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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 September 28, 2002

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 the number of shares outstanding of each of the issuer's classes of common stock as of September 28, 2002:

Class A common stock -
Class B common stock -

13,876,861 shares
1,804,800 shares

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

A. T. CROSS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

September 28, 2002

December 29, 2001

(Unaudited)

(In Thousands of Dollars)

ASSETS

CURRENT ASSETS

Cash and Cash Equivalents

$ 11,106

$ 12,651

Short-Term Investments

9,172

8,846

Accounts Receivable

22,103

27,924

Inventories:

Finished Goods

7,287

6,143

Work in Process

5,584

5,051

Raw Materials

2,641

2,729

15,512

13,923

Deferred Income Taxes

5,297

5,281

Other Current Assets

4,652

4,064

TOTAL CURRENT ASSETS

67,842

72,689

PROPERTY, PLANT AND EQUIPMENT

126,140

121,568

Less Allowances for Depreciation

97,710

91,524

28,430

30,044

GOODWILL

3,944

3,944

DEFERRED INCOME TAXES

2,427

2,379

INTANGIBLES, NET

831

731

OTHER ASSETS

1,396

1,446

TOTAL ASSETS

$ 104,870

$ 111,233

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES

Note Payable to Bank

$ 1,500

$ 0

Accounts Payable, Accrued Expenses and Other Liabilities

15,126

17,238

Accrued Compensation and Related Taxes

3,758

4,352

Contributions Payable to Employee Benefit Plans

7,323

7,586

Restructuring Liabilities

1,417

2,173

Income Taxes Payable

0

622

TOTAL CURRENT LIABILITIES

29,124

31,971

ACCRUED WARRANTY COSTS

4,686

4,687

COMMITMENTS AND CONTINGENCIES (NOTE H)

-

-

SHAREHOLDERS' EQUITY

Common Stock, Par Value $1 Per Share:

Class A, Authorized 40,000,000 Shares;

16,009,209 Shares Issued and 13,876,861

Shares Outstanding at September 28, 2002 and

15,967,549 Shares Issued and 14,657,868

Shares Outstanding at December 29, 2001

16,009

15,968

Class B, Authorized 4,000,000 Shares;

1,804,800 Shares Issued and Outstanding

at September 28, 2002 and December 29, 2001

1,805

1,805

Additional Paid-In Capital

15,688

15,481

Unearned Stock-Based Compensation

( 28

)

( 68

)

Retained Earnings

58,406

56,855

Accumulated Other Comprehensive Loss

( 1,334

)

( 1,710

)

90,546

88,331

Treasury Stock, at Cost

( 19,486

)

( 13,756

)

TOTAL SHAREHOLDERS' EQUITY

71,060

74,575

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$ 104,870

$ 111,233

See notes to condensed consolidated financial statements.

 

A. T. CROSS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 28,

September 29,

September 28,

September 29,

2002

2001

2002

2001

(In Thousands, Except per Share Data)

Net Sales

$ 29,075

$ 27,805

$ 84,046

$ 85,329

Cost of Goods Sold

13,913

13,574

40,260

40,684

Gross Profit

15,162

14,231

43,786

44,645

Selling, General and Administrative Expenses

12,346

10,759

38,262

36,771

Research and Development Expenses

542

516

1,659

1,519

Service and Distribution Costs

809

1,240

2,389

2,484

Restructuring Charges

0

10

0

( 62

)

Operating Income

1,465

1,706

1,476

3,933

Interest and Other

231

146

649

( 5,207

)

Income (Loss) from Continuing Operations

Before Income Taxes

1,696

1,852

2,125

( 1,274

)

Income Tax Expense (Benefit)

424

834

574

( 573

)

Income (Loss) from Continuing Operations

1,272

1,018

1,551

( 701

)

Income from Discontinued Operations

(Net of Income Taxes)

0

0

0

30

Net Income (Loss)

$ 1,272

$ 1,018

$ 1,551

$ ( 671

)

Basic and Diluted Earnings (Loss) Per Share:

Continuing Operations

$ 0.08

$ 0.06

$ 0.10

$( 0.04

)

Discontinued Operations

0.00

0.00

0.00

0.00

Net Income (Loss) Per Share

$ 0.08

$ 0.06

$ 0.10

$( 0.04

)

