SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended JulyJanuary 31, 20022003 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from
_________ to _________.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1150732
----------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
- ------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to the filing
requirements for the past 90 days:
Yes X No
--- ---Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No X
The number of shares of the Registrant's common stock outstanding as of
August
31, 2002February 28, 2003 was 5,583,158.
HURCO COMPANIES, INC.
July 2002INC
January 2003 Form 10-Q Quarterly Report
Table of Contents
Part I - Financial Information
Item 1. Condensed Financial Statements
Condensed Consolidated Statement of Operations -
Three months and nine months ended July 31, 2002 and 2001.........3
Condensed Consolidated Balance Sheet -
As of July 31, 2002 and October 31, 2001..........................4
Condensed Consolidated Statement of Cash Flows -
Three months and nine months ended July 31, 2002 and 2001.........5
Condensed Consolidated Statement of Changes in Shareholders' Equity -
Nine months ended July 31, 2002 and 2001..........................6
Notes to Condensed Consolidated Financial Statements..................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........17
Item 4. Controls and Procedures..............................................19
Part II - Other Information
Item 1. Legal Proceedings....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
Signatures....................................................................21
Certifications................................................................22
Page
Item 1. Condensed Financial Statements
Condensed Consolidated Statements of Operations -
Three months ended January 31, 2003 and 2002.......................... 3
Condensed Consolidated Balance Sheets -
As of January 31, 2003 and October 31, 2002........................... 4
Condensed Consolidated Statements of Cash Flows -
Three months ended January 31, 2003 and 2002.......................... 5
Consolidated Statements of Changes in Shareholders' Equity
Three months ended January 31, 2003 and 2002.......................... 6
Notes to Condensed Consolidated Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............... 14
Item 4. Controls and Procedures................................................... 16
Part II - Other Information
Item 1. Legal Proceedings......................................................... 17
Item 6. Exhibits and Reports on Form 8-K.......................................... 17
Signatures.............................................................................. 18
Certifications.......................................................................... 19
PART 1I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Hurco Companies, Inc.HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF OPERATIONS
(In thousands, except per-share data)
Three Months Ended
Nine Months Ended
JulyJanuary 31,
July 31,
-------------------- --------------------2003 2002
2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)---------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Sales and service fees $18,204 $21,678 $51,719 $71,043fees..................................................... $ 15,953 $ 18,520
Cost of sales and service 13,823 16,391 40,369 53,169
Cost of sales - restructuring - - 1,083 -
-------- -------- -------- --------service.................................................. 11,959 14,517
----------- ----------
Gross profit 4,381 5,287 10,267 17,874profit.......................................................... 3,994 4,003
Selling, general and administrative expenses 4,672 5,896 14,421 17,941expenses............................... 4,428 5,214
Restructuring expense and other expense, net - 395 1,751 67
-------- -------- -------- --------net............................... -- 356
---------- -----------
Operating loss (291) (1,004) (5,905) (134)
License fee income, net - 3 163 512loss........................................................ (434) (1,567)
Interest expenseexpense........................................................... 159 233 469 612177
Other income, (expense), net (47) 41 (10) 464
-------- -------- -------- --------
Income (loss)net.......................................................... 116 202
--------- ----------
Loss before taxes (497) (1,193) (6,221) 230income taxes.............................................. (477) (1,542)
Provision for income taxes 154 136 282 669
-------- -------- -------- --------taxes................................................. 105 99
--------- ----------
Net lossloss................................................................... $ (651)(582) $ (1,329) $ (6,503) $ (439)
======== ======== ======== ========(1,641)
=========== ===========
Loss per common share
BasicBasic................................................................. $ (0.12)(.10) $ (0.24)(.29)
=========== ===========
Diluted............................................................... $ (1.16)(.10) $ (0.08)
======== ======== ======== ========
Diluted $ (0.12) $ (0.24) $ (1.16) $ (0.08)
======== ======== ======== ========(.29)
=========== ===========
Weighted average common shares outstanding
BasicBasic................................................................. 5,583 5,5815,582
========== ==========
Diluted............................................................... 5,583 5,7005,582
========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements.
HURCO COMPANIES, INC. January 31, October 31,
CONDENSED CONSOLIDATED BALANCE SHEETS 2003 2002
(Dollars in thousands)
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents........................................... $ 3,232 $ 4,358
Cash - restricted................................................... 1,176 --
Accounts receivable................................................. 13,161 13,425
Inventories......................................................... 23,774 22,548
Other............................................................... 1,361 1,204
---------- --------
Total current assets............................................ 42,704 41,535
---------- --------
Property and equipment:
Land ............................................................ 761 761
Building............................................................ 7,203 7,203
Machinery and equipment............................................. 10,305 10,144
Leasehold improvements.............................................. 436 396
Less accumulated depreciation and amortization.................. (10,001) (9,696)
---------- --------
8,704 8,808
---------- --------
Software development costs, less amortization............................ 1,580 1,604
Investments and other assets............................................. 5,392 5,205
---------- --------
$ 58,380 $ 57,152
========== ========
======== ======== ========
Diluted 5,583 5,624 5,583 5,736
========LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 10,770 $ 9,856
Accrued expenses.................................................... 10,048 10,016
Bank debt........................................................... 3,479 --
Current portion of long-term debt.................................. 1,653 1,313
--------- --------
Total current liabilities....................................... 25,950 21,185
--------- --------
Non-current liabilities:
Long-term debt...................................................... 4,735 7,572
Deferred credits and other ......................................... 380 378
--------- -------
5,115 7,950
--------- -------
Shareholders' equity:
Preferred stock: no par value per share; 1,000,000
shares authorized; no shares issued............................... -- --
Common stock: no par value; $.10 stated value per
share; 12,500,000 shares authorized; 5,583,158
and 5,583,158 shares issued, respectively ...................... 558 558
Additional paid-in capital.......................................... 44,717 44,717
Accumulated deficit................................................. (10,755) (10,173)
Accumulated other comprehensive income.............................. (7,205) (7,085)
--------- ---------
Total shareholders' equity...................................... 27,315 28,017
--------- ---------
The accompanying notes are an integral part of the condensed consolidated $ 58,380 $ 57,152
financial statements. ========== ========
HURCO COMPANIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended January 31,
2003 2002
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
Cash flows from operating activities:
Net loss.................................................................... $ (582) $ (1,641)
Adjustments to reconcile net income to net
cash provided by (used for) operating activities:
Equity (income) loss of affiliates...................................... (96) 44
Restructuring expense and other expense, net............................ -- 225
Depreciation and amortization.......................................... 349 513
Change in assets and liabilities:
