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UNITED STATES |
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FORM 10-Q (Mark One) |
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[X] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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For the quarterly period ended October 2, 2004 or |
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[ |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from __________to __________ |
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Commission File Number 1-6720 A. T. CROSS COMPANY |
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Rhode Island |
05-0126220 |
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One Albion Road, Lincoln, Rhode Island |
02865 |
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Registrant's telephone number, including area code (401) 333-1200 |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or |
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Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ___ No X |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock as of October 2, 2004: |
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Class A common stock - |
13,229,547 shares |
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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A. T. CROSS COMPANY AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(THOUSANDS OF DOLLARS) |
OCTOBER 2, 2004 |
JANUARY 3, 2004 |
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(UNAUDITED) |
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ASSETS |
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Current Assets |
||||||
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Cash and cash equivalents |
$ 6,689 |
$ 8,295 |
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Short-term investments |
7,014 |
7,927 |
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Accounts receivable, net |
23,659 |
32,143 |
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Inventories: |
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Finished goods |
11,670 |
8,647 |
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Work in process |
6,061 |
4,182 |
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Raw materials |
4,222 |
3,235 |
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21,953 |
16,064 |
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Deferred income taxes |
4,792 |
4,471 |
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Other current assets |
7,820 |
7,812 |
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Total Current Assets |
71,927 |
76,712 |
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Property, Plant and Equipment |
127,714 |
125,305 |
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Less allowances for depreciation |
104,051 |
99,380 |
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Net Property, Plant and Equipment |
23,663 |
25,925 |
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Goodwill |
7,408 |
7,408 |
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Intangibles, Net |
4,693 |
4,975 |
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Deferred Income Taxes |
2,348 |
2,702 |
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Other Assets |
408 |
424 |
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Total Assets |
$ 110,447 |
$ 118,146 |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
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Current Liabilities |
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Line of credit |
$ 3,000 |
$ 3,155 |
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Current maturities of long-term debt |
1,350 |
1,350 |
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Accounts payable, accrued expenses and other liabilities |
17,488 |
20,859 |
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Accrued compensation and related taxes |
3,949 |
2,783 |
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Contributions payable to employee benefit plans |
6,657 |
6,791 |
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Restructuring liabilities |
106 |
995 |
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Total Current Liabilities |
32,550 |
35,933 |
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Long-Term Debt, Less Current Maturities |
5,850 |
6,862 |
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Accrued Warranty Costs |
1,962 |
1,936 |
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Commitments and Contingencies (Note N) |
- |
- |
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Shareholders' Equity |
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Common stock, par value $1 per share: |
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Class A - authorized 40,000,000 shares, 16,293,095 shares issued and |
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13,229,547 shares outstanding at October 2, 2004, and 16,077,177 |
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shares issued and 13,216,629 shares outstanding at January 3, 2004 |
16,293 |
16,077 |