Weighted Average Shares Outstanding:

Denominator for Basic Earnings (Loss) Per Share

15,765

16,674

16,007

16,752

Effect of Dilutive Securities:

Common Stock Equivalents

231

269

256

- ( A

)

Denominator for Diluted Earnings (Loss) Per Share

15,996

16,943

16,263

16,752

(A) No incremental shares related to options or restricted stock granted 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

Nine Months

Ended

Ended

September 28, 2002

September 29, 2001

(In Thousands of Dollars)

Cash Provided by (Used in):

Operating Activities:

Income (Loss) from Continuing Operations

$ 1,551

$ ( 701)

Adjustments to Reconcile Income (Loss) from Continuing

Operations to Net Cash Provided by Continuing Operations:

Depreciation and Amortization

6,584

5,418

Restructuring Charges

0

( 34

)

Impairment of Investment

0

5,000

Loss on Sale and Impairment of Marketable Equity Securities

0

927

Provision for Losses on Accounts Receivable

216

235

Deferred Income Taxes

( 53

)

15

Provision for Warranty Costs

311

424

Unrealized Gain on Trading Securities

( 129

)

( 131

)

Warranty Costs Paid

( 312

)

( 429

)

Restructuring Charges Paid

( 898

)

( 5,044

)

Foreign Currency Transaction Loss (Gain)

250

( 404

)

Changes in Operating Assets and Liabilities:

Accounts Receivable

5,605

8,735

Inventories

( 1,590

)

( 2,765

)

Other Assets - Net

( 1,084

)

( 1,887

)

Accounts Payable and Other Liabilities - Net

( 3,512

)

( 7,785

)

Net Cash Provided by Continuing Operations

6,939

1,574

Net Cash Provided by Discontinued Operations

0

30

Net Cash Provided by Operating Activities

6,939

1,604

Investing Activities:

Additions to Property, Plant and Equipment

( 4,552

)

( 4,830

)

Purchase of Short-Term Investments

( 7,193

)

( 10,698

)

Sale or Maturity of Short-Term Investments

6,996

12,914

Sale of Marketable Equity Securities

0

22

Net Cash Used in Investing Activities

( 4,749

)

( 2,592

)

Financing Activities:

Proceeds from Bank Borrowings

2,000

3,000

Repayment of Bank Borrowings

( 500

)

( 1,500

)

Purchase of Treasury Stock

( 5,730

)

( 2,172

)

Proceeds from Sale of Class A Common Stock

248

415

Net Cash Used in Financing Activities

( 3,982

)

( 257

)

Effect of Exchange Rate Changes on Cash and Cash Equivalents

247

( 100

)

Decrease in Cash and Cash Equivalents

( 1,545

)

( 1,345

)

Cash and Cash Equivalents at Beginning of Period

12,651

13,800

Cash and Cash Equivalents at End of Period

$ 11,106

$ 12,455

See notes to condensed consolidated financial statements.

A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 2002

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 September 28, 2002 are not necessarily indicative of the results that may be expected for the twelve months ending December 28, 2002. 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 29, 2001.

NOTE B - Restructuring Charges
In 2000, the Company's Board of Directors approved a plan to restructure the Company's domestic and international quality writing instrument operations. As part of this restructuring plan, the Company consolidated writing instrument manufacturing and distribution at its headquarters in Lincoln, Rhode Island, closed its Irish manufacturing and distribution facility and reorganized its European operations. There was no change in the estimated expenses related to the restructuring plan in 2002.

The following is a tabular presentation of the restructuring liabilities:

(In Thousands)

Severance

Professional

& Related

Fees

Contractual

Expenses

& Other

Obligations

Total

Balances at December 29, 2001

$ 947

$ 117

$ 1,109

$ 2,173

Foreign Exchange Effects

( 5

)

0

( 16

)

( 21

)

Cash Payments

( 253

)

( 63

)

0

( 316

)

Balances at March 30, 2002

689

54

1,093

1,836

Foreign Exchange Effects

26

0

151

177

Cash Payments

( 395

)

( 47

)

0

( 442

)

Balances at June 29, 2002

320

7

1,244

1,571

Foreign Exchange Effects

0

0

( 14

)

