-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SRQ4/S+sF8hes7uIcInIVCh675WpM0FTo6YXiiiSJhfyNqkehMXv3z8BLBnuoHvN C9QPqtYbG+z57YpJPX4uYw== 0000025793-97-000001.txt : 19970328 0000025793-97-000001.hdr.sgml : 19970328 ACCESSION NUMBER: 0000025793-97-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROSS A T CO CENTRAL INDEX KEY: 0000025793 STANDARD INDUSTRIAL CLASSIFICATION: PENS, PENCILS & OTHER ARTISTS' MATERIALS [3950] IRS NUMBER: 050126220 STATE OF INCORPORATION: RI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-06720 FILM NUMBER: 97564198 BUSINESS ADDRESS: STREET 1: ONE ALBION RD CITY: LINCOLN STATE: RI ZIP: 02865 BUSINESS PHONE: 4013331200 MAIL ADDRESS: STREET 1: ONE ALBION ROAD STREET 2: 50 KENNEDY PLAZA CITY: LINCOLN STATE: RI ZIP: 02865 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1996 OR [ ] 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 Number 1-6720 A. T. CROSS COMPANY (Exact name of registrant as specified in its charter) Rhode Island 05-0126220 (State or other jurisdiction of (I.R.S. 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 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered: Class A Common Stock ($1. Par Value) American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1997: Class A common stock - $154,431,900 (For this purpose all directors have been treated as affiliates). The number of shares outstanding of each of the issuer's classes of common stock as of February 28, 1997: Class A common stock - 14,691,679 shares Class B common stock - 1,804,800 shares DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual report to shareholders for the year ended December 31, 1996 are incorporated by reference into Parts I, II and IV. Portions of the definitive proxy statement for the 1997 annual meeting of shareholders are incorporated by reference into Part III. PART I Item 1. BUSINESS A. T. Cross Company (the "registrant") currently operates predominantly in one business segment, the manufacture and sale of high quality writing instruments. The registrant manufactures fine writing instruments consisting of ball- point and fountain pens, Selectip roller-ball pens (which also accommodate a porous point refill), mechanical pencils, desk sets and ball-point refills. The registrant's writing instruments are offered in a variety of styles and materials, including the traditional, narrow girth Century line and the wider girth Townsend line, both fabricated primarily in metal, the Solo and Solo Classic lines, fabricated in resin, and the new Metropolis line, also fabricated in metal, introduced in the United States and certain foreign markets in 1996. The registrant also markets certain writing instrument accessories. The registrant continues to be the leading company in the United States in fine writing instruments priced from $10 to $50. Products in this price range include Century, Solo and Solo Classic and Metropolis. The Townsend collection has given the registrant a notable presence in the $55 to $250 price range of products. The registrant emphasizes styling, craftsmanship and quality control in the design and production of its products. All of the registrant's writing instruments carry a full warranty of unlimited duration against mechanical failure. The registrant's writing instruments are packaged and sold as individual units or in matching sets. The registrant also sells single and double unit desk sets with bases made of various materials such as onyx, marble and wood. The registrant's writing instrument products are distributed throughout the United States by approximately 40 manufacturer's agents or representatives to about 7,300 active retail and wholesale accounts. Retail accounts include gift stores, department stores, jewelers, stationery and office supply stores, mass merchandisers and catalogue showrooms. The wholesale accounts distribute the registrant's products to retail outlets which purchase in smaller quantities. Advertising specialty representatives market the registrant's writing instruments in the United States to business and industry. Typically, such products are engraved or carry the purchaser's name or emblem and are used for gifts, sales promotions, incentive purposes or advertising. The registrant also sells its products to United States military post exchanges, service centers and central buying operations. Sales of the registrant's writing instrument products outside the United States during 1996 were made by the registrant and by its wholly-owned subsidiaries to foreign distributors and to retailers principally in Canada, Latin America, Europe, Africa, the Middle East, Asia, and the Far East. The registrant also markets fine quality leather goods (primarily ladies handbags) and accessories through its wholly-owned subsidiary, Manetti- Farrow, Incorporated. Manetti-Farrow is the exclusive wholesale distributor for Fendi and Echo brands of leather products and fashion accessories in the United States. Raw Materials: Most raw materials for production of writing instruments in the United States are obtained domestically. Some desk set base materials, some fountain pen nibs and front sections, certain finished caps and barrels, and some lacquer coating of metal shells are imported from Germany and France. Complete pencil mechanisms, some porous point refill components and leads, resin caps and barrels and some fountain pen nibs and front sections are imported from Japan. Raw materials for production of writing instruments in Ireland are obtained largely from Ireland, Germany, Japan and the United States. Patents and Trademarks: The registrant, directly and through its subsidiaries, has certain trademark registrations in the United States and many foreign countries, including but not limited to, its principal trademark "CROSS", and related trademarks, and the frustoconical top of its writing instruments. The principal trademark "CROSS" and related goodwill is of fundamental importance to the business. The registrant also holds certain United States and foreign patents covering its desk set units, Townsend series writing instruments, Solo and Solo Classic series writing instruments, Metropolis series writing instruments, Signature series writing instruments, fountain pens, mechanical pencil mechanisms, ball-point pen mechanisms, and fountain pen cartridges, and has filed United States and foreign patent applications on certain of the foregoing writing instruments and related items. While the registrant pursues a practice of seeking patent protection for novel inventions or designs, the Company's business is not significantly dependent upon obtaining and maintaining patents. In 1993, the registrant sold its Mark Cross trademark and selected assets of its wholly-owned subsidiary, Mark Cross, Inc. and discontinued its Mark Cross retail business. However, under the terms of that sale, the registrant retained the right to use the CROSS trademark in certain non- writing instruments categories, without challenge by the purchaser of the Mark Cross trademark. Seasonal Business: Retail demand for the registrant's products is traditionally highest immediately prior to Christmas and other gift-giving occasions. However, seasonal fluctuations have not materially affected continuous production of writing instrument products. The Company generates approximately one third of its annual sales in the fourth quarter. Working Capital Requirements: Inventory balances tend to be highest in anticipation of new product launches and just before peak selling seasons. Production for some products which have longer lead times or for which production capacity is limited is proportionately greater earlier in the year, and inventory balances are relatively higher, to assure adequate supply is available for the peak selling season. The registrant has offered in the past, and may offer in the future, extended payment terms to domestic customers at certain points during the year, usually September through November. See the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the registrant's annual report to shareholders for the year ended December 31, 1996 (filed herewith as Exhibit 13 and hereinafter referred to as the "1996 Annual Report"), which section is incorporated by reference herein. Customers: The registrant is not dependent for a material part of its business upon any single customer or a small number of customers. Backlog of Orders: The backlog of orders is not a significant factor in the registrant's business. Government Contracts: Sales of the registrant's writing instrument products are made to military post exchanges and service centers, but no contracts are entered into which are subject to renegotiation or termination by the United States Government. Competition: The writing instrument field is highly competitive. In particular, competition is strong with respect to product quality and brand recognition. There are numerous manufacturers of ball-point, roller-ball and fountain pens and mechanical pencils in the United States and abroad. Many of such manufacturers produce lower priced writing instruments than those produced by the registrant. Although the registrant is a major producer of ball-point, roller-ball and fountain pens and mechanical pencils in the $10 to $50 price range, other writing instrument companies have significantly higher sales volumes from a broader product line across a wider range of prices or have greater resources as divisions of larger corporations. Research and Development: The registrant had expenditures for research and development of new products and improvement of existing products of approximately $2,877,000 in 1996, $2,991,000 in 1995, and $2,036,000 in 1994. Environment: The registrant believes it is in substantial compliance with all Federal, State and local environmental laws and regulations. It is believed that future capital expenditures for environmental control facilities will not be material. Employees: The registrant had approximately 1,200 employees at December 31, 1996, of which 255 were employed by foreign subsidiaries or branches. Foreign Operations and Export Sales: Approximately 45% of the registrant's sales in 1996 were in foreign markets. The registrant's primary foreign markets are in Europe and the Far East. Sales of writing instrument products to foreign distributors are subject to import duties in many countries although sales by the registrant's wholly-owned manufacturing and distribution facilities in Ireland into European Common Market countries are duty free. The operations of the registrant's foreign subsidiaries and branches are subject to the effects of currency fluctuations, to the availability of dollar exchange, to exchange control and to other restrictive regulations. Undistributed earnings of the foreign manufacturing and marketing subsidiaries prior to the Revenue Reconciliation Act of 1993 (i.e., the "1993 Act") generally are not subject to current United States federal income and state income taxes. However, repatriation to the registrant of the accumulated earnings of foreign subsidiaries would subject such earnings to United States federal and state income taxes. It is not the intention of the registrant to repatriate these earnings. The 1993 Act added Internal Revenue Code Section 956A which had the effect of subjecting a portion of current foreign earnings (i.e., earnings generated subsequent to the 1993 Act) to United States federal taxation. See Note F to the registrant's financial statements included in the 1996 Annual Report, which note to such financial statements is incorporated by reference herein. See geographic information and export sales data in Note G to the registrant's financial statements included in the 1996 Annual Report, which note to such financial statements is hereby incorporated by reference. ___________________________________________________________________________ See the first paragraph under the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the 1996 Annual Report incorporated herein by reference. In addition to statements in this document that may be construed as forward-looking statements, there may be statements in other documents of the registrant and oral statements by representatives of the registrant to security analysts or investors that may be construed as forward-looking statements about the business and new products, sales and expenses, and operating and capital requirements. Any such statements are subject to risks that could cause the actual results or needs to differ materially, including but not limited to the ability of the Company to generate consumer acceptance of various new products recently introduced and or planned for introduction in the coming months; increases in the cost of, or limitations in the supply of, raw materials (including prices of precious metals used in the Company's products); changes in political and economic conditions in the United States and other countries in which the Company operates; interest and currency rate fluctuations; competitive product and pricing pressures; and inflation. These risks are discussed in the section referred to above. Item 2. PROPERTIES The registrant currently occupies approximately 269,000 square feet of manufacturing, warehouse and office space in its facility in Lincoln, Rhode Island. The registrant's wholly-owned subsidiary, A. T. Cross Limited, owns and operates an approximately 64,000 square foot manufacturing and distribution facility in Ballinasloe, County Galway, Ireland. Substantially all of these facilities, which are well maintained and in good repair, are currently being utilized in either a manufacturing, distribution or administrative capacity. The productive capacity of these facilities is sufficient to meet the registrant's needs for the foreseeable future. The registrant also owns an approximately 130,000 square foot facility in Lincoln, formerly the site of the registrant's distribution center and certain administrative offices, which it is offering for sale, and which currently is partially rented. The registrant's operations in Germany, Japan, France, Italy, the United Kingdom, Spain and Hong Kong, all lease their administrative offices and warehouse space. Manetti-Farrow leases administrative office space in New York, New York and warehouse and office space in Oakland, California. Item 3. LEGAL PROCEEDINGS No material legal proceedings are pending by or against the registrant or any of its subsidiaries which would have a material effect upon the consolidated business and financial condition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS See the "Market and Dividend Information" section of the 1996 Annual Report, which section is incorporated by reference herein. Item 6. SELECTED FINANCIAL DATA See the "Five-Year Summary" section of the 1996 Annual Report, which section is incorporated by reference herein. