SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] for the fiscal year ended October 31, 2003 or
Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from _________ to _________.
Commission File No. 0-9143
HURCO COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1150732
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
One Technology Way
Indianapolis, Indiana 46268
- ------------------------------------------ -----------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (317) 293-5309
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
No Par Value
------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes No X
---- ---
The aggregate market value of the Registrant's voting stock held by
non-affiliates as of April 30, 2003 (the last day of our most recently completed
second quarter) was $8,430,569.
The number of shares of the Registrant's common stock outstanding as of January
2, 2004 was 5,609,360.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Registrant's Proxy
Statement for its 2004 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, among others, changes in
general economic and business conditions that affect market demand for machine
tools and related computer control systems, software products, and replacement
parts, changes in manufacturing markets, adverse currency movements, innovations
by competitors, performance of our contract manufacturers, governmental actions
and initiatives, including import and export restrictions and tariffs, and
developments in the relations among the U.S., China and Taiwan.
PART I
Item 1. BUSINESS
General
Hurco Companies, Inc. is an industrial technology company. We design and produce
interactive, personal computer (PC) based, computer control systems and software
and computerized machine tools for sale to the metal working industry through a
worldwide sales, service and distribution network. Our proprietary computer
control systems and software products are sold primarily as integral components
of our computerized machine tool products.
We pioneered the application of microprocessor technology and conversational
programming software for application on computer controls for machine tools and,
since our founding in 1968, 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. 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 or forming a
particular part from a blueprint or computer-aided design (CAD) and immediately
begin production of that part.
Our executive offices and principal design, engineering, and manufacturing
management operations are headquartered in Indianapolis, Indiana. Sales,
application engineering and service offices are located in Indianapolis,
Indiana; High Wycombe, England; Munich, Germany; Paris, France; Milan, Italy;
Singapore and Taichung, Taiwan. We also have a representative sales office in
Shanghai, China. Distribution facilities are located in Los Angeles, California
and Venlo, the Netherlands; a manufacturing facility is located in Taichung,
Taiwan.
Our strategy is to design, develop, produce and market a comprehensive line of
computerized machine tools for the global metal working market, which
incorporates our proprietary interactive computer control technology. This
technology is designed to enhance the 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 used with standard PC hardware and
have emphasized an operator friendly design that employs both interactive
conversational and graphical programming software.
Products
During fiscal 2002, we discontinued several under-performing product lines and
sold the related assets, to enable us to focus our resources and technology
development on our core products. Our core products consist primarily of general
purpose computerized machine tools for the metal cutting industry (principally
vertical machining centers) into which our proprietary Ultimax(R) software and
computer control systems have been fully integrated. We discontinued and sold
the Delta(TM) series computer control and related Dynapath(TM) milling machine
product line, and related parts and service activities, along with press brake
(metal bending machine) product lines and all tooling products related to press
brake applications. We continue to produce computer control systems and related
software for press brake applications that are sold primarily as retrofit
control systems. In addition, we produce and distribute software options,
control upgrades, hardware accessories and replacement parts related to our
continuing product lines and provide operator training and support services to
our customers.
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
Year ended October 31,
------------------------------------------------------------------------------------
2003 2002 2001
-------------------------- ------------------------- -------------------------
Continuing Products and Services
Computerized Machine Tools $60,977 80.7% $ 52,056 73.9% $ 69,631 75.4%
Computer Control Systems 3,044 4.0% 3,194 4.5% 4,782 5.2%
and Software *
Service Parts 7,616 10.1% 7,240 10.3% 8,038 8.7%
Service Fees 3,460 4.6% 3,240 4.6% 3,749 4.1%
----------- ----------- ------------ ---------- ----------- ----------
Total $75,097 99.4% $ 65,730 93.3% $ 86,200 93.4%
Discontinued Products and Services 435 0.6% 4,756 6.7% 6,067 6.6%
----------- ----------- ------------ ---------- ----------- ----------
Total $75,532 100.0% $ 70,486 100.0% $ 92,267 100.0%
=========== =========== ============ ========== =========== ==========
* Amounts shown do not include computer control systems sold as an integrated
component of computerized machine tools.
Computerized Machine Tool Products
We design, manufacture and market computerized machine tools which are equipped
with a fully integrated interactive Ultimax(R) computer control system. Our
Ultimax(R) twin screen "conversational" computer control system is sold solely
as a fully integrated feature of Hurco computerized machine tools. This computer
control system enables a machine tool operator to create a complex
two-dimensional machining program directly from a blue print or CAD. An operator
with little or no programming experience can successfully create a program and
begin the machining of a part in a short time with minimal special training.
Since the initial introduction of the Ultimax(R) computer control, we have added
enhancements related to operator programming productivity, CAD compatibility,
data processing throughput and motion control speed and accuracy. Our current
Ultimax(R) 4 programming stations use a Pentium* processor featuring an operator
console with liquid crystal display screens and incorporate personal computer
(PC) platform components. This upgradeable computer control product offers
enhanced performance while ensuring access to cost effective computing hardware
and software.
Our current line of Ultimax(R) metal cutting machine tools is a complete family
of products, which include vertical machining centers with an x-axis travel of
24, 26, 30, 40, 42, 50 and 64 inches. During fiscal 2002 we introduced the first
model in our new VM series, the VM1, a vertical machining center with a 26 inch
x-axis travel, a substantially smaller footprint and significantly lower price
than our previous entry-level vertical machining center. In fiscal 2003, we
introduced the VM2, a vertical machining center with a 40 inch x-axis travel.
The VM2 has a smaller footprint and lower price than our vertical machining
center with an x-axis travel of 42 inches. We also introduced four new
higher-performance machine models in our VMX series vertical machining center
line. These products provide different levels of performance features for
different market applications ranging in price from $36,000 to $165,000.
Computer Control Systems and Software
The following computer control systems and software products are marketed
directly to end-users and or to original equipment manufacturers.
o Autobend(R)
Autobend(R) computer control systems are applied to metal bending press brake
machines that form parts from sheet metal and steel plate and 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(R) product line since 1968. We currently market two models of
our Autobend(R) 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 of such equipment.
o CAM and Software Products
In addition to our standard computer control features, we offer software option
products for programming two and three-dimensional parts. These products are
marketed to users of our computerized machine tools equipped with our
Pentium*-based Ultimax(R) computer control systems. Our Advanced Velocity
Control (AVC) and Adaptive Surface Finish (ASF), high performance machining
software options enable a customer to increase machine throughput using higher
cutting feed rates. The ASF software option facilitates optimized surface
finishes on complex parts using faster high resolution part data transfers.
Other products in this line are WinMax(R), a Windows** based off-line
programming system; DXF, a data file transfer software option; and UltiNet(TM),
a networking software option. The DXF software option eliminates manual data
entry of part features by transferring AutoCAD(TM) drawing files directly into
an Ultimax(R) computer control, or into our off-line programming software,
substantially increasing operator productivity. UltiNet(TM) 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.
We also offer conversational part and tool dimension probing options for
Ultimax(R) based machines. These options permit the computerized dimensional
measurement of machined parts and the associated cutting tools. This
"on-machine" technique significantly improves the throughput of the measurement
process when compared to traditional "off-machine" approaches.
Parts and Service
Our 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 new product sales. We also service and
support a substantial installed base of existing customers. Our service
organization also sells software options, computer controls upgrades,
accessories and replacement parts for our products. Our after-sale parts and
service business helps strengthen our customer relationships and provides
continuous information concerning the evolving requirements of end-users.
Marketing and Distribution
We sell our products through approximately 200 independent agents and
distributors in approximately 40 countries throughout North America, Europe and
Asia. We also have our own direct sales personnel in England, France, Germany,
Italy, Singapore and China, which are among the world's principal machine tool
consuming countries. During fiscal 2003, no distributor accounted for more than
5% of our sales and service fees. Approximately 89% of the worldwide demand for
computerized machine tools and computer control systems comes from outside the
U.S. In fiscal 2003, approximately 70% of our revenues were from overseas
customers.
The end-users of our products are precision tool, die and mold manufacturers,
independent metal parts manufacturers and specialized production applications or
prototype shops within large manufacturing corporations. Industries served
include aerospace, defense, medical equipment, energy, transportation and
computer equipment.
Our computerized machine tool software options and accessories are sold
primarily to end-users. We sell our Autobend(R) computer control systems to
original equipment manufacturers of new machine tools who integrate them with
their own products prior to the sale of those products to their own customers,
to retrofitters of used machine tools who integrate them with those machines as
part of the retrofitting operation and to end-users who have an installed base
of machine tools, either with or without related computer control systems.
During fiscal 2003, no single end-user of our products accounted for more than
5% of our total sales and service fees.
We believe that advances in industrial technology and the related demand for
process improvements drive demand for our products.
Other factors affecting demand include:
o the need to continuously improve productivity and shorten cycle time,
o an aging machine tool installed base that will require replacement with
more advanced and efficient technology created by shorter product life
cycles,
o the industrial development of emerging countries in Asia and Eastern
Europe, and
o the declining supply of skilled machinists.
However, demand for our products is highly dependent upon economic conditions
and the general level of business confidence, as well as such factors as
production capacity utilization and changes in governmental policies regarding
tariffs, corporate taxation and other investment incentives. By marketing and
distributing our products on a worldwide basis, we reduce the potential impact
on our total sales and service fees by adverse changes in economic conditions in
any particular geographic region.
Competition
We compete with many other companies in the United States and international
markets. Several of these competitors are larger and have greater financial
resources than we do. We strive to compete effectively by incorporating unique,
patented software and other proprietary features into our products that offer
enhanced productivity, greater 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.
In the United States and European metal cutting markets, major competitors
include Haas Automation, Inc., Cincinnati Machine, Deckel, Maho Gildemeister
Group (DMG), Bridgeport Machines, Ltd. and Fadal Engineering along with a large
number of foreign manufacturers including Okuma Machinery Works Ltd., Mori Seiki
Co., Ltd., Masak and Matsuura Machinery Corporation.
Manufacturing
Our manufacturing strategy is based on global sourcing of components and a
network of contract suppliers and sub-contractors who manufacture our products
in accordance with our proprietary design, quality standards and cost
specifications. This has enabled us to lower product costs, lower working
capital per sales dollar and increase our worldwide manufacturing capacity
without significant incremental investment in capital equipment or increased
personnel.
Our computerized metal cutting machine tools are manufactured to our
specifications, primarily by our wholly owned subsidiary in Taiwan, Hurco
Manufacturing Limited (HML), which we established in fiscal 2000. This
subsidiary has increased our overall capacity and reduced or eliminated our
dependence on other Taiwan contract manufacturers. In addition, we have a 24%
ownership interest in a contract machine manufacturer that produces certain of
our models. HML and our affiliated machine manufacturer conduct final assembly
operations and are supported by a network of sub-contract suppliers of
components and sub-assemblies.
We also have a contract manufacturing agreement for computer control systems
with a Taiwanese-based affiliate in which we have a 35% ownership interest. This
company is manufacturing our Ultimax(R) and Autobend(R) computer control systems
to our specifications, and is engaged primarily in the sourcing of industry
standard computer components and proprietary parts, final assembly and test
operations. We source one of the proprietary Ultimax(R) computer components
(PCB) from a sole domestic supplier with whom we have had a long-term
relationship.
We work closely with our manufacturing subsidiary and affiliates to increase
their production capacity to meet the demand for our machine tool products and
believe that such capacity is sufficient to meet our current and projected
demand. We also continue to consider additional contract manufacturing resources
that will increase our long-term capacity, and we believe that, except for the
sole-sourced PCB, alternative sources for standard and proprietary components
are available; however, any prolonged interruption of operations or significant
reduction in capacity or performance capability of these principal Taiwan-based
manufacturing facilities or the PCB supplier would have a material adverse
effect on our operations.
Backlog
Backlog consists of firm orders received from customers and distributors but not
shipped. Backlog was $8.2 million, $5.3 million and $9.1 million as of October
31, 2003, 2002, and 2001, respectively.
Intellectual Property
We consider certain features of our products to be proprietary. We own, directly
or through a subsidiary, a number of patents that are significant to our
business.
In fiscal 2002, we acquired the core technology assets of a software development
company for $1.9 million. As part of the acquisition, we obtained ownership of
three existing patents and one pending patent related to computer control
technology, which we expect to incorporate in our proprietary computer control
system.
We own patents for an object-oriented, open architecture methodology for
computer control software. We also hold a non-exclusive license covering
features of the automatic tool changer offered with certain of our computerized
machining centers as well as a patent for a manual tool changing apparatus.
Research and Development
Research and development expenditures for new products and significant product
improvements, included as period operating expenses, were $1.8 million, $2.4
million and $3.5 million in fiscal 2003, 2002, and 2001, respectively. In
addition, we recorded expenditures of $679,000 in 2003, $534,000 in 2002, and
$665,000 in 2001 related to software development projects that were capitalized.
Employees
We had 232 employees at the end of fiscal 2003, none of which are covered by a
collective-bargaining agreement or represented by a union. We have experienced
no employee-generated work stoppages or disruptions and we consider our employee
relations to be satisfactory.
Geographic Areas
Financial information about geographic areas is set forth in Note 15 to the
Consolidated Financial Statements.
We are subject to the risks of doing business on a global basis, including
foreign currency fluctuation risks, changes in general economic and business
conditions in the countries and markets that we serve and government actions and
initiatives including import and export restrictions and tariffs.
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 as soon as reasonably practical
after the filing date.
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, computer control
assembly, sales, application engineering and
customer service
Los Angeles, California 13,000 Warehouse, distribution, sales, application
engineering and customer service
High Wycombe, England 12,000 Sales, application engineering and
customer service
Paris, France 4,800 Sales, application engineering and
customer service
Munich, Germany 19,600 Sales, application engineering and
customer service
Milan, Italy 4,850 Sales, application engineering and
customer service
Singapore 3,000 Sales, application engineering and
customer service
Shanghai, China 1,100 Sales, application engineering and
customer service
Taichung, Taiwan 65,333 Manufacturing
- -------------------------------------------------------------------------------------------------------------------
(1) Approximately 45,000 square feet is leased to a third-party under a lease
which expires January 30, 2005.
We own the Indianapolis facility and lease all other facilities. The leases have
terms expiring at various dates ranging from January 2004 to April 2008. We
believe that all of our facilities are well maintained and are adequate for our
needs now and in the foreseeable future. We do not believe that we would
experience any difficulty in replacing any of the present facilities if any of
our leases were not renewed at expiration.
Item 3. LEGAL PROCEEDINGS
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 consolidated 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 December 31, 2003, the name of each
executive officer, his age, tenure as an officer, principal occupation and
business experience for the last five years:
Name Age Position(s) with the Company
Michael Doar 48 Chairman of the Board and Chief
Executive Officer
James D. Fabris 52 President and Chief Operating Officer
Roger J. Wolf 63 Senior Vice President, Secretary,
Treasurer and Chief Financial
Officer
David E. Platts 51 Vice President, Technology
Stephen J. Alesia 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.
Roger J. Wolf has been Senior Vice President, Secretary, Treasurer and Chief
Financial Officer since January 1993.
David E. Platts has been employed by Hurco since 1982, and was elected Vice
President, Technology in May 2000. Mr. Platts previously served as Vice
President of Research and Development since 1989.
Stephen J. Alesia has been the Corporate Controller since joining Hurco in June
1996 and was elected an executive officer in September 1996. Prior to joining
Hurco, Mr. Alesia was employed for seven years by an international public
accounting firm.
PART II
Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"HURC". The following table sets forth the high and low sales prices of the
shares of our common stock for the periods indicated, as reported by the Nasdaq
National Market.
2003 2002
---------- -- --------- --------- --- ------------
Fiscal Quarter Ended: High Low High Low
- --------------------
---------- --------- --------- ------------
January 31................................. $2.030 $1.300 $2.780 $2.050
April 30................................... 1.670 1.400 3.350 2.030
July 31.................................... 3.150 1.520 2.950 1.500
October 31................................. 2.740 2.100 2.220 1.450
We do not currently pay dividends on our common stock and intend to continue to
retain earnings for working capital, capital expenditures and debt reduction.
There were approximately 294 holders of record of our common stock as of January
2, 2004.
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" in Item
12 of this report is incorporated by reference in response to this item.
Item 6. SELECTED FINANCIAL DATA
The Selected Financial Data presented below have been derived from our
Consolidated Financial Statements for the years indicated and should be read in
conjunction with the Consolidated Financial Statements and related notes set
forth elsewhere herein.
Year Ended October 31
--------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ------------- --------- ----------- -----------
Statement of Operations Data: (In thousands, except per share amounts)
Sales and service fees (1)......... $ 75,532 $ 70,486 $ 92,267 $ 96,204 $ 88,238
Gross profit....................... 20,822 15,246 (2) 23,262 25,377 24,174
Selling, general and
administrative expenses......... 18,749 19,658 24,040 23,538 21,259
Restructuring expense (credit)
and other expense, net.......... (124) 2,755 143 300 (103)
Operating income (loss)............ 2,197 (7,167) (921) 1,539 3,018
Interest expense................... 658 634 790 939 1,293
License fee income and
litigation settlement fees, net. -- 163 723 5,365 304
Net income (loss).................. 462 (8,263) (1,597) 5,035 1,802
Earnings (loss)
per common share-diluted........ 0.08 (1.48) (.28) .84 .30
Weighted average common
shares outstanding-diluted...... 5,582 5,583 5,670 6,020 6,061
(1) Sales and service fees for discontinued products were $435, $4,756, $6,067, $10,156, and $7,286, for the
years ended 2003 through 1999, respectively.
(2) Includes $1,083 of inventory write-down provision.
As of October 31
------------------------------------------------------------------------
2003 2002 2001 2000 1999
------------ ----------- ----------- ----------- -----------
Balance Sheet Data: (Dollars in thousands)
Current assets................... $42,390 $ 41,535 $ 49,510 $ 49,195 $52,856
Current liabilities.............. 20,154 21,185 18,217 23,124 19,580
Working capital.................. 22,236 20,350 31,293 26,071 33,276
Current ratio.................... 2.1 2.0 2.7 2.1 2.7
Total assets..................... 57,958 57,152 66,217 65,024 69,632
Non-current liabilities.......... 9,063 7,950 12,532 3,009 13,904
Total debt....................... 9,222 8,885 12,000 3,736 14,172
Shareholders' equity............. 28,741 28,017 35,468 38,891 36,148
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table presents, for the fiscal years indicated, selected items
from the Consolidated Statements of Operations expressed as a percentage of
worldwide sales and service fees and the year-to-year percentage changes in the
dollar amounts of those items.
Percentage of Revenues Year-to-Year % Change
------------------------------------------- ------------------------------
2003 2002 2001 Increase (Decrease)
----------- ------------ ------------ ------------------------------
03 vs. 02 02 vs. 01
------------- ------------
Sales and service fees.......... 100.0% 100.0% 100.0% 7.2% (23.6%)
Gross profit.................... 27.6% 21.6% 25.2% 36.6% (34.5%)
Selling, general and
Administrative expenses...... 24.8% 27.9% 26.1% (4.6%) (18.2%)
Restructuring expense and
Other expenses, net.......... (0.2%) 3.9% 0.2% N/A N/A
Operating income (loss)......... 2.9% (10.2%) (1.0%) N/A N/A
License fee income, net......... -- 0.2% 0.8% -- (77.4%)
Interest expense................ 0.9% 0.9% 0.9% 3.8% (19.7%)
Net income (loss)............... 0.6% (11.7%) (1.7%) N/A N/A
Fiscal 2003 Compared With Fiscal 2002
Net income for fiscal 2003 was $462,000, or $.08 per share, compared to a net
loss of $8.3 million in the prior year. We attribute our return to profitability
to incremental sales from a new, entry-level machine model (the VM1) introduced
in late fiscal 2002, strengthening European currencies in relation to the U.S.
Dollar and the implementation of restructuring and cost reduction actions over
the past 18 months. Results for fiscal 2002 were adversely impacted by $3.8
million of restructuring expense.
We developed the VM1 to improve our competitiveness in the entry-level machining
center market. The VM1 has been successful in both the domestic and
international markets. In the United States, we have obtained an approximate 20%
market share in the entry-level machining center market. In fiscal 2003, we
shipped 285 VM1 units worldwide, which resulted in approximately $11.0 million
of incremental machine sales.
Our operating results for fiscal 2003 were also favorably impacted by changes in
foreign currency exchange rates, particularly the Euro, in relation to the U.S.
Dollar when translating foreign sales and service fees into U.S. Dollars for
financial reporting purposes. As noted in the following table, approximately
63.9% of our net sales and service fees in fiscal 2003 were derived from
European markets. The weighted average exchange rate for the Euro during fiscal
2003 was $1.10, as compared to $.93 for fiscal 2002, an increase of 18%.
Net Sales and Service Fees by Geographic Region
The following tables set forth net sales by geographic region for the years
ended October 31, 2003 and 2002 (in thousands):
October 31,
-------------------------------------------------
2003 2002
------------------------ ----------------------
Americas $ 24,313 32.2% $ 24,148 34.3%
Europe 48,277 63.9% 44,509 63.1%
Asia Pacific 2,942 3.9% 1,829 2.6%
---------- ---------- ---------- --------
Total $ 75,532 100.0% $ 70,486 100.0%
========== ========== ========== ========
Total sales and service fees on a worldwide basis were $75.5 million in fiscal
2003, compared to $70.5 million in the prior fiscal year, a $5.0 million, or 7%,
increase. However, on a constant dollar basis, sales and service fees were $68.7
million, a $1.8 million decrease.
In the Americas, sales and service fees from continuing products and services
increased $4.5 million, or 23%, due primarily to the successful introduction of
the VM1, in late fiscal 2002. This increase was offset by a decrease of $4.3
million in sales of discontinued products, the liquidation of which was
substantially completed in fiscal 2002.
In Europe, sales and service fees increased by $3.8 million as a result of the
favorable effect of stronger European currencies. However, when measured at
constant exchange rates, sales and service fees in Europe decreased $3.0
million, or 7%, reflecting the continuing weakness in industrial equipment
spending and reduced consumption of machine tools by many manufacturing
companies, particularly in Germany.
Sales and service fees in Asia Pacific were not significantly affected by
currency rates, but reflect improved activity in Asian markets.
In the fourth quarter of fiscal 2003, sales and service fees improved over the
first three fiscal quarters, reflecting an improvement in worldwide computerized
machine tool demand from the depressed levels of the past three years.
Net Sales and Service Fees by Product Category
The following table sets forth net sales and service fees by product category
for years ended October 31, 2003 and 2002 (in thousands):
October 31,
---------------------------------------------------------
2003 2002
-------------------------- --------------------------
Continuing Products and Services
Computerized Machine Tools $ 60,977 80.7% $ 52,056 73.9%
Computer Control Systems and Software 3,044 4.0% 3,194 4.5%
Service Parts 7,616 10.1% 7,240 10.3%
Service Fees 3,460 4.6% 3,240 4.6%
------------ ---------- ------------ ----------
Total $ 75,097 99.4% $ 65,730 93.3%
Discontinued Products and Services* 435 0.6% 4,756 6.7%
------------ ---------- ------------ ----------
Total $ 75,532 100.0% $ 70,486 100.0%
============ ========== ============ ==========
* Discontinued product sales were made solely in the United States.
Sales of continuing machine tool products increased $8.9 million, or 17%, of
which $6.1 million was attributable to the favorable effects of foreign currency
translation. Unit shipments of continuing machine tool models increased 23%, as
sales of the VM1 more than offset a decline in the balance of the product line.
The average net selling price per unit of continuing machine tool models
decreased approximately 5% due to product mix and discounting, the effects of
which were partially offset by the favorable effects of currency translation.
When measured at constant exchange rates, the average net selling price per
continuing unit declined approximately 16%.
New order bookings for fiscal 2003 were $77.9 million, an increase of 16% as
compared to $67.0 million recorded in fiscal 2002. When measured at constant
exchange rates, new order bookings increased $3.5 million, or 5%. New order
bookings for continuing products and services increased $7.8 million, or 12%,
when measured at constant exchange rates. The increase in orders for continuing
products in constant U.S. Dollars was attributable to orders for the VM1 model,
which more than offset the effect of weak order rates in the first nine months
of fiscal 2003 related to the balance of the product line. New order bookings
increased significantly in the fourth quarter of fiscal 2003 and were $13.9
million, $20.6 million, $18.9 million and $24.5 million for each of the four
quarters in fiscal 2003. Backlog was $8.2 million at October 31, 2003 compared
to $5.3 million at October 31, 2002.
Gross profit margin increased in fiscal 2003 to 27.6% from 21.6% (23.2%
excluding a $1.1 million restructuring charge) in fiscal 2002, due in part to
strengthening European currencies as well as previously reported employee cost
reductions and fewer sales of discontinued products, which were liquidated at
discounted prices.
Selling, general and administrative ("SG&A") expenses for fiscal 2003 of $18.7
million declined $900,000, or 5%, from those of the corresponding 2002 period.
When measured at constant exchange rates, SG&A expenses decreased $2.1 million,
or 11%, from fiscal 2002, as a result of previously reported employee cost
reductions, lower research and development expenses, and reduced sales and
marketing expenditures. The decrease was offset, in part, by the effects of a
weaker U.S. Dollar when translating expenses incurred outside the United States
for financial reporting purposes.
Other expense, net includes $51,000 related to certain stock options which are
subject to variable plan accounting as described in Note 8 to the Consolidated
Financial Statements. Expense for this item in future periods will be directly
impacted by changes in the price of our common stock until the options are
exercised. Other expense, net in fiscal 2003 also includes currency exchange
losses on inter-company receivables and payables denominated in foreign
currencies, net of gains or losses on related forward contracts, and other
non-operating income and expense items.
The provision for income taxes is related to the earnings of two foreign
subsidiaries. In the United States and certain other foreign jurisdictions, we
have net operating loss carryforwards for which we have a 100% valuation reserve
at October 31, 2003. The provision for income tax increased in fiscal 2003
because of increased earnings from our taxable foreign subsidiaries.
Fiscal 2002 Compared With Fiscal 2001
Our net loss for the year ended October 31, 2002, which was more than five times
greater than that reported for fiscal 2001, was due primarily to substantially
lower sales and service fees as result of a continuing decline in machine tool
orders in both the U.S. and Europe. The Association for Manufacturing
Technology, the machine tool industry's trade association, reported that in
2002, the U.S. dollar value of orders for machine tools decreased 25%, and there
was a corresponding deterioration in our European markets.
Also contributing to the loss for fiscal 2002 were restructuring and other
special charges totaling $3.8 million, which consisted primarily of: (a)
non-cash inventory write-downs of $1.1 million, which were recorded as an
increase in the cost of sales, and the write-off of capitalized software
development costs of $1.0 million, which was recorded as a restructuring
expense, (b) severance costs of $1.1 million related to personnel reductions,
and (c) a reserve of $1.1 million (of which $896,000 was recorded in the fourth
fiscal quarter) for potential expenditures that might be required pursuant to a
disputed claim regarding a terminated facility lease in the United Kingdom,
which is more fully discussed below.
During fiscal 2002, we discontinued several under-performing product lines, and
sold the related assets, to enable us to focus our resources and technology
development on our core products. These continuing core products, known as
milling machines and vertical machining centers, consist primarily of general
purpose computerized machine tools for the metal cutting industry into which our
proprietary Ultimax(R) software and computer control systems have been fully
integrated. Discontinued and sold were the Delta(TM) series computer control and
related Dynapath(TM) milling machine product line, and related parts and service
activities, along with press brake product lines and all tooling products
related to press brake applications. These discontinued product lines were
marketed exclusively in the United States.
During fiscal 2002, we also eliminated 53 domestic employee positions, which we
expect will result in annual cost reductions of approximately $3.8 million, of
which $2.1 million was realized in fiscal 2002. The positions that were
eliminated were those related to the discontinued product lines as well as some
positions associated with our realigned and consolidated domestic sales and
service operations.
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. The scope and cost of the repairs alleged by the
lessor to be required evolved throughout fiscal 2002 and 2003 as investigations
and negotiations proceeded. On September 30, 2003, we settled this claim with
the lessor for (pound)684,000 (approximately $1.2 million), which we had
previously accrued. The settlement payment was due and paid in the first quarter
of fiscal 2004.
The following tables set forth net sales by geographic region and product
category for the years ended October 31, 2002 and 2001 (in thousands):
Net Sales and Service Fees by Geographic Region
October 31,
---------------------------------------------------------
2002 2001
---------------------------- --------------------------
Americas............................................. $ 24,148 34.3% $ 34,779 37.7%
Europe .............................................. 44,509 63.1% 54,977 59.6%
Asia Pacific......................................... 1,829 2.6% 2,511 2.7%
------------- ----------- ----------- ----------
Total........................................... $ 70,486 100.0% $ 92,267 100.0%
============= =========== =========== ==========
Net Sales and Service Fees by Product Category
October 31,
----------------------------------------------------------
2002 2001
---------------------------- --------------------------
Continuing Products and Services
Computerized Machine Tools...................... $ 52,056 73.9% $ 69,631 75.4%
Computer Control Systems and Software........... 3,194 4.5% 4,782 5.2%
Service Parts................................... 7,240 10.3% 8,038 8.7%
Service Fees.................................... 3,240 4.6% 3,749 4.1%
----------- ----------- ---------- ---------
Total...................................... $ 65,730 93.3% $ 86,200 93.4%
Discontinued Products and Services................... 4,756 6.7% 6,067 6.6%
------------- ----------- ----------- ----------
Total....................................... $ 70,486 100.0% $ 92,267 100.0%
============= =========== =========== ==========
Our total sales and service fees were $70.5 million in fiscal 2002, a $21.8
million, or 24%, decline compared to fiscal 2001. Sales of computerized machine
tools (other than discontinued products) declined $17.6 million, or 25%,
compared to fiscal 2001, reflecting the continuing global weakness in industrial
equipment spending and reduced consumption of machine tools by many
manufacturing companies, with the decline comprising $6.8 million, $10.1 million
and $671,000 in the United States, Europe and Southeast Asia, respectively.
Non-machine tool revenues also declined due to reduced activity levels in our
market sectors, with the decline being most pronounced in the U.S.
The following table sets forth machine unit volume and average net selling price
for computerized machine tools by continuing and discontinued products:
Computerized Machine Tools - Units Sold 2002 2001
---------------- ----------------
Continuing Products 697 88.9% 942 92.4%
Discontinued Products 87 11.1% 77 7.6%
------ ------- ------ -------
Total 784 100.0% 1,019 100.0%
Average Net Selling Price - Per Unit (in thousands) 2002 2001
----------- -----------
Continuing Products $ 74.7 $ 73.9
Discontinued Products $ 39.6 $ 47.5
Total $ 70.8 $ 71.9
The average net selling price per machine unit of continuing products increased
due to the effect of stronger European currencies when translating foreign sales
for financial reporting purposes which more than offset the effect of increased
discounting due to weak market conditions.
New order bookings for continuing products in fiscal 2002 were $62.2 million
compared to $83.3 million in fiscal 2001, a 25% decline. New orders for
computerized machine tools (other than discontinued products) declined 27% in
U.S. dollars worldwide. The decline, which was experienced in all of our
geographic markets, reflected a sharp decrease in orders for vertical machining
centers, our primary product line. Backlog was $5.3 million at October 31, 2002,
compared to $9.1 million at October 31, 2001.
Gross margin for fiscal 2002, exclusive of inventory write-downs recorded in
cost of sales, declined to 23.2% from 25.2% in fiscal 2001, due to the decline
in our sales of vertical machining centers and our sale of approximately $4.8
million in discontinued products at discounted prices. Gross margin did improve
in the last three quarters of fiscal 2002 compared to the immediately preceding
quarter, although the improvement was due primarily to the cost reductions
implemented over the preceding eighteen months.
Selling, general and administrative expenses for fiscal 2002 of $19.7 million
were $4.4 million, or 18%, lower than those for fiscal 2001, due to our cost
reduction programs. We expect operating expenses to be lower in 2003 as we
experience a full year's benefit of cost reductions initiated in fiscal 2002.
Non-operating items consisted of interest expense of $634,000 in fiscal 2002,
which was $156,000, or 20%, lower than in fiscal 2001, primarily due to reduced
borrowings. License fee income and litigation settlement fees in fiscal 2002 and
2001 consisted of several licenses that were granted during the year. The
licensing program that resulted in these fees was effectively completed in the
first quarter of fiscal 2002 and we do not expect additional license fee income
in the foreseeable future. Earnings from equity investments are from our two
affiliates which are accounted for using the equity method. Other expense in
fiscal 2002 was not significant and in fiscal 2001, consisted primarily of the
costs of typhoon-related flood damage at our manufacturing facility in Taiwan.
The provision for income taxes is related to the earnings of two foreign
subsidiaries.
Liquidity and Capital Resources
At October 31, 2003, we had cash and cash equivalents of $5.3 million, exclusive
of $622,000 restricted cash related to derivative instruments, compared to $4.4
million at October 31, 2002. Cash generated from operations totaled $2.3 and
$6.2 million at October 31, 2003 and 2002, respectively.
The weakening of the U.S. dollar in relation to European currencies subsequent
to October 31, 2003, will result in a temporary increase in restricted cash
related to derivative instruments, pending the liquidation of forward contracts
in the normal course during fiscal 2004. Anticipated cash losses on these
forward contracts will be funded by the increased U.S. dollar value of the
related inter-company sales which are being hedged and; as a result, we do not
expect cash flow from operations to be adversely affected.
Working capital, excluding short-term debt, was $21.6 million at October 31,
2003, approximately the same as at October 31, 2002. Cash flow from operations
benefited $1.3 million in fiscal 2003 from accelerated collections of accounts
receivable and $1.5 million from planned reductions of finished machines in
inventory. These amounts were substantially offset by reductions in accounts
payable and accrued expenses due principally to timing of payments related to
prior year foreign taxes and other operating items. We expect our operating
working capital requirements to increase in fiscal 2004, commensurate with any
increase in sales and service fees. Any such increase will be funded by cash
flow from operation and borrowings under our bank credit facilities.
Capital investments during the year consisted of normal expenditures for
software development projects and purchases of equipment. We funded these
expenditures with cash flow from operations. On October 24, 2002, we issued a
secured promissory note for $1.3 million to the seller of certain patent rights
as partial payment for the purchase of those rights. The note had an interest
rate of 2.75% per annum and was payable in four quarterly installments of
$337,500, the last of which was paid on December 31, 2003.
Effective December 1, 2003, we amended and restated our credit agreement with
our domestic bank, which extended the maturity date to December 1, 2006 and
increased the maximum amount of the facility from $7.0 million to $8.0 million.
The credit agreement provides the lender with a security interest in
substantially all domestic assets, exclusive of the assets subject to the first
mortgage, and 66% of the common stock of our U.S. holding companies, which own
our foreign subsidiaries. Borrowings may be made in U.S. Dollars, Euros or
Pounds Sterling. Interest on all outstanding borrowings is payable at LIBOR for
the respective currency plus an applicable margin, or, at our option, prime rate
plus a specified margin based on funded debt to EBITDA (earnings before
interest, taxes, depreciation and amortization) ratio, as follows:
Total Funded Debt/EBITDA ratio LIBOR Margin Prime Margin
- ------------------------------------------------------------- ------------------- ------------------
- ------------------------------------------------------------- ------------------- ------------------
Greater than 3.0 2.75% 0%
Greater than 2.5 and less than or equal to 3.0 2.0% (.25%)
Greater than 2.0 and less than or equal to 2.5 1.5% (.50%)
Less than or equal to 2.0 1.0% (.75%)
Prior to March 1, 2004, the applicable margin is determined based on the total
funded debt/EBITDA ratio being greater than 2.5 and less than or equal to 3.0.
Thereafter, the applicable margin will be adjusted on the first day of the month
following the month after each quarter end.
Availability under the facility is limited to the greater of the commitment or a
borrowing base, as defined in the agreement, which measured as of October 31,
2003, aggregated $7.5 million. The agreement requires that we maintain
Consolidated Net Worth of $32.0 million plus an amount equal to 75% of positive
consolidated net income for the fiscal year ended October 31, 2004, and for each
fiscal year thereafter. Consolidated Net Worth is defined as total Shareholders'
Equity excluding Accumulated Other Comprehensive Income. Our consolidated total
debt as compared to consolidated total debt plus Consolidated Net Worth ratio
cannot be greater than 0.35 to 1.0 and our fixed charge coverage ratio cannot be
less than 1.10 to 1.0. The fixed charge coverage ratio is the ratio of
consolidated EBITDA minus taxes, unfunded capital expenditures and redemptions
of capital stock to principal payments of indebtedness plus consolidated
interest expense.
Effective January 15, 2004, we entered into an agreement with our principal
domestic bank which provides our U.K. subsidiary with a revolving credit and
overdraft facility. The facility includes a maximum commitment aggregating
(pound)1.0 million (approximately $1.7 million) and matures January 31, 2007.
Borrowings will be secured by liens on substantially all of the assets of our
U.K. subsidiary. Interest on outstanding borrowings will be based on LIBOR for
fixed rate loans and a base rate for overdrafts, in each case, plus a margin
based on consolidated funded debt to EBITDA equivalent to that of our domestic
bank facility.
We have a 3.0 million Euro credit facility with a European bank. On December 1,
2003, the maturity date of the facility was extended until November 30, 2004.
Interest on the facility is payable at 7.16% per annum or, at our option, 1.75%
above EURIBOR for fixed rate borrowings. Although the facility is
uncollateralized, the bank reserves the right to require collateral in the event
of increased risk evaluation. Borrowings outstanding under this facility at
October 31, 2003 were $1.3 million.
During the fourth quarter of fiscal 2003, we settled a disputed claim in the
United Kingdom regarding a terminated facility lease for $1.2 million, which had
been previously accrued. The settlement payment was due in two equal
installments, which where paid in the first quarter of fiscal 2004. The
settlement payments were funded through cash flow from operations and borrowings
available from bank credit facilities.
Total debt at October 31, 2003 was $9.2 million representing 24% of total
capitalization, compared to $8.9 million, or 24% of total capitalization, at
October 31, 2002. We were in compliance with all loan covenants and had unused
credit availability of $6.4 million at October 31, 2003. We believe that cash
flow from operations and borrowings available to us under our credit facilities
will be sufficient to meet our anticipated cash requirements in fiscal 2004.
