10-K 1 v136606_10k.htm Unassociated Document
UNITED STATES
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 for the fiscal year ended October 31, 2008 or
o
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
 
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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 orSection 15(d).
Yes o  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller Reporting Company o
   
(Do not check if a smaller reporting company)
 
                     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No x
The aggregate market value of the registrant’s voting stock held by non-affiliates as of April 30, 2008 (the last day of our most recently completed second quarter) was $294,011,000.

The number of shares of the registrant’s common stock outstanding as of January 7, 2009 was 6,420,851.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its 2009 Annual Meeting of Shareholders (Part III).
 

 
Disclosure Concerning Forward-looking Statements

Certain statements made in this annual report on form 10-K may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These factors include the risks identified in Item 1A.
 
PART I

Item 1.    BUSINESS

General

Hurco Companies, Inc. is an industrial technology company.  We design, manufacture and sell computerized machine tools, consisting primarily of vertical machining centers (mills) and turning centers (lathes), to companies in the metal working industry through a worldwide sales, service and distribution network.  Although our computer control systems and software products are proprietary, they predominantly use industry standard personal computer components.  Our computer control systems and software products are primarily sold as integral components of our computerized machine tool products.  As used in this report, the words “we”, “us” and “our” refer to Hurco Companies, Inc. and its consolidated subsidiaries.

Since our founding in 1968, we have been a leader in the introduction of interactive computer control systems that automate manufacturing processes and improve productivity in the metal parts manufacturing industry. Hurco pioneered the application of microprocessor technology and conversational programming software for use in machine tools.  We have concentrated on designing “user-friendly” computer control systems that can be operated by both skilled and unskilled machine tool operators and yet are capable of instructing a machine to perform complex tasks.  The combination of microprocessor technology and patented interactive, conversational programming software in our computer control systems enables operators on the production floor to quickly and easily create a program for machining a particular part from a blueprint or computer-aided design file and immediately begin machining that part.

Our executive offices and principal design and engineering operations are headquartered in Indianapolis, Indiana.  Sales, application engineering and service subsidiaries are located in Mississauga, Canada; Shanghai, China; High Wycombe, England; Paris, France; Munich, Germany; Chennai, India; Milan, Italy; and Singapore, along with manufacturing operations in Taiwan and China. Products are sold through independent agents and distributors in North America, Europe and Asia.  We also have direct sales forces in Canada, France, Germany, Italy, Singapore and the United Kingdom.  Distribution facilities are located in Los Angeles, California, Venlo, the Netherlands, and Singapore. In August, we held the official grand opening ceremony for our newest sales, application engineering and service subsidiary, Hurco India, Ltd. The event was held at our Technical Center in Chennai and was an opportunity to illustrate the capabilities of Hurco technology and machining centers to this growing market. Hurco machine tools are advantageous to customers in India because the user-friendly control and conversational programming enables machine shop owners to hire workers with less technical skill sets.

Our strategy is to design, manufacture and sell to the global metalworking market a comprehensive line of computerized machine tools that incorporate our proprietary, interactive computer control technology.  Our technology is designed to enhance the machine tool user's productivity through ease of operation and higher levels of machine performance (speed, accuracy and surface finish quality).  We use an open system software architecture that permits our computer control systems and software to be produced and employed using standard PC hardware. We have emphasized a “user-friendly” design that employs both interactive conversational and graphical programming software. Each year we have expanded our product offering to meet customer needs, which has led us to design and manufacture more complex machining centers with advanced capabilities.  We bring a disciplined approach to strategically enter new geographic markets, as appropriate.  Our introduction of new, technologically advanced products, combined with our expansion into new markets, has resulted in our significant growth over the last several years.  In addition to this strong organic growth, we have the capability to pursue opportunistic acquisitions that are consistent with our strategic focus on expanding our product line and entering new markets.  At present, we are not engaged in negotiations, and have no current plans, for any acquisitions.
 
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Industry
 
Machine tool products are considered capital goods, which makes them part of an industry that has historically been highly cyclical. 
 
Although, industry association data for the U.S. machine tool market is available, that market accounts for only 9% of worldwide consumption.  Reports available for the U.S. machine tool market include:
 
 
·
United States Machine Tool Consumption – generated by the Association for Manufacturing Technology and American Machine Tool Distributor Association, this report includes metal cutting machines of all types and sizes, including segments in which we do not compete
 
 
·
Purchasing Manager’s Index - developed by the Institute for Supply Management and reports activity levels in U.S. manufacturing plants that purchase machine tools 
 
 
·
Capacity Utilization of Manufacturing Companies – issued by the Federal Reserve Board
 
A limited amount of information for foreign markets is available, and different reporting methodologies are used by various countries.  Machine tool consumption data published by Gardner Publications, Inc., calculates machine tool consumption annually by country.  It is important to note that data for foreign countries is based on government reports that may lag six to twelve months and therefore is unreliable for forecasting purposes. 
 
Demand for capital equipment can fluctuate during periods of changing economic conditions.  Manufacturers and suppliers of capital goods, such as Hurco, are often the first to experience these changes in demand. Additionally, since our order backlog is approximately 45 days, it is difficult to estimate demand with any reasonable certainty. Therefore, we do not have the benefit of relying on the common leading indicators that are available to many other industries for market analysis and forecasting purposes.
 
Products
 
Our core products consist of general purpose computerized machine tools for the metal cutting industry.  These are, principally, vertical machining centers (mills) and turning centers (lathes), with which our proprietary software and computer control systems are fully integrated. We also produce computer control systems and related software for press brake applications that are sold as retrofit units for installation on existing or new press brake machines.   Additionally, we produce and distribute software options, control upgrades, hardware accessories, and replacement parts for our machine tool product lines and we provide operator training and support services to our customers.
 
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The following table sets forth the contribution of each of our product groups to our total sales and service fees during each of the past three fiscal years:
 
Net Sales and Service Fees by Product Category
 
(Dollars in thousands)
 
Year ended October 31,
 
   
2008
   
2007
   
2006
 
Continuing Products and Services
                               
Computerized Machine Tools
  $ 199,238       89.0 %   $ 165,832       88.2 %   $ 128,946       86.8 %
Computer Control Systems and Software *
    5,678       2.5 %     5,291       2.8 %     4,694       3.2 %
Service Parts
    13,240       5.9 %     12,096       6.4 %     10,494       7.0 %
Service Fees
    5,838       2.6 %     4,828       2.6 %     4,383       3.0 %
Total
  $ 223,994       100 %   $ 188,047       100 %   $ 148,517       100 %
 
* Amounts shown do not include computer control systems sold as integrated components of computerized machine tools.

Computerized Machine Tools – Machining and Turning Centers

We design, manufacture and sell computerized machine tools equipped with a fully integrated interactive computer control system that features our WinMax® software. Our computer control system enables a machine tool operator to create complex two-dimensional or three-dimensional machining programs directly from an engineering drawing or computer aided design geometry file. An operator with little or no machine tool programming experience can successfully create a program with minimal training and begin machining the part in a short period of time.  The control features an operator console with a liquid crystal display (LCD), and incorporates an upgradeable personal computer (PC) platform using a Pentium®* class processor with solid rendering graphical programming.  In addition, WinMax® has a Windows®** based operating system to enable users to improve shop floor flexibility and software productivity.

In the intensely competitive global manufacturing marketplace, increases in productivity are being derived from control and software technologies. Companies using computer controlled machine tools are better able to:

 
·
maximize the efficiency of their human resources
 
·
continue to expand their capability to make more advanced and complex parts from a wide range of materials using multiple processes
 
·
maintain the ability to incorporate fast moving changes in technology into their operations to keep their competitive edge
 
·
continue to integrate themselves into the global supply chain of their customers by supporting small to medium lot sizes for “just in time” initiatives

Our Windows®** based control facilitates our ability to meet these customer needs. Companies are finding that the familiar Windows®** operating system coupled with the Hurco conversational style of program creation means that their operators are capable of creating and editing part-making programs without incurring the incremental overhead of specialized computer aided design and computer aided manufacturing programmers. With the ability to transfer most computer aided design data directly into a Hurco program, programming time becomes minutes instead of hours.

Products today are being designed to meet the demand for machining complex parts with greater part accuracies.  Our proprietary controls with WinMax® software and Pentium®* processors efficiently handle the large amounts of data these complex part-making programs require, which enables our customers to create parts with superb accuracy at world-class speeds. We continue to add technology to our control design as it becomes available.

Our offering of machining centers, currently equipped with either a twin touch-screen console or a single touch-screen console, consists of the following six product lines:
 
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VM Product Line

The VM product line consists of moderately priced vertical machining centers for the entry-level market. Their design premise of a machining center with a large work cube and a small footprint optimizes the use of available floor space. The VM line consists of five models in three sizes with X-axis (horizontal) travels of 26, 40, and 50 inches. The base prices of the VM machines range from $40,000 to $80,000.