(Increase) decrease in accounts receivable.............................. 896 1,378
(Increase) decrease in inventories...................................... (288) 2,820
Increase (decrease) in accounts payable.................... 788 (2,471)
Increase (decrease) in accrued expenses................................. (1,535) 145
Other................................................................... (307) 275
-------- --------
Net cash provided by (used for) operating activities.................... (775) 1,288
-------- --------
Cash flows from investing activities:
Proceeds from sale of equipment............................................. -- 45
Purchases of property and equipment......................................... (102) (292)
Software development costs.................................................. (66) (157)
Change in restricted cash................................................... (1,176) --
Other....................................................................... (8) (21)
-------- --------
Net cash used for investing activities.................................. (1,352) (425)
-------- --------
Cash flows from financing activities:
Advances on bank credit facilities.......................................... 6,200 6,975
Repayment on bank credit facilities......................................... (5,366) (8,275)
Repayment of first mortgage................................................. (25) --
Proceeds from exercise of common stock options.............................. -- 4
-------- --------
Net cash provided by (used for) financing activities.................... 809 (1,296)
-------- --------
Effect of exchange rate changes on cash and cash equivalents..................... 192 (129)
-------- --------
Net decrease in cash and cash equivalents............................... (1,126) (562)
Cash and cash equivalents at beginning of period................................. 4,358 3,523
-------- --------
Cash and cash equivalents at end of period....................................... $ 3,232 $ 2,961
======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
Hurco Companies, Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per-share data)
July 31, October 31,
2002 2001
(unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,162 $ 3,523
Accounts receivable, net 11,786 14,436
Inventories 23,888 30,319
Other 1,366 1,232
-------- --------
Total current assets 40,202 49,510
-------- --------
Property and equipment:
Land 761 761
Building 7,202 7,187
Machinery and equipment 11,053 11,410
Leasehold improvements 1,175 1,059
Less accumulated depreciation and amortization (11,225) (11,653)
-------- --------
8,966 8,764
-------- --------
Software development costs, less amortization 1,945 3,066
Investments and other assets 3,200 4,877
-------- --------
$ 54,313 $ 66,217
======== ========
LIABILITIES ANDHURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,618 $ 9,936
Accrued expenses 8,108 8,081
Short-term debt 1,599 200
-------- --------
Total current liabilities 19,325 18,217
Non-current liabilities:
Long-term debt 4,986 11,800
Deferred credits and other obligations 379 732
-------- --------
Total non-current liabilities 5,365 12,532
Shareholders' equity:
Preferred stock: no par value per share; 1,000,000 shares
authorized; no shares issued - -
Common stock: no par value; $.10 stated value per share;
12,500,000 shares authorized; and 5,583,158 and
5,580,658 shares issued, respectively 558 558
Additional paid-in capital 44,717 44,714
Accumulated deficit (8,413) (1,910)
Accumulated other comprehensive income (7,239) (7,894)
-------- --------
Total shareholders' equity 29,623 35,468
-------- --------
$ 54,313 $ 66,217
======== ========
The accompanying notes are an integral part ofFor the condensed consolidated financial statements.
Hurco Companies, Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
Three Months Ended Nine Months Ended
Julyended January 31, July 31,
------------------ -------------------2003 and 2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Cash flows from operating activities:
Net loss $ (651) $ (1,329) $ (6,503) $ (439)
Adjustments to reconcile net loss to net
cash provided by (used for) operating activities:
Restructuring and other expense (173) 140 2,346 (188)
Equity in (income) loss of affiliates (11) (54) - (366)
Depreciation and amortization 485 613 1,475 1,724
Change in assets and liabilities:
(Increase) decrease in accounts receivable (372) 3,493 3,197 622
(Increase) decrease in inventories 1,638 (1,230) 6,391 (7,011)
Increase (decrease) in accounts payable 1,404 (3,776) (430) (761)
Increase (decrease) in accrued expenses 447 203 (568) 1,425
Other (647) 264 (613) (16)
-------- -------- -------- --------
Net cash provided by (used for) operating activities 2,120 (1,676) 5,295 (5,010)
Cash flows from investing activities:
Proceeds from sale of equipment 26 9 71 24
Purchase of property and equipment (480) (461) (1,096) (912)
Software development costs (132) (223) (417) (485)
Proceeds from terminated loan and warrant agreements - - 1,000 -
Other investments 155 (296) 46 (600)
-------- -------- -------- --------
Net cash provided by (used for) investing activities (431) (971) (396) (1,973)
Cash flows from financing activities:
Advances on bank credit facilities 6,450 11,950 19,025 36,600
Repayment on bank credit facilities (8,350) (7,850) (28,925) (24,550)
Proceeds from first mortgage 4,500 --
Repayment on first mortgage (15) - (15) -
Repayment of term debt (1,786)
Proceeds from exercise of common stock options 4 35
Purchase of common stock (1,706)
-------- -------- -------- --------
Net cash provided by (used for) financing activities (1,915) 4,100 (5,411) 8,593
-------- -------- -------- --------
Effect of exchange rate changes on cash 170 (25) 151 (311)
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (56) 1,428 (361) 1,299
Cash and cash equivalents at beginning of period 3,218 3,255 3,523 3,384
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 3,162 $ 4,683 $ 3,162 $ 4,683
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
Common Stock
---------------------------
Accumulated
Shares Additional Other
Issued & Stated Paid-In Accumulated Comprehensive
Outstanding ValueAmount Capital Deficit Income(loss)Income Total
------------- ------- ----------- --------------- -------------- -------- ---------- ------------ ------------- --------
(dollars------
(Dollars in thousands)
Balances, October 31, 2000 5,955,3592001 5,580,658 $558 $44,714 $ 596 $46,347 $ (313) $ (7,739) $38,891(1,910) $(7,894) $35,468
- ------------------------------------- ========== ====== ======== ========= ====== ======= ======= ==================== =======
Net income (439) (439)loss......................... -- -- -- (1,641) -- (1,641)
Translation of foreign currency
financial statements 22 22statements.......... -- -- -- -- (511) (511)
Unrealized loss ofgain on derivative
instruments (120) (120)instruments..................... -- -- -- -- 555 555
------
Comprehensive income (loss) (537)loss............... -- -- -- -- -- (1,597)
Exercise of Common Stock Options 16,400 1 34 35
Repurchase of Common Stock (391,101) (39) (1,667) (1,706)Options. 2,500 -- 3 --
---------- ------ -------- ------- --------- ----------- -------
Balances, JulyJanuary 31, 2001 5,580,6582002 5,583,158 $558 $44,717 $ 558 $44,714 $ (752) $ (7,837) $36,683(3,551) $(7,850) $33,874
- ------------------------------------- =========== ====== ======== ========= ====== ======= ======= ==================== =======
Balances, October, 31 2001 5,580,658 $ 558 $44,714 $ (1,910) $ (7,894) $35,4682002 5,583,158 $558 $44,717 $(10,173) $(7,085) $28,017
- ------------------------------------- =========== ====== ======== ========= ====== ======= ======= ==================== =======
Net loss (6,503) (6,503)Loss......................... -- -- -- (582) -- (582)
Translation of foreign currency
financial statements 870 870statements.......... -- -- -- -- 648 648
Unrealized gainloss on derivative
instruments (215) (215)instruments...................... -- -- -- -- (768) (768)
-------
Comprehensive income (loss) (5,848)
Exercise of Common Stock 2,500 3 3loss............... -- -- -- -- -- (702)
------------- -------- -------- ---------- ------ -------- ------- -------------------- -------
Balances, JulyJanuary 31, 20022003 5,583,158 $ 558$558 $44,717 $ (8,413) $ (7,239) $29,623
=========$(10,755) $(7,205) $27,315
- ------------------------------------- ============= ====== ======= ======= ========= =============== ========== =========== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. GENERAL
The unaudited Condensed Consolidated Financial Statements include the
accounts of Hurco Companies, Inc. and its consolidated subsidiaries. We
design and produce interactive personal computer (PC) based, computer control systems and software and
computerized machine tools for sale through a world wide sales,our distribution network to the
worldwide metal working market. We also provide software options, computer
control upgrades, accessories and replacement parts for our products, as well as
customer service and distribution network.training support.
