuming countries. During fiscal 2000, no distributor accounted for more than 5% of our sales and training.service fees. Approximately 80% of the worldwide demand for computerized machine systems and computer control systems comes from outside the U.S. In fiscal 1999, we converted to direct sales agents2000, approximately 54% of our revenues were from distributors in the United Kingdom. In November 1999, we converted two sales territories in the Midwest United States from independent distributors to a direct sales force. Also, in November 1999, we established a direct sales subsidiary in Italy.overseas customers. The end-users of our products are precision tool, die and mold manufacturers, independent metal parts manufacturers and specialized production groups within large manufacturing corporations. Industries served include aerospace, defense, medical equipment, energy, injection molding, transportation and computer equipment. Our computerized machine systems (integrated CNC-operated milling machines, machining centers and press brakes) along with software options and accessories are sold primarily to end-users. We sell certain CNCcomputer control systems (i) to original equipment manufacturers of new machine tools who integrate them with their own products prior to the sale of those products to their own customers, (ii) to retrofitters of used machine tools who integrate them with those machine tools as part of the retrofitting operation and (iii) to end-users who have an installed base of machine tools, either with or without related CNCcomputer control systems. During fiscal 1999,2000, no single end-user of our products accounted for more than 5% of our total sales and service fees. We sellIn fiscal 2000, we increased and strengthened our products through over 260 independent agentsNorth American sales organization and we established a direct sales subsidiary in Italy as well as a European distribution center in the Netherlands. Also, in fiscal 2000 we expanded our sales territories in Asia by establishing distributors in 58 countries throughout North America, EuropeMalaysia, Korea and Asia.Taiwan. We also have our own direct sales personnel in the - ------------ * Pentium isopened a registered trademark of Intel Corporation United States, England, France, Germany, Italy and Singapore, which are considered to be among the world's principal computerized machine system consuming countries. During fiscal 1999, no distributor accounted for more than 5% of our sales and service fees. We have continuing agreements with all of our distributors, but may terminate those agreements upon prior notice ranging from 30 days to 180 days. Approximately 80% of the worldwide demand for computerized machine systems and CNC systems comes from outside the U.S. and accordingly, we consider our international market presence to be critical to our operations.office in Shanghai that supports mainland China. We believe changingthat advances in industrial technology and the related need for process improvements and also capacity expansion drivesdrive the demand for computerized machine systems and CNCcomputer control systems. Factors affecting demand include: (i) the declining supply of skilled machinists, (ii)o the need to continuously improve productivity and shorten cycle time, (iii)o an aging machine tool installed base that will require replacement with more advanced and efficient technology and (iv)created by shorter product life cycles, o the industrial development of emerging countries in Asia and Eastern Europe.Europe, and o the declining supply of skilled machinists, However, the demand for computerized machine systems 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 our products on a worldwide basis, we attempt to reduce the potential impact on our total sales and service fees by adverse changes in economic conditions in any particular geographic region. Competition NumerousMany companies compete with our product linesproducts in both the United States and international markets. ManySeveral of these competitors are larger and have greater financial resources than we do. We strive to compete effectively by designingincorporating unique, patented software and other proprietary features into our products critical proprietary features that offer a distinct value differential from comparably priced competitive products in terms of enhanced productivity, greater technological capabilities and ease of use. In addition, by offeringWe offer our products in a range of prices and capabilities we seek to meet the needs oftarget a broad potential market. We also believe that our competitiveness is aided by our reputation for reliability and quality, our strong international sales and distribution organization and our extensive customer service organization. In the United States and European metal cutting markets, major competitors include Haas Automation, Inc., Cincinnati Machine, Deckel, Maho Gildemeister Group (DMG), Bridgeport Machines, Inc. and Fadal Engineering along with a large number of foreign manufacturers including Okuma Machinery Works Ltd., Mori Seiki Co., Ltd., Masak and Matsuura Machinery Corporation. The largest competitors with respect to our computerized forming machine systems for metal forming applications include Amada Co. Ltd.America, Inc. and Trumph. We believe we are one of the largest domestic manufacturers of CNC gauging systems for press brakes. In the United States CNC gauging systems market for press brakes, we compete with Automec, Inc., a CNC gauge manufacturer, and Cybelec SA, a control manufacturer. We also compete with Cybelec in Europe.Trumpf. Manufacturing We have established aOur manufacturing strategy that includes the development ofis based on a global network of contract manufacturerssuppliers who manufacture our products in accordance with our proprietary design, quality standards and cost specifications. This has enabled us to lower product costs, lower working capital per sales dollar and increase our worldwide manufacturing capacity without significant incremental investment in capital equipment or increased personnel. Our computerized metal cutting machine systems are manufactured to our specifications by manufacturing contractors in Taiwan and in Europe. During fiscal 2000, we established a wholly owned subsidiary in Taiwan to manufacture computerized machine systems. This subsidiary has increased our overall capacity and reduced our dependence on other Taiwan contract manufacturers. We also have a 24% ownership interest in another contract manufacturer. We have worked closely with our contract manufacturers to increase their production capacity to meet the rising demand for our machine tool products and believe that such capacity is sufficient to meet our current and projected demand. Although weWe are exploringcontinuing to identify additional contract manufacturing sources for certain ofresources that will increase our computerized machine systems, alternative sources are not readily obtainable andcapacity, however; any significant reduction in capacity or performance capability of our principal manufacturing contractors would have a material adverse effect on our operations. We also have a contract manufacturing agreement for computer control systems with a Taiwanese-based affiliate in which we have a 35% ownership interest. This company is manufacturing most of our CNCcomputer control systems to our specifications and supplies certain proprietary and standard components for use in our domestic production. We believe that alternativeAlternative sources for thestandard and proprietary components are readily available. Backlog Backlog consists of firm orders received from customers and distributors but not shipped. Backlog was $10.2 million, $8.5 million $7.5 million and $7.4$7.5 million as of October 31, 2000, 1999, 1998 and 1997,1998, respectively. Intellectual Property We consider certain features of our products to be proprietary and weproprietary. We own, directly or through a subsidiary, a number of patents that are significant to our business. Our subsidiary, IMS Technology, Inc. (IMS), a wholly owned subsidiary, owns domestic and foreign patents covering the machining method practiced when a machine tool is integrated with an interactive CNCcomputer control (these patents are collectively referred to as the "Interactive Machining Patents"). We also hold a non-exclusive license covering features of the automatic tool changer offered with certain of our CNCcomputer control machining centers. We also own a patent on an object-oriented, open architecture methodology for CNCcomputer control software. In fiscal 2000, we were granted a patent (patent no. 6149562) for a manual tool changing apparatus. This is a manually operated apparatus for removal and insertion of a tool holder to and from a tool pocket of a magazine. Also in fiscal 2000, we were granted a Registered Trademark for the software options WinMax(R) and we were granted a Registered Service Mark for the phrase "We make machines smarter(R)." Beginning in October 1995, IMS initiated a number of infringementlegal actions against enterprises that it believed were employing or practicing machining methods covered byinfringing on one of the Interactive Machining Patents. These enterprises included end-users of interactive CNCs,computer controls, machine tool builders employing interactive CNCscomputer controls within their products and CNCcomputer control manufacturers whose control designs permit use of interactive methods when coupled to machine tools (CNC Users)(computer control users). At the present date, all but one action haslegal actions have been settled through licensing arrangements or litigation settlements. See Item 3. Legal Proceedings. IMS has actively pursued a program to license the use of the Interactive Machining Patents. During the past threefive fiscal years, IMS entered into agreements with approximately 40 CNCcomputer control Users under which IMS has granted a non-exclusive license to practice methods covered by thelicenses of Interactive Machining Patents in exchange for lump-sum payments or fixed payments through fiscal 2001.Patents. We recorded license fee income of $5.4 million, $.3 million $6.3 million and $9.1$6.3 million, net of legal fees and expenses, in fiscal 2000, 1999, and 1998 and, 1997, respectively. Subject to the continuing validity of the U.S. Interactive Machining Patent, certain of the existing license agreements at October 31, 1999 are expectedwe expect to result inreceive additional license fee income, net of legal fees and expenses, of approximately $873,000 through$300,000 in fiscal 2001. In addition, IMS has received a royalty-free non-exclusive license under six patents owned by two of the licensees. There are a limited number of remaining CNCcomputer control users that IMS has identified as potential licensees. Research and Development Research and development expenditures for new products and significant product improvements, included as period operating expenses, were $2.1$3.2 million, $2.0$2.5 million and $1.9$2.4 million in fiscal 2000, 1999, 1998 and 1997,1998, respectively. In addition, we recorded expenditures of $706,000 in 2000, $1.0 million in 1999 and $1.3 million in 1998 and $1.6 million in 1997 related to software development projects that were capitalized. Employees We had approximately 280292 employees at the end of fiscal 1999,2000, none of whomwhich are covered by a collective-bargaining agreement or represented by a union. We have experienced no employee-generated work stoppages or disruptions and we consider our employee relations to be satisfactory. (d) Financial Information About Geographic Areas Financial information about geographic areas is set forth in Note 14 to the Consolidated Financial Statements. We are subject to the risks of doing business on a global basis, including foreign currency fluctuation risks, changes in general economic and business conditions in the countries and markets that we serve and government actions and initiatives including import and export restrictions and tariffs. Item 2. PROPERTIES The following table sets forth the location, size and principal use of each of our facilities: Location Square Footage Principal Uses Indianapolis, Indiana 165,000(1) Corporate headquarters, design and engineering, product testing, CNC assembly, sales, application engineering and customer service. Long Beach, California 3,000 United States Distribution. Farmington Hills, Michigan 37,500(2) Design and engineering, product testing, CNC assembly, sales, application engineering and customer service. High Wycombe, England 45,000(3) Sales, application engineering and customer service. Paris, France 2,800 Sales, application engineering and customer service. Munich, Germany 10,700 Sales, application engineering and customer service. Singapore 1,200 Sales, application engineering and customer service. - -------------------------------------------------------------------------------- Location Square Footage Principal Uses Indianapolis, Indiana 165,000(1) Corporate headquarters, design and engineering, product testing, computer control assembly, sales, application engineering and customer service Farmington Hills, Michigan 37,500(2) Design and engineering, product testing, computer control assembly, sales, application engineering and customer service Long Beach, California 3,000 Warehouse and distribution High Wycombe, England 45,000(3) Sales, application engineering and customer service Paris, France 2,800 Sales, application engineering and customer service Munich, Germany 17,100 Sales, application engineering and customer service Milan, Italy 4,850 Sales, application engineering and customer service Singapore 3,000 Sales, application engineering and customer service Taichung, Taiwan 26,600 Manufacturing - ----------------------------------------------------------------------------------------------------------------------------
(1) Approximately 45,000 square feet is available for sublease insublet through fiscal 2000.2001. (2) Approximately 24,000 square feet is under sublease through fiscal 2001. (3) Approximately 24,000 square feet have been sublet to a subtenant since November 1995. We own the Indianapolis facility and lease all other facilities. The leases have terms expiring at various dates ranging from January 2000March 2001 to February 2004.2005. We believe that all of our facilities are well maintained and are adequate for our needs now and in the foreseeable future. We do not believe that we would experience any difficulty in replacing any of the present facilities if any of our leases were not renewed at expiration. Item 3. LEGAL PROCEEDINGS As previously reported, Hurco and its subsidiary IMS Technology, Inc. (IMS) have been parties to a number of legal proceedings which involved alleged infringement of one of the Interactive Machining Patents. At the present date, all but one action hasa United States interactive machining patent (the Patent) owned by IMS. All actions have been settled through licensing arrangements or litigation settlements. The only remaining action is described below. On July 3, 1997,August 8, 2000, Hurco and IMS commenced an action in the United States District Court of Virginia againstagreed to a settlement with Haas Automation Inc. and its owner (collectively, Haas) and certain other end-users and manufacturers of computerized machine tool systems. The action sought monetary damages and an injunction against future infringement.Gene Haas (Haas). Under the settlement, IMS subsequently entered into settlements with all defendants other thanlicensed the Patent to Haas and dismissed claims against them. As previouslyHaas made a one-time payment to IMS. We reported on October 2, 1998license fee income and litigation settlement fees, net of expenses, of approximately $5.4 million in the trial court granted summary judgment in favorfourth quarter of Haas and dismissed the action, finding that there was no infringement by Haas based on the court's claim interpretation and its finding that a floppy disk is not the equal of a cassette tape. Haas' affirmative defenses challenging the validity of the IMS patent were also dismissed. IMS subsequently filed an appeal to the United States Court of Appeals for the Federal Circuit. The appeal seeks relieffiscal 2000 primarily resulting from the trial court's order regarding claim interpretation of the IMS patent, the order granting defendant's motion for summary judgment and the final judgment in favor of Haas. Haas has filed a cross-appeal to the same court from the trial court's order regarding claim construction of the IMS patent. Oral argument was held before the United States Court of Appeals for the Federal Circuit in August 1999; however, the court has not yet ruled on the appeal. Although management continues to believe that the IMS claims of patent infringement have substantial merit, it is unable to predict the outcome of this matter.settlement. 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 Our Common Stockcommon stock is traded on the Nasdaq National Market under the symbol "HURC". The following table sets forth the high and low sales prices of the shares of Common Stockour common stock for the periods indicated, as reported by the Nasdaq National Market. 1999 1998 ------------------- -------------------- Fiscal Quarter Ended: High Low High Low -------------------- ------------------- -------------------- January 31.............................. $6-3/8 $4-5/32 $8-31/32 $6-1/4 April 30................................ 5 3-7/8 9-1/4 6-1/4 July 31................................. 6-5/8 4-1/4 9 6-7/8 October 31.............................. 4-1/2 3-3/8 7-1/8 6-1/4