( 14

)

Cash Payments

( 135

)

( 5

)

0

( 140

)

Balances at September 28, 2002

$ 185

$ 2

$ 1,230

$ 1,417

NOTE C - Comprehensive Income (Loss)
Comprehensive income (loss) for the three and nine month periods ended September 28, 2002 and September 29, 2001 follows:

Three Months

Three Months

Nine Months

Nine Months

(In Thousands)

Ended

Ended

Ended

Ended

September 28,

September 29,

September 28,

September 29,

2002

2001

2002

2001

Net Income (Loss)

$ 1,272

$ 1,018

$ 1,551

$ ( 671

)

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

Unrealized (Loss) Gain on Available for Sale

Investments

( 7

)

( 222

)

( 18

)

204

Foreign Currency Translation Adjustments

( 56

)

176

394

( 132

)

Comprehensive Income (Loss)

$ 1,209

$ 972

$ 1,927

$ ( 599

)

NOTE D - Segment Information
The Company has one reportable segment, Quality Writing Instruments ("QWI"). In 2001, the Company significantly downsized the Pen Computing Group and more closely aligned its efforts with the QWI research and development department. Therefore, effective for 2002, pen computing results are no longer reported as a separate segment. For further information, refer to notes A and L in the Company's annual report on Form 10-K for the year ended December 29, 2001.

NOTE E - Line of Credit
The Company currently has a $25 million unsecured line of credit with a bank. The Company is required to meet certain liquidity levels and covenants. The most restrictive covenant is to maintain a consolidated cash, cash equivalents and short-term investments balance of not less than $15 million at the end of each quarter. 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 and bear interest at either the bank's prime lending rate or at one percent per annum in excess of the London Interbank Offering Rate. At September 28, 2002 and September 29, 2001 there was $1.5 million outstanding under this line of credit.

NOTE F - New Accounting Pronouncements
Effective January 1, 2002, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill and certain intangible assets deemed to have indefinite lives will remain on the balance sheet and not be amortized. Goodwill will be tested for impairment annually or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, and write downs may be necessary. Testing goodwill impairment under SFAS No. 142 is a two-step process. The first step is a comparison of the reporting unit's fair value to its carrying amount. If the fair value exceeds the carrying value, no impairment would be recognized. If, however, the carrying value of the reporting unit exceeds the fair value, the goodwill may be impaired . The first step of the initial assessment must be completed within six months of adoption. The second step of SFAS No. 142, determining the amount of the impairment, if any, must be performed no later than December 28, 2002. The Company has performed the first step of testing goodwill for impairment and has determined that there is no impairment. At September 28, 2002, the carrying value of goodwill was approximately $3,944,000. A reconciliation of reported net income (loss) and basic and diluted earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization follows:

(In Thousands, Except per Share Amounts)

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

September 28,

September 29,

September 28,

September 29,

2002

2001

2002

2001

Reported Net Income (Loss)

$ 1,272

$ 1,018

$ 1,551

$ ( 671

)

Add Goodwill Amortization

0

55

0

165

Adjusted Net Income (Loss)

$ 1,272

$ 1,073

$ 1,551

$ ( 506

)

Reported Basic and Diluted Earnings (Loss) per Share

$ 0.08

$ 0.06

$ 0.10

$( 0.04

)

Add Goodwill Amortization per Share

0.00

0.00

0.00

0.01

Adjusted Basic and Diluted Earnings (Loss) per Share

$ 0.08

$ 0.06

$ 0.10

$( 0.03

)

Other intangibles consisted of the following:

(In Thousands)

September 28, 2002

December 29, 2001

Gross

Other

Gross

Other

Carrying

Accumulated

Intangibles,

Carrying

Accumulated

Intangibles,

Amount

Amortization

Net

Amount

Amortization

Net

Patents

$ 2,027

$ 1,602

$ 425

$ 1,782

$ 1,489

$ 293

Trademarks

6,112

5,706

406

5,945

5,507

438

Other Intangibles

$ 8,139

$ 7,308

$ 831

$ 7,727

$ 6,996

$ 731

The Company amortizes other intangibles over an average five-year life. Amortization expense was approximately $310,000 and $335,000 for the nine months ended September 28, 2002 and September 29, 2001, respectively. The estimated future amortization expense for other intangibles remaining as of September 28, 2002 is as follows:

