UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the quarterly period ended June 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File No. 1-6720
A. T. CROSS COMPANY
(Exact name of registrant as specified in its charter)
Rhode Island 05-0126220
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Albion Road, Lincoln, Rhode Island 02865
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (401) 333-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of June 30, 1997:
Class A common stock - 14,690,134 shares
Class B common stock - 1,804,800 shares
PART I. FINANCIAL INFORMATION
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30 December 31
1997 1996 1996
ASSETS (Thousands of Dollars)
CURRENT ASSETS
Cash and Cash Equivalents $ 21,374 $ 18,537 $ 14,767
Short-Term Investments 27,674 31,988 27,289
Accounts Receivable 19,182 26,241 43,222
Inventories-Note B 23,130 30,723 19,011
Net Assets of Discontinued Operations 8,436 11,138 13,246
Other Current Assets 5,582 7,700 4,606
TOTAL CURRENT ASSETS 105,378 126,327 122,141
PROPERTY, PLANT AND EQUIPMENT 105,798 97,162 101,697
Less Allowances for Depreciation 65,512 59,075 61,994
40,286 38,087 39,703
INTANGIBLES AND OTHER ASSETS 12,339 12,252 12,278
$158,003 $176,666 $174,122
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable, Accrued Expenses and
Other Liabilities $ 16,671 $ 16,370 $ 21,256
Note Payable to Bank 2,300 7,100 6,000
Compensation and Related Taxes 3,484 5,482 2,392
Cash Dividends Payable 0 0 2,639
Contributions Payable to Employee
Benefit Plans 9,558 9,492 8,105
Income Taxes Payable 594 1,462 1,430
TOTAL CURRENT LIABILITIES 32,607 39,906 41,822
ACCRUED WARRANTY COSTS 5,659 5,359 5,509
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share:
Class A, Authorized 40,000,000 Shares;
Issued 15,288,042 Shares and Outstanding
14,690,134 Shares in June 1997, Issued
15,258,444 Shares and Outstanding
14,762,344 Shares in June 1996 and
Issued 15,282,412 Shares and Outstanding
14,686,049 Shares in December 1996 15,288 15,258 15,282
Class B, Authorized 4,000,000 Shares;
Issued and Outstanding 1,804,800 Shares 1,805 1,805 1,805
Additional Paid-In Capital 11,900 11,504 11,838
Retained Earnings 99,988 110,542 106,781
Accumulated Foreign Currency
Translation Adjustment (326) (95) (21)
128,655 139,014 135,685
Treasury Stock, at Cost (8,918) (7,613) (8,894)
TOTAL SHAREHOLDERS' EQUITY 119,737 131,401 126,791
$158,003 $176,666 $174,122
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
(Thousands of Dollars Except per Share Data)
Net Sales $31,124 $39,035 $64,812 $71,887
Cost of Goods Sold 17,136 20,350 34,365 36,653
Gross Profit 13,988 18,685 30,447 35,234
Selling, General and
Administrative Expenses 16,629 16,623 30,594 29,963
Research and Development Expenses 820 557 1,762 1,203
Service and Distribution Costs 942 928 1,794 1,839
Operating Income (Loss) (4,403) 577 (3,703) 2,229
Interest and Other Income 444 606 883 1,297
Income(Loss)from Continuing Operations
Before Income Taxes (3,959) 1,183 (2,820) 3,526
Income Taxes (Benefit) (1,386) 414 (987) 1,234
Income(Loss)from Continuing
Operations (2,573) 769 (1,833) 2,292
Income (Loss) from Discontinued
Operations (Net of Income Taxes) (2,387) 25 (2,321) 159
Net Income (Loss) $(4,960) $ 794 $(4,154) $ 2,451
Income (Loss) Per Share - Note C
Continuing Operations $ (0.16) $ 0.05 $ (0.11) $ 0.14
Discontinued Operations (0.14) 0.00 (0.14) 0.01
Net Income (Loss) Per Share $ (0.30) $ 0.05 $ (0.25) $ 0.15
Dividends Declared Per Share $0.16 $ 0.16 $0.16 $ 0.16
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30
1997 1996
(Thousands of Dollars)
Cash Provided By (Used In):
Operating Activities
Net Cash Provided by Continuing Operations $ 17,860 $ 17,700
Net Cash Provided by (Used In) Discontinued
Operations 2,489 (2,573)
Net Cash Provided By Operating Activities 20,349 15,127
Investing Activities:
Additions to Property, Plant and Equipment (4,081) (4,087)
Purchase of Short-Term Investments (1,505) (30,032)
Sale or Maturity of Short-Term Investments 1,120 19,470
Net Cash Used In Investing Activities (4,466) (14,649)
Financing Activities:
Cash Dividends Paid (5,278) (5,300)