2000 1999 --------------------- --------------------- Fiscal Quarter Ended: High Low High Low - -------------------- --------------------- --------------------- January 31............ $4.125 $3.000 $6.375 $4.156 April 30.............. 5.875 3.188 5.000 3.875 July 31............... 4.750 3.625 6.625 4.250 October 31............ 4.813 3.375 4.500 3.375 We do not currently pay dividends on our Common Stockcommon stock and intend to continue to retain earnings for working capital, capital expenditures and debt reduction. There were approximately 481454 holders of record of our Common Stockcommon stock as of January 11, 2000.2, 2001. During the period covered by this report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended. Item 6. SELECTED FINANCIAL DATA The Selected Financial Data presented below have been derived from our Consolidated Financial Statements for the years indicated and should be read in conjunction with the Consolidated Financial Statements and related notes set forth elsewhere herein. Year Ended October 31, 2000 1999 1998 1997 1996 1995 -------------------------------------------------------------------- Statement of Operations Data: (In thousands, except per share amounts) Sales and service fees................ $88,238$ 96,204 $ 88,238 $ 93,422 $ 95,729 $ 99,351 $ 89,632 Gross profit.......................... $24,174$ 25,377 $ 24,174 $ 27,939 $ 27,773 $ 28,421 $ 23,470 Selling, general and adminis- trationtrative expenses.................... $21,259$ 23,538 $ 21,259 $ 21,786 $ 21,047 $ 21,343 $ 19,002 Restructuring charge (credit)......... $ 300 $ (103) $ 1,162 $ -- $ -- $ -- Operating income...................... $ 1,539 $ 3,018 $ 4,991 $ 6,726 $ 7,078 $ 4,468 Interest expense...................... $ 939 $ 1,293 $ 876 $ 1,938 $ 3,211 $ 4,250 License fee income and litigation settlement fees, net................ $ 5,365 $ 304 $ 6,974 $ 10,095 $ 590 $ -- Net income............................ $1,802$ 5,035 $ 1,802 $ 9,254 $ 13,804 $ 4,264 $ 204 Earnings per common share-diluted............ $ .84 $ .30 $ 1.39 $ 2.06 $ .72 $ .04 Weighted average common shares outstanding-diluted.......... 6,020 6,061 6,670 6,704 5,907 5,536 As of October 31, 2000 1999 1998 1997 1996 1995 --------------------------------------------------------------------- Balance Sheet Data: (Dollars in thousands) Current assets........................ $52,856$ 49,195 $ 52,856 $ 55,143 $ 42,222 $ 44,108 $ 46,356 Current liabilities................... $19,580$ 23,124 $ 19,580 $ 25,794 $ 19,370 $ 23,336 $ 26,479 Working capital ...................... $33,276$ 26,071 $ 33,276 $ 29,349 $ 22,852 $ 20,772 $ 19,877 Current ratio......................... 2.1 2.7 2.1 2.2 1.9 1.8 Total assets.......................... $69,632$ 65,024 $ 69,632 $ 71,696 $ 58,748 $ 59,750 $ 61,421 Long-term obligations................. $13,904$ 3,009 $ 13,904 $ 8,162 $ 9,602 $ 20,273 $ 27,459 Total debt............................ $14,172$ 3,736 $ 14,172 $ 8,358 $ 10,043 $ 22,110 $ 33,599 Shareholders' equity.................. $36,148$ 38,891 $ 36,148 $ 37,740 $ 29,776 $ 16,141 $ 7,483
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. SuchThese forward-looking statements involve known and unknown risks, uncertainties and other factors whichthat may cause our actual results, performance or achievements or the machine tool industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. SuchThese factors include, among others, (i) changes in general economic and business conditions that affect demand for Computer Numeric Controlcomputer numeric control (CNC) systems, machine tools and software products, (ii) changes in manufacturing markets, (iii) innovations by competitors, (iv) quality and delivery performance by our contract manufacturers and (v) governmental actions and initiatives including import and export restrictions and tariffs. Results of Operations The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Operations expressed as a percentage of worldwide sales and service fees and the year-to-year percentage changes in the dollar amounts of those items. Percentage of Revenues Year-to-Year % Change Increase (Decrease) 2000 1999 1998 199700 vs. 99 99 vs. 98 98 vs. 97 ----- ----- ----- --------- --------- Sales and service fees................ 100.0% 100.0% 100.0% 9.0% (5.6%) (2.4%) Gross profit.......................... 26.4% 27.4% 29.9% 29.0%5.0% (13.5%) 0.6% Selling, general and administrative expenses............. 24.5% 24.1% 23.3% 22.0%10.7% (2.4%) 3.5% Restructuring charge (credit)......... (0.1%) 1.2% -- (108.9%) -- Operating income...................... 1.6% 3.4% 5.3% 7.0%(49.0%) (39.5%) (25.8%License fee income and litigation settlement fees, net............... 5.6% 0.3% 7.5% 1664.8% (95.6%) Interest expense...................... 0.9% 1.5% 0.9% 2.0%(27.4%) (47.6%) (54.8%) Net income............................ 5.2% 2.0% 9.9% 14.4%179.4% (80.5%) (33.0%)
Fiscal 2000 Compared With Fiscal 1999 Net income for the fiscal year ended October 31, 2000 was $5.0 million, or $.84 per share, on a diluted basis, compared to $1.8 million, or $.30 per share, for the preceding year. Fiscal 2000 net income was due almost entirely to the receipt in the fourth quarter of proceeds from a settlement of a long-standing patent infringement claim. Operating results for fiscal 2000, however, compared unfavorably to those for the prior year, due to the substantial adverse impact of converting foreign sales and costs, particularly those denominated in Euros, to U.S. dollars for financial reporting purposes. Had exchange rates in fiscal 2000 remained the same as the average rate in effect during fiscal 1999, income before taxes for fiscal 2000 would have increased by approximately $3.5 million. Sales and service fees were $96.2 million for fiscal 2000, an increase of 9.0% from the $88.2 million reported for fiscal 1999. When measured at constant exchange rates, however, net sales and service fees would have been approximately $102.2 million for the fiscal year, an increase of 15.6% compared to the prior year. The increase in sales and service fees was primarily driven by an increase in sales of computerized machine systems. Sales of computerized machine systems totaled $71.7 million in fiscal 2000 compared to $63.8 million in fiscal 1999, a 12.4% increase. Domestic sales of computerized machine systems in fiscal 2000 increased by $4.3 million, or 20.4%, due primarily to a 25% increase in units shipped. Shipments of computerized machine systems in Europe also increased by 15.5%. Shipments of computerized machine systems in Southeast Asia also benefited from significantly improved market conditions. International sales, including export sales from the United States, approximated 57.5% of consolidated sales and service fees for fiscal 2000 compared to 58.4% for fiscal 1999. New order bookings for fiscal 2000 were $100.7 million compared to $89.9 million for fiscal 1999, an increase of 12%. Orders for computerized machine systems increased $11.2 million reflecting a 30% increase in unit orders. Unit orders for machine systems in the U.S. increased 40% over fiscal 1999 as a result of a very strong fourth quarter, which reflected favorable acceptance of our new products introduced at the biennial International Manufacturing Technology Show (IMTS) in September 2000, along with improved market conditions. Outside of the United States, orders for machine systems increased 23% due principally to increased market penetration in continental Europe and Southeast Asia. Orders in Southeast Asia also benefited from significantly improved market conditions. Backlog was $10.2 million at October 31, 2000, compared to $8.5 million at the end of fiscal 1999. Gross profit margin, as a percentage of sales, declined in fiscal 2000 to 26.4% from 27.4% in fiscal 1999, due primarily to the unfavorable effects of the stronger U.S. dollar particularly in relationship to the Euro. The unfavorable effect was most pronounced in the fourth fiscal quarter. Operating expenses increased to $23.5 million in fiscal 2000 from $21.3 million in fiscal 1999, due primarily to product development costs associated with the our new line of computerized machine systems as well as costs associated with expanded sales and marketing activities. The increased operating expenses, combined with the adverse margin impact of the strong U.S. dollar, resulted in a decrease in operating profit from $3.0 million in fiscal 1999 to $1.5 million in fiscal 2000. In the fourth quarter of fiscal 2000, we recorded a restructuring charge of $300,000 for severance costs related to the termination of employees at our subsidiary, Autocon Technologies, Inc. in connection with the completion of the consolidation of this operation into our North American sales and service business. Interest expense for fiscal 2000 declined by $354,000, or 27.4%, from the level in fiscal 1999, primarily due to the significant reduction in our outstanding borrowings. Other expense was $359,000 in fiscal 2000 compared to other income of $25,000 in fiscal 1999. The increase is primarily the result of realized and unrealized currency losses associated with accounts receivable denominated in foreign currencies, primarily those linked to the Euro, which for the most part, were not hedged during fiscal 2000. The provision for income taxes of $571,000 in fiscal 2000 is primarily related to the earnings of a foreign subsidiary as well as to the settlement of a previously disclosed German tax issue for approximately $275,000. Domestic net operating loss carryforwards were substantially utilized in fiscal 2000. We would have recorded an additional tax provision of approximately $1.9 million in fiscal 2000 without the benefit of net operating loss carryforwards. Note 6 to the Consolidated Financial Statements contains more information with respect to our net operating loss carryforwards. Fiscal 1999 Compared With Fiscal 1998 Net income for the fiscal year ending October 31, 1999 was $1.8 million, or $.30 per share, on a diluted basis, compared to $9.3 million, or $1.39 per share, for the preceding year. Results for fiscal 1999 are not comparable to the preceding period because fiscal 1998 results include a $1.2 million restructuring charge and $6.3 million of license fees and litigation settlements net of expenses and foreign withholding taxes. As discussed below, net license fee income and litigation settlements fees for fiscal 1999 were $304,000. Sales and service fees were $88.2 million for fiscal 1999, a decrease of 5.6% from the $93.4 million reported in fiscal 1998. The decrease in sales was due in part to the negative impact of a stronger U.S. dollar when converting foreign sales to U.S. dollars for financial reporting purposes. At constant exchange rates, net sales and service fees for fiscal 1999 would have been $89.2 million. Sales of computerized machine systems, before foreign currency translation effects were substantially unchanged from the prior year and accounted for 72.3% of our annual sales and service fees. Domestic sales of computerized machine systems in fiscal 1999 decreased by $3.2 million, or 13.2%, reflecting very weak market conditions that have existed since the third quarter of fiscal 1998. Sales of computerized machine systems in Europe increased $1.7 million, or 4.3%, in fiscal 1999 on a constant dollar basis, while sales in Southeast Asia increased $1.3 million. The increase in international sales was offset in part by approximately $1.0 million negative effect from foreign currency translation. Sales of stand-alone CNC systems and software declined by $4.1 million, or 27.9%. The decline in stand-alone CNC systems was primarily the result of an anticipated reduction in shipments to original equipment manufacturers (OEMs) and retrofit dealers of stand-alone CNC systems, primarily related to our DeltaTM Series CNC systems, as we have repositioned these products as components of integrated machine systems. International sales, including export sales from the United States, increased to approximately 58.4% of consolidated sales and service fees for fiscal 1999 compared to 54.5% for fiscal 1998. Orders for the year1999 were $89.9 million compared to $92.4 million in the prior year, a $2.5 million, or 2.7%, decrease. Computerized machine system orders increased $1.5 million, or 2.3%, while stand-alone CNC system orders decreased $2.9 million, or 23.1%. Computerized machine system unit orders in Europe increased 7.2% while orders in the United States declined 10.5%. Offsetting the increase in computerized machine system orders in Europe was a decline in stand-alone CNC system unit orders of 32.3%. The decline in orders for stand-alone CNC systems is the result of our repositioning these products for marketing as components of integrated computerized machine systems. Backlog was $8.5 million at October 31, 1999 and $7.5 million at October 31, 1998. Gross profit margin as a percentage of sales decreased to 27.4% in fiscal 1999 compared to 29.9% in the prior year. The decrease was primarily the result of lower service margin and the effects of a stronger dollar relative to foreign currencies. Interest expense for fiscal 1999 increased $417,000 or 47.6% from the amount reported for the corresponding period in fiscal 1998, primarily due to increased borrowing to support an increase in finished product inventory which began in the second half of fiscal 1998. License fee income and litigation settlement fees for fiscal 1999 were $304,000 compared to $7.0 million in the prior year. As previously reported, there are a limited number of CNC users that are not already licensed and most of the licenses previously granted provided for a single lump sum payment at the time of grant.licensed. As a result, license fee income and litigation settlement fees in fiscal 1999 were not expected to equal that recorded in fiscal 1998. For further information, refer to Note 10 to the Consolidated Financial Statements. Statements contains more information on license fee income and litigation settlement fees. The provision for income taxes in fiscal 1999 is primarily related to the earnings of a foreign subsidiary which no longer has the benefit of net operating loss carryforwards to offset taxable income. The fiscal 1999 provision was favorably impacted by a $377,000 tax asset recorded by a foreign subsidiary due to a change in its tax status. The provision for foreign income taxes in fiscal 1998 consisted of $640,000 of foreign withholding taxes resulting from license fee income and litigation settlement fees and approximately $1.2 million related to the earnings of foreign subsidiaries. Net operating loss carryforwards available to offset pre-tax income in future periods are set forth in Note 6 to the Consolidated Financial Statements. A German tax examiner has contested our 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 have protested this matter and have not yet received a ruling from the German tax authorities on the tax examiner's finding and our protest. In the event an unfavorable ruling is received from the German tax authorities, we will consider whether to appeal to the German Federal Tax Court. No provision for the contingency has been recorded. Fiscal 1998 Compared With Fiscal 1997 Net income for the fiscal year ending October 31, 1998 was $9.3 million, or $1.39 per share, on a diluted basis, compared to $13.8 million, or $2.06 per share, for the preceding year. Included in 1998 results was a $1.2 million restructuring charge (which is more fully discussed below and in Note 15 to the Consolidated Financial Statements). Net income in fiscal 1998 and 1997 also included $6.3 million and $9.1 million, respectively, of license fees and litigation settlements net of expenses and foreign withholding taxes. Excluding the restructuring charge and net license fee and litigation settlements, net income in fiscal 1998 would have been $4.1 million, or $.61 per share, on a diluted basis, compared to $4.7 million, or $.70 per share, in fiscal 1997. In addition, the provision for income taxes in fiscal 1998 increased by $906,000, or 88%, primarily the result of the earnings of a foreign subsidiary which no longer has the benefit of net operating loss carryforwards to offset taxable income. Sales and service fees were $93.4 million for fiscal 1998, a decrease of 2.4% from the $95.7 million reported in fiscal 1997. The decrease in sales for the fiscal year was due in part to the negative impact of a stronger U.S. dollar during the first three fiscal quarters, when converting foreign sales to U.S. dollars for financial reporting purposes. At constant exchange rates, net sales and service fees for the fiscal year would have been $95.0 million. Sales of computerized machine systems, before foreign currency translation effects, increased $4.6 million, or 7.5%, for fiscal 1998 and accounted for 69.3% of our annual sales and service fees. Domestic sales of computerized machine systems in fiscal 1998 approximated the fiscal 1997 level while sales in the United Kingdom, which experienced unfavorable economic conditions, declined $2.6 million, or 24.1%. Sales of computerized machine systems in continental Europe, primarily Germany and France, increased $6.6 million, or 26.2%, in fiscal 1998. Also contributing to the increase in computerized machine systems was our offering of a new milling machine featuring a fully integrated Delta(TM) CNC system sold under the DynaPath(TM) name and our press brake system sold with a fully integrated Autobend(R) CNC system. Both computerized machine systems were released for sale in the second half of fiscal 1998. The increase in sales of computerized machine systems was offset by a $4.8 million, or 27.4%, decline in sales of stand-alone CNC systems. The decline in stand-alone CNC systems was the result of reduced shipments to original equipment manufacturers (OEMs) and retrofit dealers of stand-alone CNC systems, primarily related to our Delta(TM) Series CNC systems, as we reposition these products for marketing as components of integrated machine systems. Service income declined by approximately $600,000, or 12.1%, as a result of our on-going transfer of customer servicing responsibility to certain of our distributors as well as improved quality of the computerized machine systems. International sales, including export sales from the United States, increased to approximately 54.5% of consolidated sales and service fees for fiscal 1998 compared to 51.4% for fiscal 1997. Orders for the year were $92.4 million compared to $94.8 million in the prior year, a $2.4 million, or 2.5%, decrease. Computerized machine system orders increased $2.4 million, or 4.8%, while stand-alone CNC system orders decreased $3.7 million, or 24.0%. Computerized machine system unit orders in continental