(In Thousands)

Remainder of 2002

$ 72

2003

276

2004

236

2005

165

2006

82

Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. The adoption of SFAS No. 144 had no material effect on the Company's consolidated financ ial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 amends, among other things, the financial accounting and reporting for extinguishment of debt obligations and certain lease modifications. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 with regard to extinguishment of debt obligations and is effective for transactions occurring after May 15, 2002 with regard to certain lease modifications. The remaining provisions are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS No. 145 had no material effect on the Company's consolidated financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," and nullified Emerging Issues Task Force ("EITF") Issue No. 94-3. SFAS No.146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact of adoption of this statement.

NOTE G - Stock Repurchase Plan
On April 26, 2001, the Company's Board of Directors authorized the repurchase of up to 10% of the Company's outstanding Class A common stock. In the third quarter of 2002, the Company repurchased 348,867 shares of stock for approximately $2.4 million. At September 28, 2002, the Company had repurchased 1,446,267 shares of stock for approximately $9.9 million under this plan at an average price of $6.81. This plan was completed in October 2002. There were a total of 1,499,967 shares purchased under this plan for approximately $10.2 million at an average price per share of $6.78.

On October 23, 2002 the Company's Board of Directors authorized a new plan to repurchase up to an additional 10% of the outstanding Class A common stock. The Company plans to purchase approximately 1.4 million shares of stock on the open market, subject to regulatory considerations, from time to time, depending on market conditions.

Repurchased shares will be held as treasury stock and will be available for general corporate purposes including but not limited to employee benefit plans, strategic acquisitions and alliances.

NOTE H - Contingencies
On or about April 21, 2000, the Company, certain officers and directors of the Company and others were named as defendants in an action filed in the United States District Court for the District of Rhode Island. The suit, which is brought by a purchaser of the Company's Class A common stock, alleges that the defendants violated Federal securities laws by making material misstatements and omissions in the Company's public filings and statements relating to the Company's Pen Computing Group ("PCG") business. The suit seeks class action status including all purchasers of the Company's Class A common stock between September 17, 1997 and April 22, 1999. The damages sought are unspecified.

On June 30, 2000, the Company filed a Motion to Dismiss the action in the United States District Court in Rhode Island. The United States District Court for the District of Rhode Island granted the Company's Motion to Dismiss in June 2001. In July 2001, the Plaintiff filed an appeal with the First Circuit Court of Appeals.

On March 20, 2002, the Court of Appeals for the First Circuit issued a judgment affirming the dismissal of all claims asserted against the W. Russell Boss Jr. Trust A, W. Russell Boss Jr. Trust B and W. Russell Boss Jr. Trust C and reversing the District Court's dismissal of the claims asserted against the Company and the named individual defendants. The Court of Appeals' ruling was limited to a finding that the plaintiff's complaint had satisfied the pleading requirements of the Private Securities Litigation Reform Act of 1995; the Court did not opine on the merits of plaintiff's claims. The Company maintains that the claims are without merit and continues to vigorously defend the litigation.

In 1998, the Company received a Letter of Responsibility ("LOR") from the Rhode Island Department of Environmental Management ("DEM"). The LOR stated that analytical results indicated elevated levels of volatile organic compounds at several sites on the Company's property and requested that the Company conduct a site investigation to identify the source. The Company retained an environmental consulting firm to perform the site investigation and develop remedial action alternatives. The DEM has accepted these proposals and remediation activities began in 2001.

In 2000, the Company was advised by its environmental consultants that elevated levels of certain contaminants were found in soil and groundwater at the Company's Irish facility. These conditions have been reported to the regulatory authorities in Ireland and additional investigation is ongoing. A proposed remediation program was developed and presented to the Irish Environmental Protection Agency ("EPA") in 2001. This program was approved by the Irish EPA in the second quarter of 2002 and implementation is ongoing. Results will be subject to Irish EPA approval.

At September 28, 2002, there was approximately $744,000 in accrued expenses and other liabilities for these remediation programs.

