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 June 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 June 30, 1998:
Class A common stock - 14,721,394 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
June 30 December 31
1998 1997
(Unaudited)
ASSETS (Thousands of Dollars)
CURRENT ASSETS
Cash and Cash Equivalents $ 27,607 $ 25,801
Short-Term Investments 21,570 21,607
Accounts Receivable 20,977 37,571
Inventories:
Finished Goods 9,768 7,767
Work in Process 8,305 5,647
Raw Material 8,773 6,625
26,846 20,039
Other Current Assets 7,494 4,761
TOTAL CURRENT ASSETS 104,494 109,779
PROPERTY, PLANT AND EQUIPMENT 112,063 109,344
Less Allowances for Depreciation 73,376 69,588
38,687 39,756
INTANGIBLES AND OTHER ASSETS 9,312 8,484
$152,493 $158,019
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable, Accrued Expenses and
Other Liabilities $ 17,985 $ 25,388
Note Payable to Bank 3,000 0
Compensation and Related Taxes 3,366 3,328
Cash Dividends Payable 0 1,320
Contributions Payable to Employee
Benefit Plans 10,038 9,228
TOTAL CURRENT LIABILITIES 34,389 39,264
ACCRUED WARRANTY COSTS 5,971 5,821
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share:
Class A, Authorized 40,000,000 Shares;
15,321,562 Shares Issued and 14,721,394
Shares Outstanding at June 30, 1998 and
15,294,652 Shares Issued and 14,696,272
Shares Outstanding at December 31, 1997 15,322 15,295
Class B, Authorized 4,000,000 Shares;
1,804,800 Shares Issued and Outstanding
at June 30, 1998 and December 31, 1997 1,805 1,805
Additional Paid-In Capital 12,219 11,959
Retained Earnings 92,516 93,503
Accumulated Other Comprehensive Loss (777) (703)
121,085 121,859
Treasury Stock, at Cost (8,952) (8,925)
TOTAL SHAREHOLDERS' EQUITY 112,133 112,934
$152,493 $158,019
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
(Thousands of Dollars Except per Share Data)
Net Sales $34,693 $31,124 $66,218 $64,812
Cost of Goods Sold 17,757 17,136 34,887 34,365
Gross Profit 16,936 13,988 31,331 30,447
Selling, General and
Administrative Expenses 15,701 16,629 30,824 30,594
Research and Development Expenses 1,220 820 2,226 1,762
Service and Distribution Costs 856 942 1,628 1,794
Operating Loss (841) (4,403) (3,347) (3,703)
Interest and Other Income 856 444 1,411 883
Income(Loss)from Continuing
Operations Before Income Taxes 15 (3,959) (1,936) (2,820)
Income Taxes (Benefit) 4 (1,386) (620) (987)
Income(Loss)from Continuing
Operations 11 (2,573) (1,316) (1,833)
Income(Loss) from Discontinued
Operations (Net of Income Taxes) 1,653 (2,387) 1,653 (2,321)
Net Income(Loss) $ 1,664 $(4,960) $ 337 $(4,154)
Basic and Diluted Earnings
(Loss) Per Share:
Continuing Operations $ 0.00 $ (0.16) $ (0.08) $ (0.11)
Discontinued Operations 0.10 (0.14) 0.10 (0.14)
Net Income(Loss) Per Share $ 0.10 $ (0.30) $ 0.02 $ (0.25)
Weighted Average Shares Outstanding:
Denominator for Basic Earnings
Per Share 16,523 16,495 16,515 16,495
Effect of Dilutive Securities:
Employee Stock Options 119 - (A) - (A) - (A)
Denominator for Diluted Earnings
Per Share 16,642 16,495 16,515 16,495
Dividends Declared Per Share $ 0.08 $ 0.16 $ 0.08 $ 0.16
(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)
SIX MONTHS ENDED
JUNE 30
1998 1997
(Thousands of Dollars)
Cash Provided By (Used In):
Operating Activities:
Net Cash Provided by Continuing Operations $ 1,774 $ 17,860
Net Cash Provided by Discontinued Operations 2,288 2,489
Net Cash Provided By Operating Activities 4,062 20,349
Investing Activities:
Additions to Property, Plant and Equipment (2,825) (4,081)
Purchase of Short-Term Investments (11,787) (1,505)
Sale or Maturity of Short-Term Investments 11,824 1,120
Net Cash Used In Investing Activities (2,788) (4,466)
Financing Activities:
Cash Dividends Paid (2,643) (5,278)
Repayment of Bank Borrowings 0 (6,000)
Proceeds from Bank Borrowings 3,000 2,300
Other 261 45
Net Cash Provided by (Used In)
Financing Activities 618 (8,933)
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (86) (343)
Increase in Cash and Cash Equivalents 1,806 6,607
Cash and Cash Equivalents at Beginning of Period 25,801 14,767
Cash and Cash Equivalents at End of Period $ 27,607 $ 21,374
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six months ended June 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 of $2,387,000, or $0.14 per share, in
the 1997 second quarter and an after tax loss $2,321,000, or $0.14 per
share, for 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 the quarter 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 second quarter and six months
ended June 30, 1998 and 1997 follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
Net Income (Loss) $ 1,664 $(4,960) $ 337 $(4,154)
Change in Cumulative
Translation Adjustment (38) 169 (74) (305)
Comprehensive Income (Loss) $ 1,626 $(4,791) $ 263 $(4,459)
NOTE D - New Accounting Pronouncements
The FASB has recently 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 Second Quarter 1998 Compared to Second Quarter 1997
Net sales for the second quarter ended June 30, 1998 increased 11.5%
compared to the second quarter of 1997. Total writing instrument net sales
for the quarter of $28.5 million were down 8.1% from the prior year.