Europe (principally Germany & France) increased 23.7% while orders in the United States and England declined 5.8% reflecting weaker demand in those markets. Offsetting the increase in computerized machine system orders was a decline in stand-alone CNC system orders units of 26.4%. The decline in orders for stand-alone CNC systems is the result of our repositioning these products for marketing as components of integrated computerized machine systems. Backlog was $7.5 million at October 31, 1998 and $7.4 million at October 31, 1997. Gross profit margin as a percentage of sales increased to 29.9% in fiscal 1998 compared to 29.0% in the prior year. The increase was primarily the result of reduced costs of computerized machine systems produced by our contract manufacturers in Taiwan due to the weakening of the New Taiwan dollar in fiscal 1998. Also contributing to the improved margin was an increased mix of higher-margin European sales. As disclosed in Note 15 to the Consolidated Financial Statements, we recorded a restructuring charge in the fourth quarter of fiscal 1998 totaling $1.2 million related to our subsidiary Autocon Technologies, Inc. (ATI). ATI historically marketed its Delta(TM) series of CNC systems to OEMs and through retro-fit dealers. Throughout fiscal 1998, we repositioned ATI to market its CNC products as components of fully integrated computerized machine systems under the DynaPath(TM) brand name. The first of several planned models of the DynaPath(TM) machine systems product line was successfully launched in fiscal 1998 resulting in sales of $500,000. The decline in OEM controls sales, concurrent with a decline in demand for retro-fit CNC systems and inventory write-downs, resulted in operating losses related to ATI, before restructuring charges, of $1.2 million for the fiscal year ended October 31, 1998. As discussed above, in October 1998, we initiated a more comprehensive restructuring of ATI's business to include consolidation of operations, contract manufacturing of CNC systems in Taiwan, simplification of the CNC product offering and cancellation of certain product development projects, as well as rationalizing the sales and customer service activities. This restructuring program, which was in the first half of fiscal 1999, resulted in a $1.2 million restructuring charge. The restructuring charge was comprised of approximately $600,000 of reserves for the write down of fixed assets and $600,000 of accrued liabilities for employee severance costs and obligations under lease of manufacturing and office space that will no longer be used. Interest expense for fiscal 1998 decreased approximately $1.1 million, or 54.8%, from the amount reported for the corresponding period in fiscal 1997, primarily due to debt reduction in fiscal 1998 combined with the full year effect of the $12.1 million debt reduction that occurred in fiscal 1997. License fee income and litigation settlement fees for fiscal 1998, represented 62.3% of income before taxes compared to 68.1% in fiscal 1997 and was attributable almost entirely to licenses entered into during the year by IMS. As of October 31, 1998, license fees of approximately $797,000, net of legal fees and expenses, have been deferred and are expected to be recognized through fiscal 2001. There are a limited number of remaining CNC users that IMS has identified as potential licensees. Accordingly, we believe that it is unlikely that future license fee income and litigation settlement fees will equal that recorded in fiscal 1998. For further information, refer to Note 10 to the Consolidated Financial Statements. The provision for income taxes in fiscal 1998 consisted of approximately $640,000 of foreign withholding taxes resulting from license fee income and litigation settlement fees and approximately $1.2 million related to the earnings of a foreign subsidiary which no longer has the benefit of net operating loss carryforwards to offset taxable income. The provision for foreign income taxes in fiscal 1997 consisted almost entirely of foreign withholding taxes resulting from license fee income and litigation settlement fees. Net operating loss carryforwards available to offset pre-tax income in future periods are set forthdescribed in Note 6 to the Consolidated Financial Statements. EURO Currency Many of the countries in which we sell our products and services are Member States of the Economic and Monetary Union ("EMU")(EMU). Beginning January 1, 1999, Member States of the EMU were permitted to begin trading in either their local currencies or the Euro, the official currency of EMU participating Member States. Parties are free to choose the unit they prefer in contractual relationships during the transitional period, beginning January 1999 and ending June 2002. Our computer system contains the functionality to process transactions in either a country's localnational currency or the Euro. We have not incurred and do not anticipate incurring any material adverse effects on our operations related to the EMU's conversion to the Euro. However, there can be no assurance that the conversion of EMU Member States to the Euro will not have a material adverse effect on our operations. Foreign Currency Risk Management We manage our foreign currency exposure through the use of foreign currency forward exchange contracts. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. We also moderate our currency risk related to significant purchase commitments with certain foreign vendors through price adjustment agreements that provide for a sharing of, or otherwise limit, the risk of currency fluctuations on the costs of purchased products. The results of these programs achieved our objectives in fiscal 1999 and fiscal 1998. See Note 1 to the Consolidated Financial Statements. Year 2000 Compliance We did not experience any interruptions in our operations from Y2K related matters. The amount spentStatements has more information on Y2K testing and remediation was not material.this subject. Liquidity and Capital Resources At October 31, 1999,2000, we had cash and cash equivalents of $3.5$3.4 million compared to $3.3$3.5 million at October 31, 1998.1999. Cash used forprovided by operations totaled $12.9 million in fiscal 2000, compared to cash used by operations of $827,000 in fiscal 1999, compared to cash provided by operations of $5.9 million in fiscal 1998.1999. Cash flow from operations in fiscal 19982000 was enhanced by litigation settlement receipts of approximately $6.3$5.4 million, of license fees, net of legal fees and taxes. Working capital, excluding short-term debt was $28.1 million at October 31, 2000, compared to $33.3 million at October 31, 1999, compared to $29.3 million at October 31, 1998.1999. The decline in working capital increase is attributable to a decrease in inventory of $4.6 million and an increase in accounts payable of $4.8 million and accrued expenses of $928,000 offset by a decrease in accounts receivable of $1.0$2.7 million. The decrease in accounts payableinventory relates primarily to payments made toan increase in sales combined with a planned reduction in inventory of finished products available for shipment. The increase in accounts payable is the result of increased machine purchases from our contract manufacturers for inventory purchases that occurred in latethe fourth fiscal 1998quarter under terms that generally range from 60 to 120 days. Accounts payable at October 31, 1998 reflected a higher-than-normal level of shipments from our contract manufacturers in the fourth fiscal quarter. Capital investments for the fiscal year ended October 31, 19992000 consisted principally of expenditures for software development projects and purchases of equipment. Cash used for investing activities during the year was funded by cash flow from operations and bank credit facilities. We repurchased 395,752 and 254,500 shares of our common stock during fiscal 1999 and 1998, respectively, 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. Total debt at October 31, 19992000 was $14.2$3.7 million, representing 28.2%8.8% of total capitalization, compared to $8.4$14.2 million, or 18.1%28.2%, of total capitalization at October 31, 1998.1999. On December 29, 2000, we purchased 278,001 shares of our common stock for approximately $1.2 million from a related party, Brynwood Partners II L.P. The purchased shares will be reflected as a reduction in common stock. We were in compliance with all loan covenants at October 31, 1999.2000. We believe that anticipated cash flow generated from our future operations and borrowings available borrowingsto us under our existing credit facilities will be sufficient to meet our anticipated cash requirements in the foreseeable future. Item 7A. Quantitative and Qualitative Disclosures About Market Risks Interest Rate Risk Our bank line of credit is affected by the general level of U.S. and European interest rates and/or Libor. However, we onlyWe had $9.6 million$950,000 outstanding under our bank line of credit at October 31, 19992000 and the effect of interest rate changes wouldwill likely not be significant. 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. In Fiscal 1999,fiscal 2000, approximately 58.4%58% of our sales and service fees, including export sales, were derived from foreign markets. All computerized machine systems, CNC systems and certain proprietary service parts are sourced by a central engineering and manufacturing division of theour U.S. parent company and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies. The parentU.S. company enters into forward foreign exchange contracts from time to time to hedge the cash flow risk related to inter-company sales, andinter-company purchases, inter-company accounts receivable and accounts payable denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes. Forward contracts for the sale and purchase of foreign currencies as of October 31, 2000: Forward contracts for the sale of foreign currencies as of October 31, 1999: Notional Amount in Foreign Weighted Avg. Market Value in Foreign Forward Rate Notional Amount October 31,Fair Value Forward Contracts Currency Forward Rate in U.S. $ 1999October 31, 2000 Maturity Dates --------- -------- ------ ----- ----------------- --------------- ------------- --------------- ---------------- -------------- Sterling 2,060,000 1.6532 3,391,310 3,389,3181,000,000 1.4549 1,454,871 1,450,000 Nov '99-Jan'00-Dec `00 Euro 1,028,000 1.0776 1,107,805 1,084,540 Nov'994,073,831 .8620 3,511,575 3,463,000 Nov '00-Dec `00 Singapore Dollar 1,989,000 1.7483 1,137,682 1,136,000 Nov '00-Dec `00 NT Dollar 498,000,000 32.04 15,543,027 15,414,000 Nov '00-Oct `01
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, 19992000 and 1998,1999, 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, 1999.2000. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted auditing standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hurco Companies, Inc. and subsidiaries as of October 31, 19992000 and 1998,1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1999,2000, in conformity with accounting principles generally accepted accounting principles.in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a) 2 is presented for purposes of complying with the Securities and Exchange CommissionsCommission's rules and is not part of the basic financial statements. ThisThe schedule has been subjected to the auditing procedures applied in theour audits of the basic financial statements and, in our opinion, is fairly statesstated 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 1, 1999.5, 2000. HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended October 31, ---------------------- 2000 1999 1998 1997 ---- ---- ---- (Dollars in thousands, except per share amounts) Sales and service fees........................................ $ 96,204 $ 88,238 $ 93,422 $ 95,729 Cost of sales and service .................................... 70,827 64,064 65,483 67,956 -------- ----------------- -------- Gross profit............................................. 25,377 24,174 27,939 27,773 Selling, general and administrative expenses.................. 23,538 21,259 21,786 21,047 Restructuring charge (credit) (Note 15)....................... 300 (103) 1,162 -- --------- --------- -------- Operating income ........................................ 1,539 3,018 4,991 6,726 License fee income and litigation settlement fees, net (Note 12)................................................ 5,365 304 6,974 10,095 Interest expense.............................................. 939 1,293 876 1,938 Other income (expense), net................................... (359) 25 99 (51) ----------------- --------- -------- Income before income taxes............................... 5,606 2,054 11,188 14,832 Provision for income taxes (Note 6)........................... 571 252 1,934 1,028 ----------------- --------- -------- Net income ................................................... $ 5,035 $ 1,802 $ 9,254 $ 13,804 ================= ========= ======== Earnings per common share - basic............................. $ .85 $ .30 $ 1.42 $ 2.11 ======== ========= ========== ======== Weighted average common shares outstanding - basic............ 5,952 5,980 6,498 6,536 ======== ========= ========== ======== Earnings per common share - diluted........................... $ .84 $ .30 $ 1.39 $ 2.06 ======== ========= ========== ======== Weighted average common shares outstanding - diluted.......... 6,020 6,061 6,670 6,704 ======== ========= ========== ========
The accompanying notes are an integral part of the Consolidated Financial Statements. HURCO COMPANIES, INC. CONSOLIDATED BALANCE SHEETS ASSETS
As of October 31, 2000 1999 1998 ---- ---- (Dollars in thousands, except per share amounts) Current assets: Cash and cash equivalents..................................................... $ 3,4953,384 $ 3,2763,495 Accounts receivable, less allowance for doubtful accounts of $741 in 2000 and $687 in 1999 and $769 in 1998.............................................17,842 17,154 18,896 Inventories .................................................................. 26,176 30,767 30,817 Other......................................................................... 1,793 1,440 2,154 --------- --------- Total current assets........................................................ 49,195 52,856 55,143 --------- --------- Long-term license fee receivables (Note 12)...................................... -- 434 797 --------- --------- Property and equipment: Land.......................................................................... 761 761 Building...................................................................... 7,162 7,168 7,067 Machinery and equipment....................................................... 11,000 11,182 11,184 Leasehold improvements........................................................ 992 1,005 1,107 --------- --------- 19,915 20,116 20,119 Less accumulated depreciation and amortization................................ (11,122) (11,165) (11,037) --------- ---------- 8,951 9,082 --------- --------- 8,793 8,951 Software development costs, less accumulated amortization of $6,505 in 2000 and $5,174 in 1999 and $6,014 in 1998....................................................3,326 3,951 4,231 Other assets..................................................................... 3,710 3,440 2,443 --------- --------- $ 69,63265,024 $ 71,69669,632 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.............................................................. $ 8,51910,896 $ 13,2358,519 Accounts payable-related parties.............................................. 2,697 2,372 2,556 Accrued expenses.............................................................. 6,714 5,935 7,157 Accrued warranty expenses..................................................... 831 968 1,060 Current portion of long-term debt............................................. 1,7861,986 1,786 --------- --------- Total current liabilities................................................... 23,124 19,580 25,794 --------- --------- Non-current liabilities: Long-term debt ............................................................... 1,750 12,386 6,572 Deferred credits and other ................................................... 1,259 1,518 1,590 --------- --------- 3,009 13,904 8,162 --------- --------- Commitments and contingencies (Notes 10 and 11) Shareholders' equity: Preferred stock: no par value per share; 1,000,000 shares authorized; no shares issued................................................issued -- -- Common stock: no par value; $.10 stated value per share; 12,500,000 shares authorized; 5,951,8595,955,359 and 6,340,1115,951,859 shares issued and outstanding in 2000 and 1999, and 1998, respectively......respectively.. 596 595 634 Additional paid-in capital.................................................... 46,347 46,340 48,662 Accumulated deficit........................................................... (313) (5,348) (7,150) Foreign currency translation adjustment....................................... (7,739) (5,439) (4,406) --------- --------- Total shareholders' equity.................................................. 38,891 36,148 37,740 --------- --------- $ 69,63265,024 $ 71,69669,632 ========= ========= The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended October 31, 2000 1999 1998 1997 ---- ---- ---- (Dollars in thousands) Cash flows from operating activities: Net income ............................................................. $ 5,035 $ 1,802 $ 9,254 $ 13,804 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization......................................... 2,519 2,428 2,138 2,078 Restructuring charge (credit) ........................................ 300 (103) 1,162 -- Unrealized (gain) loss on foreign currency transactions............... 671 (219) 294 Change in assets/liabilities (Increase) decrease in accounts receivable........................... (2,101) 974 (2,808) 1,043 (Increase) decrease in inventories................................... (801)2,717 801 (8,775) 2,107 Increase (decrease) in accounts payable.............................. 2,917 (4,825) 6,864 (2,096) DecreaseIncrease (decrease) in accrued expenses.........................................expenses.............................. 