VMX Product Line

The VMX product line consists of higher performing vertical machining centers aimed at manufacturers that require greater part accuracy. It is our flagship series of machining centers. The VMX line consists of 14 models in seven sizes with X-axis travels of 24, 30, 40, 50, 60, 64, and 84 inches. The base prices of VMX machines range from $50,000 to $200,000.

Five-Axis Product Line

The five-axis product line is targeted at manufacturers seeking to produce complex multi-sided parts in a single setup. Machines in this product line can yield significant productivity gains for operations that previously processed each side of a part individually.  Due to market demand for increased processing efficiency, we focused on five-axis technology in 2008 and introduced four new five-axis machining centers in September. In total, we now have six Hurco five-axis machining centers to offer customers. The base prices of the five-axis machines range from $100,000 to $180,000.

TM/TMM Product Line

Since its introduction in fiscal 2005, we have continued to expand the TM turning center (horizontal slant-bed lathe) product line. The TM series is designed for entry-level job shops and contract manufacturers seeking efficient processing of small to medium lot sizes. The TM is offered in three models with chucks of 6, 8, and 10 inches respectively. In September 2006, we further enhanced the capability of the TM turning centers with the addition of “live” or motorized tooling on the lathe turret. Designated as the TMM product line, these machines allow our customers to complete a number of secondary milling, drilling and tapping operations, while the part is still held in the chuck after the turning operations are complete. This ability to “mill/turn” or “multi-task” on the same machine in a single setup can provide significant productivity gains. Two TMM models with this capability are being offered.  The base prices of the TM/TMM machines range from $40,000 to $85,000.

TMX Product Line

Introduced in September 2008, the TMX product line consists of high performance turning centers. There are three TMX models, all with chucks of 8 inches, but two of the models are equipped with an additional axis and motorized live tooling, and one of those models has an additional spindle. The base prices of TMX turning centers range from $80,000 to $180,000.

Specialty Product Lines

Two new specialty products were introduced in September 2008: the dual-column machining center and the zone machining center. Both of these machines are designed to facilitate production of large parts and molds. The horizontal machining center is also included in this category as it facilitates efficient and accurate machining of complex production parts. The base prices of these machines range from $235,000 to $350,000.

*Pentium® is a registered trademark of Intel Corporation.
**Windows® is a registered trademark of Microsoft Corporation.
 
4

 
Computer Control Systems and Software

The following machine tool computer control systems and software products are sold directly to end-users and/or to original equipment manufacturers.

Autobend®

Autobend® computer control systems are applied to metal bending press brake machines that form parts from sheet metal and steel plate.  They consist of a microprocessor-based computer control and back gauge (an automated gauging system that determines where the bend will be made).  We have manufactured and sold the Autobend® product line since 1968.  We currently market two models of our Autobend® computer control systems for press brake machines, in combination with six different back gauges, through distributors to end-users as retrofit units for installation on existing or new press brake machines, as well as to original equipment manufacturers and importers.

Software Products

In addition to our standard computer control features, we offer software option products for two-dimensional and three-dimensional programming.  These products are sold to users of our computerized machine tools equipped with our twin touch-screen or single touch-screen consoles featuring WinMax® control software.  The options include: Swept Surface, SelectSurface Finish Quality (SFQ), DXF Transfer, UltiNetTM, UltiPocketTM, Conversational Part and Tool Probing, Advanced Verification Graphics, and Simultaneous Five-Axis Contouring.

Our Swept Surface software option simplifies programming of 3D contours and significantly reduces programming time. SelectSurface Finish Quality (SFQ) lets the customer control surface finish quality and run time in one easy step.

The DXF Transfer software option can substantially increase operator productivity because it eliminates manual data entry of part features by transferring AutoCADTM drawing files directly into the Hurco computer control or into our desktop programming software, WinMax® Desktop.

UltiNetÔ is a networking software option used by our customers to transfer part design and manufacturing information to computerized machine tools at high speeds and to network computerized machine tools within the customer's manufacturing facility.

UltiPocketTM automatically calculates the tool path around islands, eliminating the arduous task of plotting these shapes.  Islands can also be rotated, scaled and repeated.

Conversational Part and Tool Probing options permit the computerized dimensional measurement of machined parts and the associated cutting tools.  This “on-machine” technique improves the throughput of the measurement process when compared to traditional “off-machine” approaches.

The Advanced Verification Graphics feature significantly reduces both scrap and programming time because it provides customers with a three-dimensional solid rendering of the part, including dynamic rotation. This feature allows a customer to view the rendered part from any angle without needing to redraw it.

Simultaneous five-axis contouring software enables a five-axis machine to command motion concurrently on all axes. This allows the user to create continuous tool-paths along complex geometries with only a single machine/part setup, providing increased productivity along with the performance benefits of using shorter cutting tools. The sale of simultaneous five-axis contouring software is subject to governmental licensing.
 
5

 
Parts and Service

Our service organization provides installation, warranty, operator training and customer support for our products on a worldwide basis.  In the United States, our principal distributors have primary responsibility for machine installation and warranty service and support for product sales.  Our service organization also sells software options, computer control upgrades, accessories and replacement parts for our products.  Our after-sales parts and service business strengthens our customer relationships and provides continuous information concerning the evolving requirements of end-users.

Manufacturing

Our computerized metal cutting machine tools are manufactured to our specifications primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited (HML).  This subsidiary has increased our overall capacity and reduced our dependence on other manufacturers.  HML conducts final assembly operations and is supported by a network of contract suppliers of components and sub-assemblies who manufacture components for our products in accordance with our proprietary designs, quality standards and cost specifications. This has enabled us to lower our production costs, reduce our working capital per sales dollar and increase our worldwide manufacturing capacity without significant incremental investment in capital equipment or personnel.  In 2006, we opened a new manufacturing facility in Ningbo, China, that focuses on the machining of castings and components to support HML’s production in Taiwan.  In the future, we can expand the Ningbo facility to include sub-assembly operations.  Eventually, we expect that machines designed specifically for the Chinese market will be produced at the Ningbo facility.

We have a contract manufacturing agreement for computer control systems with Hurco Automation, Ltd., a Taiwanese company in which we have a 35% ownership interest.  This company produces all of our computer control systems to our specifications, sources industry standard computer components and our proprietary parts, performs final assembly and conducts test operations.

We work closely with our subsidiaries, key component suppliers and our minority-owned affiliate to ensure that their production capacity will be sufficient to meet the projected demand for our machine tool products.  Many of the key components used in our machines can be sourced from multiple suppliers. However, any prolonged interruption of operations or significant reduction in the capacity or performance capability at either of our Taiwanese manufacturing facilities, or at any of our key component suppliers, could have a material adverse effect on our operations.

Marketing and Distribution

We sell our products through more than 100 independent agents and distributors throughout North America, Europe and Asia.  Although some distributors carry competitive products, Hurco is the primary line for the majority of our distributors globally.  We also have direct sales personnel in Canada, France, Germany, Italy, Singapore and the United Kingdom, which are among the world's principal machine tool consuming markets.

Approximately 91% of the worldwide demand for computerized machine tools and computer control systems is outside the United States.  In fiscal 2008, more than 75% of our revenues were from overseas customers.  No single end-user or distributor of our products accounted for more than 5% of our total sales and service fees.

The end-users of our products are precision tool, die and mold manufacturers, independent metal parts manufacturers, and specialized production application or prototype departments within large manufacturing companies.  Industries served include aerospace, defense, medical equipment, energy, automotive/transportation, electronics and computer equipment.
 
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We also sell our AutobendÒ computer control systems to original equipment manufacturers of new metal fabrication machine tools who integrate them with their own products prior to the sale of those products to their own customers, to retrofitters of used metal fabrication machine tools who integrate them with those machines as part of the retrofitting operation, and to end-users who have an installed base of metal fabrication machine tools, either with or without related computer control systems.

Demand

We believe that advances in industrial technology and the related demand for automated process improvements drive demand for our products.

Other factors affecting demand include:

 
·
the need to continuously improve productivity and shorten cycle time
 
·
an aging machine tool installed base that will require replacement with more advanced and efficient technology created by shorter product life cycles
 
·
the industrial development of emerging markets in Asia and Eastern Europe
 
·
the declining supply of skilled machinists

Demand for our products is also 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 seek to reduce the impact of adverse changes in economic conditions that might occur in a particular geographic region.  For additional information regarding current economic conditions and their impact on our results of operation and financial condition, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Competition

We compete with many other machine tool producers in the United States and foreign countries.  Most of our competitors are larger and have greater financial resources than our company.  In the United States and European metal cutting markets, major competitors include Haas Automation, Inc., Daewoo, Miltronics, Deckel Maho Gildemeister Group (DMG), Hardinge Inc. and MAG Industrial Automation Systems.  There are also a large number of other foreign manufacturers, including Okuma Machinery Works Ltd., Mori Seiki Co., Ltd., Mazak and Matsuura Machinery Corporation.