Repayment of Bank Borrowings (6,000) (7,100)
Proceeds from Bank Borrowings 2,300 0
Other 45 199
Net Cash Used In Financing Activities (8,933) (12,201)
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (343) (298)
Increase/(Decrease) in Cash and Cash Equivalents 6,607 (12,021)
Cash and Cash Equivalents at Beginning of Period 14,767 30,558
Cash and Cash Equivalents at End of Period $ 21,374 $ 18,537
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 1997, are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. The Company typically records its highest sales and earnings in
the fourth quarter. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1996.
NOTE B - Inventories
The components of inventory at June 30, 1997, 1996 and December 31, 1996
were as follows:
June 30 June 30 December 31
1997 1996 1996
Finished goods $ 9,736 $ 12,398 $ 7,063
Work in process 6,086 8,767 5,449
Raw materials 7,308 9,558 6,499
$ 23,130 $ 30,723 $ 19,011
NOTE C - Net Income (Loss) Per Share
Net income (loss) per share has been determined based upon the weighted
average number of Class A and Class B common shares outstanding of
16,495,206 and 16,494,906 for the second quarter and six months ended June
30, 1997, respectively, and 16,561,264 and 16,558,579 for the second
quarter and six months ended June 30, 1996, respectively. Common stock
equivalents related to outstanding stock options have not been included in
the calculations of earnings per share in 1997 because the result is not
dilutive.
In March 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share",
which the Company will adopt in the fourth quarter of 1997. Had SFAS No.
128 been effective for the quarters and six month periods ended June 30,
1997 and 1996, reported earnings per share would have been unchanged.
NOTE D - COST REDUCTION PLAN
In July 1997, the Company's Board of Directors approved a plan designed to
reduce the cost of its independent sales force and operating costs at its
manufacturing facility in Lincoln, Rhode Island. The Plan primarily
involves reducing personnel costs by eliminating redundant or excess
positions in several of the Company's functional areas. Severance and
other charges associated with the Plan will approximate $520,000 after
income taxes($.03 per share)and will be reflected in the Company's
operating results in the 1997 third quarter.
NOTE E - DISCONTINUED OPERATIONS
In June 1997, the Company discontinued the distribution of quality leather
goods and accessory products and began to wind-down all operations of its
Manetti-Farrow subsidiary. Manetti-Farrow is the exclusive wholesale
distributor for the Fendi and Echo brands of leather products and fashion
accessories in the United States. The Company recorded an after-tax loss of
$2,387,000 in the second quarter of 1997 in connection with the disposition
of this subsidiary. The following table sets forth summary information
relating to Manetti-Farrow:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1997 1996 1997 1996
(Thousands of Dollars)
Net Sales $2,471 $2,490 $5,579 $5,690
Cost and expenses 2,543 2,452 5,550 5,445
Operating gain (loss) before taxes (72) 38 29 245
Income taxes related to operations (24) 13 11 86
Operating gain (loss) (48) 25 18 159
Loss on disposal before income taxes (3,600) 0 (3,600) 0
Income tax benefit related to loss
on disposal (1,261) 0 (1,261) 0
Loss on disposal (2,339) 0 (2,339) 0
Gain (loss) from discontinued
operations $(2,387) $ 25 $(2,321) $ 159
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Recent Developments
The contract between the Company's Manetti-Farrow subsidiary and Fendi
Diffusione whereby the Company distributes Fendi leather products in the
United States expires on December 31, 1997. In June 1997, the Company and
Fendi agreed that the distribution agreement would not be renewed and,
consequently, the Company decided to discontinue the distribution of
quality leather goods and accessory products and to wind-down operations of
its Manetti-Farrow subsidiary. The Company recorded an after tax loss of
$2.4 million in connection with the discontinuation of this business.
