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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 October 4, 2003

or

[

]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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
(State or other jurisdiction of
incorporation or organization)

05-0126220
(IRS Employer Identification No.)

One Albion Road, Lincoln, Rhode Island
(Address of principal executive offices)

02865
(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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes ___ No X

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 4, 2003:

Class A common stock -
Class B common stock -

13,211,529 shares
1,804,800 shares

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

A. T. CROSS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(THOUSANDS OF DOLLARS)

OCTOBER 4, 2003

DECEMBER 28, 2002

(UNAUDITED)

ASSETS

Current Assets

Cash and cash equivalents

$ 7,857

$ 9,145

Short-term investments

7,948

8,827

Accounts receivable

24,510

27,149

Inventories:

Finished goods

9,989

7,103

Work in process

4,748

4,530

Raw materials

3,609

1,852

18,346

13,485

Deferred income taxes

4,905

4,345

Other current assets

6,688

4,801

Total Current Assets

70,254

67,752

Property, Plant and Equipment

125,042

126,472

Less allowances for depreciation

99,960

98,316

25,082

28,156

Goodwill

7,400

3,944

Deferred Income Taxes

2,545

2,453

Intangibles, Net

4,788

1,448

Other Assets

407

1,387

Total Assets

$ 110,476

$ 105,140

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities

Notes payable to banks

$ 2,268

$ 1,000

Current maturities of long-term debt

1,350

-

Accounts payable, accrued expenses and other liabilities

16,040

17,618

Accrued compensation and related taxes

2,844

3,595

Contributions payable to employee benefit plans

6,659

6,313

Restructuring liabilities

1,104

1,380

Income taxes payable

122

45

Total Current Liabilities

30,387

29,951

Long-Term Debt, Less Current Maturities

7,200

-

Accrued Warranty Costs

2,091

1,888

Commitments and Contingencies (Note L)

-

-

Shareholders' Equity

Common stock, par value $1 per share:

Class A - authorized 40,000,000 shares,

16,067,077 shares issued and 13,211,529

shares outstanding at October 4, 2003, and

16,009,209 shares issued and 13,643,161

shares outstanding at December 28, 2002

16,067

16,009

Class B - authorized 4,000,000 shares,

1,804,800 shares issued and outstanding

at October 4, 2003 and December 28, 2002

1,805

1,805

Additional paid-in capital

15,933

15,688

Unearned stock-based compensation

( 198

)

( 18

)

Retained earnings

61,411

61,770

Accumulated other comprehensive loss

( 744

)

( 1,058

)

94,274

94,196

Treasury stock, at cost

( 23,476

)

( 20,895

)

Total Shareholders' Equity

70,798

73,301

Total Liabilities and Shareholders' Equity

$ 110,476

$ 105,140

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

OCTOBER 4,

SEPTEMBER 28,

OCTOBER 4,

SEPTEMBER 28,

2003

2002

2003

2002

(THOUSANDS, EXCEPT PER SHARE DATA)

Net sales

$ 31,283

$ 29,075

$ 86,538

$ 84,046

Cost of goods sold

15,420

13,913

42,225

40,260

Gross Profit

15,863

15,162

44,313

43,786

Selling, general and administrative expenses

13,923

12,346

39,838

38,262

Research and development expenses

406

542

1,463

1,659

Service and distribution costs

1,335

809

2,914

2,389

Restructuring charges

1,650

0

1,650

0

Loss (Gain) on disposition of asset held for sale

21

0

( 990

)

0

Operating (Loss) Income

( 1,472

)

1,465

( 562

)

1,476

Interest and other (expense) income

( 25

)

231

9

649

(Loss) Income Before Income Taxes

( 1,497

)

1,696

( 553

)

2,125

Income tax (benefit) expense

( 524

)

424

( 194

)

574

Net (Loss) Income

$ ( 973

)

$ 1,272

$ ( 359

)

$ 1,551

Basic and Diluted (Loss) Earnings Per Share

$ ( 0.06

)

$ 0.08

$ ( 0.02

)

$ 0.10

Weighted Average Shares Outstanding:

Denominator for basic (loss) earnings per share

15,042

15,765

15,136

16,007

Effect of dilutive securities

- ( A

)

231

- ( A

)

256

Denominator for diluted (loss) earnings per share

15,042

15,996

15,136

16,263

(A) No incremental shares related to options or restricted stock granted are included due to the net loss.

See notes to condensed consolidated financial statements.