The condensed financial information as of JulyJanuary 31, 20022003 and for the ninethree
months ended JulyJanuary 31, 20022003 and JulyJanuary 31, 20012002 is unaudited, however, in
our opinion, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results
for the interim periods. We suggest that you read these condensed financial
statements in conjunction with the financial statements and the notes
thereto included in our Annual Report on Form 10-K for the year ended
October 31, 2001.2002.
2. LIQUIDITY MATTERS
Our domestic bank credit facility matures June 30, 2003. Effective September 1,
2002, the European credit facility was amended, extending the maturity date to
August 31, 2003. We were in compliance with all of our loan covenants at July
31, 2002. We are currently in discussions with other lenders for a long-term
domestic replacement credit facility, and while we believe that we will be able
to obtain a replacement credit facility in fiscal 2003 under acceptable terms;
no such assurance can be given.
3. HEDGING
We enter into foreign currency forward exchange contracts periodically to
hedge certain forecast inter-company sales and forecast inter-company and
third-party purchases denominated in foreign currencies (primarily Pound
Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is to
mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting
from the sales and purchases denominated in foreign currencies will be
adversely affected by changes in exchange rates. These forward contracts
have been designated as cash flow hedge instruments, and are recorded in the
Condensed Consolidated Balance Sheet at fair value in Other Current Assetscurrent assets
and Accrued Liabilities.expenses. Gains and losses resulting from changes in the fair
value of these hedge contracts are deferred in Accumulated Other Comprehensive Incomeother comprehensive
income and recognized as an adjustment to the related sale or purchase
transaction in the period that the transaction occurs. Net gains (losses) on
cash flow hedge contracts which we reclassified from Accumulated Other Comprehensive Incomeother
comprehensive income to Cost of Salessales in the first quarter ended JulyJanuary 31,
2003 and 2002 were $47,000.($158,000) and $435,000, respectively.
At JulyJanuary 31, 2002,2003, we had $685,000$1,413,000 of realized and unrealized losses related to cash
flow hedges deferred in Accumulated Other Comprehensive Income,other comprehensive income, which we
expect to recognize in Cost of Salessales within the next twelve months. Cash
flow hedge contracts mature at various dates through November 2002.
October 2003.
We also enter into foreign currency forward exchange contracts to protect
against the effects of foreign currency fluctuations on receivables and
payables denominated in foreign currencies. These derivative instruments
are not designated as hedges under the Statement of Financial Accounting
Standards No. 133, "Accounting Standards for Derivative Instruments and
Hedging Activities" (SFAS 133), and, as a result, changes in fair value are
reported currently as Other Income
(Expense)income, net in the Consolidated Statement of
Operations consistent with the transaction gain or loss on the related foreign
denominated receivable or payable. Such net transaction gains were $37,000
and (losses) were $(52,000) and $7,000$35,000 for the quarters ended JulyJanuary 31, 2003 and 2002, and 2001, respectively.
4.
3. EARNINGS PER SHARE
Basic and diluted earnings per common share are based on the weighted
average number of our shares of common stock outstanding. Diluted earnings
per common share give effect to outstanding stock options using the
treasury method. The impact of 30,000 potentially issuable shares for the nine months ended July 31,
2002 and 3,000 potentially issuable sharesall stock options for the three months ended
JulyJanuary 31, 20022003 were excluded from the computation of diluted earnings per
share because their effect would be anti-dilutive.
5.4. ACCOUNTS RECEIVABLE
The allowance for doubtful accounts was $876,000$744,000 as of JulyJanuary 31, 20022003 and
$907,000$689,000 as of October 31, 2001.2002.
5. INVENTORIES
Inventories, priced at the lower of cost (first-in, first-out method) or market, are summarized below (in thousands):
January 31, 2003 October 31, 2002
---------------- ----------------
Purchased parts and sub-assemblies $ 6,093 $ 6,677
Work-in-process 1,614 2,251
Finished goods 16,067 13,620
----------- ----------
$ 23,774 $ 22,548
=========== ==========
6. INVENTORIES
Inventories, priced atSEGMENT INFORMATION
We operate in a single segment: industrial automation systems. We design
and produce interactive computer control systems and software and
computerized machine tools for sale through our distribution network to the
lower of cost (first-in, first-out method) or market,
are summarized below (in thousands):
July 31, 2002 October 31, 2001
------------- ----------------
Purchasedworldwide metal working market. We also provide software options, computer
control upgrades, accessories and replacement parts for our products, as well
as customer service and sub-assemblies $ 6,466 $ 7,853
Work-in-process 1,368 1,256
Finished goods 16,054 21,210
--------- --------
$ 23,888 $ 30,319
========= ========training support.
7. RESTRUCTURING EXPENSE AND OTHER EXPENSE, NET
We recorded charges aggregating $2.5 million in the second quarter ofDuring fiscal 2002, for the write-down of assets related to the repositioning of product lines
and severance costs associated with cost reduction programs. These charges,
combined with a severance charge of $356,000 in the first quarter, total $2.8
million for fiscal 2002 year-to-date.
The charges include (in thousands):
Cost of sales - restructuring:
Inventory write-down related towe discontinued several under-performing product lines,
sold the related assets and discontinued a software development project, to
enable us to focus our resources and technology development on our core
products, which consist primarily of general purpose computerized machine
tools for the metal cutting industry (vertical machining centers) into which
our proprietary Ultimax software and computer control systems have been
fully integrated. At January 31, 2003, we had $85,000 accrued for costs
related to seven employees that are being discontinued $1,083
Restructuring expense:
Write-off of capitalized software development cost resulting from
termination of development project duepaid severance in future periods and
$1.1 million for potential expenditures related to product line repositioning 1,036
Severance cost 827
Other expense (credit):
Foreigna disputed claim in the
United Kingdom regarding a terminated facility lease termination liability (Note 11) 165
Termination of software development agreement (Note 9) (277)
---------
1,751
---------
Total $2,834
=========(In thousands).