Management believes that the liquidation of Manetti-Farrow, in addition to
generating significant cash flow in the next six months due to the sale of
existing inventories, will help to sharpen its focus on both its core
writing instruments business and its new product lines.
In July 1996, the Company formed the Cross Pen Computing Group or "Cross
PCG". This new division was established to develop complementary product
opportunities peripheral to or outside the Company's core writing
instruments division. In conjunction with leading high technology
companies, Cross PCG is developing products that combine the functionality
and aesthetic qualities of its quality writing instruments with state of
the art technology. The division's initial product offerings were
introduced at the June 1997 Comdex show in Atlanta, Georgia, and the
Company expects to begin sales of these products in the 1997 third quarter.
In addition, in order to test the transferability of the Cross brand to
other high quality gift and self purchase products, the Company has
developed a line of Swiss-made Cross timepieces which it plans to introduce
on a limited basis in the third quarter.
The Company believes that, while the potential of these new product
initiatives is difficult to forecast at this early stage, sales of Cross
PCG products and Cross timepieces could reach 10% of writing instrument
revenue for the last six months of 1997. The Company also believes that
these products, particularly Cross PCG products, may have a material impact
on 1998 consolidated revenue and earnings, although there can be no
assurance of success for these products at this early stage.
In July 1997, the Company adopted a cost reduction plan designed to reduce
operating costs primarily by eliminating excess or redundant positions at
its manufacturing facility in Lincoln, Rhode Island, and by reducing the
size of its independent sales force. Severance and other charges
associated with this plan which will be recorded in the third quarter are
expected to approximate $800,000 ($520,000 after income taxes).
The above statements are forward looking statements subject to the
implications set forth below ("Forward Looking Statements").
Results of Operations Second Quarter 1997 Compared to Second Quarter 1996
Net sales for the second quarter ended June 30, 1997 decreased 20.3%
compared to the second quarter of 1996. International writing instrument
sales of $15.1 million decreased 20.8% as compared to the 1996 period,
while domestic writing instrument sales of $16.0 million were 19.8% lower
than the prior year period. The Company believes that the sales decrease,
both internationally and domestically, is attributable, to some extent, to
a worldwide decrease in demand for quality writing instruments. The
Company believes that many of its competitors are experiencing similar
sales decreases in many key markets.
The decrease in International sales was the result of a significant decline
in sales to Asia, the Far East, Europe and the Middle East/Africa,
partially offset by an improvement in sales to Canada. With respect to
Asia and the Far East, the 1997 results compared to the 1996 period were
affected by a flat market throughout most of the region in 1997, price-
driven promotions in 1996 that were not repeated this year and an inability
to repeat substantial, one time business gift sales in 1996. Actual sales
in Yen decreased somewhat from the prior year period due to a negative
consumer reaction to the tax increases that were implemented in Japan in
April. In addition, the dollar decrease in Japanese sales was exacerbated
by the further weakening of the Yen. The improvement in Canadian sales was
the result of a change in the method of distribution in this market, from a
distributor to direct sales to major Canadian retail customers. The 1997
increase also reflects the deterioration of Canadian sales in the second
quarter of 1996 due to the financial difficulties experienced by the
Company's distributor at that time. Sales to Europe and the Middle East
decreased from the second quarter of 1996 partially due to strong initial
product sales in 1996 of the restaged Century product, and to a weak
economy in 1997 in a number of countries in Europe and the Middle East,
most significantly Germany, and a soft retail environment in France and
Spain. The stronger US dollar against most major currencies this year also
negatively impacted sales.