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the 1996 Annual Report, which section is incorporated by reference herein. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the registrant and its subsidiaries and the report of its independent auditors thereon for the audit of the consolidated financial statements for the year ended December 31, 1996, set forth in the 1996 Annual Report, are incorporated herein by reference. The report of the Company's independent auditors for the year ended December 31, 1995 and 1994 are included in Item 14 (a)(1). Quarterly Results of Operations in Note I of the registrant's financial statements included in the 1996 Annual Report are incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE At a meeting held on July 11, 1996 the Audit Committee of the Company's Board of Directors recommended, and the Board of Directors approved, the engagement of Deloitte & Touche LLP as its independent auditors for the year ending December 31, 1996 to replace the firm of Ernst & Young LLP, who were dismissed as auditors of the Company effective July 11, 1996. The appointment of Deloitte & Touche LLP as the Company's independent accountants for 1996 was effective upon the dismissal of Ernst & Young LLP, subject to the approval of the Company's Class B shareholders which was obtained on July 16, 1996. The reports of Ernst & Young LLP on the Company's financial statements for the past two years did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with the audits of the Company's financial statements for each of the two years ended December 31, 1995, and in the subsequent interim period, there were no disagreements with Ernst & Young LLP on any matters of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the matter in its report. During the Company's two most recently completed years and the subsequent interim period preceding the engagement of Deloitte & Touche LLP through the present date, there were no reportable events (as defined in item 304 of Regulation S-K) with Ernst & Young LLP and during such periods the Company did not consult with Deloitte & Touche LLP regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT In addition to the directors and executive officers listed on pages 5 and 6 of the registrant's definitive proxy statement for the 1997 annual meeting of shareholders, which pages are incorporated by reference herein, the following are executive officers of the registrant (each of whom serves until his or her successor is elected and has qualified): Year in Which Name Age Title First Held Office Joseph F. Eastman 60 Vice President-Human Resources 1981 David A. Rogers (1) 48 Vice President-U.S. Marketing and Sales 1995 Michael El-Hillow 45 Vice President-Finance; Treasurer; 1990 Chief Financial Officer Donald W. Reilly 38 Corporate Controller 1992 Chief Accounting Officer Tina C. Benik (2) 37 Vice President-Legal, General 1993 Counsel and Corporate Secretary Steven T. Henick (3) 54 Vice President- 1996 Worldwide Marketing and Sales J. John Lawler (4) 59 Vice President- 1993 Worldwide Tax and Duty Free John T. Ruggieri (5) 40 Vice President- 1993 Corporate Development and Planning Stephen A. Perreault (6) 49 Vice President-Manufacturing 1995 David J. Arthur (7) 38 Vice President, Engineering 1996 (1) Prior to becoming the Vice President-U.S. Marketing and Sales in 1995, David A. Rogers was the Vice President of U.S. Sales. (2) Prior to becoming Vice President-Legal, General Counsel and Corporate Secretary, Tina C. Benik was the general counsel of the registrant from 1989 to 1991 and corporate secretary from 1991 to 1993. (3) Prior to becoming Vice President-International Marketing and Sales in 1996, Steven T. Henick was the Vice President-Worldwide Marketing and Sales from 1993 to 1996. Prior to 1993, Mr. Henick held various senior executive positions in large multi-national consumer goods companies, including Procter & Gamble, Inc., Tambrands, Inc., and Del International Incorporated. (4) Prior to becoming Vice President-Worldwide Tax and Duty Free in 1993, J. John Lawler was the Vice President International of the registrant. (5) Prior to becoming Vice President-Corporate Development and Planning in 1993, John T. Ruggieri was the Executive Vice President of the registrant's wholly-owned subsidiary Mark Cross, Inc. (6) Prior to becoming Vice President-Manufacturing in 1995, Stephen A. Perreault held various senior executive positions in the jewelry, cosmetics, and gift manufacturing and distribution companies, including Weingeroff Enterprises, Inc., Lantis Corporation, Swarovski Jewelry U.S. Ltd., and Avon Products, Inc. (7) Prior to becoming Vice President, Engineering in 1996, David J. Arthur was the Director of Engineering of the registrant from 1995 to 1996, and the Manager, New Business Development of the registrant from 1994 to 1995. From 1991-1994 Mr. Arthur was Group Manager, Corporate R&D and Product Line Manager, Composite Materials Division, at Rogers Corporation. Item 11. EXECUTIVE COMPENSATION See pages 7 through 13 of the registrant's definitive proxy statement for its 1997 annual meeting of shareholders, which pages are incorporated by reference herein. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See pages 3 and 4 of the registrant's definitive proxy statement for the 1997 annual meeting of shareholders, which pages are incorporated by reference herein. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See pages 5 and 6 of the registrant's definitive proxy statement for the 1997 annual meeting of shareholders, which pages are incorporated by reference herein. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) - The response to this portion of Item 14 is submitted as a separate section of this report. (3) Listing of Exhibits (3) Restated Articles of Incorporation and By-laws (incorporated by reference to Exhibit (3) to the registrant's report on Form 10-K for the year ended December 31, 1980); Amendment to Restated Articles of Incorporation (incorporated by reference to Exhibit (3) to the registrant's report on Form 10-K for the year ended December 31, 1994), Amendment to By-laws adopted December 2, 1988 (incorporated by reference to Exhibit (3) to the registrant's report on Form 10-K for the year ended December 31, 1989); Amendment to By-laws adopted February 6, 1992 (incorporated by reference to Exhibit (3) to the registrant's report on Form 10-K for the year ended December 31, 1991) (10.1) A. T. Cross Company Executive Compensation Program Performance Cash Plan, January 1, 1995 (incorporated by reference to Exhibit (10.1) to the registrant's report on Form 10-K for the year ended December 31, 1994)* (10.2) A. T. Cross Company Executive Compensation Program Annual Incentive Plan, January 1, 1995 (incorporated by reference to Exhibit (10.2) to the registrant's report on Form 10-K for the year ended December 31, 1994)* (10.3) A. T. Cross Company Non-Qualified Stock Option Plan, 1975 (as amended and restated February 4, 1988, as amended December 10, 1991, as amended October 21, 1993, and as further amended and restated December 6, 1994) (incorporated by reference to Exhibit (10.3) to the registrant's report on Form 10-K for the year ended December 31, 1995)* (10.4) A. T. Cross Company Incentive Stock Option Plan, 1981 (as amended February 6, 1992 and as further amended April 28, 1994) (incorporated by reference to Exhibit (10.4) to the registrant's report on Form 10-K for the year ended December 31, 1994)* (10.5) A. T. Cross Company Deferred Compensation Plan (incorporated by reference to Exhibit (10.5) to the registrant's report on Form 10-K for the year ended December 31, 1994)* (10.6) A. T. Cross Company Unfunded Excess Benefit Plan (as amended) (incorporated by reference to Exhibit (10.6) to the registrant's report on Form 10-K for the year ended December 31, 1994)* (10.7) A. T. Cross Company Restricted Stock Plan (incorporated by reference to Exhibit (10.7) to the registrant's report on Form 10-K for the year ended December 31, 1995)* (11) Statement Re: Computation of Per Share Earnings (13) Annual Report to Shareholders for the year ended December 31, 1996. Filed only in respect to the portions expressly incorporated by reference in this Form 10-K. (21) Subsidiaries - incorporated by reference to the "Subsidiaries and Branches" section of the registrant's 1996 Annual Report (23.1) Consent of Deloitte & Touche LLP (23.2) Consent of Ernst & Young LLP (27) Financial Data Schedules - filed electronically * Management contract, compensatory plan or arrangement (b) No reports on Form 8-K were filed in the fourth quarter of 1996. (c) Exhibits--See Item (a)(3) above (d) Financial Statement Schedules--The response to this portion of Item 14 is submitted as a separate section of this report. SIGNATURES Pursuant to the requirements of Section 13 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 By: BRADFORD R. BOSS Bradford R. Boss Chairman Dated: March 25, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated: Signature Title Date BRADFORD R. BOSS Chairman & Director March 25, 1997 (Bradford R. Boss) RUSSELL A. BOSS President & Director March 25, 1997 (Russell A. Boss) (Chief Executive Officer) JOHN E. BUCKLEY Executive Vice President March 25, 1997 (John E. Buckley) & Director (Chief Operating Officer) MICHAEL EL-HILLOW Vice President, Finance March 18, 1997 (Michael El-Hillow) Treasurer (Chief Financial Officer) DONALD W. REILLY Corporate Controller March 25, 1997 (Donald W. Reilly) (Chief Accounting Officer) BERNARD V. BUONANNO, JR. Director March 25, 1997 (Bernard V. Buonanno, Jr.) H. FREDERICK KRIMENDAHL, II Director March 25, 1997 (H. Frederick Krimendahl, II) THOMAS C. MCDERMOTT Director March 25, 1997 (Thomas C. McDermott) TERRENCE MURRAY Director March 25, 1997 (Terrence Murray) JAMES C. TAPPAN Director March 25, 1997 (James C. Tappan) EDWIN G. TORRANCE Director March 25, 1997 (Edwin G. Torrance) ANNUAL REPORT ON FORM 10-K ITEM 14 (a)(1) and (2), (c) and (d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1996 A. T. CROSS COMPANY LINCOLN, RHODE ISLAND FORM 10-K - ITEM 14(a)(1) and (2) A. T. CROSS COMPANY AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of A. T. Cross Company and its subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 1996, are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1996 and December 31, 1995 Consolidated Statements of Income and Retained Earnings - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements - December 31, 1996 Independent Auditors Report for the year ended December 31, 1996 The independent public accountants report for the years ended December 31, 1995 and 1994 are included herein. The following consolidated financial statement schedule of A. T. Cross Company and its subsidiaries is included in Item 14(d): Schedule II - Valuation and Qualifying Accounts The report of independent public accountant on Financial Statement Schedule II for the year ended December 31, 1996 is included herein. The report of independent public accountant on the consolidated financial statements, and on Financial Statement Schedule II, for the years ended December 31, 1995 and 1994, are included herein. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or the information required therein has otherwise been disclosed in the consolidated financial statements referred to above, or are inapplicable, and therefore have been omitted. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS A. T. CROSS COMPANY AND SUBSIDIARIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E Additions (A) Balance at Charged to Charged to Balance Beginning Costs and Other Accounts Deductions at End of DESCRIPTION of Period Expenses Describe Describe Period Year Ended December 31, 1996 Deducted from asset account: Allowance for doubtful accounts $1,745,000 $342,977 $535,977(A) $1,552,000 Year Ended December 31, 1995 Deducted from asset account: Allowance for doubtful accounts $1,828,000 $360,755 $443,755(A) $1,745,000 Year Ended December 31, 1994 Deducted from asset account: Allowance for doubtful accounts $1,632,000 $405,592 $209,592(A) $1,828,000 (A) Uncollectible accounts written off.