We strive to compete effectively by incorporating into our products unique, patented software and other proprietary features that offer enhanced productivity, technological capabilities and ease of use.  We offer our products in a range of prices and capabilities to target a broad potential market.  We also believe that our competitiveness is aided by our reputation for reliability and quality, our strong international sales and distribution organization, and our extensive customer service organization.

Intellectual Property

We consider our products to be proprietary.  Various features of our control systems and machine tools employ technologies covered by patents that are material to our business.  We also own additional patents covering new technologies that we have acquired or developed, and that we are planning to incorporate into our control systems in the future.
 
7

 
Research and Development
 
In the fiscal years set forth below, non-capitalized research and development expenditures for new products and significant product improvements and expenditures related to software development projects that were capitalized were as follows (in thousands):
Fiscal Year
 
Non-capitalized 
research and
development
   
Capitalized
software
development
 
2008
  $ 3,000     $ 900  
2007
    3,100       1,200  
2006
    2,500       2,100  
 
Employees

We had approximately 430 full-time employees at the end of fiscal 2008, none of whom were covered by a collective-bargaining agreement or represented by a union.  We have experienced no employee-generated work stoppages or disruptions and we consider our employee relations to be satisfactory.

Geographic Areas

Financial information about geographic areas in which we sell our products is set forth in Note 15 of Notes to Consolidated Financial Statements.

The risks of doing business on a global basis are set forth in Item 1A. Risk Factors below.

Backlog

For information on orders and backlog, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Availability of Reports and Other Information

Our website is www.hurco.com.  We make available on this website, free of charge, access to our annual, quarterly and current reports and other documents filed by us with the Securities and Exchange Commission (SEC) as soon as reasonably practical after the filing date.  These reports can also be obtained at the SEC’s Public Reference Room at 100 F Street, NE Washington, DC 20549.

Item 1A.    RISK FACTORS

In this section we describe what we believe to be the material risks related to our business.  The risks and uncertainties described below or elsewhere in this report are not the only ones to which we are exposed. Additional risks and uncertainties not presently known and/or risks we currently deem immaterial may also adversely affect our business and operations. If any of the developments included in the following risks were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.

The current global economic crisis is adversely affecting overall demand and our customers’ ability to purchase our products and services.

The current global economic crisis has severely impacted banks and other lenders, limiting the ability of many businesses to access the credit markets.  As a result of the credit crisis and the overall decline in economic activity, the ability of our customers to purchase our products and services has been adversely affected, the initial impact of which was reflected in our results for the fourth quarter of fiscal 2008.  An overall decline in economic activity may also have an adverse affect on our customers and distributors ability to pay us for the products they purchased.  A prolonged recession or further decline in the global economy will materially adversely affect our results of operations and financial condition.  For additional information regarding current economic conditions and their impact on our results of operations and financial condition, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
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The cyclical nature of our business causes fluctuations in our operating results.

The machine tool industry is highly cyclical and changes in demand can occur abruptly in the geographic markets we serve.  As a result of this cyclicality, we have experienced significant fluctuations in our sales, which, in periods of reduced demand have adversely affected our results of operations and financial condition.

Our international operations pose additional risks that may adversely impact sales and earnings.

During the fiscal year ended October 31, 2008, more than 75% of our revenues were derived from sales to customers located outside the United States.  We also have manufacturing facilities and assets located outside of the United States.  These international operations are subject to a number of risks, including:

 
·
trade barriers
 
·
regional economic uncertainty
 
·
differing labor regulation
 
·
risk of governmental expropriation
 
·
domestic and foreign customs and tariffs
 
·
current and changing regulatory environments affecting the importation and exportation of products and raw materials
 
·
difficulty in obtaining distribution support
 
·
difficulty in staffing and managing widespread operations
 
·
differences in the availability and terms of financing
 
·
political instability and unrest
 
·
risks of changes in taxes
 
·
tax implications from repatriation of funds

Quotas, tariffs, taxes or other trade barriers could require us to change manufacturing sources, reduce prices, increase spending on marketing or product development, withdraw from or not enter certain markets or otherwise take actions that could be adverse to us.  Also, in some foreign jurisdictions, we may be subject to laws limiting the right and ability of entities organized or operating therein to pay dividends or remit earnings to affiliated companies unless specified conditions are met.  These factors may adversely affect our future operating results.  All of our products are shipped from our manufacturing facility in Taiwan from the Port of Taichung to three ports of destination: Los Angeles, California, Venlo, the Netherlands, and Singapore.  Changes in customs requirements, as a result of national security or other constraints put upon these ports, may also have an adverse impact on our results of operations.

We depend on limited sources for our products.

Our wholly owned subsidiary in Taiwan, Hurco Manufacturing Ltd. (HML), produces all of our machine tools.  Any interruption in manufacturing at HML would have a material adverse effect on our results of operations and financial condition.  Interruption in manufacturing at HML could result from a change in the political environment in Taiwan or a natural disaster, such as an earthquake, typhoon, or tsunami. Any interruption with one of our key component suppliers may also have a material adverse effect on our results of operations and financial condition.
 
9

 
Fluctuations in the exchange rates between the U.S. Dollar and any of several foreign currencies can increase our costs or decrease our revenues.

Our international sales divisions generate more than 75% of our revenues, which are received in several foreign currencies, primarily the Euro and Pound Sterling. Therefore, our results of operations and financial condition are affected by fluctuations in exchange rates between these currencies and the U.S. Dollar, both for purposes of actual conversion and for financial reporting purposes. In addition, payments for components incorporated into our products are made in the New Taiwan Dollar.  We hedge our foreign currency exposure with the purchase of forward exchange contracts. Hedge contracts only mitigate the impact of changes in foreign currency rates that occur during the term of the related hedge contract period.  Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 1 of Notes to Consolidated Financial Statements for the impact of translation of foreign currencies and hedging on the consolidated financial statements.

Our competitive position and prospects for growth may be diminished if we are unable to develop and introduce new and enhanced products on a timely basis that are accepted in the market.

The machine tool industry is subject to technological change, evolving industry standards, changing customer requirements, and improvements in and expansion of product offerings. Our ability to anticipate changes in technology, industry standards, customers’ requirements and competitors’ product offerings and to develop and introduce new and enhanced products on a timely basis that are accepted in the market, will be significant factors in maintaining and improving our competitive position and growth prospects.  If the technologies or standards used in our products become obsolete or fail to gain widespread commercial acceptance, our business would be materially adversely affected. Although we believe that we have the technological capabilities to remain competitive, developments by others may render our products or technologies obsolete or noncompetitive.

We compete with larger companies that have greater financial resources, and our business could be harmed by competitors’ actions.

The markets in which our products are sold are extremely competitive and highly fragmented. In marketing our products, we compete with other manufacturers in terms of quality, reliability, price, value, delivery time, service and technological characteristics. We compete with a number of U.S., European and Asian competitors, most of which are larger, have substantially greater financial resources and are supported by governmental or financial institution subsidies. While we believe our product lines compete effectively, our financial resources are limited compared to those of most of our competitors, making it challenging to remain competitive.
 
Fluctuation of the price of raw materials, especially steel and iron, could adversely affect our sales, costs and profitability.

We manufacture products with a high iron and steel content for which worldwide prices can change significantly. The availability and price for these and other raw materials are subject to volatility due to worldwide supply and demand forces, speculative actions, inventory levels, exchange rates, production costs and anticipated or perceived shortages. In some cases, those cost increases can be passed on to customers in the form of price increases; in other cases they cannot. If the prices of raw materials increase and we are not able to charge our customers higher prices to compensate, it would adversely affect our results of operations.

Due to future changes in technology, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excess.

The technology within our products changes and generally new versions of machines are brought to market in three to five year cycles. The phasing out of an old product involves estimating the amount of inventory to hold to satisfy the final demand for those machines and to satisfy future repair part needs. Based on changing customer demand and expectations of delivery times for repair parts, we may find that we have either obsolete or excess inventory on hand. Because of unforeseen future changes in technology, market demand or competition, we might have to write off unusable inventory, which would adversely affect our results of operations.
 
10

 
We may make acquisitions that could disrupt our operations and harm our operating results.