Contractual Obligations and Commitments
The following is a table of contractual obligations and commitments as of
October 31, 2003 (all amounts in thousands):
Payments Due by Period
Less than 1-3 3-5 More than 5
Total 1 Year Years Years Years
----------- ------------ ---------- ---------- ------------
Long-Term Debt........................ $ 9,222 $ 645 $ 4,703 $ 145 $ 3,729
Operating Leases...................... 2,770 1,185 1,371 199 15
Deferred Credits and Other............ 486 -- -- -- 486
----------- ------------ ---------- ---------- ------------
----------- ------------ ---------- ---------- ------------
Total............................. $ 12,478 $ 1,830 $ 6,074 $ 344 $4,230
=========== ============ ========== ========== ============
In addition to the contractual obligations and commitments disclosed above, we
also have a variety of other contractual agreements related to the procurement
of materials and services and other commitments. With respect to these
agreements, we are not subject to any contracts which commit us to material
non-cancelable commitments. While some of these contractual agreements are
long-term supply agreements, we are not committed under these agreements to
accept or pay for requirements which are not needed to meet production needs. We
have no material minimum purchase commitments or "take-or-pay" type agreements
or arrangements.
With respect to capital expenditures, we expect capital spending in fiscal 2004,
exclusive of capitalized software development costs, to approximate $1.5
million, which includes discretionary items.
Off Balance Sheet Arrangements
From time to time, our German subsidiary guarantees third party lease financing
residuals in connection with the sale of certain machines in Europe. At October
31, 2003 there were 26 third party guarantees totaling approximately $1.4
million. A retention of title clause allows our Germany subsidiary to obtain the
machine if the customer defaults on its lease. We believe that the proceeds
obtained from liquidation of the machine would cover any payments required under
the guarantee.
Critical Accounting Policies
Our accounting policies, including those described below, require management to
make significant estimates and assumptions using information available at the
time the estimates are made. Such estimates and assumptions significantly affect
various reported amounts of assets, liabilities, revenues and expenses. If our
future experience differs materially from these estimates and assumptions, our
results of operations and financial condition could be affected.
Revenue Recognition - We recognize product revenue upon delivery to the
customer, which is normally at the time of shipment, because ownership and risk
of loss passes to the customer at that time and payment terms are fixed. Our
computerized machine tools are general-purpose computer controlled machine tools
that are typically used in stand-alone operations. Transfer of ownership and
risk of loss are not contingent upon contractual customer acceptance. Prior to
shipment, we test each machine to ensure the machine's compliance with standard
operating specifications as listed in our sales literature.
Depending upon geographic location, the machine installation at the end user may
be completed by a distributor, independent contractor or Hurco service
technician. In most instances where a machine is sold through a distributor, we
have no installation involvement. If sales are direct or through sales agents,
we will typically complete the machine installation. The machine installation
consists of the reassembly of certain parts that were removed for shipping and
the re-testing of the machine to ensure that it is performing with the standard
specifications. We consider the machine installation process inconsequential and
perfunctory. Service fees from maintenance contracts are deferred and recognized
in earnings on a pro rata basis over the term of the contract. Sales related to
software products are recognized when shipped in conformity with American
Institute of Certified Public Accountants' Statement of Position 97-2 Software
Revenue Recognition.
Inventories - We must determine at each balance sheet date how much, if any, of
our inventory may ultimately prove to be unsaleable or unsaleable at its
carrying cost. Reserves are established to effectively adjust any such inventory
to net realizable value. To determine the appropriate level of valuation
reserves, we evaluate current stock levels in relation to historical and
expected patterns of demand for all of our products. Management evaluates the
need for changes to valuation reserves based on market conditions, competitive
offerings and other factors on a regular basis.
Deferred Tax Asset Valuation - As of October 31, 2003, we have deferred tax
assets of $5.6 million for which we have recorded a full valuation allowance,
resulting in zero net deferred tax asset on our balance sheet. These future tax
benefits relate primarily to net operating loss carryforwards in the United
States and certain foreign jurisdictions, as well as Federal business tax
credits carried forward in the United States. Some of these carryforward
benefits expire at certain dates and utilization of certain others is limited to
specific amounts each year. Realization of those benefits is entirely dependent
upon generating sufficient future taxable earnings in the specific tax
jurisdictions before they expire. Due to the recent losses in the United States
and the applicable foreign tax jurisdictions, there is uncertainty whether these
tax benefits can be utilized before they expire. Therefore, we have established
a full valuation allowance. The need for this allowance is reviewed
periodically, and if reduced in future periods, the associated tax benefits will
be recorded in future operations as a reduction of income tax expense.
Capitalized Software Development Costs - Costs incurred to develop new computer
software products and significant enhancements to software features of existing
products are capitalized as required by SFAS No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased, or Otherwise Marketed", and amortized
over the estimated product life of the related software. The determination as to
when in the product development cycle technological feasibility has been
established, and the expected product life, require judgments and estimates by
management and can be affected by technological developments, innovations by
competitors and changes in market conditions affecting demand. We capitalized
$679,000 in fiscal 2003, $534,000 in fiscal 2002, and $665,000 in fiscal 2001
related to software development projects. Also in fiscal 2002, we wrote off $1.0
million of previously capitalized costs related to a discontinued product line.
At October 31, 2003 we have an asset of $1.9 million for capitalized software
development projects, a significant portion of which relates to projects
currently in process and subject to development risk and market acceptance. We
periodically review the carrying values of these assets and make judgments as to
ultimate realization considering the above mentioned risk factors.
Derivative Financial Instruments - Critical aspects of our accounting policy for
derivative financial instruments include conditions which require that critical
terms of a hedging instrument are essentially the same as a hedged forecasted
transaction. Another important element of the policy demands that formal
documentation be maintained as required by the Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." Failure to comply with these conditions would result in a
requirement to recognize changes in market value of hedge instruments in
earnings. We routinely monitor significant estimates, assumptions, and judgments
associated with derivative instruments, and compliance with formal documentation
requirements.
Stock Compensation - We apply the provisions of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation;
therefore, no compensation expense has been recognized for stock options, except
for certain shares subject to variable plan accounting, as options are granted
at fair market value. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" provides an alternative method of
accounting for stock options based on an option-pricing model, such as
Black-Scholes. We have adopted the disclosure requirements of SFAS No. 123.
Information and assumptions regarding compensation expense under the alternative
method is provided in Note 8 to the Consolidated Financial Statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risks
Interest Rate Risk
Our earnings are affected by changes in interest expense on our outstanding
debt, all of which is subject to floating rates, either LIBOR or Prime. If
market interest rates on our outstanding variable rate borrowings were to have
increased by one percentage point (1%) (or 100 basis points) over the actual
rates paid in that year, interest expense would have increased by $62,000 in
fiscal 2003 and $90,000 in fiscal 2002. This sensitivity analysis assumes no
changes in other factors affecting our financial statements that might result
from changes in the economic environment which impact interest rates. Note 4 of
the Consolidated Financial Statements has a discussion of the interest rates
related to our current credit facilities. At October 31, 2003, outstanding
borrowings under our bank credit facilities were $4.1 million and our total
indebtedness was $9.2 million.
Foreign Currency Exchange Risk
In fiscal 2003, approximately 70% of our sales and service fees, 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 either our wholly-owned subsidiary in Taiwan, or overseas contract
manufacturers. 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 forecast inter-company sales, and forecast
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, 2003 which are designated as cash flow hedges under SFAS No. 133 were as
follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
Forward in Foreign Forward Contract October 31, Maturity
Contracts Currency Rate Date 2003 Dates
- --------------------- ---------------- --------- ---------- ---------- ---------------
Sale Contracts:
Euro 14,800,000 $ 1.1057 $ 16,364,360 $ 17,047,507 Nov 2003-Oct 2004
Sterling 1,960,000 $ 1.6241 $ 3,183,236 $ 3,278,948 Nov 2003-Sept 2004
Forward contracts for the sale of foreign currencies as of October 31, 2003
which were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables denominated in foreign currencies were
as follows:
Contract Amount at Forward
Weighted Rates in
Notional Amount Avg. U.S. Dollars
Forward in Foreign Forward Contract October 31, Maturity
Contracts Currency Rate Date 2003 Dates
- --------------------- ---------------- --------- ---------- ---------- ---------------
Sale Contracts:
Euro 4,671,837 $ 1.1650 $5,442,690 $5,399,671 Nov 2003-Dec 2003
Singapore Dollar 2,601,353 $ .5733 $1,491,356 $1,496,295 Nov 2003 -Jan 2004
Sterling 522,374 $ 1.6723 $873,566 $882,615 Nov 2003-Dec 2003
Purchase Contracts:
New Taiwan Dollar 36,800,000 33.66* $1,093,286 $1,085,478 Nov 2003-Dec 2003
* NT Dollars per U.S. dollars
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Auditors
To the Shareholders and
Board of Directors
of Hurco Companies, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Hurco Companies, Inc. and its subsidiaries at October 31,
2003 and 2002, and the results of their operations and their cash flows for each
of the two years in the period ended October 31, 2003 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the index
appearing under Item 15(a) (2) present 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 schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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
audits provide a reasonable basis for our opinion. The financial statements and
financial statement schedule of Hurco Companies, Inc. for the year ended October
31, 2001 were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements in their report dated January 15, 2002.
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
December 9, 2003
Report of Independent Public Accountants
The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP.
To the Shareholders and
Board of Directors of
Hurco Companies, Inc.:
We have audited the accompanying consolidated balance sheets of Hurco Companies,
Inc. (an Indiana corporation) and subsidiaries as of October 31, 2001* and
2000*, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 2001. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hurco Companies,
Inc. and subsidiaries as of October 31, 2001 and 2000*, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a) 2** is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
January 15, 2002.
*The 2001 and 2000 consolidated balance sheets are not required to be presented
in the 2003 annual report.
** The schedule to which this paragraph refers has not been included in this
Form 10-K as these disclosures of 2001 and 2000 information are not required to
be presented in the 2003 annual report.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended October 31
--------------------------------------------
2003 2002 2001
----------- ------------ -------------
(Dollars in thousands, except per share amounts)
Sales and service fees......................................... $ 75,532 $ 70,486 $ 92,267
Cost of sales and service...................................... 54,710 54,157 69,005
Cost of sales - restructuring.................................. -- 1,083 --
----------- ------------ -------------
Gross profit................................................ 20,822 15,246 23,262
Selling, general and administrative expenses................... 18,749 19,658 24,040
Restructuring expense (credit) and other expense, net (Note 16) (124) 2,755 143
----------- ------------ -------------
Operating income (loss)..................................... 2,197 (7,167) (921)
Interest expense............................................... 658 634 790
License fee income and litigation settlement fees, net
(Note 10 and 13)............................................ -- 163 723
Earnings from equity investments............................... 202 25 383
Other expense, net............................................. 321 61 215
----------- ------------ -------------
Income (loss) before income taxes........................... 1,420 (7,674) (820)
Provision for income taxes (Note 6)............................ 958 589 777
----------- ------------ -------------
Net income (loss).............................................. $ 462 $ (8,263) $ (1,597)
=========== ============ =============
Earnings (loss) per common share - basic....................... $ 0.08 $ (1.48) $ (.28)
=========== ============ =============
Weighted average common shares outstanding - basic............. 5,582 5,583 5,670
=========== ============ =============
Earnings (loss) per common share - diluted..................... $ 0.08 $ (1.48) $ (.28)
=========== ============ =============
Weighted average common shares outstanding - diluted........... 5,582 5,583 5,670
=========== ============ =============
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
As of October 31
----------------------------------------
2003 2002
--------------- ------------------
Current assets: (Dollars in thousands, except per share amounts)
Cash and cash equivalents.......................................... $ 5,289 $ 4,358
Cash - restricted.................................................. 622 --
Accounts receivable, less allowance for doubtful accounts
of $630 in 2003 $689 in 2002.................................... 12,823 13,425
Inventories........................................................ 22,247 22,548
Other.............................................................. 1,409 1,204
--------------- ------------------
Total current assets............................................ 42,390 41,535
--------------- ------------------
Property and equipment:
Land............................................................... 761 761
Building........................................................... 7,239 7,203
Machinery and equipment............................................ 10,568 10,144
Leasehold improvements............................................. 544 396
--------------- ------------------
19,112 18,504
Less accumulated depreciation and amortization..................... (10,730) (9,696)
--------------- ------------------
8,382 8,808
--------------- ------------------
Software development costs, less accumulated amortization............. 1,922 1,604
Investments and other assets.......................................... 5,264 5,205
--------------- ------------------
$ 57,958 $ 57,152
=============== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 9,249 $ 8,752
Accounts payable-related parties................................... 212 1,104
Accrued expenses and other......................................... 9,032 9,013
Accrued warranty expenses.......................................... 1,016 1,003
Current portion of long-term debt.................................. 645 1,313
--------------- ------------------
Total current liabilities....................................... 20,154 21,185
--------------- ------------------
Non-current liabilities:
Long-term debt..................................................... 8,577 7,572
Deferred credits and other......................................... 486 378
--------------- ------------------
9,063 7,950
--------------- ------------------
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, 5,575,987 and 5,583,158 shares issued and
outstanding in 2003 and 2002, respectively...................... 557 558
Additional paid-in capital......................................... 44,695 44,717
Accumulated deficit................................................ (9,711) (10,173)
Accumulated other comprehensive income (loss)...................... (6,800) (7,085)
--------------- ------------------
Total shareholders' equity...................................... 28,741 28,017
--------------- ------------------
$ 57,958 $ 57,152
=============== ==================
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31
-------------------------------------------
2003 2002 2001
----------- ------------ -----------
Cash flows from operating activities: (Dollars in thousands)
Net income (loss)........................................... $ 462 $ (8,263) $ (1,597)
Adjustments to reconcile net income (loss) to
Net cash provided by (used for) operating activities:
Provision for doubtful accounts.......................... 421 133 547
Equity in income of affiliates........................... (202) (25) (383)
Depreciation and amortization............................ 1,429 1,929 2,196
Restructuring charge (credit)............................ -- 2,250 (195)
Change in assets/liabilities
(Increase) decrease in accounts receivable............. 1,348 1,615 3,113
(Increase) decrease in inventories..................... 1,465 7,720 (4,018)
Increase (decrease) in accounts payable................ (687) (141) (3,521)
Increase (decrease) in accrued expenses................ (1,760) 1,228 558
Other.................................................. (200) (245) (182)
----------- ------------ -----------
Net cash provided by (used for) operating activities. 2,276 6,201 (3,482)
----------- ------------ -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment................ 14 154 38
Purchase of property and equipment.......................... (536) (1,184) (1,253)
Software development costs.................................. (679) (534) (665)
Purchase of intellectual property........................... -- (500) --
Change in restricted cash................................... (622) -- --
Other proceeds (investments)................................ (25) 1,037 (829)
----------- ------------ -----------
Net cash used for investing activities................... (1,848) (1,027) (2,709)
----------- ------------ -----------
Cash flows from financing activities:
Advances on bank credit facilities.......................... 55,731 28,369 44,300
Repayments on bank credit facilities........................ (54,418) (37,251) (34,050)
Repayments of term debt..................................... (1,211) (200) (1,986)
Proceeds from first mortgage................................ -- 4,500 --
Repayment of first mortgage................................. (108) (39) --
Proceeds from exercise of common stock options.............. -- 4 35
Purchase of common stock.................................... (23) -- (1,706)
----------- ------------ -----------
Net cash provided by (used for) financing activities..... (29) (4,617) 6,593
----------- ------------ -----------
Effect of exchange rate changes on cash........................ 532 278 (263)
----------- ------------ -----------
Net increase (decrease) in cash.......................... 931 835 139
Cash and cash equivalents at beginning of year................. 4,358 3,523 3,384
----------- ------------ -----------
Cash and cash equivalents at end of year....................... $ 5,289 $ 4,358 $ 3,523
=========== ============ ===========
Supplemental disclosures:......................................
Cash paid for:
Interest................................................. $ 595 $ 519 $ 682
Income taxes............................................. $ 468 $ 442 $ 501
Supplemental schedule of noncash investing and financial activities:
In fiscal 2002, we purchased patented technology for $1.85 million. In
connection therewith we issued a secured promissory note for $1.35 million.
Fair value of asset acquired................................ $ 1,850
Cash paid................................................... 500
------------
------------
Promissory note issued...................................... $ 1,350
============
The accompanying notes are an integral part of the Consolidated
Financial Statements.
HURCO COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Accumulated
Common Stock Other
-------------------------- Additional Comprehensive
Shares Issued Paid-In Accumulated Income
& Outstanding Amount Capital Deficit (Loss) Total
-------------- --------- ------------ ------------ ------------- ---------
(Dollars in thousands)
Balances, October 31, 2000................. 5,955,359 $ 596 $ 46,347 $ (313) $ (7,739) $38,891
-------------- --------- ------------ ------------ -------------- ---------
Net loss................................... -- -- -- (1,597) -- (1,597)
Translation of foreign currency financial -- -- -- -- 315 315
statements.................................
Unrealized loss of derivative instruments.. -- -- -- -- (470) (470)
---------
Comprehensive loss......................... (1,752)
Exercise of common stock options........... 16,400 1 34 -- -- 35
Repurchase of common stock................. (391,101) (39) (1,667) -- -- (1,706)
-------------- --------- ------------ ------------ -------------- --------
Balances, October 31,2001 5,580,658 $ 558 $ 44,714 $ (1,910) $ (7,894) $35,468
============== ========= ============ ============ ============== ========
Net income loss............................ -- -- -- (8,263) -- (8,263)
Translation of foreign currency financial -- -- -- -- 981 981
statements.................................
Unrealized loss of derivative instruments.. -- -- -- -- (172) (172)
--------
Comprehensive loss......................... (7,454)
Exercise of common stock options........... 2,500 -- 3 -- -- 3
-------------- --------- ------------ ------------ ------------ --------
Balances, October 31, 2002................. 5,583,158 $ 558 $ 4,717 $ (10,173) $ (7,085) $28,017
============== ========= ============ ============ ============ ========
Net income loss............................ -- -- -- 462 -- 462
Translation of foreign currency financial
statements................................. -- -- -- -- 1,454 1,454
Unrealized loss of derivative instruments.. -- -- -- -- (1,169) (1,169)
--------
Comprehensive income....................... 747
Repurchase of common stock................. (7,171) (1) (22) -- -- (23)
-------------- --------- ------------ ------------ -------------- -------
Balances, October 31, 2003................. 5,575,987 $ 557 $ 44,695 $ (9,711) $ (6,800) $28,741
============== ========= ============ ============ ============== =======
The accompanying notes are an integral part of the Consolidated Financial Statements.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation. The consolidated financial statements include the accounts of
Hurco Companies, Inc. (an Indiana corporation) and our wholly owned and
controlled subsidiaries. We have a 35% and 24% ownership interest in two
affiliates accounted for using the equity method. Our combined investments in
affiliates are approximately $1.8 million and are included in Investments and
Other Assets on the accompanying Consolidated Balance Sheets. Intercompany
accounts and transactions have been eliminated.
Statements of Cash Flows. We consider all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents. Cash flows from
hedges are classified consistent with the items being hedged.
Restricted Cash. Restricted cash results from hedging arrangements that require
cash to be on deposit with an institution based on open positions.
Translation of Foreign Currencies. All balance sheet accounts of non-U.S.
subsidiaries are translated at the exchange rate as of the end of the year.
Income and expenses are translated at the average exchange rates during the
year. Cumulative foreign currency translation adjustments of $5.0 million are
included in Accumulated Other Comprehensive Income in shareholders' equity.
Foreign currency transaction gains and losses are recorded as income or expense
as incurred.
Hedging. On November 1, 2001, we adopted Statement of Financial Accounting
Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities"
(SFAS 133). In accordance with the provisions of SFAS No. 133, we recorded a
transition adjustment upon the adoption of the standard to recognize the
difference between the fair value of the derivative instruments recorded on the
balance sheet and the previous carrying amount of those derivatives. The effect
of this transition adjustment was insignificant and is reflected in the Other
Expense, Net in the Consolidated Statement of Operations. We also recorded a
transition adjustment of approximately $129,000 in Accumulated Other
Comprehensive Income to recognize previously deferred net losses on derivatives
designated as cash flow hedges.
We enter into foreign currency forward exchange contracts periodically to hedge
certain forecast inter-company sales and forecast inter-company and third-party
purchases of product denominated in foreign currencies (primarily Pound
Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is to
mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting
from the sales and purchases denominated in foreign currencies will be adversely
affected by changes in exchange rates. These forward contracts have been
designated as cash flow hedge instruments, and are recorded in the Consolidated
Balance Sheet at fair value in Other Current Assets and Accrued Expenses. Gains
and losses resulting from changes in the fair value of these hedge contracts are
deferred in Accumulated Other Comprehensive Income and recognized as an
adjustment to cost of sales in the period that the sale of the related hedged
item is recognized, thereby providing an offsetting economic impact against the
corresponding change in the U.S. dollar value of the inter-company sale or
purchase item being hedged.
At October 31, 2003, we had $1,814,000 of losses related to cash flow hedges
deferred in Accumulated Other Comprehensive Income. Of this amount, $778,000
represents unrealized losses related to future cash flow hedge instruments that
remain subject to currency fluctuation risk. These deferred losses will be
recorded as an adjustment to cost of sales in the periods through October 31,
2004, in which the sale of the related hedged item is recognized, as described
above. At October 31, 2002, we had $645,000 of losses related to cash flow
hedges deferred in Accumulated Other Comprehensive Income. Net losses on cash
flow hedge contracts which we reclassified from Other Comprehensive Income to
Cost of Sales
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
in the years ended October 31, 2003, 2002 and 2001 were $1,430,000, $617,000,
and $261,000, respectively.
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" (SFAS 133), and, as a result, changes in
fair value are reported currently as Other Expense, Net in the Consolidated
Statement of Operations consistent with the transaction gain or loss on the
related foreign denominated receivable or payable. Such net transaction losses
were $(154,000), $(209,000) and $(50,000) for the years ended October 31, 2003,
2002 and 2001, respectively.
Inventories. Inventories are stated at the lower of cost or market, with cost
determined using the first-in, first-out method.
Property and Equipment. Property and equipment are carried at cost. Depreciation
and amortization of assets are provided primarily under the straight-line method
over the shorter of the estimated useful lives or the lease terms as follows:
Number of Years
Building 40
Machines 10
Shop and office equipment 5
Leasehold improvements 5
Total depreciation expense for the years ended October 31, 2003, 2002 and 2001
was $1.0 million, $1.1 million and $1.3 million, respectively. Any impairment
would be recognized based on an assessment of future operations (including cash
flows) to insure that assets are appropriately valued.
Revenue Recognition. We recognize product revenue upon delivery to the customer,
which is normally at the time of shipment because ownership and risk of loss
passes to the customer at that time and payment terms are fixed. Our
computerized machine tools are general-purpose computer controlled machine tools
that are typically used in stand-alone operations. Transfer of ownership and
risk of loss are not contingent upon contractual customer acceptance. Prior to
shipment, we test each machine to ensure the machine's compliance with standard
operating specifications as listed in our sales literature.
Depending upon geographic location, the machine installation at the end user may
be completed by a distributor, independent contractor or Hurco service
technician. In most instances where a machine is sold through a distributor, we
have no installation involvement. If sales are direct or through sales agents,
we will typically complete the machine installation. The machine installation
consists of the reassembly of certain parts that were removed for shipping and
the re-testing of the machine to ensure that it is performing with the standard
specifications. We consider the machine installation process inconsequential and
perfunctory.
Service fees from maintenance contracts are deferred and recognized in earnings
on a pro rata basis over the term of the agreement. Sales related to software
products are recognized when shipped in conformity with American Institute of
Certified Public Accountants' Statement of Position 97-2 Software Revenue
Recognition.
License Fee Income, Net. From time to time, our wholly owned subsidiary, IMS
Technology, Inc. (IMS) entered into agreements for the licensing of its
interactive computer control patents. License fees received under a fully
paid-up license, for which there are no future performance requirement or
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
contingency, and litigation settlement fees were recognized in income, net of
legal fees and expenses, if any, at the time the related agreement was executed.
License fees received in periodic installments that were contingent upon the
continuing validity of a licensed patent were recognized in income, net of legal
fees and expenses, if any, over the life of the licensed patent, which expired
in October 2001. We have no deferred license fee income at October 31, 2003 and
do not expect any significant license fee income in the foreseeable future.
Product Warranty. Expected future product warranty expense is recorded when the
product is sold.
Research and Development Costs. The costs associated with research and
development programs for new products and significant product improvements are
expensed as incurred and are included in Selling, General and Administrative
expenses. Research and development expenses totaled $1.8 million, $2.4 million,
and $3.5 million in fiscal 2003, 2002, and 2001, respectively.
Costs incurred to develop computer software products and significant
enhancements to software features of existing products to be sold or otherwise
marketed are capitalized, after technological feasibility is established.
Software development costs are amortized to Cost of Sales on a straight-line
basis over the estimated product life of the related software, which ranges from
three to five years. We capitalized $679,000 in 2003, $534,000 in 2002, and
$665,000 in 2001 related to software development projects. Amortization expense
was $361,000, $719,000, and $925,000, for the years ended October 31, 2003,
2002, and 2001, respectively. Accumulated amortization at October 31, 2003 and
2002 was $8.8 million and $8.4 million, respectively. Any impairment of the
carrying value of the capitalized software development costs could be recognized
based on an assessment of future operations (including cash flows) to insure
that assets are appropriately valued.
Estimated amortization expense for the existing amortizable intangible assets
for the years ended October 31, is as follows:
Amortization Expense
Fiscal Year
2004 $372
2005 380
2006 367
2007 367
2008 367
Earnings Per Share. Basic and diluted earnings per common share are based on the
weighted average number of our shares of common stock outstanding. Diluted
earnings per common share give effect to outstanding stock options using the
treasury method. The impact of potentially issuable shares for the years ended
October 31, 2002 and 2001 was excluded from the computation of diluted earnings
per share because their effect would be anti-dilutive.
Income Taxes. We record income taxes under SFAS 109 "Accounting for Income
Taxes". SFAS 109 utilizes the liability method for computing deferred income
taxes. It also requires that the benefit of certain loss carryforwards be
recorded as an asset and that a valuation allowance be established against the
asset when it is "more likely than not" the benefit will not be realized
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of sales and expenses during the reporting period. Actual
results could differ from those estimates.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
2. BUSINESS OPERATIONS
Nature of Business. We design and produce computer control systems and software
and computerized machine tools for sale through our own distribution system to
the worldwide machine tool industry.
The end market for our products consists primarily of precision tool, die and
mold manufacturers, independent job shops and specialized short-run production
applications within large manufacturing operations. Industries served include:
aerospace, defense, medical equipment, energy, transportation and computer
industries. Our products are sold through independent agents and distributors in
countries throughout North America, Europe and Asia. We also maintain direct
sales operations in England, France, Germany, Italy, Singapore and China.
Credit Risk. We sell products to customers located throughout the world. We
perform ongoing credit evaluations of customers and generally do not require
collateral. Allowances are maintained for potential credit losses. Concentration
of credit risk with respect to trade accounts receivable is limited due to the
large number of customers and their dispersion across many geographic areas.
Although a significant amount of trade receivables are with distributors
primarily located in the United States, no single distributor or region
represents a significant concentration of credit risk.
Manufacturing Risk. Our computerized machine tools and integrated computer
controls are manufactured primarily in Taiwan by our wholly-owned subsidiary and
our affiliated contract manufacturers. We also source one of the proprietary
Ultimax(R) computer components from a sole domestic supplier. Any interruption
from these sources would restrict the availability of our computerized machine
tool systems and would affect operating results adversely.
3. INVENTORIES
Inventories as of October 31, 2003 and 2002 are summarized below (in thousands):
2003 2002
------------ ------------
Purchased parts and sub assemblies....... $ 5,729 $ 6,677
Work-in-process.......................... 2,029 2,251
Finished goods........................... 14,489 13,620
------------ ------------
$ 22,247 $ 22,548
============ ============
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
4. DEBT AGREEMENTS
Long-term debt as of October 31, 2003 and 2002, consisted of (in thousands):
2003 2002
------------ ------------
Domestic bank revolving credit facility....................$ 2,850 $ --
European bank credit facility.............................. 1,274 2,475
First Mortgage............................................. 4,360 4,460
Installment Promissory Note................................ 338 1,350
Economic Development Revenue Bonds, Series 1990............ 400 600
----------- ------------
9,222 8,885
Less current portion....................................... 645 1,313
------------ ------------
$ 8,577 $ 7,572
============ ============
As of October 31, 2003, long-term debt was payable as follows (in thousands):
Fiscal 2004........................................... 645
Fiscal 2005........................................... 1,591
Fiscal 2006........................................... 126
Fiscal 2007........................................... 2,986
Fiscal 2008........................................... 145
Thereafter............................................ 3,729
------------
9,222
============
As of October 31, 2003 and 2002, we had $0 and $1.1 million, respectively, of
outstanding letters of credit issued to non-U.S. suppliers for inventory
purchase commitments. As of October 31, 2003, we had unutilized credit
facilities of $6.4 million available for either direct borrowings or commercial
letters of credit. We were in compliance with all loan covenants at October 31,
2003.
Domestic Bank Credit Facility. Interest on the domestic bank credit facility was
payable at rates ranging from 5.12% to 6.25% at October 31, 2003 and from 4.28%
to 5.25% at October 31, 2002.
Effective December 1, 2003, we amended and restated our bank credit agreement
with our domestic bank, which extended the maturity date to December 1, 2006 and
increased the maximum amount of the facility from $7.0 million to $8.0 million.
The credit agreement provides the lender with a security interest in
substantially all domestic assets, exclusive of the assets subject to a first
mortgage, and 66% of the common stock of our U.S. holding companies, which own
our foreign subsidiaries. Borrowings may be made in U.S. Dollars, Euro or Pounds
Sterling. Interest on all outstanding borrowings is payable at LIBOR for the
respective currency plus an applicable margin, or, at our option, prime rate
plus a specified margin based on funded debt to EBITDA (earnings before
interest, taxes, depreciation and amortization) ratio, as follows:
Total Funded Debt/EBITDA ratio LIBOR Margin Prime Margin
- ------------------------------------------------- ------------------- ------------------
- ------------------------------------------------- ------------------- ------------------
Greater than 3.0 2.75% 0%
Greater than 2.5 and less than or equal to 3.0 2.0% (.25%)
Greater than 2.0 and less than or equal to 2.5 1.5% (.50%)
Less than or equal to 2.0 1.0% (.75%)
Prior to March 1, 2004, the applicable margin is determined based on the total
funded debt/EBITDA ratio being greater than 2.5 and less than or equal to 3.0.
Thereafter, the applicable margin will be adjusted on the first day of the month
following the month after each quarter end.
Availability under the facility is limited to the greater of the commitment
or a borrowing base, as defined in the agreement, which measured as of
October 31, 2003 aggregated $7.5 million. The
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
agreement requires that we maintain Consolidated Net Worth of $32.0 million plus
an amount equal to 75% of positive consolidated net income for the fiscal year
ended October 31, 2004, and for each fiscal year thereafter. Consolidated Net
Worth is defined as total Shareholders' Equity excluding Accumulated Other
Comprehensive Income. Our consolidated total debt compared to consolidated total
debt plus Consolidated Net Worth ratio cannot be greater than 0.35 to 1.0 and
our fixed charge coverage ratio cannot be less than 1.10 to 1.0. The fixed
charge coverage ratio is the ratio of consolidated EBITDA minus taxes, unfunded
capital expenditures and redemptions of capital stock to principal payments of
indebtedness plus consolidated interest expense.
Promissory Note. On October 24, 2002, we issued a secured promissory note for
$1,350,000 to the seller of patented technology that we purchased. The note
bears interest at 2.75% per annum and at October 31, 2003 the balance of the
note is $337,500, due at December 31, 2003.
First Mortgage. On April 30, 2002, we obtained a $4.5 million first mortgage
loan on our Indianapolis corporate headquarters. The loan bears interest at a
rate of 7?% and matures in April 2009. We are required to make principal
payments over the seven-year term of the loan, based on a twenty-year
amortization schedule. The proceeds from the first mortgage loan, together with
other available cash, were used to repay bank debt.
European Bank Credit Facilities. Effective January 15, 2004, we entered into a
letter agreement with our principal domestic bank which provides our U.K.
subsidiary with a revolving credit and overdraft facility. The facility includes
a maximum commitment aggregating (pound)1.0 million (approximately $1.7 million)
and matures January 31, 2007. Borrowings will be secured by liens on
substantially all of the assets of our U.K. subsidiary. Interest on outstanding
borrowings will be based on LIBOR for fixed rate loans and a base rate for
overdrafts, in each case, plus a margin based on consolidated funded debt to
EBITDA equivalent to that of our domestic bank facility.
We have a 3.0 million Euro credit facility with a European bank. On December 1,
2003, the maturity date of the facility was extended until November 30, 2004.
Interest on the facility is payable at 7.16% per annum or, at our option, 1.75%
above EURIBOR for fixed rate borrowings. Although the facility is
uncollateralized, the bank reserves the right to require collateral in the event
of increased risk evaluation. Borrowings outstanding under this facility at
October 31, 2003 were $1.3 million.
Economic Development Revenue Bonds. The Economic Development Revenue Bonds are
payable in two remaining equal annual installments due on September 1, 2004 and
2005 and are secured by a letter of credit issued by our domestic bank. Interest
rates on the bonds adjust weekly and, as of October 31, 2003 and 2002, interest
was accruing at a rate of 1.12% and 2.10%, respectively.
5. FINANCIAL INSTRUMENTS
The carrying amounts for trade receivables and payables approximate their fair
values. At October 31, 2003, the carrying amounts and fair values of our
financial instruments, which include bank revolving credit facilities, senior
notes and Economic Development Revenue Bonds, are not materially different. The
fair value of long-term debt, including the current portion, is estimated based
on quoted market prices for similar issues or on current rates offered to us for
debt of the similar terms and maturities.
We also have financial instruments in the form of foreign currency forward
exchange contracts as described in Note 1 to the Consolidated Financial
Statements. The U.S. Dollar equivalent notional amount of these contracts was
$28.4 million at October 31, 2003. The net fair value of these derivative
instruments recorded in Accrued Expenses at October 31, 2003 was $758,000.
Current market prices were used to estimate the fair value of the foreign
currency forward exchange contracts.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The future value of the foreign currency forward exchange contracts and the
related currency positions are subject to offsetting market risk resulting from
foreign currency exchange rate volatility. The counterparties to these contracts
are substantial and creditworthy financial institutions. We do not consider
either the risk of counterparty non-performance or the economic consequences of
counterparty non-performance as material risks.
6. INCOME TAXES
Deferred income taxes reflect the effect of temporary differences between the
tax basis of assets and liabilities and the reported amounts of those assets and
liabilities for financial reporting purposes. Deferred income taxes also reflect
the value of net operating losses and an offsetting valuation allowance. Our
total deferred tax assets and corresponding valuation allowance at October 31,
2003 and 2002, consisted of the following (in thousands):
October 31
2003 2002
------------- ------------
Tax effects of future tax deductible items related to:
Accrued inventory reserves................................................... $ 630 $ 623
Accrued warranty expenses.................................................... 107 121
Deferred compensation........................................................ 224 213
Other accrued expenses....................................................... 389 521
------------- ------------
Total deferred tax assets.................................................. 1,350 1,478
------------- ------------
Tax effects of future taxable differences related to:
Accelerated tax deduction and other tax over book
deductions related to property, equipment and software..................... (990) (968)
Other........................................................................ (632) (698)
------------- ------------
Total deferred tax liabilities............................................. (1,622) (1,666)
------------- ------------
Net tax effects of temporary differences................................... (272) (188)
------------- ------------
Tax effects of carryforward benefits:
U.S. federal net operating loss carryforwards, expiring 2023................. 2,868 2,745
Foreign tax benefit carryforwards, expiring 2004-2008........................ 568 326
Foreign tax benefit carryforwards, with no expiration........................ 1,398 1,435
U.S. federal general business tax credits, expiring 2004-2023................ 1,036 1,017
------------- ------------
Tax effects of carryforwards............................................... 5,870 5,523
------------- ------------
Tax effects of temporary differences and carryforwards, net................ 5,598 5,335
Less valuation allowance................................................... (5,598) (5,335)
------------- ------------
Net deferred tax asset..................................................... $ -- $ --
============= ============
Except as indicated above, our carryforwards expire at specific future dates and
utilization of certain carryforwards is limited to specific amounts each year
and further limitations may be imposed if an "ownership change" would occur.
Realization is entirely dependent upon generating sufficient future earnings in
specific tax jurisdictions prior to the expiration of the loss carryforwards.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Due to the uncertain nature of their ultimate realization based upon past
performance and expiration dates, we have established a full valuation allowance
against carryforward benefits. While the need for this valuation allowance is
subject to periodic review, if the allowance is reduced, the tax benefits of the
carryforwards will be recorded in future operations as a reduction of our income
tax expense.
Income (loss) before income taxes (in thousands): Year Ended October 31
----------------------------------------------
2003 2002 2001
------------ ------------ --------------
Domestic................................................ $ (875) $ (7,238) $ (2,980)
Foreign................................................. 2,295 (436) 2,160
------------ ------------ --------------
------------ ------------ --------------
$ 1,420 $ (7,674) $ (820)
Differences between the effective tax rate and
U.S. federal income tax rate were (in thousands):
Tax at U.S. statutory rate.................................... $ 497 $ (2,686) $ (287)
Federal tax................................................... -- (95) 95
Effect of tax rates of international jurisdictions
In excess (less than) of U.S. statutory rates.............. (130) 97 155
State income taxes............................................ -- (6) --
Effect of losses without current year benefit................. 591 3,279 1,043
Utilization of net operating loss carryforwards -- -- (229)
------------ ------------ --------------
------------ ------------ --------------
Provision for income taxes.................................... $ 958 $ 589 $ 777
Our provision for income taxes in fiscal 2003, 2002 and 2001 represents taxes
currently payable.
We have not provided any U.S. income taxes on the undistributed earnings of our
foreign subsidiaries or equity method investments based upon our determination
that such earnings will be indefinitely reinvested.
7. EMPLOYEE BENEFITS
We have defined contribution plans that include a majority of our employees,
under which our contributions are discretionary. The purpose of these plans is
generally to provide additional financial security during retirement by
providing employees with an incentive to save throughout their employment. Our
contributions to the plans are based on employee contributions or compensation.
Our contributions totaled $228,076, $263,640, and $344,811, for the years ended
October 31, 2003, 2002 and 2001, respectively.
We also have split-dollar life insurance agreements with our executive officers.
