Hurco Companies (HURC)

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The following table presents, for the fiscal years indicated, selected items from the Consolidated Statements of Income expressed as a percentage of worldwide sales and service fees and the year-to-year percentage changes in the dollar amounts of those items.

		Percentage of Revenues												Year-to-Year % Change
		2007				2006				2005				Increase (Decrease)
														07 vs. 06				06 vs. 05
Sales and service fees			100.0	%			100.0	%			100.0	%			26.6	%			18.3	%
Gross profit			37.8	%			35.9	%			33.9	%			33.3	%			25.3	%
Selling, general and Administrative expenses			21.3	%			20.7	%			20.7	%			30.7	%			17.8	%
Operating income			16.5	%			15.2	%			13.1	%			36.8	%			37.1	%
Interest expense (income)			(0.03	%)			0.2	%			0.3	%			(125.1	%)			(27.0	%)
Net income			11.1	%			10.4	%			13.1	%			35.0	%			(5.9	%)

Fiscal 2007 Compared to Fiscal 2006>

Sales and Service Fees. Sales and service fees for fiscal 2007 were the highest in our 39-year history, totaling $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 effects of a weakening U.S. dollar on currency translation.  Computerized machine tool sales, which also were the highest in our history, 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				%
Americas		$	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 the Americas, 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.

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.

 

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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 the Americas, 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.

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.

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.

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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.

Fiscal 2006 Compared to Fiscal 2005>

Sales and Service Fees. Sales and service fees for fiscal 2006 were $148.5 million, an increase of $23.0 million, or 18.3%, over fiscal 2005, of which $24.6 million was attributable to operational growth offset by approximately $1.6 million of unfavorable effects of currency translation.  Computerized machine tool sales totaled $128.9 million, an increase of 20.2% from the $107.3 million recorded in 2005, primarily driven by strong worldwide demand for our products.  Approximately $4.0 million, or 17.6%, of the increase in sales of computerized machine tools was the result of sales of our lathe machine line, which we introduced in the first quarter of fiscal 2005.

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, 2006 and 2005 (in thousands):

		October 31,																Increase
		2006								2005								Amount				%
Americas		$	50,563				34.0	%		$	43,194				34.4	%		$	7,369				17.1	%
Europe			87,735				59.1	%			75,225				59.9	%			12,510				16.6	%
Asia Pacific			10,219				6.9	%			7,090				5.7	%			3,129				44.1	%
Total		$	148,517				100.0	%		$	125,509				100.0	%		$	23,008				18.3	%

In the Americas, sales and service fees increased $7.4 million, or 17.1%, due to the growth of our VM product line combined with continued demand for our higher end VMX product line and incremental sales of the lathe product line.  Lathe unit shipments increased 15.0% in fiscal 2006 compared to fiscal 2005.  Unit shipments of vertical machining centers (which exclude lathes) increased approximately 28.1% in fiscal 2006 compared to 16.8% for similar products in the United States as reported by the Association for Manufacturing Technology.

In Europe, our sales and service fees increased by $12.5 million, or 16.6%, which includes an unfavorable impact due to changes in currency rates of $1.8 million or 2.4%.  Unit sales increased 19.2% when comparing fiscal 2006 to 2005.

Sales and service fees in the Asia Pacific region were not significantly affected by changes in currency exchange rates, but did reflect improved activity in Asian markets.  Shipments of our lathe product line increased 9.0% and shipments of vertical machining centers increased 48.7% in fiscal 2006 compared to fiscal 2005.

 

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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, 2006 and 2005 (in thousands):

		October 31,																Increase
		2006								2005								Amount				%
Computerized  Machine Tools		$	128,946				86.8	%		$	107,313				85.5	%		$	21,633				20.2	%
Service Fees, Parts  and Other			19,571				13.2	%			18,196				14.5	%			1,375				7.6	%
Total		$	148,517				100.0	%		$	125,509				100.0	%		$	23,008				18.3	%

Sales of computerized machine tools totaled $128.9 million in fiscal 2006, an increase of $21.6 million, or 20.2%, primarily driven by strong worldwide demand for our existing products.  Approximately $4.0 million of the increase in sales of computerized machine tools was a result of sales of our lathe machine line, which was introduced in the first quarter of fiscal 2005.

Orders and Backlog.  New order bookings for fiscal 2006 totaled $154.8 million, an increase of $31.9 million, or 26.0%, as compared to $122.9 million recorded in fiscal 2005.  New order bookings increased by 17.6%, 27.4% and 63.3% in the Americas, Europe and Asia Pacific, respectively.  Unit orders were also strong in all geographic regions in fiscal 2006. Unit orders increased 33.4%, 29.4% and 66.7% in North America, Europe and Asia Pacific, respectively.  Orders for fiscal 2006 compared to fiscal 2005 were unfavorably affected by approximately $1.7 million due to changes in currency exchange rates. Backlog was $16.1 million at October 31, 2006, compared to $10.0 million at October 31, 2005.  We do not believe backlog is a useful measure of past performance or indicative of future performance.  Backlog orders as of October 31, 2006 are expected to be fulfilled in fiscal 2007.