The balance of the reserve for Restructuring expense and other expense, net at July 31, 2002 is as follows:
Balance ProvisionCharges to Balance
(in thousands)Description 10/31/01 (Credit) Used 7/31/02 ------------ ------------- ------------ ------------
------------ ------------- ------------ ------------Provision Accrual 1/31/03
- ----------- -------- ---------- ---------- ---------
Cost of sales - restructuring:
Inventory write-down $-- $1,083 $1,083Severance $ 264 $ -- Restructuring expense:
Capitalized software development cost write-off -- 1,036 1,036 --
Severance costs 133 827 600 360
Other expense (credit):$ (179) $ 85
Foreign lease termination liability 60 1651,113 -- 225
Termination of software development agreement -- (277) (277)1,113
-------- ---------- ---------- ---------
Total $ 1,377 -- ------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Total $193 $2,834 $2,442 $585
============ ============= ============ ============$ (179) $ 1,198
The balance of $ 585,000 at July 31, 2002 represents severance costs related to
employees that will be paid in future periods and the estimated liability for a
foreign lease obligation. The severance provision recorded in the second quarter
of fiscal 2002 represents 46 domestic positions that have been or will be
eliminated in fiscal 2002. At July 31, 2002, 32 employees had been paid the full
amount of their severance while the remaining employees will be paid at
different times through the second quarter of fiscal 2003.
8. TERMINATION OF AGREEMENTS
During the second quarter of fiscal 2002, we terminated certain software
development and loan agreements previously entered into in fiscal 2001. We
received early repayment of our investment in a secured loan and warrants
totaling $1.0 million. We were also reimbursed for software development fees
previously paid and expensed, resulting in a credit of $277,000 which is
reflected in Restructuring expense and other expense, net in the second quarter
of fiscal 2002. Neither party has any remaining obligations to the other.
9. DEBT AGREEMENTS
On April 30, 2002, we obtained a $4.5 million first mortgage loan on our
Indianapolis corporate headquarters. The loan bears an interest rate of 7?% per
annum and matures in April 2009. We are requiredcurrently in discussions with lenders to make principal payments overreplace our existing domestic
credit facility with a long-term credit facility in conjunction with
assessing our liquidity needs for fiscal 2004 and beyond. We expect the
seven-year term of the loan, based on a twenty-year amortization schedule.
On September 1, 2002, our 3.0 million EuroEuropean bank credit facility which was
entered into on January 8, 2002, was extended to August 31, 2003. Interest on
the facility is payable at 7.16% per annum or, at the Company's option, 1.75%
above EURIBOR for fixed rate borrowings. The facility is uncollateralized
however, the bank reserves the right of lien and collateral as provided in its
standard terms and conditions. No borrowings were outstanding on the facility
at July 31, 2002.
Effective April 30, 2002, we amended our bank credit agreement, extending the
maturity date to June 30, 2003, and reducing the bank's commitment to $10.0
million at June 30, 2002. Interest rate margins for borrowings under Libor or
the prime rate option are as follows:
Libor Prime
Margin Margin
------------ ----------
------------ ----------
May 1, 2002 - October 31, 2002 2.5% 0.5%
November 1, 2002 - January 31, 2003 3.0% 1.0%
February 1, 2003 - June 30, 2003 3.5% 1.5%
The net worth covenant was amended to require tangible net worth, exclusive of
Accumulated Other Comprehensive Income, to be not less than $32.5 million at
July 31, 2002,renewed for twelve-months on or before its
maturity date. We believe, but cannot assure you, that we will be able to
obtain a replacement domestic facility and $32.3 million thereafter. Our EBITDA (earnings before
interest, taxes, depreciationa renewed European facility under
acceptable terms. Failure to obtain replacement facilities would have a
material adverse effect on our business and amortization) requirements recorded on a
twelve consecutive month basis cannot be less than negative $2.75 million on
July 31, 2002, increasing to negative $2.15 million on October 31, 2002,
negative $750,000 at January 31, 2003 and positive $1.0 million at April 30,
2003. Other financial covenants were extended to June 30, 2003. A facility fee
previously payable August 1, 2002 was reduced to $50,000 from $100,000 and is
payable March 31, 2003, if we have not obtained a new financing arrangement by
that time.condition.
We were in compliance with all loan covenants at JulyJanuary 31, 2002,2003, and had additionalan
unused credit availability of $10.1 million, including $2.9 million under
the European bank credit facility.
10.$6.0 million.
9. LEASEHOLD REPAIRS CONTINGENCY
The lease for ourWe previously occupied a facility located in England under a lease that expired
in April 2002 and2002. The lease required that, following expiration of the lease,
we make certain repairs to the facility at the conclusionresulting from deterioration of the
lease
resulting from dilapidation of the facility that occurred during the lease term. The extentWe are vigorously contesting the amount of repairs to be completed are being negotiatedthe
claim made by the lessor and ashave recently entered into settlement discussions.
As of October 31, 2002, we established a result, the
costreserve of these repairs cannot be estimated. Our maximum liability$1.1 million for the repairs
and fees is believed to be approximately $800,000. However, this amount could be
reduced by statutory limitations or by a negotiated settlement. We believe our
minimum liability is approximately $225,000,claim,
which we have accrued at Julycontinue to believe is appropriate.
10. GUARANTEES
For the quarter ending January 31, 2002. We have engaged a firm that specializes in these types of claims and
intend to vigorously contest this matter.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the2003, we adopted Financial Accounting
Standards Board issuedInterpretation No. 45 ("FIN 45"), "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107
and Rescission of FASB Interpretation No. 34." FIN 45 clarifies the
requirements of FASB Statement No. 141,
"Business Combinations" (SFAS 141) and Statement No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 141 requires that all business combinations
initiated after June 30, 2001 be accounted5, Accounting for under the purchase method of
accounting. Under SFAS 142, amortization of goodwill will cease and the goodwill
carrying values will be tested periodically for impairment. We are required to
adopt SFAS 142, effective November 1, 2002 for goodwill and intangible assets
acquired prior to July 1, 2001. Goodwill and intangible assets acquired after
June 30, 2001 were subject immediatelyContingencies, relating to
the goodwill non-amortization and
intangible provisions of this statement. We believe the impact on our financial
statements will be immaterial.
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, "Accountingguarantor's accounting for, the Impairment or Disposal of Long-Lived Assets" (SFAS
144), which is effective for the fiscal year beginning November 1, 2002. SFAS
144 establishes a single model to account for impairment of assets to be held or
disposed of, incorporating guidelines for accounting and disclosure of, discontinued operations.the issuance of certain types
of guarantees.
From time to time, our German subsidiary guarantees third party lease
financing residuals in connection with the sale of certain machines in Europe.
At January 31, 2003 there were 23 third party guarantees totaling approximately
$1.1 million, all of which were entered into prior to January 1, 2003. A
retention of title clause allows us to obtain the machine should the customer
default on the payment terms to the financing company. If default occurs,
the proceeds obtained from liquidation of the machine would, we believe,
cover any payments required under the guarantee.