1,023 (928) (994) (681) Other................................................................ (45) (712) (525) ------- ----- -------440 (976) (931) --------- --------- -------- Net cash provided by (used for) operating activities.............. 12,850 (827) 5,910 16,024 ------- ----- ---------------- --------- -------- Cash flows from investing activities: Proceeds from sale of equipment......................................... 36 69 93 126 Purchase of property and equipment...................................... (1,193) (1,176) (1,013) (640) Software development costs.............................................. (706) (981) (1,315) (1,595) Other .................................................................. (138) (288) (411) (418) ------- ------ ---------------- --------- -------- Net cash (used for) investing activities.......................... (2,001) (2,376) (2,646) (2,527) ------- ------ --------------- --------- -------- Cash flows from financing activities: Advances on bank credit facilities...................................... 28,500 61,920 15,053 30,173 Repayments of bank credit facilities.................................... (37,150) (54,320) (14,953) (39,154) Repayments of term debt................................................. (1,786) (1,786) (3,036)(1,786) Proceeds from exercise of common stock options.......................... 8 18 120 38 Purchase of common stock................................................ -- (2,379) (1,827) -- ------- ------ ------------------- --------- -------- Net cash provided by (used for) financing activities.............. (10,428) 3,453 (3,393) (11,979) ------- ------ --------------- --------- -------- Effect of exchange rate changes on cash.................................... (532) (31) 34 (24) ------- ------- --------------- --------- -------- Net increase (decrease) in cash................................... (111) 219 (95) 1,494 Cash and cash equivalents at beginning of year............................. 3,495 3,276 3,371 1,877 ------- ----- ------------- --------- -------- Cash and cash equivalents at end of year................................... $3,495 $3,276 $3,371 ===== ====== ======$ 3,384 $ 3,495 $ 3,276 ======== ========= ======== Supplemental disclosures: Cash paid for: Interest............................................................. $ 834 $ 1,016 $ 702 $ 1,828 Income taxes......................................................... $ 739 $ 1,003 $ 1,818 $ 1,234 The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated Other Comprehensive Income (loss): Foreign Common Stock Additional Currency Shares Issued Paid-In Accumulated Translation & Outstanding Amount Capital Deficit Adjustment Total (Dollars in thousands) Balances, October 31, 1996 6,531,871 $ 653 $50,312 $(30,208) $(4,616) $16,141 Net income........................................... -- -- -- 13,804 -- 13,804 Translation of foreign currency financial statements........................................ -- -- -- -- (207) (207) ------- Comprehensive Income................................ 13,597 Exercise of common stock options..................... 12,960 1 37 -- -- 38 --------- ------ -------- ------- ------- ----- Balances, October 31, 1997...........................1997................. 6,544,831 $ 654 $50,349$ 50,349 $(16,404) $(4,823) $29,776 --------- ------ -------- ------- ------- ------ Net income...........................................income................................. -- -- -- 9,254 -- 9,254 Translation of foreign currency financial statements........................................statements.............................. -- -- -- -- 417 417 ------ Comprehensive Income.................................Income....................... 9,671 Exercise of common stock options.....................options........... 49,780 5 115 -- -- 120 Purchase of common stock.............................stock................... (254,500) (25) (1,802) -- -- (1,827) ---------- ------ --------- --------- -------- ------ -------- ------- ------ ------- Balances, October 31, 1998...........................1998................. 6,340,111 $ 634 $48,662 $(7,150)$ 48,662 $ (7,150) $(4,406) $37,740 ------- --------------- ------ --------- --------- -------- ------- ------ -------------- Net income...........................................income................................. -- -- -- 1,802 -- 1,802 Translation of foreign currency financial statements........................................statements.............................. -- -- -- -- (1,033) (1,033) ------ Comprehensive Income.................................Income....................... 769 Exercise of common stock options.....................options........... 7,500 1 17 -- -- 18 Purchase of common stock............................. (395,752 )stock................... (395,752) (40) (2,339) -- -- (2,379) ---------- ------ --------- --------- -------- -------- Balances, October 31, 1999................. 5,951,859 $ 595 $ 46,340 $ (5,348) $(5,439) $36,148 ---------- ------ --------- --------- -------- -------- Net income................................. -- -- -- 5,035 -- 5,035 Translation of foreign currency financial statements.............................. -- -- -- -- (2,300) (2,300) Comprehensive Income....................... 2,735 Exercise of common stock options........... 3,500 1 7 -- -- 8 ---------- ------ ------- ---------------- --------- -------- ------- Balances, October 31, 1999........................... 5,951,8592000................. 5,955,359 $ 595 $46,340 $(5,348) $(5,439) $36,148596 $ 46,347 $ (313) $(7,739) $38,891 ========== ====== ========= ====== ================ ======== ======== =======
The accompanying notes are an integral part of the Consolidated Financial Statements. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation. The consolidated financial statements include the accounts of Hurco Companies, Inc. (an Indiana corporation) and our wholly owned and controlled subsidiaries. AWe have a 35% and 24% ownership interest in an affiliate recordedtwo affiliates accounted for using the equity method and a 15% ownership interest in an affiliate recorded at costmethod. These investments are included in Other Assets on the accompanying Consolidated Balance Sheets. Intercompany accounts and transactions have been eliminated. Statements of Cash Flows. We consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash flows from hedges are classified consistent with the items being hedged. Translation of Foreign Currencies. All balance sheet accounts of non-U.S. subsidiaries are translated at the exchange rate as of the end of the year. Income and expenses are translated at the average exchange rates during the year. 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. We enter into foreign currency forward exchange contracts to hedge certain firm intercompanyinter-company sale and purchase commitments denominated in foreign currencies (primarily pound sterling, Euro and Euro) for which we have firm purchase commitments.New Taiwan Dollar). The purpose of these instruments is to protect us from the risk that the U.S. dollar net cash inflows and outflows resulting from the sales and purchases denominated in foreign currencies will be adversely affected by changes in exchange rates. Gains and losses on these hedge contracts are deferred and recognized as an adjustment to the related salessale or purchase transactions. We enter into foreign currency forward exchange contracts periodically to provide a hedge against the effect of foreign currency fluctuations on receivables and payables denominated in foreign currencies. Gains and losses related to contracts designated as hedges of receivables and payables denominated in foreign currencies are accrued as exchange rates change and are recognized as "Other income (expense), net" in the Consolidated Statements of Operations. The U.S. dollar equivalent notional amount of outstanding foreign currency forward exchange contracts was approximately $22.0 million as of October 31, 2000 ($15.5 million related to intercompany purchase commitments) and $4.5 million as of October 31, 1999 ($2.1 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 losses related to hedges of future sales transactions were approximately $48,000$155,300 and $434,000$48,000 as of October 31, 19992000 and 1998,1999, respectively. Contracts outstanding at October 31, 19992000 mature at various times through January 2000. All contractsOctober 2001. Contracts are for the sale and purchase of foreign currency. We do not enter into these contracts for trading purposes. On November 1, 2000, we adopted Statement of Financial Accounting Standards (SFAS) No. 133 Accounting for Derivative Instruments and Hedging Activities. Refer to Footnote 16 for more information on the impact of SFAS No. 133. Inventories. Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Property and Equipment. Property and equipment are carried at cost. Depreciation and amortization of assets are provided primarily under the straight-line method over the shorter of the estimated useful lives or the lease terms as follows: Number of Years Building 40 Machines 10 Shop and office equipment 5 Leasehold improvements 5 Revenue Recognition. Sales of products and services are recorded when products are shipped or services are performed. Service fees from maintenance contracts are deferred and recognized in earnings on a pro rata basis over the period of the agreement. Sales related to software products are recognized when shipped in conformity with American Institute of Certified Public Accountants' Statement of Position 97-2 Software Revenue Recognition. License Fee Income 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 litigation settlement fees, are recognized in income, net of legal fees and expenses, if any, at the time the related agreement is executed. License fees received in periodic installments that are contingent upon the continuing validity of a licensed patent are recognized in income, net of legal fees and expenses, if any, over the life of the licensed patent. Product Warranty. Expected future product warranty expense is recorded when the product is sold. Research and Development Costs. The costs associated with research and development programs for new products and significant product improvements are expensed as incurred and included in selling, general and administrative expenses. Research and development expenses totaled $2.1$3.2 million, $2.0$2.5 million and $1.9$2.4 million in fiscal 2000, 1999, 1998 and 1997,1998, respectively. Costs incurred to develop computer software products and significant enhancements to software features of existing products to be sold or otherwise marketed are capitalized, after technological feasibility is established. Software development costs are amortized to Cost of Sales on a straight-line basis over the estimated product life of the related software, which ranges from three to five years. We capitalized $706,000 in 2000, $1.0 million in 1999 and $1.3 million in 1998 and $1.6 million in 1997 related to software development projects. Amortization expense was $1.3 million, $1.3 million and $1.1 million and $940,000, for the three years ended October 31, 2000, 1999, 1998 and 19971998, respectively. Earnings Per Share. Earnings per share of common stock are based on the weighted average number of common shares outstanding, which, for diluted purposes, includes the effects of outstanding stock options computed using the treasury method. Income Taxes. We record income taxes under Statement of Accounting Standards (SFAS)SFAS 109 "Accounting for Income Taxes". SFAS 109 utilizes the liability method for computing deferred income taxes and requires that the benefit of certain loss carryforwards be recorded as an asset and that a valuation allowance be established against the asset to the extent it is "more likely than not" that the benefit will not be realized. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. 2. BUSINESS OPERATIONS Nature of Business. We design and produce computer numerical control (CNC) systems and software and computerized machine systems for sale through our own distribution system to the worldwide machine tool industry. The end market for our products consists primarily of precision tool, die and mold manufacturers, independent job shops and specialized short-run production applications within large manufacturing operations. Industries served include: aerospace, defense, medical equipment, energy, transportation and computer industries. Our products are sold through independent agents and distributors in countries throughout North America, Europe and Asia. We also maintain direct sales operations in the United States, England, France, Germany, Italy and Singapore. Credit Risk. We sell products to customers located throughout the world. We perform ongoing credit evaluations of customers and generally do not require collateral. Allowances are maintained for potential credit losses, and such losses have been within our 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. We contract with manufacturing contractors located in Taiwan and Europe for the manufacture and assembly of computerized machine systems, based on our designs and specifications. Any interruption from these sources would restrict the availability of our computerized machine systems whichand would affect operating results adversely. 3. INVENTORIES Inventories as of October 31, 19992000 and 19981999 are summarized below (in thousands): 1999 1998 ---------- ---------- Purchased parts and sub-assemblies................................... $ 9,104 $ 11,749 Work-in-process...................................................... 1,070 1,774 Finished goods....................................................... 20,593 17,294 --------- ------ $ 30,767 $ 30,817 ========= ======
2000 1999 -------- -------- Purchased parts and sub-assemblies........ $ 10,526 $ 9,104 Work-in-process........................... 1,339 1,070 Finished goods............................ 14,311 20,593 -------- -------- $ 26,176 $ 30,767 ======== ======== HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 4. DEBT AGREEMENTS Long-term debt as of October 31, 1999 and 1998, consisted of (in thousands): 1999 1998 -------- -------- Bank revolving credit facilities............................................. $ 9,600 $ 2,000 Senior Notes................................................................. 3,572 5,358 Economic Development Revenue Bonds, Series 1990.............................. 1,000 1,000 -------- --------- 14,172 8,358 Less current portion......................................................... 1,786 1,786 --------- --------- $ 12,386 $ 6,572 ========= ========= As of October 31, 1999, long-term debt was payable as follows (in thousands): Fiscal 2000.................................................................. 1,786 Fiscal 2001.................................................................. 1,986 Fiscal 2002.................................................................. 9,800 Fiscal 2003.................................................................. 200 Fiscal 2004 and thereafter................................................... 400 -------- $14,172
Long-term debt as of October 31, 2000 and 1999, consisted of (in thousands): 2000 1999 -------- -------- Bank revolving credit facilities................ $ 950 $ 9,600 Senior Notes.................................... 1,786 3,572 Economic Development Revenue Bonds, Series 1990. 1,000 1,000 -------- -------- 3,736 14,172 Less current portion............................ 1,986 1,786 -------- -------- $ 1,750 $ 12,386 ======== ======== As of October 31, 19992000, long-term debt was payable as follows (in thousands): Fiscal 2001............................. $ 1,986 Fiscal 2002............................. 1,150 Fiscal 2003............................. 200 Fiscal 2004............................. 200 Fiscal 2005 ............................ 200 -------- $ 3,736 ======== As of October 31, 2000 and 1998,1999, we had $7.2$8.5 million and $11.4$7.2 million, respectively, of outstanding letters of credit issued to non-U.S. suppliers for inventory purchase commitments. As of October 31, 1999,2000, we had unutilized credit facilities of $8.2$15.6 million available for either direct borrowings or commercial letters of credit. As of October 31, 19992000 and 1998,1999, the domestic bank revolving credit facility was payable at an interest rates ranging from 6.9% to 8.25%.rate of 9.5% and 6.9-8.25%, respectively. Interest was payable on the Senior Notes at 10.37% at October 31, 19992000 and 1998.1999. The principal terms of the Bank Credit Agreement and Senior Notes Agreement are set forth below: a) Bank Credit Agreement 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 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 Euro dollar 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. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued b) Senior Notes At October 31, 1999,2000, we had outstanding approximately $3.6$1.8 million of unsecured Senior Notes, bearing an interest rate of 10.37%,. The final installment of which approximately $1.8 million is due on December 1, 1999, and the balance is due in fiscal 2000. The financial covenants substantially conform to those contained in our bank credit agreement. The Economic Development Revenue Bonds are payable in five equal annual installments beginning on September 1, 2001 and are secured by a letter of credit issued in the amount of $1.1 million by a bank. The Bonds' interest rates adjust weekly and, as of October 31, 19992000 and 1998,1999, interest was accruing at a rate of 3.7%4.65% and 3.4%3.7%, respectively. We were in compliance with all loan covenants at October 31, 1999.2000. 5. FINANCIAL INSTRUMENTS The carrying amounts for trade receivables and payables approximate their fair values. At October 31, 19992000 the carrying amounts and fair values of our financial instruments, which includes bank revolving credit facilities, senior notes and Economic Development Revenue Bonds are not materially different. We also have 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 both $4.5$22.0 million and $21.5 million at October 31, 1999.2000. 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 risksrisk of counterparty non-performance nor the economic consequences of counterparty non-performance associated with these contracts are considered by us 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 offsetting valuation allowance. Our total deferred tax assets and corresponding valuation allowance at October 31, 19992000 and 1998,1999, consisted of the following (in thousands): October 31, ----------------------------- 2000 1999 1998--------- --------- Tax effects of future tax deductible items related to: Accrued inventory reserves................................................. $ 824890 $ 710824 Accrued warranty expenses.................................................. 226 249 276 Deferred Compensationcompensation ..................................................... 365 310 194 Other accrued expenses..................................................... 830 745 977 --------- ------------- Total deferred tax assets.............................................. 2,311 2,128 2,157 --------- ------- Tax effects of future taxable differences related to: Accelerated tax deduction and other tax over book deductions related to property, equipment and software................... (1,552) (1,774) (1,883) Other...................................................................... (575)(672) (575) --------- --------------- Total deferred tax liabilities........................................... (2,224) (2,349) (2,458) --------- --------------- Net tax effects of temporary differences................................. 87 (221) (301) --------- --------------- Tax effects of carryforward benefits: U.S. federal net operating loss carryforwards, expiring 2008-2013................................................................................... -- 1,636 2,170 Foreign net tax benefit carryforwards with various expiration years........years............................................ 1,561 1,339 1,174 U.S. federal general business tax credits, expiring 2008-2013....................................................... 548 1,001 1,367 U.S. Alternative Minimum Tax Credit with no expiration..................... 508 426 412 --------- --------- Tax effects of carryforwards .......................................... 2,617 4,402 5,123 --------- --------- Tax effects of temporary differences and carryforwards................. 2,704 4,181 4,822 Less valuation allowance............................................... (2,196) (3,755) (4,410) --------- --------- Net deferred tax asset................................................. $ 426508 $ 412426 ========= =========