The Company is involved in various litigation and legal matters that have arisen in the ordinary course of business. To its knowledge, management believes that the ultimate resolution of any existing matter will not have a material adverse effect on the Company's consolidated financial results.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations Third Quarter 2002 Compared to Third Quarter 2001

Net sales for the third quarter of 2002 were $29.1 million, an increase of 4.6% as compared to the third quarter of 2001. Total Quality Writing Instrument ("QWI") sales for the quarter of $29.1 million increased 6.9% from the prior year. Domestic writing instrument sales of $15.4 million increased 18.5% as compared to the third quarter of 2001, while international writing instrument sales of $13.7 million decreased 3.6% as compared to the 2001 period. The Company significantly downsized the Pen Computing Group in 2001 and more closely aligned its efforts with the QWI research and development department. Therefore, effective for 2002, pen computing results are no longer reported as a separate segment. There was no significant pen computing activity in the third quarter of 2002. Pen computing segment revenue was $603,000 in the third quarter of 2001.

The third quarter increase in domestic writing instrument sales was due to higher retail division sales. Retail sales were 24.6% higher than the third quarter of 2001. This increase was due largely to a new Century® holiday gift package program offered to an existing warehouse club account. Century is one of the Company's core products. In addition, in the quarter, was the launch of the Company's new non-Cross branded popular priced Penatia™ line and new distribution in department stores of a new ion® gift package. ion is the Company's palm sized pen that uses gel ink. OEM revenue, which consists of sales of non-Cross branded writing instruments, increased 8.9% in the quarter. Domestic corporate gift division sales decreased 1.2% in the quarter, due to adverse economic conditions and the resulting reduction in corporate discretionary spending.

The third quarter decrease in international writing instrument sales was the result of a 13.2% decrease in Asian markets. The decline in Asian revenue was generally due to adverse economic conditions affecting the region's corporate gift and duty free sales, particularly in Japan, our largest Asian market. The Europe, Middle East and Africa ("EMEA") region sales increased 3.2% in the quarter. The EMEA increase was due to improved retail performance in Europe, which more than offset declines in the corporate gift division and the Middle East markets. Sales in the international Americas, consisting of Canada and Latin America, decreased 5.6% compared to the third quarter of 2001.

The gross profit margin for the third quarter of 2002 was 52.1%, 0.9 percentage points higher than the 51.2% margin for the comparable period last year. Writing instrument margins declined 1.1 percentage points to 52.1% due to the effect of product mix and higher fixed manufacturing expenses. PCG segment margins were negative in the third quarter of 2001.

SG&A expenses for the third quarter of 2002 were 14.8% higher than the third quarter of 2001. Included in the 2002 third quarter were $340,000 of due diligence expenses related to a review of a strategic acquisition target as part of an ongoing search for external growth opportunities. At this time, the Company has decided not to pursue this target. Marketing and selling support for writing instruments increased by 9.6%. Included in the 2002 third quarter SG&A expense were costs associated with maintaining our Irish facility, which is for sale. All other SG&A expenses were 11.8% higher than the third quarter of 2001, largely due to timing.

Service and distribution ("S&D") expenses were lower than the prior year third quarter by $431,000, or 34.8%. In the prior year, a reclassification was made in the quarter to align the Company's S&D expenses with the restructured European operations. Excluding the effect of this reclassification, S&D expenses declined 25% in the quarter due to the effects of cost control programs put in place.

In the third quarter of 2002, Interest and other was $231,000 of income as compared to $146,000 of income in the third quarter of 2001. Interest income was lower in the third quarter of 2002 as compared to the third quarter of 2001 as interest rates were substantially below the prior year level. Other income was approximately $86,000 as compared to other expense of approximately $48,000 in the third quarter of 2001.

The effective tax rate in the third quarter of 2002 was 25% on the income from continuing operations as compared to a 45.0% rate for the prior year quarter. The significant decrease is due to a reduction in the quarter of the estimated rate for the full year 2002. This change in estimate is due to greater than expected tax benefits from operating loss carryforwards and export sales. The 2001 rate was impacted by the unfavorable tax treatment of loss provisions on Internet investments that utilized offshore funds.

