-----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, F0wOwvNX7wnmURK4i3u4TxJU6qgjkCtSka7DwQpu4v9mvLTfIyGdj7vA3zdfPiT8 3++SBRQhvLVvOtIraAZ4+A== 0000025793-98-000007.txt : 19981113 0000025793-98-000007.hdr.sgml : 19981113 ACCESSION NUMBER: 0000025793-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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-Q SEC ACT: SEC FILE NUMBER: 001-06720 FILM NUMBER: 98745252 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from __________ to __________ Commission File No. 1-6720 A. T. CROSS COMPANY (Exact name of registrant as specified in its charter) Rhode Island 05-0126220 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One Albion Road, Lincoln, Rhode Island 02865 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (401) 333-1200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No______ Indicate the number of shares outstanding of each of the issuer's classes of common stock as of September 30, 1998: Class A common stock - 14,743,994 shares Class B common stock - 1,804,800 shares PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS A. T. CROSS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS September 30 December 31 1998 1997 (Unaudited) ASSETS (Thousands of Dollars) CURRENT ASSETS Cash and Cash Equivalents $ 20,024 $ 25,801 Short-Term Investments 21,835 21,607 Accounts Receivable 25,155 37,571 Inventories: Finished Goods 11,742 7,767 Work in Process 9,060 5,647 Raw Material 11,326 6,625 32,128 20,039 Other Current Assets 9,046 4,761 TOTAL CURRENT ASSETS 108,188 109,779 PROPERTY, PLANT AND EQUIPMENT 113,364 109,344 Less Allowances for Depreciation 75,338 69,588 38,026 39,756 INTANGIBLES AND OTHER ASSETS 9,314 8,484 TOTAL ASSETS $155,528 $158,019 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Note Payable to Bank $ 5,000 $ 0 Accounts Payable, Accrued Expenses and Other Liabilities 24,230 25,388 Accrued Compensation and Related Taxes 3,599 3,328 Cash Dividends Payable 0 1,320 Contributions Payable to Employee Benefit Plans 9,830 9,228 TOTAL CURRENT LIABILITIES 42,659 39,264 ACCRUED WARRANTY COSTS 6,046 5,821 SHAREHOLDERS' EQUITY Common Stock, Par Value $1 Per Share: Class A, Authorized 40,000,000 Shares; 15,344,162 Shares Issued and 14,743,994 Shares Outstanding at September 30, 1998 and 15,294,652 Shares Issued and 14,696,272 Shares Outstanding at December 31, 1997 15,344 15,295 Class B, Authorized 4,000,000 Shares; 1,804,800 Shares Issued and Outstanding at September 30, 1998 and December 31, 1997 1,805 1,805 Additional Paid-In Capital 12,433 11,959 Retained Earnings 86,776 93,503 Accumulated Other Comprehensive Loss (583) (703) 115,775 121,859 Treasury Stock, at Cost (8,952) (8,925) TOTAL SHAREHOLDERS' EQUITY 106,823 112,934 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $155,528 $158,019 See notes to condensed consolidated financial statements. A. T. CROSS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 1998 1997 (Thousands of Dollars, Except per Share Data) Net Sales $33,852 $36,626 $100,070 $101,438 Cost of Goods Sold 19,002 19,084 53,889 53,449 Gross Profit 14,850 17,542 46,181 47,989 Selling, General and Administrative Expenses 20,072 17,397 50,896 47,991 Research and Development Expenses 1,146 555 3,372 2,317 Service and Distribution Costs 805 990 2,433 2,784 Operating Loss (7,173) (1,400) (10,520) (5,103) Interest and Other Income 678 495 2,089 1,378 Loss from Continuing Operations Before Income Taxes (6,495) (905) (8,431) (3,725) Income Tax Benefit (2,078) (317) (2,698) (1,304) Loss from Continuing Operations (4,417) (588) (5,733) (2,421) Income(Loss) from Discontinued Operations (Net of Income Taxes) 0 0 1,653 (2,321) Net Loss $(4,417) $ (588) $ (4,080) $ (4,742) Basic and Diluted Earnings (Loss) Per Share: Continuing Operations $ (0.27) $ (0.04) $ (0.35) $ (0.15) Discontinued Operations 0.00 0.00 0.10 (0.14) Net Loss Per Share $ (0.27) $ (0.04) $ (0.25) $ (0.29) Weighted Average Shares Outstanding: Denominator for Basic Earnings Per Share 16,548 16,500 16,530 16,496 Effect of Dilutive Securities: Employee Stock Options - (A) - (A) - (A) - (A) Denominator for Diluted Earnings Per Share 16,548 16,500 16,530 16,496 Dividends Declared Per Share $ 0.08 $ 0.08 $ 0.16 $ 0.24 (A) No incremental shares related to stock options are included due to the loss from continuing operations. See notes to condensed consolidated financial statements. A. T. CROSS COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30 1998 1997 (Thousands of Dollars) Cash Provided By (Used In): Operating Activities: Net Cash Provided by (Used In) Continuing Operations $ (5,363) $ 16,093 Net Cash Provided by Discontinued Operations 2,288 5,489 Net Cash Provided By (Used In) Operating