Except as indicated above, our 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, we have established a full valuation allowance against carryforward benefits with expiration dates. Alternative minimum tax credits may be carried forward indefinitely and as a result, are not provided with a valuation allowance. While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits of the carryforwards will be recorded in future operations as a reduction of our income tax expense. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Income (loss) before income taxes (in thousands): Year Ended October 31, ---------------------- 2000 1999 1998 1997 ---------- ------------ -------------------- ----------- Domestic............................................... $ 5,459 $ 1,848 $ 8,809 $ 10,303 Foreign................................................ 147 206 2,379 4,529 ------- -------- --------------- --------- $ 5,606 $ 2,054 $ 11,188 $ 14,832 ======== ========= =========
Differences between the effective tax rate and U.S. federal income tax rate were (in thousands): Tax at U.S. statutory rate.................................... $ 1,962 $ 719 $ 3,915 $ 5,191 Foreign withholding taxes..................................... 19 4 640 1,012German tax settlement (Note 10)............................... 275 -- -- Effect of tax rates of international jurisdictions in excess of U.S. statutory rates........................... 39 209 563 342 State income taxes............................................ 46 41 35 16 Utilization of net operating loss carryforwards............... (1,770) (721) (3,219) (5,533) ------- ------ -------------- --------- --------- Provision for income taxes.................................... $ 571 $ 252 $ 1,934 $ 1,028 ======== ========= =========
Foreign withholding taxes are the result of foreign dividends received during fiscal 2000 and 1999 and certain license fee payments received during fiscal 1998 and 1997.1998. Our provision for income taxes in fiscal 2000, 1999 1998 and 19971998 represents taxes currently payable with the exception of the $377,000 tax asset recorded in 1999 by a foreign subsidiary due to a change in its tax status.payable. We have not provided any U.S. income taxes on the undistributed earnings of our foreign subsidiaries or equity method investments based upon our determination that such earnings will be indefinitely reinvested. 7. EMPLOYEE BENEFITS We have defined contribution plans that include a majority of our employees worldwide, under which our 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. Our contributions to the plans are based on employee contributions or compensation. Our contributions totaled $321,422, $331,605 $357,000 and $307,000$357,000 for the years ended October 31, 2000, 1999 1998 and 1997,1998, respectively. We also have Split-Dollar Life Insurance Agreements with certain of our executive officers. Under the terms of the agreements, we pay all of the premiums on behalf of the officers. We will be repaid the premiums from the policies' cash surrender value when the policies are terminated in accordance with the provisions of the agreements. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 8. STOCK OPTIONS In March 1997, we adopted the 1997 Stock Option and Incentive Plan (the 1997 Plan) which allows us to grant awards of options to purchase shares of our common stock, stock appreciation rights, restricted shares and performance shares. Under the provisions of theThe 1997 Plan was amended in fiscal 2000 to increase the maximum number of shares of common stock that may be issued is 500,000. The totalfrom 500,000 to 750,000 and to increase the maximum number of shares of common stock whichthat may be granted to any individual during the term of the 1997 Plan may not exceedfrom 100,000 to 200,000 shares. Options granted under the 1997 Plan are exercisable for a period up to ten years after date of grant and vest in equal annual installments as specified by the Compensation Committee of our Board of Directors (the Committee) as the Committee determines at the time of grant. The option price of options intended to qualify as incentive stock options may not be less than 100% of the fair market value of a share of common stock on the date of grant. As of October 31, 1999,2000, options to purchase 305,500 shares had been granted under the 1997 Plan. In 1990, we adopted the 1990 Stock Option Plan (the 1990 Plan) which allowed us to grant options to purchase shares of our common stock and related stock appreciation rights and limited rights to officers and our key employees. Under the provisions of the 1990 Plan, the maximum number of shares of common stock which may be issued under options and related rights is 500,000. There is no annual limit on the number of such shares with respect to which options and rights may be granted. Options granted under the 1990 Plan are exercisable for a period up to ten years after date of grant and vest in equal installments over a period of three to five years from the date of grant. The option price may not be less than 100% of the fair market value of a share of common stock on the date of grant and no options or rights may be granted under the 1990 Plan after April 30, 2000. A summary of the status of the options under the 1990 and 1997 Plans as of October 31, 2000, 1999 1998 and 19971998 and the related activity for the year is as follows: Shares under Weighted average exercise option price per share - ----------------------------------------------- -------------------- ---------------------------- - ----------------------------------------------- -------------------- ---------------------------- Balance October 31, 1996 431,620 $4.01 Granted 5,000 8.25 Cancelled (1,800) 3.79 Expired - - Exercised (12,960) 3.63 - ----------------------------------------------- -------------------- ---------------------------- - ----------------------------------------------- -------------------- ---------------------------- Balance October 31, 1997 421,860 4.07$4.07 Granted 26,000 8.25 Cancelled (4,000) 5.13 Expired - - Exercised (49,780) 2.43 - ----------------------------------------------- -------------------- ---------------------------- - ----------------------------------------------- -------------------- ---------------------------- Balance October 31, 1998 394,080 4.54 Granted 305,500 5.68 Cancelled (20,400) 4.91 Expired - - Exercised (7,500) 2.42 - ----------------------------------------------- -------------------- ---------------------------- Balance October 31, 1999 671,680 5.07 Granted 180,600 3.76 Cancelled (22,120) 6.15 Expired - - Exercised (3,500) 2.13 - ----------------------------------------------- -------------------- ---------------------------- Balance October 31, 1999 671,680 $5.072000 826,660 $4.77 =============================================== ==================== ============================
HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Stock options outstanding and exercisable on October 31, 19992000 are as follows: Weighted average Weighted average remaining Range of exercise prices Shares under option exercise price per share contractual life in years per share - --------------------------- --------------------- ------------------------- ------------------------------- - --------------------------- --------------------- ------------------------- ------------------------------- Outstanding Outstanding $2.125-5.125 294,180 $3.49 5.3465,160 $3.60 6.2 5.813-8.250 377,500 6.31 7.7 - --------------------------- --------------------- ------------------------- -------------------------------361,500 6.28 6.8 - --------------------------- --------------------- ------------------------- ------------------------------- $2.125-8.250 671,680 $5.07 6.6 =========================== ===================== ========================= ===============================826,660 $4.77 6.5 =========================== ===================== ========================= =============================== Exercisable $2.125-5.125 245,544 $3.27300,419 $3.44 - 5.813-8.250 139,100 6.82187,400 6.55 - - --------------------------- --------------------- ------------------------- ------------------------------- $2.125-8.250 487,819 $4.63 - --------------------------- --------------------- ------------------------- ------------------------------- $2.125-8.250 384,644 $4.55 - =========================== ===================== ========================= =============================== =========================== ===================== ========================= =============================== We apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB25), and related interpretations in accounting for the Plans, and, therefore, no compensation expense has been recognized for stock options issued under the Plans. For companies electing to continue the use of APB25, SFAS No. 123 "Accounting for Stock-Based Compensation", requires pro forma disclosures determined through the use of an option-pricing model as if the provisions of SFAS No. 123 had been adopted. The weighted average fair value at date of grant for options granted during fiscal 1999, 1998 and 1997 was $3.99, $6.10 and $6.11 per share, respectively. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: 1999 1998 1997 - ---------------------------------- ----------- ----------- ----------- - ---------------------------------- ----------- ----------- ----------- Expected dividend yield 0.00% 0.00% 0.00% Expected volatility 55.31% 58.16% 57.88% Risk-free interest rate 4.70% 5.83% 6.04% Expected term in years 10 10 10 - ---------------------------------- ----------- ----------- ----------- If we had adopted the provisions of SFAS No. 123, the impact of reported net income and earnings per share would have been as follows: 1999 1998 1997 - ------------------------------------ -------- ----------- --------- - ------------------------------------ -------- ----------- --------- Net income (in thousands) $1,613 $9,181 $13,752 Earnings per share: Basic $.27 $1.41 $2.10 Diluted $.27 $1.38 $2.05 - ------------------------------------ --------- ----------- --------
We apply Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB25), and related interpretations in accounting for the plans, and, therefore, no compensation expense has been recognized for stock options issued under the plans. For companies electing to continue the use of APB25, SFAS No. 123 "Accounting for Stock-Based Compensation", requires pro forma disclosures determined through the use of an option-pricing model as if the provisions of SFAS No. 123 had been adopted. The weighted average fair value at date of grant for options granted during fiscal 2000, 1999, and 1998 was $2.72, $3.85, and $6.10 per share, respectively. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: 2000 1999 1998 - ---------------------------------- ----------- ----------- ----------- - ---------------------------------- ----------- ----------- ----------- Expected dividend yield 0.00% 0.00% 0.00% Expected volatility 56.33% 55.09% 57.50% Risk-free interest rate 6.20% 4.69% 5.83% Expected term in years 10 10 10 - ---------------------------------- ----------- ----------- ----------- If we had adopted the provisions of SFAS No. 123, net income and earnings per share would have been as follows: 2000 1999 1998 - ---------------------------- ---------------- ----------------- ---------------- - ---------------------------- ---------------- ----------------- ---------------- Net income (in thousands) $4,726 $1,484 $9,181 Earnings per share: Basic $.79 $.25 $1.41 Diluted $.79 $.24 $1.38 - ---------------------------- ---------------- ----------------- ---------------- HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued As of October 31, 1999,2000, there were outstanding non-qualified options that had been granted outside of the 1990 and 1997 plans to outside members of the Board of Directors to purchase 50,000 and 75,000 shares at $5.13 and $5.81 per share, respectively. The 50,000These shares are exercisable while the 75,000 shares become exercisable on December 15, 1999.as of October 31, 2000. The options expire at various dates between 20022001 and 2008.2004. During fiscal 2000, 30,000 non-qualified options were granted to two new directors at $3.75 per share and are exercisable in May 2001. 9. RELATED PARTY TRANSACTIONS Hurco and Air Express International Corporation (AEI) are related parties because a common group of shareholders holds a significant ownership interest in both companies. AEI provides freight forwarding and shipping services for us. The cost of these freight services are negotiated on an arms length basis and amounted to $4.3 million, $4.1 million and $2.6 million for the years ended October 31, 1999, 1998 and 1997, respectively. Trade payables to AEI were $200,000, $217,000 and $30,000 at October 31, 1999, 1998 and 1997, respectively. We own approximately 15%24% of one of our Taiwanese-based suppliers.contract manufacturers. This investment of $361,000 is carried at costaccounted for using the equity method and is included in Other Assets on the Consolidated Balance Sheet. Purchases of product from this suppliercontract manufacturer are negotiated on an arms length basis and totaled $8.6 million, $7.8 million $7.4 million and $8.2$7.4 million for the years ended October 31, 2000, 1999 1998 and 1997,1998, respectively. Trade payables to this suppliercontract manufacturer were $1.5 million, $1.7$2.2 million and $1.8$1.5 million at October 31, 1999, 19982000 and 1997,1999, respectively. As of October 31, 1999,2000, we own 35% of Hurco Automation, Ltd. (HAL), a Taiwan based company. HAL's scope of activities includes the design, manufacture, sales and distribution of industrial automatedautomation products, software systems and related components, including CNC systems and components manufactured under contract for sale exclusively to us. We are accounting for the investment using the equity method. The investment of $732,929$932,000 at October 31, 19992000 is included in Other Assets on the Consolidated Balance Sheet. Purchases of product from this supplier are negotiated on an arms length basis and amounted to $4.2, $3.6 million and $3.1 million in 2000, 1999 and 1998, respectively. Trade payables to HAL were $672,000$542,000 and $668,000$672,000 at October 31, 2000 and 1999, respectively. Trade receivables from HAL were $461,000 and 1998,$0 at October 31, 2000 and 1999, respectively. 