In fiscal 2003, the premiums were borrowed from the cash value of the policies
and will be repaid from the policies' cash surrender values when the policies
are terminated in accordance with the provisions of the agreements. In fiscal
years prior to 2003, the premiums were paid by the Company.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
8. STOCK OPTIONS
In March 1997, we adopted the 1997 Stock Option and Incentive Plan (the 1997
Plan) which allows us to grant awards of options to purchase shares of our
common stock, stock appreciation rights, restricted shares and performance
shares. Under the provision of the 1997 Plan, 750,000 shares of common stock may
be issued and the maximum number of shares of common stock that may be granted
to any individual is 200,000 shares. Options granted under the 1997 Plan are
exercisable for a period up to ten years after date of grant and vest in equal
annual installments as specified by the Compensation Committee of our Board of
Directors at the time of grant. The option price of options intended to qualify
as incentive stock options may not be less than 100% of the fair market value of
a share of common stock on the date of grant. As of October 31, 2003, options to
purchase 657,000 shares had been granted and remained outstanding under the 1997
Plan.
In 1990, we adopted the 1990 Stock Option Plan (the 1990 Plan), which allowed us
to grant options to purchase shares of our common stock and related stock
appreciation rights and limited rights to officers and our key employees. Under
the provisions of the 1990 Plan, the maximum number of shares of common stock,
which could be issued under options and related rights, was 500,000. There was
no annual limit on the number of such shares with respect to which options and
rights could be granted. Options granted under the 1990 Plan are exercisable for
a period up to ten years after date of grant and vested in equal installments
over a period of three to five years from the date of grant. The option price
could not be less than 100% of the fair market value of a share of common stock
on the date of grant and no options or rights could be granted under the 1990
Plan after April 30, 2000.
A summary of the status of the options under the 1990 and 1997 Plans as of
October 31, 2003, 2002 and 2001 and the related activity for the year is as
follows:
Shares Under Weighted Average Exercise
Option Price Per Share
------------------------------------------------------ ---------------- -------------------------------
------------------------------------------------------ ---------------- -------------------------------
Balance October 31, 2000 826,660 $4.77
Granted........................................ 57,000 3.67
Cancelled...................................... (82,000) 5.23
Expired........................................ (20,000) 7.15
Exercised...................................... (16,400) 2.14
------------------------------------------------------ ---------------- -------------------------------
------------------------------------------------------ ---------------- -------------------------------
Balance October 31, 2001 765,260 $4.63
Granted........................................ 342,000 2.14
Cancelled...................................... (266,900) 4.18
Expired........................................ (7,700) 2.13
Exercised...................................... (2,500) 2.13
------------------------------------------------------ ---------------- -------------------------------
------------------------------------------------------ ---------------- -------------------------------
Balance October 31, 2002 830,160 $3.78
Granted........................................ -- --
Cancelled...................................... (8,000) 4.14
Expired........................................ (33,500) 5.85
Exercised...................................... -- --
------------------------------------------------------ ---------------- -------------------------------
------------------------------------------------------ ---------------- -------------------------------
Balance October 31, 2003 788,660 $3.69
====================================================== ================ ===============================
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Stock options outstanding and exercisable on October 31, 2003 are as follows:
Weighted Average Weighted Average Remaining
Range of Exercise Prices Per Shares Under Option Exercise Price Per Contractual Life in Years
Share Share
- ---------------------------------- -------------------- ----------------------- ------------------------------
- ---------------------------------- -------------------- ----------------------- ------------------------------
Outstanding
$ 2.125 - 5.125 580,160 $2.84 5.9
5.813 - 8.250 208,500 6.05 5.0
- ---------------------------------- -------------------- ----------------------- ------------------------------
- ---------------------------------- -------------------- ----------------------- ------------------------------
$ 2.125 - 8.250 788,660 $3.69 5.5
================================== ==================== ======================= ==============================
================================== ==================== ======================= ==============================
Exercisable
$ 2.125 - 5.125 414,787 $3.04 --
5.813 - 8.250 170,800 6.10 --
- ---------------------------------- -------------------- ----------------------- ------------------------------
- ---------------------------------- -------------------- ----------------------- ------------------------------
$ 2.125 - 8.250 585,587 $3.93 --
================================== ==================== ======================= ==============================
================================== ==================== ======================= ==============================
We apply Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB No. 25), and related interpretations in accounting
for the plans, and, except for certain shares subject to variable plan
accounting, no compensation expense has been recognized for stock options
issued under the plans. For companies electing to continue the use of APB
No. 25, SFAS No. 123 "Accounting for Stock-Based Compensation", requires pro
forma disclosures determined through the use of an option-pricing model as
if the provisions of SFAS No. 123 had been adopted.
On November 11, 2001, our former CEO was granted 110,000 options at $2.11 and
all of his previous option grants were cancelled. These options are subject to
variable plan accounting, which resulted in a charge to expense in fiscal 2003
of $51,000 for the amount of the benefit that could have been realized based on
the stock price at October 31, 2003.
The weighted average fair value at date of grant for options granted during
fiscal 2002 and 2001, was $1.43 and $2.07, per share, respectively. No options
were granted in 2003. The fair value of each option grant was estimated on the
date of the grant using the Black-Scholes option-pricing model with the
following assumptions:
2003 2002 2001
- --------------------------------------------------------- ------------- -- ------------ --- --------------
- --------------------------------------------------------- ------------- -- ------------ --- --------------
Expected dividend yield............................. NA 0.00% 0.00%
Expected volatility................................. NA 53.71% 56.00%
Risk-free interest rate............................. NA 4.99% 5.18%
Expected term in years.............................. NA 9.05 10
- --------------------------------------------------------- ------------- -- ------------ --- --------------
If we had adopted the provisions of SFAS No. 123, net income (loss) and earnings
(loss) per share would have been as follows:
2003 2002 2001
- --------------------------------------------------------- ------------- -- ------------ --- --------------
- --------------------------------------------------------- ------------- -- ------------ --- --------------
Net income (loss) (in thousands).................... $ 265 $ (8,628) $ (1,928)
Earnings (loss) per share:..........................
Basic............................................. $ 0.05 $ (1.55) $ (.34)
Diluted........................................... $ 0.05 $ (1.55) $ (.34)
- --------------------------------------------------------- ------------- -- ------------ --- --------------
As of October 31, 2003, there were outstanding non-qualified options that had
been granted outside of the 1990 and 1997 plans to current and former outside
members of the Board of Directors to purchase 50,000 and 75,000 shares at $5.13
and $5.81 per share, respectively. These shares are exercisable as of October
31, 2003. The options expire at various dates between 2002 and 2008.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
9. RELATED PARTY TRANSACTIONS
We own approximately 24% of one of our Taiwanese-based contract manufacturers.
This investment of $565,000 is accounted for using the equity method and is
included in Investments and Other Assets on the Consolidated Balance Sheet.
Purchases of product from this contract manufacturer totaled $3.7 million, $5.9
million, and $12.2 million for the years ended October 31, 2003, 2002 and 2001,
respectively. Trade payables to this contract manufacturer were $111,000 at
October 31, 2003, and $1.0 million at October 31, 2002. Trade receivables were
$108,000 at October 31, 2003 and $43,000 at October 31, 2002.
As of October 31, 2003, we owned 35% of Hurco Automation, Ltd. (HAL), a Taiwan
based company. HAL's scope of activities includes the design, manufacture, sales
and distribution of industrial automation products, software systems and related
components, including control systems and components manufactured under contract
for sale exclusively to us. We are accounting for this investment using the
equity method. The investment of $1.3 million at October 31, 2003 is included in
Investments and Other Assets on the Consolidated Balance Sheet. Purchases of
product from this supplier amounted to $4.8 million, $4.1 million and $4.1
million in 2003, 2002 and 2001, respectively. Trade payables to HAL were $1.2
million and $879,000 at October 31, 2003 and 2002, respectively. Trade
receivables from HAL were $278,000 and $311,000 at October 31, 2003 and 2002,
respectively.
Summary financial information for the two affiliates accounted for using the
equity method of accounting are as follows:
(000's) 2003 2002 2001
--------------- ------------- -------------
--------------- ------------- -------------
Net Sales....................................... $ 26,284 $ 25,013 $ 42,691
Gross Profit.................................... 4,409 4,173 7,305
Operating Income................................ 564 127 2,047
Net Income...................................... 261 425 1,609
Current Assets.................................. $ 17,162 $ 12,842 $ 14,345
Non-current Assets.............................. 2,015 1,756 1,535
Current Liabilities............................. 13,549 9,460 11,335
10. CONTINGENCIES AND LITIGATION
We previously occupied a facility located in England under a lease that expired
in April 2002. The lease required that, following expiration of the lease, we
make certain repairs to the facility resulting from deterioration of the
facility during the lease term. The scope and cost of the repairs alleged by the
lessor to be required evolved throughout fiscal 2002 and 2003 as investigations
and negotiations proceeded. On September 30, 2003, we settled this claim with
the lessor for (pound)684,000 (approximately $1.2 million), which we had
previously accrued. The settlement payment is due in two equal installments in
November 2003 and January 2004.
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 consolidated financial
position or results of operations.
11. GUARANTEES
During fiscal 2003, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others, an interpretation of FASB Statements No. 5, 57 and 107 and
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Rescission of FASB Interpretation No. 34." FIN 45 clarifies the requirements
of FASB Statement No. 5, Accounting for Contingencies, relating to the
guarantor's accounting for, and disclosures of, the issuance of certain types
of guarantees.
From time to time, our German subsidiary guarantees third party lease financing
residuals in connection with the sale of certain machines in Europe. At October
31, 2003 there were 26 third party guarantees totaling approximately $1.4
million. A retention of title clause allows our Germany subsidiary to obtain the
machine if the customer defaults on its lease. We believe that the proceeds
obtained from liquidation of the machine would cover any payments required under
the guarantee.
We provide warranties on our products with respect to defects in material and
workmanship. The terms of these warranties are generally one year for machines
and shorter periods for service parts. We recognize a reserve with respect to
this obligation at the time of product sale, with subsequent warranty claims
recorded against the reserve. The amount of the warranty reserve is determined
based on historical trend experience and any known warranty issues that could
cause future warranty costs to differ from historical experience. A
reconciliation of the changes in our warranty reserve is as follows (in
thousands):
Warranty Reserve
----------------------
----------------------
Balance at October 31, 2002 $ 1,003
Provision for warranties during the period 1,058
Charges to the accrual (1,135)
Impact of foreign currency translation 90
----------------------
----------------------
Balance at October 31, 2003 $ 1,016
======================
12. OPERATING LEASES
We lease facilities, certain equipment and vehicles under operating leases that
expire at various dates through 2008. Future payments required under operating
leases as of October 31, 2003, are summarized as follows (in thousands):
2004........................................... 1,185
2005........................................... 750
2006........................................... 337
2007........................................... 284
2008........................................... 199
Thereafter..................................... 15
-----------------
Total.......................................... 2,770
=================
Lease expense for the years ended October 31, 2003, 2002, and 2001 was $1.5
million, $1.8 million, and $1.6 million, respectively.
We recorded $118,000 of lease income from subletting 45,000 square feet of our
Indianapolis facility. The sublease expires on January 31, 2005.
13. LICENSE FEE INCOME AND LITIGATION SETTLEMENT FEES, NET
License fee income and litigation settlement fees, net for fiscal 2002 and 2001
were attributable to agreements entered into by our wholly owned subsidiary, IMS
Technology, pursuant to which IMS granted fully paid-up licenses of its
interactive patents in exchange for cash and other consideration. License fee
payments received that were contingent upon the continued validity of the patent
were deferred and recognized over the life of the patent, which expired in
October 2001. We have no deferred license fee income at October 31, 2003 and do
not expect any significant license fee income in the foreseeable future.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
14. QUARTERLY HIGHLIGHTS (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ----------- -------------
2003 (In thousands, except per share data)
Sales and service fees...................... $ 15,953 $ 17,453 $ 18,354 $ 23,772
Gross profit................................ 3,994 5,128 5,074 6,626
Gross profit margin......................... 25.0% 29.4% 27.6% 27.9%
Restructuring expense (credit) and other
expense, net (Note 16)..................... -- -- -- (124)
Selling, general and administrative expenses 4,428 4,563 4,332 5,426 (b)
Operating income (loss)..................... (434) 565 742 1,324
Net income (loss)........................... (582) 139 331 574
Loss per common share - basic............... $ (.10) $ .02 $ .06 $ .10
Loss per common share - diluted............. $ (.10) $ .02 $ .06 $ .10
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ----------- -------------
2002 (In thousands, except per share data)
Sales and service fees...................... $ 18,520 $ 14,995 $ 18,204 $ 18,767
Gross profit................................ 4,003 1,883 (a) 4,381 4,979
Gross profit margin......................... 21.6% 12.6% (a) 24.1% 26.5%
Restructuring expense and other expense, net
(Note 16).................................. 356 1,395 -- 1,004
Selling, general and administrative expenses 5,214 4,535 4,672 5,237
Operating loss.............................. (1,567) (4,047) (291) (1,262)
Net loss.................................... (1,614) (4,211) (651) (1,760)
Loss per common share - basic............... $ (.29) $ (.75) $ (.12) $ (.32)
Loss per common share - diluted............. $ (.29) $ (.75) $ (.12) $ (.32)
a. Includes $1.1 million restructuring charge for inventory write-downs
related to under-performing product lines that were discontinued. Gross
profit margin exclusive of the inventory charge was 19.1%.
b. Includes $400,000 of incentive compensation expense.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
15. SEGMENT INFORMATION
We operate in a single segment: industrial automation equipment. We design and
produce interactive computer control systems and software and computerized
machine tools for sale through our own distribution network to the worldwide
metal working market. We also provide software options, control upgrades,
accessories and replacement parts for our products, as well as customer service
and training support.
Our computerized metal cutting machine tools are manufactured to our
specifications by manufacturing contractors in Taiwan including our wholly owned
subsidiary, Hurco Manufacturing Limited (HML). Our executive offices and
principal design, engineering, and manufacturing management operations are
headquartered in Indianapolis, Indiana. We sell our products through
approximately 200 independent agents and distributors in approximately 40
countries throughout North America, Europe and Asia. We also have our own direct
sales and service organizations in England, France, Germany, Italy, Singapore
and China. During fiscal 2003, no customer accounted for more than 5% of our
sales and service fees.
The following table sets forth the contribution of each of our product groups to
our total sales and service fees during each of the past three fiscal years (in
thousands):
Net Sales and Service Fees by Product Category Year ended October 31,
------------------------------------------------
2003 2002 2001
------------- ------------- -------------
Computerized Machine Tools............................. $ 61,385 $ 55,503 $ 73,286
Computer Control Systems and Software *................ 3,044 3,632 5,716
Service Parts.......................................... 7,643 8,111 9,516
Service Fees........................................... 3,460 3,240 3,749
------------- ------------- -------------
Total............................................ $ 75,532 $ 70,486 $ 92,267
============= ============= =============
*Amounts shown do not include CNC systems sold as an integrated component of
computerized machine systems.
The following table sets forth revenues by geographic area, based on customer
location, for each of the past three fiscal years were (in thousands):
Revenues by Geographic Area Year Ended October 31
------------------------------------------------
2003 2002 2001
-------------- ------------- -------------
United States.............................................. $ 22,829 $ 22,782 $ 32,935
-------------- ------------- -------------
Germany.................................................... 22,111 22,863 28,452
United Kingdom............................................. 8,381 7,387 8,814
Other Europe............................................... 17,735 14,142 17,847
-------------- ------------- -------------
Total Europe............................................ 48,227 44,392 55,113
Asia and Other............................................. 4,476 3,312 4,219
-------------- ------------- -------------
Total Foreign........................................... 52,703 47,704 59,332
-------------- ------------- -------------
$ 75,532 $ 70,486 $ 92,267
============== ============= =============
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Long-lived assets by geographic area were (in thousands):
October 31
---------------------------------
------------- -- ----------------
2003 2002
------------- ----------------
United States.................................. $ 13,847 $ 13,824
Foreign countries.............................. 1,721 1,793
------------- ----------------
------------- ----------------
$ 15,568 $ 15,617
============= ================
16. RESTRUCTURING EXPENSE AND OTHER EXPENSE, NET
In fiscal 2001, a provision of $471,000 was recorded for severance costs related
to a domestic cost reduction program in which 59 positions were eliminated.
Fiscal 2001 also included a reversal of a $328,000 previously established
reserve.
During fiscal 2002, we discontinued several under-performing product lines, sold
the related assets and discontinued a software development project to enable us
to focus our resources and technology development on our core products, which
consist primarily of general purpose computerized machine tools for the metal
cutting industry (vertical machining centers) into which our proprietary
Ultimax(R) software and computer control systems have been fully integrated. As
a result of these actions, we recorded restructuring charges totaling $3.1
million consisting primarily of: (a) non-cash write downs of inventories of $1.1
million recorded in cost of sales and capitalized software development costs of
$1.0 million recorded as restructuring expense, and (b) severance costs of
$934,000, related to personnel reductions.
Also included in restructuring expense and other expense, net in fiscal 2002 is
a $1.1 million provision for potential expenditures related to a disputed claim
in the United Kingdom, regarding a terminated facility lease (Note 10) and a
$277,000 credit due to a refund of software development fees resulting from the
termination of a software development agreement during the second fiscal quarter
(Note 18).
The severance accrual of $264,000 at October 31, 2002 represented costs related
to employees to be paid in future periods. The severance provision represented
53 positions that have been eliminated or were to be eliminated in fiscal 2003.
At October 31, 2002, 38 employees had been paid the full amount of their
severance while the remaining 15 employees were paid at various times through
the second quarter of fiscal 2003.
In fiscal 2003, we paid the remaining severance and adjusted the foreign lease
liability balance to the actual settlement amount.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Balance Provision Charges to Balance
Description 10/31/00 (Credit) Accrual 10/31/01
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Excess building capacity..................... $ 286 $ (286) $ -- $ --
Equipment leases............................. 54 (42) (12) --
Severance costs.............................. 300 471 (638) 133
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
$ 640 $ 143 $ (650) $ 133
============ ============= ============= ==============
============ ============= ============= ==============
Balance Provision Charges to Balance
Description 10/31/01 (Credit) Accrual 10/31/02
------------ ------------- ------------- --------------
Cost of sales - restructuring:
Inventory write-down.................... $ -- $ 1,083 $ 1,083 $ --
Restructuring expense:
Capitalized software development cost
write-off.............................. -- 1,036 1,036 --
Severance costs.............................. 133 934 803 264
Other expense (credit):
Foreign lease termination liability (Note10) 51 1,062 -- 1,113
Termination of software development
agreement (Note 18)..................... -- (277) (277) --
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Total restructuring and other expense, net... 184 2,755 1,562 1,377
------------ ------------- ------------- --------------
------------ ------------- ------------- --------------
Total................................... $ 184 $ 3,838 $ 2,645 $ 1,377
============ ============= ============= ==============
============ ============ ============= ==============
Balance Provision Charges to Balance
Description 10/31/02 (Credit) Accrual 10/31/03
------------ ------------ ------------- -----------------
Severance costs.............................. 264 (43) 221 --
Foreign lease termination liability.......... 1,113 (81) (157) 1,189
------------ ------------ ------------- -----------------
------------ ------------ ------------- -----------------
$ 1,377 $ (124) $ 64 $ 1,189
============ ============ ============= =================
17. STOCK REPURCHASES
Pursuant to our odd-lot tender offer in fiscal 2003, we repurchased 7,171 shares
of common stock for approximately $23,000. The repurchases of shares is
reflected as a reduction in common stock.
In fiscal 2001, we repurchased 391,101 shares of our common stock for
approximately $1.7 million of which 278,001 were purchased from a related party
for $1.2 million. The repurchase of shares is reflected as a reduction in common
stock.
18. SOFTWARE DEVELOPMENT AGREEMENTS AND LOAN AGREEMENT
During fiscal 2001, we entered into agreements with a private software company
to fund development costs related to the integration of patented, open
architecture technology into our computer control products. We agreed to fund an
aggregate of $405,000, over a fifteen-month period ending in July 2002 of which
$180,000 was paid and recorded as a research and development expense in fiscal
2001. We also agreed to fund a secured term loan payable in installments through
February 2002, of $1.0 million which is due April 1, 2003. In addition, the
company granted us warrants to purchase an equity interest, which were
exercisable on or before December 31, 2002, and 2003.
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During fiscal 2002, we terminated these agreements. In connection therewith, we
received repayment of our investment in a secured loan and warrants. We were
also reimbursed for software development fees previously paid and expensed,
resulting in a credit of $277,000 which is reflected in Restructuring Expense
and Other Expense. Net. Neither party has any future obligations to the other
under the termination agreement.
We had an agreement with another private software company to fund $683,000 of
development costs, which was recorded as a research and development expense in
fiscal 2002 and fiscal 2001. In October 2002, we exercised an option to purchase
the core technology owned by the software company for $1.9 million which is
recorded in Investments and Other Assets at October 31, 2003. The core
technology consists of patented software-based computer control technology that
will be incorporated in our proprietary computer control system.
19. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued Statement No. 141, "Business Combinations" (SFAS
141) and Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 requires that all business combinations initiated after June 30, 2001
be accounted for under the purchase method of accounting. Under SFAS 142,
amortization of goodwill ceased and the goodwill carrying values are tested
periodically for impairment. We adopted SFAS 142, effective November 1, 2002 for
goodwill and intangible assets acquired prior to July 1, 2001. Goodwill and
intangible assets acquired after June 30, 2001 were subject immediately to the
goodwill non-amortization and intangible provisions of this statement. The
adoption of this standard did not have a material effect on the Consolidated
Financial Statements.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), which was effective for
the fiscal year beginning November 1, 2002. SFAS 144 established a single model
to account for impairment of assets to be held or disposed of, incorporating
guidelines for accounting and disclosure of discontinued operations. The
adoption of this standard did not have a material effect on the Consolidated
Financial Statements.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This Standard, which was effective
for disposal activities initiated after December 31, 2002, addressed significant
issues regarding the recognition, measurement and reporting of costs associated
with exit and disposal activities. The adoption of this standard did not have a
material impact on the Consolidated Financial Statements.
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock Based
Compensation - Transition and Disclosure - An Amendment to FASB Statement No.
123" (SFAS 148) for fiscal years ending after December 15, 2002. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The adoption of this standard did
not have a material effect on the Consolidated Financial Statements.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46)
Consolidation of Variable Interest Entities. This Interpretation requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risks among
parties involved and is effective for the first fiscal year or interim period
beginning after June 15, 2003 for variable interest entities in which an
enterprise holds a variable interest that it acquired before
HURCO COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
February 1, 2003. We do not expect that the adoption of this standard will have
a material effect on the Consolidated Financial Statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
150). This Standard is effective for financial instruments entered into or
modified after May 31, 2003, and for all other instruments for interim periods
beginning after June 15, 2003. SFAS 150 requires certain liabilities previously
classified as equity to be reclassified to a liability. The adoption of this
standard did not have a material effect on the Consolidated Financial
Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
Not Applicable.
Item 9A. CONTROLS AND PROCEDURES
We carried out an evaluation under the supervision and with participation of
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of October 31, 2003 pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, our
management, including the Chief Executive Officer and Chief Financial Officer,
concluded that our disclosure controls and procedures were effective as of the
evaluation date.
There have been no changes in our internal controls over financial reporting
that occurred during the year ended October 31, 2003 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference from
our definitive proxy statement for our 2004 annual meeting of shareholders
except that the information required by Item 10 regarding Executive Officers is
included herein under a separate caption at the end of Part I.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference from
the definitive proxy statement for our 2004 annual meeting of shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Except for the information concerning equity compensation plans, the information
required by this item is hereby incorporated by reference from the definitive
proxy statement for our 2004 annual meeting of shareholders.
Equity Compensation Plan Information
The following table gives information about our common stock that may be issued
upon the exercise of options, warrants and rights under all of our existing
equity compensation plans as of October 31, 2003, including the 1997 Stock
Option and Incentive Plan and the 1990 Stock Option Plan.
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding (excluding securities
warrants and rights options, warrants reflected in column (a))
Plan Category (a) (#) and rights (b) ($) (c) (#)
- -------------------------------------- ---------------------- ------------------- -----------------------------
- -------------------------------------- ---------------------- ------------------- -----------------------------
Equity compensation plans approved
by security holders 788,660 $3.69 89,500
Equity compensation plans not
approved by security holders1 125,000 5.54 --
---------------------- ------------------- -----------------------------
---------------------- ------------------- -----------------------------
Total 913,660 $3.90 89,500
====================== =================== =============================
1 Represents non-qualified options granted to the Board of Directors in 1996 and 1998.
As of October 31, 2003, there were outstanding non-qualified options that had
been granted outside of the 1990 and 1997 plans to current and former outside
members of the Board of Directors to purchase 50,000 and 75,000 shares at $5.13
and $5.81 per share, respectively. These shares are exercisable as of October
31, 2003. The options expire at various dates between 2002 and 2008.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference from
the definitive proxy statement for our 2004 annual meeting of shareholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is hereby incorporated by reference from
the definitive proxy statement for our 2004 annual meeting of shareholders.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements. The following consolidated financial
statements of Registrant are included herein under Item 8 of Part II:
Page
Reports of Independent Accountants...............................22 - 23
Consolidated Statements of Operations - years ended
October 31, 2003, 2002 and 2001................................. 24
Consolidated Balance Sheets - as of October 31, 2003 and 2002.... 25
Consolidated Statements of Cash Flows - years
ended October 31, 2003, 2002 and 2001........................... 26
Consolidated Statements of Changes in Shareholders' Equity -
years ended October 31, 2003, 2002 and 2001..................... 27
Notes to Consolidated Financial Statements....................... 28
2. Financial Statement Schedule. The following financial statement
schedule is included in this Item.
Schedule II - Valuation and Qualifying
Accounts and Reserves.............................. 49
All other financial statement schedules are omitted because they are not
applicable or the required information is included in the consolidated
financial statements or notes thereto.
(b) Reports on Form 8-K
Report furnished on August 20, 2003 under Item 12, Results of Operation and
Financial Condition.
(c) Exhibits
Exhibits are filed with this Form 10-K or incorporated herein by reference
as listed on pages 50 and 51.
Schedule II - Valuation and Qualifying Accounts and Reserves
for the years ended October 31, 2003, 2002, and 2001
(Dollars in thousands)
Balance at Charged to Charged Balance
Beginning Costs and To Other At End
Description of Period Expenses Accounts Deductions Of Period
------------ ------------- ---------- ------------- ------------
------------ ------------- ---------- ------------- ------------
Allowance for doubtful Accounts for the year ended:
October 31, 2003............. $ 689 $ 421 $ -- $ 480 (1) $ 630
============ ============= ========== ============= ============
============ ============= ========== ============= ============
October 31, 2002............. $ 907 $ 133 $ -- $ 351 (2) $ 689
============ ============= ========== ============= ============
============ ============= ========== ============= ============
October 31, 2001............. $ 741 $ 547 $ -- $ 381 (3) $ 907
============ ============= ========== ============= ============
============ ============= ========== ============= ============
Accrued warranty expenses For the year ended:
October 31, 2003............. $ 1,003 $ 1,148 $ $ $ 1,016
-- 1,135
============ ============= ========== ============= ============
============ ============= ========== ============= ============
October 31, 2002............. $ 792 $ 1,089 $ -- $ 878 $ 1,003
============ ============= ========== ============= ============
============ ============= ========== ============= ============
October 31, 2001............. $ 831 $ 661 $ -- $ 700 $ 792
============ ============= ========== ============= ============
(1) Receivable write-offs of $493,000, net of cash recoveries on accounts previously written off of $12,000.
(2) Receivable write-offs of $359,000, net of cash recoveries on accounts previously written off of $9,000.
(3) Receivable write-offs of $384,000, net of cash recoveries on accounts previously written off of $4,000.
EXHIBITS INDEX
Exhibits Filed. The following exhibits are filed with this report:
- --------------
10.1 Third Amended and Restated Credit Agreement and Amendment to
Reimbursement Agreement dated as of December 1, 2003 between the
Registrant and Bank One, NA.
10.2 Revolving Credit Facility and Overdraft Facility between Hurco Europe
Limited and Bank One, NA dated January 15, 2004.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Registrant.
23.2 Consent of PricewaterhouseCoopers LLP.
31.1 Certification by the Chief Executive Officer, pursuant to Rule
13a-15(b) under the Securities and Exchange Act of 1934, as amended.
31.2 Certification by the Chief Financial Officer, pursuant to Rule
13a-15(b) under the Securities and Exchange Act of 1934, as amended.
32.1 Certification by the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification by the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
Exhibits Incorporated by Reference. The following exhibits are incorporated
into this report:
3.1 Amended and Restated Articles of Incorporation of the Registrant,
incorporated by reference to Exhibit 3.1 to the Registrant's Report
on Form 10-Q for the quarter ended July 31, 2000.
3.2 Amended and Restated By-Laws of the Registrant dated November 14,
2001, incorporated by reference to Exhibit 3.2 to the Registrant's
Report on Form 10-K for the year ended October 31, 2001.
10.3* Non-qualified Stock Option Agreement between the Registrant and O.
Curtis Noel effective, March 3, 1993, incorporated by reference to
Exhibit 10.44 to the Registrant's Report on Form 10-K for the year
ended October 31, 1993.
10.4* Employment Agreement between the Registrant and Roger J. Wolf dated
January 8, 1993, incorporated by reference to Exhibit 10.45 to the
Registrant's Report on Form 10-K for the year ended October 31, 1993.
10.5* Form of Director Non-qualified Stock Option Agreement between the
Registrant and Richard T. Niner, O. Curtis Noel and Charles E.
Mitchell Rentschler, incorporated by reference as Exhibit 10.4
to the Registrant's Form 10-K for the year ended October 31, 1999.
10.6* Non-qualified Stock Option Agreement between the Registrant and
Richard T. Niner, effective July 8, 1996 incorporated by reference to
Exhibit 10.49 to the Registrant's Report on Form 10-K for the year
ended October 31, 1996.
10.7* Non-qualified Stock Option Agreement between the Registrant and O.
Curtis Noel, effective July 8, 1996 incorporated by reference to
Exhibit 10.50 to the Registrant's Report on Form 10-K for the year
ended October 31, 1996.
10.8* Non-qualified Stock Option Agreement between the Registrant and
Charles E. Mitchell Rentschler, effective July 8, 1996 incorporated
by reference to Exhibit 10.51 to the Registrant's Report on Form 10-K
for the year ended October 31, 1996.
10.9* Amended 1997 Stock Option and Incentive Plan, incorporated by
reference as Exhibit 10.1 to the Registrant's Report on Form 10-Q
for the quarter ended July 31, 2000.
10.10* Employment Agreement between the Registrant and James D. Fabris dated
November 18, 1997, incorporated by reference as Exhibit 10.15 to the
Registrant's Report on Form 10-Q for the quarter ended January 31,
1998.
10.11 Mortgage dated April 30, 2002 between the Registrant and American
Equity Investment Life Insurance Company incorporated by reference as
Exhibit 10.2 to the Registrant's Report on Form 10-Q for the quarter
ended April 30, 2002.
10.12* Employment Agreement between the Registrant and Michael Doar dated
November 13, 2001 incorporated by reference as Exhibit 10.2 to the
Registrant's Report on Form 10-Q dated January 31, 2002
10.13 Promissory Note dated October 24, 2002 between the Registrant and
CIMplus, Inc. (incorporated by reference to Exhibit 10.2 to the
Registrants Report on Form 10-K for the year ended October 31, 2002.
- ---------------
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be listed by Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 23rd day of January
23, 2004.
HURCO COMPANIES, INC.
By: /s/ Roger J. Wolf
-------------------------------
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature and Title(s) Date
/s/ Michael Doar January 23, 2004
- ------------------------------------
Michael Doar, Chairman of the Board,
Chief Executive Officer and Director
of Hurco Companies, Inc.
(Principal Executive Officer)
/s/ Roger J. Wolf January 23, 2004
- ------------------------------------
Roger J. Wolf
Senior Vice-President,
Secretary, Treasurer and
Chief Financial Officer
of Hurco Companies, Inc.
(Principal Financial Officer)
/s/ Stephen J. Alesia January 23, 2004
- --------------------------------------------
Stephen J. Alesia
Corporate Controller
of Hurco Companies, Inc.
(Principal Accounting Officer)
/s/ Robert W. Cruickshank January 23, 2004
- ------------------------------------
Robert W. Cruickshank, Director
/s/ Richard T. Niner January 23, 2004
- --------------------------------------------
Richard T. Niner, Director
/s/ O. Curtis Noel January 23, 2004
- --------------------------------------------
O. Curtis Noel, Director
/s/ Charles E. M. Rentschler January 23, 2004
- --------------------------------------------
Charles E. M. Rentschler, Director
/s/ Gerald V. Roch January 23, 2004
- --------------------------------------------
Gerald V. Roch, Director
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
AND
AMENDMENT TO REIMBURSEMENT AGREEMENT
DATED AS OF DECEMBER 1, 2003
BETWEEN
HURCO COMPANIES, INC.
AND
BANK ONE, NA
TABLE OF CONTENTS
ARTICLE I. DEFINITIONS 1
1.1. Certain Definitions...............................................................................1
1.2. Other Definitions; Rules of Construction.........................................................16
ARTICLE II. THE CREDITS..............................................................................................16
2.1. Commitment.......................................................................................16
2.2. Determination of Dollar Amounts; Required Payments; Termination..................................17
2.3. Reserved.........................................................................................17
2.4. Types of Advances................................................................................17
2.5. Fees; Reductions in Commitment...................................................................17
2.6. Minimum Amount of Each Advance...................................................................18
2.7. Optional Principal Payments......................................................................18
2.8. Method of Selecting Types and Interest Periods for New Advances..................................18
2.9. Conversion and Continuation of Outstanding Advances..............................................18
2.10. Changes in Interest Rate, etc....................................................................19
2.11. Rates Applicable After Default...................................................................19
2.12. Method of Payment................................................................................19
2.13. Noteless Agreement; Evidence of Indebtedness.....................................................20
2.14. Telephonic Notices...............................................................................20
2.15. Interest Payment Dates; Interest and Fee Basis...................................................21
2.16. Lending Installations............................................................................21
2.17. Reserved.........................................................................................21
2.18. Facility LCs.....................................................................................21
2.18.1 Issuance.....................................................................................20
2.18.2. Notice......................................................................................21
2.18.3. Administration; Reimbursement by the Bank...................................................22
2.18.4. Reimbursement by the Borrower...............................................................22
2.18.5. Obligations Absolute........................................................................22
2.18.6. Actions of the Bank.........................................................................22
2.18.7. Indemnification.............................................................................23
2.18.8. Facility LC Collateral Account..............................................................23
2.19. Borrowing Base
Adjustments.......................................................................23
2.20. Security and
Collateral..........................................................................23
2.21 Market Disruption 23
ARTICLE III. YIELD PROTECTION; TAXES.................................................................................24
3.1. Yield Protection.................................................................................24
3.2. Changes in Capital Adequacy Regulations..........................................................25
3.3. Availability of Types of Advances................................................................25
3.4. Funding Indemnification..........................................................................26
3.5. Taxes............................................................................................26
3.6. Bank Statements; Survival of Indemnity...........................................................26
ARTICLE IV. CONDITIONS PRECEDENT.....................................................................................27
4.1. Initial Credit Extension.........................................................................27
4.2. Each Credit Extension............................................................................28
ARTICLE V. REPRESENTATIONS AND WARRANTIES............................................................................28
5.1. Existence and Standing...........................................................................28
5.2. Authorization and Validity.......................................................................29
5.3. No Conflict; Government Consent..................................................................29
5.4. Financial Statements.............................................................................29
5.5. Material Adverse Change..........................................................................29
5.6. Taxes............................................................................................29
5.7. Litigation and Contingent Obligations............................................................29
5.8. Subsidiaries.....................................................................................30
5.9. ERISA............................................................................................30
5.10. Accuracy of Information..........................................................................30
5.11. Regulation U.....................................................................................30
5.12. Material Agreements..............................................................................30
5.13. Compliance With Laws.............................................................................30
5.14. Ownership of Properties..........................................................................30
5.15. Plan Assets; Prohibited Transactions.............................................................30
5.16. Environmental Matters............................................................................31
5.17. Investment Company Act...........................................................................31
5.18. Public Utility Holding Company Act...............................................................31
5.19. Insurance........................................................................................31
5.20. Borrowing Base...................................................................................31
5.21. Disclosure.......................................................................................31
5.22. Intellectual Property............................................................................32
ARTICLE VI. COVENANTS 32
6.1. Financial Reporting..............................................................................32
6.2. Use of Proceeds..................................................................................33
6.3. Notice of Default................................................................................33
6.4. Conduct of Business..............................................................................34
6.5. Taxes............................................................................................34
6.6. Insurance........................................................................................34
6.7. Compliance with Laws.............................................................................34
6.8. Maintenance of Properties........................................................................34
6.9. Inspection.......................................................................................34
6.10 Dividends............................................................................................33
6.11. Indebtedness.....................................................................................34
6.12. Merger...........................................................................................35
6.13. Sale of Assets...................................................................................35
6.14. Investments and Acquisitions.....................................................................35
6.15. Liens............................................................................................36
6.16. Affiliates.......................................................................................36
6.17. Sale and Leaseback Transactions..................................................................37
6.18 Contingent Obligations...............................................................................35
6.19. Reserved.........................................................................................37
6.20. Financial Covenants..............................................................................37
6.20.1 Minimum Consolidated Net Worth.........................................................37
6.20.2 Maximum Consolidated Total Indebtednessto Consolidated Total Capitalization............37
6.20.3 Fixed Charge Coverage Ratio...........................................................37
6.21 Banking Relationship.............................................................................36
6.22. Collateral Documents.............................................................................37
6.23. Further Assurances...............................................................................38
6.24. Accounting Changes...............................................................................38
6.25. Inconsistent Agreements..........................................................................38
ARTICLE VII. DEFAULTS 38
7.1 ...................................................................................................37
7.2 ...................................................................................................37
7.3 ...................................................................................................38
7.4 ...................................................................................................38
7.5 ...................................................................................................38
7.6 ...................................................................................................38
7.7 ...................................................................................................38
7.8 ...................................................................................................38
7.9 ...................................................................................................38
7.10 ...................................................................................................39
7.11 ...................................................................................................39
7.12 ...................................................................................................39
7.13 ...................................................................................................39
7.14 ...................................................................................................39
7.15 ...................................................................................................39
7.16 ...................................................................................................39
7.17 ...................................................................................................39
7.18 ...................................................................................................39
ARTICLE VII A AMENDMENT TO REIMBURSEMENT AGREEMENT...............................................................40
7A1. Administration of Outstanding Facilities.........................................................40
7A2. Amendments to Reibmrusement Agreement............................................................40
ARTICLE VIII. ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES.........................................................41
8.1. Acceleration; Facility LC Collateral Account.....................................................41
8.2. Amendments.......................................................................................42
8.3. Preservation of Rights...........................................................................42
ARTICLE IX. GENERAL PROVISIONS........................................................................................42
9.1. Survival of Representations......................................................................42
9.2. Governmental Regulation..........................................................................42
9.3. Headings.........................................................................................42
9.4. Entire Agreement.................................................................................43
9.5. Benefits of this Agreement.......................................................................43
9.6. Expenses; Indemnification........................................................................43
9.7. Accounting.......................................................................................43
9.8. Severability of Provisions.......................................................................43
9.9. Nonliability of the Bank.........................................................................44
9.10. Confidentiality..................................................................................44
9.11. Disclosure.......................................................................................44
9.12. Construction of Certain Provisions...............................................................44
9.13. Independence of Covenants........................................................................44
9.14. Interest Rate Limitation.........................................................................44
9.15 USA Patriot Act Notification....................................................................44
ARTICLE X. SETOFF 45
ARTICLE XI. BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS........................................................45
11.1. Successors and Assigns...........................................................................45
11.2. Participations...................................................................................45
11.2.1. Permitted Participants; Effect...........................................................45
11.2.2. Voting Rights............................................................................46
11.2.3. Benefit of Setoff........................................................................46
11.3. Dissemination of Information.....................................................................46
ARTICLE XII. NOTICES 46
12.1. Notices..........................................................................................46
12.2. Change of Address................................................................................46
ARTICLE XIII. COUNTERPARTS...........................................................................................47
ARTICLE XIV. CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL............................................47
14.1. CHOICE OF LAW....................................................................................47
14.2. CONSENT TO JURISDICTION..........................................................................47
14.3. WAIVER OF JURY TRIAL.............................................................................47
SCHEDULE 1. OTHER INVESTMENTS........................................................................................49
SCHEDULE 2. LENDING INSTALLATIONS....................................................................................50
SCHEDULE 5.8. SUBSIDIARIES AND AFFILIATES OF THE BORROWER............................................................51
SCHEDULE 5.22. INTELLECTUAL PROPERTY OF THE BORROWER AND ITS SUBSIDIARIES............................................52
Other schedules and exhibits (omitted) supplementary are available to The
Commission upon request.
