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 April 3, 1999
[ ] 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 May 7, 1999:
Class A common stock - 14,857,203 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
April 3, December 31,
1999 1998
ASSETS (Unaudited)
CURRENT ASSETS (Thousands of Dollars)
Cash and Cash Equivalents $ 20,928 $ 22,781
Short-Term Investments 19,968 21,717
Accounts Receivable 21,601 34,535
Inventories:
Finished Goods 9,120 9,887
Work in Process 4,728 5,646
Raw Material 7,375 6,662
21,223 22,195
Other Current Assets 5,338 4,522
TOTAL CURRENT ASSETS 89,058 105,750
PROPERTY, PLANT AND EQUIPMENT 116,663 115,343
Less Allowances for Depreciation 78,573 76,719
38,090 38,624
INTANGIBLES AND OTHER ASSETS 11,927 11,963
TOTAL ASSETS $139,075 $156,337
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Note Payable to Bank $ 0 $ 6,000
Accounts Payable, Accrued Expenses and
Other Liabilities 18,002 27,417
Accrued Compensation and Related Taxes 1,537 2,746
Contributions Payable to Employee
Benefit Plans 10,260 10,096
TOTAL CURRENT LIABILITIES 29,799 46,259
ACCRUED WARRANTY COSTS 5,821 5,821
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share:
Class A, Authorized 40,000,000 Shares;
15,458,269 Shares Issued and 14,857,203
Shares Outstanding at April 3, 1999 and
15,344,162 Shares Issued and 14,743,096
Shares Outstanding at December 31, 1998 15,458 15,344
Class B, Authorized 4,000,000 Shares;
1,804,800 Shares Issued and Outstanding
at April 3, 1999 and December 31, 1998 1,805 1,805
Additional Paid-In Capital 12,975 12,433
Retained Earnings 82,964 84,087
Accumulated Other Comprehensive Loss (781) (446)
112,421 113,223
Treasury Stock, at Cost (8,966) (8,966)
TOTAL SHAREHOLDERS' EQUITY 103,455 104,257
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $139,075 $156,337
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Thirteen Week Three Months
Period Ended Ended
April 3, 1999 March 31, 1998
(In Thousands Except per Share Data)
Net Sales $28,519 $31,525
Cost of Goods Sold 16,570 17,130
Gross Profit 11,949 14,395
Selling, General and
Administrative Expenses 14,591 15,123
Research and Development Expenses 533 1,006
Service and Distribution Costs 910 772
Operating Loss (4,085) (2,506)
Interest and Other Income 546 555
Loss from Continuing Operations
Before Income Taxes (3,539) (1,951)
Income Tax Benefit (920) (624)
Loss from Continuing Operations (2,619) (1,327)
Income from Discontinued
Operations (Net of Income Taxes) 1,496 0
Net Loss $(1,123) $(1,327)
Basic and Diluted Earnings
(Loss) Per Share:
Continuing Operations $ (0.16) $ (0.08)
Discontinued Operations 0.09 0.00
Net Loss Per Share $ (0.07) $ (0.08)
Weighted Average Shares Outstanding:
Denominator for Basic Earnings
Per Share 16,558 16,507
Effect of Dilutive Securities:
Employee Stock Options - (A) - (A)
Denominator for Diluted Earnings
Per Share 16,558 16,507
(A) No incremental shares related to stock options are
included due to the net loss.
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Thirteen Week Three Months
Period Ended Ended
April 3, 1999 March 31, 1998
(Thousands of Dollars)
Cash Provided By (Used In):
Operating Activities:
Net Cash Provided by Continuing Operations $ 2,651 $ 8,017
Net Cash Provided by Discontinued Operations 1,496 0
Net Cash Provided By Operating Activities 4,147 8,017
Investing Activities:
Additions to Property, Plant and Equipment (1,414) (919)
Purchase of Short-Term Investments (8,288) (10,042)
Sale or Maturity of Short-Term Investments 10,038 10,024
Net Cash Provided by (Used In)
Investing Activities 336 (937)
Financing Activities:
Cash Dividends Paid 0 (1,320)
Repayment of Bank Borrowings (6,000) 0
Other 25 134
Net Cash Used In Financing Activities (5,975) (1,186)
Effect of Exchange Rate Changes on
Cash and Cash Equivalents (361) (143)
Increase (Decrease) in Cash and Cash Equivalents (1,853) 5,751
Cash and Cash Equivalents at Beginning of Period 22,781 25,801
Cash and Cash Equivalents at End of Period $ 20,928 $ 31,552
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 3, 1999
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 three months ended April 3, 1999, are not necessarily indicative of the
results that may be expected for the full year ending January 1, 2000. 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, 1998.