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Class B - authorized 4,000,000 shares, 1,804,800 shares issued and |
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outstanding at October 2, 2004 and January 3, 2004 |
1,805 |
1,805 |
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Additional paid-in capital |
16,939 |
15,975 |
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Unearned stock-based compensation |
( 856 |
) |
( 155 |
) |
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Retained earnings |
60,864 |
63,547 |
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Accumulated other comprehensive loss |
( 364 |
) |
( 328 |
) |
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94,681 |
96,921 |
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Treasury stock, at cost |
( 24,596 |
) |
( 23,506 |
) |
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Total Shareholders' Equity |
70,085 |
73,415 |
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Total Liabilities and Shareholders' Equity |
$ 110,447 |
$ 118,146 |
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See notes to condensed consolidated financial statements. |
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A. T. CROSS COMPANY AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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(UNAUDITED) |
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(THOUSANDS OF DOLLARS, |
THREE MONTHS ENDED |
NINE MONTHS ENDED |
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EXCEPT PER SHARE AMOUNTS) |
OCTOBER 2, |
OCTOBER 4, |
OCTOBER 2, |
OCTOBER 4, |
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2004 |
2003 |
2004 |
2003 |
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Net sales |
$ 30,128 |
$ 31,537 |
$ 88,515 |
$ 87,282 |
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Cost of goods sold |
16,110 |
15,915 |
43,951 |
43,666 |
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Gross Profit |
14,018 |
15,622 |
44,564 |
43,616 |
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Selling, general and administrative expenses |
13,934 |
13,831 |
42,675 |
39,544 |
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Service and distribution costs |
878 |
1,186 |
2,862 |
2,511 |
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Research and development expenses |
411 |
406 |
1,363 |
1,463 |
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Restructuring charges |
348 |
1,650 |
1,871 |
1,650 |
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Loss (Gain) on disposition of asset held for sale |
- |
21 |
- |
( 990 |
) |
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Operating Loss |
( 1,553 |
) |
( 1,472 |
) |
( 4,207 |
) |
( 562 |
) |
|
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|
|
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|
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Interest and other income (expense) |
51 |
( 25 |
) |
261 |
9 |
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Loss from Operations Before Income Taxes |
( 1,502 |
) |
( 1,497 |
) |
( 3,946 |
) |
( 553 |
) |
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Income tax benefit |
( 408 |
) |
( 524 |
) |
( 1,263 |
) |
( 194 |
) |
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Net Loss |
$ ( 1,094 |
) |
$ ( 973 |
) |
$ ( 2,683 |
) |
$ ( 359 |
) |
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Basic and Diluted Net Loss Per Share: |
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Net Loss Per Share |
$( 0.07 |
) |
$( 0.06 |
) |
$( 0.18 |
) |
$( 0.02 |
) |
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Weighted Average Shares Outstanding: |
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Denominator for Basic Net Loss Per Share |
14,919 |
15,042 |
14,966 |
15,136 |
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Effect of dilutive securities |
- ( A |
) |
- ( A |
) |
- ( A |
) |
- ( A |
) |
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Denominator for Diluted Net Loss Per Share |
14,919 |
15,042 |
14,966 |
15,136 |
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(A) No incremental shares related to options or restricted stock granted are included due to the net loss, as such securities would be anti-dilutive. |
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A. T. CROSS COMPANY AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME |
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(UNAUDITED) |
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(THOUSANDS OF DOLLARS, |
THREE MONTHS ENDED |
NINE MONTHS ENDED |
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EXCEPT PER SHARE AMOUNTS) |
OCTOBER 2, |
OCTOBER 4, |
OCTOBER 2, |
OCTOBER 4, |
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2004 |
2003 |
2004 |
2003 |
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Net Loss |
$ ( 1,094 |
) |
$ ( 973 |
) |
$ ( 2,683 |
) |
$ ( 359 |
) |
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Other Comprehensive (Loss) Income, Net of Tax: |
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Unrealized (loss) gain on interest rate swap |
( 11 |
) |
100 |
39 |
( 91 |
) |