Although we are not currently engaged in negotiations, and have no current plans for any acquisitions, we may seek to expand our product offerings or the markets we serve by acquiring other companies, product lines, technologies and personnel.  Acquisitions involve numerous risks, including the following:

 
·
difficulties integrating the operations, technologies, products, and personnel of the acquired companies
 
·
diversion of management’s attention from normal daily operations of the business
 
·
potential difficulties completing projects associated with in-process research and development
 
·
difficulties entering markets in which we have no or limited prior experience, especially when competitors in such markets have stronger market positions
 
·
initial dependence on unfamiliar supply chains or relatively small supply partners
 
·
insufficient revenues to offset increased expenses associated with acquisitions
 
·
the potential loss of key employees of the acquired companies

Acquisitions may also cause us to:

 
·
issue common stock that would dilute our current shareholders’ percentage ownership
 
·
assume liabilities
 
·
record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges
 
·
incur amortization expenses related to certain intangible assets
 
·
incur large and immediate write-offs, and restructuring and other related expenses
 
·
become subject to litigation

Mergers and acquisitions are inherently risky. No assurance can be given that our acquisitions will be successful. Further, no assurance can be given that acquisitions will not adversely affect our business, operating results, or financial condition. Failure to manage and successfully integrate acquisitions could harm our business and operating results in a material way. Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely manner or that pre-acquisition due diligence will identify all possible issues that might arise with respect to such products.

Risks related to new product development also apply to acquisitions. For additional information, please see the risk factor above entitled, “Due to future changes in technology, changes in market demand, or changes in market expectations, portions of our inventory may become obsolete or excess.”

Intangible or other assets may become impaired, requiring us to record a significant charge to earnings.

Under U.S. Generally Accepted Accounting Principles, we review our assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable.  Intangible assets and our investment accounted for under the equity method are required to be tested for impairment at least annually.  We could be required to record a significant charge to earnings in our financial statements for the period in which any impairment of these assets is determined, which would adversely affect our results of operations for that period.

11

 
Our continued success depends on our ability to protect our intellectual property.

Our future success depends in part upon our ability to protect our intellectual property.  We rely principally on nondisclosure agreements, other contractual arrangements, trade secret law, trademark and patent law, to protect our intellectual property.  However, these measures may be inadequate to protect our intellectual property from infringement by others or prevent misappropriation of our proprietary rights.  In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do U.S. laws.  Our inability to protect our proprietary information and enforce our intellectual property rights through infringement proceedings could have a material adverse effect on our business, financial condition and results of operations.

The unplanned loss of current members of our senior management team and other key personnel may adversely affect our operating results.

The unexpected loss of senior management or other key personnel could impair our ability to carry out our business plan. We believe that our future success will depend in part on our ability to attract and retain highly skilled and qualified personnel. The loss of senior management or other key personnel may adversely affect our operating results as we incur costs to replace the departed personnel and potentially lose opportunities in the transition of important job functions.

Item 1B.    UNRESOLVED STAFF COMMENTS
 
 
None.
 
12

 
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, sales and marketing, application engineering and customer service
                 
Los Angeles, California
    13,000        
Warehouse, distribution, sales, application engineering and customer service
                 
Dexter, Michigan
    3,000        
Sales, design engineering, product testing and customer service
                 
Mississauga, Canada
    3,600        
Sales, application engineering andcustomer service
                 
High Wycombe, England
    12,000        
Sales, application engineering and customer service
                 
Paris, France
    9,700        
Sales, application engineering and customer service
                 
Munich, and Rodermark, Germany
    26,000        
Sales, application engineering and customer service
                 
Milan and Venice, Italy
    13,000        
Sales, application engineering and customer service
                 
Singapore
    9,300        
Sales, application engineering and customer service
                 
Shanghai, China
    8,000        
Sales, application engineering and customer service
                 
Guangzhou, China
    2,400        
Sales, application engineering and customer service
                 
Chennai, India
    5,400        
Sales, application engineering and customer service
                 
Liegnitz, Poland
    2,900        
Sales, application engineering and customer service
                 
Taichung, Taiwan
    221,000        
Manufacturing
                 
Ningbo, China
    34,000        
Manufacturing
 
(1)
Approximately 50,000 square feet is leased to a third-party under a lease, which expires April 30, 2010.
 
We own the Indianapolis facility and lease all other facilities.  The leases have terms expiring at various dates ranging from September 2009 to May 2017.  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.
 
13

 
Item 3.    LEGAL PROCEEDINGS
 
We are involved in various claims and lawsuits arising in the normal course of business.  We do not expect any of these claims, individually or in the aggregate, to have a material adverse effect on our financial position or results of operations.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Executive Officers of the Registrant

Executive officers are elected each year by the Board of Directors at the first board meeting following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and qualified.  There are no family relationships between any of our executive officers or between any of them and any of the members of the Board of Directors.

The following information sets forth as of October 31, 2008, the name of each executive officer and his or her age, tenure as an officer, principal occupation and business experience for the last five years:
 
Name
 
Age
 
Position(s) with the Company
Michael Doar
 
53
 
Chairman of the Board and Chief Executive Officer
James D. Fabris
 
57
 
President and Chief Operating Officer
John G. Oblazney
 
40
 
Vice President, Secretary, Treasurer and Chief Financial Officer
Sonja K. McClelland
 
37
 
Corporate Controller, Assistant Secretary
 
Michael Doar was elected Chairman of the Board and Chief Executive Officer on November 14, 2001.  Mr. Doar had held various management positions with Ingersoll Milling Machine Company from 1989 until 2001.  Mr. Doar has been a director of Hurco since 2000.

James D. Fabris was elected President and Chief Operating Officer on November 14, 2001.  Mr. Fabris served as Executive Vice President - Operations from November 1997 until his current appointment and previously served as a Vice President of Hurco since February 1995.

John G. Oblazney was elected Vice President, Secretary, Treasurer and Chief Financial Officer in September 2006.  Prior to joining us, Mr. Oblazney served as the Chief Financial Officer of Carrier Corporation’s Light Commercial Business, a division of United Technologies Corporation, since December 2005. Prior to that, Mr. Oblazney served in various other financial positions with Carrier Corporation from 2000 to 2005.  Prior to joining Carrier Corporation, Mr. Oblazney was employed for six years with Cooper Industries and employed three years by an international public accounting firm.

Sonja K. McClelland has been employed by Hurco since September 1996 and was elected Corporate Controller, Assistant Secretary in November 2004.  Ms. McClelland served as Corporate Accounting Manager from September 1996 to 1999, then as Division Controller for Hurco USA from September 1999 to November 2004.  Prior to joining Hurco, Ms. McClelland was employed for three years by an international public accounting firm.
 
14

 
PART II

Item 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Global Select Market under the symbol “HURC”.  The following table sets forth the high and low sale prices of the shares of our common stock for the periods indicated, as reported by the Nasdaq Global Select Market.

   
2008
   
2007
 
Fiscal Quarter Ended:
 
High
   
Low
   
High
   
Low
 
January 31                                                    
  $ 58.68     $ 30.24     $ 33.18     $ 24.61  
April 30                                                    
    52.12       33.41       47.86       33.07  
July 31                                                    
    49.30       23.11       56.28       39.12  
October 31                                                    
    38.24       16.92       60.44       39.77  

At January 7, 2009, the closing price of our common stock on the Nasdaq Global Select Market was $14.76.

We do not currently pay dividends on our common stock and intend to continue to retain earnings for working capital, and capital expenditures.

There were186 holders of record of our common stock as of January 7, 2009.

During the period covered by this report, we did not sell any equity securities that were not registered under the Securities Act of 1933, as amended.
 
The disclosure under the caption “Equity Compensation Plan Information” is included in Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
 
15

 
Item 6.    SELECTED FINANCIAL DATA
 

The Selected Financial Data presented below has 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 and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

   
Year Ended October 31
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
Statement of Operations Data:
 
(Dollars in thousands, except per share amounts)
 
Sales and service fees                                           
  $ 223,994     $ 188,047     $ 148,517     $ 125,509     $ 99,572  
Gross profit                                           
    82,617       71,082       53,325       42,558       30,298  
Selling, general and administrative expenses
    46,811       40,124       30,697       26,057       21,401  
Restructuring expense (credit) And other expense, net
    --       --       --       --       465  
Operating income                                           
    35,806       30,958       22,628       16,501       8,432  
Other income (expense)*
    (1,640 )     1,742       745       (64 )     (396 )
Net income                                           
    22,520       20,889       15,479       16,443       6,269  
  Earnings per common share-diluted                                              
    3.49       3.24       2.42       2.60       1.04  
Weighted average common shares outstanding-diluted
    6,444       6,440       6,397       6,336       6,026  
 
   
As of October 31
 
   
2008
   
2007
   
2006
   
2005
   
2004
 
Balance Sheet Data:
 
(Dollars in thousands)
 
Current assets*
  $ 151,312     $ 139,265     $ 103,434     $ 73,818     $ 56,472  
Current liabilities
    51,129       63,215       44,340       30,761       30,125  
Working capital*
    100,183       76,050       59,094       43,057       26,347  
Current ratio
    3.0       2.2       2.3       2.4       1.9  
Total assets*
    177,444       163,781       125,545       94,114       73,446  
Non-current liabilities*
    2,838       2,963       5,830       4,409       4,866  
Total debt
    --       --       4,010       4,136       4,600  
Shareholders’ equity
    123,477       97,603       75,375       58,944       38,455  
 
*Certain information for prior year has been reclassified to reflect current year presentation.
 