The Company believes that the decline in domestic sales, primarily in the
Retail Division, was the result of continued low consumer awareness of the
Company's newer product lines. To help stimulate consumer interest, the
Company expects to increase expenditures for advertising and marketing
support in the last half of 1997 as well as in 1998, both Domestically and
Internationally.
The gross profit margin for the second quarter of 1997 was 44.9%, as
compared to 47.9% for the second quarter of 1996. The decline in margin
was attributable to changes in product mix and unfavorable foreign exchange
rates, in addition to a higher percentage of indirect product costs (i.e.,
factory overhead) in relation to sales resulting from the overall lower
sales and production levels this year. Selling, general and administrative
expenses for the second quarter of 1997, while flat with the 1996 period,
included a loss of $290,000 related to the sale of the Company's former
distribution facility in Lincoln, Rhode Island. In addition, lower
personnel and marketing costs in 1997 were partly offset by higher expenses
associated with selling directly to major retail customers in Canada
instead of through a distributor. Research and development expenses, which
exceeded the 1996 second quarter by $263,000, or 47.2%, included
expenditures associated with certain new writing instrument products and
the development of the Pen Computing Group line of products. See the
"Recent Developments" section above.
Interest and other income decreased 26.7% for the second quarter of 1997
primarily due to lower interest income. This decrease was due mostly to
lower average investable funds in the second quarter of 1997 offset by
slightly higher interest rates.
The effective income tax rate on the loss from continuing operations for
the second quarter of 1997 was 35.0%, unchanged from the second quarter of
1996.
The Company recorded an after-tax loss of $2.4 million in connection with
discontinuing its distribution of fine quality leather goods and accessory
products. See the "Recent Developments" section above.
Results of Operations Six Months Ended June 30, 1997 Compared to June 30,
1996
Net sales for the six months ended June 30, 1997 were $64.8 million, or
9.8% lower than the same period in 1996. Domestic sales of $30.7 million
were 13.4% lower, while foreign sales of $34.1 million were down 6.3% from
the same period in 1996. For the most part, the factors affecting sales
results for the second quarter had a similar effect on year-to-date sales.
Internationally, sales to Asia, the Far East and Europe declined from the
prior year period, but these declines were partially offset by increases in
Canada and Latin America. The stronger US dollar also contributed to the
decrease compared to last year, partially offset by a 1997 price increase.
Domestically, the decline in retail sales was offset slightly by an
increase in sales to business and institutional customers in the Company's
Special Markets Division.
Gross profit margins for the first six months of 1997 were 47.0%, as
compared to 49.0% for the same period in 1996. Similar to the second
quarter, unfavorable product mix and foreign exchange along with the higher
relative level of indirect factory costs together lowered overall product
margins compared to 1996. Selling, general and administrative expenses for
the six months ended June 30, 1997 were 2.1% higher than the same period
for 1996 and included the $290,000 loss on the sale of the Company's former
distribution facility discussed above. Research and Development expenses
were up from last year by 46.5%, while Service and Distribution costs were
substantially flat. As noted above, the increase in R&D was attributable to
expenditures associated with certain new writing instrument products and
the development of the Pen Computing Group line of products.
Interest and other income decreased by 31.9% for the first six months of
1997, primarily due to lower interest income as average investable funds
and interest rates were lower than last year's first half.
The effective tax rate on the loss from continuing operations for the six
months ended June 30, 1997 was 35.0%, unchanged compared to the same period
in 1996.