10. LITIGATION AND CONTINGENCIES As previously reported, Hurco and its subsidiary IMS Technology, Inc. (IMS) have been parties to a number of legal proceedings which involved alleged infringement of one of the Interactive Machining Patents. At the present date, all but one action hasa United States interactive machining patent (the Patent) owned by IMS. All actions have been settled through licensing arrangements or litigation settlements. The only remaining action is described below. On July 3, 1997,August 8, 2000, Hurco and IMS commenced an action in the United States District Court of Virginia againstagreed to a settlement with Haas Automation Inc. and its owner (collectively, Haas) and certain other end-users and manufacturers of computerized machine tool systems. The action sought monetary damages and an injunction against future infringement.Gene Haas (Haas). Under the settlement, IMS subsequently entered into settlements with all defendants other thanlicensed the Patent to Haas and dismissed claims against them. As previouslyHaas made a one-time payment to IMS. We reported on October 2, 1998license fee income and litigation settlement fees, net of expenses, of approximately $5.4 million in the trial court granted summary judgment in favorfourth quarter of Haas and dismissed the action, finding that there was no infringement by Haas based on the court's claim interpretation and its finding that a floppy disk is not the equal of a cassette tape. Haas' affirmative defenses challenging the validity of the IMS patent were also dismissed. IMS subsequently filed an appeal to the United States Court of Appeals for the Federal Circuit. The appeal seeks relieffiscal 2000 primarily resulting from the trial court's order regarding claim interpretation of the IMS patent, the order granting defendant's motion for summary judgment and the final judgment in favor of Haas. Haas has filed a cross-appeal to the same court from the trial court's order regarding claim construction of the IMS patent. Oral argument was held before the United States Court of Appeals for the Federal Circuit in August 1999; however, the court has not yet ruled on the appeal. Although management continues to believe that the IMS claims of patent infringement have substantial merit, it is unable to predict the outcome of this matter.settlement. A German tax examiner hashad contested our transfer of net operating losses between two of our German subsidiaries that merged in fiscal 1996. The contingent tax liability resulting from this issue iswas approximately $1.4 million. We have protestedIn the fourth quarter of fiscal 2000, this matter was settled for approximately $275,000. The contingency was not previously accrued and have not yet receivedas a ruling fromresult, the German tax authorities onsettlement was recorded in the tax examiner's findingfourth quarter and our protest. Inis included in the event an unfavorable ruling is received from the German tax authorities, we will consider whether to appeal to the German Federal Tax Court. No provision for the contingency has been recorded.income taxes. In addition, we are involved in various other claims and lawsuits arising in the normal course of business. NoneWe believe that none of these claims in our opinion, are expectedlikely to have a material adverse effect on our consolidated financial position or results of operations. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 11. OPERATING LEASES We lease facilities and vehicles under operating leases that expire at various dates through 2003.2005. Future payments, exclusive of amounts reflected in the balance sheet, required under operating leases as of October 31, 1999,2000, are summarized as follows (in thousands): 2000..............................................2001............................................ $ 1,350 2001.............................................. 801 2002.............................................. 537 2003.............................................. 77 2004.............................................. 11,592 2002............................................ 948 2003............................................ 402 2004............................................ 308 2005............................................ 158 -------- Total.............................................Total........................................... $ 2,7663,408 ======== Rent expense for the years ended October 31, 2000, 1999, 1998 and 19971998 was $1.7 million, $1.8$1.7 million and $1.9$1.8 million, respectively. 12. LICENSE FEE INCOME AND LITIGATION SETTLEMENT FEES, NET License fee income and litigation settlement fees, net for fiscal 2000, 1999 1998 and 19971998 were attributable to agreements entered into by IMS, pursuant to which IMS granted fully paid-up licenses of its interactive CNC patents in exchange for cash and other consideration. As of October 31, 1999,2000, additional license fees of approximately $873,000,$300,000, net of legal fees and expenses, related to future payments under completed license agreements have been deferred and are expected to be recognized in income over the two-yearone-year remaining life of the licensed patent. HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 13. QUARTERLY HIGHLIGHTS (Unaudited) 1999 2000 (In thousands, except per share data)
First Quarter Second Quarter Third Quarter Fourth Quarter Sales and service fees............................... $ 24,524 $ 24,197 $ 22,676 $ 24,807 Gross profit......................................... 6,721 6,732 6,115 5,809 Gross profit margin percentage....................... 27.4% 27.8% 27.0% 23.4% Selling, general and administrative expenses......... 5,820 5,623 5,768 6,627 Operating income (loss).............................. 901 1,109 347 (818) Net income .......................................... 459 602 407 3,567 Earnings per common share - basic.................... $ .08 $ .10 $ .07 $ .60 Earnings per common share - diluted.................. $ .08 $ .10 $ .07 $ .59 1999 (In thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Sales and service fees............................... $ 21,147 $21,532 $20,783 $24,776 Gross profit......................................... 6,004 5,858 5,915 6,397 Gross profit margin percentage....................... 28.4% 27.2% 28.5% 25.8% Selling, general and administrative expenses........expenses......... 5,335 5,352 5,152 5,420 Restructuring charge (credit)........................ -- (103) -- -- Operating income..................................... 669 609 763 977 Net income .......................................... 175 554 400 673 Earnings per common share - basic.................... $ .03 $ .09 $ .07 $ .11 Earnings per common share - diluted.................. $ .03 $ .09 $ .07 $ .11 1998 (In thousands, except per share data) First Quarter Second Quarter Third Quarter Fourth Quarter Sales and service fees............................... $ 22,120 $ 21,542 $ 23,444 $ 26,316 Gross profit......................................... 6,123 6,286 6,980 8,550 Gross profit margin percentage....................... 27.7% 29.2% 29.8% 32.5% Selling, general and administrative expenses......... 5,024 5,354 5,573 5,835 Restructuring charge (credit)........................ -- -- -- 1,162 Operating income..................................... 1,099 932 1,407 1,553 Net income .......................................... 2,186 4,270 1,830 968 Earnings per common share - basic.................... $ .33 $ .65 $ .28 $ .15 Earnings per common share - diluted.................. $ .32 $ .63 $ .27 $ .15
HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued 14. SEGMENT INFORMATION We operate in a single segment: industrial automation systems. We design and produce interactive computer numerical control (CNC) systems and software and computerized machine systems for sale through our own distribution network to the worldwide metal working market. We also provide software options, CNC upgrades, accessories and replacement parts for our products, as well as customer service and training support. Substantially all of our machine systems and CNC systems are manufactured to our specifications by contract manufacturing companies in Taiwan and Europe. Our executive offices and principal design, engineering, and manufacturing management operations are headquartered in Indianapolis, Indiana. We sell our products through over 240 independent agents and distributors in 45 countries throughout North America, Europe and Asia. We also have our own direct sales and service organizations in the United States, England, France, Germany, Italy and Singapore, which are considered to be among the world's principal computerized machine system consuming countries. During fiscal 1999,2000, no customer accounted for more than 5% of our sales and service fees. The following table sets forth the contribution of each of our product groups to our total sales and service fees during each of the past three fiscal years (in thousands): Year Ended October 31, 1999 1998 1997 ------- ------- ------- Computerized Machine Systems........................ $63,793 $64,770 $61,679 CNC Systems and Software*............................ 10,623 14,727 19,296 Service Parts........................................ 9,574 9,424 9,612 Services Fees........................................ 4,248 4,501 5,142 ------- ------- ------- .Year Ended October 31, 2000 1999 1998 ------- ------- ------- Computerized Machine Systems... $71,708 $63,793 $64,770 CNC Systems and Software*...... 9,605 10,623 14,727 Service Parts.................. 10,649 9,574 9,424 Services Fees.................. 4,242 4,248 4,501 ------- ------- ------- $96,204 $88,238 $93,422 $95,729 ======= ======= =======
- -------------- *Amounts shown do not include CNC systems sold as an integrated component of computerized machine systems. Revenues by geographic area, based on customer location, for each of the past three fiscal years were (in thousands): Year Ended October 31, ---------------------------------------- 1999 1998 1997 ------- ------- ------- United States......................................... $36,730 $42,486 $46,535 ------- ------- ------- Germany.............................................. 25,388 24,949 20,320 United Kingdom....................................... 9,567 9,454 13,280 Other Europe......................................... 12,087 12,112 12,125 -------- ------- -------- Total Europe....................................... 47,042 46,515 45,725 Asia and Other....................................... 4,466 4,421 3,469 -------- ------- -------- Total Foreign...................................... 51,508 50,936 49,194 -------- ------ --------Revenues by geographic area, based on customer location, for each of the past three fiscal years were (in thousands): Year Ended October 31, ------------------------------------------ 2000 1999 1998 ------- ------- ------- United States......... $40,920 $36,730 $42,486 ------- ------- ------- Germany............... 23,654 25,388 24,949 United Kingdom........ 10,128 9,567 9,454 Other Europe.......... 12,932 12,087 12,112 ------- ------- ------- Total Europe........ 46,714 47,042 46,515 Asia and Other........ 8,570 4,466 4,421 ------- ------- ------- Total Foreign....... 55,284 51,508 50,936 ------- ------- ------- $96,204 $88,238 $93,422 $95,729 ======== ======= =======
Long-lived assets by geographic area were (in thousands): October 31, 1999 1998 ---------- ---------- United States........................................................ $ 13,528 $ 13,836 Foreign Countries.................................................... 686 528 ---------- ---------- . $ 14,214 $ 14,364======= HURCO COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued Long-lived assets by geographic area were (in thousands): October 31, ------------------------- 2000 1999 ---------- ---------- United States................. $ 14,257 $ 15,105 Foreign Countries............. 1,064 1,671 ---------- ---------- $ 15,321 $ 16,776 ========== ==========
15. RESTRUCTURING CHARGE In fiscal 1998, we recorded a reserve for anticipated costs associated with the restructuring of a subsidiary to convert its operations from manufacturing computer controls to sales and service of computerized machine systems. This restructuring program, which was completed during the first half of fiscal 1999, resulted in a special charge to operations of $1.2 million consisting of the following components: Excess building capacity $ 500,000500 Discontinued capitalized software projects 300,714301 Fixed asset impairments 170,245170 Equipment leases 101,187101 Severance costs 89,574 ----------- $1,161,720 90 -------- $ 1,162 Of the $1.2 million provision, $690,761$691,000 was charged to the restructuring reserve while the remainder was used for asset impairments. 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. The excess building capacity reserve represents the final year of the building lease which has not been sublet. In the fourth quarter of fiscal 2000, we recorded a restructuring charge of $300,000 for severance costs related to the termination of employees at our subsidiary, Autocon Technologies, Inc. in connection with the completion of the consolidation of this operation into our North American sales and service business. At October 31, 1999,2000, the restructuring reserve balance was approximately $400,000$640,000 and consisted of the following: Balance Charges to Balance Description 10/31/98 Accrual Adjustment 10/31/99 ----------- -------- ------- ---------- -------- Excess Building Capacity $500,000 $ 10,615 $103,486 $285,899 Equipment Leases 101,187 23,808 -- 77,379 Severance Costs 89,574 89,574 -- -- -------- -------- -------- -------- $690,761 $223,997 $103,486 $363,278 ======= ======= =======Balance Charges to Balance Description 10/31/99 Provision Accrual 10/31/00 ----------- -------- ---------- ------- -------- Excess Building Capacity $ 286 $ -- $ -- $ 286 Equipment Leases 77 -- (23) 54 Severance -- 300 -- 300 -------- ---------- ------- -------- $ 363 $ 300 $ (23) $ 640 ======== ========== =======
======== 16. NEW ACCOUNTING PROUNCEMENT In June 1998, the FASB issued Statement of Financial Accounting StandardsSFAS No. 133, Accounting"Accounting for DerivativesDerivative Instruments and Hedging Instruments.Activities". This statement which is effective for the Company on November 1, 2000, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts,contracts. This statement requires that every derivative instrument be recorded in the balance sheet as either an asset or a liability measured at its fair value. Changes in the fair value of derivatives are to be recorded each period in earnings or comprehensive income, depending on whether the derivative is designated and for hedging activities. The statement is effective as part of a hedged transaction, and on the type of hedge transaction. Gains or losses on derivative instruments reported in fiscal 2000. We haveother comprehensive income must be reclassified as earnings in the period in which earnings are affected by the underlying hedged item, and the ineffective portion of all hedges must be recognized in earnings in the current period. This new standard could results in additional volatility in reported earnings and other comprehensive income. SFAS No. 133 requires that as of the date of initial adoption, the difference between the fair value of the derivative instruments recorded on the balance sheet and the previous carrying amount of those derivatives be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle in accordance with APB 20 "Accounting Changes". On November 1, 2000, we recorded the effect of the transition to SFAS No. 133 as a cumulative effect of a change in accounting principle, the result of which was not yet determinedmaterial to the impact of adopting this statement on ourCompany's consolidated financial position or results of operations. 17. SUBSEQUENT EVENTS (unaudited) On December 29, 2000, we purchased 278,001 shares of our common stock for approximately $1.2 million from a related party, Brynwood Partners II L.P. The purchased shares will be reflected as a reduction in common stock. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures - ----------------------------------------------------------------------------------------------------- Not applicable. PART III Item 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT The following information sets forth the name of each executive officer and director, his age, tenure as a director, principal occupation and business experience for the last five years: Name Age Position(s) with the Company Brian D. McLaughlin 5758 President, Chief Executive Officer and Director Roger J. Wolf 5960 Senior Vice President, Secretary, Treasurer and Chief Financial Officer James D. Fabris 4849 Executive Vice President - Operations Richard Blake 41 ViceBernard C. Faulkner 49 President of the Company and President- Hurco Machine Tool Products DivisionNorth America David E. Platts 4748 Vice President, ResearchTechnology and Business Development Stephen J. Alesia 3334 Corporate Controller, Assistant Secretary Robert W. Cruickshank 55 Director Michael Doar 45 Director Hendrik J. Hartong, Jr. 60 Director Andrew L. Lewis IV 43 Director E. Keith Moore 7761 Director Richard T. Niner 6061 Director O. Curtis Noel 6465 Director Charles E. Mitchell Rentschler 6061 Director