Gross Margin.  Gross margin for fiscal 2006 was 35.9%, an increase over the 33.9% margin realized in the corresponding 2005 period, due principally to the increased sales volume.

Operating Expenses.  Selling, general and administrative expenses for fiscal 2006 of $30.7 million increased $4.6 million, or 17.6%, from those of fiscal 2005.  The increase was primarily due to a $2.6 million increase in global sales and marketing expenditures and a $2.0 million increase in general and administrative expenses.  The increased global sales and marketing expenditures include increased expenses for local and international trade shows, increased European agent sales commissions and marketing expenses for expansion of sales into emerging markets. The principal factor contributing to the increase in general and administrative expenses was consulting and audit fees for compliance with the internal control-reporting requirement of Section 404 of the Sarbanes Oxley Act of 2002, which became applicable to us in fiscal 2006.

Operating Income.  Operating income for fiscal 2006 totaled $22.6 million, or 15.2% of sales, compared to $16.5 million or 13.1% of sales, in the prior year.

Other Income (Expense).  Other income (expense), net decrease in fiscal 2006 relates primarily to currency exchange losses on inter-company receivables and payables denominated in foreign currencies, net of gains or losses on related forward contracts.

Provision for Income Taxes.  We incurred income tax expense of $7.6 million in fiscal 2006.  In contrast we had no income tax expense in 2005 primarily due to the utilization of net operating loss carryforwards of approximately $9.8 million.

Net Income.  Net income for fiscal 2006 was $15.5 million, or $2.42 per share, compared to $16.4 million, or $2.60 per share, in the prior year.  The improvement in net income was primarily due to increased sales of our computerized machine tools and improved gross margins, partially offset by increased operating expenses and tax provision.

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Liquidity and Capital Resources>

At October 31, 2007, we had cash and cash equivalents of $39.8 million compared to $29.8 million at October 31, 2006.  Approximately 58.0% of the $39.8 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 $36.3 million at October 31, 2007, compared to $29.4 million at October 31, 2006.  The increase in working capital relates to higher inventory levels to support increased order volume, particularly for our larger machines. We expect our operating working capital requirements will increase in fiscal 2008 as our sales and service fees increase.  We will fund these increased requirements with cash flow from operations and borrowings under our bank credit facilities.  Capital expenditures were $4.5 million in fiscal 2007, $3.3 million in fiscal 2006, and $3.0 million in fiscal 2005.  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, 2007 we had no debt or borrowings outstanding under our domestic and European bank credit facilities.  The $4.0 million mortgage balance outstanding as of October 31, 2006 was paid in full on April 30, 2007.

 

On December 7, 2007, we entered into a new domestic credit agreement that provides us with a $30.0 million unsecured revolving credit facility and a separate letter of credit facility in the amount of 100.0 million New Taiwan Dollars.  On the same day, we entered into a Taiwan revolving credit agreement of 100.0 million New Taiwan Dollars which is an uncommitted demand credit facility. In the event the Taiwan facility is not available, the Taiwan letter of credit facility from the domestic agreement would enable us to provide credit enhancement to a replacement lender in Taiwan. We also entered into a £1.0 million revolving facility agreement in the United Kingdom.  The new domestic facility and U.K. facility will mature on December 7, 2012. The new domestic agreement and new U.K. agreement replace our prior agreements, which would have matured on January 31, 2008.  We incurred no early termination or prepayment penalties in connection with replacement of these prior facilities. See Note 4 of Notes to Consolidated Financial Statements for further discussions on debt.

 

On July 12, 2007, we filed a registration statement on Form S-3 with the SEC utilizing the “shelf” registration process.  The registration statement was declared effective on July 26, 2007.  This registration statement 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.

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.

 

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Contractual Obligations and Commitments>

The following is a table of contractual obligations and commitments as of October 31, 2007 (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		$	4,162			$	1,710			$	1,683			$	761			$	8
Deferred Credits and Other			1,007				--				--				--				1,007
Total		$	5,169			$	1,710			$	1,683			$	761			$	1,015

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.

We expect capital spending in fiscal 2008 to be approximately $5.6 million, which includes investments for further expansion of our manufacturing operations, capitalized software and costs to continue implementation of our integrated computer system.