Item 14 (d) Report of Deloitte & Touche LLP Independent Auditors To the Shareholders of A.T. Cross Company: We have audited the consolidated financial statements of A.T. Cross Company and subsidiaries as of December 31, 1996 and for the year then ended, and have issued our report thereon dated February 10, 1997; such consolidated financial statements and report are included in your 1996 Annual Report to Shareholders and are incorporated herein by reference. Our audit also included the consolidated financial statement schedule of A.T. Cross Company, listed in Item 14. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte & Touche LLP Boston, Massachusetts February 10, 1997 Report of Ernst & Young LLP Independent Auditors To the Shareholders of A.T. Cross Company: We have audited the accompanying consolidated balance sheets of A.T. Cross Company and subsidiaries as of December 31, 1995, and the related consolidated statements of income and retained earnings, and cash flows for each of the two years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index at item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of A.T. Cross Company and subsidiaries at December 31, 1995, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. ERNST & YOUNG LLP Providence, Rhode Island January 30, 1996 EX-11 2 EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS A. T. CROSS COMPANY AND SUBSIDIARIES Year Ended December 31 1996 1995 1994 Earnings per common share: Weighted average shares outstanding 16,531,488 16,528,876 16,872,505 Net income $ 6,605,926 $13,365,353 $10,533,922 Per share amount * $0.40 $ 0.81 $0.62 Primary: Weighted average shares outstanding 16,531,488 16,528,876 16,872,505 Dilutive stock options--based on the treasury stock method using average market price 31,115 77,320 78,315 TOTAL 16,562,603 16,606,196 16,950,820 Net income $ 6,605,926 $13,365,353 $10,533,922 Per share amount $0.40 $ 0.80 $0.62 Fully diluted: Weighted average shares outstanding 16,531,488 16,528,876 16,872,505 Dilutive stock options--based on the treasury stock method using the market price at the end of each quarter, if higher than average market price 31,325 77,659 78,477 TOTAL 16,562,813 16,606,535 16,950,982 Net income $ 6,605,926 $13,365,353 $10,533,922 Per share amount $ 0.40 $ 0.80 $0.62 * Stock options are not included in the computation of per share earnings as the effect is not material. EX-13 3 A.T. CROSS COMPANY 1996 ANNUAL REPORT THE A.T. CROSS COMPANY IS A MAJOR INTERNATIONAL MANUFACTURER OF FINE WRITING INSTRUMENTS WHICH ARE SOLD TO THE CONSUMER MARKET THROUGH FINE STORES WORLDWIDE, AND TO THE BUSINESS GIFT MARKET VIA A NETWORK OF COMPANIES SPECIALIZING IN RECOGNITION AND AWARDS PROGRAMS. CROSS PRESENTLY MARKETS FIVE LINES OF WRITING INSTRUMENTS: CENTURY_, CROSS TOWNSEND_, SOLO_, SOLO CLASSIC_, AND METROPOLIS_. EACH SERIES IS DESIGNED TO MEET THE PREFERENCES AND TASTES OF A PARTICULAR AUDIENCE. EACH OFFERS DISTINCTIVE STYLES, APPOINTMENTS AND FINISHES _ FROM PRECIOUS METALS TO COMPOSITE RESIN _ AND IS PRICED TO MEET SPECIFIC MARKET REQUIREMENTS. CROSS ALSO PRODUCES DESK SETS WHICH FEATURE BASES CRAFTED FROM WALNUT, ONYX, CHERRY AND MARBLE. LEATHER AND GIFT BUSINESS IS CONDUCTED BY MANETTI-FARROW, INCORPORATED. BASED IN NEW YORK CITY, THIS WHOLLY-OWNED SUBSIDIARY OF THE A.T. CROSS COMPANY DISTRIBUTES FENDI AND ECHO BRAND LEATHER PRODUCTS AND FASHION ACCESSORIES IN THE U.S. UNDER EXCLUSIVE AGREEMENTS. Five-Year Summary, Market & Dividend Information . . . . . . . . . . 1 Shareholders Report . . . . . . . . . . . . . . . . . . . . . . 2-3 Cross Highlights . . . . . . . . . . . . . . . . . . . .. . . . .4-9 Financial Statements . . . . . . . . . . . . . . .. . . . . . 10-19 Report of Deloitte & Touche LLP . . . . . . . . . . . . . . .. . . .20 Management's Discussion and Analysis . . . . . . . . . . . . . . 20-23 Corporate Directors & Officers. . . . . . . . . . . . . . . . . . . .24 Corporate Information . . . . . . . . . . . . . . . Inside Back Cover Five-Year Summary
(Thousands of Dollars) 1996 1995 1994 1993 1992 OPERATIONS: Net Sales From Continuing Operations $179,203 $191,090 $177,136 $164,606 $187,130 Income From Continuing Operations Before Income Taxes 9,378 20,253 19,016 1,618 19,012 Income Taxes 2,772 6,888 8,482 1,099 6,239 Income From Continuing Operations 6,606 13,365 10,534 519 12,773 Loss From Discontinued Operations, net _ _ _ (4,000) (1,955) Net Income (Loss) 6,606 13,365 10,534 (3,481) 10,818 Cash Dividends Declared 10,568 10,581 10,738 13,544 21,648 Capital Expenditures 9,135 10,839 7,662 8,494 4,603 DEPRECIATION 7,024 6,578 5,899 5,495 5,000 (Thousands of Dollars) FINANCIAL POSITION: Current Assets 119,372 135,143 130,727 130,126 143,632 Current Liabilities 42,891 52,439 46,758 40,226 39,831 Total Assets 175,191 189,362 180,369 178,994 194,455 Working Capital 76,481 82,704 83,969 89,900 103,801 Net Property, Plant and Equipment 40,325 38,237 33,950 32,130 40,162 Shareholders' Equity (Net Worth) 126,791 131,714 128,702 134,160 150,616 (Dollars) PER SHARE DATA: Income (Loss): From Continuing Operations 0.40 0.81 0.62 0.03 0.76 From Discontinued Operations _ _ _ (0.24) (0.12) Net Income (Loss) 0.40 0.81 0.62 (0.21) 0.64 CASH DIVIDENDS DECLARED 0.64 0.64 0.64 0.80 1.28 Shareholders' Equity (Book Value) 7.69 7.96 7.79 7.92 8.90
Market & Dividend Information The Company's Class A common stock is traded on the American Stock Exchange. At December 31, 1996, there were approximately 1,900 shareholders of record of the Company's Class A common stock and 2 shareholders of record of Class B common stock. The weighted average numbers of shares outstanding were 16,531,488 and 16,528,876 during 1996 and 1995, respectively. High and low stock prices and dividends for the last two years were:
CASH CASH DIVIDENDS DIVIDENDS QUARTER HIGH LOW DECLARED QUARTER HIGH LOW DECLARED 1996 1995 First 16 1/4 14 $.00 First 15 1/4 13 1/8 $.00 Second 18 15 .16 Second 17 1/4 14 1/4 .16 Third 17 1/2 11 1/4 .16 Third 17 1/4 14 1/2 .16 Fourth 12 10 1/2 .32* Fourth 16 7/8 14 .32* *One-half paid in the fourth quarter and balance paid in the subsequent year first quarter. SHAREHOLDERS REPORT To the Shareholders of A.T. Cross Company After two years of higher sales and earnings, 1996 was very disappointing for the A.T. Cross Company, as it was for many companies in the quality writing instrument sector. For the year ended December 31, 1996, net sales dropped 6.2% to $179.2 million from $191.1 million in 1995, and net income decreased 50.6% to $6.6 million, or 40 cents per share, from $13.4 million, or 81 cents per share in 1995. For the year, domestic writing instrument sales decreased 9.5% to $86.3 million from 1995, while foreign writing instrument sales were up 0.4% to $80.6 million. Leather sales were $12.3 million for the year, down 20.5% from last year. In Europe, the largest quality writing instrument market in the world, our sales increased approximately 9.0%, continuing a trend begun in 1994, and the Middle East and Africa showed 18.5% growth. Our Century Restage products, particularly our fountain pens, have proven very successful in these markets. It is gratifying to see that we have continued to grow share in these important markets since we are relatively new to the fountain pen business. Our remaining international markets were down approximately 6.6%, primarily because of declines in Japan, our largest foreign market, and Canada. The weakness of the Japanese yen resulted in a significant decline in consolidated sales after translating the yen to dollars, a problem faced by many U.S. companies in 1996. On a positive note, our local currency sales in Japan were on plan, showing the continued vitality of Cross in this top international market. The expansion of large U.S. based office mega-store retailers into Canada required us to change to direct distribution from the U.S. Sales in 1996 were negatively impacted during this transition, but should rebound as we better serve this market in the future. We have made tremendous strides in the fast growing tax and duty free market, admittedly from a fairly small base. Our Cross Townsend Lapis Lazuli writing instrument was given the Star Product of the Year Award for 1996 by Frontier Magazine, one of the leading international publications covering the tax and duty free industry. In the United States, market research shows that less than 20 percent of consumers who purchase quality writing instruments realize that Cross offers a broad range of products, even though more than 90 percent of those same consumers are aware of the Cross brand. To most consumers, Cross continues to be synonymous with our traditional Century line. In 1997, we will work to change this perception through marketing programs _ advertising, point-of-sale materials, displays and promotions _ which focus on the Company's full line of products. While there can be no assurance that such a strategy will increase consumer awareness and purchases overnight, we know consumers recognize the quality and reliability of Cross products. Once they are adequately informed about the variety of products, we believe they will find a Cross writing instrument that fits their needs, whether for personal use or as a gift. While writing instruments remain the core of our operations, Cross has begun to look into other avenues for potential revenue growth. Watches, like pens, are both functional items and fashion accessories used by both men and women. We will be testing a line of Cross watches in the U.S. in the fall to determine whether Cross' reputation for quality can be transferred to another quality gift and personal item. Our Pen Computing Group is continuing the development of products that combine the functionality and beauty of our distinctive writing instrument products with state-of-the-art technology to meet the needs of the fast growing electronic communications market; and we expect to have some sales in the second half of 1997. As we enter 1997, Cross has the broadest product line in its