We believe the impactprovide warranties on our financial statements will
be immaterial.
In Juneproducts with respect to defects in material
and workmanship. The terms of these warranties are generally one year for
machines and shorter periods for service parts. We recognize a reserve with
respect to this obligation at the time of product sale, with subsequent
warranty claims recorded against the reserve. The amount of the warranty
reserve is determined based on historical trend experience and any known
warranty issues that could cause future warranty costs to differ from historical
experience. A reconciliation of the changes in our warranty reserve is
as follows (in thousands):
Warranty Reserve
-----------------------
Balance at October 31, 2002 $ 1,003
Provision for warranties during the Financial Accounting Standards Board issued Statement No. 146
"Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146).
SFAS 146 nullifies Emerging Issues Task Force (EITF 94-3) "Liability Recognition
for Certain Termination Benefits and Other Costsperiod 330
Charges to Exit an Activity." The
principal difference between the two pronouncements is that SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred whereas EITF 94-3 required a liability
for an exit plan to be recognized when an entity commitments to an exit plan. We
believe the impact on our financial statements will be immaterial.accrual (357)
Impact of translation 59
-----------
Balance at January 31, 2003 $ 1,035
===========
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
----------------------------------------------------------------------
The following discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes thereto appearing elsewhere herein. Certain
statements made in this report may constitute "forward-looking statements".
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks,
uncertainties and other factors that that may cause our actual results,
performance or achievements to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. These factors include, among others, changes in
general economic and business conditions that affect market demand for
machinemachines tools and related computer control systems, software products, and
replacement parts, changes in manufacturing markets, the success of our plans to reduce inventory and
operating costs, adverse currency
movements, innovations by competitors, quality and delivery performance by our
contract manufacturers and governmental actions and initiatives including import
and export restrictions and tariffs.
RESULTS OF OPERATIONS
Three Months Ended JulyJanuary 31, 20022003 Compared to Three Months Ended
JulyJanuary 31, 20012002
- -----------------------------------------------------------------------------------------------------------------------------------------------
The following tables set forth net sales by geographic region and product
category for the three-monthsquarters ended JulyJanuary 31, 2003 and 2002 and 2001 (unaudited, in
millions)(in thousands):
Net Sales and Service Fees by Geographic Region
Three Months Ended
JulyJanuary 31,
------------------------------------------------------------------------------------
2003 2002
2001
--------------- -------------
United States-------------------------- ----------------------
Americas $ 6,7895,989 37.5% $ 7,3125,458 29.5%
Europe 10,767 13,6759,720 60.9% 12,483 67.4%
Asia and Other 648 691
--------------- -------------
--------------- -------------Pacific 244 1.6% 579 3.1%
------------ ---------- ------------ -------
Total $15,953 100.0% $ 18,204 $ 21,678
=============== =============18,520 100.0%
============ ========== ============ =======
Net Sales and Service Fees by Product Category
Three Months Ended
JulyJanuary 31,
--------------------------------------------------------------------------------
2003 2002
2001
--------------- -------------------------------- ---------------------
Continuing Products and Services
Computerized Machine Tools $ 14,26612,689 79.6% $ 17,23914,022 75.7%
Computer Control Systems
and Software 866 1,363703 4.4% 937 5.1%
Service Parts 2,232 2,1791,533 9.6% 1,566 8.4%
Service Fees 840 897
--------------- -------------
--------------- -------------819 5.1% 755 4.1%
---------- ------- ---------- -------
Total $ 18,20415,744 98.7% $ 21,678
=============== =============
Sales and service fees for the third quarter ending July 31, 200217,280 93.3%
Discontinued Product 209 1.3% 1,240 6.7%
------------ ------- ---------- --------
Total $ 15,953 100.0% $ 18,520 100.0%
============ ======= ========== ========
* Discontinued product sales were $18.2
million, approximately $3.5 million, or 16%, lower than the corresponding 2001
period primarily due to declines in demandmade solely in the European market. European
sales represented 59% of totalUnited States.
Total sales and service fees were $16.0 million in the third fiscal
quarter, down somewhat from 63% in the prior year period. The dollar value of
European sales benefited from the stronger values of the Euro and Pound Sterling
currencies in relation to the U.S. dollar during the period. Third quarter sales
and service fees in the U.S. market declined $523,000, or 7%, which is
attributable to a 40% decline in metal forming products, some of which are being
discontinued. However, domestic sales and service fees related to metal cutting
products increased 8% over the prior year period and 23% over the immediately
preceding quarter of 2002, reflecting improving market conditions in the U.S.
New order bookings for the thirdfirst quarter of fiscal
2002 were $17.62003, a $2.6 million, an
increase of 7% from the second quarter of this year, but down 8% from the $19.2
million booked in the corresponding prior year period. New orders for machine
tools declined compared to the prior year period. In the U.S. market, machine
tool orders increased 92% in units and 54% in dollars from the prior year third
quarter, due largely to the successful introduction in the quarter of a new
entry-level machining center model and increased unit sales of discontinued
models at discounted prices. However, the increase in domestic orders was more
than offset by reduced demand in Europe, where new machine tool orders declined
30% in units and 27% in dollars asor 14%, decline compared to the prior year period.
The dollar
value of European orders benefited somewhat from stronger European currenciesdecline was primarily attributable to decreased sales in the most recent quarter. Backlog was $6.6 million at July 31, 2002 compared to
$6.8 million at April 30, 2002 and $9.1 million at October 31, 2001.
Our gross profit margin improved to 24.1% in the third quarter, from 19.8%
(before restructuring charges) in the second quarter, due primarily to our cost
reduction programs. We sold approximately $1.4 million of discontinued product
at substantially reduced margin. The gross profit margin for the 2002 fiscal
quarter approximates the 24.4% gross margin reported for the 2001 third quarter.
Selling, general and administrative expenses for the third quarter of fiscal
2002 were 21% lower than those of the corresponding 2001 period due to
previously announced cost reduction programs.
Interest expense of $159,000 was $74,000, or 32%, lower than the comparable
prior year period primarily due to reduced borrowings.
Nine Months Ended July 31, 2002 Compared to Nine Months Ended July 31, 2001
- ---------------------------------------------------------------------------
The net loss for the nine months ended July 31, 2002 was attributed to
substantially lower sales and charges aggregating $2.8 million recorded in the
first and second fiscal quarters.
The charges consisted of: (a) non cash write downs of inventories of
approximately $1.1 million and capitalized software development costs of
approximately $1.0 million related to under-performing product lines that are
being discontinued and (b) severance costs of $827,000 related to additional
personnel reductions, including a change in senior management. Also included in
the Restructuring expense and other expense, net is $165,000 for a contingency
related to termination of a foreign lease and a credit of $277,000 due to a
refund of software development fees resulting from the termination of a software
development agreement during the second fiscal quarter.