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, 2007, 54 such guarantees were outstanding totaling approximately $1.6 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 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 have evaluated our significant accounting estimates and disclosed them in Note 1 of the Notes to Consolidated Financial Statements.

 

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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, 2007 and have not borrowed from our bank credit facilities since February 2005.  Note 4 of Notes to Consolidated Financial Statements set forth the interest rates related to our current credit facilities.

Foreign Currency Exchange Risk>

In fiscal 2007, more than two-thirds of our revenues, including export sales, were derived 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 are sourced from foreign suppliers or built to our specifications by our wholly owned subsidiary in Taiwan or overseas contract manufacturer.  These 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 our exchange rate risk associated with 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, 2007 which are designated as cash flow hedges under SFAS No. 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, 2007		Maturity Dates
Sale Contracts:
Euro		34,000,000		$1.3728		$46,675,200		$49,308,127		Nov 2007-Oct 2008
Sterling		3,985,000		$1.9926		$  7,940,511		$  8,236,052		Nov 2007-Oct 2008
Purchase Contracts:
New Taiwan Dollar		895,000,000		32.33*		$27,683,266		$28,060,651		Nov 2007-Oct 2008

*NT Dollars per U.S. Dollar

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We also enter into foreign currency forward exchange contracts to protect against the effects of foreign currency fluctuations on receivables and payables denominated in foreign currencies.  These derivative instruments are not designated as hedges under SFAS 133, “Accounting Standards for Derivative Instruments and Hedging Activities.”  The forward contracts for the sale or purchase of those currencies related to receivables and payables as of October 31, 2007 are 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, 2007		Maturity Dates
Sale Contracts:
Euro		16,677,079		$1.4187		$23,659,772		$24,168,767		Nov 2007-Dec 2007
Singapore Dollar		10,247,257		$1.4887		$  6,883,359		$  7,105,725		Nov 2007-Jan 2008
Sterling		1,535,391		$2.0417		$  3,134,808		$  3,190,363		Nov 2007-Dec 2007
Purchase Contracts:
New Taiwan Dollar		555,390,000		32.37*		$17,157,553		$17,259,035		Nov 2007-Jan 2008

*  NT Dollars per U.S. Dollar

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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, 2007, 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, 2007, are effective based on the criteria specified above.

Our independent registered accounting firm, Crowe Chizek and Company LLC, who also audited our consolidated financial statements, audited the effectiveness of our internal control over financial reporting.  Crowe Chizek and Company LLC 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 10, 2008

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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, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for the years ended October 31, 2007 and 2006.  In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule as it relates to the fiscal year 2007 and 2006 information which is listed in the index under Item 15.  We also have audited the Company’s internal control over financial reporting as of October 31, 2007, 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.

 

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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, 2007 and 2006, and the results of their operations and their cash flows for the years ended October 31, 2007 and 2006 in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, the related consolidated financial statement schedule as it relates to the fiscal year 2007 and 2006 information, when considered in relation to the basic 2007 and 2006 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, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/Crowe Chizek and Company LLC

Indianapolis, Indiana

January 10, 2008

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Report of Independent Registered Public Accounting Firm>

To the Shareholders and

Board of Directors

of Hurco Companies, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 15(a)(1) present fairly, in all material respects, the results of operations and cash flows of Hurco Companies, Inc. and its subsidiaries for the year ended October 31, 2005 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15(a) (2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP

Indianapolis, Indiana

January 18, 2006

 

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HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF INCOME>

		Year Ended October 31
		2007				2006				2005
		(Dollars in thousands, except per share amounts)
Sales and service fees		$	188,047			$	148,517			$	125,509
Cost of sales and service			116,965				95,192				82,951
Gross profit			71,082				53,325				42,558
Selling, general and administrative expenses			40,124				30,697				26,057
Operating income			30,958				22,628				16,501
Interest expense (income)			(65	)			259				355
Earnings from equity investments			1,048				865				418
Other income (expense), net			694				(120	)			(482	)
Income before income taxes			32,765				23,114				16,082
Provision for (benefit from) income taxes (Note 6)			11,876				7,635				(361	)
Net income		$	20,889			$	15,479			$	16,443
Earnings per common share – basic		$	3.27			$	2.45			$	2.66
Weighted average common shares outstanding – basic			6,382				6,317				6,171
Earnings per common share – diluted		$	3.24			$	2.42			$	2.60
Weighted average common shares outstanding – diluted			6,440				6,397				6,336

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

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HURCO COMPANIES, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS>

