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
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
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 September 30, 1998:
Class A common stock - 14,743,994 shares
Class B common stock - 1,804,800 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30 December 31
1998 1997
(Unaudited)
ASSETS (Thousands of Dollars)
CURRENT ASSETS
Cash and Cash Equivalents $ 20,024 $ 25,801
Short-Term Investments 21,835 21,607
Accounts Receivable 25,155 37,571
Inventories:
Finished Goods 11,742 7,767
Work in Process 9,060 5,647
Raw Material 11,326 6,625
32,128 20,039
Other Current Assets 9,046 4,761
TOTAL CURRENT ASSETS 108,188 109,779
PROPERTY, PLANT AND EQUIPMENT 113,364 109,344
Less Allowances for Depreciation 75,338 69,588
38,026 39,756
INTANGIBLES AND OTHER ASSETS 9,314 8,484
TOTAL ASSETS $155,528 $158,019
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note Payable to Bank $ 5,000 $ 0
Accounts Payable, Accrued Expenses and
Other Liabilities 24,230 25,388
Accrued Compensation and Related Taxes 3,599 3,328
Cash Dividends Payable 0 1,320
Contributions Payable to Employee
Benefit Plans 9,830 9,228
TOTAL CURRENT LIABILITIES 42,659 39,264
ACCRUED WARRANTY COSTS 6,046 5,821
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share:
Class A, Authorized 40,000,000 Shares;
15,344,162 Shares Issued and 14,743,994
Shares Outstanding at September 30, 1998 and
15,294,652 Shares Issued and 14,696,272
Shares Outstanding at December 31, 1997 15,344 15,295
Class B, Authorized 4,000,000 Shares;
1,804,800 Shares Issued and Outstanding
at September 30, 1998 and December 31, 1997 1,805 1,805
Additional Paid-In Capital 12,433 11,959
Retained Earnings 86,776 93,503
Accumulated Other Comprehensive Loss (583) (703)
115,775 121,859
Treasury Stock, at Cost (8,952) (8,925)
TOTAL SHAREHOLDERS' EQUITY 106,823 112,934
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $155,528 $158,019
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
(Thousands of Dollars, Except per Share Data)
Net Sales $33,852 $36,626 $100,070 $101,438
Cost of Goods Sold 19,002 19,084 53,889 53,449
Gross Profit 14,850 17,542 46,181 47,989
Selling, General and
Administrative Expenses 20,072 17,397 50,896 47,991
Research and Development Expenses 1,146 555 3,372 2,317
Service and Distribution Costs 805 990 2,433 2,784
Operating Loss (7,173) (1,400) (10,520) (5,103)
Interest and Other Income 678 495 2,089 1,378
Loss from Continuing Operations
Before Income Taxes (6,495) (905) (8,431) (3,725)
Income Tax Benefit (2,078) (317) (2,698) (1,304)
Loss from Continuing Operations (4,417) (588) (5,733) (2,421)
Income(Loss) from Discontinued
Operations (Net of Income Taxes) 0 0 1,653 (2,321)
Net Loss $(4,417) $ (588) $ (4,080) $ (4,742)
Basic and Diluted Earnings
(Loss) Per Share:
Continuing Operations $ (0.27) $ (0.04) $ (0.35) $ (0.15)
Discontinued Operations 0.00 0.00 0.10 (0.14)
Net Loss Per Share $ (0.27) $ (0.04) $ (0.25) $ (0.29)
Weighted Average Shares Outstanding:
Denominator for Basic Earnings
Per Share 16,548 16,500 16,530 16,496
Effect of Dilutive Securities:
Employee Stock Options - (A) - (A) - (A) - (A)
Denominator for Diluted Earnings
Per Share 16,548 16,500 16,530 16,496
Dividends Declared Per Share $ 0.08 $ 0.08 $ 0.16 $ 0.24
(A) No incremental shares related to stock options are included due to the
loss from continuing operations.
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
1998 1997
(Thousands of Dollars)
Cash Provided By (Used In):
Operating Activities:
Net Cash Provided by (Used In) Continuing Operations $ (5,363) $ 16,093
Net Cash Provided by Discontinued Operations 2,288 5,489
Net Cash Provided By (Used In) Operating Activities (3,075) 21,582
Investing Activities:
Additions to Property, Plant and Equipment (4,113) (5,451)
Purchase of Short-Term Investments (14,694) (1,500)
Sale or Maturity of Short-Term Investments 14,466 8,006
Net Cash Provided By (Used In) Investing Activities (4,341) 1,055
Financing Activities:
Cash Dividends Paid (3,967) (6,598)
Proceeds from Bank Borrowings 7,000 2,300
Repayment of Bank Borrowings (2,000) (8,300)
Other 497 110
Net Cash Provided by (Used In)
Financing Activities 1,530 (12,488)
Effect of Exchange Rate Changes on
Cash and Cash Equivalents 109 (637)
Increase (Decrease) in Cash and Cash Equivalents (5,777) 9,512
Cash and Cash Equivalents at Beginning of Period 25,801 14,767
Cash and Cash Equivalents at End of Period $ 20,024 $ 24,279
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
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 nine months ended September 30, 1998, are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. 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, 1997.