The following tables set forth net sales by geographic region and product
category for the nine-months ended July 31, 2002 and 2001 (unaudited, in
millions):
Net Sales by Geographic Region
Nine Months Ended
July 31,
--------------------------------
2002 2001
--------------- -------------
United States $ 18,020 $ 27,619
Europe, 32,204 41,560
Asia and Other 1,495 1,864
--------------- -------------
--------------- -------------
Total $ 51,719 $ 71,043
=============== =============
Net Sales by Product Category
Nine Months Ended
July 31,
--------------------------------
2002 2001
--------------- -------------
Computerized Machine Tools $ 40,634 $ 56,608
Computer Control Systems and Software 2,750 4,539
Service Parts 5,984 7,111
Service Fees 2,352 2,785
-------------- -------------
-------------- -------------
Total $ 51,719 $ 71,043
============== =============
Sales and service fees for the first nine months of fiscal 2002 were $51.7
million, approximately $19.3 million, or 27%, lower than those recorded in the
corresponding 2001 period. Sales and service fees in the U.S. market during the
period declined 35% to $18.0 million
reflecting the continuing weakness in industrial equipment spending and
reduced consumption of machine tools. In
Europe,tools by many manufacturing companies,
particularly in Germany. The decline in European sales and service fees was
offset partially by $1.3 million favorable effect of stronger European
currencies when translating foreign sales to U.S. dollars for financial
reporting purposes. Sales of computerized machine tools in Europe declined
23%30% in units and 25% in current dollars. Sales of computerized machine
tools in the United States (exclusive of discontinued products) increased
$1.9 million, or 92%, aided by the successful introduction of a new low cost
vertical machining center model along with an increase in orders for our other
vertical machining center models. Sales of discontinued products declined $1.0
million as that liquidation is substantially complete.
The following table sets forth unit volume and average net selling price for
computerized machine tools during the periods indicated:
January 31,
------------------------
Computerized Machine Tools - Units Sold
2003 2002
----------- -----------
Continuing Products 180 184
Discontinued Products 7 18
----------- -----------
Total 187 202
Average Net Selling Price - Per Unit (in thousands)
2003 2002
----------- -----------
Continuing Products $ 70.5 $ 76.2
Discontinued Products $ 26.0 $ 48.5
----------- -----------
Total $ 68.8 $ 73.7
The decrease in average net selling price per unit for continuing products
from fiscal 2002 to $32.2 million2003 was due to the introduction in 2003 of a 28%
decline in new orders. Non-machine revenues declined 23% and represented 21%low cost
entry level vertical machining center model, but was partially offset by
the effect of totalstronger European currencies when translating foreign sales and service fees.for
financial reporting purposes.
New order bookings for the first nine monthsquarter of fiscal 20022003 were $49.6$14.3 million, a
decline of 7% as compared to $68.4$15.5 million recorded in the prior year a 28% decline.period.
New orders for computerized machine tools declined 29% in U.S. dollars worldwide. In the U.S. market, machine tool orders declined 26% reflecting a sharp decreaseincreased 31% in orders
for vertical machining centers, our primary product line, offset partially by
increased unit sales of discontinued models which are being discounted. Newunits
and 24% in dollars, whereas new orders in Europe were 29% lower than the comparable prior year period reflecting
weaker demanddeclined 23% in fiscalunits and
17% in current dollars. Backlog was $3.9 million at January 31, 2003
compared to $5.3 million at October 31, 2002 in those markets.and $5.1 million at January 31,
2002.
Gross profit margin forincreased in the first nine monthsquarter of fiscal 2002, exclusive of the
restructuring inventory write-down, declined2003 to 21.9%,25.0%
from 25.2%21.6% in the same period a year ago, due in large part to strengthening
European currencies, particularly the decline in sales and service fees and the sale of
approximately $4.2 million in discontinued non-performing products at discounted
prices. These unfavorable effects more than offset the favorable impact of theEuro, as well as previously reported
employee cost reduction programs we had initiated during the past thirteen months.
reductions.
Selling, general and administrative expenses for the first nine monthsquarter of fiscal
20022003 of $14.4$4.4 million were $3.5 million,$786,000, or 20%, lower than15% below those of the corresponding
20012002 period, due to ourpreviously reported cost reduction programs.
During
Other income, net in the secondfirst quarter of 2002, we recorded a severance provision related to the eliminationfiscal 2003 consisted primarily of
46 domestic positions. We expect to save approximately $3.5 million on an annual
basis, the full benefit of which will not be realized until the end of the
fiscal year.
Interest expense of $469,000 was $143,000, or 23%, lower than the comparable
prior year period primarily due to reduced borrowings.
The decrease in other income for the first nine months of fiscal 2002 is the
result of a decrease in earnings of foreignfrom two affiliates accounted for using the equity method and a decreasemethod. Other
income in the prior year period consisted primarily of license fee income.income from
the patent licensing program that was completed in fiscal 2002.
The decrease inprovision for income tax expensetaxes is related to the result of a decline in earnings of two foreign
subsidiaries. In the United States and certain other foreign jurisdictions,
we have net operating carryforwards for which we have a wholly owned foreign subsidiary.100% valuation reserve
at January 31, 2003.
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 potential adverse effect of currency
fluctuations on the costs of purchased products. See Item 3 below and Note 32
to the Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2002, weWe had unrestricted cash and cash equivalents of $3.2 and $4.4 million at
January 31, 2003 and October 31, 2002, respectively. We had $1.2 million of
restricted cash at January 31, 2003 resulting from hedging arrangements that
require cash collateral based on open positions. Cash used by operations
totaled $775,000 in the first quarter of fiscal 2003 compared to $3.5 million at October 31, 2001. Cashcash provided
by operations totaled $5.3
million for the nine months ended July 31, 2002 compared to cash used for
operations of $5.0$1.3 million in the prior year. The net loss in fiscal 2002,
exclusive of non-cash charges, was more than offset by a reduction in working
capital in fiscal 2002.
Net working capital, excluding short-term debt of $5.1 million, was $22.5$21.9
million at JulyJanuary 31, 20022003 compared to $31.5$21.7 million at October 31, 2001. The decrease in working
capital was the result of a $3.2 million reduction in accounts receivable, and a
$6.4 million planned reduction in inventory, partially offset by a $1.0 million
reduction in accounts payable and accrued expenses. The reduction in accounts
receivable was due to lower sales and improved collections2002.
Capital investments for the nine monthsfirst quarter ended JulyJanuary 31, 20022003 consisted
principally of expenditures for software development projects and purchases
of equipment. DuringCash used for investing activities during the second quarter we terminated certain agreements resulting
in an early repayment of an investment we had made totaling $1.0 million.
On April 30, 2002, we obtained a $4.5 million first mortgage loan on our
Indianapolis corporate headquarters. The loan bears an interest rate of 7?% and
matures in April 2009. We are required to make principal payments over the
seven-year term of the loan, based on a twenty-year amortization schedule. The
proceeds from the first mortgage loan, together with other available cash, were
used to repay bank debt. After giving effect to the repayment and cash flow from
operations, our bank debt was
reduced to $1.3 million at July 31, 2002 from
$11.2 million at October 31, 2001.