NOTE B - Change of Accounting Periods
To facilitate the implementation of a standardized worldwide reporting
system, as of January 1, 1999 the Company changed from a calendar quarter
and year end closing schedule to a 4-4-5 week quarter-end close and a 52/53
week fiscal close. This change did not have a material impact on sales or
results of operations in the first quarter of 1999 as compared to the first
quarter of 1998.
NOTE C - Discontinued Operations
In the first quarter of 1999, the Company recorded after-tax income from
discontinued operations of $1,496,000, or $0.09 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 subsidiary, Manetti-Farrow, Inc.
NOTE D - Comprehensive Loss
Comprehensive loss for the first quarter of 1999 and 1998 follows:
Thirteen Week Three Months
Period Ended Ended
April 3, 1999 March 31, 1998
Net Loss $(1,123) $(1,327)
Other Comprehensive Loss:
Foreign Currency Translation Adjustment (335) (36)
Comprehensive Loss $(1,458) $(1,363)
NOTE E - New Accounting Pronouncement
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 will become effective for
the Company for the year ending December 30, 2000. The Company is currently
evaluating the impact that implementing this SFAS will have on its results
of operations and financial position.
NOTE F - Segment Information
The Company has three reportable segments: quality writing instruments, pen-
based computing products, and a line of branded, Swiss-made timepieces. The
Company evaluates segment performance based upon profit or loss from
operations before income taxes. For further information, refer to footnotes
A and G included in the Company's annual report on Form 10-K for the year
ended December 31, 1998. Below is the segment information for the Company
for the first quarter of 1999 and 1998:
Thirteen Week Three Months
Period Ended Ended
April 3, 1999 March 31, 1998
Revenues from external customers:
Quality Writing Instruments $ 27,252 $ 28,678
Pen-Based Computing Products 1,079 2,649
Timepieces 188 198
Total $ 28,519 $ 31,525
Segment Profit (Loss):
Quality Writing Instruments $ 959 $ (307)
Pen-Based Computing Products (4,295) (1,330)
Timepieces (203) (314)
Total $ (3,539) $ (1,951)
Segment Assets:
Quality Writing Instruments $ 125,800 (1)
Pen-Based Computing Products 10,600 (2)
(1) The decrease in segment assets since December 31, 1998 was due largely
to a reduction in trade accounts receivable from the higher sales in the
fourth quarter of 1998. Collections of accounts receivable were then used
to payoff the Note payable to bank and pay other accrued liabilities.
(2) The decrease in segment assets since December 31, 1998 was due largely
to a reduction in trade accounts receivable.
NOTE G - Line of Credit
During the first quarter of 1999, the Company renegotiated its existing line
of credit from $50 million to $25 million, to more appropriately reflect the
Company's needs. Any amounts borrowed under this agreement are payable on
demand and bear interest at one percent per annum (1.0%) in excess of the
London Interbank Offering Rate.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Results of Operations First Quarter 1999 Compared to First Quarter 1998
Net sales for the first quarter of 1999 decreased 9.5% as compared to the
first quarter of 1998. Total writing instrument sales for the quarter of
$27.2 million were down 5.0% from the prior year. Domestic writing
instrument sales of $12.1 million were 13.6% lower than the first quarter
1998 while foreign writing instrument sales of $15.1 million improved 3.2%
as compared to the 1998 period. Sales by the Pen Computing Group ("PCG")
during the first quarter of 1999 were $1.1 million compared to last year's
sales of $2.6 million in the first quarter. Timepieces generated $188,000
of revenue in this year's first quarter, down approximately 5% from the same
period of the prior year.
The decline in domestic writing instrument sales was due primarily to lower
sales through the Company's Special Markets Division, i.e., sales of
personalized products to corporate accounts. The Company believes that
sales have declined in this category due to the fact that there are now a
number of gift alternatives to chose from besides writing instruments with
which to recognize and motivate employees.
The international sales increase in the first quarter of 1999 was due
largely to improvement in the Asian markets. The sales in this region were
higher than last year's first quarter by approximately 50% as the Company's
new subsidiaries in Hong Kong and Taiwan, as well as the existing subsidiary
in Japan, were able to take advantage of the slowly improving economic
conditions in the region. Offsetting this improvement were lower sales in
Europe, the Middle East and Africa and Latin America. The Company believes
that although first quarter sales in the European market were lower than
last year, continued sales growth in this market is expected for the full
year.
PCG net sales during the first quarter were down approximately 60% from the
prior year. As part of a marketing plan to expand the installed customer
base for the CrossPad and make the product more affordable to students and
other users, in late January 1999, the Company decided to lower the price of
the CrossPad and CrossPadXP effective February 1, 1999, and committed to
issue related rebates to dealers. The effect of this rebate reduced PCG
sales and gross margins in the quarter by approximately $2.5 million.