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Borrowing Base Certificate
Exhibit C - Compliance Certificate
Exhibit D - Form of Subsidiary Guaranty
Exhibit E -Hurco Fiscal Year 2004 Plan
Exhibit F - Wire Transfer Instructions
Exhibit G - Form of Opinion
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
AND AMENDMENT TO REIMBURSEMENT AGREEMENT
This Third Amended and Restated Credit Agreement and Amendment to
Reimbursement Agreement, dated as of December 1, 2003, is between Hurco
Companies, Inc., an Indiana corporation, and Bank One, NA, a national banking
association having its principal office in Chicago, Illinois. The parties hereto
agree as follows:
INTRODUCTION
A. Hurco Companies, Inc. (defined below as the Borrower) and the Bank
are parties to that certain Second Amended and Restated Credit Agreement and
Amendment to Reimbursement Agreement dated as of October 31, 2001, (as amended,
the "Existing Credit Agreement"), pursuant to which the Bank has provided to the
Borrower (or certain of the Borrower's Subsidiaries as further described
therein) a revolving credit facility, including letters of credit (the "Existing
Revolving Credit"), all for the purposes and on the terms therein set forth.
B. The Borrower and the Bank, successor by merger to Bank One, Michigan
(formerly known as NBD Bank, Michigan) are parties to a Reimbursement Agreement
(as defined below), pursuant to which the Bank has issued the IRB L/C (as
defined below). The Borrower wishes to amend the Reimbursement Agreement to
coordinate its provisions with those of this Agreement.
C. The Borrower desires to amend and restate the Existing Credit
Agreement to replace the Existing Revolving Credit and refinance the
indebtedness outstanding thereunder, to be used for working capital and general
corporate purposes, and to modify the terms of the Existing Credit Agreement in
certain other respects, and the Bank is willing to do so on the terms herein set
forth.
D. On or about the Effective Date, Hurco Europe Limited, a corporation
organized under the laws of England and Wales and a Subsidiary of the Borrower
("Hurco Europe") will enter into a Letter Loan Agreement with the Bank, whereby
the Bank has agreed to make revolving credit loans in favor of Hurco Europe in
an aggregate amount not to exceed British Pounds Sterling 1,000,000 (the "UK
Facility").
The Bank is willing to undertake these additional matters and amend the
Reimbursement Agreement, all on the terms set forth below.
In consideration of the premises and of the mutual agreements herein
contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. As used herein, the following terms have
the following respective meanings:
"Active Subsidiary" means a Subsidiary of the Borrower which is not an
Inactive Subsidiary.
"Acquisition" means any transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (i) acquires any going business or all or
substantially all of the assets of any firm, corporation or limited liability
company, or division thereof, whether through purchase of assets, merger or
otherwise or (ii) directly or indirectly acquires (in one transaction or as the
most recent transaction in a series of transactions) at least a majority (in
number of votes) of the securities of a corporation which have ordinary voting
power for the election of directors (other than securities having such power
only by reason of the happening of a contingency) or a majority (by percentage
or voting power) of the outstanding ownership interests of a partnership or
limited liability company.
"Advance" means a borrowing hereunder, (i) made by the Bank on the same
Borrowing Date, or (ii) converted or continued by the Bank on the same date of
conversion or continuation, consisting, in either case, of the aggregate amount
of the several Credit Extensions of the same Type and, in the case of
Eurocurrency Advances, in the same Agreed Currency and for the same Interest
Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person owns 10% or
more of any class of voting securities (or other ownership interests) of the
controlled Person or possesses, directly or indirectly, the power to direct or
cause the direction of the management or policies of the controlled Person,
whether through ownership of stock, by contract or otherwise.
"Agreed Currencies" means (i) Dollars, (ii) so long as such currencies
remain Eligible Currencies, British Pounds Sterling and the Euro, and (iii) any
other Eligible Currency which the Borrower requests the Bank to include as an
Agreed Currency hereunder and which is acceptable to the Bank. For the purposes
of this definition, each of the specific currencies referred to in clause (ii),
above shall mean and be deemed to refer to the lawful currency of the
jurisdiction referred to in connection with such currency, e.g., "British Pounds
Sterling " means the lawful currency of Great Britain.
"Agreement" means this Third Amended and Restated Credit Agreement and
Amendment to Reimbursement Agreement, as it may be amended or modified and in
effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
that used in preparing the financial statements referred to in Section 5.4.
"Alternate Base Rate" means, for any day, a rate of interest per annum
equal to the higher of (i) the Prime Rate for such day and (ii) the sum of the
Federal Funds Effective Rate for such day plus 1% per annum.
"Applicable Margin" means, with respect to the Eurocurrency Rate,
Floating Rate and Commitment Fees, the applicable percentage rates per annum set
forth in the table below based upon the Total Funded Debt/EBITDA Ratio as of the
date of the applicable Advance or Commitment Fee:
-------------------------------- -------------------- -------------------- -----------------------
Total Funded Debt/EBITDA Ratio Eurocurrency Floating Rate Commitment
Advances Advances Fee
(% per annum) (% per annum) (% per annum)
-------------------------------- -------------------- -------------------- -----------------------
-------------------------------- -------------------- -------------------- -----------------------
Greater than 3.0 2.75% 0% .375%
-------------------------------- -------------------- -------------------- -----------------------
-------------------------------- -------------------- -------------------- -----------------------
Greater than 2.5 and less than 2.0% -.25% .25%
or equal to 3.0
-------------------------------- -------------------- -------------------- -----------------------
-------------------------------- -------------------- -------------------- -----------------------
Greater than 2.0 and less than 1.5% -.50% .25%
or equal to 2.5
-------------------------------- -------------------- -------------------- -----------------------
-------------------------------- -------------------- -------------------- -----------------------
Less than or equal to 2.0 1.0% -.75% .125%
-------------------------------- -------------------- -------------------- -----------------------
Notwithstanding the above, the Applicable Margin with respect to the
Eurocurrency Rate and the Floating Rate shall be adjusted quarterly as necessary
as of the first day of the month following the Bank receiving the financial
statements required pursuant to Section 6.1(ii) allowing the Total Funded
Debt/EBITDA Ratio to be calculated for the quarterly periods ending on each
January 31, April 30, July 31, and October 31. Prior to March 1, 2004, the
Applicable Margin shall be determined based on the Total Funded Debt/EBITDA
Ratio being greater than 2.5 and less than or equal to 3.0.
"Approximate Equivalent Amount" of any currency with respect to any
amount of Dollars shall mean the Equivalent Amount of such currency with respect
to such amount of Dollars on or as of such date, rounded up to the nearest
amount of such currency as determined by the Bank from time to time.
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Associated Costs Rate" means that rate quoted to the Bank at the time
the Borrower requests a Eurocurrency Advance in an Agreed Currency other than
Dollars which the Bank determines will be made by a Lending Installation in the
United Kingdom.
"Authorized Officer" means any of the President, Chief Executive
Officer, Chief Financial Officer, or Corporate Controller of the Borrower,
acting singly.
"Bank" means Bank One, NA, a national banking association having its
principal office in Chicago, Illinois, any of its Lending Installations listed
on Schedule 2 attached hereto, and any of their respective successors and
assigns.
"Bond Default", as used in the Reimbursement Agreement, means the
occurrence of an Event of Default under Section 610(h) of the Trust Indenture or
under Section 201(d)(5) of the Trust Indenture, or any corresponding default
under the Loan Agreement referred to in the Trust Indenture.
"Borrower" means Hurco Companies, Inc., an Indiana corporation, and its
successors and assigns.
"Borrowing Base" means, as of any date, an amount equal to the sum,
without duplication, of:
(i) 50% of the book value of Eligible Finished Goods
Inventory as of such date, provided, however,that the
aggregate book value of all Consigned Inventory
included in this calculation shall not exceed
$500,000 at any one time, plus
(ii) 40% of the book value of Eligible Inventory as of
such date, plus
(iii) 80% of the book value of Eligible Trade Receivables
as of such date, plus
(iv) 80% of the book value (such book value in the
aggregate not to exceed $1,250,000) of Eligible
Extended Receivables as of such date.
Notwithstanding the foregoing, assets which are subject to any
Permitted Lien described in subsections (vii), (viii), or (xi) of Section 6.15
shall not be included in calculating the Borrowing Base.
"Borrowing Base Certificate" for any date means an appropriately
completed report as of such date in substantially the form of Exhibit B,
certified as true and correct by an Authorized Officer.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Borrowing Notice" is defined in Section 2.8.
"Business Day" means (i) with respect to any borrowing, payment or rate
selection of Eurocurrency Advances, a day (other than a Saturday or Sunday) on
which banks generally are open in Chicago and New York for the conduct of
substantially all of their commercial lending activities, interbank wire
transfers can be made on the Fedwire system and dealings in Dollars and the
other Agreed Currencies are carried on in the London interbank market (and, if
the Advances which are the subject of such borrowing, payment, or rate selection
are denominated in Euros, a day upon which such clearing system as is determined
by the Bank to be suitable for clearing or settling the Euro is open for
business) and (ii) for all other purposes, a day (other than a Saturday or
Sunday) on which banks generally are open in Chicago for the conduct of
substantially all of their commercial lending activities and interbank wire
transfers can be made on the Fedwire system.
"Business Plan" means the Fiscal Year 2004 Plan prepared by the
Borrower and attached as Exhibit E.
"Capital Expenditures" means, without duplication, any expenditures for
any purchase or other acquisition of any asset which would be classified as a
fixed or capital asset on a consolidated balance sheet of the Borrower and its
Subsidiaries prepared in accordance with Agreement Accounting Principles.
"Capital Stock" of any person means any equity securities, any
securities exchangeable for or convertible into equity securities, and any
warrants, rights, or other options to purchase or otherwise acquire such
securities.
"Capitalized Lease" of a Person means any lease of Property by such
Person as lessee which would be capitalized on a balance sheet of such Person
prepared in accordance with Agreement Accounting Principles.
"Capitalized Lease Obligations" of a Person means the amount of the
obligations of such Person under Capitalized Leases which would be shown as a
liability on a balance sheet of such Person prepared in accordance with
Agreement Accounting Principles.
"Cash Equivalent Investments" means (i) short-term obligations of, or
fully guaranteed by, the United States of America, (ii) commercial paper rated
A-1 or better by S&P or P-1 or better by Moody's, (iii) demand deposit accounts
maintained in the ordinary course of business, (iv) certificates of deposit
issued by and time deposits with commercial banks (whether domestic or foreign)
having capital and surplus in excess of $100,000,000, and (v) deposits in the
Pru Account; provided in each case (excepting the Pru Account) that the same
provides for payment of both principal and interest (and not principal alone or
interest alone) and is not subject to any contingency (other than the passage of
time or notice) regarding the payment of principal or interest.
"CIMPlus Purchase" means the purchase of core technology and all
license agreements related to such core technology by Borrower from CIMPlus,
Inc., pursuant to that certain Purchase Agreement dated as of October 24, 2002.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"Collateral" means the "Collateral" under and as defined in the
Collateral Documents.
"Collateral Documents" means, collectively, the Pledge and Security
Agreement dated as of October 31, 2001, executed by the Borrower in favor of the
Bank, the Confirmation of Pledge and Security Agreement of the Borrower of even
date herewith, the Confirmation of Security Agreement (Patent & Licenses) of the
Borrower of even date herewith ,and all other agreements granting a Lien in
favor of the Bank securing the Secured Obligations, as any of the foregoing may
be amended or modified from time to time, including any and all other security
agreements, mortgages and pledge agreements delivered hereafter.
"Collateral Shortfall Amount" is defined in Section 8.1.
"Commitment" means, the obligation of the Bank (a) to make Loans to,
and issue Facility LCs upon the application of, the Borrower in an aggregate
amount not exceeding $8,000,000, reduced by the amount as required pursuant to
Section 2.5(c).
"Computation Date" is defined in Section 2.2.
"Consigned Inventory" means inventory of the Borrower which is Eligible
Finished Goods Inventory but which at the time of determination has been
delivered by the Borrower on consignment to a customer or potential customer of
the Borrower or a university, college, or trade school and in which the Borrower
has perfected its consignment rights.
"Consolidated Assets" as of any date means the aggregate book value of
the total assets of the Borrower and its Subsidiaries determined on a
consolidated basis in accordance with Agreement Accounting Principles.
"Consolidated Capital Expenditures" means, with reference to any
period, the Capital Expenditures of the Borrower and its Subsidiaries calculated
on a consolidated basis for such period.
"Consolidated EBITDA" means, with reference to any period, Consolidated
Net Income for such period determined in accordance with Agreement Accounting
Principles plus, to the extent deducted in determining Consolidated Net Income,
(i) Consolidated Interest Expense, (ii) expense for income taxes, (iii)
depreciation, (iv) amortization, (v) extraordinary losses incurred other than in
the ordinary course of business, (vi) non-current asset write downs, and (vii)
non-cash losses on equity interests of Affiliates, minus, to the extent included
in Consolidated Net Income, extraordinary gains realized other than in the
ordinary course of business (including without limitation non-cash gains on
equity interests of Affiliates), all calculated for the Borrower and its
Subsidiaries on a consolidated basis.
"Consolidated Interest Expense" means, with reference to any period,
the interest expense of the Borrower and its Subsidiaries (including the
interest component of Rentals under Capitalized Leases and capitalized interest)
calculated on a consolidated basis for such period.
"Consolidated Net Income" means, with reference to any period, the net
income (or loss) of the Borrower and its Subsidiaries calculated on a
consolidated basis for such period.
"Consolidated Net Worth" means, as of any date, (a) the amount of any
Capital Stock, paid-in-capital, and similar equity accounts of the Borrower and
its Subsidiaries calculated on a consolidated basis as of such time, plus (or
minus in the case of a deficit) the capital surplus and retained earnings of the
Borrower and its Subsidiaries calculated on a consolidated basis as of such time
and excluding the amount of Other Comprehensive Income of the Borrower and its
Subsidiaries calculated on a consolidated basis as of such time, less (b) any
treasury stock of the Borrower and its Subsidiaries calculated on a consolidated
basis as of such time.
"Consolidated Total Capitalization" means at any time the sum of
Consolidated Total Indebtedness and Consolidated Net Worth, each calculated at
such time.
"Consolidated Total Indebtedness" means, as of any date, the
Indebtedness of the Borrower and its Subsidiaries, determined on a consolidated
basis in accordance with Agreement Accounting Principles, which, without
duplication, either (a) is interest-bearing and, in accordance with Agreement
Accounting Principles, should be reflected on a consolidated balance sheet of
the Borrower and its Subsidiaries as of such date or (b) consists of Letters of
Credit, valued at the undrawn face amount thereof.
"Contingent Obligation" of a Person means any agreement, undertaking or
arrangement by which such Person assumes, guarantees, endorses, contingently
agrees to purchase or provide funds for the payment of,
or otherwise becomes or is contingently liable upon, the obligation or
liability of any other Person, or agrees to maintain the net worth or working
capital or other financial condition of any other Person, or otherwise assures
any creditor of such other Person against loss, including, without limitation,
any comfort letter, operating agreement, take-or-pay contract or the obligations
of any such Person as general partner of a partnership with respect to the
liabilities of the partnership.
"Controlled Group" means all members of a controlled group of
corporations or other business entities and all trades or businesses (whether or
not incorporated) under common control which, together with the Borrower or any
of its Subsidiaries, are treated as a single employer under Section 414 of the
Code.
"Conversion/Continuation Notice" is defined in Section 2.9.
"Credit Extension" means the making of an Advance or the issuance of a
Facility LC hereunder
"Credit Extension Date" means the Borrowing Date for an Advance or the
issuance date for a Facility LC.
"Credit Obligations" means all present and future obligations and other
liabilities of the Borrower and its Subsidiaries (without duplication) arising
under or included within the Outstanding Facilities, as amended from time to
time, including without limitation any interest, premium, fees, expenses, and
charges relating thereto and any renewals, extensions, and refundings of the
foregoing. The principal amount of the Credit Obligations shall be the aggregate
of the outstanding principal amount of all loans outstanding under the
Outstanding Facilities plus the undrawn face amount of the IRB L/C and the
Facility LCs plus, the unreimbursed portions of any amounts drawn under the IRB
L/C.
"Default" means an event described in Article VII.
"Dollar Amount" of any currency at any date shall mean (i) the amount
of such currency if such currency is Dollars or (ii) the equivalent in Dollars
of such amount if such currency is any currency other than Dollars, calculated
on the basis of the arithmetical mean of the buy and sell spot rates of exchange
of the Bank for such currency on the London market at 11:00 a.m., London time,
on or as of the most recent Computation Date provided for in Section 2.2.
"Dollars" and "$" shall mean the lawful currency of the United States
of America.
"Domestic Subsidiaries" means all Subsidiaries of the Borrower which
are organized under the laws of one of the states of the United States.
"Effective Date" means the date on which the Borrower satisfies the
conditions set forth in Section 4.1.
"Eligible Currency" means any currency other than Dollars (i) that is
readily available, (ii) that is freely traded, (iii) in which deposits are
customarily offered to banks in the London interbank market, (iv) which is
convertible into Dollars in the international interbank market and (v) as to
which an Equivalent Amount may be readily calculated. If, after the designation
by the Bank of any currency as an Agreed Currency, (x) currency control or other
exchange regulations are imposed in the country in which such currency is issued
with the result that different types of such currency are introduced, (y) such
currency is, in the determination of the Bank, no longer readily available or
freely traded, or (z) in the determination of the Bank, an Equivalent Amount of
such currency is not readily calculable, the Bank shall promptly notify the
Borrower, and such currency shall no longer be an Agreed Currency until such
time as the Bank agrees to reinstate such currency as an Agreed Currency and
promptly, but in any event within five Business Days of receiving such notice
from the Bank, the Borrower shall repay all Loans in such affected currency or
convert such Loans into Loans in Dollars or another Agreed Currency, subject to
the other terms set forth in Article II.
"Eligible Finished Goods Inventory" means, as of any date, all
inventory that is located within or is in transit to the United States (which
shall not be deemed to include any territories of the United States) and that
constitutes finished goods included in the consolidated financial statements of
the Borrower and its Subsidiaries, determined in accordance with Agreement
Accounting Principles, including demonstration models and consigned finished
goods.
"Eligible Inventory" means, as of any date, all inventory that is
located within or is in transit to the United States (which shall not be deemed
to include any territories of the United States), including without limitation
raw materials but excluding finished goods and work in process, included in the
consolidated financial statements of the Borrower and its Subsidiaries,
determined in accordance with Agreement Accounting Principles.
"Eligible Trade Receivables" means, as of any date, all accounts
receivable included in the consolidated financial statements of the Borrower and
its Subsidiaries for products or services sold or rendered by the Borrower in
the ordinary course of business on normal 30 day terms, before reserves for bad
debts, all determined in accordance with Agreement Accounting Principles other
than (i) any such accounts receivable which are more than 90 days past due, (ii)
are due from any Affiliate or Subsidiary of the Borrower, (iii) are payable by
any Person located outside the United States (which shall not be deemed to
include any territories of the United States) and Canada; or (iv) accounts
receivable that are payable by any Person as to which 40% or more of the
aggregate amount of such accounts receivable by such Person to the Company do
not otherwise constitute Eligible Trade Receivables or Eligible Extended
Receivables.
"Eligible Extended Receivables" means as of any date, all accounts
receivable included in the consolidated financial statements of the
Borrower and its Subsidiaries for products or services sold or rendered by the
Borrower in the ordinary course of business with payment terms greater than 30
days, before reserves for bad debts, all determined in accordance with Agreement
Accounting Principles, other than (i) any such accounts receivable which are
more than 60 days past due, (ii) are due from any Affiliate or Subsidiary of the
Borrower, (iii) are payable by any Person located outside the United States
(which shall not be deemed to include any territories of the United States) and
Canada; or (iv) accounts receivable that are payable by any Person as to which
40% or more of the aggregate amount of such accounts receivable by such Person
to the Company do not otherwise constitute Eligible Trade Receivables or
Eligible Extended Receivables.
"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating to
(i) the protection of the environment, (ii) the effect of the environment on
human health, (iii) emissions, discharges or releases of pollutants,
contaminants, hazardous substances or wastes into surface water, ground water or
land, or (iv) the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants, hazardous
substances or wastes or the clean-up or other remediation thereof.
"Equivalent Amount" of any currency with respect to any amount of
Dollars at any date shall mean the equivalent in such currency of such amount of
Dollars, calculated on the basis of the arithmetical mean of the buy and sell
spot rates of exchange of the Bank for such other currency at 11:00 a.m., London
time, on the date on or as of which such amount is to be determined.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Euro" and/or "EUR" means the euro referred to in Council Regulation
(EC) No. 1103/97 dated June 17, 1997 passed by the Council of the European
Union, or, if different, the then lawful currency of the member states of the
European Union that participate in the third stage of Economic and Monetary
Union.
"Eurocurrency" means any Agreed Currency.
"Eurocurrency Advance" means an Advance which, except as otherwise
provided in Section 2.11, bears interest at the applicable Eurocurrency Rate.
"Eurocurrency Payment Office" of the Bank shall mean, for each of the
Agreed Currencies, the office, branch, affiliate or correspondent bank of the
Bank specified as the "Eurocurrency Payment Office" for such currency in
Schedule 3 hereto or such other office, branch, affiliate or correspondent bank
of the Bank as it may from time to time specify to the Borrower and each Lender
as its Eurocurrency Payment Office.
"Eurocurrency Rate" means, with respect to a Eurocurrency Advance for
the relevant Interest Period, the sum of (i) the quotient of (a) the
Eurocurrency Reference Rate applicable to such Interest Period, divided by (b)
one minus the Reserve Requirement (expressed as a decimal) applicable to such
Interest Period, if any, plus (ii) the Applicable Margin, changing when and as
the Applicable Margin changes, plus, (iii) for Advances booked in the United
Kingdom, the Associated Costs Rate.
"Eurocurrency Reference Rate" means, with respect to a Eurocurrency
Advance for the relevant Interest Period, the applicable British Bankers'
Association LIBOR rate for deposits in the applicable Agreed Currency as
reported by any generally recognized financial information service as of 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period, and having a maturity equal to such Interest Period, provided that, if
no such British Bankers' Association LIBOR rate is available, the applicable
Eurocurrency Reference Rate for the relevant Interest Period shall instead be
the rate determined by the Bank to be the rate at which the Bank offers to place
deposits in the applicable Agreed Currency with first-class banks in the London
interbank market at approximately 11:00 a.m. (London time) two Business Days
prior to the first day of such Interest Period, in the approximate amount of the
Bank's relevant Eurocurrency Loan and having a maturity equal to such Interest
Period.
"Excluded Taxes" means, in the case of the Bank or applicable Lending
Installation, taxes imposed on its overall net income, and franchise taxes
imposed on it, by (i) the jurisdiction under the laws of which the Bank is
incorporated or organized or (ii) the jurisdiction in which the Bank's principal
executive office or the Bank's applicable Lending Installation is located.
"Exhibit" refers to an exhibit to this Agreement, unless another
document is specifically referenced.
"Existing Credit Agreement" is defined in the Introduction to this
Agreement.
"Existing Revolving Credit" is defined in the Introduction to this
Agreement.
"Facility LC" is defined in Section 2.18.1.
"Facility LC Application" is defined in Section 2.18.2.
"Facility LC Collateral Account" is defined in Section 2.18.8.
"Facility Termination Date" means December 1, 2006.
"Federal Funds Effective Rate" means, for any day, an interest rate per
annum equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers on such day, as published for such day (or, if such day is not a
Business Day, for the immediately preceding Business Day) by the Federal Reserve
Bank of New York, or, if such rate is not so published for any day which is a
Business Day, the average of the quotations at approximately 10:00 a.m. (Chicago
time) on such day on such transactions received by the Bank from three Federal
funds brokers of recognized standing selected by the Bank in its sole
discretion.
"Floating Rate" means, for any day, a rate per annum equal to (i) the
Alternate Base Rate for such day plus (ii) the Applicable Margin, in each case
changing when and as the Alternate Base Rate and Applicable Margin change.
"Floating Rate Advance" means an Advance which, except as otherwise
provided in Section 2.11, bears interest at the Floating Rate.
"Guarantors" means Hurco International Inc. and Hurco International
Holdings, Inc. as signatories to the Guaranty and any other Person who
guaranties to the Bank the Borrower's payment and performance of its obligations
under this Agreement and the other Loan Documents, including without limitation
each other Subsidiary which becomes a party to the Guaranty after the date of
this Agreement and their respective successors and assigns.
"Guaranty" means that certain Subsidiary Guaranty, dated of even date
herewith, executed by the Guarantors in favor of the Bank substantially in the
form of Exhibit D.
"Hurco Deferred Compensation Plan" means the unfunded plan adopted by
the Borrower for the purpose of providing deferred compensation for a select
group of management personnel or other employees of the Borrower, as evidenced
by the CORPORATE plan for Retirement Select Plan and Basic Plan Document
effective as of July 1, 1996, as amended, and the related Hurco Deferred
Compensation Plan Trust Agreement.
"Hurco Deferred Compensation Plan Trust Agreement" means the Trust
Agreement dated as of April 11, 1996, between the Borrower and Fidelity
Management Trust Company, as amended.
"Hurco Europe" is defined in the Introduction to this Agreement.
"Hurco GmbH" means Hurco GmbH Werkzeugmaschinen CIM-Bausteine Vertreib
und Service, a corporation organized under the laws of the Federal Republic of
Germany, and an indirect wholly-owned subsidiary of the Borrower.
"Hurco GmbH Facility" means a credit facility of Hurco GmbH in a
maximum principal amount of Three Million Euros obtained from Dresdner Bank or
any affiliate or successor thereof which may be secured by assets of Hurco GmbH
and an unsecured guaranty of payment of the Borrower.
"Hurco Guaranty" means the Hurco Guaranty dated on or about the
Effective Date, executed by the Borrower in favor of the Bank, by which the
Borrower has guaranteed to the Bank the obligations of Hurco Europe under the UK
Facility, as it may be amended, modified or confirmed and in effect from time to
time.
"Inactive Subsidiary" means a Subsidiary of the Borrower not actively
engaged in business, and which has assets with a book value less than or equal
to $10,000. Schedule 5.8 lists all Inactive Subsidiaries existing on the
Effective Date.
"Indebtedness" of a Person means, without duplication, such Person's
(i) obligations for borrowed money (including without limitation, with respect
to the Borrower, all Reimbursement Obligations, all Credit Obligations and all
Rate Management Transactions), (ii) obligations representing the deferred
purchase price of Property or services (other than accounts payable arising in
the ordinary course of such Person's business payable on terms customary in the
trade), (iii) obligations, whether or not assumed, secured by Liens or payable
out of the proceeds or production from Property now or hereafter owned or
acquired by such Person, (iv) obligations which are evidenced by notes,
acceptances, or other instruments, (v) obligations of such Person to purchase
securities or other Property arising out of or in connection with the sale of
the same or substantially similar securities or Property, (vi) Capitalized Lease
Obligations, (vii) all obligations of such Person to purchase goods, property,
or services where payment therefor is required, regardless of whether delivery
of such goods or property or the performance of such services is ever made or
tendered (generally referred to as "take or pay contracts"), (viii) all
liabilities of such person in respect of Unfunded Liabilities under any Plan of
such Person or of any ERISA Affiliate and (ix) any other obligation for borrowed
money or other financial accommodation which in accordance with Agreement
Accounting Principles would be shown as a liability on the consolidated balance
sheet of such Person, including without limitation all obligations of others
similar in character to those described in clauses (i) through (viii) of this
definition for which such Person is contingently liable, as guarantor, surety,
accommodation party, partner or in any other capacity, or in respect of which
obligations such person assures a creditor against loss or agrees to take any
action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business), including
without limitation all reimbursement obligations of such Person in respect of
letters of credit, surety bonds, or similar obligations, and all obligations of
such Person to advance funds to, or to purchase assets, property or services
from, any other Person in order to maintain the financial condition of such
other Person.
"Intellectual Property" is defined in Section 5.22.
"Interest Period" means, with respect to a Eurocurrency Advance, a
period of one, two, three or six months commencing on a Business Day selected by
the Borrower pursuant to this Agreement. Such Interest Period shall end on the
day which corresponds numerically to such date one, two, three or six months
thereafter, provided, however, that if there is no such numerically
corresponding day in such next, second, third or sixth succeeding month, such
Interest Period shall end on the last Business Day of such next, second, third
or sixth succeeding month. If an Interest Period would otherwise end on a day
which is not a Business Day, such Interest Period shall end on the next
succeeding Business Day, provided, however, that if said next succeeding
Business Day falls in a new calendar month, such Interest Period shall end on
the immediately preceding Business Day.
"Investment" of a Person means any loan, advance (other than
commission, travel and similar advances to officers and employees made in the
ordinary course of business), extension of credit (other than accounts
receivable arising in the ordinary course of business on terms customary in the
trade) or contribution of capital by such Person; stocks, bonds, mutual funds,
partnership interests, notes, debentures or other securities owned by such
Person; any deposit accounts and certificate of deposit owned by such Person;
and structured notes, derivative financial instruments and other similar
instruments or contracts owned by such Person.
"IRB Bonds" means the $1,000,000 City of Indianapolis Economic
Development Revenue Bonds (Hurco Companies, Inc. Project), Series 1990, and the
related Loan Agreement dated as of September 1, 1990, between the City of
Indianapolis, Indiana, and the Borrower.
"IRB L/C" means the Irrevocable Letter of Credit No. 252 issued by the
Bank, successor by merger to Bank One, Michigan (formerly NBD Michigan) in favor
of First of America Bank-Indianapolis, in the original face amount of
$1,060,274, pursuant to the Reimbursement Agreement in support of the IRB Bonds,
and any letter of credit issued by the Bank in exchange or replacement therefor.
"LC Fee" is defined in Section 2.5(b).
"LC Obligations" means, at any time, the sum, without duplication, of
(i) the aggregate undrawn stated amount under all Facility LCs outstanding at
such time plus (ii) the aggregate unpaid amount at such time of all
Reimbursement Obligations.
"LC Payment Date" is defined in Section 2.18.3.
"Lending Installation" means, with respect to the Bank, the office,
branch, subsidiary or affiliate of the Bank with respect to each Agreed Currency
listed on Schedule 2 or otherwise selected by the Bank pursuant to Section 2.16.
"Letter of Credit" of a Person means a letter of credit or similar
instrument which is issued upon the application of such Person or upon which
such Person is an account party or for which such Person is in any way liable.
"Lien" means any lien (statutory or other), mortgage, pledge,
hypothecation, assignment, deposit arrangement, encumbrance or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including, without limitation, the interest of a vendor or
lessor under any conditional sale, Capitalized Lease or other title retention
agreement).
"Loan" means the Bank's loan made pursuant to Article II (or any
conversion or continuation thereof).
"Loan Documents" means this Agreement, the Facility LC Applications,
any Notes issued pursuant to Section 2.15, the Reimbursement Agreement, the
Collateral Documents, the Guaranty, and all other agreements and documents
executed or delivered in connection with any of the foregoing at any time, as
each may be amended or modified from time to time.
"Material Adverse Effect" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise), results of operations,
or prospects of the Borrower and its Subsidiaries taken as a whole, (ii) the
ability of the Borrower or any Subsidiary to perform its obligations under the
Loan Documents to which it is a party, or (iii) the validity or enforceability
of any of the Loan Documents or the rights or remedies of the Bank thereunder.
"Modify" and "Modification" are defined in Section 2.18.1.
"Moody's" means Moody's Investors Service, Inc., and any successor
thereto.
"Mortgage Financing" means a mortgage loan of the Borrower from
American Investments Life Insurance Company, secured by the Borrower's
headquarters and associated fixtures, leases, and rents, in the maximum
principal amount of $5,000,000.
"Multiemployer Plan" means a Plan maintained pursuant to a collective
bargaining agreement or any other arrangement to which the Borrower or any
member of the Controlled Group is a party to which more than one employer is
obligated to make contributions.
"Note" is defined in Section 2.15 and includes any and all notes
executed pursuant to this Agreement, each in the form of Exhibit A.
"Obligations" means all Reimbursement Obligations, Credit Obligations,
and all accrued and unpaid fees and all expenses, reimbursements, indemnities
and other obligations of the Borrower to the Bank or any indemnified party
arising under the Loan Documents.
"Operating Lease" of a Person means any lease of Property (other than a
Capitalized Lease) by such Person as lessee which has an original term
(including any required renewals and any renewals effective at the option of the
lessor) of one year or more.
"Other Comprehensive Income" means that amount reported in the
Borrower's consolidated balance sheet as "Accumulated Other Comprehensive Income
(Loss)" and which is included in total shareholders' equity in accordance with
Agreement Accounting Principles.
"Other Taxes" is defined in Section 3.5(ii).
"Outstanding Credit Exposure" means, as to the Bank at any time, the
sum of (i) the aggregate principal amount of its Advances outstanding at such
time, plus (ii) an amount equal to the LC Obligations at such time.
"Outstanding Facilities" means, collectively and without duplication,
the Advances, the Reimbursement Agreement, the IRB L/C, and the Facility LCs,
each as existing following the Effective Date.
"Participants" is defined in Section 11.2.1.
"Payment Date" means the last day of each quarter.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Permitted Liens" means Liens permitted by Section 6.15.
"Person" means any natural person, corporation, firm, joint venture,
partnership, limited liability company, association, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title
IV of ERISA or subject to the minimum funding standards under Section 412 of the
Code as to which the Borrower or any member of the Controlled Group may have any
liability.
"Pledge Agreement" means the Pledge and Security Agreement dated as of
October 31, 2001, executed by the Borrower in favor of the Bank.
"Prime Rate" means a rate per annum equal to the prime rate of interest
announced from time to time by the Bank or its parent (which is not necessarily
the lowest rate charged to any customer), changing when and as said prime rate
changes.
"Property" of a Person means any and all property, whether real,
personal, tangible, intangible, or mixed, of such Person, or other assets owned,
leased or operated by such Person.
"Pru Account" means the Commodities Futures Account maintained by the
Borrower with Prudential Securities, Inc.
"Rate Management Transaction" means any transaction (including an
agreement with respect thereto) now existing or hereafter entered into between
the Borrower and any Person which is a rate swap, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
forward transaction, currency swap transaction, cross-currency rate swap
transaction, currency option or any other similar transaction (including any
option with respect to any of these transactions) or any combination thereof,
whether linked to one or more interest rates, foreign currencies, commodity
prices, equity prices or other financial measures.
"Rate Management Obligations" of a Person means any and all obligations
of such Person, whether absolute or contingent and howsoever and whensoever
created, arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (i) any and all Rate
Management Transactions, and (ii) any and all cancellations, buy backs,
reversals, terminations or assignments of any Rate Management Transactions.
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor thereto
or other regulation or official interpretation of said Board of Governors
relating to reserve requirements applicable to member banks of the Federal
Reserve System.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"Reimbursement Agreement" means the Reimbursement Agreement dated as of
September 1, 1990, as amended, between the Borrower and the Bank, successor by
merger to Bank One, Michigan (formerly known as NBD Michigan), pursuant to which
the IRB L/C was issued.
"Reimbursement Obligations" means, at any time, the aggregate of all
obligations of the Borrower then outstanding under Section 2.18 to reimburse the
Bank for amounts paid by the Bank in respect of any one or more drawings under
Facility LCs.
"Rentals" of a Person means the aggregate fixed amounts payable by such
Person under any Operating Lease.
"Reportable Event" means a reportable event as defined in Section 4043
of ERISA and the regulations issued under such section, with respect to a Plan,
excluding, however, such events as to which the PBGC has by regulation waived
the requirement of Section 4043(a) of ERISA that it be notified within 30 days
of the occurrence of such event, provided, however, that a failure to meet the
minimum funding standard of Section 412 of the Code and of Section 302 of ERISA
shall be a Reportable Event regardless of the issuance of any such waiver of the
notice requirement in accordance with either Section 4043(a) of ERISA or Section
412(d) of the Code.
"Reports" is defined in Section 9.6.
"Reserve Requirement" means, with respect to an Interest Period, the
maximum aggregate reserve requirement (including all basic, supplemental,
marginal and other reserves) which is imposed under Regulation D on Eurocurrency
liabilities.
"S&P" means Standard and Poor's Ratings Services, a division of The
McGraw Hill Companies, Inc., and any successor thereto.
"Sale and Leaseback Transaction" means any sale or other transfer of
Property by any Person with the intent to lease such Property as lessee.