16

 
Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Hurco Companies, Inc. is an industrial technology company operating in a single segment.  We design and produce computerized machine tools, featuring our proprietary computer control systems and software, for sale through our own distribution network to the worldwide metal cutting market.  We also provide software options, control upgrades, accessories and replacement parts for our products, as well as customer service and training support.

The following overview is intended to provide a brief explanation of the principal factors that have contributed to our financial performance.  This overview is intended to be read in conjunction with the more detailed information that follows and our audited financial statements that appear elsewhere in this report.

The primary drivers of our operational performance in the past three years have been improved worldwide demand for our products, the increasing acceptance of our expanded product line and our success in selling and manufacturing outside of the United States.

The market for machine tools is an international market.  We have both significant foreign sales and manufacturing operations.  During fiscal 2008, more than 75% of our revenues were attributable to customers located abroad.  The percentage of revenues to customers located abroad has increased during the last fiscal year due in part to deterioration of the North American market for machine tool products, as well as the effect of a weaker U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes.  We sell our products through more than 100 independent agents and distributors in countries throughout North America, Europe and Asia.  We also have our own direct sales and service organizations in Canada, France, Germany, Italy, Singapore and the United Kingdom.  Our computerized metal cutting machine tools are manufactured in Taiwan to our specifications by our wholly owned subsidiary, Hurco Manufacturing Limited (HML).

Our sales to foreign customers are denominated, and payments by those customers are made in the prevailing currencies—primarily the Euro and Pound Sterling—in the countries in which those customers are located, and our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar.  Changes in currency exchange rates may have a material effect on our operating results and consolidated balance sheets as reported under U.S. Generally Accepted Accounting Principles.  For example, when a foreign currency increases in value relative to the U.S. Dollar, sales made (and expenses incurred) in that currency, when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when that currency has a lower value relative to the U.S. Dollar.  In our comparison of period-to-period results, we discuss not only the increases or decreases in those results as reported in our financial statements (which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements), but also the effect that changes in exchange rates had on those results. For additional information on the impact of translation of foreign currencies and our hedging practices, see Note 1 of Notes to Consolidated Financial Statements.

Our high levels of foreign manufacturing and sales also subject us to cash flow risks due to fluctuating currency exchange rates.  We seek to mitigate those risks through the use of various derivative instruments – principally foreign currency forward exchange contracts.

We experienced changes in material costs from inflation in fiscal 2008, which caused our gross margin to decline.  While some material costs have recently declined, our production cycle of approximately six months requires us to establish material costs at the time a purchase order is accepted, when costs may have been higher.
 
17

 
Government sources have confirmed that the U.S. economy has been in a recession since December 2007.  We first experienced a decline in sales orders in our North American market during the first quarter of fiscal 2008.  The deterioration in that market continued and became more severe in subsequent quarters.  During the second half of calendar year 2008, the recession became global in scope, impacting every market we serve and significantly affecting our sales and orders during the fourth fiscal quarter.  Our sales in the fourth quarter of fiscal 2008 were 5.3% lower than in the corresponding quarter of fiscal 2007 and, most significantly, 17.2% below those of the third quarter of 2008.  Similarly, our new orders in the fourth quarter of fiscal 2008 declined 27.0% from their level in the corresponding quarter of fiscal 2007 and 23.7% below the third quarter of fiscal 2008.  Economic conditions have continued to worsen since the beginning of fiscal 2009.  Many economists have indicated that the current deterioration in the global markets will remain or become more severe and continue for a prolonged period of time.

During the fourth quarter, we implemented various initiatives to reduce expenses while staying committed to our strategic plan of product innovation and penetration of developing markets.   We have also taken steps to reduce our inventories to reflect the decline in customer demand.  Since our production lead time is approximately six months, the impact of reduced production levels on our inventories may take several quarters to be fully realized.

We believe that, notwithstanding the severity of the current economic crisis, our company remains fundamentally stable.  We have a broad product line due to recent new product introductions, no outstanding debt and a strong cash position.

Results of Operations

The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Income expressed as a percentage of our 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
 
   
2008
   
2007
   
2006
   
Increase (Decrease)
 
                     
’08 vs. ’07
   
’07 vs. ’06
 
Sales and service fees
    100.0 %     100.0 %     100.0 %     19.1 %     26.6 %
Gross profit
    36.9 %     37.8 %     35.9 %     16.2 %     33.3 %
Selling, general and administrative expenses
    20.9 %     21.3 %     20.7 %     16.7 %     30.7 %
Operating income
    16.0 %     16.5 %     15.2 %     15.7 %     36.8 %
Other income (expense)*
    (0.7 %)     0.9 %     0.5 %     (194.1 %)     133.8 %
Net income
    10.1 %     11.1 %     10.4 %     7.8 %     35.0 %
 
*Certain information for prior years has been reclassified to reflect current year presentation.

Fiscal 2008 Compared to Fiscal 2007

Sales and Service Fees. Notwithstanding the severe decline in the fourth quarter of fiscal 2008, annual sales and service fees were the highest in our 40-year history, totaling $224.0 million, an increase of $35.9 million, or 19.1%, over fiscal 2007.  Of this increase, $22.7 million was attributable to operational growth and approximately $13.2 million was due to the favorable effect of a weakening U.S. Dollar on currency translation.  Computerized machine tool sales, which also were the highest in our history, totaled $199.2 million, an increase of 20.1% from the $165.8 million recorded in 2007, primarily driven by strong customer demand in European markets during the first nine months of the fiscal year, particularly for our higher end VMX product line.
 
18

 
Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the years ended October 31, 2008 and 2007 (in thousands):

   
October 31,
   
Increase (Decrease)
 
   
2008
   
2007
     
Amount
     
 %
 
North America
  $ 48,373       21.6 %   $ 52,133       27.7 %   $ (3,760 )     (7.2 %)
Europe
    163,807       73.1 %     125,446       66.7 %     38,361       30.6 %
Asia Pacific
    11,814       5.3 %     10,468       5.6 %     1,346       12.9 %
Total
  $ 223,994       100.0 %   $ 188,047       100.0 %   $ 35,947       19.1 %

In North America, sales and service fees decreased 7.2% as unit volumes decreased by 14.9% primarily in the second half of the year as a result of the global economic slowdown.  This decrease in volume was partially offset by improved product mix.

European sales and service fees increased by 30.6%, which includes a favorable impact due to changing currency rates of $12.4 million, or 9.9%.  Unit sales increased by 11.5% in fiscal 2008 compared to fiscal 2007 as a result of a strong European market during the first three quarters of the fiscal year and continued expansion into eastern European markets.  The remaining 9.2% of growth in European sales and service fees was primarily derived by continued demand for our higher end VMX product line.

Sales and service fees in the Asia Pacific region increased by 12.9%, due to penetration into new markets along with the favorable impact of changes due to currency exchange rates of $778,000, or 7.4%.

Net Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the years ended October 31, 2008 and 2007 (in thousands):

   
October 31,
   
Increase
 
   
2008
   
2007
     
Amount
 
   
%
 
                                     
Computerized Machine Tools
  $ 199,238       88.9 %   $ 165,832       88.2 %   $ 33,406       20.1 %
Service Fees, Parts and Other
    24,756       11.1 %     22,215       11.8 %     2,541       11.4 %
Total
  $ 223,994       100.0 %   $ 188,047       100.0 %   $ 35,947       19.1 %

Sales of computerized machine tools totaled $199.2 million in fiscal 2008, an increase of $33.4 million, or 20.1%, primarily driven by a strong European market and continued demand for our higher end VMX product line.

Orders and Backlog.  New order bookings in fiscal 2008, were $212.5 million, an increase of $13.6 million, or 6.8%, over the prior year.  Orders for fiscal 2008 compared to fiscal 2007 were favorably affected by approximately $11.7 million, or 5.9%, due to changes in currency exchange rates.  Unit orders increased 1.1% in Europe and decreased by 18.0% and 11.5% in North America and Asia Pacific, respectively.  These order rates were significantly impacted by an overall fourth quarter decline in unit orders of 32.4%.  Orders declined in all regions as our customers reacted to the sudden downturn in the markets they serve and limitations on their own ability to access the credit markets.  Backlog was $15.7 million at October 31, 2008, compared to $29.4 million at October 31, 2007.  We do not believe backlog is a useful measure of past performance or indicative of future performance.  Backlog orders as of October 31, 2008 are expected to be fulfilled in fiscal 2009.
 