The gross profit margin for the first quarter of 1999 was 41.9%, down from
45.7% for the comparable period last year. The decline in margin was
attributable to the PCG segment, which generates lower average margins than
writing instruments, and the effect on margins of the rebate and price
reduction discussed above. Also, included in cost of sales are royalty
expenses related to PCG sales. These royalties are paid to suppliers of
certain software and hardware components.
Selling, general and administrative ("SG&A") expenses for the first quarter
of 1999 were 3.5% lower than last year. This decrease was due to lower
writing instrument SG&A expenses resulting from the strict cost reduction
programs put in place last year.
Research and development ("R&D")expenses were below 1998's first quarter by
47.0%, due in part to significantly lower R&D expenditures on the
development of PCG products this year as well as lower R&D expenditures on
writing instruments. The Company expects R&D expenditures to be lower this
year than in 1998.
Interest and other income for the first three months of 1999 were comparable
to the same period last year.
The Company recorded an income tax benefit of 26.0% on the loss from
continuing operations in the first quarter of 1999 as compared to the 1998
first quarter income tax benefit of 32.0%. This decrease was due, in part,
to a shift in the mix of domestic and foreign sourced income.
As a result of the price reduction in the CrossPad, the six to nine month
development time projected for forms application and the continued
investment in pen-based products, the Company expects that PCG's 1999
revenues will be less than 1998 revenues and its 1999 operating loss will be
greater than the prior year's loss.
Liquidity and Sources of Capital
Cash, cash equivalents and short-term investments (i.e., "cash") decreased
$3.6 million from December 31, 1998 to $40.9 million at April 3, 1999. Cash
available for domestic operations approximated $5.4 million while cash held
offshore approximated $35.5 million at the end of the first quarter 1999.
Accounts receivable decreased since the end of 1998 by $12.9 million to
$21.6 million as cash was collected in January 1999 from customers who took
advantage of the Company's 1998 extended dating program which allowed
domestic customers to defer payments on certain 1998 purchases to 1999.
This program was similar to holiday season extended dating programs that
have been offered in past years. The Company has available a $25 million
line of credit with a bank which provides an additional source of working
capital on a short-term basis. At April 3, 1999 there were no outstanding
amounts 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. The
Company eliminated its quarterly cash dividend on common stock as of
December 8, 1998.
New Accounting Pronouncement
The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 will become effective for the Company for
the year ending December 30, 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 could lead to system failures or miscalculations,
possibly causing disruptions of business processes.
The Company started to address this problem early in 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 information
technology and non-information technology 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. Substantially all of the Company's
business applications have been remediated and are believed to be year 2000
compliant with the remaining systems planned to be in compliance by the end
of the second quarter of 1999. The Company is utilizing both internal and
external resources to identify, correct and test the systems for Year 2000
compliance and has engaged the services of an independent consulting firm to
review the Company's Year 2000 remediation plan. Testing of the modified
systems has been ongoing as non-compliant systems are replaced or upgraded.
Substantial testing of critical business applications began 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
approximately $500,000 and approximately $600,000 planned in 1999. These
remediation costs are being funded through current operating cash flows and
are not material to the Company's operating results. The Company has not
deferred any information technology projects to address the Year 2000 issue.
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. The most
reasonably likely worst case scenario is that a short-term disruption will
occur with a small number of customers or suppliers. 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. In addition, the
Company is dependant on the infrastructures within all the countries it has
operations, therefore, the failure of these infrastructures could adversely
affect the Company's operations.
The cost of remediation and completion dates are based upon management's
best estimates and may be updated as additional information becomes
available.
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 1999 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
Refer to the Company's annual report on Form 10-K for the year ended
December 31, 1998 for a complete discussion of the Company's market risk.
There have been no material changes to the market risk information included
in the Company's 1998 annual report on Form 10-K.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On April 22, 1999, Russell A. Boss, President and C.E.O. of A.T. Cross
Company announced at the Company's annual meeting of stockholders plans to
retire from the position of President and C.E.O. The Board of Directors has
formed a search committee to appoint a successor. Mr. Boss will remain
President and C.E.O. of the Company until such time as a successor is
appointed. Furthermore, Mr. Boss is a member of the search committee and
will remain a Director of the Company after his retirement.
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: May 13, 1999 By: JOHN E. BUCKLEY
John E. Buckley
Executive Vice President
Chief Operating Officer
Date: May 13, 1999 By: JOHN T. RUGGIERI
John T. Ruggieri
Senior Vice President
Chief Financial Officer
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<LEGEND>
This schedule contains summary financial information extracted from financial
statements included in the A.T. Cross Company Form 10-Q for the quarterly period
ended April 3, 1999 and is qualified in its entirety by reference to such
financial statements.
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