"Schedule" refers to a specific schedule to this Agreement, unless
another document is specifically referenced.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
"Secured Obligations" means, collectively, (i) the Obligations and (ii)
all Rate Management Obligations owing to the Bank or any of its Affiliates.
"Single Employer Plan" means a Plan maintained by the Borrower or any
member of the Controlled Group for employees of the Borrower or any member of
the Controlled Group.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any partnership, limited liability company, association, joint venture or
similar business organization more than 50% of the ownership interests having
ordinary voting power of which shall at the time be so owned or controlled.
Unless otherwise expressly provided, all references herein to a "Subsidiary"
shall mean a Subsidiary of the Borrower.
"Substantial Portion" means, with respect to the Property of the
Borrower and its Subsidiaries, Property which (i) represents more than
10% of the consolidated assets of the Borrower and its Subsidiaries as would be
shown in the consolidated financial statements of the Borrower and its
Subsidiaries as at the beginning of the twelve-month period ending with the
month in which such determination is made, or (ii) is responsible for more than
7.5% of the consolidated net sales of the Borrower and its Subsidiaries as
reflected in the financial statements referred to in clause (i) above.
"Taxes" means any and all present or future taxes, duties, levies,
imposts, deductions, charges or withholdings, and any and all liabilities with
respect to the foregoing, but excluding Excluded Taxes and Other Taxes.
"Total Funded Debt/EBITDA Ratio" means the ratio of Consolidated Total
Indebtedness as of the end of each fiscal quarter of the Borrower to
Consolidated EBITDA for the four consecutive fiscal quarters then ending.
"Transferee" is defined in Section 11.3.
"Trust Indenture" means the Trust Indenture dated as of September 1,
1990, between the City of Indianapolis, Indiana, and First of America
Bank-Indianapolis, as trustee, as amended from time to time, entered into in
conjunction with the IRB Bonds.
"Type" means, with respect to any Advance, its nature as a Floating
Rate Advance or a Eurocurrency Advance.
"UK Facility" is defined in the Introduction to this Agreement.
"UK Lease Liability" means the amount paid or accrued by the Borrower
or an Affiliate of the Borrower to settle or otherwise satisfy a claim by Land
Securities Ltd., against Hurco Europe for repair costs under the terms of a
sub-lease of the facility previously occupied by Hurco Europe which terminated
in April 2002.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all vested and unvested accrued benefits under all Single Employer
Plans exceeds the fair market value of all such Plan assets allocable to such
benefits, all determined as of the then most recent valuation date for such
Plans using PBGC actuarial assumptions for single employer plan terminations.
"Unmatured Default" means an event which but for the lapse of time or
the giving of notice, or both, would constitute a Default.
"Wholly-Owned Subsidiary" of a Person means (i) any Subsidiary all of
the outstanding voting securities of which shall at the time be owned or
controlled, directly or indirectly, by such Person or one or more Wholly-Owned
Subsidiaries of such Person, or by such Person and one or more Wholly-Owned
Subsidiaries of such Person, or (ii) any partnership, limited liability company,
association, joint venture or similar business organization 100% of the
ownership interests having ordinary voting power of which shall at the time be
so owned or controlled.
1.2 Other Definitions; Rules of Construction. The foregoing definitions
include both the singular and the plural forms thereof and shall be construed
accordingly. All computations required hereunder and all financial terms used
herein shall be made or construed in accordance with Agreement Accounting
Principles unless such principles are inconsistent with the express requirements
of this Agreement; provided that, if the Borrower notifies the Bank that the
Borrower wishes to amend any covenant in Article VI to eliminate the effect of
any change in Agreement Accounting Principles in the operation of such covenant
(or if the Bank notifies the Borrower that the Bank wishes to amend Article VI
for such purpose), then the Borrower's compliance with such covenant shall be
determined on the basis of Agreement Accounting Principles in effect immediately
before the relevant change in Agreement Accounting Principles became effective,
until either such notice is withdrawn or such covenant is amended in a manner
satisfactory to the Borrower and the Bank. Use of the terms "herein", "hereof",
and "hereunder" shall be deemed references to this entire Agreement and not to
the Section or clause in which the term appears. References to "Sections" and
"subsections" shall be to Sections and subsections, respectively, of this
Agreement unless otherwise specifically provided.
ARTICLE II
THE CREDITS
2.1. Commitment.
(a) From and including the Effective Date and prior to the Facility
Termination Date, the Bank agrees, on the terms set forth in this Agreement, to
(i) make Advances to the Borrower in Agreed Currencies from time to time, and
(ii) issue Facility LCs upon the request of the Borrower, in Dollar Amounts not
to exceed in the aggregate principal amount at any time outstanding the lesser
of (A) the amount of the Borrowing Base as of the close of business on the last
day of the month next preceding the date any such Advance is made and (B) the
amount of the Commitment as of the date any such Advance is made, provided,
however, that (A) the aggregate principal amount of Facility LCs outstanding at
any time shall not exceed the amount of the Commitment in effect at such time,
and (B) all Floating Rate Loans shall be made and Facility LCs shall be issued
in Dollars. Subject to the terms of this Agreement, the Borrower may borrow,
repay and reborrow at any time prior to the Facility Termination Date. The
Commitment to extend credit hereunder shall expire on the Facility Termination
Date. The Bank will issue Facility LCs hereunder on the terms and conditions set
forth in Section 2.18.
(b) The Bank agrees that this Agreement consolidates, amends,
restates, and supersedes the Existing Credit Agreement, and the Borrower
acknowledges, accepts, and ratifies the Outstanding Facilities evidenced by this
Agreement. All amounts outstanding under the Existing Credit Agreement on the
Effective Date shall constitute Advances under Section 2.1(a), with each
existing Eurocurrency Advance remaining outstanding under its existing Interest
Period. Each letter of credit, bankers acceptance, and bank guaranty issued by
the Bank for the Borrower's account which is outstanding under the Existing
Credit Agreement on the Effective Date (other than the IRB L/C) shall be treated
for all purposes as Facility LCs issued by the Bank under this Agreement.
2.2. Determination of Dollar Amounts; Required Payments; Termination.
(a) The Bank will determine the Dollar Amount of each Advance as of the date
three Business Days prior to the Borrowing Date or, if applicable, date of
conversion or continuation of the Advance, and on any other Business Day elected
by the Bank in its discretion (each a "Computation Date").
(b) The Outstanding Credit Exposure and all other unpaid
Obligations shall be paid in full by the Borrower on the
Facility Termination Date.
(c) The Borrower shall pay or cause to be paid when due (i) all
regularly scheduled principal payments on the Outstanding
Facilities and (ii) all payments of interest and fees
(including without limitation amendment fees, letter of credit
fees, and commitment fees) which are owing under the
Outstanding Facilities.
2.3. Reserved.
2.4. Types of Advances. The Advances may be Floating Rate Advances
or Eurocurrency Advances, or a combination thereof, selected
by the Borrower in accordance with Sections 2.8 and 2.9.
2.5. Fees; Reductions in Commitment.
(a) Commitment Fee. The Borrower agrees to pay to the Bank a
commitment fee at a per annum rate equal to the Applicable
Margin on the daily unused amount of the Commitment from the
Effective Date to and including the Facility Termination Date,
payable quarterly in arrears and on the Facility Termination
Date. The commitment fee for each fiscal quarter of the
Borrower shall be due and payable within ten (10) days after
the Bank submits a statement to the Borrower of the amount due
for such fiscal quarter, based on the Bank's determination of
the Applicable Margin for such fiscal quarter. For purposes of
calculating the commitment fee hereunder, the principal amount
of each Advance made in an Agreed Currency other than Dollars
shall be the Dollar Amount of such Advance as determined on
the most recent Computation Date with respect to such Advance.
(b) LC Fees. The Borrower shall pay to the Bank (i) with respect
to each standby Facility LC, a letter of credit fee at a per
annum rate equal to the Applicable Margin for Eurocurrency
Advances in effect from time to time on the average daily
undrawn stated amount under such standby Facility LC, subject
to the Bank's standard minimum fee existing at the time of
issuance, such fee to be payable in advance on each Payment
Date, and (ii) with respect to each commercial Facility LC, a
one-time letter of credit fee at times and in amounts as the
Borrower and the Bank may agree from time to time (each such
fee described in this sentence, an "LC Fee"). The Borrower
shall also pay to the Bank at the time each Facility LC is
issued documentary and processing charges in connection with
the issuance or Modification of and draws under Facility LCs
in accordance with the Bank's standard schedule for such
charges as in effect from time to time.
(c) Optional Reductions in Commitment. From time to time, the
Borrower may permanently reduce the Commitment in a minimum
amount of $1,000,000 and in integral multiples of $500,000 (or
the Approximate Equivalent Amount if denominated in an Agreed
Currency other than Dollars), upon written notice to the Bank,
which notice shall specify the amount of any such reduction,
provided, however, that the amount of the Commitment may not
be reduced below the aggregate principal Dollar Amount of the
Outstanding Credit Exposure.
(d) Mandatory Prepayments. Notwithstanding anything in this
Agreement to the contrary, if at any time the aggregate Dollar
Amount of the Outstanding Credit Exposure (calculated, with
respect to those Advances denominated in Agreed Currencies
other than Dollars, as of the most recent Computation Date
with respect to each such Advance) exceeds the lesser of the
Borrowing Base or the Commitment, and upon written notice from
the Bank of such occurrence, the Borrower shall immediately
repay Advances in an aggregate principal amount sufficient to
eliminate any such excess, to be applied first to amounts
outstanding under the Loan, and then to the Facility LC
Collateral Account.
2.6. Minimum Amount of Each Advance. Each Eurocurrency Advance
shall be in the minimum amount of $1,000,000 and in multiples
of $100,000 if in excess thereof (or the Approximate
Equivalent Amount if denominated in an Agreed Currency other
than Dollars), and each Floating Rate Advance shall be in the
minimum amount of $100,000 and in multiples of $10,000 if in
excess thereof, provided, any Floating Rate Advance may be in
the amount of the unused Commitment.
2.7. Optional Principal Payments. The Borrower may from time to
time pay, without penalty or premium, all outstanding Floating
Rate Advances, or, in a minimum aggregate amount of $100,000
or any integral multiple of $10,000 in excess thereof, any
portion of the outstanding Floating Rate Advances. The
Borrower may from time to time pay, subject to the payment of
any funding indemnification amounts required by Section 3.4
but without penalty or premium, all outstanding Eurocurrency
Advances, or, in a minimum aggregate amount of $1,000,000 or
any integral multiple of $100,000 in excess thereof (or the
Approximate Equivalent Amount if denominated in an Agreed
Currency other than Dollars), any portion of the outstanding
Eurocurrency Advances upon three Business Days' prior notice
to the Bank.
2.8. Method of Selecting Types and Interest Periods for New
Advances. The Borrower shall select the Type of Advance and,
in the case of each Eurocurrency Advance, the Interest Period
and Agreed Curency applicable thereto from time to time. The
Borrower shall give the Bank irrevocable notice (a "Borrowing
Notice") not later than Noon (Chicago time) on the Borrowing
Date of each Floating Rate Advance and three Business Days
before the Borrowing Date for each Eurocurrency Advance,
specifying:
(i) the Borrowing Date, which shall be a Business Day, of such
Advance,
(ii) the aggregate amount of such Advance,
(iii) the Type of Advance selected, and
(iv) in the case of each Eurocurrency Advance, the Interest Period
and Agreed Currency applicable thereto.
2.9. Conversion and Continuation of Outstanding Advances. Floating
Rate Advances shall continue as Floating Rate Advances unless
and until such Floating Rate Advances are converted into
Eurocurrency Advances pursuant to this Section 2.9 or are
repaid in accordance with Section 2.7. Each Eurocurrency
Advance shall continue as a Eurocurrency Advance until the end
of the then applicable Interest Period therefor, at which
time:
(i) each such Eurocurrency Advance denominated in Dollars
shall be automatically converted into a Floating Rate Advance unless (x) such
Eurocurrency Advance is or was repaid in accordance with Section 2.7 or (y) the
Borrower shall have given the Bank a Conversion/Continuation Notice requesting
that, at the end of such Interest Period, such Eurocurrency Advance either
continue as a Eurocurrency Advance for the same or another Interest Period or be
converted into a Floating Rate Advance; and
(ii) each such Eurocurrency Advance denominated in an Agreed
Currency other than Dollars shall automatically continue as a Eurocurrency
Advance in the same Agreed Currency with an Interest Period of one month unless
(x) such Eurocurrency Advance is or was repaid in accordance with Section 2.7 or
(y) the Borrower shall have given the Bank a Conversion/Continuation Notice
requesting that, at the end of such Interest Period, such Eurocurrency Advance
continue as a Eurocurrency Advance for the same or another Interest Period.
Subject to the terms of Section 2.6, the Borrower may elect from time
to time to convert all or any part of a Floating Rate Advance into a
Eurocurrency Advance denominated in the same or any other Agreed Currency,
provided, that any conversion of any Eurocurrency Advance shall be made only on
the last day of the Interest Period applicable thereto. The Borrower shall give
the Bank irrevocable notice (a "Conversion/Continuation Notice") of each
conversion of a Floating Rate Advance into a Eurocurrency Advance or
continuation of a Eurocurrency Advance not later than 10:00 a.m. (Chicago time)
at least three Business Days prior to the date of the requested conversion or
continuation, specifying:
(i) the requested date, which shall be a Business Day, of such
conversion or continuation,
(ii) the aggregate amount and Type of the Advance which is to be
converted or continued, and,
(iii) the Agreed Currency, amount of such Advance which is to be
converted into or continued as a Eurocurrency Advance and the
duration of the Interest Period applicable thereto.
2.10. Changes in Interest Rate, etc. Each Floating Rate Advance
shall bear interest on the outstanding principal amount
thereof, for each day from and including the date such Advance
is made or is converted from a Eurocurrency Advance into a
Floating Rate Advance pursuant to Section 2.9, to but
excluding the date it is paid or is converted into a
Eurocurrency Advance pursuant to Section 2.9 hereof, at a rate
per annum equal to the Floating Rate for such day. Changes in
the rate of interest on that portion of any Advance maintained
as a Floating Rate Advance will take effect simultaneously
with each change in the Alternate Base Rate. Each Eurocurrency
Advance shall bear interest on the outstanding principal
amount thereof from and including the first day of the
Interest Period applicable thereto to (but not including) the
last day of such Interest Period at the interest rate
determined by the Bank as applicable to such Eurocurrency
Advance based upon the Borrower's selections under Sections
2.8 and 2.9 and otherwise in accordance with the terms hereof.
No Interest Period may end after the Facility Termination
Date.
2.11. Rates Applicable After Default. Notwithstanding anything to
the contrary contained in Section 2.8 or 2.9, during the
continuance of a Default or Unmatured Default the Bank may, at
its option, by notice to the Borrower, declare that no Advance
may be made as, converted into or continued as a Eurocurrency
Advance. During the continuance of a Default the Bank may, at
its option, by notice to the Borrower, declare that (i) each
Eurocurrency Advance shall bear interest for the remainder of
the applicable Interest Period at the rate otherwise
applicable to such Interest Period plus 2% per annum, (ii)
each Floating Rate Advance shall bear interest at a rate per
annum equal to the Floating Rate in effect from time to time
plus 2% per annum and (iii) the LC Fee shall be increased by
2% per annum, provided that, during the continuance of a
Default under Section 7.6 or 7.7, the interest rates set forth
in clauses (i) and (ii) above and the increase in the LC Fee
set forth in clause (iii) above shall be applicable to all
Credit Extensions without any election or action on the part
of the Bank.
2.12. Method of Payment. (a) Each Advance shall be repaid and each
payment of interest thereon shall be paid in the currency in
which such
Advance was made. All payments of the Obligations hereunder shall be made,
without setoff, deduction, or counterclaim, in immediately available funds to
the Bank at the Bank's address specified pursuant to Article XII, or at any
other Lending Installation of the Bank specified in writing by the Bank to the
Borrower, by noon (Chicago time) on the date when due and shall (except in the
case of Reimbursement Obligations for which the Bank has not been fully
indemnified, or as otherwise specifically required hereunder) be applied by the
Bank as it may determine in its sole discretion. The Bank is authorized to
charge any account of the Borrower maintained with the Bank or any of its
Affiliates for each payment of principal, interest, Reimbursement Obligations
and fees as it becomes due hereunder.
(b) Notwithstanding the foregoing provisions of this Section, if, after
the making of any Advance in any currency other than Dollars, currency control
or exchange regulations are imposed in the country which issues such currency
with the result that the type of currency in which the Advance was made (the
"Original Currency") no longer exists or the Borrower is not able to make
payment to the Bank in such Original Currency, then all payments to be made by
the Borrower hereunder in such currency shall instead be made when due in
Dollars in an amount equal to the Dollar Amount (as of the date of repayment) of
such payment due, it being the intention of the parties hereto that the Borrower
take all risks of the imposition of any such currency control or exchange
regulations.
2.13. Noteless Agreement; Evidence of Indebtedness. (i) The Bank shall
maintain in accordance with its usual practice an account or accounts evidencing
the indebtedness of the Borrower to the Bank resulting from each Advance made by
the Bank from time to time, including the amounts of principal and interest
payable and paid to the Bank from time to time hereunder.
(ii) The Bank shall also maintain accounts in which it will record (a)
the amount of each Advance made hereunder, the Agreed Currency and Type thereof
and the Interest Period with respect thereto, (b) the amount
of any principal or interest due and payable or to become due and payable from
the Borrower to the Bank hereunder, (c) the original stated amount of each
Facility LC and the amount of LC Obligations outstanding at any time, and (d)
the amount of any sum received by the Bank hereunder from the Borrower.
(iii) The entries maintained in the accounts maintained pursuant to
paragraphs (i) and (ii) above shall be prima facie evidence of the existence and
amounts of the Obligations therein recorded; provided, however, that the failure
of the Bank to maintain such accounts or any error therein shall not in any
manner affect the obligation of the Borrower to repay the Obligations in
accordance with their terms.
(iv) The Bank may request that its Loan be evidenced by a promissory
note (a "Note"). In such event, the Borrower shall prepare, execute and deliver
to the Bank a Note payable to the order of the Bank in a form supplied by the
Bank. Thereafter, the Advances evidenced by such Note and interest thereon shall
at all times (including after any assignment pursuant to Section 11.3) be
represented by one or more Notes payable to the order of the payee named therein
or any assignee pursuant to Section 11.3, except to the extent that the Bank or
assignee subsequently returns any such Note for cancellation and requests that
the Loan once again be evidenced as described in paragraphs (i) and (ii) above.
2.14. Telephonic Notices. The Borrower authorizes the Bank to extend,
convert or continue Advances, effect selections of Agreed Currencies and Types
of Advances and to transfer funds based on telephonic notices made by any person
or persons the Bank in good faith believes to be acting on behalf of the
Borrower, it being understood that the foregoing authorization is specifically
intended to allow Borrowing Notices and Conversion/Continuation Notices to be
given telephonically. The Borrower agrees to deliver promptly to the Bank a
written confirmation, if such confirmation is requested by the Bank, of each
telephonic notice signed by an Authorized Officer. If the written confirmation
differs in any material respect from the action taken by the Bank, the records
of the Bank shall govern absent manifest error.
2.15. Interest Payment Dates; Interest and Fee Basis. Interest accrued
on each Floating Rate Advance shall be payable on each Payment Date, commencing
with the first such date to occur after the date hereof and at maturity.
Interest accrued on each Eurocurrency Advance shall be payable on the last day
of its applicable Interest Period, on any date on which the Eurocurrency Advance
is prepaid, whether by acceleration or otherwise, and at maturity. Interest
accrued on each Eurocurrency Advance having an Interest Period longer than three
months shall also be payable on the last day of each three-month interval during
such Interest Period. Interest and LC Fees shall be calculated for actual days
elapsed on the basis of a 360-day year, except for interest on Loans denominated
in British Pounds Sterling, which shall be calculated for actual days elapsed on
the basis of a 365-day year. Interest shall be payable for the day an Advance is
made but not for the day of any payment on the amount paid if payment is
received prior to noon (local time) at the place of payment. If any payment of
principal of or interest on an Advance shall become due on a day which is not a
Business Day, such payment shall be made on the next succeeding Business Day
and, in the case of a principal payment, such extension of time shall be
included in computing interest in connection with such payment.
2.16. Lending Installations. The Bank may book its Loans and the
Facility LCs at the appropriate Lending Installation listed on Schedule 2 or
such other Lending Installation designated by the Bank in accordance with the
final sentence of this Section 2.16. All terms of this Agreement shall apply to
any such Lending Installation and the Loan, Facility LCs, and any Note issued
hereunder shall be deemed held by the Bank for the benefit of any such Lending
Installation. The Bank may, by written notice to the Borrower, designate
replacement or additional Lending Installations through which Advances will be
made by it or Facility LCs will be issued by it and for whose account Loan
payments or payments with respect to Facility LCs are to be made.
2.17. Reserved.
2.18. Facility LCs.
2.18.1. Issuance.
(a) The Bank agrees, on the terms set forth in this Agreement, to issue
standby and commercial letters of credit (each, a "Facility LC" ) and to renew,
extend, increase, decrease or otherwise modify each Facility LC ("Modify" and
each such action a "Modification"), from time to time from and including the
date of this Agreement and prior to the Facility Termination Date upon the
request of the Borrower; provided that immediately after each such Facility LC
is issued or Modified, (i) the aggregate amount of the outstanding LC
Obligations shall not exceed the Commitment, and (ii) the Outstanding Credit
Exposure shall not exceed the Commitment. No Facility LC shall have an expiry
date later than the earlier of (x) the fifth Business Day prior to the Facility
Termination Date and (y) one year after its issuance.
2.18.2. Notice. Subject to Section 2.18.1, the Borrower shall give the
Bank notice prior to 10:00 a.m. (Chicago time) at least five Business Days prior
to the proposed date of issuance or Modification of each Facility LC specifying
the beneficiary, the proposed date of issuance (or Modification) and the expiry
date of such Facility LC, and describing the proposed terms of such Facility LC
and the nature of the transactions proposed to be supported thereby. The
issuance or Modification by the Bank of any Facility LC shall, in addition to
the conditions precedent set forth in Article IV (the satisfaction of which the
Bank shall have no duty to ascertain), be subject to the conditions precedent
that such Facility LC shall be satisfactory to the Bank and that the Borrower
shall have executed and delivered such application agreement and/or such other
instruments and agreements relating to such Facility LC as the Bank shall have
reasonably requested (each, a "Facility LC Application"). In the event of any
conflict between the terms of this Agreement and the terms of any Facility LC
Application, the terms of this Agreement shall control.
2.18.3. Administration; Reimbursement by the Bank . Upon
receipt from the beneficiary of any Facility LC of any demand for payment under
such Facility LC, the Bank shall promptly notify the Borrower as to the amount
to be paid by the Bank as a result of such demand and the proposed payment date
(the "LC Payment Date"). The responsibility of the Bank to the Borrower shall be
only to determine that the documents (including each demand for payment)
delivered under each Facility LC in connection with such presentment shall be in
conformity in all material respects with such Facility LC. The Bank shall
endeavor to exercise the same care in the issuance and administration of the
Facility LCs as it does with respect to letters of credit in which no
participations are granted.
2.18.4. Reimbursement by the Borrower. The Borrower shall be
irrevocably and unconditionally obligated to reimburse the Bank on or before the
applicable LC Payment Date for any amounts to be paid by the Bank upon any
drawing under any Facility LC, without presentment, demand, protest or other
formalities of any kind; provided that the Borrower shall not be precluded from
asserting any claim for direct (but not consequential) damages suffered by the
Borrower to the extent, but only to the extent, caused by (i) the willful
misconduct or gross negligence of the Bank in determining whether a request
presented under any Facility LC issued by it complied with the terms of such
Facility LC or (ii) the Bank's failure to pay under any Facility LC issued by it
after the presentation to it of a request strictly complying with the terms and
conditions of such Facility LC. All such amounts paid by the Bank and remaining
unpaid by the Borrower shall bear interest, payable on demand, for each day
until paid at a rate per annum equal to (x) the rate applicable to Floating Rate
Advances for such day if such day falls on or before the applicable LC Payment
Date and (y) the sum of 2% plus the rate applicable to Floating Rate Advances
for such day if such day falls after such LC Payment Date. Subject to the terms
of this Agreement (including without limitation the submission of a Borrowing
Notice in compliance with Section 2.8 and the satisfaction of the applicable
conditions precedent set forth in Article IV), the Borrower may request an
Advance hereunder for the purpose of satisfying any Reimbursement Obligation.
2.18.5. Obligations Absolute. The Borrower's obligations under
this Section 2.18 shall be absolute and unconditional under any and all
circumstances and irrespective of any setoff, counterclaim or defense to payment
which the Borrower may have or have had against the Bank or any beneficiary of a
Facility LC. The Borrower further agrees with the Bank that the Bank shall not
be responsible for, and the Borrower's Reimbursement Obligation in respect of
any Facility LC shall not be affected by, among other things, the validity or
genuineness of documents or of any endorsements thereon, even if such documents
should in fact prove to be in any or all respects invalid, fraudulent or forged,
or any dispute between or among the Borrower, any of its Affiliates, the
beneficiary of any Facility LC or any financing institution or other party to
whom any Facility LC may be transferred or any claims or defenses whatsoever of
the Borrower or of any of its Affiliates against the beneficiary of any Facility
LC or any such transferee. The Bank shall not be liable for any error, omission,
interruption or delay in transmission, dispatch or delivery of any message or
advice, however transmitted, in connection with any Facility LC. The Borrower
agrees that any action taken or omitted by the Bank under or in connection with
each Facility LC and the related drafts and documents, if done without gross
negligence or willful misconduct, shall be binding upon the Borrower and shall
not put the Bank under any liability to the Borrower. Nothing in this Section
2.18.5 is intended to limit the right of the Borrower to make a claim against
the Bank for damages as contemplated by the proviso to the first sentence of
Section 2.18.4.
2.18.6. Actions of the Bank. The Bank shall be entitled to
rely, and shall be fully protected in relying, upon any Facility LC, draft,
writing, resolution, notice, consent, certificate, affidavit, letter, cablegram,
telegram, telecopy, telex or teletype message, statement, order or other
document believed by it to be genuine and correct and to have been signed, sent
or made by the proper Person or Persons, and upon advice and statements of legal
counsel, independent accountants and other experts selected by the Bank. The
Bank shall be fully justified in failing or refusing to take any action under
this Agreement unless it shall first have received such advice as it reasonably
deems appropriate or it shall first be indemnified to its reasonable
satisfaction against any and all liability and expense which may be incurred by
it by reason of taking or continuing to take any such action.
2.18.7. Indemnification. The Borrower indemnifies and holds
harmless the Bank, and its directors, officers, agents and employees from and
against any and all claims and damages, losses, liabilities, costs or expenses
which the Bank may incur (or which may be claimed against the Bank by any Person
whatsoever) by reason of or in connection with the issuance, execution and
delivery or transfer of or payment or failure to pay under any Facility LC or
any actual or proposed use of any Facility LC, including, without limitation,
any claims, damages, losses, liabilities, costs or expenses which the Bank may
incur by reason of or in connection with, by reason of or on account of the Bank
issuing any Facility LC which specifies that the term "Beneficiary" included
therein includes any successor by operation of law of the named Beneficiary, but
which Facility LC does not require that any drawing by any such successor
Beneficiary be accompanied by a copy of a legal document, satisfactory to the
Bank, evidencing the appointment of such successor Beneficiary; provided that
the Borrower shall not be required to indemnify the Bank for any claims,
damages, losses, liabilities, costs or expenses to the extent, but only to the
extent, caused by (x) the willful misconduct or gross negligence of the Bank in
determining whether a request presented under any Facility LC complied with the
terms of such Facility LC or (y) the Bank's failure to pay under any Facility LC
after the presentation to it of a request strictly complying with the terms and
conditions of such Facility LC. Nothing in this Section 2.18.7 is intended to
limit the obligations of the Borrower under any other provision of this
Agreement.
2.18.8. Facility LC Collateral Account. The Borrower agrees
that it will, upon the request of the Bank and until the final expiration date
of any Facility LC and thereafter as long as any amount is payable to the Bank
in respect of any Facility LC, maintain a special collateral
account pursuant to arrangements satisfactory to the Bank (the "Facility LC
Collateral Account") at the Bank's office at the address specified pursuant to
Article XII, in the name of such Borrower but under the sole dominion and
control of the Bank and in which such Borrower shall have no interest other than
as set forth in Section 8.1. The Borrower pledges, assigns and grants to the
Bank, a security interest in all of the Borrower's right, title and interest in
and to all funds which may from time to time be on deposit in the Facility LC
Collateral Account to secure the prompt and complete payment and performance of
the Obligations. The Bank will invest any funds on deposit from time to time in
the Facility LC Collateral Account in certificates of deposit of the Bank having
a maturity not exceeding 30 days. Nothing in this Section 2.18.8 shall either
obligate the Bank to require the Borrower to deposit any funds in the Facility
LC Collateral Account or limit the right of the Bank to release any funds held
in the Facility LC Collateral Account in each case other than as required by
Section 8.1.
2.19 Borrowing Base Adjustments. The Borrower agrees that if at any
time any trade account receivable or any inventory of the Borrower fails to
constitute Eligible Finished Goods Inventory, Eligible Trade Receivables,
Eligible Extended Receivables, or Eligible Inventory, as the case may be, for
any reason, the Bank may, at any time and notwithstanding any prior
classification of eligibility, classify such asset as ineligible and exclude the
same from the computation of the Borrowing Base without in any way impairing the
rights of the Bank in and to the same under the Collateral Documents.
2.20 Security and Collateral. To secure the payment when due of any
Note and the other Obligations to the Bank, the Borrower and the Guarantors
shall each execute and deliver, or cause to be executed and delivered, to the
Bank (to the extent not previously executed and delivered) Collateral Documents
granting the following:
(a) Security interests in all present and future
accounts, inventory, equipment, general intangibles, investment property,
deposit accounts, fixtures, and all other personal property of the Borrower
other than property held in the trust existing pursuant to the Hurco Deferred
Compensation Plan Trust Agreement in connection with the Hurco Deferred
Compensation Plan.
(b) Pledges of 100% of the Capital Stock of all
Domestic Subsidiaries (excluding the Guarantors and all Inactive Subsidiaries),
plus a pledge of 66% of the Capital Stock of Hurco International, Inc., and
Hurco International Holdings, Inc.
(c) Guarantees of the Guarantors under the Guaranty.
(d) All other security and collateral described in
the Collateral Documents.
2.21. Market Disruption. Notwithstanding the satisfaction of all
conditions referred to in Article II and Article IV with respect to any Advance
in any Agreed Currency other than Dollars, if there shall occur on or prior to
the date of such Advance any change in national or international financial,
political or economic conditions or currency exchange rates or exchange controls
which would in the reasonable opinion of the Bank make it impracticable for any
Eurocurrency Advances to be denominated in the Agreed Currency specified by the
Borrower, then the Bank shall forthwith give notice thereof to the Borrower, and
such Eurocurrency Advances shall not be denominated in such Agreed Currency but
shall be made on such Borrowing Date in Dollars, in an aggregate principal
amount equal to the Dollar Amount of the aggregate principal amount specified in
the related Borrowing Notice or Conversion/Continuation Notice, as the case may
be, as Floating Rate Advances, unless the Borrower notifies the Bank at least
one Business Day before such date that (i) it elects not to borrow on such date
or (ii) it elects to borrow on such date in a different Agreed Currency, as the
case may be, in which the denomination of such Advances would in the opinion of
the Bank be practicable and in an aggregate principal amount equal to the Dollar
Amount of the aggregate principal amount specified in the related Borrowing
Notice or Conversion/Continuation Notice, as the case may be.
2.22. Judgment Currency. If for the purposes of obtaining
judgment in any court it is necessary to convert a sum due from the Borrower
hereunder in the currency expressed to be payable herein (the "specified
currency") into another currency, the parties agree that the rate of exchange
used shall be that at which in accordance with normal banking procedures the
Bank could purchase the specified currency with such other currency at the
Bank's main Chicago office on the Business Day preceding that on which final,
non-appealable judgment is given. The obligations of the Borrower in respect of
any sum due to the Bank shall, notwithstanding any judgment in a currency other
than the specified currency, be discharged only to the extent that on the
Business Day following receipt by the Bank of any sum adjudged to be so due in
such other currency the Bank may in accordance with normal, reasonable banking
procedures purchase the specified currency with such other currency. If the
amount of the specified currency so purchased is less than the sum originally
due to the Bank in the specified currency, the Borrower agrees, to the fullest
extent that it may effectively do so, as a separate obligation and
notwithstanding any such judgment, to indemnify the Bank against such loss, and
if the amount of the specified currency so purchased exceeds the sum originally
due to the Bank in the specified currency, the Bank agrees to remit such excess
to the Borrower.
ARTICLE III
YIELD PROTECTION; TAXES
3.1. Yield Protection. In the event that any applicable law, treaty or
other international agreement, rule, or regulation (whether domestic or foreign)
now or hereafter in effect and whether or not presently applicable to the Bank
or applicable Lending Installation, or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by the Bank or applicable Lending
Installation with any guideline, request or directive of any such authority
(whether or not having the force of law), shall (a) affect the basis of taxation
of payments to the Bank of any amounts payable by the Borrower under this
Agreement (other than Excluded Taxes), or (b) shall impose, modify or deem
applicable any reserve, special deposit or similar requirement against assets
of, deposits with or for the account of, or credit extended by the Bank or
applicable Lending Installation (other than reserves and assessments taken into
account in determining the interest rate applicable to Eurocurrency Advances),
or (c) shall impose any other condition with respect to this Agreement, the
Commitment, any Note, or the Loan, or any Facility LC (including without
limitation converting any Eurocurrency Advance denominated in an Agreed Currency
other than the Euro into a Eurocurrency Advance denominated in the Euro), and
the result of any of the foregoing is to increase the cost to the Bank or
applicable Lending Installation of making, funding, or maintaining any
Eurocurrency Advance or any Facility LC or to reduce the amount of any sum
receivable by the Bank or applicable Lending Installation thereon, then the
Borrower shall pay to the Bank, from time to time, upon its request, additional
amounts sufficient to compensate the Bank for such increased cost or reduced sum
receivable. A statement as to the amount of such increased cost or reduced sum
receivable, prepared in good faith and in reasonable detail by the Bank and
submitted by the Bank to the Borrower, shall be conclusive and binding for all
purposes absent manifest error in computation.
3.2. Changes in Capital Adequacy Regulations. In the event that any
applicable law, treaty, or other international agreement, rule, or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to the Bank, or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by the Bank with any guideline, request or
directive of any such authority (whether or not having the force of law),
including any risk-based capital guidelines, affects or would affect the amount
of capital required or expected to be maintained by the Bank (or any corporation
controlling the Bank) and the Bank determines that the amount of such capital is
increased by or based upon the existence of the Bank's obligations hereunder and
such increase has the effect of reducing the rate of return on the Bank's (or
such controlling corporation's) capital as a consequence of such obligations
hereunder to a level below that which the Bank (or such controlling corporation)
could have achieved but for such circumstances (taking into consideration its
policies with respect to capital adequacy), then the Borrower shall pay to the
Bank from time to time, upon request by the Bank, additional amounts sufficient
to compensate such Bank (or such controlling corporation) for any increase in
the amount of capital and reduced rate of return which the Bank reasonably
determines to be allocable to the existence of the Bank's obligations hereunder.
A statement as to the amount of such compensation, prepared in good faith and in
reasonable detail by the Bank and submitted to the Borrower, shall be conclusive
and binding for all purposes absent manifest error in computation.
3.3. Availability of Types of Advances. In the event that any
applicable law, treaty, or other international agreement, rule, or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to the Bank, or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by the Bank with any guideline, request,
or directive of such authority (whether or not having the force of law),
including without limitation exchange controls, shall make it unlawful or
impossible for the Bank to maintain any Eurocurrency Advance at a suitable
Lending Installation under this Agreement, shall make it impracticable, unlawful
or impossible for, or shall in any way limit or impair ability of, the Borrower
to make or the Bank to receive any payment under this Agreement at the place
specified for payment hereunder, the Bank shall suspend the availability of
Eurocurrency Advances and the Borrower shall, upon receiving notice thereof from
the Bank, repay in full the then-outstanding principal amount of each
Eurocurrency Advance so affected, together with all accrued interest thereon to
the date of payment and all amounts owing to the Bank under Section 3.4, (a) on
the last day of the then-current Interest Period applicable to the Eurocurrency
Advance if the Bank may lawfully continue to maintain the Eurocurrency Advance
to that day, or (b) immediately if the Bank may not continue to maintain the
Eurocurrency Advance to that day.
3.4. Funding Indemnification. If the Borrower makes any payment of
principal with respect to any Eurocurrency Advance on any other date than the
last day of an Interest Period applicable thereto (whether pursuant to Section
2.2, Section 2.5, Section 2.7, Section 8.1, or otherwise), or if the Borrower
fails to borrow any Eurocurrency Advance after notice has been given to the Bank
in accordance with Section 2.8, or if the Borrower fails to make any payment of
principal or interest in respect of a Eurocurrency Advance when due, the
Borrower shall reimburse the Bank on demand for any resulting loss or expense
incurred by the Bank, including without limitation any loss incurred in
obtaining, liquidating, or employing deposits from third parties, whether or not
the Bank shall have funded or committed to fund the Eurocurrency Advance. A
statement as to the amount of such loss or expense, prepared in good faith and
in reasonable detail by the Bank and submitted by the Bank to the Borrower,
shall be conclusive and binding for all purposes absent manifest error in
computation. Calculation of all amounts payable to the Bank under this Section
3.4 shall be made as though the Bank shall have actually funded or committed to
fund the relevant Eurocurrency Advance through the purchase of an underlying
deposit in an amount equal to the amount of the Eurocurrency Advance in the
relevant market and having a maturity comparable to the related Interest Period
and through the transfer of such deposit to a domestic office of the Bank in the
United States; provided, however, that the Bank may fund any Eurocurrency
Advance in any manner it sees fit and the foregoing assumption shall be utilized
only for the purpose of calculating amounts payable under this Section 3.4.
3.5. Taxes. (i) All payments of principal of and interest on the Loan
and other amounts payable by the Borrower hereunder shall be made by the
Borrower without setoff or counterclaim, and, subject to the next succeeding
sentence, free and clear of, and without deduction or withholding for, or on
account of, any Taxes. If any Taxes are imposed, the Borrower will pay such
additional amounts as may be necessary so that payment of principal of and
interest on the Loan and other amounts payable hereunder, after withholding or
deduction for or on account thereof, will not be less than any amount provided
to be paid hereunder and, in any such case, the Borrower will furnish to the
Bank certified copies of all tax receipts evidencing the payment of such amounts
within 45 days after the date any such payment is due pursuant to applicable
law.