history: traditional slim-line Century and wider-bodied Cross Townsend, offered in metals, epoxies and luxurious lacquers; our resin-based products Solo and Solo Classic, the former with vibrant colors and black appointments, the latter with more traditional colors and gold plated appointments; and the contemporary Metropolis, with its fluted barrel and lacquered cap. Our new products have enabled Cross to regain prestige with our carriage trade accounts in the U.S. These retailers tell us that we are bringing excitement into the quality writing instrument category. Our goal for 1997 and beyond is to implement marketing programs that generate similar enthusiasm among consumers, including many who might not have been attracted to, or looked beyond, the Century line. While 1996 was not a banner year for Cross or our industry, all Cross employees are excited about our most diverse line of products ever and the opportunities available to us in writing instruments, watches, leather and pen computing. Cordially yours, Bradford R. Boss Russell A. Boss Chairman President February 14, 1997 CROSS TOWNSEND & METROPOLIS Throughout the world, the name A.T. Cross continues to stand for quality and reliability. As we have expanded our product lines, we have also developed a reputation for style and innovation. The Cross writing instruments of today have distinctive personalities, geared to the tastes and preferences of our various target audiences. For Cross Townsend and Metropolis, luxury and style are key. Prospective buyers shop in the finest stores and select only the best. For them, writing instruments must not only function beautifully, but be recognized as symbols of good taste and elegance. Cross Townsend's strong yet familiar silhouette, coupled with opulent finishes, appeals to a more mature audience. Metropolis, with its architectural detailing, is the choice for the younger, more trend setting, group. IN 1996, WE EXPANDED THE CROSS TOWNSEND LINE WITH THE INTRODUCTION OF A STERLING SILVER PRODUCT, A FITTING CHOICE FOR OUR 150TH ANNIVERSARY YEAR. THE STRIKING CROSS TOWNSEND LAPIS LAZULI WAS HAILED AS "A CONTEMPORARY CLASSIC" AND NAMED STAR PRODUCT OF THE YEAR BY FRONTIER, THE LEADING INTERNATIONAL TRAVEL RETAILING MONTHLY. METROPOLIS, WITH ITS URBAN APPEAL, IS DESIGNED TO ATTRACT A NEW CONSUMER TO CROSS QUALITY WRITING INSTRUMENTS. CENTURY & SOLO CLASSIC For Century and Solo Classic, traditional design and reasonable price are of primary importance. Buyers of these lines shop in a broad range of retail outlets. They expect value for their dollar and view quality writing instruments as a sign of achievement and refinement. Century remains the first choice of those many consumers who favor a slim silhouette. It continues to be popular for gift-giving occasions and is often used, with a company emblem, for business functions. Solo Classic, with its wider body and deep colors, is specifically designed to appeal to a broad range of consumers. It is also well- suited for promotional applications, since it offers the space necessary for clear, easy-to-read imprinting. ACCOMPLISHMENT AND GOOD TASTE ARE KEY TO THE MARKETING OF CENTURY AND SOLO CLASSIC FOR BOTH THE GENERAL CONSUMER AND BUSINESS MARKETS. THEY PLAY AN IMPORTANT ROLE IN THE SPECIAL MARKETS DIVISION, WHERE THEY ARE EXCELLENT CHOICES FOR PROMOTIONS WHERE QUALITY AND REPUTATION MUST BE ASSURED AT A REASONABLE PRICE. HALLMARK MAGLITE & RICHARTZ Hallmark, Maglite and Richartz all build upon the popularity of Cross products as personal and business gifts. For Hallmark, we've developed a collection of Cross writing instruments using well-known Hallmark designs. For holidays and special occasions, these include Solo writing instruments with silk-screened popular Hallmark designs which are also featured on the gift packaging. The pairing of Maglite and Solo is aimed at a broad consumer audience as well as customized presentations for business and promotional purposes. Known for its rugged dependability, the Maglite name is a great opportunity to merchandise to manufacturers and the trades. Richartz, Germany's premier line of pocket knives, adds breadth to our Special Markets product line. They offer a high level of quality and craftsmanship, allowing for interesting promotions with Cross quality writing instruments. SYNERGY IS KEY FOR NEW PROMOTIONS WHICH PAIR CROSS WITH OTHER WELL RECOGNIZED, HIGH- QUALITY NAMES. THE HALLMARK PROGRAM OFFERS NEW GIFT- GIVING OPPORTUNITIES. THE CROSS AND MINI MAGLITE PROMOTION REACHES A BROAD AUDIENCE WHICH MIGHT NOT USUALLY PURCHASE A QUALITY WRITING INSTRUMENT. THE RICHARTZ KNIVES PROGRAM WAS LAUNCHED, WITH GOOD RESPONSE, AT THE CHICAGO PREMIUM SHOW IN OCTOBER 1996.
Consolidated Balance Sheets DECEMBER 31
ASSETS 1996 1995 Current Assets Cash and cash equivalents $ 16,170,955 $ 32,469,549 Short-term investments 27,290,051 21,426,585 Accounts receivable, less allowances for doubtful accounts of $1,552,000 in 1996 and $1,745,000 in 1995 44,970,281 48,017,341 Inventories Finished goods 14,225,830 14,499,263 Work in process 5,449,050 7,837,532 Raw materials 6,498,693 7,128,544 26,173,573 29,465,339 Other current assets 4,767,023 3,764,664 Total Current Assets 119,371,883 135,143,478 Property, Plant and Equipment Land and land improvements 1,274,453 1,256,426 Buildings 17,485,386 16,359,227 Machinery and equipment 85,698,610 77,973,736 104,458,449 95,589,389 Less allowances for depreciation 64,133,753 57,352,065 Net Property, Plant and Equipment 40,324,696 38,237,324 Intangibles and Other Assets 15,493,956 15,981,397 $175,190,535 $189,362,199 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Note payable to bank $ 6,000,000 $ _ Accounts payable 5,992,132 12,275,420 Accrued compensation and related taxes 2,782,905 5,308,445 Accrued expenses and other liabilities 15,660,701 17,879,607 Cash dividends payable 2,638,536 2,648,323 Contributions payable to employee benefit plans 8,228,537 9,443,292 Income taxes payable 1,587,799 4,883,640 Total Current Liabilities 42,890,610 52,438,727 Accrued Warranty Costs 5,509,000 5,209,000 Shareholders' Equity Common stock, par value $1 per share: Class A _ authorized 40,000,000 shares, 15,282,412 shares issued and 14,686,049 shares outstanding in 1996, and 15,243,316 shares issued and 14,747,216 shares outstanding in 1995 15,282,412 15,243,316 Class B _ authorized 4,000,000 shares, 1,804,800 shares issued and outstanding 1,804,800 1,804,800 Additional paid-in capital 11,837,534 11,319,614 Retained earnings 106,781,204 110,743,135 Accumulated foreign currency translation adjustment (20,876) 215,950 135,685,074 139,326,815 Treasury stock, at cost, 596,363 shares in 1996 and 496,100 shares in 1995 (8,894,149) (7,612,343) Total Shareholders' Equity 126,790,925 131,714,472 $175,190,535 $189,362,199 See notes to consolidated financial statements.
Consolidated Statements of Income & Retained Earnings
YEAR ENDED DECEMBER 31 1996 1995 1994 Revenues Net sales $179,203,443 $191,090,409 $177,135,770 Interest and other income 2,091,054 3,617,193 3,943,234 181,294,497 194,707,602 181,079,004 Costs and Expenses Cost of goods sold 94,092,978 94,422,106 88,691,081 Selling, general and administrative expenses 70,627,432 72,553,706 66,794,430 Research and development expenses 2,876,756 2,990,745 2,035,568 Service and distribution costs 4,319,405 4,487,692 4,542,003 171,916,571 174,454,249 162,063,082 Income Before Income Taxes 9,377,926 20,253,353 19,015,922 Provision for income taxes 2,772,000 6,888,000 8,482,000 Net Income 6,605,926 13,365,353 10,533,922 Retained earnings at beginning of year 110,743,135 107,958,596 108,162,260 117,349,061 121,323,949 118,696,182 Cash dividends declared (per share: $0.64 in 1996, 1995 and 1994) 10,567,857 10,580,814 10,737,586 Retained Earnings at End of Year $106,781,204 $110,743,135 $107,958,596 Net Income Per Share $0.40 $0.81 $0.62 Weighted Average Shares Outstanding 16,531,488 16,528,876 16,872,505 See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 CASH PROVIDED BY (USED IN): 1996 1995 1994 Operating Activities: Net income $ 6,605,926 $ 13,365,353 $ 10,533,922 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,463,842 7,012,931 6,346,690 Provision for losses on accounts receivable 342,977 360,755 405,592 Deferred income taxes 792,000 (287,000) 458,000 Provision for warranty costs 685,183 1,050,103 1,195,595 Changes in operating assets and liabilities: Accounts receivable 2,221,489 (11,141,399) (6,806) Inventories 3,031,766 (12,855,331) 2,643,810 Other assets _ net (1,979,091) 773,518 (1,143,887) Accounts payable (6,301,984) 5,354,448 2,733,123 Other liabilities _ net (8,530,170) 2,153,170 2,663,867 Warranty costs paid (385,183) (750,103) (895,595) Foreign currency transaction (gain) loss 270,579 (194,763) (82,495) Net Cash Provided by Operating Activities 4,217,334 4,841,682 24,851,816 Investing Activities: Additions to property, plant and equipment (9,135,401) (10,839,460) (7,662,300) Additional acquisition payment _ _ (687,086) Purchase of short-term investments (26,373,158) (42,638,815) (86,088,263) Sale or maturity of short-term investments 20,509,692 77,543,554 48,068,902 Net Cash Provided by (Used in) Investing Activities (14,998,867) 24,065,279 (46,368,747) Financing Activities: Cash dividends paid (10,577,643) (10,576,346) (10,802,656) Proceeds from bank borrowings 8,600,000 10,700,000 9,023,000 Repayment of bank borrowings (2,600,000) (12,700,000) (7,023,000) Proceeds from sale of Class A common stock 316,826 647,225 262,033 Purchase of treasury stock (1,281,806) (306,606) (7,305,737) Net Cash Used in Financing Activities (5,542,623) (12,235,727) (15,846,360) Effect of exchange rate changes on cash and cash equivalents 25,562 108,751 230,490 Increase (decrease) in cash and cash equivalents (16,298,594) 16,779,985 (37,132,801) Cash and cash equivalents at beginning of year 32,469,549 15,689,564 52,822,365 Cash and Cash Equivalents at End of Year $ 16,170,955 $ 32,469,549 $ 15,689,564 See notes to consolidated financial statements.