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Foreign currency translation adjustments |
( 28 |
) |
214 |
( 75 |
) |
405 |
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Comprehensive Loss |
$ ( 1,133 |
) |
$ ( 659 |
) |
$ ( 2,719 |
) |
$ ( 45 |
) |
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See notes to condensed consolidated financial statements. |
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A. T. CROSS COMPANY AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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(UNAUDITED) |
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(THOUSANDS OF DOLLARS) |
NINE MONTHS ENDED |
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OCTOBER 2, 2004 |
OCTOBER 4, 2003 |
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CASH PROVIDED BY (USED IN): |
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Operating Activities: |
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Net Loss |
$ ( 2,683 |
) |
$ ( 359 |
) |
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Adjustments to reconcile net loss to |
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net cash provided by operating activities: |
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Depreciation and amortization |
5,851 |
6,443 |
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Restructuring charges |
1,871 |
1,650 |
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Gain on disposition of asset held for sale |
- |
( 990 |
) |
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Provision for bad debts |
35 |
448 |
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Deferred income taxes |
33 |
( 98 |
) |
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Provision for accrued warranty costs |
196 |
376 |
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Unrealized losses on trading securities |
71 |
90 |
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Amortization of unearned stock-based compensation |
121 |
78 |
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Non-cash compensation |
67 |
- |
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Changes in operating assets and liabilities: |
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Accounts receivable |
8,449 |
3,969 |
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Inventories |
( 5,889 |
) |
( 3,015 |
) |
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Other assets, net |
( 290 |
) |
( 2,124 |
) |
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Accounts payable and other liabilities, net |
( 2,300 |
) |
( 3,502 |
) |
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Warranty costs paid |
( 170 |
) |
( 253 |
) |
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Restructuring charges paid |
( 2,748 |
) |
( 2,096 |
) |
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Foreign currency transaction (gain) loss |
( 50 |
) |
284 |
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Net Cash Provided by Operating Activities |
2,564 |
901 |
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Investing Activities: |
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Purchase of short-term investments |
( 3,052 |
) |
( 10,082 |
) |
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Sale or maturity of short-term investments |
3,893 |
10,871 |
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Additions to property, plant and equipment |
( 3,009 |
) |
( 2,476 |
) |
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Acquisition of Costa Del Mar, net of cash acquired |
- |
( 9,570 |
) |
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Proceeds from disposition of asset held for sale |
- |
1,565 |
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Net Cash Used in Investing Activities |
( 2,168 |
) |
( 9,692 |
) |
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Financing Activities: |
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Purchase of treasury stock |
( 1,090 |
) |
( 2,581 |
) |
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Proceeds from long-term debt |
- |
9,000 |
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|
Repayments of long-term debt |
( 1,013 |
) |
( 450 |
) |
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|
Proceeds from line of credit |
1,000 |
2,555 |
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|
Repayments of line of credit |
( 1,155 |
) |
( 1,287 |
) |
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|
Proceeds from sale of Class A common stock |
292 |
40 |
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|
Net Cash (Used in) Provided by Financing Activities |
( 1,966 |
) |
7,277 |
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|
Effect of exchange rate changes on cash and cash equivalents |
( 36 |
) |
226 |
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|
Decrease in Cash and Cash Equivalents |
( 1,606 |
) |
( 1,288 |
) |
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|
Cash and cash equivalents at beginning of period |
8,295 |
9,145 |
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|
Cash and Cash Equivalents at End of Period |
$ 6,689 |
$ 7,857 |
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|