19

 
Gross Margin.  Gross margin for fiscal 2008 was 36.9%, a decrease from the 37.8% margin realized in the corresponding 2007 period, reflecting the impact of higher material costs.

Operating Expenses.  Selling, general and administrative expenses for fiscal 2008 increased $6.7 million, or 16.7%, from those of fiscal 2007 and includes the unfavorable effect of currency translation of $2.2 million, or 5.6%.  The remaining increase of $4.5 million was attributable to increased global sales and marketing expenditures, which include increased expenses for trade shows, European agent sales commissions and marketing expenses for expansion of sales into emerging markets.

Operating Income.  Operating income for fiscal 2008 totaled $35.8 million, or 16.0% of sales, compared to $31.0 million, or 16.5%, of sales, in fiscal 2007.   The increase in operating income year-over-year primarily reflected growth in foreign sales and an improved product mix partially offset by higher material costs and operating expenses to support sales growth initiatives.

Other Income (Expense).  The decrease in other income of $3.4 million for fiscal 2008 compared to fiscal 2007 was primarily due to $2.3 million of currency exchange losses on inter-company receivables and payables denominated in foreign currencies, net of gains or losses on forward exchange contracts.  Included in this decrease was approximately $220,000 of net losses related to cash flow hedges of forecasted inter-company sales and purchases that were de-designated as production levels steeply declined in the fourth quarter of fiscal 2008.  Additionally, fiscal 2007 included income from our equity investment in a Taiwan contract manufacturer, which was sold during the fourth quarter of that year.

Provision for Income Taxes.  The effective tax rate for fiscal 2008 was 34.1%, compared to 36.2% for the same period in the prior year.  The reduction in the effective tax rate was primarily due to the utilization of tax credits and tax rates of international jurisdictions that were less than U.S. statutory rates.

Net Income.  Net income for fiscal 2008 was $22.5 million, or $3.49 per share, which is an increase of 7.8% over fiscal 2007 net income of $20.9 million, or $3.24 per share.

Fiscal 2007 Compared to Fiscal 2006

Sales and Service Fees. Sales and service fees for fiscal 2007 were $188.0 million, an increase of $39.5 million, or 26.6%, over fiscal 2006.  Of this increase, $28.5 million was attributable to operational growth and approximately $11.0 million was due to the favorable effect of a weakening U.S. Dollar on currency translation.  Computerized machine tool sales totaled $165.8 million, an increase of 28.6% from the $128.9 million recorded in 2006, primarily driven by strong worldwide demand for our products and an increase in the percentage of sales attributable to higher price machines as a result of our expanded product line.

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region for the years ended October 31, 2007 and 2006 (in thousands):

   
October 31,
   
Increase
 
   
2007
   
2006
     
Amount
 
   
%
 
North America
  $ 52,133       27.7 %   $ 50,563       34.0 %   $ 1,570       3.1 %
Europe
    125,446       66.7 %     87,735       59.1 %     37,711       43.0 %
Asia Pacific
    10,468       5.6 %     10,219       6.9 %     249       2.4 %
Total
  $ 188,047       100.0 %   $ 148,517       100.0 %   $ 39,530       26.6 %

In North America, sales and service fees increased 3.1% primarily due to improved mix as unit sales volumes decreased by 4.7% a result of general weakening in demand for the domestic machine tool market.
 
20

 
European sales and service fees increased by 43.0%, which includes a favorable impact due to changing currency rates of $10.5 million, or 11.9%.  Unit sales increased by 28.0% in fiscal 2007 compared to fiscal 2006 as a result of a strong European market and continued expansion into eastern European markets.  The remaining 15.0% of growth in European sales and service fees was primarily derived by continued demand for our higher end VMX product line.

Sales and service fees in the Asia Pacific region increased by 2.4%, due to increased volume of larger higher priced machines, partially offset by a 10.1% decline in overall unit volume.  The effect of a weaker U.S. Dollar when translating foreign sales for financial reporting purposes had a favorable impact of approximately $539,000, or 5.3%, on this region’s sales comparison for the full year.

Net Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category for the years ended October 31, 2007 and 2006 (in thousands):

   
October 31,
   
Increase
 
   
2007
   
2006
     
Amount
     
%
 
                                     
Computerized Machine Tools
  $ 165,832       88.2 %   $ 128,946       86.8 %   $ 36,886       28.6 %
Service Fees, Parts and Other
    22,215       11.8 %     19,571       13.2 %     2,644       13.5 %
Total
  $ 188,047       100.0 %   $ 148,517       100.0 %   $ 39,530       26.6 %

Sales of computerized machine tools totaled $165.8 million in fiscal 2007, an increase of $36.9 million, or 28.6%, primarily driven by a strong European market and continued demand for our higher end VMX product line.

Orders and Backlog.  New order bookings in fiscal 2007 were $199.0 million, an increase of $44.2 million, or 28.6%, over the prior year.  New order bookings increased by 6.1%, 43.6% and 5.2% in North America, Europe and Asia Pacific, respectively.  Europe was the primary contributor to the increased orders, driven by a strong market, expansion into new markets and favorable product mix.  Unit orders increased 26.1% in Europe and decreased by 6.7% and 10.7% in North America and Asia Pacific, respectively.  The reduction in North America was primarily due to a general weakening in demand for the domestic machine tool market, while Asia Pacific orders were down slightly due to continued development of the selling channels in China and India.  Orders for fiscal 2007 compared to fiscal 2006 were favorably affected by approximately $11.7 million, or 7.5%, due to changes in currency exchange rates.  Backlog was $29.4 million at October 31, 2007, compared to $16.1 million at October 31, 2006.  We do not believe backlog is a useful measure of past performance or indicative of future performance.  Backlog orders as of October 31, 2007 are expected to be fulfilled in fiscal 2008.

Gross Margin.  Gross margin for fiscal 2007 was 37.8%, an increase over the 35.9% margin realized in the corresponding 2006 period, reflecting the impact of higher sales and improved mix.

Operating Expenses.  Selling, general and administrative expenses for fiscal 2007 of $40.1 million increased $9.4 million, or 30.7%, from those of fiscal 2006 and includes the unfavorable effect of currency translation of $1.5 million, or 5.0%.  The increase was attributable to a $571,000 increase in product development expenses, a $4.5 million increase in global sales and marketing expenditures and a $4.4 million increase in general and administrative expenses.  The increased global sales and marketing expenditures include increased expenses for local trade shows, increased European agent sales commissions and marketing expenses for expansion of sales into emerging markets.  General and administrative expenses increased primarily as a result of incentive compensation, incremental healthcare related benefits, and increases in other miscellaneous administrative expenses.
 
21

 
Operating Income.  Operating income for fiscal 2007 totaled $31.0 million, or 16.5% of sales, compared to $22.6 million or 15.2% of sales, in fiscal 2006.  The increase in operating income year-over-year primarily reflected growth in foreign sales and service fees and improved mix partially offset by higher operating expenses.

Other Income (Expense).  Other income (expense), net in fiscal 2007 relates primarily to increased income from investments in minority-owned contract manufacturers in Taiwan accounted for under the equity method, tax deferred income earned on investments of cash, and currency exchange gains on inter-company receivables and payables denominated in foreign currencies, net of gains or losses on related forward contracts.

Provision for Income Taxes.  The effective tax rate for fiscal 2007 was 36.2%, compared to 33.0% for the same period in the prior year.  The 2006 lower effective tax rate was primarily due to a deduction generated from a change in tax code.

Net Income.  Net income for fiscal 2007 was $20.9 million, or $3.24 per share, which is an increase of 35.0% over fiscal 2006 net income of $15.5 million, or $2.42 per share.

Liquidity and Capital Resources

At October 31, 2008, we had cash and cash equivalents of $26.4 million compared to $29.8 million at October 31, 2007.  Approximately 54.9% of the $26.4 million of cash and cash equivalents is denominated in U.S. Dollars.  The remaining balances are denominated in the local currencies of our various foreign entities and are subject to fluctuations in currency exchange rates.

Working capital, excluding cash and short-term debt, was $67.1 million at October 31, 2008, compared to $36.3 million at October 31, 2007.  The increase in working capital primarily relates to increased derivative assets related to unrealized gains on forward exchange contracts, increased accounts receivable, increased inventory due to the recent decline in demand and the introduction of new products, and a reduction in accounts payable as a result of the cutback in production volume.