 

A. T. CROSS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

NINE MONTHS ENDED

(THOUSANDS OF DOLLARS)

OCTOBER 4, 2003

SEPTEMBER 28, 2002

CASH PROVIDED BY (USED IN):

Operating Activities:

Net (Loss) Income

$ ( 359

)

$ 1,551

Adjustments to reconcile net (loss) income to

net cash provided by operating activities:

Depreciation and amortization

6,443

6,584

Restructuring charges

1,650

-

Gain on disposition of asset held for sale

( 990

)

-

Provision for bad debts

448

216

Deferred income taxes

( 98

)

( 53

)

Provision for warranty costs

376

311

Unrealized loss (gain) on trading securities

90

( 129

)

Changes in operating assets and liabilities:

Accounts receivable

3,969

5,605

Inventories

( 3,015

)

( 1,590

)

Other assets, net

( 2,124

)

( 1,084

)

Accounts payable and other liabilities, net

( 3,687

)

( 3,512

)

Warranty costs paid

( 253

)

( 312

)

Restructuring charges paid

( 2,096

)

( 898

)

Foreign currency transaction loss

284

250

Net Cash Provided by Operating Activities

638

6,939

Investing Activities:

Acquisition of Costa Del Mar, net of cash acquired

( 9,570

)

-

Proceeds from disposition of asset held for sale

1,565

-

Purchase of short-term investments

( 10,082

)

( 7,193

)

Sale or maturity of short-term investments

10,871

6,996

Additions to property, plant and equipment

( 2,476

)

( 4,552

)

Net Cash Used in Investing Activities

( 9,692

)

( 4,749

)

Financing Activities:

Purchase of treasury stock

( 2,581

)

( 5,730

)

Proceeds from bank borrowings

11,555

2,000

Repayment of bank borrowings

( 1,737

)

( 500

)

Proceeds from sale of class A common stock

303

248

Net Cash Provided by (Used in) Financing Activities

7,540

( 3,982

)

Effect of exchange rate changes on cash and cash equivalents

226

247

Decrease in Cash and Cash Equivalents

( 1,288

)

( 1,545

)

Cash and cash equivalents at beginning of period

9,145

12,651

Cash and Cash Equivalents at End of Period

$ 7,857

$ 11,106

Non-cash financing activities:

Conversion of a portion of outstanding line of credit to term note

$ 9,000

-

See notes to condensed consolidated financial statements.

A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 4, 2003

NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America for 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 October 4, 2003 are not necessarily indicative of the results that may be expected for the twelve months ending January 3, 2004. The Company has historically recorded its highest sales in the fourth quarter. Certain prior year amounts have been reclassified in order to conform to the current year presentation. 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 28, 2002.

NOTE B - Acquisition of Costa Del Mar Sunglasses, Inc. ("Costa Del Mar")
On April 22, 2003, the Company completed the acquisition of all of the outstanding shares of Costa Del Mar, a designer, manufacturer and wholesaler of high quality, high-performance polarized sunglasses. The acquisition of Costa Del Mar is part of the Company's strategy of becoming a leading designer and marketer of branded personal and business accessories. Costa Del Mar was a privately held company founded in Florida in 1983. The excess of the purchase price over the fair value of the net assets acquired approximated $3.4 million, which will not be deductible for income tax purposes. The acquired intangible, the Costa Del Mar trade name, is deemed to have an indefinite life and will not be amortized. The results of operations of Costa Del Mar since April 21, 2003 are included in the consolidated statements of operations of the Company. Costa Del Mar will be reported in the optical segment of the Company.

The following is the allocation of the purchase price of Costa Del Mar:

(THOUSANDS OF DOLLARS)

Cash Purchase Price

$ 10,000

Less: Assets Acquired

Cash and cash equivalents

430

Accounts receivable, net

1,778

Inventories, net

1,847

Property, plant and equipment, net

461

Intangible asset

3,400

Other

951

1,133

Plus: Liabilities Assumed

Accounts payable and accrued expenses

782

Accrued payroll and related benefits

277

Current portion of long-term debt

1,047

Other

217

Unallocated Purchase Price (Goodwill)

$ 3,456

The following unaudited pro forma summary financial information summarizes the estimated combined results of operations of the Company and Costa Del Mar assuming that the acquisition had taken place on December 30, 2001. The unaudited pro forma combined results of operations were prepared on the basis of information provided to the Company by the former management of Costa Del Mar.

(THOUSANDS OF DOLLARS, EXCEPT

THREE MONTHS ENDED

NINE MONTHS ENDED

PER SHARE DATA)

OCTOBER 4,

SEPTEMBER 28,

OCTOBER 4,

SEPTEMBER 28,

2003

2002

2003

2002

Net Sales

$ 31,283

$ 31,603

$ 90,420

$ 92,878

Net (Loss) Income

$ ( 973

)

$ 1,292

$ ( 275

)

$ 2,228

Basic and Diluted (Loss) Earnings per Share

$( 0.06

)

$ 0.08

$( 0.02

)

$ 0.14

NOTE C - Restructuring Charges
In 2000, the Company's Board of Directors approved a plan to restructure the Company's domestic and international writing instrument operations. As part of this restructuring plan, the Company consolidated all writing instrument manufacturing and distribution at its headquarters in Lincoln, Rhode Island, closed its Irish facility and reorganized its European operations. There was no change to the estimated expenses related to this restructuring plan in 2003.