(ii) In addition, the Borrower agrees to pay any present or future
stamp or documentary taxes and any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or under any Note or
Facility LC Application or from the execution or delivery of, or otherwise with
respect to, this Agreement or any Note or Facility LC Application ("Other
Taxes").
(iii) The Borrower indemnifies the Bank for the full amount of Taxes or
Other Taxes (including, without limitation, any Taxes or Other Taxes imposed on
amounts payable under this Section 3.5) paid by the Bank and any liability
(including penalties, interest and expenses) arising therefrom or with respect
thereto. Payments due under this indemnification shall be made within 30 days of
the date the Bank makes demand therefor pursuant to Section 3.6.
3.6. Bank Statements; Survival of Indemnity. To the extent reasonably
possible, the Bank shall designate an alternate Lending Installation with
respect to its Eurocurrency Advances to reduce any liability of the Borrower to
the Bank under Sections 3.1, 3.2 and 3.5 or to avoid the unavailability of
Eurocurrency Advances under Section 3.3, so long as such designation is not, in
the judgment of the Bank, disadvantageous to it. The Bank shall deliver a
written statement to the Borrower as to the amount due, if any, under Section
3.1, 3.2, 3.4 or 3.5. Such written statement shall set forth in reasonable
detail the calculations upon which the Bank determined such amount and shall be
final, conclusive and binding on the Borrower in the absence of manifest error.
Determination of amounts payable under such Sections in connection with a
Eurocurrency Advances shall be calculated as though the Bank funded its
Eurocurrency Advances through the purchase of a deposit of the type and maturity
corresponding to the deposit used as a reference in determining the Eurocurrency
Rate applicable to such Credit Extension, whether in fact that is the case or
not. Unless otherwise provided herein, the amount specified in the written
statement of the Bank shall be payable on demand after receipt by the Borrower
of such written statement. The obligations of the Borrower under Sections 3.1,
3.2, 3.4, and 3.5 shall survive payment of the Obligations and termination of
this Agreement.
ARTICLE IV
CONDITIONS PRECEDENT
4.1. Initial Credit Extension. The Bank shall not be required to make
the initial Credit Extension hereunder unless the Borrower has furnished to the
Bank and completed the following matters, all in form and substance satisfactory
to the Bank:
(i) Copies of the articles or certificate of incorporation of the
Borrower and the Guarantors, together with all amendments, and
a certificate of good standing or existence for the Borrower
and each Guarantor, each certified by the appropriate
governmental officer in its jurisdiction of incorporation.
(ii) Copies, certified by the Secretary or Assistant Secretary of
the Borrower and the Guarantors, of each of their respective
by-laws and of each of their respective Board of Directors'
resolutions and of resolutions or actions of any other body
authorizing the execution of the Loan Documents to which the
Borrower and the Guarantors are a party.
(iii) An incumbency certificate, executed by the Secretary or
Assistant Secretary of the Borrower and the Guarantors,
which shall identify by name and title and bear the
signatures of the Authorized Officers and any other officers
of the Borrower and the Guarantors authorized to sign the
Loan Documents to which the Borrower and the Guarantors are a
party, upon which certificate the Bank shall be entitled
to rely until informed of any change in writing by the
Borrower or the Guarantors, as the case may be.
(iv) A certificate, signed by the chief financial officer of the
Borrower, stating that on the initial Credit Extension Date no
Default or Unmatured Default has occurred and is continuing.
(v) A written opinion of the Borrower's and the Guarantors'
counsel, addressed to the Bank in substantially the form of
Exhibit G.
(vi) Any Notes requested by the Bank pursuant to Section 2.15
payable to the order of the Bank.
(vii) Written money transfer instructions, in substantially the form
of Exhibit F, addressed to the Bank and signed by an
Authorized Officer, together with such other related money
transfer authorizations as the Bank may have reasonably
requested.
(viii) If the initial Credit Extension will be the issuance of a
Facility LC, a properly completed Facility LC Application.
(ix) A Confirmation of Pledge and Security Agreement of the
Borrower, the Guaranty substantially in the form of Exhibit D,
a Confirmation of Security Agreement (Patent & Licenses) of
the Borrower, and any other Collateral Documents required by
the Bank duly executed on behalf of the Borrower or the
Guarantors, as the case may be.
(x) The insurance certificate described in Section 5.19.
(xi) A duly completed Borrowing Base Certificate as of the close of
the fiscal month which precedes its delivery date.
(xii) Copies of all governmental and non-governmental consents,
approvals, authorizations, declarations, registrations or
filings, if any, required on the part of the Borrower or the
Guarantors in connection with the execution, delivery,
and performance of the Loan Documents, or the transactions
contemplated thereby or as a condition to the legality,
validity or enforceability of the Loan Documents, certified
as true and correct and in full force and effect as of
the Effective Date by a duly authorized officer of the
Borrower or the Guarantors, or, if none are required, a
certificate of such officer to that effect.
(xiii) Such other documents as the Bank or its counsel may have
reasonably requested.
4.2. Each Credit Extension. The Bank shall not be required to make
any Credit Extension unless on the applicable Credit
Extension Date:
(i) There exists no Default or Unmatured Default.
(ii) The representations and warranties contained in Article V are
true and correct as of such Credit Extension Date except to
the extent any such representation or warranty is stated to
relate solely to an earlier date, in which case such
representation or warranty shall have been true and correct on
and as of such earlier date.
(iii) All legal matters incident to the making of such Credit
Extension shall be satisfactory to the Bank and its counsel.
(iv) The Bank shall have received a Borrowing Notice or, in the
case of any issuance of a Facility LC, a properly completed
Facility LC Application and such other documentation in
connection therewith as requested by the Bank.
Each Borrowing Notice or request for issuance of a Facility LC with
respect to each such Credit Extension shall constitute a representation and
warranty by the Borrower that the conditions contained in Sections 4.2(i) and
(ii) have been satisfied. The Bank may require a duly completed compliance
certificate in substantially the form of Exhibit C as a condition to making a
Credit Extension.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Bank that:
5.1. Existence and Standing. Each of the Borrower and its Active
Subsidiaries is a corporation duly and properly incorporated, validly existing
and in good standing under the laws of its jurisdiction of incorporation or
organization and has all requisite authority to conduct its business in each
jurisdiction in which its business is conducted. The Borrower has all requisite
corporate power to own or lease the properties used in its business and to carry
on its business as now being conducted and as proposed to be conducted.
5.2. Authorization and Validity. The Borrower and each Guarantor, as
the case may be, has the power and authority and legal right to execute and
deliver the Loan Documents to which it is a party and to perform its obligations
thereunder. The execution and delivery by the Borrower and each of the
Guarantors, as the case may be, of the Loan Documents to which it is a party and
the performance of its obligations thereunder have been duly authorized by
proper corporate proceedings, and the Loan Documents to which the Borrower and
each of the Guarantors is a party, as the case may be, constitute legal, valid
and binding obligations of the Borrower and each of the Guarantors, as the case
may be, enforceable against the Borrower or each Guarantor, as the case may be,
in accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency or similar laws affecting the enforcement of creditors'
rights generally.
5.3. No Conflict; Government Consent. Neither the execution and
delivery by the Borrower or the Guarantors of the Loan Documents to which it is
a party, nor the consummation of the transactions therein contemplated, nor
compliance with the provisions thereof will violate (i) any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on the
Borrower or any of its Subsidiaries or (ii) the Borrower's or any Subsidiary's
articles or certificate of incorporation, partnership agreement, certificate of
partnership, articles or certificate of organization, by-laws, or operating or
other management agreement, as the case may be, or (iii) the provisions of any
indenture, instrument or agreement to which the Borrower or any of its
Subsidiaries is a party or is subject, or by which it, or its Property, is
bound, or conflict with or constitute a default thereunder, or result in, or
require, the creation or imposition of any Lien in, of or on the Property of the
Borrower or a Subsidiary pursuant to the terms of any such indenture, instrument
or agreement. No order, consent, adjudication, approval, license, authorization,
or validation of, or filing, recording or registration with, or exemption by, or
other action in respect of any governmental or public body or authority, or any
subdivision thereof, which has not been obtained by the Borrower or any of its
Subsidiaries, is required to be obtained by the Borrower or any of its
Subsidiaries in connection with the execution and delivery of the Loan
Documents, the borrowings under this Agreement, the payment and performance by
the Borrower of the Obligations or the legality, validity, binding effect or
enforceability of any of the Loan Documents.
5.4. Financial Statements. The September 30, 2003, consolidated
financial statements of the Borrower and its Subsidiaries heretofore delivered
to the Bank were prepared in accordance with generally accepted accounting
principles in effect on the date such statements were prepared and fairly
present the consolidated financial condition and operations of the Borrower and
its Subsidiaries at such date and the consolidated results of their operations
for the period then ended.
5.5. Material Adverse Change. Since September 30, 2003, there has been
no change in the business, Property, prospects, condition (financial or
otherwise) or results of operations of the Borrower and its Subsidiaries which
could reasonably be expected to have a Material Adverse Effect.
5.6. Taxes. The Borrower and its Subsidiaries have filed all United
States federal tax returns and all other tax returns which are required to be
filed and have paid all taxes due pursuant to said returns or pursuant to any
assessment received by the Borrower or any of its Subsidiaries, except such
taxes, if any, as are being contested in good faith and as to which adequate
reserves have been provided in accordance with Agreement Accounting Principles
and as to which no Lien exists. No tax liens have been filed and no claims are
being asserted with respect to any such taxes. The charges, accruals and
reserves on the books of the Borrower and its Subsidiaries in respect of any
taxes or other governmental charges are adequate.
5.7. Litigation and Contingent Obligations. There is no litigation,
arbitration, governmental investigation, proceeding or inquiry pending or, to
the knowledge of any of their officers, threatened against or affecting the
Borrower or any of its Subsidiaries which could reasonably be expected to have a
Material Adverse Effect or which seeks to prevent, enjoin or delay the making of
any Credit Extensions. Other than any liability incident to any litigation,
arbitration or proceeding which could not reasonably be expected to have a
Material Adverse Effect, the Borrower has no material contingent obligations not
provided for or disclosed in the financial statements referred to in Section
5.4.
5.8. Subsidiaries. Schedule 5.8 contains an accurate list of all
Subsidiaries of the Borrower as of the date of this Agreement, setting forth
their respective jurisdictions of organization and the percentage of their
respective Capital Stock or other ownership interests owned by the Borrower or
other Subsidiaries. All of the issued and outstanding shares of Capital Stock or
other ownership interests of such Subsidiaries have been (to the extent such
concepts are relevant with respect to such ownership interests) duly authorized
and issued and are fully paid and non-assessable. Each Subsidiary of the
Borrower has and will have all requisite corporate power to own or lease the
properties used in its business and to carry on its business as now being
conducted and as proposed to be conducted.
5.9. ERISA. There are no Unfunded Liabilities of any Single Employer
Plans of the Borrower or the Guarantors. Neither the Borrower nor any other
member of the Controlled Group has incurred, or is reasonably expected to incur,
any withdrawal liability to Multiemployer Plans. Each Plan complies in all
material respects with all applicable requirements of law and regulations, no
Reportable Event has occurred with respect to any Plan, neither the Borrower nor
any other member of the Controlled Group has withdrawn from any Plan or
initiated steps to do so, and no steps have been taken to reorganize or
terminate any Plan.
5.10. Accuracy of Information. No information, exhibit or report
furnished by the Borrower or any of its Subsidiaries to the Bank in connection
with the negotiation of, or compliance with, the Loan Documents contained any
material misstatement of fact or omitted to state a material fact or any fact
necessary to make the statements contained therein not misleading.
5.11. Regulation U. Margin stock (as defined in Regulation U)
constitutes less than 25% of the value of those assets of the Borrower and its
Subsidiaries which are subject to any limitation on sale, pledge, or other
restriction hereunder.
5.12. Material Agreements. Neither the Borrower nor any Subsidiary is a
party to any agreement or instrument or subject to any charter or other
corporate restriction which could reasonably be expected to have a Material
Adverse Effect. Neither the Borrower nor any Subsidiary is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in (i) any agreement to which it is a party, which default
could reasonably be expected to have a Material Adverse Effect or (ii) any
agreement or instrument evidencing or governing Indebtedness.
5.13. Compliance With Laws. The Borrower and its Subsidiaries have
complied with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof having jurisdiction over the conduct of their respective
businesses or the ownership of their respective Property.
5.14. Ownership of Properties. On the date of this Agreement, the
Borrower and its Subsidiaries will have good title, free of all Liens other than
those permitted by Section 6.15, to all of the Property and assets reflected in
the Borrower's most recent consolidated financial statements provided to the
Bank as owned by the Borrower and its Subsidiaries.
5.15. Plan Assets; Prohibited Transactions. The Borrower is not an
entity deemed to hold "plan assets" within the meaning of 29 C.F.R. ss.
2510.3-101 of an employee benefit plan (as defined in Section 3(3) of ERISA)
which is subject to Title I of ERISA or any plan (within the meaning of Section
4975 of the Code), and neither the execution of this Agreement nor the making of
Credit Extensions hereunder gives rise to a prohibited transaction within the
meaning of Section 406 of ERISA or Section 4975 of the Code.
5.16. Environmental Matters. In the ordinary course of its business,
the officers of the Borrower consider the effect of Environmental Laws on the
business of the Borrower and its Subsidiaries, in the course of which they
identify and evaluate potential risks and liabilities accruing to the Borrower
due to Environmental Laws. On the basis of this consideration, the Borrower and
each of its Subsidiaries has concluded that Environmental Laws cannot reasonably
be expected to have a Material Adverse Effect. Neither the Borrower nor any
Subsidiary has received any notice to the effect that its operations are not in
material compliance with any of the requirements of applicable Environmental
Laws or are the subject of any federal or state investigation evaluating whether
any remedial action is needed to respond to a release of any toxic or hazardous
waste or substance into the environment, which non-compliance or remedial action
could reasonably be expected to have a Material Adverse Effect.
5.17. Investment Company Act. Neither the Borrower nor any Subsidiary
is an "investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
5.18. Public Utility Holding Company Act. Neither the Borrower nor any
Subsidiary is a "holding company" or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
5.19. Insurance. The certificate signed by the President or Chief
Financial Officer of the Borrower, that attests to the existence and adequacy
of, and summarizes, the property and casualty insurance program carried by the
Borrower with respect to itself and its Subsidiaries and that has been furnished
by the Borrower to the Bank, is complete and accurate. This summary includes the
insurer's or insurers' name(s), policy number(s), expiration date(s), amount(s)
of coverage, type(s) of coverage, exclusion(s), and deductibles. This summary
also includes similar information, and describes any reserves, relating to any
self-insurance program that is in effect.
5.20 Borrowing Base. All accounts receivable and inventory of the
Borrower represented or reported by the Borrower to be, or are otherwise
included in, Eligible Finished Goods Inventory, Eligible Trade Receivables,
Eligible Extended Receivables, and Eligible Inventory comply in all respects as
of the date reported with the requirements therefor set forth in the definition
thereof, and the computation of the Borrowing Base set forth in each Borrowing
Base Certificate is true and correct.
5.21 Disclosure. No report or other information furnished in writing or
on behalf of the Borrower or any Guarantor to the Bank in connection with the
negotiation or administration of this Agreement contains any material
misstatement of fact or omits to state any material fact or any fact necessary
to make the statements contained therein not misleading in light of the
circumstances in which they were made. Neither this Agreement, or the Notes, the
Collateral Documents nor any other document, certificate, or report or statement
or other information furnished to the Bank by or on behalf of the Borrower or
any Guarantor in connection with the transactions contemplated by this Agreement
contains any untrue statement of a material fact or omits to state a material
fact in order to make the statements contained herein and therein not misleading
in light of the circumstances in which they were made. Except as reflected in
the Business Plan, there is no fact known to the Borrower or any Guarantor which
materially and adversely affects, or which in the future may (so far as the
Borrower or any Guarantor can now foresee) materially and adversely affect, the
business, properties, operations or condition, financial or otherwise, of the
Borrower, any Guarantor or any of their respective Subsidiaries, which has not
been set forth in this Agreement or in the other documents, certificates,
statements, reports and other information furnished in writing to the Bank by or
on behalf of the Borrower or any Guarantor in connection with the transactions
contemplated by this Agreement.
5.22 Intellectual Property. Set forth on Schedule 5.22 is a complete
and accurate list of all patents, trademarks, trade names, service marks and
copyrights, and all applications therefor and licenses thereof, of the Borrower
and each of its Subsidiaries showing the jurisdiction in which registered, the
registration number and the date of registration. The Borrower and each of its
Subsidiaries owns, or is licensed to use, all trademarks, trade names, service
marks, copyrights, technology, know-how and processes necessary for the conduct
of its business as currently conducted (the "Intellectual Property") except for
those the failure to own or license which could not reasonably be expected to
have a Material Adverse Effect. Except as set forth on Schedule 5.22, no claim
has been asserted and is pending by any Person challenging or questioning the
use of any such Intellectual Property or the validity or effectiveness of any
such Intellectual Property, nor does the Borrower or any of its Subsidiaries
know of any valid basis for any such claim, the use of such Intellectual
Property by the Borrower and each of its Subsidiaries does not infringe on the
rights of any Person, and, to the knowledge of the Borrower, no Intellectual
Property has been infringed, misappropriated or diluted by any other Person
except for such claims, infringements, misappropriation and dilutions that, in
the aggregate, could not have a Material Adverse Effect.
ARTICLE VI
COVENANTS
During the term of this Agreement, unless the Bank shall otherwise
consent in writing:
6.1. Financial Reporting. The Borrower will maintain, for itself and
each Subsidiary, a system of accounting established and administered in
accordance with generally accepted accounting principles, and furnish to the
Bank:
(i) Within 110 days after the close of each of its fiscal years,
an unqualified audit report certified by independent
certified public accountants acceptable to the Bank, prepared
in accordance with Agreement Accounting Principles on
a consolidated and consolidating basis (except that
consolidated balance sheets and statements of operations and
retained earnings need not be given for Inactive Subsidiaries
or Active Subsidiaries whose only asset is the Capital
Stock of another Subsidiary of the Borrower and consolidating
statements need not be certified by such accountants)
for itself and its Subsidiaries, including balance sheets as
of the end of such period, related profit and loss and
reconciliation of surplus statements, and a statement of
cash flows, accompanied by (a) any management letter
prepared by said accountants, (b) a certificate of said
accountants that, in the course of their examination
necessary for their certification of the foregoing, they
have obtained no knowledge of any Default or Unmatured
Default, or if, in the opinion of such accountants, any
Default or Unmatured Default shall exist, stating the nature
and status thereof, and (d) a certificate of the Borrower's
chief financial officer or principal accounting officer
as required under Section 6.1(d)(ii).
(ii) Within 30 days after the close of each monthly period,
for itself and its Subsidiaries, consolidated and
consolidating unaudited balance sheets as at the close of
each such period and consolidated and consolidating profit
and loss and reconciliation of surplus statements and a
statement of cash flows for the period from the beginning of
such fiscal year to the end of such month (except that
consolidating balance sheets and statements of operations and
retained earnings need not be given for Inactive
Subsidiaries or Active Subsidiaries whose only asset is the
Capital Stock of another Subsidiary of the Borrower), all
certified by its chief financial officer or principal
accounting officer as fairly presenting the consolidated
financial position of the Borrower and its Subsidiaries
for the periods contained therein and as having been prepared
in accordance with Agreement Accounting Principles,
together with a certificate of such officer demonstrating
compliance with all financial covenants contained in
this Agreement, including without limitation Section 6.20
hereof, and such supporting schedules setting forth such
information as the Bank may reasonably request relating to
such covenants, and stating whether such officer is aware
of any Default or any event or condition which, with notice
or lapse of time, or both, would constitute a Default,
and, if such Default or such an event or condition then
exists and is continuing, a statement setting forth the
nature and status thereof.
(iii) As soon as possible and in any event within 10 days after the
Borrower knows that any Reportable Event has occurred with
respect to any Plan, a statement, signed by the chief
financial officer of the Borrower, describing said Reportable
Event and the action which the Borrower proposes to take with
respect thereto.
(iv) As soon as possible and in any event within 10 days after
receipt by the Borrower, a copy of (a) any notice or claim to
the effect that the Borrower or any of its Subsidiaries is or
may be liable to any Person as a result of the release by the
Borrower, any of its Subsidiaries, or any other Person of any
toxic or hazardous waste or substance into the environment,
and (b) any notice alleging any violation of any federal,
state or local environmental, health or safety law or
regulation by the Borrower or any of its Subsidiaries.
(v) Promptly upon the furnishing thereof to the shareholders of
the Borrower, copies of all financial statements, reports and
proxy statements so furnished.
(vi) Promptly upon the filing thereof, notice regarding the filing
of all registration statements and annual, quarterly, monthly
or other regular reports which the Borrower or any of its
Subsidiaries files with the Securities and Exchange
Commission.
(vii) As soon as available and in any event within 30 days after the
end of each month, a Borrowing Base Certificate, prepared for
the Borrower as of the close of business on the last day of
each month, together with supporting schedules, in form set
forth on Exhibit B, each certified as true and correct by a
duly authorized officer of the Borrower.
(viii) Within 30 days after the end of each month, a report
containing an aging as of the end of the preceding month of
accounts receivable of the Borrower and its Subsidiaries, in a
form satisfactory to the Bank.
(vix) Such other information (including non-financial information) as the
Bank may from time to time reasonably request.
6.2. Use of Proceeds. The Borrower will, and will cause each Subsidiary
to, use the proceeds of the Credit Extension for general corporate purposes. The
Borrower will not, nor will it permit any Subsidiary to, use any of the proceeds
of the Advances to purchase or carry any "margin stock" (as defined in
Regulation U).
6.3. Notice of Default. The Borrower will, and will cause each
Subsidiary to, give prompt notice in writing to the Bank of the occurrence of
any Default or Unmatured Default and of any other development, financial or
otherwise, which could reasonably be expected to have a Material Adverse Effect.
6.4. Conduct of Business. The Borrower will, and will cause each
Subsidiary to, carry on and conduct its business in substantially the same
manner and in substantially the same fields of enterprise as it is presently
conducted and do all things necessary to remain duly incorporated or organized,
validly existing and (to the extent such concept applies to such entity) in good
standing as a domestic corporation, partnership or limited liability company in
its jurisdiction of incorporation or organization, as the case may be, and
maintain all requisite authority to conduct its business in each jurisdiction in
which its business is conducted.
6.5. Taxes. The Borrower will, and will cause each Subsidiary to,
timely file complete and correct United States federal and applicable foreign,
state and local tax returns required by law and pay when due all taxes,
assessments and governmental charges and levies upon it or its income, profits
or Property, except those which are being contested in good faith by appropriate
proceedings and with respect to which adequate reserves have been set aside in
accordance with Agreement Accounting Principles.
6.6. Insurance. The Borrower will, and will cause each Subsidiary to,
maintain with financially sound and reputable insurance companies insurance on
all their Property in such amounts and covering such risks as is consistent with
sound business practice, and the Borrower will furnish to the Bank upon request
full information as to the insurance carried.
6.7. Compliance with Laws. The Borrower will, and will cause each
Subsidiary to, comply with all laws, rules, regulations, orders, writs,
judgments, injunctions, decrees or awards to which it may be subject including,
without limitation, all Environmental Laws.
6.8. Maintenance of Properties. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its Property in good repair, working order and condition, and make all necessary
and proper repairs, renewals and replacements so that its business carried on in
connection therewith may be properly conducted at all times.
6.9. Inspection. The Borrower will, and will cause each Subsidiary to,
permit the Bank, by its representatives and agents, to inspect any of the
Property, books and financial records of the Borrower and each Subsidiary, to
examine and make copies of the books of accounts and other financial records of
the Borrower and each Subsidiary, and to discuss the affairs, finances and
accounts of the Borrower and each Subsidiary with, and to be advised as to the
same by, their respective officers at such reasonable times and intervals as the
Bank may designate.
6.10 Dividends. The Borrower will not, nor will it permit any
Subsidiary to, declare or pay any dividends or make any distributions on its
Capital Stock (other than dividends payable in its own Capital Stock) or redeem,
repurchase or otherwise acquire or retire any of its Capital Stock at any time
outstanding, provided, however, that (i) any Subsidiary may declare and pay
dividends or make distributions to the Borrower or to a Wholly-Owned Subsidiary,
and (ii) the Borrower may redeem, repurchase, or otherwise acquire or retire
shares of its Capital Stock, at a purchase price equivalent to the shares'
then-current fair market value.
6.11. Indebtedness. The Borrower will not, nor will it permit any
Subsidiary to, create, incur or suffer to exist any Indebtedness, except:
(i) The Loan, the other Outstanding Facilities, and the Reimbursement
Obligations.
(ii) Indebtedness arising under Rate Management Transactions.
(iii) The IRB Bonds.
(iv) Indebtedness of any Subsidiary owing to the Borrower or to any
other Subsidiary and indebtedness of the Borrower owing to any
Subsidiary.
(v) The Hurco GmbH Facility, the Mortgage Financing, the UK
Facility, a guaranty of payment of the Hurco GmbH Facility
from the Borrower or any Subsidiary, and the Hurco Guaranty.
(vi) Product warranty obligations incurred in the ordinary course of
business.
(vii) Indebtedness of the Borrower in an aggregate principal amount
from and after the Effective Date not to exceed $350,000
incurred in connection with the CIMPlus Purchase.
(viii) The UK Lease Liability, not to exceed British Pounds Sterling 350,000.
(ix) Indebtedness (other than the Indebtedness permitted under
subsections (i) though (viii) above) which in the aggregate
does not exceed six percent (6%) of the Consolidated Net Worth
existing from time to time.
6.12. Merger. The Borrower will not, nor will it permit any Subsidiary
to, merge or consolidate with or into any other Person, except that a Subsidiary
may merge into the Borrower or a Wholly-Owned Subsidiary.
6.13. Sale of Assets. The Borrower will not, nor will it permit any
Subsidiary to, lease, sell or otherwise dispose of its Property (other than
cash) to any other Person, except:
(i) Sales and leases of inventory in the ordinary course of
business, and licensing of software, patents, and other assets
in the ordinary course of business.
(ii) Leases, sales or other dispositions of its Property that,
together with all other Property of the Borrower and its
Subsidiaries previously leased, sold or disposed of (other
than inventory in the ordinary course of business) as
permitted by this Section during the twelve-month period
ending with the month in which any such lease, sale or other
disposition occurs, do not constitute a Substantial Portion of
the Property of the Borrower and its Subsidiaries.
(iii) Sales of the Borrower's Capital Stock, so long as the proceeds are
applied as required by Section 2.5(d)(iv).
6.14. Investments and Acquisitions. The Borrower will not, nor will it
permit any Subsidiary to, make or suffer to exist any Investments (excluding
loans and advances to, and other Investments in, Subsidiaries permitted by
Section 6.11), or commitments therefor, or to create any Subsidiary or to become
or remain a partner in any partnership or joint venture, or to make any
Acquisition of any Person, except:
(i) Cash Equivalent Investments and Investments under the Hurco
Deferred Compensation Plan made pursuant to the Hurco Deferred
Compensation Plan Trust Agreement.
(ii) Existing Investments in Subsidiaries and other Investments in
existence on the date hereof and described in Schedule 1.
(iii) Additional Investments comprised of capital contributions
(whether in the form of cash, a note, or other assets), up to
$1,000,000 in the aggregate, to new or existing Subsidiaries.
6.15. Liens. The Borrower will not, nor will it permit any Subsidiary
to, create, incur, or suffer to exist any Lien in, of or on the Property of the
Borrower or any of its Subsidiaries, except:
(i) Liens for taxes, assessments or governmental charges or levies
on its Property if the same shall not at the time be
delinquent or thereafter can be paid without penalty, or are
being contested in good faith and by appropriate proceedings
and for which adequate reserves in accordance with Agreement
Accounting Principles shall have been set aside on its books.
(ii) Liens imposed by law, such as carriers', warehousemen's and
mechanics' liens and other similar liens arising in the
ordinary course of business which secure payment of
obligations not more than 60 days past due.
(iii) Liens arising out of pledges or deposits under worker's
compensation laws, unemployment insurance, old age pensions,
or other social security or retirement benefits, or similar
legislation.
(iv) Utility easements, building restrictions and such other
encumbrances or charges against real property as are of a
nature generally existing with respect to properties of a
similar character and which do not in any material way affect
the marketability of the same or interfere with the use
thereof in the business of the Borrower or its Subsidiaries.
(v) Liens in favor of the Bank granted pursuant to any Collateral
Document.
(vi) The interest or title of a lessor under any lease (including
without limitation Capitalized Leases) otherwise permitted
under this Agreement with respect to the property subject to
such lease.
(vii) Liens on the assets of Hurco GmbH to secure the Hurco GmbH Facility.
(viii) Liens on the assets of Hurco Europe to secure the UK Facility.
(ix) A mortgage lien on the Borrower's headquarters and associated
fixtures, leases, and rents to secure the Mortgage Financing.
(x) The lien granted in favor of CIMPlus, Inc. on Property of the
Borrower acquired in connection with the CIMPlus Purchase as
security for Indebtedness permitted by Section 6.11(vii).
(xi) Liens (other than the Liens permitted under subsections (i)
through (x) above) as security for Indebtedness permitted by
Section 6.11(vii) on Property of the Borrower or any
Subsidiary, the book value less applicable depreciation and
amortization of which in the aggregate does not exceed six
percent (6%) of the Consolidated Net Worth existing from time
to time.
6.16. Affiliates. The Borrower will not, and will not permit any
Subsidiary to, enter into any transaction (including, without
limitation, the purchase or sale of any Property or service) with, or
make any payment or transfer to, any Affiliate except in the ordinary
course of business and pursuant to the reasonable requirements of the
Borrower's or such Subsidiary's business and upon fair and reasonable
terms no less favorable to the Borrower or such Subsidiary than the
Borrower or such Subsidiary would obtain in a comparable arms-length
transaction.
6.17. Sale and Leaseback Transactions. The Borrower will not, nor will
it permit any Subsidiary to, enter into or suffer to exist any Sale and
Leaseback Transaction.
6.18. Contingent Obligations. The Borrower will not, nor will it permit
any Subsidiary to, make or suffer to exist any Contingent Obligation
(including, without limitation, any Contingent Obligation with respect
to the obligations of a Subsidiary), except (i) by endorsement of
instruments for deposit or collection in the ordinary course of
business, (ii) the Reimbursement Obligations, (iii) the Credit
Obligations, (iv) the Guaranty and the Hurco Guaranty, (v) the guaranty
of the Hurco GmbH Facility by the Borrower or any Subsidiary, (vi) the
Guaranty of Underlease dated on or about April 30, 2002, among CMP
Batteries Limited, Hurco Europe, and the Borrower, and (vii) to the
extent permitted by Section 6.11.
6.19. Reserved.
6.20. Financial Covenants.
6.20.1. Minimum Consolidated Net Worth. The Borrower will not permit or
suffer, at the end of each fiscal quarter beginning with the fiscal
quarter ending October 31, 2003, the Consolidated Net Worth to be less
than the sum of (a) $32,000,000 plus, (b) an amount equal to 75% of
positive Consolidated Net Income of the Borrower for the fiscal year
ended October 31, 2003, and for each fiscal year thereafter (excluding
any Other Comprehensive Income for each period), such 75% of
Consolidated Net Income to be added as of the end of each fiscal year
of the Borrower.
6.20.2. Maximum Consolidated Total Indebtedness to Consolidated Total
Capitalization. The Borrower will not permit the ratio, determined as
of the end of each of its fiscal quarters, of (i) Consolidated Total
Indebtedness to (ii) Consolidated Total Capitalization, to be greater
than 0.35 to 1.0.
6.20.3. Fixed Charge Coverage Ratio. The Borrower will not permit the
ratio, determined as of (a) the end of the fiscal quarter ending on
October 31, 2003, for the period of the three fiscal quarters of the
Borrower then ending, (b) the end of each fiscal quarter for the period
of the four fiscal quarters of the Borrower then ending, beginning with
the fiscal quarter ending on January 31, 2004, of (i) Consolidated
EBITDA for such period, minus income taxes included in calculating
Consolidated EBITDA, minus Capital Expenditures incurred during such
period and financed with an Advance or other facility not constituting
long term Indebtedness, minus redemptions of its Capital Stock by the
Borrower, to (ii) principal payments of Indebtedness during such period
(other than principal payments in connection with the CIMPlus Purchase
or the UK Lease Liability) plus Consolidated Interest Expense during
such period, all calculated for the Borrower and its Subsidiaries on a
consolidated basis, to be less than 1.10 to 1.0.
6.21. Banking Relationship. The Borrower will use, and cause its
Domestic Subsidiaries to use, the Bank as its primary bank of account
and related account services.
6.22. Collateral Documents. Promptly, but not more than 10 days after
the event causing the additional collateral requirement, the Borrower
will, and will cause each Guarantor to, (i) execute and deliver
additional Collateral Documents sufficient to grant to the Bank liens
and security interests, securing the Secured Obligations, in any
present or after acquired Collateral (including without limitation
pledging the Capital Stock of any Domestic Subsidiary which is formed
or which ceases to be an Inactive Subsidiary after the date hereof),
and (ii) cause each Domestic Subsidiary which is acquired or created or
which ceases to be an Inactive Subsidiary after the date hereof to
execute and deliver to the Bank a Guaranty and other Collateral
Documents, together with other related documents described in Article
IV sufficient to grant to the Bank liens and security interests in all
Collateral securing the Secured Obligations. The Borrower shall notify
the Bank, within 10 days after the occurrence thereof, of the
acquisition of any Collateral that is not subject to the existing
Collateral Documents, any Person becoming a Subsidiary and any other
event or condition, other than the passage of time, that may require
additional action of any nature in order to preserve the effectiveness
and perfected status of the liens and security interests of the Bank
with respect to all Collateral pursuant to the Collateral Documents,
including without limitation delivering the originals of all promissory
notes and other instruments to the Bank and delivering the originals of
all stock certificates or other certificates evidencing any Capital
Stock which is Collateral at any time.
6.23. Further Assurances. The Borrower will, and will cause each
Guarantor to, execute and deliver within 30 days after request therefor
by the Bank, all further instruments and documents and take all further
action that may be necessary or desirable, or that the Bank may
request, in order to give effect to, and to aid in the exercise and
enforcement of the rights and remedies of the Bank under, this
Agreement, the Notes and the Collateral Documents, including without
limitation causing each lessor of real property to the Borrower, any
Guarantor or any of their respective Subsidiaries to execute and
deliver to the Bank, prior to or upon the commencement of any tenancy,
an agreement in form and substance acceptable to the Bank duly executed
on behalf of such lessor waiving any distraint, lien and similar rights
with respect to any property subject to the Collateral Documents and
agreeing to permit the Bank to enter such premises in connection
therewith. In addition, each of the Borrower and each Guarantor agrees
to deliver to the Bank within 30 days after the acquisition or creation
of any Subsidiary not listed in Schedule 5.8 hereto, supplements to
Schedule 5.8 such that such Schedule, together with such supplements,
shall at all times accurately reflect the information provided for
thereon. Each of the Borrower and each Guarantor further agrees to
deliver to the Bank, on or before each anniversary date of the
Effective Date, a certificate of the chief financial officer of the
Borrower or each Guarantor, as the case may be, stating that such
officer has reviewed the Collateral Documents and that each party
thereto is in compliance with the terms thereof. The Borrower and each
Guarantor shall take, or cause to be taken, all action necessary to
permit such an opinion to be rendered, including filing such financing
statements and continuation statements and executing and delivering
such supplements to the Collateral Documents and other instruments as
may be necessary or desirable in connection with such opinion.
6.24. Accounting Changes. Until the Facility Termination Date and
thereafter until payment in full of accrued interest on the Notes and
the performance of all other Obligations, the Borrower agrees that,
unless the Bank shall otherwise consent in writing it shall not, and
shall not permit any of its Subsidiaries to, change their respective
fiscal years or make any significant changes (i) in accounting
treatment and reporting practices except as permitted by Agreement
Accounting Principles and disclosed to the Bank, or (ii) in tax
reporting treatment except as permitted by law and disclosed to the
Bank.
6.25. Inconsistent Agreements. Until the Facility Termination Date and
thereafter until payment in full of accrued interest on the Notes and
the performance of all other Obligations, the Borrower agrees that,
unless the Bank shall otherwise consent in writing it shall not, and
shall not permit any of its Subsidiaries to, enter into any agreement
containing any provision which would be violated or breached by this
Agreement or any of the transactions contemplated hereby or by
performance by the Borrower or any of its Subsidiaries of the
obligations in connection therewith.
ARTICLE VII
DEFAULTS
The occurrence of any one or more of the following events shall
constitute a Default:
7.1. Any representation or warranty made or deemed made by or on behalf
of the Borrower or any of its Subsidiaries to the Bank under or in connection
with this Agreement, any Credit Extension, or any certificate or information
delivered in connection with this Agreement or any other Loan Document shall be
materially false on the date as of which made or deemed made and such failure
continues for more than five days following written notice thereof to the
Borrower.
7.2. Nonpayment of principal of any Credit Obligation when due,
nonpayment of any Reimbursement Obligation when due, or nonpayment of interest
upon any Credit Extension or of any amendment fee, LC Fee, facility fee or other
obligations under any of the Loan Documents when due, which nonpayment continues
for a period of three days following written notice thereof to the Borrower by
the Bank.
7.3. The breach by the Borrower of any of the terms or provisions of
Section 6.10 through Section 6.25, and such breach continues for more than ten
days following written notice thereof to the Borrower.
7.4. The breach by the Borrower (other than a breach which constitutes
a Default under another Section of this Article VII) of any of the terms or
provisions of this Agreement which is not remedied within thirty days after
written notice from the Bank.
7.5. Failure of the Borrower or any of its Active Subsidiaries or any
Guarantor to pay when due any Indebtedness (other than Indebtedness hereunder
but including the UK Facility); or the default by the Borrower or any of its
Subsidiaries or any Guarantor in the performance (beyond the applicable grace
period with respect thereto, if any) of any term, provision or condition
contained in any agreement under which any such Indebtedness was created or is
governed, including without limitation any Bond Default or any other event shall
occur or condition exist, the effect of which default or event is to cause, or
to permit the holder or holders of such Indebtedness to cause, such Indebtedness
to become due prior to its stated maturity; or any Indebtedness of the Borrower
or any of its Subsidiaries or any Guarantor shall be declared to be due and
payable or required to be prepaid or repurchased (other than by a regularly
scheduled payment) prior to the stated maturity thereof; or the Borrower or any
of its Subsidiaries or any Guarantor shall not pay, or admit in writing its
inability to pay, its debts generally as they become due.