NOTE B - Discontinued Operations
In June 1997, the Company discontinued the distribution of quality leather
goods and accessory products of its Manetti-Farrow, Inc. subsidiary. The
Company recorded an after tax loss $2,321,000, or $0.14 per share, in the six
month period ended June 30, 1997.
In the second quarter of 1998, the Company recorded after-tax income from
discontinued operations of $1,653,000, or $0.10 per share. The Company
reached a settlement with the U.S. Customs service regarding a claim filed on
the amount of duty charged in prior years on the importation of certain
products by its now discontinued Manetti-Farrow, Inc. subsidiary. After
taxes and after expenses the settlement was approximately $1,116,000. In
addition, the Company recorded after-tax income of approximately $537,000 in
connection with the final liquidation and disposition of Manetti-Farrow's
remaining net assets.
NOTE C - Comprehensive Income
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No.130, "Reporting Comprehensive Income" in the first quarter of 1998. SFAS
No.130 requires the reporting of comprehensive income which, in the case of
the Company, is the combination of reported net income and the change in the
cumulative translation adjustment which is a component of shareholders'
equity. SFAS No.130 has no impact on the Company's reported net income.
Comprehensive income for the third quarter and nine months ended September
30, 1998 and 1997 follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
Net Loss $(4,417) $(588) $(4,080) $(4,742)
Change in Cumulative
Translation Adjustment 194 (168) 120 (473)
Comprehensive Loss (4,223) $(756) $(3,960) $(5,215)
NOTE D - New Accounting Pronouncement
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This SFAS will become effective for the Company for the
year ending December 31, 2000. The Company is currently evaluating the
impact that implementing this SFAS will have in its financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Results of Operations Third Quarter 1998 Compared to Third Quarter 1997
Net sales for the third quarter ended September 30, 1998 decreased 7.6%
compared to the third quarter of 1997. Total writing instrument net sales
for the quarter of $26.3 million were down 26.7% from the prior year.
Domestic writing instrument net sales of $13.5 million were 36.0% lower than
the prior year while foreign writing instrument net sales of $12.8 million
declined 13.3% as compared to the third quarter of 1997. Sales by the Pen
Computing Group (PCG) during the third quarter of 1998 were $7.2 million
compared to sales of $644,000 in 1997, the first year in which PCG generated
revenue. Cross Timepiece revenues were $422,000 in the quarter as compared
to $128,000 for the same period last year.
Domestic writing instrument volume continued to be adversely affected by
changes in distribution channels. In addition, the Company was affected by
poor sell through during the Father's Day and graduation gift season which
left many retailers with higher than normal inventory levels. The Company
believes that consumer demand for quality writing instruments in the United
States has declined from prior year levels. In an effort to stimulate
domestic sales growth during the peak gift-giving holiday season, the Company
has launched a number of new writing instrument products in a variety of new
styles and finishes. In addition, the Company plans to repeat its extended
dating program that allows domestic customers to defer payments on certain
1998 purchases.
International sales continue to be adversely impacted by the economic crisis
affecting Asian markets. The Company remains committed to the region and has
established two new branch offices, one in Hong Kong and the other in Taiwan.
These new branches, along with our Japanese subsidiary, are intended to
position the Company to take advantage of an eventual recovery in this
region. Sales to this region were down 50.8% in the third quarter of 1998 as
compared to the same quarter of 1997. Somewhat offsetting this decline was
improved sales in Europe and Canada.
The Pen Computing Group launched CrossPad XP, as planned, in late September.
CrossPad XP, a 6" by 9" version of the full size CrossPad, features a
redesigned CrossWriter II digital pen and utilizes the latest upgraded
version of IBM's Ink Manager software. Sales of PCG products which, in
addition to CrossPad and CrossPad XP, primarily consist of iPenPro,
DigitalWriter and accessories, were $7.2 million in the third quarter and
represented approximately 34% of total domestic revenue for the period. PCG
products were available for sale only in the United States in approximately
3,000 locations during the third quarter.