Non-cash financing activities: |
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|
Conversion of a portion of outstanding line of credit to term note |
- |
$ 9,000 |
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|
See notes to condensed consolidated financial statements. |
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A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 2, 2004
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 2, 2004 are not necessarily indicative of the results that may be expected for the twelve months ending January 1, 2005. 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 January 3, 2004.
NOTE B - Restructuring Charges
In July 2003, the Company announced a corporate restructuring program of its writing instrument and accessory segment designed to increase its 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 were affected in 2003 as part of the initial phase of this plan. In addition, approximately 80 global non-manufacturing positions were eliminated as part of the program to consolidate and reduce administrative expenses. The Company expects to incur pre-tax r
estructuring charges of approximately $6.5 million over the life of the program, assuming full implementation. Of this $6.5 million, approximately $5.5 million is for severance and related expenses and approximately $1 million for professional fees, consisting primarily of legal and tax advisory fees and outplacement service charges, travel and other. In 2003, approximately $2.4 million, of which $2 million was for severance and related expenses and $400,000 for professional fees and other, was recognized. Of the $2.4 million incurred in 2003, $1.6 million was paid in 2003. In the third quarter of 2004, an additional $389,000 was charged to the restructuring accrual, of which $250,000 was for severance and related expenses and $139,000 was for professional fees, travel and other. Approximately $528,000 of restructuring costs were paid in the third quarter of 2004. As approximately $4.4 million of restructuring charges have been incurred since the inception of this restructuring program, approximately $
2.1 million of restructuring charges are expected to be incurred in future periods. The following is a tabular presentation of the restructuring liabilities related to this plan:
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(THOUSANDS OF DOLLARS) |
SEVERANCE & |
PROFESSIONAL |
TOTAL |
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Balances at January 3, 2004 |
$ 808 |
$ 105 |
$ 913 |
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|
Restructuring charges incurred |
1,084 |
56 |
1,140 |
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|
Cash payments |
( 785 |
) |
( 126 |
) |
( 911 |
) |
|
|
Foreign exchange effects |
4 |
- |
4 |
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Balances at April 3, 2004 |
1,111 |
35 |
1,146 |
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|
Restructuring charges incurred |
114 |
269 |
383 |
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|
Cash payments |
( 994 |
) |
( 275 |
) |
( 1,269 |
) |
|
|
Foreign exchange effects |
( 14 |
) |
- |
( 14 |
) |
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|
Balances at July 3, 2004 |
217 |
29 |
246 |
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|
Restructuring charges incurred |
250 |
139 |
389 |
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|
Cash payments |
( 360 |
) |
( 168 |
) |
( 528 |
) |
|
|
Foreign exchange effects |
( 1 |
) |
- |
( 1 |
) |
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Balances at October 2, 2004 |
$ 106 |
$ - |
$ 106 |
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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 facility in Ireland and reorganized its European operations. The final obligation for restructuring under this plan was satisfied in the third quarter of 2004. The following is a tabular presentation of the restructuring liabilities related to this plan:
|
(THOUSANDS OF DOLLARS) |
SEVERANCE & |
TOTAL |
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|
Balances at January 3, 2004 |
$ 82 |
$ 82 |
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|
Foreign exchange effects |
( 2 |
) |
( 2 |
) |
|
|
Balances at April 3, 2004 |
80 |
80 |
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|
Foreign exchange effects |
1 |
1 |
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|
Balances at July 3, 2004 |
81 |
81 |
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|
Change in estimate |
( 41 |
) |
( 41 |
) |
|
|
Cash payments |
( 40 |
) |
( 40 |
) |
|
|
Balances at October 2, 2004 |
$ - |
$ - |
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NOTE C - Segment Information
The Company 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 2, 2004 and October 4, 2003:
|
(THOUSANDS OF DOLLARS) |
THREE MONTHS ENDED |
NINE MONTHS ENDED |
|||||||
|
OCTOBER 2, |
OCTOBER 4, |
OCTOBER 2, |
OCTOBER 4, |
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|
2004 |
2003 |
2004 |
2003 |
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|
Revenues from External Customers: |