Capital expenditures were $5.5 million in fiscal 2008, $4.5 million in fiscal 2007, and $3.3 million in fiscal 2006.  Capital expenditures were primarily for an integrated computer system, software development projects and purchases of equipment related to expansion of our manufacturing facilities.  We funded these expenditures with cash flow from operations.
 
As of October 31, 2008, we had no debt or borrowings outstanding under any of our bank credit facilities.
 
We have an effective “shelf” registration statement on file with the SEC that allows us to offer and sell a variety of securities, including common stock, preferred stock, warrants, depositary shares and debt securities, up to an aggregate amount of $200.0 million, if and when authorized by the Board of Directors.

As of October 31, 2008 we had $6.7 million in investments of auction rate securities.  During December 2008, our auction rates securities were sold at par value.

Although we have not made any significant acquisitions in the recent past, we continue to receive information on businesses and assets, including intellectual property assets that are being sold.  Should attractive opportunities arise, we believe that our earnings, cash flow from operations, borrowings under our bank credit facilities, and the sale of securities from our shelf registration would provide sufficient resources to finance a possible acquisition.
 
22

 
Contractual Obligations and Commitments

The following is a table of contractual obligations and commitments as of October 31, 2008 (all amounts in thousands):

Payments Due by Period
 
   
Total
   
Less than
1 Year
   
1-3
Years
   
3-5
Years
   
More than 5
Years
 
Operating Leases
  $ 6,500     $ 2,533     $ 2,410     $ 1,017     $ 540  
Deferred Credits and Other
    782       --       --       --       782  
    Total                                              
  $ 7,282     $ 2,533     $ 2,410     $ 1,017     $ 1,332  

In addition to the contractual obligations and commitments disclosed above, we also have a variety of other obligations for the procurement of materials and services, none of which subject us to any material non-cancelable commitments.  While some of these obligations arise under long-term supply agreements, we are not committed under these agreements to accept or pay for requirements that are not needed to meet our production needs.  We have no material minimum purchase commitments or “take-or-pay” type agreements or arrangements.  Unrecognized tax benefits in the amount of approximately $613,000 have been excluded from the table above because we are unable to determine a reasonably reliable estimate of the timing of future payment.

We expect capital spending in fiscal 2009 to be approximately $4.4 million, which includes investments for capitalized software, capital equipment and costs to continue implementation of our integrated computer system.  We will fund these commitments with cash on hand and income from operations.

Off Balance Sheet Arrangements

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing.  At October 31, 2008, 56 such guarantees were outstanding totaling approximately $1.7 million.  Upon shipment, the customer has the risk of ownership.  The customer does not obtain title until the machine is paid in full.  We believe that the proceeds obtained from liquidation of the machine would cover any payments required by the guarantee.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles.  The preparation of financial statements in conformity with those accounting principles require us to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes.  Those judgments and estimates have a significant effect on the financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain.  Actual results could differ from those estimates.  We frequently re-evaluate our judgments and estimates that are based upon historical experience and on various other assumptions that are believed to be reasonable under the circumstances.  We do not believe we have any critical accounting policies or estimates.  We have evaluated our significant accounting policies and estimates that are disclosed in Note 1 of the Notes to Consolidated Financial Statements.
 
23

 
Item 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Interest Rate Risk

We had no borrowings outstanding under our bank credit facilities at October 31, 2008 and have not borrowed from our bank credit facilities since February 2005.  Note 5 of Notes to Consolidated Financial Statements set forth the interest rates related to our current credit facilities.

Foreign Currency Exchange Risk

In fiscal 2008, we derived more than 75% of our revenues, including export sales, from foreign markets.  All of our computerized machine tools and computer control systems, as well as certain proprietary service parts, are sourced by our U.S.-based engineering and manufacturing division and re-invoiced to our foreign sales and service subsidiaries, primarily in their functional currencies.

Our products components are sourced from foreign suppliers and built to our specifications by our wholly owned subsidiary in Taiwan.  Our purchases are predominantly in foreign currencies and in some cases our arrangements with these suppliers include foreign currency risk sharing agreements, which reduce (but do not eliminate) the effects of currency fluctuations on product costs. The predominant portion of the exchange rate risk associated with our product purchases relates to the New Taiwan Dollar.

We enter into foreign currency forward exchange contracts from time to time to hedge the cash flow risk related to forecasted inter-company sales and forecasted inter-company and third party purchases denominated in, or based on, foreign currencies (primarily the Euro, Pound Sterling, and New Taiwan Dollar).  We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies. We do not speculate in the financial markets and, therefore, do not enter into these contracts for trading purposes.

Forward contracts for the sale or purchase of foreign currencies as of October 31, 2008, which are designated as cash flow hedges under FASB Statement 133, “Accounting Standards for Derivative Instruments and Hedging Activities,” were as follows:
 
               
Contract Amount at
Forward Rates in
U.S. Dollars
   
Forward
Contracts
 
Notional Amount
in Foreign
Currency
   
Weighted
Avg.
Forward
Rate
   
Contract
Date
   
October 31,
2008
 
Maturity
Dates
Sale Contracts:
                         
Euro
    33,400,000     $ 1.5046     $ 52,252,730     $ 42,500,042  
Nov 2008-Oct 2009
Sterling
    4,215,000     $ 1.9247     $ 8,112,611     $ 6,756,793  
Nov 2008-Oct 2009
Purchase Contracts:
                                 
New Taiwan Dollar
    990,000,000       30.15 *   $ 32,834,950     $ 30,266,754  
Nov 2008-Oct 2009
*NT Dollars per U.S. Dollar
 
24

 
Forward contracts for the sale or purchase of foreign currencies as of October 31, 2008, which were entered into to protect against the effects of foreign currency fluctuations on receivables and payables and are not designated as hedges under Statement 133 denominated in foreign currencies, were as follows:
 
               
Contract Amount at
Forward Rates in
U.S. Dollars
   
Forward
Contracts
 
Notional Amount
in Foreign
Currency
   
Weighted Avg.
Forward
Rate
   
Contract
Date
   
October 31,
2008
 
Maturity
Dates
Sale Contracts:
                         
Euro
    18,403,269     $ 1.4094     $ 25,937,568     $ 23,437,198  
Nov 2008-Mar 2009
Singapore Dollar
    1,116,718     $ 1.4139     $ 789,814     $ 753,305  
Nov 2008
Sterling
    1,755,731     $ 1.6809     $ 2,951,168     $ 2,825,637  
Nov 2008-Jan 2009
Purchase Contracts:
                                 
New Taiwan Dollar
    94,155,000       32.36 *   $ 2,909,327     $ 2,852,891  
Nov 2008
*  NT Dollars per U.S. Dollar

We are exposed to foreign currency exchange risks related to our investment in net assets in foreign countries.  To manage this risk, we entered into a forward contract on November 26, 2007, with a notional amount of €3.0 million.  We have designated this forward contract as a hedge of our net investment in Euro denominated assets.  We have selected the forward method under the guidance of the Derivatives Implementation Group Statement 133 Issue H8, “Foreign Currency Hedges: Measuring the Amount of Ineffectiveness in a Net Investment Hedge.” The forward method requires all changes in the fair value of the forward to be reported as a cumulative translation adjustment in Accumulated Other Comprehensive Loss in the same manner as the underlying hedged net assets.  As of October 31, 2008, we had a gain of $624,000, net of tax, recorded as a cumulative translation adjustment in Accumulated Other Comprehensive Income (Loss) related to the forward contract.

Forward contracts for the sale or purchase of foreign currencies as of October 31, 2008, which are designated as net investment hedges under Statement 133 were as follows:

   
 
   
 
   
Contract Amount at
Forward Rates in
U.S. Dollars
   
Forward
Contracts
 
Notional Amount
in Foreign
Currency
   
Weighted Avg.
Forward
Rate
   
Contract
Date
   
October 31,
2008
 
Maturity
Date
Sale Contracts:
                         
Euro
    3,000,000     $ 1.4837     $ 4,451,100     $ 3,827,010  
November 2008
 
25

 
Management’s Annual Report on Internal Control Over Financial Reporting

To the Shareholders and
Board of Directors
of Hurco Companies, Inc.:

Management of Hurco Companies, Inc. (the “Company”), has assessed the effectiveness of internal controls over financial reporting as of October 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting.

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In management’s opinion, the Company’s internal controls over financial reporting as of October 31, 2008, are effective based on the criteria specified above.

Our independent registered accounting firm, Crowe Horwath, LLP, who also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting.  Crowe Horwath LLP has issued their attestation report, which is included in Part II, Item 8 of this Annual Report on Form 10-K.