Liquidity and Sources of Capital
Cash, cash equivalents and short-term investments (i.e., "cash") increased
$7.0 million from December 31, 1996 to $49.0 million at June 30, 1997. Cash
available for domestic operations approximated $9.5 million while cash held
off-shore approximated $39.5 million at June 30, 1997. Accounts receivable
decreased since the end of 1996 by $24.0 million to $19.2 million as cash
was collected in January 1997 from customers who took advantage of the
Company's 1996 extended dating program that allowed domestic customers to
defer payments on certain 1996 purchases. This program was similar to
extended dating programs that have been offered in past years. The Company
has available a $50 million line of credit with Fleet National Bank which
provides an additional source of working capital on a short-term basis. At
June 30, 1997 there was $2.3 million outstanding under this line (which was
repaid in July). The Company also has available a $7 million multi-
currency credit arrangement with a bank to meet short-term foreign currency
needs. The Company believes that its current level of working capital,
along with the funds available from the Fleet line of credit and the
proceeds from the sale of its former distribution facility and the
liquidation of Manetti-Farrow, will be sufficient to meet the Company's
normal operating needs and to finance the development of its new Pen
Computing Group division for the foreseeable future.
While inventory of $23.1 million increased $4.1 million since December 31,
1996, compared to the end of June 1996 inventory levels have been reduced
by $7.6 million. This decrease from June 1996 was the result of inventory
reduction efforts undertaken in the second half of 1996. The increase in
the first six months of 1997 is the result of lower sales, and of the
production of certain products with longer lead times in anticipation of
higher demand in the last six months.
Citing the disappointing operating results for the first six months and
uncertainty about the remainder of 1997, the Company's Board of Directors
at their meeting on July 10, 1997, voted to reduce the quarterly dividend
from $.16 to $.08 per share.
Forward Looking Information
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. In addition, use of
words such as "believes," "anticipates," "expects" and similar expressions
are intended to identify forward-looking statements. The Company cautions
that a number of important factors could cause actual results for 1997 and
beyond to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company. Such statements contain a
number of risks and uncertainties, including, but not limited to, risks
associated with consumer acceptance of the Company's new product lines, the
successful development and performance of new technology in connection with
such new products, the Company's ability to streamline its manufacturing
and sales operations as planned in a timely manner with expected cost
savings, the impact of such streamlining on revenues from the Company's
existing and new products as well as on the successful launch of new
products, the Company's other strategic initiatives, and customer and
consumer support for such initiatives and changes. The Company cannot
assure that it will be able to anticipate or respond timely to changes
which could adversely affect its operating results in one or more fiscal
quarters. Results of operations in any past period should not be
considered indicative of results to be expected in future periods.
Fluctuations in operating results may result in fluctuations in the price
of the Company's common stock.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on April 24, 1997 at its corporate
headquarters in Lincoln, Rhode Island. The following are the matters
submitted to a vote of the shareholders:
a. Number of Directors
The proposition to fix the total number of directors at nine, of which
three shall be Class A directors and six shall be Class B directors.
Approved by the vote of 13,242,113 Class A shares in favor, 244,744
against, 21,510 abstaining, and by the vote of 1,804,800 Class B
shares in favor and none against.
b. Election of Directors
The following directors were elected by the Class A shareholders:
For Withheld
Terrence Murray 13,237,980 270,387
James C. Tappan 13,328,377 179,990
Thomas C. McDermott 13,333,377 174,990
The following directors were elected by the unanimous vote of
1,804,800 Class B shares:
Bradford R. Boss
Russell A. Boss
John E. Buckley
Bernard V. Buonanno, Jr.
H. Frederick Krimendahl II
Edwin G. Torrance
c. Appointment of Independent Auditors
A proposal to ratify the appointment of Deloitte & Touche LLP as
independent auditors for the Company for the year ending December 31,
1997 was approved by the unanimous vote of 1,804,800 Class B shares.
Item 6. Exhibits and Reports on Form 8-K
No reports have been filed on Form 8-K pursuant to item 6(b) and no other
items are applicable for six months ended June 30, 1997.
SIGNATURES
Pursuant to the requirement 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.
A. T. CROSS COMPANY
Date: August 13, 1997 By: JOHN E. BUCKLEY
John E. Buckley
Executive Vice President
Chief Operating Officer
Date: August 13, 1997 By: JOHN T. RUGGIERI
John T. Ruggieri
Senior Vice President
Chief Financial Officer
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This schedule contains summary financial information extracted from financial
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ended June 30, 1997 and is qualified in its entirety by reference to such
financial statements.
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