Notes to Consolidated Financial Statements December 31, 1996 NOTE A _ SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of the Company and all of its subsidiaries. Upon consolidation, all material intercompany accounts and transactions are eliminated. ACCOUNTING FOR ESTIMATES: The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make assumptions that affect the estimates reported in these consolidated financial statements. Actual results may differ from these estimates. INDUSTRY SEGMENT AND NATURE OF OPERATIONS: The Company predominately operates in one industry segment, the manufacture, sale and distribution of writing instruments, and sells to retailers and wholesale distributors throughout the world, principally in North America, Europe and the Far East/Asia. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: The Company considers all highly liquid investments with a remaining maturity of three months or less when purchased to be cash equivalents. Short-term investments are stated at cost, which approximates market, and consist of interest bearing investments with a remaining maturity of greater than three months when purchased. Cash equivalents and short-term investments are placed only with high-credit quality financial institutions. At December 31, 1996 and 1995, approximately 53% and 66%, respectively, of the Company's cash, cash equivalents and short-term investments were placed with one financial institution. Short-term investments at December 31, 1996 and 1995 include time deposits, certificates of deposit and certain municipal bonds ("Held-to- Maturity" securities) and other municipal bonds ("Trading" securities) which have a maturity greater than three months. The Company has the positive intent and ability to hold its Held-to-Maturity securities until maturity and has stated these investments at cost which approximates market. Trading securities are stated at cost which approximates fair market value. INVENTORIES: Substantially all domestic inventories are priced at the lower of last-in, first-out cost or market. The remaining inventories are priced at the lower of first-in, first-out cost or market. PROPERTY, PLANT AND EQUIPMENT, AND RELATED DEPRECIATION: Property, plant and equipment are stated on the basis of cost. Provisions for depreciation are computed using a combination of accelerated and straight-line methods which are intended to depreciate the cost of such assets over their estimated useful lives which range from three to thirty years. ASSETS HELD FOR SALE: The carrying value of the Company's former distribution center in Lincoln, RI, which is held for sale, is included in the balance sheet caption "Intangibles and Other Assets" at December 31, 1996 and 1995. FOREIGN CURRENCY TRANSLATION: The Company has a program in place to manage foreign currency risk. As part of that program, the Company has entered into foreign currency exchange contracts to hedge anticipated foreign currency transactions or commitments, primarily purchases of materials and products from foreign suppliers, and certain foreign currency denominated balance sheet positions. The terms of the contracts generally correspond with the dates of the anticipated foreign currency transactions. Realized and unrealized gains and losses on those contracts intended to hedge specific foreign currency transactions or commitments are deferred and accounted for as part of the transaction, while gains and losses on other contracts are included in net income. At December 31, 1996 and 1995, the Company held forward exchange contracts approximating $10,497,000 and $12,828,000, respectively. The face value of the outstanding contracts in both years approximated market prices of comparable instruments at December 31, 1996 and 1995. The outstanding contracts at December 31, 1996 hedge commitments becoming due at various dates through September 1997. Foreign currency exchange gains (losses) are included in selling, general and administrative expenses and approximated ($249,000), $88,000 and $189,000 in 1996, 1995 and 1994, respectively. GOLD PURCHASE CONTRACTS: To reduce its exposure to fluctuating gold prices, the Company enters into gold purchase contracts with a bank. The contracts, which do not have expiration dates, allow the Company to purchase a specified quantity of gold bullion at a fixed price at any time in the future. The contracts require the Company to pay a monthly fee on the total value of each contract. The rate of the fee on each contract is selected from a pool of available rates related to, for example, the federal funds rate or the London Interbank Offering Rate (LIBOR). At any point in time, the Company's outstanding gold purchase contracts are generally sufficient to supply approximately twelve months expected gold usage. At December 31, 1996, the total contract prices of outstanding gold purchase commitments amounted to $6,481,200. ADVERTISING COSTS: The costs of advertising are charged to expense as incurred and amounted to $21,535,000, $22,245,000 and $20,718,000 for the years ended December 31, 1996, 1995 and 1994, respectively. WARRANTY COSTS: The Company's writing instruments are sold with a full warranty of unlimited duration against mechanical failure. Estimated warranty costs are accrued at the time of sale. Discretionary product repair and replacement costs, not related to mechanical failure, are classified as marketing costs and are included in selling, general and administrative expenses. NET INCOME PER SHARE: Net income per share is computed based upon the weighted average number of shares of Class A and Class B common stock outstanding during the year. The exercise of outstanding stock options would not result in a material dilution of net income per share. NOTE A _ SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS: In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed of." In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." The Company adopted both of these new accounting principles in 1996, neither of which had a material impact on the consolidated financial statements. NOTE B _ INVENTORIES Domestic inventories approximating $17,129,000 and $19,245,000 at December 31, 1996 and 1995, respectively, are priced at the lower of last-in, first-out (LIFO) cost or market. The remaining inventories are priced at the lower of first-in, first-out cost or market. If the first-in, first-out method of inventory valuation had been used by the Company for those inventories priced using the last-in, first- out method, inventories would have been approximately $14,547,000 and $12,907,000 higher than reported at December 31, 1996 and 1995, respectively. The Company believes the LIFO method of inventory valuation ordinarily results in a more appropriate matching of its revenues to their related costs since current costs are included in cost of goods sold and distortions in reported income due to the effect of changing prices are reduced NOTE C _ COMMON STOCK The Class A and Class B common stock are identical, except for differences with respect to certain voting rights. They are entitled to share equally in dividends that may be declared by the Board of Directors and, upon liquidation, to share ratably in any assets which remain available for distribution on the Class A and Class B common stock. Holders of Class A common stock are entitled to elect one-third of the number of directors. Changes in Class A common stock and additional paid-in capital are shown below (there were no changes in Class B common stock)
CLASS A COMMON STOCK NUMBER ADDITIONAL OF PAID-IN SHARES AMOUNT CAPITAL Balances at January 1, 1994 15,125,982 $15,125,982 $ 9,389,762 Stock option activity 10,753 10,753 523,766 Stock purchase plan 8,636 8,636 116,860 Issued to profit sharing trust 48,922 48,922 691,024 Balances at December 31, 1994 15,194,293 15,194,293 10,721,412 Stock option activity 40,984 40,984 484,808 Stock purchase plan 8,039 8,039 113,394 Balances at December 31, 1995 15,243,316 15,243,316 11,319,614 Stock option activity 15,334 15,334 189,488 Stock purchase plan 7,947 7,947 104,057 Restricted stock plan 15,815 15,815 224,375 Balances at December 31, 1996 15,282,412 $15,282,412 $11,837,534
NOTE D _ STOCK OPTIONS AND STOCK PURCHASE PLANS The Company has an incentive stock option plan and a non-qualified stock option plan under which options to purchase shares of Class A common stock may be granted to key employees. Options to purchase Class A shares are automatically granted annually pursuant to formula under the non-qualified plan to members of the Company's Board of Directors. Under the incentive plan, the option price is the mean between the high and low prices of the stock on the date that the option is granted. Under its present terms, the plan will expire in 1998. The term of each option is ten years or such shorter period as may be determined by the Board of Directors. The option price for options issued under the non-qualified plan is the mean between the high and low price on the date of the grant. The plan has no definite expiration date, but may be terminated by the Board of Directors. The term of each option is ten years or such shorter period as may be determined by the Board of Directors. The number of shares of Class A common stock reserved for issuance under the plan was increased by 675,000 by the Company's shareholders in 1995. Options under both the incentive plan and the non-qualified plan vest and become exercisable at such time or times, in installments or otherwise, as may be determined by the Compensation Committee of the Board of Directors and set forth in a written agreement evidencing the grant of such option. Stock option activity during the three years ended December 31, 1996 was as follows:
WEIGHTED AVERAGE SHARES Options Price Per Share Reserved Incentive Stock Option Plan: Outstanding at January 1, 1994 405,470 $22.74 610,390 Granted 117,750 $14.92 _ Exercised (2,250) $13.21 (2,250) Canceled (59,850) $22.61 _ Outstanding at December 31, 1994 461,120 $21.21 608,140 Granted 32,250 $15.75 _ Exercised (3,334) $15.44 (3,334) Canceled (62,149) $22.10 _ Outstanding at December 31, 1995 427,887 $19.48 604,806 Granted 37,250 $14.95 _ Exercised (4,000) $15.44 (4,000) CANCELED (73,887) $19.25 _ Outstanding at December 31, 1996 387,250 $19.90 600,806
Approximately 354,000 (at a weighted average price of $20.51), 385,000 and 378,000 options outstanding were exercisable at December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, exercise prices of outstanding options ranged from $10.75 to $36.69 and outstanding options had a weighted average remaining contractual life of approximately six years.