	As of October 31
		2007				2006
Current assets:	(Dollars in thousands, except per share amounts)
Cash and cash equivalents		$	39,760			$	29,846
Accounts receivable, less allowance for doubtful accounts of  $751 in 2007 and $635 in 2006			25,645				22,248
Inventories			61,121				43,343
Deferred tax assets, net			8,258				5,320
Other			4,481				2,677
Total current assets			139,265				103,434
Property and equipment:
Land			776				761
Building			7,135				7,234
Machinery and equipment			13,629				12,952
Leasehold improvements			1,473				1,147
			23,013				22,094
Less accumulated depreciation and amortization			(11,617	)			(12,944	)
			11,396				9,150
Software development costs, less accumulated amortization			5,960				5,580
Investments and other assets			7,160				7,381
		$	163,781			$	125,545
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	33,056			$	24,482
Accounts payable-related parties			2,430				2,123
Accrued expenses and other			25,280				15,673
Accrued warranty expenses			2,449				1,926
Current portion of long-term debt			--				136
Total current liabilities			63,215				44,340
Non-current liabilities:
Long-term debt			--				3,874
Deferred tax liability, net			1,956				1,431
Deferred credits and other			1,007				525
			2,963				5,830
Commitments and contingencies (Notes 10 and 11)
Shareholders’ equity:
Preferred stock: no par value per share, 1,000,000 shares authorized, no shares issued			--				--
Common stock: no par value, $.10 stated value per share, 12,500,000 shares authorized, 6,392,220 and 6,346,520 shares issued and outstanding in 2007 and 2006, respectively			639				635
Additional paid-in capital			50,971				50,011
Retained earnings			49,369				28,480
Accumulated other comprehensive income (loss)			(3,376	)			(3,751	)
Total shareholders’ equity			97,603				75,375
		$	163,781			$	125,545

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

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HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS>

 

		Year Ended October 31
		2007				2006				2005
Cash flows from operating activities:		(Dollars in thousands)
Net income		$	20,889			$	15,479			$	16,443
Adjustments to reconcile net income to Net cash provided by operating activities:
Provision for doubtful accounts			116				(207	)			119
Deferred Tax Provision			1,216				491				(4,389	)
Equity in income of affiliates			(1,048	)			(865	)			(418	)
Depreciation and amortization			2,106				1,504				1,331
Tax benefit from exercise of stock options (prior to Adoption of SFAS 123(R)			--				--				1,146
Change in assets/liabilities
(Increase) decrease in accounts receivable			(1,742	)			(1,312	)			(3,606	)
(Increase) decrease in inventories			(14,116	)			(12,726	)			(660	)
Increase (decrease) in accounts payable			7,821				9,318				(1,191	)
Increase (decrease) in accrued expenses			6,474				3,423				2,653
Other			(7,523	)			(1,059	)			549
Net cash provided by operating activities			14,193				14,046				11,977
Cash flows from investing activities:
Proceeds from sale of property and equipment			--				16				--
Purchase of property and equipment			(3,325	)			(1,212	)			(1,879	)
Software development costs			(1,185	)			(2,089	)			(1,161	)
Change in restricted cash			--				--				277
Other proceeds (investments)			1,898				(335	)			224
Net cash used for investing activities			(2,612	)			(3,620	)			(2,539	)
Cash flows from financing activities:
Advances on bank credit facilities			--				--				4,977
Repayments on bank credit facilities			--				--				(5,124	)
Repayments of term debt			--				--				(200	)
Repayment of first mortgage			(4,010	)			(126	)			(117	)
Tax benefit from exercise of stock options			298				744				--
Proceeds from exercise of common stock options			186				562				797
Net cash provided by (used for) financing activities			(3,526	)			1,180				333
Effect of exchange rate changes on cash			1,859				681				(461	)
Net increase in cash			9,914				12,287				9,310
Cash and cash equivalents at beginning of year			29,846				17,559				8,249
Cash and cash equivalents at end of year		$	39,760			$	29,846			$	17,559
Supplemental disclosures:
Cash paid for:
Interest		$	157			$	314			$	331
Income taxes		$	9,971			$	3,920			$	1,509

 

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

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HURCO COMPANIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY>

		Common Stock								Additional								Accumulated Other
(Dollars in thousands, except Shares Issued and Outstanding)		Shares Issued & Outstanding				Amount				Paid-In Capital				Retained Earnings (Deficit)				Comprehensive Income (Loss)				Total
Balances, October 31, 2004			6,019,594			$	602			$	46,778			$	(3,442	)		$	(5,483	)		$	38,455
Net income			--				--				--				16,443				--				16,443
Translation of foreign currency financial statements			--				--				--				--				(838	)			(838	)
Unrealized gain of derivative instruments, net of tax			--				--				--				--				2,941				2,941
Comprehensive income																							18,546
Exercise of common stock options			200,626				20				777				--				--				797
Tax benefit from exercise of stock options			--				--				1,146				--				--				1,146
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				1,288
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