Activities (3,075) 21,582 Investing Activities: Additions to Property, Plant and Equipment (4,113) (5,451) Purchase of Short-Term Investments (14,694) (1,500) Sale or Maturity of Short-Term Investments 14,466 8,006 Net Cash Provided By (Used In) Investing Activities (4,341) 1,055 Financing Activities: Cash Dividends Paid (3,967) (6,598) Proceeds from Bank Borrowings 7,000 2,300 Repayment of Bank Borrowings (2,000) (8,300) Other 497 110 Net Cash Provided by (Used In) Financing Activities 1,530 (12,488) Effect of Exchange Rate Changes on Cash and Cash Equivalents 109 (637) Increase (Decrease) in Cash and Cash Equivalents (5,777) 9,512 Cash and Cash Equivalents at Beginning of Period 25,801 14,767 Cash and Cash Equivalents at End of Period $ 20,024 $ 24,279 See notes to condensed consolidated financial statements. A. T. CROSS COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 NOTE A - Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1998, are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. The Company typically records its highest sales and earnings in the fourth quarter. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. NOTE B - Discontinued Operations In June 1997, the Company discontinued the distribution of quality leather goods and accessory products of its Manetti-Farrow, Inc. subsidiary. The Company recorded an after tax loss $2,321,000, or $0.14 per share, in the six month period ended June 30, 1997. In the second quarter of 1998, the Company recorded after-tax income from discontinued operations of $1,653,000, or $0.10 per share. The Company reached a settlement with the U.S. Customs service regarding a claim filed on the amount of duty charged in prior years on the importation of certain products by its now discontinued Manetti-Farrow, Inc. subsidiary. After taxes and after expenses the settlement was approximately $1,116,000. In addition, the Company recorded after-tax income of approximately $537,000 in connection with the final liquidation and disposition of Manetti-Farrow's remaining net assets. NOTE C - Comprehensive Income The Company adopted Statement of Financial Accounting Standards ("SFAS") No.130, "Reporting Comprehensive Income" in the first quarter of 1998. SFAS No.130 requires the reporting of comprehensive income which, in the case of the Company, is the combination of reported net income and the change in the cumulative translation adjustment which is a component of shareholders' equity. SFAS No.130 has no impact on the Company's reported net income. Comprehensive income for the third quarter and nine months ended September 30, 1998 and 1997 follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 1998 1997 Net Loss $(4,417) $(588) $(4,080) $(4,742) Change in Cumulative Translation Adjustment 194 (168) 120 (473) Comprehensive Loss (4,223) $(756) $(3,960) $(5,215) NOTE D - New Accounting Pronouncement The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This SFAS will become effective for the Company for the year ending December 31, 2000. The Company is currently evaluating the impact that implementing this SFAS will have in its financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Results of Operations Third Quarter 1998 Compared to Third Quarter 1997 Net sales for the third quarter ended September 30, 1998 decreased 7.6% compared to the third quarter of 1997. Total writing instrument net sales for the quarter of $26.3 million were down 26.7% from the prior year. Domestic writing instrument net sales of $13.5 million were 36.0% lower than the prior year while foreign writing instrument net sales of $12.8 million declined 13.3% as compared to the third quarter of 1997. Sales by the Pen Computing Group (PCG) during the third quarter of 1998 were $7.2 million compared to sales of $644,000 in 1997, the first year in which PCG generated revenue. Cross Timepiece revenues were $422,000 in the quarter as compared to $128,000 for the same period last year. Domestic writing instrument volume continued to be adversely affected by changes in distribution channels. In addition, the Company was affected by poor sell through during the Father's Day and graduation gift season which left many retailers with higher than normal inventory levels. The Company believes that consumer demand for quality writing instruments in the United States has declined from prior year levels. In an effort to stimulate domestic sales growth during the peak gift-giving holiday season, the Company has launched a number of new writing instrument products in a variety of new styles and finishes. In addition, the Company plans to repeat its extended dating program that allows domestic customers to defer payments on certain 1998 