Non-Qualified Stock Option Plan: Outstanding at January 1, 1994 589,719 $17.20 795,300 Granted 176,860 $13.48 _ Exercised (8,503) $12.54 (8,503) Canceled (53,069) $19.61 _ Outstanding at December 31, 1994 705,007 $16.53 786,797 Addition to shares reserved 675,000 Granted 677,226 $15.21 _ Exercised (37,650) $12.64 (37,650) Canceled (83,993) $15.01 _ Outstanding at December 31, 1995 1,260,590 $16.10 1,424,147 Granted 11,182 $11.50 _ Exercised (11,334) $12.63 (11,334) Canceled (86,317) $16.24 _ Outstanding at December 31, 1996 1,174,121 $15.91 1,412,813
Approximately 603,000 (at a weighted average of price $16.47), 629,000 and 546,000 options outstanding were exercisable at December 31, 1996, 1995 and 1994, respectively. At December 31, 1996, exercise prices of outstanding options ranged from $11.38 to $33.02 and outstanding options had a weighted average remaining contractual life of approximately seven years. The Company also has an employee stock purchase plan allowing eligible employees, other than officers and directors, to purchase shares of the Company's Class A common stock at 10% less than the mean between the high and low prices of the stock on the date of purchase. A maximum of 320,000 shares is available under the plan and the aggregate number of shares reserved was 145,730, 153,677 and 161,716 at December 31, 1996, 1995 and 1994, respectively. In addition, the Company has a restricted stock plan under which shares of the Company's Class A common stock may be issued to certain executives representing a portion of their annual incentive compensation in the event that such annual incentive compensation is in excess of performance target levels. Shares granted under the plan may not be sold, assigned, pledged or otherwise encumbered during the restriction period which expires on December 31, 1999. If the Company fails to achieve certain operating targets during the restriction period, shares granted under the plan will revert back to the Company or will be canceled. AS PROVIDED FOR IN SFAS NO. 123, THE COMPANY APPLIES ACCOUNTING PRINCIPLES BOARD OPINION NO. 25 AND RELATED INTERPRETATIONS IN ACCOUNTING FOR ITS STOCK OPTION PLANS. ACCORDINGLY, NO COMPENSATION COST HAS BEEN RECOGNIZED IN CONNECTION WITH OPTIONS ISSUED. HAD COMPENSATION COST FOR THE COMPANY'S STOCK OPTION PLANS BEEN DETERMINED BASED ON THE FAIR VALUE OF THE OPTIONS USING THE BLACK SCHOLES OPTION PRICING MODEL WITH AN ASSUMED RISK FREE INTEREST RATE OF 5%, AN EXPECTED LIFE OF FIVE YEARS, VOLATILITY OF 25% AND AN ASSUMED DIVIDEND RATE OF 4.2%, THE COMPANY'S EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 WOULD HAVE DECREASED BY LESS THAN $0.01 EACH YEAR. Note E _ Employee Benefit Plans The Company has a noncontributory defined benefit pension plan, a savings plan, a noncontributory profit sharing plan and a voluntary employee beneficiary association (VEBA) plan which cover substantially all domestic employees. Employees of non-U.S. subsidiaries generally receive retirement benefits from company sponsored defined benefit or defined contribution plans or from statutory plans administered by governmental agencies in their countries. The Company does not provide its employees any postretirement benefits other than those described above. Benefits under the defined benefit plans are based on the employee's years of service and compensation, as defined. The Company's funding policy is consistent with applicable local laws and regulations. The savings plan, established under Section 401(k) of the Internal Revenue Code, allows participants to contribute up to 10% of their annual compensation. The Company will contribute 50% of the participant's contribution, to a maximum of 3% of the participant's salary and bonus. The Company's annual accrual and contribution for both the savings and profit sharing plans will not exceed the maximum amount deductible for such year for federal income tax purposes. The VEBA plan provides payment of health benefits to the Company's employees and their beneficiaries. The following table sets forth the defined benefit plans' combined funded status and amounts recognized in the Company's consolidated balance sheet at December 31 of each year:
1996 1995 1994 Actuarial present value of benefit obligations: Accumulated benefit obligation including vested benefits of $17,869,000 in 1996, $16,331,000 in 1995, and $12,297,000 in 1994 $ 18,322,000 $ 16,877,000 $ 12,667,000 Projected benefit obligation $(25,280,000) $(23,023,000) $(18,383,000) Plan assets at fair value (marketable securities and short-term cash investments) 22,870,000 18,553,000 14,847,000 Projected benefit obligation in excess of plan assets (2,410,000) (4,470,000) (3,536,000) Unrecognized net gain (3,440,000) (1,316,000) (1,296,000) Unrecognized prior service cost 185,000 174,000 161,000 Unrecognized net transition obligation, net of amortization 486,000 421,000 327,000 Accrued pension cost included in contributions payable to employee benefit plans $ (5,179,000) $ (5,191,000) $ (4,344,000)
NOTE E _ EMPLOYEE BENEFIT PLANS (CONTINUED)
1996 1995 1994 The principal assumptions used in computing the amounts on the preceding page are as follows: Weighted average discount rate 7.00%-7.75% 7.00%-8.00% 8.00%-9.00% Increase in future compensation 4.50%-5.00% 4.00%-6.00% 5.00%-7.00% Expected long-term return on plan assets 8.00%-9.00% 8.00%-9.00% 8.00%-9.00% Expenses for each of the employee benefit plans are as follows: Service cost _ benefits earned during the year $ 1,685,000 $ 1,316,000 $ 1,519,000 Interest cost on projected benefit obligation 1,666,000 1,590,000 1,389,000 Actual return on plan assets (2,966,000) (3,278,000) 131,000 Net amortization and deferral 1,339,000 1,893,000 (1,185,000) Net pension cost of defined benefit plans 1,724,000 1,521,000 1,854,000 Savings plan 761,000 686,000 621,000 Profit sharing plan _ 1,000,000 1,000,000 Total $ 2,485,000 $ 3,207,000 $ 3,475,000
NOTE F _ INCOME TAXES The provision (benefit) for income taxes consists of the following: 1996 1995 1994 Currently payable: Federal $ 1,866,000 $ 6,673,000 $ 5,349,000 State 19,000 414,000 637,000 Foreign 95,000 88,000 1,717,000 1,980,000 7,175,000 7,703,000 Deferred: Federal 664,000 (236,000) 857,000 State 137,000 (60,000) 93,000 Foreign (9,000) 9,000 (171,000) 792,000 (287,000) 779,000 TOTAL $ 2,772,000 $ 6,888,000 $ 8,482,000 The reconciliation of income taxes computed at the statutory federal income tax rate to the provision for income taxes from continuing operations is as follows: Statutory federal income tax $ 3,282,000 $ 7,089,000 $ 6,656,000 State income tax expense, less federal tax benefit 101,000 230,000 475,000 Foreign operations 145,000 170,000 1,779,000 Benefit of Foreign Sales Corporation (457,000) (575,000) (553,000) Miscellaneous (299,000) (26,000) 125,000 Provision for income taxes $ 2,772,000 $ 6,888,000 $ 8,482,000 NOTE F _ INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are presented below: 1996 1995 DEFERRED TAX ASSETS: Accounts receivable $ 378,000 $ 516,000 Additional costs inventoried for tax purposes and inventory reserves not deductible for tax purposes 1,268,000 1,465,000 Excess benefit plan 1,086,000 874,000 Accrued warranty costs 2,138,000 2,021,000 Accrued pension costs 1,221,000 1,215,000 Intangible assets 639,000 575,000 Net operating loss carryforward 1,322,000 1,325,000 Other 529,000 636,000 8,581,000 8,627,000 Less: valuation allowance (1,322,000) (1,325,000) Total deferred tax assets 7,259,000 7,302,000 DEFERRED TAX LIABILITIES: Property, plant and equipment, principally due to differences in depreciation (622,000) (174,000) OTHER (398,000) (97,000) Total deferred tax liabilities (1,020,000) (271,000) Net deferred tax asset (included in the balance sheet caption "Intangibles and Other Assets") $6,239,000 $7,031,000 The Company's wholly-owned subsidiary, A. T. Cross Limited ("ATCL") is not subject to the Republic of Ireland statutory income tax rate. Through 2010, ATCL is subject to the 10% rate on profits from sales of Irish manufactured goods, as defined. This lower tax rate reduced income tax expense and increased net income by approximately $246,000 ($0.01 per share) in 1996, $625,000 ($0.04 per share) in 1995, and $1,692,000 ($0.10 per share) in 1994. Beginning in 1994, the earnings of ATCL are subject to taxation in the United States pursuant to anti- deferral legislation. This had the effect of decreasing net income by approximately $215,000 ($0.01 per share) in 1996, $549,000 ($0.03 per share) in 1995, and $1,375,000 ($0.08 per share) in 1994. At December 31, 1996 and 1995 undistributed earnings of foreign subsidiaries amounted to approximately $71,083,000 and $70,089,000 (including approximately $37 million in 1996 and $46 million in 1995 of cash, cash equivalents and short-term investments). These earnings could become subject to additional tax if they are remitted as dividends, if foreign earnings are lent to the Company or a U.S. affiliate, or if the Company should sell its stock in the subsidiaries. Since it is generally the intention of the Company to invest the undistributed earnings of foreign subsidiaries in the growth of business outside the United States, deferred income taxes have not been provided on such earnings. The amount of additional taxes that might be payable on the foreign earnings approximates $21,920,000. At December 31, 1996, net operating loss carryforwards for certain foreign subsidiaries were approximately $3,693,000 for tax purposes. These losses begin to expire in 1998. Income taxes paid in 1996, 1995 and 1994 were approximately $5,200,000, $7,275,000 and $4,533,000, respectively. NOTE G _ GEOGRAPHIC INFORMATION The following table sets forth geographic information for the Company: 1996 1995 1994 Sales to unaffiliated customers: United States $123,853,010 $138,749,427 $132,177,946 Europe and Far East 55,350,433 52,340,982 44,957,824 Total $179,203,443 $191,090,409 $177,135,770 Income before income taxes: United States $ 5,930,891 $ 15,507,613 $ 14,314,316 Europe and Far East 3,447,035 4,745,740 4,701,606 Total $ 9,377,926 $ 20,253,353 $ 19,015,922 Identifiable assets: United States $ 79,422,307 $106,934,644 $ 96,145,653 Europe and Far East 95,768,228 82,427,555 84,223,452 Total $175,190,535 $189,362,199 $180,369,105 Identifiable assets outside the United States include cash, cash equivalents and short-term investments of $37,363,000, $46,259,000 and $54,178,000 at December 31, 1996, 1995 and 1994, respectively. United States sales to unaffiliated customers include export sales of approximately $25,252,000, $27,972,000 and $23,950,000 in 1996, 1995 and 1994, respectively. NOTE H _ LINE OF CREDIT The Company has an unsecured line of credit agreement with a bank under which it may borrow up to $50,000,000. Any amounts borrowed under the agreement are payable on demand and will bear interest at one half of one percent (1/2 of 1%) per annum in excess of the London Interbank Offering Rate (LIBOR). The agreement is cancelable at any time by the Company or the bank. The highest amount borrowed at any time during the year was $8,600,000. The Company also has a multi-currency credit arrangement with a bank under which it may borrow up to the equivalent of 7,000,000 U.S. dollars to meet short-term foreign currency needs. This agreement is on an "offering basis" in that the terms and conditions of any transaction shall be mutually agreed upon at the time of each specific transaction. There were no amounts outstanding under this agreement at any time in 1996 NOTE I _ QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly results of operations for the years ended December 31, 1996 and 1995: (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