Domestic writing instrument net sales of $14.8 million were 6.7% lower than
the prior year while foreign writing instrument net sales of $13.7 million
declined 9.6% as compared to second quarter of 1997. Sales by the Pen
Computing Group (PCG) during the second quarter of 1998 were $6.0 million
compared to sales of $68,000 in 1997, the year in which PCG introduced its
first products. Cross Timepiece revenues were $133,000 in the quarter as
compared to $20,000 for the same period last year.
Domestic writing instrument sales continue to be affected by changes in
distribution methods, away from the mass market and catalog showroom
channels to the growing office supply superstore accounts. The Company
believes that demand for all quality writing instruments in the United
States is flat. In the continuing effort to stimulate sales growth in the
United States during the second half of the year, the Company will be
launching 31 new writing instrument products in a variety of new styles and
finishes.
International sales continue to be adversely impacted by the deepening
economic crisis in Asia and the Far East. Sales to Asian and Far East
markets were down approximately 47% in the second quarter of 1998 as
compared to the same quarter of 1997. Somewhat offsetting these declines
were improved sales to Europe, the Middle East/Africa, Latin America and
Canada.
The second quarter of 1998 was the first full quarter of sales of the PCG
division's newest product, CrossPad. CrossPad, a personal digital notepad,
was developed jointly with IBM and was first shipped in late March. It is
currently available only in the United States in approximately 2,300
locations, where it is being supported by an extensive advertising and
promotional campaign. Sales of PCG products, which in addition to CrossPad
primarily consist of iPenPro and DigitalWriter Duo, were $6.0 million in
the second quarter and represented almost 29% of total domestic revenue for
the period.
Gross profit margins of 48.8% for the second quarter of 1998 were up 3.9
percentage points as compared to the second quarter of 1997. Total Company
margins have improved as a result of higher writing instrument margins,
primarily as a result of the cost reduction programs put in place during
last year and the first six months of 1998. The writing instrument gross
margin improvements were offset somewhat by lower PCG and Timepiece margins
as these products, on average, generate lower margins than writing
instruments. Included in the second quarter's cost of sales are royalty
expenses related to PCG sales. These royalties are paid to suppliers of
certain software and hardware components for both the iPen and CrossPad.
Selling, general and administrative expenses (SG&A) for the second quarter
of 1998 were $15.7 million, or 5.6% below the same 1997 period. Included
in the quarter's results were PCG and Timepiece SG&A expenses of $3.0
million and $400,000, respectively. Writing Instrument SG&A for the
quarter was 24.3% lower than the second quarter of 1997, partially as a
result of the Company's strict cost control programs that are in effect.
Research and development expenses (R&D) of $1.2 million were 48.8% higher
than 1997, due almost entirely to the increased R&D expenditures on new
product development by the PCG division.
Due to the extensive product development and marketing support expenses
required in 1998, it is expected that the Pen Computing Group will not be
profitable in 1998.
Interest and other income were higher in the second quarter of 1998 in part
due to higher interest income as average investable funds and interest
rates were higher.
For a discussion of the Company's effective tax rate see Results of
Operations Six Months Ended June 30, 1998.