purchases. International sales continue to be adversely impacted by the economic crisis affecting Asian markets. The Company remains committed to the region and has established two new branch offices, one in Hong Kong and the other in Taiwan. These new branches, along with our Japanese subsidiary, are intended to position the Company to take advantage of an eventual recovery in this region. Sales to this region were down 50.8% in the third quarter of 1998 as compared to the same quarter of 1997. Somewhat offsetting this decline was improved sales in Europe and Canada. The Pen Computing Group launched CrossPad XP, as planned, in late September. CrossPad XP, a 6" by 9" version of the full size CrossPad, features a redesigned CrossWriter II digital pen and utilizes the latest upgraded version of IBM's Ink Manager software. Sales of PCG products which, in addition to CrossPad and CrossPad XP, primarily consist of iPenPro, DigitalWriter and accessories, were $7.2 million in the third quarter and represented approximately 34% of total domestic revenue for the period. PCG products were available for sale only in the United States in approximately 3,000 locations during the third quarter. Gross profit margins of 43.9% for the third quarter of 1998 were down 4.0 percentage points as compared to the third quarter of 1997. Writing instrument gross margins were primarily affected by fixed manufacturing expenses spread over substantially lower unit sales in the quarter. In addition, PCG products and Timepieces generate, on average, lower margins than writing instruments. Included in the third quarter's cost of sales are royalty expenses related to PCG sales which are paid to suppliers of certain software and hardware components for the iPen, CrossPad and CrossPad XP. Selling, general and administrative expenses (SG&A) for the third quarter of 1998 were $20.1 million, or 15.4% higher than the same quarter of 1997. Included in the current year's third quarter results were PCG and Timepiece SG&A expenses of $4.2 million and $1.9 million, respectively, as compared to $1.4 million for PCG and $900,000 for Timepieces in 1997's third quarter. Writing instrument SG&A expenses for the quarter were 7.8% lower than the third quarter of 1997, primarily a result of the Company's strict cost control programs that are in effect. Research and development expenses (R&D) for the current year's third quarter were $1.1 million as compared to $555,000 for the same period of 1997. This increase was due entirely to the increased R&D expenditures on new products under development by the pen computing group. Service and distribution costs were lower than the prior year and are in line with the reduced sales volume. Interest and other income were higher in the third quarter of 1998 due to higher interest income as average investable funds and earned interest rates were somewhat higher than the same period of the prior year. For a discussion of the Company's effective tax rate see "Results of Operations Nine Months Ended September 30, 1998 Compared to September 30, 1997." Considering the disappointing results of the third quarter and the uncertainty of consumer demand for writing instruments in the fourth quarter, the combined operating losses for both PCG and Timepieces are now expected to exceed the projected profitable results of the quality writing instrument business. As a result, the Company does not expect to be profitable on a consolidated basis for the full year ended December 31, 1998. Results of Operations Nine Months Ended September 30, 1998 Compared to September 30, 1997 Net sales for the nine months ended September 30, 1998 were $100.1 million, or 1.3% lower than the same nine month period in 1997. Total writing instrument net sales of $83.5 million were 17.0% lower than last year. Domestic writing instrument net sales of $42.3 million for the nine months were down 18.1% versus the comparable period last year and foreign writing instrument net sales of $41.2 million were down 15.8% from 1997. Sales of PCG products were $15.8 million through September 1998 as compared to September 1997 revenue of $761,000. Sales of Cross Timepieces in the test markets were $754,000 through the September 1998 period versus sales of $148,000 during the same period last year. Domestic writing instrument net sales remained below last year's levels reflecting the fall off of consumer demand for quality writing instruments. Sales through the mass market, catalog showroom and carriage trade channels declined sharply from the prior year. Sales to the high volume office supply accounts were just slightly over the same period last year. Internationally, year-to-date sales to the Company's Asian markets