March 31 June 30 September 30 December 31 1996: Net sales $36,053 $41,524 $43,053 $58,573 Gross profit 17,900 19,736 20,264 27,210 Net income 1,657 794 1,621 2,534 Net income per share 0.10 0.05 0.10 0.15 1995: Net sales $35,407 $44,883 $44,859 $65,941 Gross profit 17,597 21,668 21,660 35,743 Net income 1,554 1,647 2,751 7,413 Net income per share 0.09 0.10 0.17 0.45
Report of Deloitte & Touche LLP To the Shareholders of A.T. Cross Company We have audited the accompanying consolidated balance sheet of A.T. Cross Company & subsidiaries as of December 31, 1996 and the related consolidated statements of income and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of the Company for the years ended December 31, 1995 and 1994 were audited by other auditors whose report, dated January 30, 1996, expressed an unqualified opinion on those statements. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such 1996 consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1996, and the consolidated results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts February 10, 1997 Management's Discussion & Analysis of Financial Condition and Results of Operations This section, as well as other portions of this document, includes certain statements which are or may be construed as forward looking about the Company's business and new products, sales and expenses, and operating and capital requirements. Any such statements are subject to risks that could cause the actual results or needs to vary materially. These risks are discussed in this document and in the Company's 10-K for its fiscal year ended December 31, 1996 filed with the Securities and Exchange Commission. RESULTS OF OPERATIONS COMPARISON OF 1996 WITH 1995 Consolidated net sales decreased 6.2% or $11.9 million in 1996 compared to 1995. Overall, the decrease is attributable to a decline in sales of the Company's traditional, slim Century line, offset somewhat by sales of the Company's newer products. Domestic net writing instrument sales decreased by $9.0 million, or 9.5%, while foreign net writing instrument sales were essentially even with 1995. Sales of Fendi leather products by the Company's Manetti-Farrow subsidiary declined 20.5%, or $3.2 million. The decline in Century sales was particularly notable in the United States where this product line has been marketed for over 50 years. In the last three years, the Company began offering new product lines to complement the sagging Century line. For the most part, these new products have been very well received. However, in 1996 new products did not generate sufficient sales to completely offset the Century decline. The Company attributes the less than expected new product sales to a lack of consumer awareness of the Company's new products. While the established Century line is well-known and quickly associated by consumers with the Cross brand name, the Company has not successfully transferred this high brand awareness to its other products. The Company believes that a new, long-term marketing strategy, to be developed in 1997, which emphasizes the family of Cross products may stimulate interest in both the Century line and the newer Cross offerings. The decline in domestic writing instruments was most significant in sales to mass market retailers which declined almost 40%. However, part of the decline in sales to this distribution channel was the result of the Company's decision to discontinue business with certain customers whose merchandising strategies were incompatible with the Cross brand image. The Company's Century line and its more recently introduced, low- priced Solo line were the most negatively affected by the fall off in business to mass market retailers. While sales of the Company's new Metropolis and Solo Classic lines, particularly to the office mega stores as well as to department, gift and jewelry stores (i.e., the "carriage trade"), helped to partially offset the Century and Solo decreases, sales of these products were less than anticipated and insufficient to offset the entire decline. Sales of Townsend products, the Company's highest priced product line, were relatively flat compared to 1995. Domestic sales in 1996 benefited somewhat from an approximate 2% first quarter price increase. Internationally, while sales in Asia and the Far East decreased approximately 3% primarily due to the weaker Japanese yen compared to 1995, European sales increased significantly (9.0%). The Company's largest sales growth in recent years has been in international markets, where the Company has a much lower share of the writing instruments market than in the United States, and the Company has taken steps to increase its market share in these areas of the world. For example, in Europe, the Company introduced a new line of Century products (Century Restage) complete with unique finishes and designs developed specifically for this market. The success of this new product, especially the fountain pen, contributed to the higher European sales in 1996. The overall consolidated gross margin decreased to 47.5% in 1996 from 50.6% in 1995. Although cost controls have been effective at keeping production cost increases to a minimum, lower sales combined with even lower production levels in 1996 resulted in a much higher percentage of indirect product costs (i.e., factory overhead) in relation to sales. In addition, a number of the Company's newer products earn incrementally lower margins than the Company's older, more mature products. Selling, general and administrative expenses decreased $1.9 million (2.7%) in 1996 compared to 1995, and were 39.4% of net sales in 1996, as compared to 38.0% in 1995. The lower expenses this year largely resulted from the Company's cost containment efforts undertaken in response to lower sales. Although the Company's overall cost structure is higher due to the establishment in 1995 of a European Sales and Marketing Headquarters facility in Paris, France, many discretionary costs were reduced or eliminated in order to minimize the negative impact on earnings associated with lower sales. The stronger dollar, particularly with respect to the Japanese yen, also contributed to lower expenses this year. Research and development expenses and service and distribution costs were relatively unchanged in comparison to 1995. Interest and other income decreased $1.5 million (42.2%) from 1995. Interest income was lower due to lower interest rates earned on lower average invested funds, and to interest earned in 1995 on a non- recurring state income tax refund claim. The effective income tax rate in 1996 was 29.6% as compared to the 1995 rate of 34.0%. The lower rate this year primarily resulted from the utilization of foreign tax credits and increased tax benefits derived from export sales. The Company expects its effective tax rate in 1997 to approximate 33-35%. COMPARISON OF 1995 WITH 1994 Consolidated net sales increased 7.9% in 1995 compared to 1994. Overall, the increase was attributable to the favorable consumer response to the Company's new product offerings. Domestic net sales increased by $2.5 million, or 2.4%, while foreign net sales were $11.4 million, or 16.6%, improved over the prior year. The higher domestic sales were largely the result of new products launched in 1995, in particular the Solo and Solo Classic lines, and the continued success of the Townsend line, the Company's highest priced product line. While overall domestic unit volume increased 6.2%, most of this increase was derived from Solo which has lower average selling prices than many of the Company's traditional products. Aggressive promotional pricing on certain older products helped maintain unit volume for those items. Domestic sales in 1995 benefited somewhat from a modest mid-year price increase on selected products. While foreign sales increased in nearly every major market, European sales increased dramatically (20.9%), followed closely by Asia and the Far East (15.0%). The Company has aggressively pursued opportunities to increase its market share in these areas of the world. In addition to new product offerings and promotions which have stimulated international consumer recognition of and demand for Cross products, over the last several years the Company has devoted significant effort toward identifying and replacing poor performing international distributors, and has worked more closely with its distributors to improve the merchandising and promotion of the Cross brand. International sales benefited further by higher marketing support expenditures, consistent with the Company's efforts to increase market share in key foreign markets. Overall, favorable foreign exchange rates against the lower dollar, particularly in Japan, added to the improvement in sales. The overall consolidated gross margin increased to 50.6% in 1995 from 49.9% in 1994. As cost controls were effective at keeping production cost increases low, the higher sales and production volume had a direct and positive impact on the Company's worldwide margins in 1995. Selling, general and administrative expenses increased $5.8 million (8.6%) in 1995 compared to 1994, and were 38.0% of net sales in 1995, as compared to 37.7% in 1994. The increase was due in part to higher marketing support expenses of $1.5 million, as well as higher personnel costs principally in the sales and marketing areas. Some of the personnel costs, and certain other administrative costs, were attributable to the establishment of a European Sales and Marketing Headquarters facility in Paris, France, organized in connection with the Company's efforts to maximize its growth opportunities in the lucrative European writing instruments market. The weaker dollar also contributed to higher expenses in 1995. Research and development expenses increased $1.0 million or 46.9% from 1994, reflecting the Company's commitment to developing new products and improving processes and technologies. Service and distribution costs were 1.2% lower than 1994 due to ongoing cost reduction efforts in this area. Interest and other income decreased $0.3 million (8.3%) from 1994. Interest income was higher due to higher interest rates earned on lower average invested funds, and to interest earned on a non-recurring state income tax refund claim. The higher interest income was offset by lower other income resulting from certain non-recurring gains recorded in the prior year. The effective income tax rate in 1995 was 34.0% as compared to the 1994 rate of 44.6%. The Company implemented a reorganization of certain of its European operations at the end of 1994 to reflect a change of functions performed by both its manufacturing and distribution affiliates, and to more closely align the responsibilities of management in each area to their operational objectives. These operational changes had the effect of more closely conforming the Company's effective tax rate with its historical tax rate of 31% (average effective tax rate from 1988 to 1992). LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and short-term investments (i.e., "cash") decreased $10.4 million in total in 1996 to $43.5 million. Among other factors, expenditures for capital additions, dividends and treasury stock acquisitions exceeded cash generated from operating activities and bank borrowings, resulting in the overall decrease in cash. Although net income decreased $6.8 million, lower inventories and accounts receivable at the end of the year resulted in a relatively minor decrease, $0.6 million, in cash generated from operations. Accounts receivable decreased $2.2 million primarily