The following is a tabular presentation of the restructuring liabilities related to this plan:

(THOUSANDS OF DOLLARS)

SEVERANCE

& RELATED

CONTRACTUAL

EXPENSES

OBLIGATIONS

TOTAL

Balances at December 28, 2002

$ 71

$ 1,309

$ 1,380

Foreign exchange effects

3

43

46

Balances at March 29, 2003

74

1,352

1,426

Cash payments

( 3

)

( 1,471

)

( 1,474

)

Foreign exchange effects

4

119

123

Balances at June 28, 2003

75

-

75

Foreign exchange effects

1

-

1

Balances at October 4, 2003

$ 76

$ -

$ 76

On July 24, 2003, the Company announced a corporate restructuring program designed to increase the Company's competitiveness in the global marketplace by significantly reducing operating costs and freeing additional capital for product development and diversification as well as marketing and brand development.

Management intends to phase in the reorganization over several years. As part of this program, a number of the writing instrument manufacturing departments will be moved offshore. Each succeeding step of the process will be fully dependent on the newly sourced product achieving the high quality standards expected of every Cross product. Approximately 80 manufacturing positions in Lincoln, Rhode Island will be affected in 2003 as part of the initial phase of this plan.

In addition, over 80 global non-manufacturing positions will be eliminated in 2003 and early 2004 as part of the program to consolidate and reduce administrative expenses.

The Company expects to incur pre-tax restructuring charges of approximately $6.5 million that will be incurred over the life of the program, assuming full implementation. Of this $6.5 million, approximately $5.5 million will be for severance and related expenses and approximately $1.0 million for professional fees and other. Approximately $2.5 million, of which $1.9 million will be for severance and related expenses and $0.6 million for professional fees and other, is expected to be recognized in 2003.

Of the $1,650,000 restructuring charges incurred through October 4, 2003, approximately $1.5 million was for severance and related expenses and $142,000 was for professional fees and other.

The following is a tabular presentation of the restructuring liabilities related to the initial phase of this plan:

(THOUSANDS OF DOLLARS)

SEVERANCE

PROFESSIONAL

& RELATED

FEES

EXPENSES

& OTHER

TOTAL

Balances at June 28, 2003

$ 0

$ 0

$ 0

Restructuring charges incurred

1,508

142

1,650

Cash Payments

( 490

)

( 132

)

( 622

)

Balances at October 4, 2003

$ 1,018

$ 10

$ 1,028

NOTE D - Segment Information

With the acquisition of Costa Del Mar in the second quarter of 2003, the Company now has two reportable segments; Writing Instruments and Accessories ("WI&A") and Optical. The Company evaluates segment performance based upon profit or loss from operations before income taxes. Following is the segment information for the Company for the three and nine month periods ended October 4, 2003 and September 28, 2002:

(THOUSANDS OF DOLLARS)

THREE MONTHS ENDED

NINE MONTHS ENDED

OCTOBER 4,

SEPTEMBER 28,

OCTOBER 4,

SEPTEMBER 28,

2003

2002

2003

2002

Revenues from External Customers:

WI&A

$ 28,135

$ 29,075

$ 80,205

$ 84,046

Optical

3,148

-

6,333

-

Total

$ 31,283

$ 29,075

$ 86,538

$ 84,046

Segment Profit (Loss):

WI&A

$ ( 1,553

)

$ 1,696

$ ( 1,381

)

$ 2,125

Optical

56

-

828

-

Total

$ ( 1,497

)

$ 1,696

$ ( 553

)

$ 2,125

Segment Assets:

WI&A

$ 101,921

Optical

$ 8,555

Total

$ 110,476

NOTE E - Comprehensive Income
Comprehensive income for the three and nine month periods ended October 4, 2003 and September 28, 2002 follows:

(THOUSANDS OF DOLLARS)

THREE MONTHS ENDED

NINE MONTHS ENDED

OCTOBER 4,

SEPTEMBER 28,

OCTOBER 4,

SEPTEMBER 28,

2003

2002

2003

2002

Net (Loss) Income

$ ( 973

)

$ 1,272

$ ( 359

)

$ 1,551

Other Comprehensive Income (Loss) (Net of Tax):

Unrealized loss on investment

-

( 7

)

-

( 18

)

Unrealized gain (loss) on interest rate swap

100

-

( 91

)

-

Foreign currency translation adjustments

214

( 56

)

405

394

Comprehensive Income

$ ( 659

)

$ 1,209

$ ( 45

)

$ 1,927

NOTE F - Stock Option Accounting
The Company has elected to account for stock options in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," which uses the intrinsic value method of accounting. Accordingly, the Company has not recognized compensation expense for the value of its stock-based awards in its condensed consolidated statements of operations. The following table reflects pro forma net income (loss) and earnings (loss) per share had the Company elected to record expense for employee stock options under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation."