declined from the prior year by 51.3% as a result of the economic and fiscal conditions in these markets. The Company remains committed to the region and has established two new branch offices, one in Hong Kong and the other in Taiwan. These new branches, along with our Japanese subsidiary, are intended to position the Company to take advantage of an eventual recovery in this region. Partially offsetting the declines in Asia were sales increases in Canada, Latin America, Europe and the Middle East/Africa. Gross profit margins for the first nine months of 1998 were 46.1%, down 1.2 percentage points from the same period in 1997. Writing instrument margins were slightly improved over the same period of the prior year, primarily due to cost reduction programs. However, writing instrument gross margin improvement was entirely offset by lower PCG and Timepiece margins as these products, on average, generate lower margins than writing instruments. Included in cost of sales are royalty expenses paid to certain suppliers of components related to PCG sales. Selling, general and administrative expenses for the nine months ended September 30, 1998 were 6.1% higher than the same period for 1997. SG&A expenses through September 1998 included $8.6 million and $2.7 million for PCG and Timepieces, respectively, as compared to $1.7 million for PCG and $1.1 million for Timepieces for the same period for 1997. SG&A for writing instruments was 12.5% lower than 1997 as these expenses remain under tight control. Research and development expenses of $3.4 million were up from last year by 45.5%, entirely due to the pen computing group. Service and distribution costs were also less than 1997 largely due to the lower writing instrument sales levels. Interest and other income increased 51.6% for the first nine months of 1998, due in part to higher interest income. The Company recorded an income tax benefit of 32.0% on the loss from continuing operations for the nine months ended September 30, 1998, as compared to the September 30, 1997 income tax benefit of 35.0%. Considering the disappointing results of the third quarter and the uncertainty of consumer demand for writing instruments in the fourth quarter, the combined operating losses for both PCG and Timepieces are now expected to exceed the projected profitable results of the quality writing instrument business. As a result, the Company does not expect to be profitable on a consolidated basis for the full year ended December 31, 1998. Liquidity and Sources of Capital Cash, cash equivalents and short-term investments (i.e., "cash") decreased $5.5 million from December 31, 1997 to $41.9 million at September 30, 1998. Accounts receivable decreased since the end of 1997 by $12.4 million to $25.2 million. The decrease in accounts receivable was primarily due to cash collected in January 1998 from customers who took advantage of the Company's 1997 extended dating program that allowed domestic customers to defer payments on certain 1997 purchases. This program, similar to extended dating programs in past years, will be in effect for this year as well and typically results in higher accounts receivable balances at year end than at any other time during the year. Inventory of $32.1 million increased $12.1 million since December 31, 1997. The inventory increase in the first nine months of 1998 was largely due to higher levels of pen computing and timepiece inventories. Writing instrument inventory levels have also increased since December 31, 1997, primarily due to lower than anticipated sales results through the first nine months. The Company has a $50 million line of credit available with a bank which provides an additional source of working capital on a short-term basis. At September 30, 1998 there was $5.0 million outstanding under this line. The Company believes that its current level of working capital, along with the funds available from the line of credit, will be sufficient to meet the Company's normal operating needs for the foreseeable future. New Accounting Pronouncement The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This SFAS will become effective for the Company for the year ending December 31, 2000. The Company is currently evaluating the impact that implementing this SFAS will have in its financial statements. Year 2000 Compliance The Year 2000 issue refers to a condition where computer programs were written so that when reading a date entered as a two digit year, i.e., "00", they could not distinguish between the year 1900 and the year 2000. If not corrected, this problem will lead to system failures or miscalculations, possibly causing disruptions of business processes. The Company started to address