Results of Operations Nine Months Ended September 28, 2002 Compared to September 29, 2001

Net sales for the nine month period ended September 28, 2002 were $84.0 million, a decrease of 1.5% as compared to the same period in 2001. Total QWI sales of $84.0 million increased 1.0% over the prior year. Domestic writing instrument sales were $43.7 million for the first nine months, 11.8% higher than the comparable period last year. International writing instrument sales of $40.3 million were 8.5% lower than the comparable period in 2001. Effective for 2002, pen computing results are no longer reported as a separate segment. For the nine months ended September 28, 2002, there was no significant pen computing activity, while sales in the 2001 period were $2.1 million.

The increase in domestic writing instrument sales was due primarily to retail division growth and higher OEM revenue. Sales by the retail division increased 11.8% for the first nine months of 2002 as compared to the first nine months of 2001. The increase in this division can be attributed to a new Century holiday gift package program offered to an existing warehouse club account, the cumulative effect of the launch of several new products and initiatives during the year and new distribution in department stores of new ion gift packages. OEM revenue was $3.2 million for the nine months ended September 28, 2002, compared to $1.3 million in the comparable period of 2001 due to the addition of a new customer. Business gift sales declined by 5.1% in 2002 compared to 2001, due to continued adverse economic conditions and the resulting reduction in corporate discretionary spending.

International revenues decreased for the first nine months primarily due to lower sales in Asia and the EMEA markets. Asia revenue declined 16.9% for the nine months ended September 28, 2002. This decline was due to the continuing adverse economic conditions in Asia, particularly in Japan, that are affecting the region's corporate gift and duty free sales. EMEA sales for the first nine months of 2002 declined 5.0% as compared to the same period of 2001. EMEA revenue has been affected by an 18% decline in business gift sales, offset somewhat by a 4% increase in retail sales. Canada and Latin America sales declined slightly as compared to 2001.

The gross profit margin for the first nine months of 2002 was 52.1%, 0.2 percentage points lower than the 52.3% gross margin reported for the comparable period last year. QWI gross margins were lower by 1.8 percentage points due to product mix as well as the effect of higher fixed manufacturing expenses on relatively flat sales volume. PCG segment margins were negative for the first nine months of 2001.

SG&A expenses for the first nine months of 2002 were 4.1% higher than the prior year. SG&A expenses in 2002 included $340,000 of due diligence expenses related to a review of a strategic acquisition target. At this time, the Company has decided not to pursue this target. Marketing and selling support expenses for the first nine months of 2002 increased 4.4% over the same period last year due to the Company's decision to investment spend in this area. All other SG&A expenses increased 1.2% for the first nine months as compared to the same period of 2001.

R&D expenses in the first nine months of 2002 were higher than the same 2001 period by 9.2%. This was due to increased expenditures for the development of new QWI products.

Interest and other for the first nine months of 2002 was income of $649,000 as compared to expense of $5.2 million in 2001. Interest income was 37.6% lower than 2001, due primarily to lower interest rates. The 2001 expense was due almost entirely to activity relating to the Company's Internet investments, as the Company recorded a loss of approximately $5.9 million in the second quarter of 2001, due to the decline in value of investments in DigitalConvergence.:Com Inc. and NeoMedia.

The Company recorded income tax expense of 27% on income from continuing operations in the first nine months of 2002. This is the Company's best estimate of the effective tax rate for the full year, which reflects greater than expected benefits from operating loss carryforwards and export sales. The Company recorded an income tax benefit of 45% on the loss from continuing operations for the first nine months of 2001. The 2001 rate was impacted by unfavorable tax treatment of loss provisions on Internet investments that utilized offshore funds.

Liquidity and Sources of Capital

Cash, cash equivalents and short-term investments ("STI") ("cash and STI") decreased approximately $1.2 million from December 29, 2001 to $20.3 million at September 28, 2002. Cash and STI available for domestic operations approximated $762,000, while cash and STI held offshore approximated $19.5 million at September 28, 2002. For the nine months ending September 28, 2002, the Company used approximately $5.7 million of cash generated from domestic operations to repurchase shares of the Company's stock. In 1999, the Company determined that approximately $15 million in undistributed foreign earnings were no longer considered invested indefinitely and recorded a provision for deferred taxes of approximately $5.3 million. This represented the estimated tax associated with these undistributed earnings. As of September 28, 2002, approximately $9.4 million of these earnings had been repatriated to the U.S. The Company expects to repatriate an additional $2.5 million of undistributed foreign earnings in the fourth quarter of 2002. At present, management continues to believe that the unremitted foreign earnings for which deferred taxes have not been provided will continue to be permanently invested in the growth of business outside of the U.S.; hence, no additional deferred taxes were recorded during the first nine months of 2002.