due to the lower sales volume in the last months of the year as compared to the same months of 1995. The Company ordinarily offers domestic retail customers a program whereby they may either delay payment on certain third and fourth quarter purchases until January of the next year, or may earn a greater discount on these purchases if payment is made earlier. As a result, the Company's cash level is lowest at the end of the year when accounts receivable are at their highest. Inventory decreased $3.0 million compared to 1995. The inventory reduction was the result of significantly lower production this year, especially in the fourth quarter. Additions to property, plant and equipment were $9.1 million in 1996, compared to $10.8 million in 1995. The Company expects capital expenditures will approximate $6.5 million in 1997, as compared with expected depreciation expense of approximately $7.0 million. The Company's working capital was $76.5 million at the end of 1996, a decrease of $6.2 million from 1995, and its current ratio increased to 2.78:1 at the end of 1996 from 2.58:1 at the end of 1995. The Company has a $50.0 million bank line of credit to meet any temporary cash flow shortages that may arise. Also, the Company has a multi-currency credit arrangement under which it may borrow up to the equivalent of 7.0 million U.S. dollars to meet short-term foreign currency needs. The Company believes that funds from operations and existing cash, supplemented, as appropriate, by the Company's existing short-term borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements. At the end of 1996, cash available for domestic operations amounted to $6.1 million while cash held offshore for use in international operations amounted to $37.4 million. While it is not the Company's intention to do so, if in the future the Company determines that the cash held offshore is not necessary for international operations, it may repatriate such cash for use in domestic operations. However, repatriated offshore funds will be subject to additional federal and state income taxes of approximately 31% of the remitted amounts. IMPACT OF INFLATION AND CHANGING PRICES The Company's operations are subject to the effects of general inflation as well as fluctuations in foreign currencies. In addition, the Company is exposed to volatility in the price of gold and silver as those precious metals are used in the manufacture of its products. Policies and programs are in place to manage the potential risks in these areas. The Company has generally been successful in controlling cost increases due to precious metal fluctuations and due to general inflation. For example, the Company reduced its number of suppliers in order to obtain lower costs and higher quality on many of its materials and purchased components, and has taken steps in recent years to reduce excess manufacturing capacity. Because of volatility in both the gold bullion and foreign currency markets, the Company has followed the practice of making advance commitments for approximately one year's projected requirements for its gold needs and for a portion of its foreign currency needs. In addition, the Company normally enters into foreign currency forward exchange contracts to hedge that portion of its net financial position that is exposed to foreign currency fluctuations. As noted above, the Company has a multi-currency credit arrangement which may help the Company meet some of its foreign currency needs and may serve as an additional tool for hedging assets and liabilities exposed to foreign currency fluctuations. The Company has adopted accounting practices which tend to reflect current costs in its income statement. Approximately 65% of total inventories at the end of 1996 and 1995, and 54% at the end of 1994, were accounted for using the last-in, first-out (LIFO) valuation method. Normally under this method, the cost of goods sold reported in the financial statements approximates current costs and, thus, helps reduce distortions in reported income due to the effect of changing prices. Depreciation expense is based on historical costs and, therefore, is lower than if based on the current cost of productive capacity. However, the Company uses accelerated depreciation methods for most assets, thereby reducing operating income by a greater amount than would be the case if the more generally used straight-line method was employed. Assets acquired in prior years will, of course, be replaced at higher costs, but this will take place over many years. These new assets will result in higher depreciation charges, but in many cases, due to technological improvements, there quite likely will be operating cost savings as well. RISKS AND UNCERTAINTIES The following section describes certain of the more prominent risks and uncertainties inherent in the Company's operations. However, this section does not intend to discuss all possible risks and uncertainties to which the Company is subjected, nor can it be assumed necessarily that there are no other risks and uncertainties which may be more significant to the Company. NEW PRODUCTS: The Company's ability to restore growth in sales depends largely on consumer acceptance of various new products recently introduced and planned for introduction in the coming months. While the Company is optimistic about the prospects of favorable consumer reaction to these new products, the market in which the Company sells is highly competitive, and there is no assurance that such consumer acceptance will be realized to the degree necessary to generate growth in the Company's sales and earnings. DEPENDENCE ON CERTAIN SUPPLIERS: To maintain the highest level of product quality, the Company relies on a limited number of domestic and foreign suppliers for certain raw materials and manufacturing technologies. The Company may be adversely affected in the event that these suppliers cease operations, or if pricing terms become less favorable. The Company believes, but cannot be assured, that the raw materials currently supplied by these vendors could be obtained from other sources and that the manufacturing technologies could be developed internally or that suitably similar technologies could be located. BOARD OF DIRECTORS Bradford R. Boss Chairman of the Board Class B Director.1,4 Russell A. Boss President and Chief Executive Officer Class B Director.1,4 John E. Buckley Executive Vice President Chief Operating Officer Class B Director. 1,4 Bernard V. Buonanno, Jr. Partner, Edwards & Angell, Providence, Rhode Island Class B Director. 3 H. Frederick Krimendahl, II Limited Partner, The Goldman Sachs Group, L.P., New York, New York Class B Director. 3 Thomas C. McDermott President and Chief Executive Officer, Goulds Pumps, Inc., Fairport, New York Class A Director. 2 Terrence Murray Chairman, President and Chief Executive Officer, Fleet Financial Group, Inc., Boston, Massachusetts Class A Director. 3 James C. Tappan President, Tappan Capital Partners, Hobe Sound, Florida Class A Director. 2 Edwin G. Torrance Partner, Hinckley, Allen & Snyder, Providence, Rhode Island Class B Director. 2 CORPORATE OFFICERS Bradford R. Boss Chairman of the Board Russell A. Boss President Chief Executive Officer John E. Buckley Executive Vice President Chief Operating Officer David J. Arthur Vice President, Engineering Tina C. Benik Vice President, Legal General Counsel and Corporate Secretary Joseph F. Eastman Vice President, Human Resources Michael El-Hillow Vice President, Finance Treasurer, Chief Financial Officer Steven T. Henick Vice President, International Marketing and Sales J. John Lawler Vice President, Worldwide Tax and Duty Free Stephen A. Perreault Vice President, Manufacturing Donald W. Reilly Corporate Controller David A. Rogers Vice President, U.S. Marketing and Sales John T. Ruggieri Vice President, Corporate Development and Planning Board Committees: 1. Executive; 2. Audit; 3. Compensation; 4. Employee Benefits CORPORATE INFORMATION Corporate Headquarters A.T. Cross Company One Albion Road Lincoln, Rhode Island 02865 U.S.A. Tel. (401) 333-1200 Fax (401) 334-2861 Subsidiaries and Branches ATX Marketing Company, Lincoln, Rhode Island ATX International, Inc., Wilmington, Delaware A.T. Cross Export Company Limited, St. Thomas, Virgin Islands A.T. Cross Limited, Ballinasloe, Republic of Ireland A.T. Cross Distribution, Ballinasloe, Republic of Ireland A.T. Cross (Canada), Inc. Toronto, Ontario, Canada ATX Ireland, Limited, Ballinasloe, Republic of Ireland A.T. Cross Italia, S.r.l. Milan, Italy A.T. Cross Company, French Branch Paris, France A.T. Cross Company, Hong Kong Branch Hong Kong A.T. Cross (U.K.) Limited, Luton, Bedfordshire, England A.T. Cross (Europe), Limited, Luton, Bedfordshire, England A.T. Cross Company, Spanish Branch Malaga, Spain A.T. Cross Deutschland GmbH, Mainz, Federal Republic of Germany Cross Company of Japan, Limited, Tokyo, Japan Manetti-Farrow, Incorporated, New York, New York Annual Meeting The Annual Meeting of Shareholders of A.T. Cross Company will be held on Thursday, April 24, 1997 at 10:00 a.m. at the offices of the Company, One Albion Road, Lincoln, Rhode Island 02865 Legal Counsel Hinckley, Allen & Snyder, Providence, Rhode Island 02903 Auditors Deloitte & Touche LLP, Boston, Massachusetts 02110 Stock Symbol American Stock Exchange Symbol: ATX.A Transfer Agent and Registrar Fleet National Bank of Rhode Island, Providence, Rhode Island 02903 10-K Report A copy of the Company's report to the Securities and Exchange Commission on Form 10-K will be furnished free of charge to any security holder upon written request to the Vice President, Finance, at One Albion Road, Lincoln, Rhode Island 02865 EX-23.1 4 EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in Post-Effective Amendment Number 6 to Registration Statement No. 2-54429 on Form S-8, Post-Effective Amendment Number 9 to Registration Statement No. 2-42388 on form S-8, and Registration Statement Nos. 33-23709, 33-23710, 33-54176, 33-64729, and 33- 64731 of A.T. Cross Company on Forms S-8 of our reports dated February 10, 1997, appearing in and incorporated by reference in this Annual Report on Form 10-K of A.T. Cross Company for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Boston, Massachusetts March 21, 1997 EX-23.2 5 EXHIBIT 23.2 Consent of Independent Auditors We also consent to the incorporation by reference in Post-Effective Amendment number 6 to Registration Statement number 2-54429 on Form S-8, Post-Effective Amendment Number 9 to Registration Statement Number 2-42388 on Form S-8, Registration Statement Number 33-23709 on Form S-8, Registration Statement Number 33-23710 on Form S-8, Registration Statement Number 33-54176 on Form S-8, Registration Statement Number 33-64729 on Form S-8, and Registration Statement Number 33-64731 on Form S-8 of our report dated January 30, 1996, with respect to the consolidated financial statements and schedule of A.T.Cross Company as of December 31, 1995, and for each of the two years in the period ended December 31, 1995, included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Providence, Rhode Island March 25, 1997 EX-27 6
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS INCLUDED IN THE A. T. CROSS COMPANY ANNUAL REPORT TO SECURITY HOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 DEC-31-1996 43,461,006 0 46,522,281 1,552,000 26,173,573 119,371,883 104,458,449 64,133,753 175,190,535 42,890,610 0 0 0 17,087,212 109,703,713 175,190,535 179,203,443 181,554,512 94,092,978 0 77,480,616 342,977 260,015 9,377,926 2,772,000 6,605,926 0 0 0 6,605,926 0.40 0.40
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