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|
WI&A |
$ 26,726 |
$ 28,321 |
$ 76,707 |
$ 80,836 |
|||||
|
Optical |
3,402 |
3,216 |
11,808 |
6,446 |
|||||
|
Total |
$ 30,128 |
$ 31,537 |
$ 88,515 |
$ 87,282 |
|||||
|
Depreciation and Amortization: |
|||||||||
|
WI&A |
$ 2,191 |
$ 2,181 |
$ 5,727 |
$ 6,391 |
|||||
|
Optical |
49 |
17 |
124 |
52 |
|||||
|
Total |
$ 2,240 |
$ 2,198 |
$ 5,851 |
$ 6,443 |
|||||
|
Segment (Loss) Profit: |
|||||||||
|
WI&A |
$ ( 1,512 |
) |
$ ( 1,553 |
) |
$ ( 5,097 |
) |
$ ( 1,381 |
) |
|
|
Optical |
10 |
56 |
1,151 |
828 |
|||||
|
Total |
$ ( 1,502 |
) |
$ ( 1,497 |
) |
$ ( 3,946 |
) |
$ ( 553 |
) |
|
|
Restructuring Charges: |
|||||||||
|
WI&A |
$ 348 |
$ 1,650 |
$ 1,871 |
$ 1,650 |
|||||
|
Optical |
- |
- |
- |
- |
|||||
|
Total |
$ 348 |
$ 1,650 |
$ 1,871 |
$ 1,650 |
|||||
|
OCTOBER 2, |
JANUARY 3, |
||||||||
|
2004 |
2004 |
||||||||
|
Segment Assets: |
|||||||||
|
WI&A |
$ 97,333 |
$ 106,969 |
|||||||
|
Optical |
13,114 |
11,177 |
|||||||
|
Total |
$ 110,447 |
$ 118,146 |
|||||||
|
Goodwill: |
|||||||||
|
WI&A |
$ 3,944 |
$ 3,944 |
|||||||
|
Optical |
3,464 |
3,464 |
|||||||
|
Total |
$ 7,408 |
$ 7,408 |
|||||||
NOTE D - Warranty Costs
The Company's Cross branded writing instruments are sold with a full warranty of unlimited duration against mechanical failure. Accessories are sold with a one-year warranty against mechanical failure and defects in workmanship, and timepieces are warranted to the original owner to be free from defects in material and workmanship for a period of ten years. Costa Del Mar sunglasses are sold with a lifetime warranty against defects in materials or workmanship. Estimated warranty costs are accrued at the time of sale. The most significant factors in the estimation of warranty cost liabilities include the operating efficiency and related cost of the service department, writing instrument unit sales and the number of units that are eventually returned for warranty repair. The current portion of accrued warranty costs was $488,000 at October 2, 2004 and January 3, 2004, and was recorded in accrued expenses and other liabilities. The long-term portion of accrued warranty costs was approximately $2.0 m
illion at October 2, 2004 and $1.9 million at January 3, 2004. The following table reflects the activity in aggregate accrued warranty costs:
|
(THOUSANDS OF DOLLARS) |
THREE MONTHS ENDED |
NINE MONTHS ENDED |
|||||||
|
OCTOBER 2, |
OCTOBER 4, |
OCTOBER 2, |
OCTOBER 4, |
||||||
|
2004 |
2003 |
2004 |
2003 |
||||||
|
Balance at beginning of period |
$ 2,440 |
$ 2,640 |
$ 2,424 |
$ 2,523 |
|||||
|
Warranty costs paid |
( 49 |
) |
( 70 |
) |
( 170 |
) |
( 252 |
) |
|
|
Warranty costs accrued |
59 |
157 |
196 |
376 |
|||||
|
Warranty liabilities assumed |
- |
- |
- |
80 |
|||||
|
Balance at end of period |
$ 2,450 |
$ 2,727 |
$ 2,450 |
$ 2,727 |
|||||
NOTE E - Stock-Based Compensation
The Company applies the intrinsic-value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for employee stock-based compensation and provides pro forma disclosures of the compensation expense determined under the fair value provisions of Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS No. 148. No employee stock-based compensation cost is reflected in net income (loss) related to options granted under those plans for which the exercise or purchase price was equal to the market value of the underlying common stock on the date of grant. Deferred compensation is recorded on the date of grant if the exercise or purchase price of the stock award is less than the market value of the underlying common stock on the date of grant. Deferred compensation is expensed on a straight-line basis over the vesting period of the stock award. The
following table reflects pro forma net loss and net loss per share had the Company elected to record expense for employee stock options under SFAS No. 123.
|
(THOUSANDS OF DOLLARS, |
THREE MONTHS ENDED |
NINE MONTHS ENDED |
|||||||
|
EXCEPT PER SHARE AMOUNTS) |
OCTOBER 2, |
OCTOBER 4, |
OCTOBER 2, |
OCTOBER 4, |
|||||
|
2004 |
2003 |
2004 |
2003 |
||||||
|
Net loss, as reported |
$ ( 1,094 |
) |
$ ( 973 |
) |
$ ( 2,683 |
) |
$ ( 359 |
) |
|
|
Deduct: Total stock-based employee compensation expense |
|||||||||
|
as determined under the fair value based method for all |
|||||||||
|
awards, net of related tax effects |
90 |
192 |
307 |
562 |
|||||
|
Pro Forma Net Loss |
$ ( 1,184 |
) |
$ ( 1,165 |
) |
$ ( 2,990 |
) |
$ ( 921 |
) |
|
|
Net Loss per Share: |
|||||||||
|
Basic and diluted - as reported |
$( 0.07 |
) |
$( 0.06 |
) |
$( 0.18 |
) |
$( 0.02 |
) |
|
|
Basic and diluted - pro forma |
$( 0.08 |
) |
$( 0.08 |
) |
$( 0.20 |
) |
$( 0.06 |
) |
|
NOTE F - Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of total shares of Class A and Class B common stock outstanding during the year. Diluted net income (loss) per share is computed by dividing net income (loss) by diluted weighted average shares outstanding. Diluted weighted average shares reflect the dilutive effect, if any, of potential common shares. To the extent that their effect is dilutive, potential common shares include common stock options and restricted stock based on the treasury method.
NOTE G -