Brian D. McLaughlin has been President and Chief Executive Officer of Hurco 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. Mr. McLaughlin has also been a director since 1987. Roger J. Wolf has been Senior Vice President, Secretary, Treasurer and Chief Financial Officer since January 1993. Prior to joining Hurco, 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, Vice President and Treasurer of Ransburg Corporation, an international manufacturer of factory automation equipment. James D. Fabris was elected Executive Vice President - Operations in November 1997 and Vice President of Hurco in February 1995. Mr. Fabris was President of Hurco Machine Tool Products Division from November 1993 to December 1997 and previously served various operating capacities since being employed by Hurco in 1988. Richard Blake was named President of Hurco Machine Tool Products Division in November 1997 and Vice President of Hurco in January 1996. Mr. Blake also served as Managing Director of Hurco Europe, Ltd., a subsidiary of Hurco, from December 1993 until October 1998. Mr. Blake previously served in several sales and marketing capacities since being employed by Hurco in 1989.1997. David E. Platts has been employed by Hurco since 1982, and was elected Vice President, ResearchTechnology and Business Development in 1989. Bernard C. Faulkner joined Hurco in March 2000 and was elected an Executive Officer in May 2000. Prior to joining Hurco, Mr. Faulkner was Vice President and General Manager for the Industrial Products division of Flair Corporation. Mr. Faulkner was employed by the Flair Corporation for four years. Stephen J. Alesia joinedhas been the Corporate Controller since joining Hurco in June 1996 and was elected an executive officer in September 1996. Prior to joining Hurco, Mr. Alesia was employed for seven years by Arthur Andersen LLP, an international public accounting firm. Robert W. Cruickshank has been owner of R. W. Cruickshank Company, a financial services firm since 1981. Mr. Cruickshank is also a director of Calgon Carbon Corporation and Friedman's Jewelers, Inc. Mr. Cruickshank has been a director since 2000. Michael Doar has been President of Ingersoll Contract Manufacturing Company, a subsidiary of Ingersoll International, since 1999. From 1989 until 1998, he held various management positions with Ingersoll Milling Machine Company. Mr. Doar has been a director since 2000. Hendrik J. Hartong, Jr. is a general partner of Brynwood Management III and Brynwood Management IV, L.P., the general partner of Brynwood Partners III and Brynwood Partners IV, L.P. Mr. Hartong is also a general partner of Brynwood Management II, L.P., the general partner of Brynwood Partners II, L.P., and until December 31, 1998, was a general partner of Brynwood Management, the general partner of Brynwood Partners Limited Partnership. Mr. Hartong has served as a director of Lincoln Snacks since June 1998. Mr. Hartong has also served as a director and Chairman of the Board of Air Express International Corporation since 1985. Mr. Hartong has been a director since 1986. Andrew L. Lewis IV has served as Chief Executive Officer of KRR Partners, L.P. since July 1993. Mr. Lewis was a consultant for USPCI of Pennsylvania, Inc. from 1991 to 1993. Mr. Lewis is also a director of Air Express International Corporation. Mr. Lewis has been a director since 1988. E. Keith Moore has served as President of Hurco International, Inc., a subsidiary of the Hurco, from April 1988 until December 1999. Mr. Moore is also a director of Met-Coil Systems Corporation. Mr. Moore has been a director since 1990. Richard T. Niner was elected Chairman of the Board of Directors on March 9, 1999. Mr. Niner is a general partner of Wind River Associates. Mr. Niner is also a general partner of Brynwood Management II, L.P., the general partner of Brynwood Partners II, L.P., and until December 31, 1998, was a general partner of Brynwood Management, the general partner of Brynwood Partners Limited Partnership. Mr. Niner is also a director of Air Express International Corporation, Arrow International, Inc. and Case, Pomeroy & Company, Inc. Mr. Niner has been a director since 1986. 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. Mr. Noel has been a director since 1993. Charles E. Mitchell Rentschler has served as President and Chief Executive Officer of The Hamilton Foundry & Machine Co. since 1985. The Hamilton Foundry & Machine Co. filed a petition for relief under Chapter 11 of the Bankruptcy Code on October 10, 2000. Mr. Rentschler has been a director since 1986. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of our common stock, to file reports of ownership with the Securities and Exchange Commission and Nasdaq. Such persons are also required to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms received or written representations from certain reporting persons that they were not required to file a Form 5 to report previously unreported ownership or changes in ownership, we believe that, during our fiscal year ending October 31, 1999,2000, our officers, directors and greater than 10% beneficial owners complied with all filing requirements under Section 16(a). Item 11. EXECUTIVE COMPENSATION Summary Compensation The following table sets forth all compensation paid or accrued during each of the last three fiscal years to the Chief Executive Officer and each of the other four executive officers of Hurco (the Named Executive Officers) whose salary and bonus exceeded $100,000 during fiscal 1999. 2000. Summary Compensation Table
Long-Term Annual Compensation Compensation All Other ------------------------------------------ ------------ All OtherCompen- Name and Fiscal Salary Bonus Other Annual Securities Underlying Compensationsation Principal Position Year ($) ($)(1) Compensation ($) Options(2)(2) Options(3) ($) (3)(4) - ------------------ ------ ------ ------ ---------------- ---------- -------------------------- ------------ -------- Brian D. McLaughlin 2000 $278,076 90,000 -- 40,000 $52,506 President and CEO 1999 $268,077268,077 -- -- 50,000 $52,206 President and CEO52,206 1998 258,077 75,000 -- -- 52,206 1997 250,000 125,000 -- -- 51,726 Roger J. Wolf 2000 $173,462 50,000 -- 30,000 $46,933 Sr. VP, Secretary 1999 $165,946165,946 -- -- 25,000 $47,566 Sr. VP, Secretary47,566 Treasurer and CFO 1998 160,039 50,000 -- -- 48,064 Treasurer and CFO 1997 156,000 60,000 -- -- 47,086 James D. Fabris 2000 $185,576 65,000 -- 20,000 $24,284 Executive Vice 1999 $165,904165,904 -- -- 35,000 $23,984 Executive Vice23,984 President - Operations 1998 156,154 65,000 -- -- 24,054 Bernard C Faulkner 2000 $108,596 25,000 36,939 25,000 $17,151 President - Operations 1997 140,000 60,000 -- -- 23,504 Richard Blake 1999 $135,268 -- -- -- -- V.P. of Hurco and 1998 128,124 40,000 -- -- $1,791 President Hurco Machine 1997 108,550 41,750 -- -- 4,633 Tool Products DivisionNorth America David E. Platts 2000 $105,182 20,000 -- 10,000 $14,577 Vice President of 1999 $105,000105,000 -- -- 10,000 $14,802 Vice President of14,802 Technology & 1998 104,038 10,000 -- -- 15,436 Research &Business Development 1997 100,000 45,000 -- -- 13,153 - --------------------------- (1) Represents cash bonuses earned and paid in the subsequent year. (2) Represents shares of common stock underlying grants of options made during the year. We have not granted any Stock Appreciation Rights (SARs). (3) Represents our contribution- ---------------------------
(1) Represents cash bonuses earned and paid in the subsequent year. (2) Represents compensation related to relocation costs. (3) Represents shares of common stock underlying grants of options made during the year. We have not granted any Stock Appreciation Rights (SARs). (4) Represents contributions to defined contribution plans and split dollar life insurance premiums. During fiscal 1997, we initiated Split-Dollar Life Insurance Agreements with certain officers of Hurco. Under the terms of the agreements, we pay all of the premiums on behalf of the officers. We will be repaid the premiums from the policies' cash surrender value when the policies are terminated in accordance with the provisions of the agreements. Defined Contribution Plan Company paidPaid Split-Dollar Name Company Match Life Insurance Premiums Brian D. McLaughlin $4,800$5,100 $47,406 Roger J. Wolf 4,8004,167 42,766 James D. Fabris 4,8005,100 19,184 Bernard C. Faulkner 2,776 14,375 David E. Platts 2,5872,362 12,215 Stock Options The following table sets forth information related to options granted and exercised during fiscal 19992000 and options held at fiscal year-end by the Named Executive Officers. We do not have any outstanding SARs. Option Grants During Fiscal 2000 Option Grants During Fiscal 1999 Fiscal Year % of Total Potential Realizable Number of Options Value at Assumed Annual Securities Granted to Rates of Stock Price Underlying Employees Exercise Appreciation for Option Options in Fiscal Price Expiration Term1Term(1) Name Granted2Granted(2) Year ($/SH) Date 5%($) 10%($) - ---- -------- ---- ------ ---- ----- ------------- Brian D. McLaughlin 50,000 16.4% $5.81340,000 22.1% $3.75 12/15/08 182,788 463,22107/09 $94,334 $239,061 Roger J. Wolf 25,000 8.2% $5.81330,000 16.6% $3.75 12/15/08 231,61107/09 70,751 179,296 James D. Fabris 35,000 11.5% $5.81320,000 11.1% $3.75 12/15/08 127,952 324,25507/09 47,167 119,531 Bernard C. Faulkner 25,000 13.8% $3.63 02/09/10 58,959 149,143 David E. Platts 10,000 3.3% $5.8135.5% $3.75 12/15/08 36,558 92,64407/09 23,584 59,765
1(1) The potential realizable value illustrates value that might be realized upon the exercise of the options immediately prior to the expiration of their terms, assuming the specified compounded rates of appreciation of Hurco's common stock from the date of grant through the term of the options. 2(2) Options may be exercised in fivethree annual installments commencing on the first anniversary of the date of grant. Aggregated Option Exercises in Fiscal 1999grant except for Bernard C. Faulkner's options which may be exercised in five annual installments. Aggregated Option Exercises in Fiscal 2000 and Year-End Option Values
Value of Number of Unexercised Shares Securities Underlying In-the-Money AcquiredShares Unexercised Options Options on ValueAcquired at FY-End (#) at FY-End ($)(1) on Value ------------------------ --------------------- Exercise Realized Exer- Unexer- Exer- Unexer- Name (#) ($) cisable cisable cisable cisable - ---- --------- --------- ------- ------- ------- ------- Brian D. McLaughlin -- -- 125,000 50,000 $70,000145,000 70,000 $61,250 -- Roger J. Wolf -- -- 50,000 25,000 7,00060,000 45,000 6,125 -- James D. Fabris 3,000 $6,375 49,000 43,000 26,375 -- Bernard C. Faulkner -- -- 36,000 39,000 33,250 -- Richard Blake -- -- 17,000 4,000 7,87525,000 -- David E. Platts -- -- 28,000 12,000 20,62533,000 17,000 18,750 --
- ----------------------------------------- (1) Value is calculated based on the closing market price of the common stock on October 31, 19992000 ($ 3.50)3.75) less the option exercise price. Compensation of Directors During 1999,2000, each director who is not a full-time employee of Hurco received a fee of $1,500 for each meeting of the Board of Directors attended and each such director also received $5,000 per quarter. Directors are also entitled to receive reimbursement for travel and other expenses incurred in attending such meetings. Mr. Niner received annual compensation of $72,000 for his services as Chairman of the Executive Committee of the Board of Directors. Employment Contracts Brian D. McLaughlin entered into an employment contract on December 14, 1987. The contract term is month-to-month. Mr. McLaughlin's salary and bonus arrangements are set annually by the Board of Directors. Other compensation, such as stock option grants, is awarded periodically at the discretion of the Board of Directors. As part of that contract, Mr. McLaughlin is entitled to 12 months' salary if we terminate 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 hiswe terminate employment is terminated without just cause. James D. Fabris entered into an employment contract on November 18, 1997. The contract term is unspecified. Mr. Fabris' salary and bonus arrangement are set annually by the Board of Directors. Other compensation, such as stock option grants, is awarded periodically at the discretion of the Board of Directors. As part of the contract, Mr. Fabris is entitled to 12 months' salary if hiswe terminate employment is terminated for any reason other than gross misconduct. Richard BlakeBernard C. Faulkner entered into an employment contract on April 21, 1999 which extends through December 31,February 4, 2000. The contract term is unspecified. Mr. Blake'sFaulkner's salary and bonus arrangements are set annually by the Compensation Committee of the Board of Directors. Other compensation, such as stock option grants, is awarded periodically at the discretion of the Board of Directors. As part of the contract,Compensation Committee. Mr. BlakeFaulkner is entitled to continuation of base12 months' salary through December 31, 2000, if we terminate his employment is terminated without cause. Mr. Blake may voluntarily resign in which case Hurco has no further obligation.for any reason. Compensation Committee Interlocks and Insider Participation During fiscal 1999,2000, the members of the Compensation Committee were Hendrik J. Hartong, Jr., O. Curtis Noel, Michael Doar and Charles E. Mitchell Rentschler.Robert W. Cruickshank. None of the Committee members is a current or former officer or employee of Hurco or any of its subsidiaries. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of January 15, 2000,2, 2001, regarding beneficial ownership of ourthe 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 Wellington Management Co. 646,900 (1) 10.9% 75 State Street Boston, Massachusetts 02109 The Prudential Insurance Company of America 489,364 8.2% 4 Gateway Center Newark, New Jersey 07102 The TCW Group, Inc. 324,800 (2) 5.5% 865 South Figueroa Street Los Angeles, California 90017 Brynwood Partners II L.P., et al 762,561 (3) 12.0% Two Soundview Avenue Greenwich, Connecticut 06830 Dimensional Fund Advisors 380,700 6.4% 1299 Ocean Avenue Santa Monica, CA 90401 FMR Corporation 379,028 (4) 6.4% 82 Devonshire Street Boston, Massachusetts 02109 Directors and Executive Officers Hendrik J. Hartong, Jr. 346,013 (3,5) 5.4% Andrew L. Lewis IV 34,000 (5) 0.5% Brian D. McLaughlin 183,586 (6,7) 2.9% E. Keith Moore 38,010 (8) 0.6% Richard T. Niner 694,549 (3,5) 10.9% O. Curtis Noel 25,000 (5) 0.4% Charles E. Mitchell Rentschler 45,000 (5,9) 0.7% Roger J. Wolf 68,492 (10) 1.1% James D. Fabris 43,500 (11) 0.7% Richard Blake 18,000 (12) 0.3% David E. Platts 31,700 (13) 0.5% Executive officers and directors 1,254,849 (14) 19.7%Shares Beneficially Owned Name and Address Number Percent Other Beneficial Owners Wellington Management Co. 645,000 (1) 11.3% 75 State Street Boston, Massachusetts 02109 The Prudential Insurance Company of America 489,364 (2) 8.6% 4 Gateway Center Newark, New Jersey 07102 The TCW Group, Inc. 324,800 (3) 5.7% 865 South Figueroa Street Los Angeles, California 90017 Dimensional Fund Advisors 398,900 (4) 7.0% 1299 Ocean Avenue Santa Monica, CA 90401 FMR Corporation 379,028 (5) 6.7% 82 Devonshire Street Boston, Massachusetts 02109 Richard T. Niner 452,448 (6) 7.4% 1055 Washington Blvd. Box 9-5th Floor Stamford, CT 06901 Directors and Executive Officers Robert W. Cruickshank 10,100 0.2% Michael Doar -- -- James D. Fabris 52,500 (11) 1.0% Hendrik J. Hartong, Jr. 67,912 (6) 1.1% Brian D. McLaughlin 193,576 (7,8) 3.4% Richard T. Niner 452,448 (6) 7.4% O. Curtis Noel 25,000 (6) 0.4% David E. Platts 44,700 (12) 0.8% Charles E. Mitchell Rentschler 35,100 (6,9) 0.6% Roger J. Wolf 73,492 (10) 1.4% Executive officers and directors 999,494 (13) 16.3% as a group (12 persons)
(1) According to the most recent public filings,a Schedule 13G, dated December 31, 1999, Wellington Management Co. has shared voting power for all shares. (2) According to a Schedule 13G, dated December 31, 1999, the most recent public filings,Prudential Insurance Company of America has sole voting power for all shares. (3) According to a Schedule 13G, dated December 31, 1999, the TCW Group, Inc. has shared voting power for all shares. (3) Represents shares owned by(4) According to a group, consisting of Brynwood Partners II L.P. ("Brynwood II"), its general partner, Brynwood Management II, L.P. ("Brynwood Management II"), and the partners of Brynwood Management, Hendrik J. Hartong, Jr., and Richard T. Niner. Brynwood Management II has shared voting and dispositive power over 278,001 shares; Mr. HartongSchedule 13G, dated December 31, 1999, Dimensional Fund Advisors has sole voting and dispositive power over 68,012 (including 25,000 shares subject to the exercise of non-qualified options) shares and shared voting and dispositive power over 278,001 shares; Mr. Niner has sole voting and dispositive power over 416,548 (including 25,000 shares subject to the exercise of non-qualified options) shares and shared voting and dispositive power over 278,001for all shares. The shares in the table for Mr. Hartong and Mr. Niner include those shares over which they have voting and investment power. (4)(5) According to most recent public filings,a Schedule 13G, dated December 31, 1999, FMR Corporation has no voting power for any of the shares. (5)(6) Includes 25,000 shares subject to the exercise of non-qualified options that are exercisable within 60 days. (6)(7) Includes 135,000158,333 shares subject to options held by Mr. McLaughlin that are exercisable within 60 days. (7)(8) Includes 10,986 shares owned by Mr. McLaughlin's wife and children, as to which he may be deemed to have beneficial ownership. (8) Includes 11,000 shares subject to options that are exercisable within 60 days. (9) Includes 1,00010,100 shares owned by Mr. Rentschler's wife, as to which he may be deemed to have beneficial ownership. (10) Includes 55,00070,000 shares subject to options that are exercisable within 60 days. (11) Includes 43,00055,667 shares subject to options that are exercisable within 60 days. (12) Includes 17,00036,333 shares subject to options that are exercisable within 60 days. (13) Includes 30,000431,666 shares subject to options that are exercisable within 60 days. (14) Includes 421,000 shares subject to options that are exercisable within 60 days. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Hurco and Air Express International (AEI) are related parties because a common group of shareholders held a significant ownership interest in both companies during fiscal 1999. AEI provides freight forwarding and shipping services for us. The cost of these freight services are negotiated on an arms length basis and amounted to $4.3 million during fiscal 1999.None 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...............................20 Consolidated Statements of Operations - years ended October 31, 1999, 1998 and 1997..........................21 Consolidated Balance Sheets - as of October 31, 1999 and 1998....22 Consolidated Statements of Cash Flows - years ended October 31, 1999, 1998 and 1997..........................23 Consolidated Statements of Changes in Shareholders' Equity - years ended October 31, 1999, 1998 and 1997....................24 Notes to Consolidated Financial Statements.......................25 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, 1999. (c) Exhibits Exhibits are filed with this Form 10-K or incorporated herein by reference as listed on Pages(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........................... 20 Consolidated Statements of Operations - years ended October 31, 2000, 1999, and 1998 .................... 21 Consolidated Balance Sheets - as of October 31, 2000 and 1999 22 Consolidated Statements of Cash Flows - years ended October 31, 2000, 1999, and 1998..................... 23 Consolidated Statements of Changes in Shareholders' Equity - years ended October 31, 2000, 1999, and 1998............... 24 Notes to Consolidated Financial Statements................... 25 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, 2000. (c) Exhibits Exhibits are filed with this Form 10-K or incorporated herein by reference as listed on pages 49 and 50.