Results of Operations Six Months Ended June 30, 1998 Compared to June 30,
1997
Net sales for the six months ended June 30, 1998 were $66.2 million, or
2.2% higher than the same period in 1997. Total writing instruments net
sales of $57.2 million were 11.6% lower than last year. Domestic writing
instrument net sales of $28.8 million for the six months were down 5.7%
versus the comparable period last year and foreign writing instrument net
sales of $28.4 million were down 16.8% from 1997. Sales of PCG products
were $8.7 million through June 1998 as compared to June 1997 revenue of
$117,000. Sales of Cross Timepieces in the two U.S. test markets were
$300,000 through the June 1998 period versus sales of $20,000 during the
same period last year.
Domestic writing instrument net sales remained below last year's levels.
Sales through the mass market catalog showroom and carriage trade channels
declined sharply from the prior year, offset somewhat as sales to the high
volume office supply accounts were up substantially over the same period
last year
Internationally, year to date sales to the Company's Asian and the Far East
markets declined from the prior year by 51.5% as the economic and fiscal
conditions in these markets continue to deteriorate. Although disappointed
with the current sales results, the Company is committed to the region and
is in the process of establishing two new branch offices, one in Hong Kong
and the other in Taiwan. These new branches, along with our established
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 six months of 1998 were 47.3%, up 0.3
percentage points from the same period in 1997. Total Company margins have
improved as a result of higher writing instrument margins, primarily as a
result of the cost reduction programs put in place during last year and the
first six months of 1998. The writing instrument gross margin improvements
were offset somewhat 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 related to PCG sales. These royalties
are paid to suppliers of certain software and hardware components for both
the iPen and CrossPad.
Selling, general and administrative expenses for the six months ended June
30, 1998 were 0.8% higher than the same period for 1997. SG&A expenses
through June 1998 included $4.4 million and $800,000 for PCG and
Timepieces, respectively. SG&A for writing instruments was 14.9% lower
than 1997. Research and development expenses of $2.2 million were up from
last year by 26.3%. Excluding PCG's R&D expenses of $1.3 million, writing
instrument R&D was below 1997 levels by 11.3%. Service and distribution
costs were below 1997 by 9.3% due largely to the lower writing instrument
sales levels.
Interest and other income increased 59.8% for the first six months of 1998,
due in part to higher interest income.
The Company recorded an income tax benefit of 32% on the loss from
continuing operations for the six months ended June 30, 1998, as compared
to the June 30, 1997 income tax benefit of 35%.
Liquidity and Sources of Capital
Cash, cash equivalents and short-term investments (i.e., "cash") increased
$1.8 million from December 31, 1997 to $49.2 million at June 30, 1998.
Cash available for domestic operations approximated $4.0 million while cash
held off-shore approximated $45.2 million at June 30, 1998. Accounts
receivable decreased since the end of 1997 by $16.6 million to $21.0
million primarily due to cash that was 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 was similar to extended dating programs that have
been offered in past years. 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 June 30, 1998 there was $3.0 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.
Inventory of $26.8 million increased $6.8 million since December 31, 1997.
The inventory increase in the first six months of 1998 was due largely to
higher levels of pen computing and timepiece inventory.
New Accounting Pronouncement
The FASB has recently 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 Company will be required to modify significant portions of its software
so that it will function properly in the year 2000. A substantial number
of software programs have already been so modified and others are being
updated on a routine ongoing basis. The Company is utilizing both internal
and external resources to identify, correct and test the systems for year
2000 compliance. It is anticipated that all modifications will be
completed by December 31, 1999, including the testing of the modified
systems. This process also includes sending written correspondence to the
Company's primary vendors and key customers to inquire about plans that are
being developed or are already in place 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. For further information
refer to the footnotes thereto 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 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 QUALATATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting on April 23, 1998 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 11,978,494 Class A shares in favor, 561,043
against, 28,037 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 12,333,908 233,666
James C. Tappan 12,340,221 227,353
Andries van Dam 12,338,357 229,217
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,
1998 was approved by the unanimous vote of 1,804,800 Class B shares.
d. Omnibus Incentive Plan
A proposal to approve the adoption of the Company's Omnibus Incentive
Plan as presented to the shareholders in the proxy was approved by the
vote of 9,553,587 Class A shares in favor, 2,965,611 against and
48,376 abstaining, and by the vote of 1,804,800 Class B shares in
favor and none against.
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: August 12, 1998 By: JOHN E. BUCKLEY
John E. Buckley
Executive Vice President
Chief Operating Officer
Date: August 12, 1998 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
statements included in A. T. Cross Company form 10-Q for the quarterly period
ended June 30, 1998 and is qualified in its entirety by reference to such
financial statements.
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