7.6. The Borrower or any of its Subsidiaries or any Guarantor shall (i)
have an order for relief entered with respect to it under the Federal bankruptcy
laws as now or hereafter in effect, (ii) make an assignment for the benefit of
creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment
of a receiver, custodian, trustee, examiner, liquidator or similar official for
it or any Substantial Portion of its Property, (iv) institute any proceeding
seeking an order for relief under the Federal bankruptcy laws as now or
hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or
seeking dissolution, winding up, liquidation, reorganization, arrangement,
adjustment or composition of it or its debts under any law relating to
bankruptcy, insolvency or reorganization or relief of debtors or fail to file an
answer or other pleading denying the material allegations of any such proceeding
filed against it, (v) take any corporate or partnership action to authorize or
effect any of the foregoing actions set forth in this Section 7.6 or (vi) fail
to contest in good faith any appointment or proceeding described in Section 7.7.
7.7. Without the application, approval or consent of the Borrower or
any of its Active Subsidiaries, a receiver, trustee, examiner, liquidator or
similar official shall be appointed for the Borrower or any of its Subsidiaries
or any Substantial Portion of its Property, or a proceeding described in Section
7.6(iv) shall be instituted against the Borrower or any of its Active
Subsidiaries and such appointment continues undischarged or such proceeding
continues undismissed or unstayed for a period of 30 consecutive days.
7.8. Any court, government or governmental agency shall condemn, seize
or otherwise appropriate, or take custody or control of, all or any portion of
the Property of the Borrower and its Active Subsidiaries which, when taken
together with all other Property of the Borrower and its Active Subsidiaries so
condemned, seized, appropriated, or taken custody or control of, during the
twelve-month period ending with the month in which any such action occurs,
constitutes a Substantial Portion.
7.9. The Borrower or any of its Subsidiaries shall fail within 30 days
to pay, bond or otherwise discharge one or more (i) judgments or orders for the
payment of money in excess of $100,000 (or the equivalent thereof in currencies
other than U.S. Dollars) in the aggregate, or (ii) nonmonetary judgments or
orders which, individually or in the aggregate, could reasonably be expected to
have a Material Adverse Effect, which judgment(s), in any such case, is/are not
stayed on appeal or otherwise being appropriately contested in good faith.
7.10. There are any Unfunded Liabilities of any Single Employer Plans
for which the Borrower or any Guarantor may be liable or any Reportable Event
shall occur in connection with any Plan.
7.11. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that it has incurred
withdrawal liability to such Multiemployer Plan.
7.12. The Borrower or any other member of the Controlled Group shall
have been notified by the sponsor of a Multiemployer Plan that such
Multiemployer Plan is in reorganization or is being terminated, within the
meaning of Title IV of ERISA, if as a result of such reorganization or
termination the aggregate annual contributions of the Borrower and the other
members of the Controlled Group (taken as a whole) to all Multiemployer Plans
which are then in reorganization or being terminated have been or will be
increased over the amounts contributed to such Multiemployer Plans for the
respective plan years of each such Multiemployer Plan immediately preceding the
plan year in which the reorganization or termination occurs.
7.13. The Borrower or any of its Subsidiaries shall (i) be the subject
of any proceeding or, to its knowledge, investigation pertaining to the release
by the Borrower, any of its Subsidiaries or any other Person of any toxic or
hazardous waste or substance into the environment, or (ii) violate any
Environmental Law, which, in the case of an event described in clause (i) or
clause (ii), could reasonably be expected to have a Material Adverse Effect.
7.14. The occurrence of any "default", as defined in any Loan Document
(other than this Agreement) or the breach of any of the terms or provisions of
any Loan Document (other than this Agreement), which default or breach continues
beyond any period of grace therein provided.
7.15. Nonpayment by the Borrower or any Subsidiary of any Rate
Management Obligation when due or the breach by the Borrower or any Subsidiary
of any term, provision or condition contained in any Rate Management
Transaction.
7.16. Any Guaranty shall fail to remain in full force or effect or any
action shall be taken to discontinue or to assert the invalidity or
unenforceability of any Guaranty, or any Guarantor shall fail to comply with any
of the terms or provisions of any Guaranty to which it is a party, or any
Guarantor shall deny that it has any further liability under any Guaranty to
which it is a party, or shall give notice to such effect.
7.17. Any Collateral Document shall fail to create a valid security
interest in the property identified therein as collateral to be covered thereby,
except as permitted by the terms of the Collateral Documents, and, to the extent
such failure is curable, the Borrower fails to execute an amendment to such
Collateral Document to remedy such failure within ten days after written request
from the Bank and submission to the Borrower of such amendment; or any
Collateral Document shall fail to remain in full force and effect (other than by
reason of any release or termination thereof to which the Bank has agreed) and,
to the extent such failure is curable, the Borrower fails to execute and deliver
to the Bank such documents as are reasonably required by the Bank to reinstate
or replace such Collateral Document within ten days after written request by the
Bank. The Borrower's violation of this Section 7.17 shall not constitute an
Unmatured Default, provided however, the Bank may declare a Default following
any violation of this Section 7.17.
7.18. The representations and warranties set forth in Section 5.15
shall at any time not be true and correct.
ARTICLE VIIA
AMENDMENT TO REIMBURSEMENT AGREEMENT
7A.1. Administration of Outstanding Facilities. The Borrower will pay
or cause to be paid all amounts required to be paid on the Reimbursement
Agreement under Article 3 and perform or cause to be performed all other
obligations contained in the Outstanding Facilities, except to the extent any
such performance would be inconsistent with the requirements of this Agreement.
The Reimbursement Agreement and the IRB L/C shall continue to be governed by the
documents under which they were originally issued, as amended through the
Effective Date, and as further amended under this Agreement below.
7A.2. Amendments to Reimbursement Agreement. After the Effective Date,
the Reimbursement Agreement is amended as follows:
The first two sentences of Section 4.02(b) of the Reimbursement
Agreement are amended to read as follows: "Permit or suffer the breach of any
covenant or agreement contained in Article VI of the Third Amended and Restated
Credit Agreement and Amendment to Reimbursement Agreement among the Company and
Bank One, NA, dated as of December 1, 2003 (as amended or modified from time to
time, the "Credit Agreement"). All such provisions of Article VI, including
definitions of defined terms used therein and exhibits referred to therein, are
incorporated by reference and made a part of this Agreement to the same extent
as if set forth fully herein, except that all cross references shall refer to
the relevant provision or provisions as incorporated herein."
ARTICLE VIII
ACCELERATION, WAIVERS, AMENDMENTS AND REMEDIES
8.1. Acceleration; Facility LC Collateral Account. (i) If any Default
described in Section 7.6 or 7.7 occurs with respect to the Borrower, the
obligations of the Bank to make Advances hereunder and the obligation and power
of the Bank to issue Facility LCs shall automatically terminate and the
Obligations shall immediately become due and payable without any election or
action on the part of the Bank and the Borrower will be and become thereby
unconditionally obligated, without any further notice, act or demand, to pay to
the Bank an amount in immediately available funds, which funds shall be held in
the Facility LC Collateral Account, equal to the difference of (x) the amount of
LC Obligations at such time, less (y) the amount on deposit in the Facility LC
Collateral Account at such time which is free and clear of all rights and claims
of third parties and has not been applied against the Obligations (such
difference, the "Collateral Shortfall Amount"). If any other Default occurs, the
Bank may (a) terminate or suspend its obligations to make Advances hereunder and
its obligation and power to issue Facility LCs, or declare the Obligations to be
due and payable, or both, whereupon the Obligations shall become immediately due
and payable, without presentment, demand, protest or notice of any kind, all of
which the Borrower expressly waives, and (b) upon notice to the Borrower and in
addition to the continuing right to demand payment of all amounts payable under
this Agreement, make demand on the Borrower to pay, and the Borrower will,
forthwith upon such demand and without any further notice or act, pay to the
Bank the Collateral Shortfall Amount, which funds shall be deposited in the
Facility LC Collateral Account.
(ii) If at any time while any Default is continuing, the Bank
determines that the Collateral Shortfall Amount at such time is greater than
zero, the Bank may make demand on the Borrower to pay, and the Borrower will,
forthwith upon such demand and without any further notice or act, pay to the
Bank the Collateral Shortfall Amount, which funds shall be deposited in the
Facility LC Collateral Account.
(iii) The Bank may at any time or from time to time after funds are
deposited in the Facility LC Collateral Account, apply such funds to the payment
of the Obligations and any other amounts as shall from time to time have become
due and payable by the Borrower to the Bank under the Loan Documents.
(iv) At any time while any Default is continuing, neither the Borrower
nor any Person claiming on behalf of or through the Borrower shall have any
right to withdraw any of the funds held in the Facility LC Collateral Account.
After all of the Obligations have been indefeasibly paid in full and the
Commitment has been terminated, any funds remaining in the Facility LC
Collateral Account shall be returned by the Bank to the Borrower or paid to
whomever may be legally entitled thereto at such time.
8.2. Amendments. The Bank and the Borrower may enter into agreements
supplemental hereto for the purpose of adding or modifying any provisions to the
Loan Documents or changing in any manner the rights of the Borrower hereunder or
waiving any Default hereunder.
8.3. Preservation of Rights. No delay or omission of the Bank to
exercise any right under the Loan Documents shall impair such right or be
construed to be a waiver of any Default or an acquiescence therein, and the
making of a Credit Extension notwithstanding the existence of a Default or the
inability of the Borrower to satisfy the conditions precedent to such Credit
Extension shall not constitute any waiver or acquiescence. Any single or partial
exercise of any such right shall not preclude other or further exercise thereof
or the exercise of any other right, and no waiver, amendment or other variation
of the terms, conditions or provisions of the Loan Documents whatsoever shall be
valid unless in writing signed by the Bank, and then only to the extent in such
writing specifically set forth. All remedies contained in the Loan Documents or
by law afforded shall be cumulative and all shall be available to the Bank until
the Obligations have been paid in full.
ARTICLE IX
GENERAL PROVISIONS
9.1. Survival of Representations. All representations and warranties of
the Borrower contained in this Agreement shall survive the making of the Credit
Extensions herein contemplated.
9.2. Governmental Regulation. Anything contained in this Agreement to
the contrary notwithstanding, the Bank shall not be obligated to extend credit
to the Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
9.3. Headings. Section headings in the Loan Documents are for
convenience of reference only, and shall not govern the interpretation of any of
the provisions of the Loan Documents.
9.4. Entire Agreement. The Loan Documents embody the entire agreement
and understanding among the Borrower and the Bank and supersede all prior
agreements and understandings among the Borrower and the Bank relating to the
subject matter thereof.
9.5. Benefits of this Agreement. This Agreement shall not be construed
so as to confer any right or benefit upon any Person other than the parties to
this Agreement and their respective successors and assigns.
9.6. Expenses; Indemnification. (i) The Borrower shall reimburse the
Bank for any costs, internal charges and out-of-pocket expenses (including
reasonable attorneys' fees and reasonable time charges of attorneys for the
Bank, which attorneys may be employees of the Bank) paid or incurred by the Bank
in connection with the preparation, negotiation, execution, delivery,
distribution (including, without limitation, via the internet), review,
amendment, modification, and administration of the Loan Documents. The Borrower
also agrees to reimburse the Bank for any costs, internal charges and
out-of-pocket expenses (including reasonable attorneys' fees and reasonable time
charges of attorneys for the Bank, which attorneys may be employees of the Bank)
paid or incurred by the Bank in connection with the collection and enforcement
of the Loan Documents. Expenses being reimbursed by the Borrower under this
Section include, without limitation, the cost and expense of obtaining an
appraisal of each parcel of real property or interest in real property described
in the Mortgage, which appraisal shall be in conformity with the applicable
requirements of any law or any governmental rule, regulation, policy, guideline
or directive (whether or not having the force of law), or any interpretation
thereof, including, without limitation, the provisions of Title XI of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended,
reformed or otherwise modified from time to time, and any rules promulgated to
implement such provisions and costs and expenses incurred in connection with the
Reports described in the following sentence. The Borrower acknowledges that from
time to time the Bank may prepare (but shall have no obligation or duty to
prepare) certain audit reports (the "Reports") pertaining to the Borrower's
assets for internal use by the Bank from information furnished to it by or on
behalf of the Borrower, after the Bank has exercised its rights of inspection
pursuant to this Agreement.
(ii) The Borrower further agrees to indemnify the Bank, its affiliates,
and each of its directors, officers and employees against all losses, claims,
damages, penalties, judgments, liabilities and expenses (including, without
limitation, all expenses of litigation or preparation therefor whether or not
the Bank or any Affiliate is a party thereto) which any of them may pay or incur
arising out of or relating to this Agreement, the other Loan Documents, the
transactions contemplated hereby or the direct or indirect application or
proposed application of the proceeds of any Credit Extension hereunder except to
the extent that they are determined in a final non-appealable judgment by a
court of competent jurisdiction to have resulted from the gross negligence or
willful misconduct of the party seeking indemnification. The obligations of the
Borrower under this Section 9.6 shall survive the termination of this Agreement.
9.7. Accounting. Except as provided to the contrary herein, all
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with Agreement Accounting
Principles, except that any calculation or determination which is to be made on
a consolidated basis shall be made for the Borrower and all its Subsidiaries,
including those Subsidiaries, if any, which are unconsolidated on the Borrower's
audited financial statements.
9.8. Severability of Provisions. Any provision in any Loan Document
that is held to be inoperative, unenforceable, or invalid in any jurisdiction
shall, as to that jurisdiction, be inoperative, unenforceable, or invalid
without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of all Loan Documents are declared
to be severable.
9.9. Nonliability of the Bank. The relationship between the Borrower on
the one hand and the Bank on the other hand shall be solely that of borrower and
lender. The Bank shall not have any fiduciary responsibilities to the Borrower.
The Bank does not undertake any responsibility to the Borrower to review or
inform the Borrower of any matter in connection with any phase of the Borrower's
business or operations. The Borrower agrees that the Bank shall not have
liability to the Borrower (whether sounding in tort, contract or otherwise) for
losses suffered by the Borrower in connection with, arising out of, or in any
way related to, the transactions contemplated and the relationship established
by the Loan Documents, or any act, omission or event occurring in connection
therewith, unless it is determined in a final non-appealable judgment by a court
of competent jurisdiction that such losses resulted from the gross negligence or
willful misconduct of the party from which recovery is sought. The Bank shall
not have any liability with respect to, and the Borrower waives, releases and
agrees not to sue for, any special, indirect, consequential or punitive damages
suffered by the Borrower in connection with, arising out of, or in any way
related to the Loan Documents or the transactions contemplated thereby.
9.10. Confidentiality. The Bank agrees to hold any confidential
information which it may receive from the Borrower pursuant to this Agreement in
confidence, except for disclosure (i) to its Affiliates, (ii) to legal counsel,
accountants, and other professional advisors to such Affiliate or to a
Transferee, (iii) to regulatory officials, (iv) to any Person as requested
pursuant to or as required by law, regulation, or legal process, (v) to any
Person in connection with any legal proceeding to which such Affiliate is a
party, (vi) to such Affiliate's direct or indirect contractual counterparties in
swap agreements or to legal counsel, accountants and other professional advisors
to such counterparties, and (vii) permitted by Section 11.4.
9.11. Disclosure. The Borrower acknowledges and agrees that the Bank
and/or its Affiliates from time to time may hold investments in, make other
loans to or have other relationships with the Borrower and its Affiliates.
9.12. Construction of Certain Provisions.If any provision of this
Agreement refers to any action to be taken by any person, or which such person
is prohibited from taking, such provision shall be applicable whether such
action is taken directly or indirectly by such person, whether or not expressly
specified in such provision.
9.13. Independence of Covenants.All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any such covenant, the fact that it would be permitted by an exception to, or
would be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or such condition exists.
9.14. Interest Rate Limitation. Notwithstanding any provisions of this
Agreement or the Notes, in no event shall the amount of interest paid or agreed
to be paid by the Borrower exceed an amount computed at the highest rate of
interest permissible under applicable law. If, from any circumstances
whatsoever, fulfillment of any provision of this Agreement or the Notes at the
time performance of such provision shall be due shall involve exceeding the
interest rate limitation validly prescribed by law which a court of competent
jurisdiction may deem applicable hereto, then, ipso facto, the obligations to be
fulfilled shall be reduced to an amount computed at the highest rate of interest
permissible under applicable law. If for any reason whatsoever the Bank shall
ever receive as interest an amount which would be deemed unlawful under such
applicable law, the amount shall be automatically applied to the payment of
principal of the Advances outstanding hereunder (whether or not then due and
payable) and not to the payment of interest, or shall be refunded to the
Borrower if such principal and all other obligations of the Borrower to the Bank
have been paid in full.
9.15. USA Patriot Act Notification. The following notification is
provided to Borrower pursuant to Section 326 of the USA Patriot Act of 2001, 31
U.S.C. Section 5318:
IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW ACCOUNT. To
help the government fight the funding of terrorism and money laundering
activities, Federal law requires all financial institutions to obtain,
verify, and record information that identifies each person or entity
that opens an account, including any deposit account, treasury
management account, loan, other extension of credit, or other financial
services product. What this means for Borrower: When Borrower opens an
account, Bank will ask for Borrower's name, tax identification number,
business address, and other information that will allow Bank to
identify Borrower. Bank may also ask to see Borrower's legal
organization documents or other identifying documents.
ARTICLE X
SETOFF
In addition to, and without limitation of, any rights of the Bank under
applicable law, if the Borrower becomes insolvent, however evidenced, or any
Default occurs, any and all deposits (including all account balances, whether
provisional or final and whether or not collected or available) and any other
Indebtedness at any time held or owing by the Bank or any Affiliate of the Bank
to or for the credit or account of the Borrower may be offset and applied toward
the payment of the Secured Obligations owing to the Bank, whether or not the
Secured Obligations, or any part thereof, shall then be due.
ARTICLE XI
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
11.1. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, provided that the Borrower may not, without the prior written consent
of the Bank, assign its rights or obligations hereunder or under any Notes and
the Bank shall not be obligated to make any Advance hereunder to any entity
other than the Borrower.
11.2. Participations.
11.2.1. Permitted Participants; Effect. The Bank may, in the
ordinary course of its business and in accordance with applicable law,
at any time sell to one or more banks or other entities
("Participants") participating interests in any Outstanding Credit
Exposure of the Bank, any Note held by the Bank, any Commitment of the
Bank or any other interest of the Bank under the Loan Documents. In the
event of any such sale by the Bank of participating interests to a
Participant, the Bank's obligations under the Loan Documents shall
remain unchanged, the Bank shall remain solely responsible to the
Borrower for the performance of such obligations, the Bank shall remain
the owner of its Outstanding Credit Exposure and the holder of any Note
issued to it in evidence thereof for all purposes under the Loan
Documents, all amounts payable by the Borrower under this Agreement
shall be determined as if the Bank had not sold such participating
interests, and the Borrower shall continue to deal solely and directly
with the Bank in connection with the Bank's rights and obligations
under the Loan Documents.
11.2.2. Voting Rights. Unless otherwise agreed between the
Bank and any Participant, the Bank shall retain the sole right to
approve, without the consent of any Participant, any amendment,
modification or waiver of any provision of the Loan Documents.
11.2.3. Benefit of Setoff. The Borrower agrees that each
Participant shall be deemed to have the right of setoff provided in
Article 10 in respect of its participating interest in amounts owing
under the Loan Documents to the same extent as if the amount of its
participating interest were owing directly to it as the Bank under the
Loan Documents, provided that the Bank shall retain the right of setoff
provided in Article 10 with respect to the amount of participating
interests sold to each Participant. The Bank agrees to share with each
Participant, and each Participant, by exercising the right of setoff
provided in Article 10, agrees to share with the Bank, any amount
received pursuant to the exercise of its right of setoff, such amounts
to be shared in accordance with their respective pro rata shares of the
Commitment or, if the Commitment is no longer available, in accordance
with their respective pro rata shares of the Outstanding Credit
Exposure.
11.3. Dissemination of Information. The Borrower authorizes the Bank to
disclose to any Participant or any other Person acquiring an interest in the
Loan Documents by operation of law or otherwise (each a "Transferee") and any
prospective Transferee any and all information in the Bank's possession
concerning the creditworthiness of the Borrower and its Subsidiaries, including
without limitation any information contained in any Reports; provided that each
Transferee and prospective Transferee agrees to be bound by Section 9.10 of this
Agreement.
ARTICLE XII
NOTICES
12.1. Notices. Except as otherwise permitted by Section 2.8 with
respect to borrowing notices, all notices, requests and other communications to
any party hereunder shall be in writing (including electronic transmission,
facsimile transmission or similar writing) and shall be given to such party: in
the case of the Borrower or the Bank, at its address or facsimile number set
forth on the signature pages hereof, or in the case of any future party, at such
other address or facsimile number as such future party may hereafter specify for
the purpose by notice to the Bank and the Borrower in accordance with the
provisions of this Section 12.1. Each such notice, request or other
communication shall be effective (i) if given by facsimile transmission, when
transmitted to the facsimile number specified in this Section and confirmation
of receipt is received, (ii) if given by mail, 72 hours after such communication
is deposited in the mails with first class postage prepaid, addressed as
aforesaid, or (iii) if given by any other means, when delivered (or, in the case
of electronic transmission, received) at the address specified in this Section;
provided that notices to the Bank under Article II shall not be effective until
received.
12.2. Change of Address. The Borrower and the Bank may each change the
address for service of notice upon it by a notice in writing to the other party
hereto.
ARTICLE XIII
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one agreement, and either party hereto may
execute this Agreement by signing any such counterpart. This Agreement shall be
effective when it has been executed by the Borrower and the Bank and the
Borrower has notified the Bank by facsimile transmission or telephone that it
has taken such action.
ARTICLE XIV
CHOICE OF LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL
14.1. CHOICE OF LAW. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (BUT OTHERWISE WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS) OF THE STATE OF INDIANA, BUT GIVING EFFECT TO FEDERAL LAWS
APPLICABLE TO NATIONAL BANKS.
14.2. CONSENT TO JURISDICTION. THE BORROWER IRREVOCABLY SUBMITS TO THE
NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR INDIANA STATE COURT
SITTING IN INDIANAPOLIS, INDIANA, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO ANY LOAN DOCUMENTS AND THE BORROWER IRREVOCABLY AGREES THAT ALL
CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN
ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE
AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT
OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE
RIGHT OF THE BANK TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY
OTHER JURISDICTION. ANY JUDICIAL PROCEEDING BY THE BORROWER AGAINST THE BANK OR
ANY AFFILIATE OF THE BANK INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY
WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT SHALL BE
BROUGHT ONLY IN A COURT IN INDIANAPOLIS, INDIANA.
14.3. WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK WAIVE TRIAL BY
JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER
(WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF,
RELATED TO, OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED
THEREUNDER.
[The balance of this page is
intentionally left blank.]
IN WITNESS WHEREOF, the Borrower and the Bank have executed this
Agreement as of the date first above written.
HURCO COMPANIES, INC.
By: /s/ Roger J. Wolf
Roger J. Wolf
Title: Senior Vice President and CFO
One Technology Way
Indianapolis, Indiana 46268
Attention: CFO
Telephone: (317) 293-5309
FAX: (317) 328-2811
BANK ONE, NA,
with its principal office in Chicago, Illinois
By: /s/ Brian D. Smith
Brian D. Smith
Title: First Vice President
Attention: Brian D. Smith
Telephone: (317) 321-7089
FAX: (317) 321-6771
Hurco Europe Limited
c/o Hurco Companies, Inc.
One Technology Way
Indianapolis
Indiana 46268-0180
USA
For the attention of: Mr Roger J. Wolf
January 15, 2004
Dear Sir
(pound)700,000 Revolving Credit Facility and (pound)300,000 Overdraft Facility
We, Bank One, NA (the "Bank", which expression includes our successors, assigns
and permitted transferees), are pleased to offer Hurco Europe Limited (the
"Borrower"), on the terms and conditions set out in this agreement:
(a) a revolving credit facility (the "Revolving Credit Facility") of up to
(pound)700,000; and
(b) an overdraft facility (the "Overdraft Facility") of up to (pound)300,000,
(together, the "Facilities") to be used for the Borrower's general working
capital and corporate requirements.
1 Definitions
In this agreement, unless the context otherwise requires:
"Additional Cost" means, in relation to any period for which a
calculation of LIBOR is to be made, a percentage calculated for such
period at an annual rate conclusively determined by the Bank to be the
cost to the Bank of complying with the Bank of England's reserve asset
special deposit and mandatory liquid assets requirements from time to
time;
"Advance" means each borrowing by way of an advance under the Revolving
Credit Facility or (as the context requires) the principal amount of that
borrowing outstanding at any relevant time;
"Affiliate" means in relation to a company (i) any company or body
corporate which is for the time being a holding company or a subsidiary
of that company or a subsidiary of any such holding company ("holding
company" and "subsidiary" having the meanings respectively given thereto
by Section 736 of the Companies Act 1985) and (ii) any person or group of
persons which, or which together, control (within the meaning of Section
840 of the Income and Corporation Taxes Act 1988) that company;
"Banking Day" means a day when dealings in Sterling are carried on in the
London interbank market and banks are open for business in London;
"Base Rate" means the Bank's base rate for Sterling as varied from time
to time;
"Borrowing Base" means, at any time, an amount equal to the aggregate of:
(a) 80 per cent of the Eligible Trade Debts;
(b) 50 per cent of the Eligible Finished Goods Inventory; and
(c) 40 per cent of the Eligible Unfinished Goods Inventory;
"Borrowing Base Certificate" means a certificate substantially in the
form of Appendix 1 or as commonly in use by the Bank or its affiliates;
"Collateral" means the Charged Assets as such term is defined in the
Debenture;
"Credit Documents" means the US Credit Agreement, the US Security
Documents, the Parent Guarantee and any other agreement, instrument or
documents designated as such by the Bank;
"Debenture" means the debenture dated on or about the date of this
agreement in form and substance satisfactory to the Bank in favour of the
Bank granting, inter alia, fixed charges over the Borrower's book debts,
inventory and plant, machinery and equipment and a floating charge over
all of the Borrower's undertaking, properties and assets to secure all
the Borrower's obligations, liabilities and indebtedness from time to
time hereunder;
"Default" means any Event of Default or any event or circumstance which
would upon the giving of a notice by the Bank and/or expiry of the
relevant period and/or fulfilment of any other condition (in each case as
specified in clause 14), constitute an Event of Default;
"Eligible Finished Goods Inventory" means the finished goods inventory of
the Borrower located in the United Kingdom in each case valued at the
book value given in the Borrower's latest monthly inventory listings
provided in each case that the Bank has not determined that such
inventory or goods are not acceptable for any reason having regard to its
age, type, category and/or quality;
"Eligible Unfinished Goods Inventory" means the raw material inventory
and parts inventory of the Borrower located in the United Kingdom,
excluding work in progress, in each case valued at the book value given
in the Borrower's latest monthly inventory listings provided in each case
that the Bank has not determined that such inventory or goods are not
acceptable for any reason having regard to its age, type, category and/or
quantity;
"Eligible Trade Debt" means a book debt of the Borrower:
(a) in relation to which the relevant debtor is domiciled in
the United States of America or European Union; and
(b) which is legally and beneficially owned (with full title
guarantee) by the Borrower; and
(c) which is not subject to any restrictions on assignment or
charge so that it can be charged or otherwise secured to
the Bank in accordance with the Debenture; and
(d) which the relevant debtor is bound to pay, and does not
dispute that it is bound to pay, in full on the due date;
and
(e) which is not and is not asserted by the relevant debtor to
be:
(i) subject of any set-off, counterclaim or other equity; or
(ii) subject to any discount (not already accounted for in the
Borrower's books) or attempt to vary the terms of its
payment; or
(iii) the subject of any action or attempted action for its
recovery; or
(iv) a debt in connection with a contract which has been
breached; or
(v) a debt in connection with any goods or services which have
been rejected for any reason whatsoever;
and
(f) in relation to which the relevant debtor has not suffered
an event which if it had occurred in relation to the
Borrower would have been an Event of Default under
clauses 14.1.5 to 14.1.8 (inclusive); and
(g) which, if such debt is subject to credit insurance
arrangements, is otherwise acceptable to the Bank, in its
sole discretion; and
(h) which either:
(i) (in the case of debts required to be paid within 30 days
from the invoice date) has not remained unpaid for a
period exceeding 90 days past due; or
(ii) (in the case of debts not required to be paid within 30
days from the invoice date) has not remained unpaid for
a period exceeding 60 days past due;
and
(i) which is not owed by an Affiliate of the Borrower; and
(j) which is not an Excluded Debt;
"Encumbrance" means any mortgage, charge (whether fixed or floating),
pledge, lien, hypothecation, standard security, assignment by way of
security or other security interest of any kind;
"Event of Default" means any of the events of default set out in clause
14;
"Excluded Debt" " means book debts of the Borrower:
(a) owing by debtors in connection with non-arms length transactions
which are connected with any member of the Borrower; or
(b) relating to stage payments or progress payments; or
(c) relating to amounts which are not or are alleged not to be fixed
for liquidated amounts; or
(d) owing by a debtor in respect of which 40 per cent. or more of the
aggregate amount of book debts owed by that debtor to the Borrower
do not constitute Eligible Trade Debts;
"Guaranteed Amount" means, at any time, the aggregate amount of the
Bank's maximum potential liability under all Undertakings issued and
outstanding at that time;
"Indebtedness" means:
(a) all indebtedness in respect of borrowed money or for the deferred
purchase price of property or services (other than current trade
liabilities incurred in the ordinary course of business and
payable in accordance with customary practices);
(b) any other indebtedness which is evidenced by a note, bond,
debenture or similar instrument;
(c) all capitalised lease obligations;
(d) all obligations in respect of outstanding letters of credit,
acceptances and similar obligations;
(e) all liabilities secured by any security interest, lien or other
encumbrance on any property owned by the Borrower even though the
Borrower has not assumed or otherwise become liable for the
payment thereof;
(f) any net liabilities under interest rate cap agreements, interest
rate swap agreements, foreign currency exchange agreements and
other hedging agreements or arrangements; and
(g) all guaranties, endorsements and other contingent obligations
whether direct or indirect in respect of Indebtedness of others,
including any obligation to supply funds to or in any manner to
invest in, directly or indirectly, the debtor, to purchase
Indebtedness, or to assure the owner of Indebtedness against loss,
through an agreement to purchase goods, supplies, or services for
the purpose of enabling the debtor to make payment of the
Indebtedness held by such owner or otherwise;
"LIBOR" means, in relation to any Advance:
(a) the applicable Screen Rate; or
(b) (if no Screen Rate is available for the Term of that Advance) the
rate (rounded upwards to four decimal places) as supplied to the
Bank at its request quoted by the Reference Bank to leading
lenders in the London interbank market, as at 11 a.m. on the
first day of such period for the offering of deposits in
Sterling of that and for a period comparable to the Term for that
Advance;
"Margin" means the applicable rate of interest set out in the following
table:
------------------------------------------- ----------------------------------------
Total Funded Debt/EBITDA Ratio Margin (% per annum) in respect of the
Facilities
------------------------------------------- ----------------------------------------
------------------------------------------- ----------------------------------------
> 3.00:1 2.75%
------------------------------------------- ----------------------------------------
------------------------------------------- ----------------------------------------
> 2.50:1 and <= 3.00:1 2.00%
------------------------------------------- ----------------------------------------
------------------------------------------- ----------------------------------------
> 2.00:1 and <= 2.50:1 1.50%
------------------------------------------- ----------------------------------------
------------------------------------------- ----------------------------------------
<= 2.00:1 1.00%
------------------------------------------- ----------------------------------------
But so that:
(a) no adjustment to the Margin shall occur prior to 1 March 2004 and
prior to such date the Margin shall at all times be 2.00% per annum; and
(b) any adjustment to the Margin shall only be made on 1 March, 1
June, 1 September and 1 December in each year and, for such
purposes, the Total Funded Debt/EBITDA Ratio shall be determined
as of the last day of (and for the period of) each period of four
consecutive quarters ending on the preceding 31 October, 31
January, 30 April and 31 July respectively by reference to the
management accounts delivered to the Bank pursuant to Section 6.1
of the US Credit Agreement;
"Operating Account" means the account in the name of the Borrower opened
with the Bank, with account No. 7139268;
"Optional Currency" means any currency which is freely transferable,
freely convertible into Sterling and dealt in on the London interbank
market and for which the Bank provides overdraft facilities in the course
of its normal operations;
"Overdraft" means, at any relevant time, the debit balance of the
Operating Account;
"Parent" means Hurco Companies, Inc., an Indiana corporation whose
principal place of business is at One Technology Way,
Indianapolis, Indiana 46268-0180;
"Parent Guarantee" means the agreed form guarantee dated on or about the
date of this agreement entered into by the Parent in favour of the Bank;
"Permitted Disposal" means any sale, lease or other disposal of:
(a) obsolete assets on normal arm's length commercial terms where the
assets are no longer required for the purposes of the business of
the Borrower;
(b) assets where the disposal proceeds (net of Taxes and costs of
disposal) are used within six months of that disposal for the
purchase of an asset to replace the asset disposed;
(c) assets in exchange for assets of a substantially similar nature
and value in the ordinary course of business; and
(d) inventory in the ordinary course of business;
"Permitted Encumbrance" means an Encumbrance being any of the following:
(a) Encumbrances granted with the prior written consent of the Bank;
(b) liens and rights of set off arising by operation of law in the
normal course of business and any encumbrance arising by way of
retention of title of goods by the supplier of such goods where
such goods are supplied on credit and are acquired in the
Borrower's normal course of business;
(c) Encumbrances comprised in the Debenture;
(a) any other Encumbrance permitted to be entered into by a Subsidiary
(as such term is defined in the US Credit Agreement) under Section
6.15 of the US Credit Agreement (other than sub-paragraphs (vii),
(ix) and (x) thereof);
"Permitted Indebtedness" means:
(a) Indebtedness incurred under this agreement;
(b) unsecured debt incurred in the ordinary course of business;
(c) unsecured Indebtedness owing to the Parent or any Affiliate of the
Borrower;
(d) Indebtedness incurred under the UK Lease Liability (as such term
is defined in the US Credit Agreement); and
(e) Indebtedness (other than unsecured trade debt incurred in the
ordinary course of business) that is unsecured and fully
subordinated to the interests of the Bank on terms acceptable to
the Bank and only with the Bank's consent;
(f) any other Indebtedness permitted to be entered into by a
Subsidiary (as such term is defined in the US Credit Agreement)
under Section 6.11 of the US Credit Agreement;
"Qualifying Bank" means a person which (at the time the relevant interest
payment is made) is:
(a) beneficially entitled to the interest payable to it under this agreement;
and
(b) a UK Lender or a Treaty Lender;
"Reference Bank" means the principal London office of Bank One, NA;
"Screen Rate" means the British Bankers' Association Interest Settlement
Rate for the relevant period, displayed on the appropriate page of the
Telerate screen. If the agreed page is replaced or service ceases to be
available, the Bank may specify another page or service displaying the
appropriate rate after consultation with the Borrower;
"Spot Rate" means in respect of any date the Bank's spot rate of exchange
for the purchase of Dollars with Sterling at or about 11.00 a.m. on such
date;
"Sterling" and "(pound)" means the lawful currency for the time being of
the United Kingdom and in respect of all payments to be made under this
agreement in Sterling means immediately available, freely transferable
cleared funds;
"Taxes" includes all present and future taxes, levies, imposts, duties,
fees or charges of whatever nature together with interest thereon and
penalties in respect thereof and "Tax" and "Taxation" shall be construed
accordingly;
"Term" has the meaning given to that term in clause 4.1.2(c);
"Termination Date" means 31 January 2007;
"Total Funded Debt/EBITDA Ratio" has the meaning given to it in the US
Credit Agreement;
"Total Outstandings" means, at any relevant time, the aggregate of:
(a) all Advances;
(b) the Overdraft; and
(c) the Guaranteed Amount,
at such time;
"Transferee" has the meaning given to that term in clause 19.1;
"Treaty Lender" means a person which is resident (as such term is defined
in the appropriate double taxation treaty) in a country with which the
United Kingdom has a double taxation treaty giving the Borrower complete
exemption from the imposition of any withholding or deduction for or on
account of Taxes on interest (and which does not carry on business in
that jurisdiction through a permanent establishment with which the
Facilities in respect of which the interest is paid is effectively
connected) and which has (or will have prior to the first date on which
the relevant payment is to be made) delivered to the Bank for
transmission to the Borrower, all necessary forms, claims, certificates
and other documentation duly executed by such person necessary to
establish that such person is entitled to receive payments by the
Borrower under this agreement without any deduction for, or on account
of, Taxes imposed and provided that if written authority from the
relevant Tax authority is required to be obtained, prior to the making of
any payments of interest by the Borrower, to make such payment without
any such deduction, such authority has been received by the Borrower (and
remains valid and outstanding) prior to the first date on which the
Borrower is required to make any such payment to such person and the
Borrower undertakes to use all reasonable endeavours to request such
authority;
"UK GAAP" means generally accepted accounting principles and practices in
the United Kingdom;
"UK Lender" means a person which is:
(a) a company which is resident in the UK for tax purposes; or
(b) partnership each of whose members is a company so resident; or
(c) a company which is not resident in the UK for tax purposes, but
which carries on a trade in the UK through a branch or agency and
is subject to corporation tax on interest paid to it under this
agreement under section 11(1) of the Income and Corporation Taxes
Act 1988;
"Undertakings" means VAT Guarantees, standby letters of credit or
guarantees issued by the Bank on behalf of the Borrower in accordance
with clause 5 and "Undertaking" shall be construed accordingly;
"US Credit Agreement" means the Third Amended and Restated Credit
Agreement and Amendment to Reimbursement Agreement as of December 1,
2003, entered into between the Parent and the Bank (as the same may be
amended and/or restated from time to time);
"US Credit Documents" means the US Credit Agreement and the US Security
Documents;
"US Security Documents" means (collectively, as the same may be amended
and/or restated from time to time):
(a) a patents and licences security agreement entered into by the
Parent in favour of the Bank, dated October 24, 2002 and confirmed
on December 1, 2003;
(b) a pledge and security agreement entered into by the Parent in favour
of the Bank dated October 31, 2001 and
confirmed on December 1, 2003;
(c) the subsidiary guarantee by the Parent in favour of the Bank,
dated December 1, 2003; and
(d) any other documents evidencing any security interest or guarantee
or indemnity entered into by the Parent in favour of the Bank,
pursuant to the US Credit Agreement;
"VAT Guarantee" means each guarantee issued by the Bank in favour of H.M.