(THOUSANDS OF DOLLARS, EXCEPT

THREE MONTHS ENDED

NINE MONTHS ENDED

PER SHARE DATA)

OCTOBER 4,

SEPTEMBER 28,

OCTOBER 4,

SEPTEMBER 28,

2003

2002

2003

2002

Net (Loss) Income, as Reported

$ ( 973

)

$ 1,272

$ ( 359

)

$ 1,551

Deduct: Total stock-based employee compensation

expense as determined under the fair value based

method for all awards, net of related tax effects

( 192

)

( 253

)

( 562

)

( 608

)

Pro Forma Net (Loss) Income

$ ( 1,165

)

$ 1,019

$ ( 921

)

$ 943

(Loss) Earnings per Share:

Basic and diluted - as reported

$( 0.06

)

$ 0.08

$( 0.02

)

$ 0.10

Basic and diluted - pro forma

$( 0.08

)

$ 0.06

$( 0.06

)

$ 0.06

NOTE G - Line of Credit
The Company maintains a $25 million unsecured line of credit with a bank. During the second quarter of 2003 the Company renegotiated the loan agreement with the bank. The renegotiated agreement requires the Company to meet certain covenants. The most restrictive covenant is that over the next three fiscal years the Company can not incur extraordinary charges, as defined by the bank, in excess of approximately $6.5 million. There is also a restriction on the Company's ability to grant a security interest in its assets. Any amounts borrowed under this agreement are payable on demand. Under this agreement, the Company has the option to borrow either at the bank's prime lending rate or at one percent per annum in excess of the London Interbank Offering Rate. This agreement is cancelable at any time by the Company or the bank. During the second quarter of 2003, the Company borrowed approximately $10 million on this line of credit, primarily to finance the acquisition of Costa Del Mar. On May 23, 2003, $9 million of this amount was converted into a five-year term note incurring interest at a rate of London Interbank Offering Rate plus 75 basis points.

On October 4, 2003, approximately $8.6 million of the $9 million converted debt was outstanding, of which $7.2 million was classified as long-term debt, less current maturities and $1.4 million was classified as current maturities of long-term debt. The outstanding balance of notes payable to banks at October 4, 2003 was approximately $2.3 million.

NOTE H - Derivative Financial Instruments
During the second quarter of 2003, the Company entered into an interest rate swap agreement with an initial notional amount of $9 million and a term of five years. This swap effectively fixes the interest rate on the Company's five-year term note at 4.15%. The terms of the swap and the term note being hedged match, and the Company qualifies for the "shortcut" treatment under SFAS 133 "Accounting for Derivative Instruments and Hedging Activities" and the related amendments and interpretations. Amounts paid or received under this swap agreement are recorded as adjustments to interest expense. This swap has been designated as a cash flow hedge and the effect of the mark-to-market valuation that relates to the effective amount of the derivative financial instrument is recorded as an adjustment, net of tax, to accumulated other comprehensive loss. From inception to October 4, 2003, the effect of the mark-to-market valuation, net of tax, was an unrealized loss of approximately $91,000.

NOTE I - Goodwill and Other Intangible Assets
The Company accounts for intangible assets, including goodwill, under SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is tested for impairment annually or when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, and write downs may be necessary. As a result of the Costa Del Mar acquisition in the second quarter of 2003, approximately $3.5 million of additional goodwill was capitalized during fiscal 2003. At October 4, 2003, the carrying value of all goodwill was approximately $7.4 million.

Other intangibles consisted of the following:

(THOUSANDS OF DOLLARS)

OCTOBER 4, 2003

DECEMBER 28, 2002

GROSS

OTHER

GROSS

OTHER

CARRYING

ACCUMULATED

INTANGIBLES,

CARRYING

ACCUMULATED

INTANGIBLES,

AMOUNT

AMORTIZATION

NET

AMOUNT

AMORTIZATION

NET

Amortized:

Trademarks

$ 7,063

$ 6,155

$ 908

$ 6,842

$ 5,875

$ 967

Patents

2,290

1,810

480

2,139

1,658

481

9,353

7,965