Effective April 30, 2002, we amendedfunded by borrowings under our bank credit agreement, extendingfacilities.
At January 31, 2003, outstanding borrowings of $3.5 million under our domestic
and European bank credit facilities were classified as a current liability
because the maturity date to Junefacilities mature on December 15, 2003 and November 30, 2003,
and reducing the bank's commitmentrespectively. Total debt at January 31, 2003 was $9.9 million representing
27% of total capitalization compared to $10.0$8.9 million, or 24% of total
capitalization at June 30,October 31, 2002. We were in compliance with all loan
covenants at JulyJanuary 31, 2002,2003 and had an additionalunused credit availability of $10.1 million, including
$2.9 million under a European bank facility.
On September 1, 2002,$6.0
million.
Based on our 3.0 million Euro bank credit facility, which was
entered into on January 8, 2002, was extended to August 31, 2003. Interest on
the facility is payable at 7.16% per annum or, at the Company's option, 1.75%
above EURIBORbusiness plan and financial projections for fixed rate borrowings. The facility is uncollateralized
however, the bank reserves the right of lien and collateral as provided in its
standard terms and conditions. No borrowings were outstanding on the facility
at July 31, 2002.
Ourfiscal 2003,
we believe that cash flow from operations and borrowings available to us
under our credit facilities will be sufficient to meet our anticipated cash
requirements for the first nine monthsbalance of fiscal 2002 was
consistent with2003. Although we believe that the
assumptions underlying our 2003 business plan. However,plan are reasonable and achievable,
there are risks related to further declines in market demand and reduced sales
in the U.S. and Europe for the first nine months of fiscal 2002 has been less than expected inand adverse currency movements that could cause our
actual results to differ from our business plan. As a result, we implemented additional cost reduction actions in
the second quarter, which involved a 20% reduction in our domestic workforce,
and which we expect will generate an annual cost savings of approximately $3.5
million. Our plans call for further reductions in inventory to improve cash flow
from operations over the remainder of fiscal 2002 and first half of fiscal 2003.
The inventory reductions will result in part from the sale of discounted
products related to the discontinued under-performing products. We are also currently in
discussions with other lenders forto replace our existing domestic credit facility
with a long-term domestic replacement credit facility in conjunction with assessing our
liquidity needs for fiscal 2004 and while webeyond. We expect the European bank credit
facility to be renewed for twelve-months on or before its maturity date.
We believe, but cannot assure you, that we will be able to obtain a replacement
creditdomestic facility and a renewed European facility under acceptable terms.
Failure to obtain replacement facilities would have a material adverse effect on
our business and financial condition.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement No.
142, "Goodwill and Other Intangible Assets"(SFAS 142). Under SFAS 142,
amortization of goodwill will cease and the goodwill carrying values will be
tested periodically for impairment. We adopted SFAS 142, effective November
1, 2002 for goodwill and intangible assets acquired prior to July 1, 2001.
Goodwill and intangible assets acquired after June 30, 2001 were subject
immediately to the goodwill non-amortization and intangible provisions of
this statement. The adoption of this standard did not have a material effect on
the Condensed Consolidated Financial Statements.
In August 2001, the Financial Accounting Standards Board issued Statement
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(SFAS 144), which is effective for the fiscal year beginning November 1,
2002. SFAS 144 establishes a single model to account for impairment of
assets to be held or disposed of, incorporating guidelines for accounting
and disclosure of discontinued operations. The adoption of this standard
did not have a material effect on the Condensed Consolidated Financial
Statements.
In July 2002, the Financial Accounting Standards Board issued Statement No.
146, "Accounting for Costs Associated with Exit or Disposal Activities".
This Standard, which is effective for disposal activities initiated after
December 31, 2002, addresses significant issues regarding the recognition,
measurement and reporting of costs associated with exit and disposal activities.
We will comply with the provisions of the Standard with respect to exit and
disposal activities initiated after the effective date.
In December 2002, the Financial Accounting Standards Board issued Statement
No.148, "Accounting for Stock-Based Compensation Transition and Disclosure
an amendment of SFAS No.123, Accounting for Stock-Based Compensation"(SFAS 148).
The Standard provides for (1) alternative methods of transition for an
entity that voluntarily changes to the fair-value method of accounting for
stock-based compensation; (2) requires more prominent disclosure of the
effects of an entity's accounting policy decisions with respect to stock-based
compensation on reported income; and (3) amends APB Opinion No.28, "Interim
Financial Reporting", to require disclosure of those effects in interim
financial information. SFAS No.148 is effective for fiscal years ending after
December 15, 2002, and for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. We
are currently reviewing alternatives related to the adoption of the fair-value
method of accounting for stock-based compensation and will finalize our
decision in fiscal 2003 under acceptable terms;2003. We do not expect the adoption of SFAS 148 to have a
material impact on our Condensed Consolidated Financial Statements.
Critical Accounting Policies
Our accounting policies require our management to make significant estimates
and assumptions using information available at the time the estimates are made.
Such estimates and assumptions significantly affect various reported
amounts of assets, liabilities, revenues and expenses. If our future
experience differs materially from these estimates and assumptions, our
results of operations and financial condition could be affected. There have
been no such assurance can be
given.
material changes to our critical accounting policies, which are
described in our Annual Report on Form 10-K for the fiscal year ended October 31
, 2002.
Contractual Obligations and Contingent Liabilities and Commitments
There have been no material changes from the information provided in our Annual
Report on Form 10-K for the fiscal year ended October 31, 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Interest Rate Risk
Interest on our bank borrowings is affected by changes in prevailing U.S.
and European interest rates and/or Libor.rates. At JulyJanuary 31, 2002,2003, outstanding borrowings
under our bank credit facilities were $1.3$3.5 million and our total indebtedness
was $6.6$9.9 million. The interest rate on the Libor portion of our bank debt was
Libor plus 2.5%, which increases to 3.0% effective November 1, 2002.
Foreign Currency Exchange Risk
In the first quarter of fiscal 2002,2003, approximately 67%64% of our sales and
service fees, including export sales, were derived from foreign markets.
All of our computerized machine toolssystems and computer numerical control
systems, as well as certain proprietary service parts, are sourced by our
U.S.-based engineering and manufacturing division and re-invoiced to our
foreign sales and service subsidiaries, primarily in their functional
currencies.
Our products are sourced primarily from foreign suppliers or built to our specifications
by either our wholly owned subsidiary in Taiwan, or contract manufacturers
overseas. These purchases are predominantly in foreign currencies and in many
cases our arrangements with these suppliers include foreign currency risk
sharing agreements, which reduce (but do not eliminate) the effects of
currency fluctuations on product costs. The predominant portion of our exchange
rate risk associated with product purchases relates to the New Taiwan Dollar.