Customs and Excise in relation to the deferred payment of import duty in
accordance with clause 5.
2 Conditions
2.1 The Bank shall not be obliged to make the Facilities available under this
agreement unless it shall have received the following documents in form
and substance satisfactory to it:
2.1.1 a director's certificate in the form of Appendix 2, attaching the
following documents:
(a) a copy of the Certificate of Incorporation and Memorandum and
Articles of Association of the Borrower;
(b) a copy of the resolutions of the Board of Directors of the
Borrower approving the terms of this agreement and the Debenture
and authorising its appropriate officers to accept this
agreement and to enter into the Debenture and to give all
notices hereunder or thereunder on behalf of the Borrower; and
(c) specimen signatures, authenticated by the secretary or a
director of the Borrower of the persons authorised in the
resolutions referred to in (b) above;
2.1.2 the Debenture duly executed by the Borrower;
2.1.3 the Parent Guarantee duly executed by the Parent; and
2.1.4 a copy of the US Credit Agreement duly executed by the parties
thereto together with evidence that each of the other US Credit
Documents has become in all respects unconditional in accordance with
their respective terms;
2.1.5 a copy, certified as being true, complete and up-to-date by a
Director or the Secretary of the Parent or its solicitors, of:
(a) the Certificate of Incorporation and By-Laws of the Parent;
(b) resolutions of the Board of Directors of the Parent approving
the terms of the Parent Guarantee and authorising its
appropriate officers to enter into the Parent Guarantee; and
2.1.6 specimen signatures, authenticated by the secretary or a director of
the Parent of the persons authorised in the resolutions referred to
in 2.1.5(b) above.
2.2 In addition no utilisation of the Facilities may be made if, at the time
that utilisation is due to be made (i) the representations and warranties
set out in clause 12 (for which purpose clause 12.1.5 shall refer to the
latest audited financial statements of the Borrower delivered to the Bank
under clause 13.7) are untrue or misleading or incorrect in any respect
as if made with respect to the facts and circumstances existing at such
time or (ii) a Default has occurred and is continuing or would result
from the making of that utilisation.
3 The Facilities
3.1 The Bank, relying on each of the representations and warranties in
clause 12 agrees to make available to the Borrower the Facilities.
3.2 The Revolving Credit Facility may be utilised by the Borrower prior
to the Termination Date on the terms and conditions set out in this
agreement by:
3.2.1 the drawing of Advances in Sterling by the Borrower; or
3.2.2 the issue of Undertakings.
3.3 The Overdraft Facility may be utilised by the Borrower prior to the
Termination Date on the terms and conditions set out in this agreement by
debits to the Operating Account.
3.4 No utilisation of the Facilities shall be permitted if, as a result:
3.4.1 the Total Outstandings would exceed the lower of (A) the Borrowing Base
and (B)(pound)1,000,000 at that time; or
3.4.2 the Guaranteed Amount would exceed(pound)200,000; or
3.4.3 the aggregate of the Advances and the Guaranteed Amount would exceed
(pound)700,000; or
3.4.4 the amount of the Overdraft would exceed(pound)300,000.
4 Advances and the Overdraft
4.1 Advances
4.1.1 The Borrower may at any time prior to the Termination Date request
the Bank by notice in writing to make Advances to the Borrower on the
terms and conditions set out in this agreement.
4.1.2 Such notice shall specify:
(a) the amount of the proposed Advance (which shall be in a minimum
amount of(pound)50,000 or an integral multiple of pound)50,000);
(b) the proposed date of drawing (which shall be a Banking Day); and
(c) the period (the "Term") during which the Advance is to remain
outstanding (which shall be 30, 60, 90 or 180 days or such other
period as the Bank and the Borrower may agree expiring not later
than the Termination Date),
and shall be received by the Bank not later than 11.00.a.m. on the
proposed date of drawing.
4.1.3 Every such notice shall be irrevocable by the Borrower.
4.2 Overdraft
4.2.1 The Overdraft Facility may be used by the Borrower by debits to the
Operating Account.
4.2.2 The Overdraft is repayable by the Borrower on demand by the Bank
which may be made by the Bank in its sole discretion at any time.
4.2.3 The Bank shall deliver to the Borrower as soon as reasonably
practicable after the 24th day of each month an interest statement
itemising the daily interest accruing to the Operating Account on
each day during the period commencing on the 24th day of the previous
month and ending on the 23rd day of the current month.
5 Undertakings
5.1 The Borrower may make drawings under the Revolving Credit Facility by
requesting the Bank by notice in writing to issue standby letters of
credit and/or guarantees on its behalf in favour of such persons as the
Borrower may specify to the Bank and/or VAT Guarantees on its behalf in
favour of H.M. Customs and Excise.
5.2 Each request shall be received by the Bank no later than 10.00 a.m.
on the second Banking Day before the proposed date of issuance of the
relevant undertaking.
5.3 Each Undertaking shall be in Sterling or any other Optional Currency
agreed by the Bank and in a form and substance approved by the Bank. The
express expiry date of each Undertaking shall be satisfactory to the Bank
and no Undertaking shall have an express expiry date later than the
Termination Date. Without prejudice to the generality of the foregoing,
each VAT Guarantee shall provide for expiry of the Bank's liability on
receipt by H.M. Customs and Excise of seven days' notice of termination
in writing from the Bank.
5.4 The Bank's issuance of any Undertaking shall be deemed, for the purpose
of clause 3.4, to be a utilisation of the Revolving Credit Facility to
the extent of the Bank's maximum potential liability under that
Undertaking.
5.5 Each Undertaking issued by the Bank shall be a guarantee of payment only
and shall contain no obligations by the Bank other than to make payment
to the beneficiary/ies of the Undertaking on demand.
5.6 The Borrower shall indemnify the Bank against all losses, costs, damages
expenses and demands which the Bank may suffer, incur, sustain or receive
under or by reason of or in connection with the Undertakings and the
Borrower shall pay to the Bank forthwith all moneys whatsoever which may
from time to time be claimed or demanded from the Bank or which the Bank
shall pay under or in connection with the Undertakings. This indemnity
shall be a continuing indemnity and shall be in addition to any security
or other right the Bank may have against the Borrower and shall not be
wholly or partly discharged, varied or affected by any time or indulgence
granted to or by the Bank or any other party or by any variation of any
Undertakings or of this agreement or by anything done or omitted which
would but for this provision operate to exonerate the Borrower.
5.7 The Borrower irrevocably authorises the Bank to pay immediately any
amounts from time to time demanded or claimed or which the Bank may
become liable to pay under or by reason of the Undertakings without
reference to or further authority from the Borrower and notwithstanding
that the Borrower may dispute the validity of such claim or demand.
5.8 The Bank's maximum actual and/or potential liability or risk in respect
of an Undertaking shall not be treated as reduced for the purposes of
this agreement unless (and to the relevant extent):
5.8.1 the Bank has received a written confirmation from the beneficiary of
the relevant Undertaking of the amount of such reduction; or
5.8.2 such Undertaking has, under or in accordance with its terms, expired; or
5.8.3 a payment has been made under such an Undertaking.
5.9 Without prejudice to clause 14, upon the occurrence of an Event of
Default and while the same is continuing the Borrower shall use all
endeavours to procure the Bank's release from its liability thereunder by
the relevant beneficiary.
5.10 The Borrower agrees that a certificate signed by an officer of the Bank
to the effect that a sum has become due from the Bank in connection with
an Undertaking shall (in the absence of manifest error) be conclusive as
to the amount then due.
6 Borrowing Base Certificate
6.1 The Borrower shall monthly prepare and deliver to the Bank a Borrowing
Base Certificate signed by a director or a secretary of the Borrower
setting out:
6.1.1 the details of the Eligible Trade Debts and stating the aggregate of
those Eligible Trade Debts at the end of the preceding month;
6.1.2 the value of its Eligible Finished Goods Inventory at the end of the
preceding month; and
6.1.3 the value of its Eligible Unfinished Goods Inventory at the end of the
preceding month,
such certificate to be delivered to the Bank within 30 days of the end of
each calendar month.
6.2 The Borrower shall ensure that the aggregate of the Total
Outstandings at any time shall not exceed the Borrowing Base at that
time.
6.3 If by reason of the reduction in the Borrowing Base the foregoing is not
complied with, the Borrower shall within 5 Banking Days reduce the Total
Outstandings to ensure such compliance.
7 Repayment
7.1 Each Advance shall be repaid in full together with accrued interest and
all other moneys outstanding in connection with such Advance on the last
day of its Term.
7.2 Notwithstanding the foregoing, if a new Advance is to be made on a day on
which an outstanding Advance is due to be repaid then, unless the
Borrower and the Bank otherwise agree, the Bank shall apply the proceeds
of the new Advance in meeting the Borrower's obligation to repay the
maturing Advance.
7.3 All outstanding Advances (if any) together with accrued interest and all
other moneys outstanding in connection with such Advances shall be repaid
or paid in full on the Termination Date.
8 Interest and Guarantee Fees
8.1 Interest on Advances
Interest shall be paid by the Borrower on each Advance at the rate per
annum equal to the aggregate of (i) the applicable Margin; (ii) LIBOR;
and (iii) the Additional Cost and shall be debited to the Operating
Account on the last day of its Term.
8.2 Interest on the Overdraft
The Borrower shall pay interest on the Overdraft monthly in arrears on
the 24th day of each month at the rate per annum determined by the Bank
to be the aggregate of (i) the applicable Margin and (ii) the Base Rate.
The accrued interest on the Overdraft shall be debited to the Operating
Account monthly.
8.3 Guarantee fee
A guarantee fee shall be payable by the Borrower on the Guaranteed Amount
from time to time at the annual rate per annum of the applicable Margin.
Such fee shall be payable quarterly in arrears and the first payment to
be made three months from the date of the first Undertaking and quarterly
thereafter.
8.4 Default interest
Interest shall be paid on any overdue amount under this agreement (both
before and after judgment) or on the occurrence of any other Default by
the Borrower or the Parent under this agreement or the Parent Guarantee
at the annual rate determined by the Bank to be the aggregate of (i) 2
per cent. per annum, (ii) LIBOR (in the case of the Advances) or the Base
Rate (in the case of the Overdraft); (iii) the applicable Margin; and
(iv) the Additional Cost (in the case of the Advances). Such rate shall
be determined daily or two Banking Days before any period selected by the
Bank. As long as the amount continues to be overdue such rate shall be
recalculated on the same basis at the end of each period selected by the
Bank and such interest shall be compounded at the end of each such
period.
9 Expenses
The Borrower shall pay to the Bank (whether or not any of the Facilities
is utilised) on demand an amount equal to all fees, costs, charges and
expenses (including, but not limited to, reasonable legal expenses,
stamp, registration or other duties) incurred by the Bank in connection
with the preparation and execution of this agreement, the Debenture, the
Parent Guarantee and the documentation contemplated hereby and all costs,
charges and expenses (including, but not limited to, reasonable legal
expenses on a full indemnity basis) of the Bank in connection with the
enforcement or preservation of any of its rights under this agreement,
the Debenture and the Parent Guarantee or otherwise in connection with
the Facilities. The Borrower shall also pay an amount equal to any value
added tax payable by the Bank in respect of such costs, charges and
expenses.
10 Payments and Indemnity
10.1 All sums payable in connection with the Facilities shall be paid to the
Bank on the due date no later than 12 noon in Sterling in same day funds
to such account as the Bank shall have notified to the Borrower by not
less than 3 Banking Days' notice free and clear of any present or future
taxes duties charges fees or withholdings and without any set-off or
counterclaim or any condition or deduction whatsoever.
10.2 If the Borrower repays or prepays all or any part of the outstanding
Advances before the expiry of the relevant Term (whether following the
occurrence of an Event of Default or otherwise), the Borrower will
indemnify the Bank against all loss or expense (including, but not
limited to, reasonable legal expenses on a full indemnity basis) and all
loss of profit the Bank may incur or sustain (including but not limited
to all costs and losses resulting from the relevant payment not being
made on the last day of the relevant Term). The Bank's certificate as to
the amount of such loss or expense and interest shall be conclusive and
binding on the Borrower save for manifest error.
10.3 Interest and any other payments under this agreement of an annual nature
shall be calculated on a day to day basis and on the basis of the actual
number of days elapsed and on the basis of: (i) a 365 day year (in the
case of Sterling) and (ii) a 360 day year (in the case of currencies
other than Sterling).
10.4 Any certificate or determination of the Bank as to any rate of interest,
rate of exchange or any amount payable hereunder shall be prima facie
evidence of the relevant rate or amount payable.
10.5 When any payment under this agreement would otherwise be due on a day
which is not a Banking Day, the due date for payment shall be postponed
to the next following Banking Day unless such Banking Day falls in the
next calendar month in which case payment shall be made on the
immediately preceding Banking Day.
11 Facility Fee
The Borrower shall pay to the Bank (i) on the date of this agreement and
(ii) on each anniversary of the date of this agreement until the
Termination Date, a fee in the amount of US $6,000.
12 Representations and warranties
The Borrower represents, warrants and undertakes to the Bank on (i) the
date of this agreement, (ii) each occasion on which the Borrower draws or
otherwise requests a utilisation under the Facilities and (iii) each
occasion an Advance is renewed for a further Term that:
12.1.1 the Borrower is duly incorporated and validly existing under the laws
of England and Wales and has power to execute, deliver and perform
its obligations under this agreement and the Debenture; all necessary
action has been taken by it to authorise the execution, delivery and
performance of this agreement and the Debenture, no limitation on its
powers will be exceeded as a result of transactions under this
agreement or the Debenture and this agreement and (subject to
applicable insolvency laws and general principles of equity) the
Debenture, when executed, will constitute valid and legally binding
obligations of the Borrower enforceable in accordance with their
respective terms;
12.1.2 the execution, delivery and performance of this agreement and the
Debenture by the Borrower will not contravene any existing law,
regulation or authorisation to which it is subject, result in any
material breach of or default under any agreement or other instrument
to which the Borrower is a party or is subject or contravene any
provision of the Borrower's Memorandum or Articles of Association;
12.1.3 every authorisation of, or registration with, governmental or public
bodies or courts required by the Borrower in connection with the
execution, delivery, performance, validity, enforceability or
admissibility in evidence of this agreement and the Debenture has
been obtained or made and is in full force and effect and there has
been no default in the observance of any conditions imposed in
connection therewith;
12.1.4 (save as disclosed to the Bank in writing prior to the date of this
agreement) no litigation, alternative dispute resolution,
arbitration, administrative proceeding or labour dispute is taking
place, pending or, to its knowledge, threatened against the Borrower
or any of its assets which, if adversely determined, could be
reasonably expected to result in a liability of the Borrower in
excess of (pound)50,000;
12.1.5 the audited financial statements of the Borrower provided to the Bank
pursuant to clause 13.7 (if any) have been prepared in accordance
with UK GAAP which have been consistently applied and give a true and
fair view of the financial position of the Borrower as at the date to
which they were prepared and the results of the operations of the
Borrower for the financial year ended on such date;
12.1.6 there has been no material adverse change in the financial position
of the Borrower from that set forth in its most recent financial
statements (if any) provided pursuant to clause 13.7;
12.1.7 no event or circumstance which constitutes or which with the giving
of notice or lapse of time or both would constitute an Event of
Default has occurred and is continuing; and
12.1.8 the Borrower has not sold, transferred, lent or otherwise disposed of
or ceased to exercise direct control over all or any part of its
present or future undertaking, assets, rights or resources or agreed
to do so (other than by way of a Permitted Disposal).
13 Covenants
It is a term of the Facilities that at all times during their continuance
and until repayment of all Advances and the Overdraft and the discharge
of all Undertakings and payment of all other moneys payable (whether
actually or contingently) hereunder that the Borrower will:
13.1 not, without the Bank's prior written consent, create or allow to exist
any Encumbrance (save for a Permitted Encumbrance) over any of its
present or future assets, rights or revenues to secure obligations of
itself or of any other person;
13.2 not, without the Bank's prior written consent, sell, transfer, lend,
lease or otherwise dispose of or cease to exercise direct control over
all or any part of its present or future undertaking, assets, rights or
revenues (other than by way of a Permitted Disposal) whether by one or a
series of transactions related or not other than by way of a Permitted
Disposal;
13.3 not permit any of the Borrower's liabilities to have the benefit of any
guarantee, indemnity, bond or comfort letter unless the party giving the
same similarly guarantees the outstanding Advances and all other moneys
payable hereunder;
13.4 not make any material change in the nature of the Borrower's
business, as carried on at the date of this agreement;
13.5 obtain, maintain in full force and effect and comply in all material
respects with any conditions imposed in connection with, every
authorisation of governmental or public bodies or courts and do, or cause
to be done, all other acts and things, which may from time to time be
necessary under applicable law for the continued due performance of its
obligations under this agreement;
13.6 inform the Bank of any Event of Default or any event which with the
giving of notice or lapse of time or both would constitute an Event of
Default forthwith upon becoming aware thereof;
13.7 send to the Bank:
13.7.1 within 110 days of each fiscal year end, a copy of the Borrower's annual
audited financial statements;
13.7.2 within 30 days of the end of each calendar month, monthly management
accounts with such other information, certificates and forecasts as
the Bank may from time to time reasonably require;
13.7.3 within 30 days of the end of each calendar month, a statement of aged
accounts receivable; and
13.7.4 all other financial and other information concerning the Borrower and
its business affairs as the Bank may from time to time reasonably
require upon reasonable notice;
13.8 not, without the prior written consent of the Bank, incur or permit to
exist on its behalf any obligations in respect of Indebtedness to any
person other than Permitted Indebtedness;
13.9 not acquire or merge with any company;
13.10 file or cause to be filed all tax returns required to be filed in all
jurisdictions in which it is situated or carries on business or is
otherwise subject to taxation and pay all taxes shown to be due and
payable on such returns or any assessments made against it prior to
penalties being incurred unless the liability to pay such taxes is the
subject of a bona fide dispute and it is maintaining adequate reserves in
respect of such liability;
13.11 obtain or cause to be obtained, maintain in full force and effect and
comply in all material respects with the conditions and restrictions (if
any) imposed in, or in connection with, every authorisation material to
the carrying on of its business;
13.12 ensure that its obligations under this agreement and the Debenture shall
at all times rank at least pari passu with all its other present and
future unsecured and unsubordinated Indebtedness with the exception of
any obligations which are mandatorily preferred by law and not by
contract;
13.13 ensure that the levels of contribution to the pension schemes for the
time being operated by it are and continue to be sufficient to comply
with applicable law;
13.14 maintain and keep up to date adequate insurance over all its present and
future assets, including its employees, in form and substance
satisfactory to the Bank;
13.15 not change the nature of its business as conducted on the date of this
agreement; and
13.16 ensure that, by no later than the date falling 6 months after the date of
this agreement, all primary clearing, depository and other banking
facilities required by the Borrower are maintained with the Bank.
14 Events of Default
Without prejudice to the on demand nature of the Overdraft and without
prejudice to the Bank's other rights, the Bank may terminate the Bank's
obligation to make the Facilities available and demand immediate
repayment of all outstanding Advances together with all accrued interest
thereon and payment of cash cover equal to the Guaranteed Amount and of
all other moneys payable to the Bank under this agreement or otherwise at
any time after any of the following events shall have occurred:
14.1.1 the Borrower fails to pay any sum payable by it under this agreement
in the currency, at the time and in the manner specified in this
agreement (or within 3 Banking Days thereafter where the failure to
pay is due solely to an administrative or systems error arising in
the transmission of funds); or
14.1.2 the Borrower defaults in the due performance or observance of any
other of its obligations under this agreement or the Parent default
in the due performance or observance of any of its obligations under
the Parent Guarantee and (if such default is in the opinion of the
Bank capable of remedy) such default shall not have been remedied
within 10 days of the Bank notifying the Borrower or the Parent, as
the case may be of such default; or
14.1.3 any representation or warranty made or deemed to be made or repeated
by the Borrower in or pursuant to this agreement or by the Parent in
or pursuant to the Parent Guarantee is or proves to have been
incorrect in any material respect; or
14.1.4 any obligation (including a contingent obligation) of the Borrower in
respect of Indebtedness is not paid when due or becomes due or
capable of being declared due prior to its stated maturity by reason
of default; or
14.1.5 any judgment or order of a court of competent jurisdiction made
against the Borrower which, if taken together with the amount of all
other outstanding judgments or orders against the Borrower at such
time, is in the aggregate sum of the Sterling Equivalent of $100,000,
is not stayed or complied with within 7 days or an encumbrancer takes
possession of the whole or any part of the assets, rights or revenues
of the Borrower, or
14.1.6 a distress or other legal process is levied or enforced upon any of
the assets, rights or revenues of the Borrower and is not discharged
within 7 days; or
14.1.7 the Borrower stops or suspends payment of its debts or is, or is
deemed to be, unable to, or admits inability to, pay its debts as
they fall due or commences negotiations with one or more of its
creditors with a view to the general rescheduling of all or any of
its debts or proposes or enters into any composition or other
arrangement for the benefit of its creditors generally or any class
thereof; or
14.1.8 the Borrower is adjudicated or found bankrupt or insolvent or any
step is taken or proceedings are commenced for the winding-up,
administration or dissolution of the Borrower or for the appointment
of a liquidator, administrator, receiver or similar officer in
respect of the Borrower or of the whole or any part of its assets,
rights or revenues (and, in the case of a petition for winding-up of
the Borrower, such petition is not discharged within 7 days from its
presentation); or
14.1.9 any event occurs or proceeding is taken with respect to the Borrower
in any jurisdiction to which it is subject which has an effect
equivalent or similar to any of the events mentioned in clauses
14.1.5, 14.1.7 or 14.1.8; or
14.1.10 it becomes unlawful for the Borrower to perform all or any of its
obligations under this agreement or the Debenture or for the Parent
to perform any of its obligations under the Parent Guarantee; or
14.1.11 the Borrower ceases to be a subsidiary of the Parent; or
14.1.12 the Debenture ceases for any reason to be the valid and legally
binding obligations of the Borrower; or
14.1.13 the Parent Guarantee ceases for any reason to be the valid and
legally binding obligations of the Parent; or
14.1.14 any of the Credit Documents ceases for any reason to be the
valid and legally binding obligation of the
Borrower or the Parent; or
14.1.15 a Default (as such term is defined in any Credit Document) occurs
under any of the Credit Documents or, if any Credit Document has been
terminated, an event occurs which, but for such termination, would
have been such a Default; or
14.1.16 any of the events mentioned in clauses 14.1.1 and 14.1.4 to 14.1.9
occurs in relation to the Parent; or 14.1.17 any other event occurs
or circumstance arises which, in the reasonable opinion of the Bank,
is likely materially and adversely to affect the ability of the
Borrower or the Parent to perform all or any of their respective
obligations under or otherwise to comply with the terms of this
agreement or the Debenture (in the case of the Borrower) or the
Parent Guarantee (in the case of the Parent).
15 Set-off
The Bank may apply any credit balance to which the Borrower is entitled
on any of the Borrower's accounts with the Bank at any of the Bank's
branches in or towards satisfaction or any sum then due and payable by
the Borrower hereunder. For this purpose, the Bank is authorised to
purchase with the moneys standing to the credit of such account such
other currencies as may be necessary to effect such application.
16 Indemnity
16.1 The Borrower shall indemnify the Bank on demand against any loss or
expense which the Bank shall incur as a consequence of the occurrence of
any Event of Default.
16.2 No payment to the Bank under this agreement pursuant to any judgment or
order of any court or otherwise shall operate to discharge the obligation
of the Borrower in respect of which it was made unless and until payment
in full shall have been received in the currency in which it is payable
and to the extent that the amount of any such payment shall on actual
conversion into the currency in which it is payable fall short of the
amount of the obligation expressed in the currency in which it is payable
the Bank shall have a further and separate cause of action against the
Borrower for the recovery of such sum as shall after conversion into the
currency in which it is payable be equal to the amount of the shortfall.
17 Illegality and increased costs
17.1 If at any time it is unlawful or contrary to any regulation for the Bank
to make, fund or allow to remain outstanding any Advances or Undertakings
under this agreement then the Bank's obligation to make the Facilities
available shall cease and, if the Bank so requires, the Borrower shall
forthwith repay all amounts outstanding under this agreement together
with accrued interest thereon and all other moneys owing hereunder and
pay to the Bank an amount equal to the face amount of each Undertaking.
17.2 If the result of (i) any change in, or in the interpretation or
application of any law or regulation or (ii) the introduction of any law
or regulation (in each case which occurs after the date of this
agreement) is to:
17.2.1 subject the Bank to Taxes or change the basis of Taxation with
respect to any payment under this agreement (other than Taxes or
Taxation on the overall net income, profits or gains of the Bank
imposed in the jurisdiction in which its principal or lending office
under this agreement is located); and/or
17.2.2 increase the cost to, or impose an additional cost on, the Bank in
making the Facilities available or maintaining or funding any
Advances or the Overdraft or providing any Undertaking; and/or
17.2.3 reduce the amount payable or the effective return to the Bank under
this agreement; and/or
17.2.4 reduce the Bank's rate of return on its capital by reason of a change
in the manner in which it is required to allocate capital resources
to its obligations under this agreement; and/or
17.2.5 require the Bank to make a payment or forgo a return on or calculated
by reference to any amount received or receivable by it under this
agreement,
then and in each such case (unless the increased cost or reduction in
return would not have arisen but for any assignment by the Bank to a
Transferee under clause 19.1 or the movement by the Bank of its
facility office):
(i) the Bank shall notify the Borrower in writing of such event
promptly upon its becoming aware of the same; and
(ii) the Borrower shall on demand, made at any time whether or not
the amounts outstanding under this agreement have been repaid,
pay to the Bank the amount which the Bank specifies (in a
certificate setting forth the basis of the computation of such
amount but not including any matters which the Bank regards as
confidential in relation to its funding arrangements) is
required to compensate the Bank for such increased cost,
reduction, payment or foregone return.
17.3 In the event that the Borrower is obliged to repay any amounts
outstanding under this agreement under clause 17.2, the Borrower may
within sixty days from the date of the demand referred to in clause
17.2.5(ii) prepay the Facilities in full, together with all other amounts
then payable under this agreement.
18 Taxes
18.1 If at any time the Borrower is required to make any deduction or
withholding in respect of Taxes from any payment due under this agreement
for the account of the Bank, the sum due from the Borrower in respect of
such payment shall be increased to the extent necessary to ensure that,
after the making of such deduction or withholding, the Bank receives on
the due date for such payment (and retains, free from any liability in
respect of such deduction or withholding) a net sum equal to the sum
which it would have received had no such deduction or withholding been
required to be made. The Borrower shall promptly upon request deliver to
the Bank any receipts, certificates or other proof evidencing the amounts
(if any) paid or payable in respect of any such deduction or withholding.
18.2 If following any such deduction or withholding as is referred to in
clause 18.1 the Bank shall receive or be granted a credit against or
remission for any Taxes payable by it, the Bank shall, subject to the
Borrower having made any increased payment in accordance with clause 18.1
and to the extent that the Bank can do so without prejudicing the
retention of the amount of such credit or remission and without prejudice
to the right of the Bank to obtain any other relief or allowance which
may be available to it, reimburse the Borrower with such amount as the
Bank shall in its absolute discretion certify to be the proportion of
such credit or remission as will leave the Bank (after such
reimbursement) in no worse position than it would have been in had there
been no such deduction or withholding from the payment by the Borrower as
aforesaid. Such reimbursement shall be made forthwith upon the Bank
certifying that the amount of such credit or remission has been received
by it. Nothing contained in this agreement shall oblige the Bank to
rearrange its tax affairs or to disclose any information regarding its
tax affairs and computations. Without prejudice to the generality of the
foregoing, the Borrower shall not by virtue of this clause 18.2, be
entitled to enquire about the Bank's tax affairs.
18.3 The Bank hereby confirms to the Borrower that, on the date of this
agreement, it is a Qualifying Bank.
18.4 The Bank shall, upon becoming aware in the context of this agreement that
it has ceased to be a Qualifying Bank, promptly notify the Borrower.
19 Assignment
19.1 This agreement shall be binding upon, and enure for the benefit of, the
Bank and the Borrower and their respective successors. The Borrower may
not assign or transfer any of its rights or obligations under this
agreement. The Bank may, without the consent of the Borrower, assign or
transfer all or any part of its rights or transfer all or any part of its
obligations under this agreement to any one or more purchasers whether or
not they are related to the Bank (a "Transferee") unless such Transferee
is not a Qualifying Bank in which event the Borrower's prior written
consent to such assignment or transfer shall be required. If the Bank
transfers all or any part of its rights or transfers all or any part of
its obligations as provided in this clause 19.1 all relevant references
in this agreement to the Bank shall thereafter be construed as a
reference to the Bank and/or its assignee(s) or transferee(s) (as the
case may be) to the extent of their respective interests and, in the case
of a transfer, the Borrower shall look solely to the Transferee for the
performance of the obligations so transferred to it.
19.2 The Bank may disclose to a potential assignee or transferee or to any
other person who is proposing to enter into contractual relations with
the Bank in relation to this agreement such information about the
Borrower as the Bank shall consider appropriate provided that any such
potential assignee or transferee or other person has first agreed to keep
that information confidential.
20 Notices
20.1 Every notice, request, demand or other communication under this agreement
shall:
20.1.1 be in writing delivered personally or by first-class prepaid letter or
telefax;
20.1.2 be deemed to have been received, subject as otherwise provided in
this agreement, in the case of a letter, when delivered and, in the
case of a telefax, when a complete and legible copy is received by
the addressee (unless the time of despatch of any telefax is after
close of business in which case it shall be deemed to have been
received at the opening of business on the next business day); and
20.1.3 be sent:
(a) to the Borrower at:
Hurco Europe Limited
Halifax Road
Cressex Business Park
High Wycombe
Buckinghamshire, Hp12 3SN
Telefax: +44 (0) 1494 443350
Attention: David Waghorn, Managing Director;
Ray Axon, Financial Controller and Company Secretary;
with a copy to:
Hurco Companies, Inc
One Technology Way
Indianapolis
IN 46268-0180
Telefax: 00 1 317 347 6201
Attention: Mr Roger J. Wolf, Senior Vice President &
Chief Financial Officer
(b) to the Bank at:
Bank One, NA
1 Triton Square
London NW1 3FN
Telefax: 020 7903 4889
Attention: Mark Herridge, Associate Director;
Paul Hogan, Associate;
with a copy to
Bank One, NA
111 Monument Circle
Indianapolis
IN 46277-0104
Telefax: 00 1 317 321 6771
Attention: Brian D Smith, First Vice President.
or to such other address or telefax number as is notified by the
relevant party to the other party to this agreement.
21 Law and jurisdiction
21.1 This agreement shall be governed by and construed in accordance with
English law.
21.2 The parties to this agreement agree for the benefit of the Bank that:
21.2.1 if any party has any claim against any other arising out of or in
connection with this agreement such claim shall be referred to the
High Court of Justice in England, to the jurisdiction of which each
of the parties irrevocably submits; and
21.2.2 nothing in this clause 21.2 shall limit the right of the Bank to
refer any such claim against the Borrower to any other court of
competent jurisdiction outside England, to the jurisdiction of which
the Borrower hereby irrevocably agrees to submit, nor shall the
taking of proceedings by the Bank before the courts in one or more
jurisdictions preclude the taking of proceedings in any other
jurisdiction whether concurrently or not.
21.3 No term of this agreement is enforceable under the Contracts
(Rights of Third Parties) Act 1999 by a person who is not party to this
agreement
We enclose a copy of this letter which we request the Borrower to sign and
return to us signifying the Borrower's acceptance of the Facilities and the
Borrower's agreement with all the above terms and conditions. If we do not
receive such signed copy by 5.30 p.m. on 31 January 2004 the offer of the
Facilities contained in this letter shall thereupon be deemed automatically to
be withdrawn.
Yours faithfully
/s/ Mark Herridge
............................................................
For and on behalf of
Bank One, NA
To: Bank One, NA
1 Triton Square
London NW1 3FN
January 15, 2004
Dear Sirs
(pound)700,000 Revolving Credit Facility and (pound)300,000 Overdraft Facility
We are pleased to confirm our acceptance of the Facilities which you have placed
at our disposal on the terms and conditions set out in your letter of 15 January
2004 of which the above is a copy.
/s/ Roger J. Wolf
............................................................
For and on behalf of
Hurco Europe Limited
Appendix 1
Form of Borrowing Base Certificate
To: the Bank
From: the Borrower
(pound)700,000 Revolving Credit Facility and
(pound)300,000 Overdraft Facility Agreement
dated [o]January 2004
(the "Agreement")
We hereby certify that as at [specify relevant month end] the amount of Eligible
Trade Debts, Eligible Finished Goods Inventory, Eligible Unfinished Goods
Inventory and the Borrowing Base were:
1 Eligible Trade Debts
(a) total Eligible Trade Debts (pound)[o]
(b) 80 per cent of total Eligible Trade Debts
2 Eligible Finished Goods Inventory
(a) total Eligible Finished Goods Inventory (pound)[o]
(b) 50 per cent of total Eligible Finished Goods Inventory
3 Eligible Unfinished Goods Inventory
(a) total Eligible Unfinished Goods Inventory (pound)[o]
(b) 40 per cent of total Eligible Unfinished Goods Inventory
4 Borrowing Base
Borrowing Base
(being the aggregate of:
(a) the amount set out in 1(b);
(b) the amount set out in 2(b); and
(c) the amount set out in 3(b)).
We confirm that:
1 no event or circumstance has occurred and is continuing which constitutes
an Event of Default;
2 the representations and warranties contained in clause 12 of the
Agreement are true and correct at the date of this certificate as if made
with respect to the facts and circumstances existing at the date of this
certificate.
Words and expressions defined in the Agreement shall have the same meaning where
used in the certificate.
........................................................
For and on behalf of
Hurco Europe Limited
Appendix 2
[DIRECTOR'S/SECRETARY'S] CERTIFICATE
I, Roger J. Wolf, being a Director of Hurco Europe Limited (the "Company"),
HEREBY CERTIFY on behalf of the Company and without personal liability as
follows:
1. Private company
The Company is a private limited company incorporated in England and Wales with
company number 0162880 and registered office at Halifax Road, Cressex Business
Park, High Wycombe, Buckinghamshire HP12 3SN.
2. Constitutional documents of the Company
The documents annexed to this certificate as annexure "A" constitute a true and
up to date copy of the certificate of incorporation, each certificate of
incorporation on change of name of the Company, the certificate of
re-registration as a public or private company and the memorandum and articles
of association of the Company containing all modifications thereto, and there
are no other constitutional documents of the Company.
3. Board resolutions of the Company
The documents annexed to this certificate as annexure "B" are true copies of the
minutes of a meeting of the board of directors of the Company duly convened and
held on [?] January 2004. The resolutions set out therein were duly passed and
have not been amended or revoked. No borrowing restrictions (or lack of power)
in relation to the giving of guarantees or security or otherwise of the Company
will be exceeded as a result of the Company entering into the [Documents] (as
defined in the minutes referred to above) (the "Documents"), borrowing moneys
thereunder or giving the guarantees or security thereunder or incurring or
performing the obligations expressed to be assumed by it thereunder.
4. Authorised signatories
Set out below are true signatures of those persons authorised by the
resolutions of the board of directors of the Company referred to in paragraph 3
above to sign the Documents and to execute all such undertakings, statements,
certificates, notices (including, without limitation, any Borrowing Base
Certificate), acknowledgements and other documents as may be required to be
done, signed and executed by or on behalf of the Company in connection with the
Documents and otherwise in relation to or ancillary to the same.
Roger J. Wolf, Director
David G. Waghorn, Director
Raymond Axon, Secretary
SIGNED [DATE]
..................................
Roger J. Wolf, Director
Exhibit 11
Statement Re: Computation of Per Share Earnings
Three Months Ended Twelve Months Ended
October 31, October 31,
------------------------------------------------------------------------------------------
2003 2002 2003 2002
------------------------------------------------------------------------------------------
(in thousands, except per share amount)
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
---------- ---------- ----------- ---------- ---------- ---------- ---------- ------------
Net loss $ 574 $ 574 $ (1,760) $(1,760) $ 462 $ 462 $ (8,263) $ (8,263)
Weighted average shares
outstanding 5,578 5,578 5,583 5,583 5,582 5,582 5,583 5,583
Assumed issuances under
stock options plans -- 34 -- -- -- -- -- --
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
5,578 5,612 5,583 5,583 5,582 5,582 5,583 5,583
Loss per common share $ 0.10 $ 0.10 $ (0.32) $ (0.32) $ 0.08 $ 0.08 $(1.48) $(1.48)
=========== ========= =========== ========== ======== ============ =========== ===========
Exhibit 21
SUBSIDIARIES OF HURCO COMPANIES, INC.
Jurisdiction
Name of Incorporation
Hurco B.V. the Netherlands
Hurco Europe Limited United Kingdom
Hurco GmbH Federal Republic of Germany
Hurco Manufacturing Ltd. Taiwan R.O.C.
Hurco S.a.r.l. France
Hurco S.r.l. Italy
Hurco (S.E. Asia) Pte Ltd. Singapore
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-48204) of Hurco Companies, Inc. of our report
dated December 9, 2003, relating to the financial statements and financial
statement schedule, which appears in this Form 10-K.
/s/PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 23, 2004
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED
I, Michael Doar, certify that:
1. I have reviewed this annual report on Form 10-K of Hurco
Companies, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made known
to us by others within those entities, particularly
during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end
of the period covered by this report based on such
evaluation; and
(c) Disclosed in this report any change in the
registrant's internal control over financial reporting
that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter
in the case of an annual report) that has materially
affected, or is reasonably likely to materially
affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
/s/ Michael Doar
Michael Doar,
Chairman of the Board & Chief Executive Officer
January 16, 2004
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED
I, Roger J. Wolf, certify that:
1. I have reviewed this annual report on Form 10-K of Hurco Companies,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Roger J. Wolf
Roger J. Wolf
Senior Vice President & Chief Financial Officer
January 16, 2004
exhibit 32.1
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hurco Companies, Inc. (the "Company") on
Form 10-K for the period ending October 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned
hereby certifies, pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Michael Doar
Michael Doar
Chairman of the Board & Chief Executive Officer
January 16, 2004
exhibit 32.2
CERTIFICATION PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hurco Companies, Inc. (the "Company") on
Form 10-K for the period ending October 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), the undersigned
hereby certifies, pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
/s/ Roger J. Wolf
- -----------------------------------------------------
Roger J. Wolf
Senior Vice President & Chief Financial Officer
January 16, 2004