Accounts receivable decreased since the end of 2001 by approximately $5.8 million to $22.1 million, primarily due to cash collected in January 2002 from customers who took advantage of the Company's 2001 extended dating program. This program allowed domestic customers to defer payments on certain 2001 purchases to 2002. This program was similar to holiday season dating programs that have been offered in prior years and is being offered again in 2002.

Included in other assets is the net book value of the Irish facility, approximately $1.0 million, which was closed as part of the Company's restructuring plan and is classified as an asset held for sale. A deposit and letter of intent have been received from a potential buyer of this property and negotiations are in progress.

The Company currently has available a $25 million unsecured line of credit with a bank that provides an additional source of working capital on a short-term basis. There was $1.5 million outstanding under this line of credit at September 28, 2002 and September 29, 2001.

In the third quarter of 2002, $140,000 of restructuring charges were paid. Total cash payments to date through September 28, 2002, related to the restructuring plan, approximated $13.9 million. The total cash portion of the restructuring is expected to approximate $15.3 million. The Company expects that cash payments for restructuring will be substantially completed by the end of 2002.

The Company is currently reviewing the assumptions used for the estimated return on plan assets and discount rate of the Company's defined benefit retirement plan. Given the actual investment return on the Company's defined benefit retirement plan portfolio, the Company is considering reducing the return on plan assets and discount rate assumptions. This will likely result in a cash contribution of approximately $700,000 in 2003.

On April 26, 2001, the Company's Board of Directors authorized the repurchase of up to 10% of the Company's outstanding Class A common stock. In the third quarter of 2002, the Company repurchased 348,867 shares of stock for approximately $2.4 million. At September 28, 2002, the Company had repurchased 1,446,267 shares of stock for approximately $9.9 million under this plan at an average price of $6.81. This plan was completed in October 2002. There were a total of 1,499,967 shares purchased under this plan for approximately $10.2 million at an average price per share of $6.78.

On October 23, 2002 the Company's Board of Directors authorized a new plan to repurchase up to an additional 10% of the outstanding Class A common stock. The Company plans to purchase approximately 1.4 million shares of stock on the open market, subject to regulatory considerations, from time to time, depending on market conditions. There is no assurance as to the actual number of shares that will be repurchased under this program and purchases can be suspended at any time.

The Company believes that existing cash and funds from operations, supplemented, as appropriate, by the Company's short-term borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements, the remaining requirements of the restructuring plan, contributions to the defined benefit retirement plan and the stock repurchase plan. Should operating cash flows in 2002 not materialize as projected, the Company has a number of alternatives to ensure that it will have sufficient cash to meet its operating needs. These alternatives include implementation of strict cost controls on discretionary spending, delaying non-critical research and development and capital projects and delaying the completion of the stock repurchase plan.

New Accounting Pronouncements

Effective January 1, 2002, the Company adopted FASB SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Goodwill and certain intangible assets deemed to have indefinite lives will remain on the balance sheet and not be amortized. Goodwill will be tested for impairment annually or when an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, and write downs may be necessary. Testing goodwill impairment under SFAS No. 142 is a two-step process. The first step is a comparison of the reporting unit's fair value to its carrying amount. If the fair value exceeds the carrying value, no impairment would be recognized. If, however, the carrying value of the reporting unit exceeds the fair value, the goodwill may be impaired. This first step of the initial assessment must be completed within six months of adoption. The second step of SFAS No. 142, determining the amount of the impairment, if any, must be performed no later than December 28, 2002. The Company has performed the first step of testing goodwill for impairment and has determined that there is no impairment. At September 28, 2002, the carrying value of goodwill was approximately $3,944,000. Amortization of goodwill was $55,000 in the third quarter of 2001.

Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that opinion). SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions than were included under the previous standards. The adoption of SFAS No. 144 had no material effect on the Company's consolidated financial position or results of opera tions.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 amends, among other things, the financial accounting and reporting for extinguishment of debt obligations and certain lease modifications. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002 with regard to extinguishment of debt obligations and is effective for transactions occurring after May 15, 2002 with regard to certain lease modifications. The remaining provisions are effective for financial statements issued on or after May 15, 2002. The adoption of SFAS No. 145 had no material effect on the Company's consolidated financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," and nullified EITF Issue No. 94-3. SFAS No.146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF No 94-3 had recognized the liability at the commitment date to an exit plan. The Company is required to adopt the provisions of SFAS No. 146 effective for exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the impact of adoption of this statement.

Forward-Looking Statements

Statements contained in this Form 10-Q that are not historical fact are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (including but not limited to the effect of new products and new distribution, continued strength of the retail market in the United States and Europe, the anticipated effective tax rate, the expected results of litigation, the anticipated benefits of strict cost controls and statements related to available working capital). In addition, use of words such as "believes," "anticipates," "expects," "will" and similar expressions are intended to identify forward-looking statements. The Company cautions that a number of important factors could cause actual results for fiscal 2002 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. The forward-looking statements contain a number of risks and uncertainties, including, but not limite d to, risks associated with the uncertainty of the domestic and foreign economies, the political uncertainty of certain foreign markets in which the Company operates, the uncertainty related to litigation, customer and consumer acceptance of the Company's new and existing product lines, and new distribution. See the Company's Form 10-K for a more detailed discussion of certain of these factors. The Company cannot assure that it will be able to anticipate or respond timely to changes which could adversely affect its operating results in one or more fiscal quarters. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of the Company's common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to the Company's annual report on Form 10-K for the twelve month period ended December 29, 2001 for a complete discussion of the Company's market risk. There have been no material changes to the market risk information included in the Company's 2001 annual report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days prior to the filing date of this quarterly report, have concluded that, based on such evaluation, the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

(b) Changes in Internal Controls. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. Accordingly, no corrective actions were required or undertaken.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On or about April 21, 2000, the Company, certain officers and directors of the Company and others were named as defendants in an action filed in the United States District Court for the District of Rhode Island. The suit, which is brought by a purchaser of the Company's Class A common stock, alleges that the defendants violated Federal securities laws by making material misstatements and omissions in the Company's public filings and statements relating to the Company's PCG business. The suit seeks class action status including all purchasers of the Company's Class A common stock between September 17, 1997 and April 22, 1999. The damages sought are unspecified.

On June 30, 2000, the Company filed a Motion to Dismiss the action in the United States District Court in Rhode Island. The United States District Court for the District of Rhode Island granted the Company's Motion to Dismiss in June 2001. In July 2001, the Plaintiff filed an appeal with the First Circuit Court of Appeals.

On March 20, 2002, the Court of Appeals for the First Circuit issued a judgment affirming the dismissal of all claims asserted against the W. Russell Boss Jr. Trust A, W. Russell Boss Jr. Trust B and W. Russell Boss Jr. Trust C and reversing the District Court's dismissal of the claims asserted against the Company and the named individual defendants. The Court of Appeals' ruling was limited to a finding that the plaintiff's complaint had satisfied the pleading requirements of the Private Securities Litigation Reform Act of 1995; the Court did not opine on the merits of plaintiff's claims. The Company maintains that the claims are without merit and continues to vigorously defend the litigation.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

Exhibit 99 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

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, 2002

By: DAVID G. WHALEN
David G. Whalen
Chief Executive Officer

Date: November 12, 2002

By: JOHN T. RUGGIERI
John T. Ruggieri
Senior Vice President
Chief Financial Officer

 

CERTIFICATION

Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

I, David G. Whalen, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of A.T. Cross Company;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

 

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

 

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 12, 2002

DAVID G. WHALEN

 

David G. Whalen

 

President and Chief Executive Officer

CERTIFICATION

Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

I, John T. Ruggieri, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of A.T. Cross Company;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

 

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

 

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

 

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: November 12, 2002

JOHN T. RUGGIERI

 

John T. Ruggieri

 

Chief Financial Officer