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended October 31, 2000, 1999, and Qualifying Accounts and Reserves for the years ended October 31, 1999, 1998 and 1997 (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, 2000 $ 687 $ 185 $ -- $ 131 (1) $ 741 ======== ======= ======= ======== ======== October 31, 1999 $ 769 $ 231 $ -- $ 313 3(2) $ 687 ======== ======= ======= ======== ======== October 31, 1998 $ 757 $ 280 $ -- $ 268 2(3) $ 769 ======== ======= ======= ======== ======== October 31, 1997 $ 785 $ 73 $ -- $ 101 1 $ 757 ======== ======== ======= ======== ======== Accrued warranty expenses for the year ended: October 31, 2000 $ 968 $ 430 $ -- $ 567 $ 831 ======== ======= ======= ======== ======== October 31, 1999 $ 1,060 $ 533 $ -- $ 625 $ 968 ======== ======= ======= ======== ======== October 31, 1998 $ 1,452 $ 503 $ -- $ 895 $ 1,060 ======== ======= ======= ======== ======== October 31, 1997 $ 1,425 $ 1,321 $ -- $ 1,294 $ 1,452 ======== ======= ======= ======== ======== Accrued restructuring expenses for the year ended: October 31, 2000 $ 363 $ 300 $ -- $ 23 $ 640 ======== ======= ======== ======== ======== October 31, 1999 $ 690 $ (103) $ -- $ 224 $ 363 ======== ======= ======== ======== ======== October 31, 1998 $ -- $ 1,162 $ 471-- $ --472 $ 690 ======== ======= ======== ======== =================
1(1) Receivable write-offs of $106,000,$140,000, net of cash recoveries on accounts previously written off of $5,000. 2$9,000. (2) Receivable write-offs of $337,000, net of cash recoveries on accounts previously written off of $24,000. (3) Receivable write-offs of $280,000, net of cash recoveries on accounts previously written off of $12,000. 3 Receivable write-offs of $337,000, net of cash recoveries on account previously written off of $24,000. EXHIBITS INDEX Exhibits Filed. The following exhibits are filed with this report: - -------------- 10.1 The third amendment to the amended and restated credit agreement and amendment to reimbursement agreement between the Registrant and Bank One, Indiana National Association and Bank One, Michigan (formerly known as NBD Bank) dated August 17, 1999. 10.2 Third amendment to European facility between the Registrant and The First National Bank of Chicago dated August 17, 1999. 10.3 Employment agreement between the Registrant and Richard Blake dated April 21, 1999. 10.4 Form of Director Non-Qualified Stock Option Agreement between the Registrant and Hendrick J. Hartong, Jr., Andrew L. Lewis IV, Richard T. Niner, O. Curtis Noel and Charles E. Mitchell Rentschler. 11 Statement re: computation of per share earnings 21 Subsidiaries of the Registrant 23 Consent of the 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 to Exhibit 3.1,3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended JulyJanuary 31, 1997.2000. 3.2 Amended and Restated By-Laws of the Registrant dated September 12, 1995, incorporated by reference to Exhibit 3.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996. 10.1 The Underlease between Dikappa (Number 220) Limited and Northern & London Investment Trust Limited dated December 2, 1982, incorporated by reference to Exhibit 10.13 to itsthe Registrant's Registration Statement on Form S-1, No.2-82804 dated April 1, 1983. 10.2 Non-Qualified10.2* Non-qualified Stock Option Agreement between the Registrant and O. Curtis Noel effective, March 3, 1993, incorporated by reference to Exhibit 10.44 to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1993. 10.310.3* Employment Agreement between the Registrant and Roger J. Wolf dated January 8, 1993, incorporated by reference to Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the year ended October 31, 1993. 10.410.4* Non-qualified Stock Option Agreement between the Registrant and Hendrik J. Hartong, Jr., effective July 8, 1996 incorporated by reference to Exhibit 10.47 to the Registrant's Report on Form 10-K for the year ended October 31, 1996. 10.510.5* Form of Director Non-qualified Stock Option Agreement between the Registrant and Hendrik J. Hartong, Jr., Andrew L. Lewis IV, effective July 8, 1996Richard T. Niner, O. Curtis Noel and Charles E. Mitchell Rentschler, incorporated by reference toas Exhibit 10.4810.2 to the Registrant's Report on Form 10-K for the year ended October 31, 1996. 10.61999. 10.6* Non-qualified Stock Option Agreement between the Registrant and Richard T. Niner, effective July 8, 1996 incorporated by reference to Exhibit 10.49 to the Registrant's Report on Form 10-K for the year ended October 31, 1996. 10.710.7* Non-qualified Stock Option Agreement between the Registrant and O. Curtis Noel, effective July 8, 1996 incorporated by reference to Exhibit 10.50 to the Registrant's Report on Form 10-K for the year ended October 31, 1996. 10.8 10.8* Non-qualified Stock Option Agreement between the Registrant and Charles E. Mitchell Rentschler, effective July 8, 1996 incorporated by reference to Exhibit 10.51 to the Registrant's Report on Form 10-K for the year ended October 31, 1996. 10.910.9* Amended 1997 Stock Option and Incentive Plan, effective May 29, 1997, incorporated by reference as Exhibit 10.1 to Exhibit 10.52 inthe Registrant's Report on Form 10-Q for the quarter ended July 31, 1997.2000. 10.10 Amended and Restated Credit Agreement and Amendment to Reimbursement Agreement, effective September 8, 1997 between the Registrant and NBD Bank, N.A. and NBD Bank incorporated by reference to Exhibit 10.10 into the Registrant's Report on Form 10-K for the year ended October 31, 1997. 10.11 Second Amended and Restated Senior Note Agreement between the Registrant and Principal Mutual Life Insurance Company effective September 8, 1997 incorporated by reference to Exhibit 10.11 into the Registrant's Report on Form 10-K for the year ended October 31, 1997. 10.12 Letter Agreement (European Facility) dated September 8, 1997, between Registrant's subsidiaries and The First National Bank of Chicago incorporated by reference to Exhibit 10.12 into the Registrant's Report on Form 10-K for the year ended October 31, 1997. 10.13 Guaranty Agreement dated September 8, 1997, between the Registrant and The First National Bank of Chicago incorporated by reference to Exhibit 10.13 into the Registrant's Report on Form 10-K for the year ended October 31, 1997. 10.14 Guaranty Agreement dated September 8, 1997, between Autocon Technologies, Inc. and The First National Bank of Chicago incorporated by reference to Exhibit 10.14 into the Registrant's Report on Form 10-K for the year ended October 31, 1997. 10.15 Employment agreement between the Registrant and James D. Fabris dated November 18, 1997, incorporated by reference as exhibitExhibit 10.15 to the Registrant's Quarterly Report ofon Form 10-Q for the quarter ended January 31, 1998. 10.16 The first amendmentFirst Amendment to the amendedThe Amended and restated credit agreementRestated Credit Agreement and amendmentAmendment to reimbursement agreementReimbursement Agreement between the Registrant and NBD Bank N.A. dated September 29, 1998, incorporated by reference as Exhibit 10.1 to the Registrant's Annual Report on Form 10-K forFor the year ended October 31, 1998. 10.17 The second amendmentSecond Amendment to the amendedAmended and restated credit agreementRestated Credit Agreement and amendmentAmendment to reimbursement agreementReimbursement Agreement between the Registrant and NBD Bank N.A. dated December 19, 1998, incorporated by reference as Exhibit 10.1 to the Registrant's Quarterly Report of Form 10Q10-Q for the quarter ended January 31, 1999. 10.18 Sublease between Autocon Technologies, Inc. and Robert Bosch Corporation dated April 30, 1999, incorporated by reference as Exhibit 10.1 to the Registrant's Annual Report on Form 10-Q for the quarter ended April 30, 1999. 10.19* Employment agreement between the Registrant and Bernard C. Faulkner dated February 4, 2000, incorporated by reference as Exhibit 10.1 to the Registrant's Report of Form 10-Q for the quarter ended April 30, 2000. 10.20 The Third Amendment to The Amended and Restated Credit Agreement and Amendment to Reimbursement Agreement between the Registrant and Bank One, Indiana National Association and Bank One, Michigan (formerly known as NBD Bank) dated August 17, 1999, incorporated by reference as Exhibit 10.1 to the Registrant's Report on Form 10-K for the year ended October 31, 1999. 10.21 Third amendment to European facility between the Registrant and The First National Bank of Chicago dated August 17, 1999, incorporated by reference as Exhibit 10.2 to the Registrant's Report on Form 10-K for the year ended October 31, 1999. - ------------------------------- * The indicated exhibit is a management contract, compensatory plan, or arrangement required to be listed by Item 601 of Regulation S-K 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 27th day of January, 2000.2001. 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 27, 200026, 2001 - ----------------------------------- Brian D. McLaughlin, Director, President and Chief Executive Officer of Hurco Companies, Inc. (Principal Executive Officer) _________________/s/ ROGER J. WOLF January 27, 200026, 2001 - ------------------------------------------------------------------------------- Roger J. Wolf Senior Vice-President, Secretary, Treasurer and Chief Financial Officer of Hurco Companies, Inc. (Principal Financial Officer) _____________________/s/ STEPHEN J. ALESIA January 27, 200026, 2001 - -------------------------------------------------------------------------- Stephen J. Alesia Corporate Controller of Hurco Companies, Inc. (Principal Accounting Officer) ____________________________/s/ HENDRIK J. HARTONG, JR. January 27, 200026, 2001 - -------------------------------------------------------------------------- Hendrik J. Hartong, Jr., Director ______________________/s/ ROBERT W. CRUICKSHANK January 27, 200026, 2001 - -------------------------------------- Andrew L. Lewis, IV,-------------------------------------------- Robert W. Cruickshank, Director __________________/s/ MICHAEL DOAR January 27, 200026, 2001 - ------------------------------------------ E. Keith Moore,-------------------------------------------- Michael Doar, Director ____________________/s/ RICHARD T. NINER January 27, 200026, 2001 - ------------------------------------------------------------------------------------- Richard T. Niner, Director _________________/s/ O. CURTIS NOEL January 27, 200026, 2001 - ----------------------------------------------------------------------------------------- O. Curtis Noel, Director ____________________________/s/ CHARLES E. M. RENTSCHLER January 27, 200026, 2001 - ----------------------------------------------------------------------------- Charles E. M. Rentschler, Director