Gross profit margins of 43.9% for the third quarter of 1998 were down 4.0
percentage points as compared to the third quarter of 1997. Writing
instrument gross margins were primarily affected by fixed manufacturing
expenses spread over substantially lower unit sales in the quarter. In
addition, PCG products and Timepieces generate, on average, lower margins
than writing instruments. Included in the third quarter's cost of sales are
royalty expenses related to PCG sales which are paid to suppliers of certain
software and hardware components for the iPen, CrossPad and CrossPad XP.
Selling, general and administrative expenses (SG&A) for the third quarter of
1998 were $20.1 million, or 15.4% higher than the same quarter of 1997.
Included in the current year's third quarter results were PCG and Timepiece
SG&A expenses of $4.2 million and $1.9 million, respectively, as compared to
$1.4 million for PCG and $900,000 for Timepieces in 1997's third quarter.
Writing instrument SG&A expenses for the quarter were 7.8% lower than the
third quarter of 1997, primarily a result of the Company's strict cost
control programs that are in effect. Research and development expenses (R&D)
for the current year's third quarter were $1.1 million as compared to
$555,000 for the same period of 1997. This increase was due entirely to the
increased R&D expenditures on new products under development by the pen
computing group. Service and distribution costs were lower than the prior
year and are in line with the reduced sales volume.
Interest and other income were higher in the third quarter of 1998 due to
higher interest income as average investable funds and earned interest rates
were somewhat higher than the same period of the prior year.
For a discussion of the Company's effective tax rate see "Results of
Operations Nine Months Ended September 30, 1998 Compared to September 30,
1997."
Considering the disappointing results of the third quarter and the
uncertainty of consumer demand for writing instruments in the fourth quarter,
the combined operating losses for both PCG and Timepieces are now expected to
exceed the projected profitable results of the quality writing instrument
business. As a result, the Company does not expect to be profitable on a
consolidated basis for the full year ended December 31, 1998.
Results of Operations Nine Months Ended September 30, 1998 Compared to
September 30, 1997
Net sales for the nine months ended September 30, 1998 were $100.1 million,
or 1.3% lower than the same nine month period in 1997. Total writing
instrument net sales of $83.5 million were 17.0% lower than last year.
Domestic writing instrument net sales of $42.3 million for the nine months
were down 18.1% versus the comparable period last year and foreign writing
instrument net sales of $41.2 million were down 15.8% from 1997. Sales of
PCG products were $15.8 million through September 1998 as compared to
September 1997 revenue of $761,000. Sales of Cross Timepieces in the test
markets were $754,000 through the September 1998 period versus sales of
$148,000 during the same period last year.
Domestic writing instrument net sales remained below last year's levels
reflecting the fall off of consumer demand for quality writing instruments.
Sales through the mass market, catalog showroom and carriage trade channels
declined sharply from the prior year. Sales to the high volume office supply
accounts were just slightly over the same period last year.
Internationally, year-to-date sales to the Company's Asian markets declined
from the prior year by 51.3% as a result of the economic and fiscal
conditions in these markets. The Company remains committed to the region and
has established two new branch offices, one in Hong Kong and the other in
Taiwan. These new branches, along with our Japanese subsidiary, are intended
to position the Company to take advantage of an eventual recovery in this
region. Partially offsetting the declines in Asia were sales increases in
Canada, Latin America, Europe and the Middle East/Africa.
Gross profit margins for the first nine months of 1998 were 46.1%, down 1.2
percentage points from the same period in 1997. Writing instrument margins
were slightly improved over the same period of the prior year, primarily due
to cost reduction programs. However, writing instrument gross margin
improvement was entirely offset by lower PCG and Timepiece margins as these
products, on average, generate lower margins than writing instruments.
Included in cost of sales are royalty expenses paid to certain suppliers of
components related to PCG sales.
Selling, general and administrative expenses for the nine months ended
September 30, 1998 were 6.1% higher than the same period for 1997. SG&A
expenses through September 1998 included $8.6 million and $2.7 million for
PCG and Timepieces, respectively, as compared to $1.7 million for PCG and
$1.1 million for Timepieces for the same period for 1997. SG&A for writing
instruments was 12.5% lower than 1997 as these expenses remain under tight
control. Research and development expenses of $3.4 million were up from last
year by 45.5%, entirely due to the pen computing group. Service and
distribution costs were also less than 1997 largely due to the lower writing
instrument sales levels.
Interest and other income increased 51.6% for the first nine months of 1998,
due in part to higher interest income.
The Company recorded an income tax benefit of 32.0% on the loss from
continuing operations for the nine months ended September 30, 1998, as
compared to the September 30, 1997 income tax benefit of 35.0%.