/s/ Michael Doar
Michael Doar,
Chairman of the Board & Chief Executive Officer

/s/ John G. Oblazney
John G. Oblazney,
Vice President & Chief Financial Officer

/s/ Sonja K. McClelland
Sonja K. McClelland
Corporate Controller, Assistant Secretary
(Principal Accounting Officer)

Indianapolis, Indiana
January 12, 2009
 
26

 
Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

To the Shareholders and
Board of Directors
of Hurco Companies, Inc.

We have audited the accompanying consolidated balance sheets of Hurco Companies, Inc. and Subsidiaries as of October 31, 2008, and 2007, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended October 31, 2008.  In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule listed in the index under Item 15.  We also have audited the Company’s internal control over financial reporting as of October 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Hurco Companies, Inc. management is responsible for these financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s annual report on internal control over financial reporting.  Our responsibility is to express an opinion on these financial statements and the financial statement schedule and an opinion on the company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.  A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
27

 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hurco Companies, Inc and Subsidiaries as of October 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2008 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.  Also, in our opinion, Hurco Companies, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of October 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


/s/Crowe Horwath LLP

Indianapolis, Indiana
January 12, 2009
 
28

 
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME

   
Year Ended October 31
 
   
2008
   
2007
   
2006
 
   
(Dollars in thousands, except per share amounts)
 
Sales and service fees                                                                            
  $ 223,994     $ 188,047     $ 148,517  
Cost of sales and service                                                                            
    141,377       116,965       95,192  
Gross profit                                                                          
    82,617       71,082       53,325  
Selling, general and administrative expenses                                                                            
    46,811       40,124       30,697  
Operating income                                                                          
    35,806       30,958       22,628  
Interest expense                                                                            
    63       201       359  
Interest income                                                                            
    542       699       527  
Investment income                                                                            
    465       339       9  
Earnings from equity investments                                                                            
    12       1,048       865  
Other income (expense), net                                                                            
    (2,596 )     (78 )     (556 )
Income before income taxes                                                                          
    34,166       32,765       23,114  
Provision for income taxes (Note 7)                                                                            
    11,646       11,876       7,635  
Net income                                                                            
  $ 22,520     $ 20,889     $ 15,479  
                         
Earnings per common share – basic                                                                            
  $ 3.51     $ 3.27     $ 2.45  
Weighted average common shares outstanding – basic
    6,415       6,382       6,317  
Earnings per common share – diluted                                                                            
  $ 3.49     $ 3.24     $ 2.42  
Weighted average common shares outstanding – diluted
    6,444       6,440       6,397  

 
The accompanying notes are an integral part of the consolidated financial statements.
 
29

 
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS

ASSETS
 
 
As of October 31
 
   
2008
   
2007
 
Current assets:
(Dollars in thousands, except per share amounts)
 
   Cash and cash equivalents                                                                                    
  $ 26,394     $ 29,760  
   Short-term investments                                                                                    
    6,674       10,000  
   Accounts receivable, less allowance for doubtful accounts of  $678 in 2008 and $751 in 2007                                    
    31,952       28,625  
   Inventories                                                                                    
    66,368       61,121  
   Deferred tax assets, net                                                                                    
    5,444       8,258  
   Derivative assets 
    12,463       485  
   Other                                                                                    
    2,017       1,016  
Total current assets                                                                             
    151,312       139,265  
                 
Property and equipment:
               
Land                                                                                 
    782       776  
Building                                                                                 
    7,127       7,135  
Machinery and equipment                                                                                 
    14,885       13,629  
Leasehold improvements                                                                                 
    1,765       1,473  
      24,559       23,013  
Less accumulated depreciation and amortization                                                                                 
    (10,961 )     (11,617 )
      13,598       11,396  
Software development costs, less accumulated amortization
    5,711       5,960  
Investments and other assets                                                                                    
    6,823       7,160  
    $ 177,444     $ 163,781  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
Current liabilities:
               
Accounts payable                                                                                 
  $ 26,691     $ 33,056  
Accounts payable-related parties                                                                                 
    1,612       2,430  
Accrued expenses and other                                                                                 
    17,598       21,558  
Accrued warranty expenses                                                                                 
    2,536       2,449  
    Derivative liabilities                                                                                    
    2,692       3,722  
Total current liabilities                                                                             
    51,129       63,215  
                 
Non-current liabilities:
               
    Deferred tax liability, net                                                                                    
    2,056       1,956  
Deferred credits and other                                                                                 
    782       1,007  
      2,838       2,963  
Commitments and contingencies (Notes 11 and 12)
               
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, 13,250,000 shares authorized, 6,420,851 and 6,392,220 shares issued and outstanding in 2008 and 2007, respectively
    642       639  
Additional paid-in capital
    51,690       50,971  
Retained earnings 
    71,889       49,369  
Accumulated other comprehensive loss 
    (744 )     (3,376 )
Total shareholders’ equity
    123,477       97,603  
    $ 177,444     $ 163,781  
 
 
The accompanying notes are an integral part of the consolidated financial statements.
 
30

 
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
Year Ended October 31
 
   
2008
   
2007
   
2006
 
Cash flows from operating activities:
 
(Dollars in thousands)
 
Net income                                                                          
  $ 22,520     $ 20,889     $ 15,479  
Adjustments to reconcile net income to Net cash provided by operating activities:
                       
Provision for doubtful accounts                                                                      
    (73 )     116       (207 )
Deferred Tax Provision                                                                      
    1,048       1,216       491  
Equity in income of affiliates                                                                      
    (12 )     (1,048 )     (865 )
Depreciation and amortization                                                                      
    3,023       2,106       1,504  
          Stock-based Compensation                                                                            
    535       480       17  
Change in assets/liabilities
                       
(Increase) decrease in accounts receivable
    (6,260 )     (1,742 )     (1,312 )
(Increase) decrease in inventories                                                                   
    (11,832 )     (14,116 )     (12,726 )
Increase (decrease) in accounts payable                                                                   
    (7,649 )     7,821       9,318  
Increase (decrease) in accrued expenses                                                                   
    3,304       6,474       3,423  
Other                                                                   
    (4,443 )     (8,003 )     (1,076 )
  Net cash provided by operating activities
    161       14,193       14,046  
                         
Cash flows from investing activities:
                       
Proceeds from sale of property and equipment
    17       --       16  
Purchase of property and equipment                                                                          
    (4,580 )     (3,325 )     (1,212 )
    Purchase of investments                                                                            
    (9,100 )     (24,000 )     --  
    Sale of investments                                                                            
    12,100       14,000       --  
Software development costs                                                                          
    (934 )     (1,185 )     (2,089 )
Other proceeds (investments)                                                                          
    (80 )     1,898       (335 )
Net cash used for investing activities                                                                      
    (2,577 )     (12,612 )     (3,620 )
                         
Cash flows from financing activities:
                       
    Repayment of first mortgage                                                                            
    --       (4,010 )     (126 )
    Tax benefit from exercise of stock options
    36       298       744  
    Proceeds from exercise of common stock options
    151       186       562  
Net cash provided by (used for) financing activities
    187       (3,526 )     1,180  
                         
Effect of exchange rate changes on cash                                                                            
    (1,137 )     1,859       681  
Net increase (decrease) in cash                                                                      
    (3,366 )     (86 )     12,287  
                         
Cash and cash equivalents at beginning of year
    29,760       29,846       17,559  
                         
Cash and cash equivalents at end of year                                                                            
  $ 26,394     $ 29,760     $ 29,846  
                         
    Supplemental disclosures:                                                                            
                       
   Cash paid for:
                       
Interest                                                                      
  $ 12     $ 157     $ 314  
Income taxes                                                                      
  $ 15,799     $ 9,971     $ 3,920  


The accompanying notes are an integral part of the consolidated financial statements.
 
31

 
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

   
 
Common Stock
   
 
 
Additional
         
Accumulated
Other
Comprehensive
       
(Dollars in thousands, except Shares Issued and Outstanding)
 
Shares Issued
& Outstanding
   
Amount
   
Paid-In
Capital
   
Retained
Earnings
   
Income
(Loss)
   
Total
 
                         
Balances, October 31, 2005
    6,220,220     $ 622     $ 48,701     $ 13,001     $ (3,380 )   $ 58,944  
                                                 
Net income
    --       --       --       15,479       --       15,479  
                                                 
Translation of foreign currency financial statements
    --       --       --       --       1,288       ,288  
                                                 
Unrealized loss of derivative instruments, net of tax
    --       --       --       --       (1,659 )     (1,659 )
     Comprehensive income
                                            15,108  
                                                 
Exercise of common stock options
    126,300       13       549       --       --       562  
                                                 
Tax benefit from exercise of stock options
    --       --       744       --       --       744  
                                                 
Stock-based compensation expense
    --