We enter into forward foreign exchange contracts from time to time to hedge
the cash flow risk related to forecast inter-company sales, and forecast
inter-company and third-party purchases denominated in, or based on, foreign
currencies. We also enter into foreign currency forward exchange contracts
to provide a natural hedge against the effects of foreign currency
fluctuations on receivables and payables denominated in foreign currencies.
We do not speculate in the financial markets and, therefore, do not enter
into these contracts for trading purposes.
Forward contracts for the sale or purchase of foreign currencies as of
JulyJanuary 31, 20022003 which are designated as cash flow hedges under SFAS No. 133
were as follows:
Contract Amount at Forward
RateWeighted Rates in
Weighted U.S. Dollars
Notional Amount Avg. -----------------------------U.S. Dollars
in Foreign Forward Contract JulyAt Date of January 31,
Forward Contracts Currency Rate Date 2002Contract 2003 Maturity Dates
--------------------------------- --------------- ---------------------- ----------- ---------- ------------------------------------
Sale Contracts:
Euro 6,800,000 .9442 $6,420,630 $6,625,004 August12,100,000 .9948 $12,037,080 $12,951,870 February - November 2002October 2003
Sterling 1,150,000 1.5580 $1,791,655 $1,790,708 August1.5526 $1,785,490 $1,878,646 February - November 2002October 2003
Purchase Contracts:
New Taiwan Dollar 160,000,000 32.85 $4,870,088 $4,749,028 August150,000,000 34.36* $4,365,541 $4,324,409 February - November 2002July 2003
Forward contracts for the sale of foreign currencies as of July
31, 2002,
Forward contracts for the sale of foreign currencies as of January 31, 2003, which were entered into to protect against the
effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies were as follows:
Contract Amount at Forward
RateWeighted Rates in
Weighted U.S. Dollars
Notional Amount Avg. -----------------------------U.S. Dollars
in Foreign Forward Contract JulyAt Date of January 31,
Forward Contracts Currency Rate Date 2002Contract 2003 Maturity Dates
----------------- --------------- -------- ------------ ----------- ---------- ------------------------------------
Sale Contracts:
Euro 6,006,512 .9869 $5,928,114 $5,858,811 August3,374,129 1.0406 $3,511,119 $3,625,277 February - September 2002March 2003
Singapore Dollar 1,883,250 1.7800 $1,058,014 $1,068,795 August1,814,753 .5743 $1,042,213 $1,044,122 February - September 2002May 2003
Sterling 395,000 1.5590 $615,811 $615,906 August840,202 1.6038 $1,347,516 $1,380,651 February - September 2002April 2003
Purchase Contracts:
New Taiwan Dollar 75,000,000 33.22 $2,257,804 $2,223,749 August130,700,000 34.48* $3,790,603 $3,765,949 February - September 2002April 2003
* NT Dollars per U.S. dollars
Item 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation,
our management, including the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective
as of the evaluation date. There have beenwere no significant changes in ourthe internal
controls or in other factors that could significantly affect these controls
subsequent to the date of
their evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.date.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are involved in various claims and lawsuits arising in the ordinarynormal course
of business, nonebusiness. We believe it is remote that any of which, in the opinion of management, is expected tothese claims will have a
material adverse effect on our consolidated financial position or results of
operations.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11 Statement re: Computation of Per Share Earnings
99.1 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Executive Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350 by the Chief
Financial Officer, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: On June 3, 2002, we filed a Current Report on Form 8-K reporting under
Item 5 that we had dismissed Arthur Andersen LLP as our independent
accountants.
On July 1, 2002, we filed a Current Report on Form 8-K reporting under
Item 4 that our Board of Directors approved the recommendation of its
Audit Committee to engage Pricewaterhouse Coopers LLP as our
independent accountants.None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HURCO COMPANIES, INC.
By: /s/ Roger J. Wolf
--------------------------
Roger J. Wolf
Senior Vice President and
Chief Financial Officer
By: /s/ Stephen J. Alesia
--------------------------
Stephen J. Alesia
Corporate Controller and
Principal Accounting Officer
September 13, 2002March 14, 2003
CERTIFICATIONS
I, Michael Doar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hurco Companies,
Inc;Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
September 13, 20024. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report(the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
a. All significant deficiencies in the design or operations of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
Hurco Companies, Inc.March 13, 2003
I, Roger J. Wolf, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hurco Companies,
Inc;Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
September 13, 20024. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report(the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operations of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
Hurco Companies, Inc.March 13, 2003
ExhibitEXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGSStatement Re: Computation of Per Share Earnings
Three Months Ended
Nine months Ended
JulyJanuary 31,
July 31,
----------------------------------------- -------------------------------------------
2002 2001 2002 2001
----------------- -------------------- --------------------- -------------------------------------------------------------------------
(in thousands, except per share amount)amounts) 2003 2002
------------------------ ------------------------
Basic Diluted Basic Diluted
Basic Diluted Basic Diluted
-------- -------- ----------- -------- --------- -------- ------- ---------
Net loss $(651) $(651) $(1,329) $ (1,329)(582) $ (6,503) $ (6,503) $ (439) $(439)(582) $(1,641) $(1,641)
Weighted average shares outstanding 5,583 5,583 5,581 5,581 5,583 5,583 5,700 5,7005,582 5,582
Dilutive effect of stock options -- -- -- 43 -- -- -- 36-
------- ------- ---------- -------- --------- -------- ------ ---------------- -------
5,583 5,583 5,581 5,624 5,583 5,583 5,700 5,7365,582 5,582
Loss per common share $(.10) $ (0.12)(.10) $ (0.12)(.29) $ (0.24) $ (0.24) $ (1.16) $ (1.16) $ (0.08) $ (0.08)(.29)
======= ======= ========== ======== ========= ========= ====== ================ =======
exhibit 99.1Exhibit 99.2
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Hurco Companies, Inc.,
(the "Company") on Form 10-Q for the periodQuarter ending JulyJanuary 31, 20022003 as filed
with the Securities and Exchange Commission on the date hereofMarch , 2003 (the "Report"),
I, Michael Doar, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. ss.ss 1350, as adopted pursuant to ss.ss 906 of the
Sarbanes-Oxley Act of 2002, that:
(1)1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Michael Doar
Michael Doar
Chairman & Chief Executive Officer
Hurco Companies, Inc.
SeptemberMarch 13, 20022003
exhibit 99.2
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Hurco Companies, Inc.,
(the "Company") on Form 10-Q for the periodquarter ending JulyJanuary 31,
20022003 as filed with the Securities and Exchange Commission on the date hereofMarch , 2003
(the "Report"), I, Roger J. Wolf, Senior Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. ss.ss 1350, as adopted
pursuant to ss.ss 906 of the Sarbanes-Oxley Act of 2002, that:
(1)1. The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2)2. The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
Hurco Companies, Inc.
SeptemberMarch 13, 20022003