Considering the disappointing results of the third quarter and the
uncertainty of consumer demand for writing instruments in the fourth quarter,
the combined operating losses for both PCG and Timepieces are now expected to
exceed the projected profitable results of the quality writing instrument
business. As a result, the Company does not expect to be profitable on a
consolidated basis for the full year ended December 31, 1998.
Liquidity and Sources of Capital
Cash, cash equivalents and short-term investments (i.e., "cash") decreased
$5.5 million from December 31, 1997 to $41.9 million at September 30, 1998.
Accounts receivable decreased since the end of 1997 by $12.4 million to $25.2
million. The decrease in accounts receivable was primarily due to cash
collected in January 1998 from customers who took advantage of the Company's
1997 extended dating program that allowed domestic customers to defer
payments on certain 1997 purchases. This program, similar to extended dating
programs in past years, will be in effect for this year as well and typically
results in higher accounts receivable balances at year end than at any other
time during the year.
Inventory of $32.1 million increased $12.1 million since December 31, 1997.
The inventory increase in the first nine months of 1998 was largely due to
higher levels of pen computing and timepiece inventories. Writing instrument
inventory levels have also increased since December 31, 1997, primarily due
to lower than anticipated sales results through the first nine months.
The Company has a $50 million line of credit available with a bank which
provides an additional source of working capital on a short-term basis. At
September 30, 1998 there was $5.0 million outstanding under this line. The
Company believes that its current level of working capital, along with the
funds available from the line of credit, will be sufficient to meet the
Company's normal operating needs for the foreseeable future.
New Accounting Pronouncement
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This SFAS will become effective for the Company for the
year ending December 31, 2000. The Company is currently evaluating the
impact that implementing this SFAS will have in its financial statements.
Year 2000 Compliance
The Year 2000 issue refers to a condition where computer programs were
written so that when reading a date entered as a two digit year, i.e., "00",
they could not distinguish between the year 1900 and the year 2000. If not
corrected, this problem will lead to system failures or miscalculations,
possibly causing disruptions of business processes.
The Company started to address this problem back in early 1997 when it formed
a cross-functional team to manage the Company's compliance process. One of
the first tasks undertaken was to identify and inventory systems and hardware
that would need to be replaced or upgraded. Since then, the Company has been
modifying and upgrading significant portions of its software and hardware so
that it will function properly in the year 2000. As of the end of the third
quarter 1998, approximately 80% of the Company's total systems are believed
to be year 2000 compliant, with 92% of the Company's major business systems
at its key U.S. and Irish locations believed to be in compliance. The
Company is utilizing both internal and external resources to identify,
correct and test the systems for year 2000 compliance. It is anticipated
that, with a few minor exceptions, primarily that of purchased software, all
modifications necessary for year 2000 compliance will be completed by year
end December 31, 1998. Testing of these modified systems has been an ongoing
process as the non-compliant systems are replaced or upgraded. Substantial
testing of the affected systems will begin in the fourth quarter of 1998 and
will continue throughout all of 1999.
The cost of the Company's Year 2000 compliance program is currently estimated
to be approximately $1.1 million, with spending in 1998 of $500,000 and
$600,000 in 1999.
The Company has also been sending written correspondence to its primary
vendors and key customers to inquire about their plans to address year 2000
compliance. There can be no assurances, however, that the systems of the
Company's primary vendors and key customers will also be converted in a
timely manner or that any such failure to convert by another company would
not have an adverse material effect on the Company's systems. Contingency
plans are currently under review to ensure that certain key materials will be
available and it is expected that replacement suppliers could be located in a
reasonable time period should this prove necessary. For further information
refer to the footnotes to the financial statements included in the Company's
annual report on Form 10-K for the year ended December 31, 1997.
Forward Looking Statements
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 1998 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 and existing product lines, the
successful development and performance of new technology in connection with
such new products, the Company's dependence on certain suppliers, the
Company's sensitivity to technological change and economic conditions, the
Company's other strategic initiatives, and customer and consumer support for
such initiatives and changes. See the Company's Form 10-K for a more
detailed discussion of certain of these factors. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 5. Other Information
Stockholders who intend to submit proposals at the 1999 Annual Meeting of
Stockholders, currently scheduled to be held on April 22, 1999, without
including such proposals in the Proxy Statement for such meeting must notify
the Corporation of this intention no later than February 3, 1999.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period covered by this
report.
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: November 12, 1998 By: JOHN E. BUCKLEY
John E. Buckley
Executive Vice President
Chief Operating Officer
Date: November 12, 1998 By: JOHN T. RUGGIERI
John T. Ruggieri
Senior Vice President
Chief Financial Officer
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<LEGEND>
This schedule contains summary financial information extacted from financial
statements included in A.T. Cross Company form 10-Q for the quarterly period
ended September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
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