this problem back in early 1997 when it formed a cross-functional team to manage the Company's compliance process. One of the first tasks undertaken was to identify and inventory systems and hardware that would need to be replaced or upgraded. Since then, the Company has been modifying and upgrading significant portions of its software and hardware so that it will function properly in the year 2000. As of the end of the third quarter 1998, approximately 80% of the Company's total systems are believed to be year 2000 compliant, with 92% of the Company's major business systems at its key U.S. and Irish locations believed to be in compliance. The Company is utilizing both internal and external resources to identify, correct and test the systems for year 2000 compliance. It is anticipated that, with a few minor exceptions, primarily that of purchased software, all modifications necessary for year 2000 compliance will be completed by year end December 31, 1998. Testing of these modified systems has been an ongoing process as the non-compliant systems are replaced or upgraded. Substantial testing of the affected systems will begin in the fourth quarter of 1998 and will continue throughout all of 1999. The cost of the Company's Year 2000 compliance program is currently estimated to be approximately $1.1 million, with spending in 1998 of $500,000 and $600,000 in 1999. The Company has also been sending written correspondence to its primary vendors and key customers to inquire about their plans to address year 2000 compliance. There can be no assurances, however, that the systems of the Company's primary vendors and key customers will also be converted in a timely manner or that any such failure to convert by another company would not have an adverse material effect on the Company's systems. Contingency plans are currently under review to ensure that certain key materials will be available and it is expected that replacement suppliers could be located in a reasonable time period should this prove necessary. For further information refer to the footnotes to the financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 1997. Forward Looking Statements Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, use of words such as "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. The Company cautions that a number of important factors could cause actual results for 1998 and beyond to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Such statements contain a number of risks and uncertainties, including, but not limited to, risks associated with consumer acceptance of the Company's new and existing product lines, the successful development and performance of new technology in connection with such new products, the Company's dependence on certain suppliers, the Company's sensitivity to technological change and economic conditions, the Company's other strategic initiatives, and customer and consumer support for such initiatives and changes. See the Company's Form 10-K for a more detailed discussion of certain of these factors. The Company cannot assure that it will be able to anticipate or respond timely to changes which could adversely affect its operating results in one or more fiscal quarters. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of the Company's common stock. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION ITEM 5. Other Information Stockholders who intend to submit proposals at the 1999 Annual Meeting of Stockholders, currently scheduled to be held on April 22, 1999, without including such proposals in the Proxy Statement for such meeting must notify the Corporation of this intention no later than February 3, 1999. ITEM 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 27 Financial Data Schedule b) Reports on Form 8-K There were no reports on Form 8-K filed during the period covered by this report. SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. A. T. CROSS COMPANY Date: November 12, 1998 By: JOHN E. BUCKLEY John E. Buckley Executive Vice President Chief Operating Officer Date: November 12, 1998 By: JOHN T. RUGGIERI John T. Ruggieri Senior Vice President Chief Financial Officer EX-27 2
5 This schedule contains summary financial information extacted from financial statements included in A.T. Cross Company form 10-Q for the quarterly period ended September 30, 1998 and is qualified in its entirety by reference to such financial statements. 1000 9-MOS DEC-31-1997 SEP-30-1998 41,859 0 26,798 1,643 32,128 108,188 113,364 75,338 155,528 42,659 0 0 0 17,149 89,674 155,528 100,070 102,293 53,889 0 56,542 159 134 (8,431) (2,698) (5,733) 1,653 0 0 (4,080) (0.25) (0.25)
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