Overview

A.T. Cross Company is a leading designer and marketer of branded personal accessories including writing instruments, watches, precision reading glasses, personal and business accessories and sunglasses.

Cross Accessory Division ("CAD")

The Company has been a manufacturer and marketer of fine quality writing instruments since 1846. Sold primarily under the Cross brand, ball-point, fountain and selectip rolling ball pens and mechanical pencils are offered in a variety of styles and finishes. Also under the Cross brand, the Company offers a line of watches, reading glasses and a variety of personal and business accessories. The Company offers a lower priced line of writing instruments and after-market refills under the brand name Penatia. We also offer writing instruments under licensed brands such as Bill Blass.

Cross Optical Group ("COG")

The Company established an optical segment with the 2003 acquisition of Costa Del Mar Sunglasses, Inc., a designer, manufacturer and marketer of high-quality polarized sunglasses. This segment typically records its highest sales and operating income in the second quarter, April through June, of the fiscal year. On March 24, 2008, the Company acquired Native Eyewear, Inc. As discussed below, this acquisition had a significant impact on the third quarter 2008 results.

Results of Operations Third quarter 2008 Compared to Third quarter 2007

In the third quarter of 2008, the Company reported net income of $1.8 million, or $0.12 per basic share and $0.11 per diluted share, compared to net income of $2.4 million, or $0.16 per basic share and $0.15 per diluted share, in the third quarter of 2007.

The following chart details net sales performance:

(THOUSANDS OF DOLLARS)               THREE MONTHS ENDED            PERCENTAGE
                           SEPTEMBER 27, 2008  SEPTEMBER 29, 2007    CHANGE
Cross Accessory Division         $ 26,633                $ 26,289        1.3%
Cross Optical Group                12,341                   8,825       39.8%
   Consolidated Net Sales        $ 38,974                $ 35,114       11.0%

Consolidated net sales were $39.0 million in the third quarter of 2008 compared to $35.1 million in the third quarter of 2007. Sales of Native Eyewear, acquired on March 24, 2008 and included in the Cross Optical Group ("COG"), were $2.5 million in the third quarter of 2008. The effect of foreign exchange was favorable to consolidated third quarter 2008 sales results by approximately $0.3 million, or 0.9 percentage points. The effect of foreign exchange was favorable to Cross Accessories Division ("CAD") third quarter 2008 sales results by approximately $0.3 million, or 1.1 percentage points.

CAD sales were unfavorably affected by the developing economic problems in the U.S., as every U.S. retail channel reported lower sales performance from a year ago. Offsetting the decline in U.S. sales were increased sales in the EMEA, Latin America and Asia regions. Growth in the EMEA region, particularly in the UK, Spain and emerging markets in India and the Middle East, was strong with very little benefit from foreign exchange. The sales increase in Asia was largely due to foreign exchange.

COG sales in the third quarter of 2008 were driven by 11.6% growth of the Costa Del Mar brand and the inclusion of Native Eyewear, which comprised 28.2 percentage points of the 39.8% COG sales increase. The Costa Del Mar increase was due to the effect of a number of new product launches, aimed to appeal to women and college students, expanded distribution and an increase in repair revenue.

Consolidated gross margin was 57.0% in the third quarter of 2008, a 30 basis point increase from the third quarter 2007 margin of 56.7%. CAD segment gross margin of 56.0% declined 70 basis points from the prior year period. This decline was attributable to higher volumes of low margin discontinued products as well as a shift in mix to lower gross margin sales channels. COG segment gross margin was 59.3% in the third quarter of 2008, a 260 basis point increase from the third quarter of 2007. This was due in part to the acquisition of Native Eyewear which generated gross margins in the quarter higher than that of Costa Del Mar.

Operating expenses for the third quarter were $19.8 million, or 50.7% of sales, as compared to $17.7 million, or 50.3% of sales, a year ago, an increase of 11.8%. The COG segment comprised 9.3 percentage points of this increase in the quarter, primarily due to the acquisition of Native Eyewear. In addition, in the third quarter of 2008, $0.2 million in restructuring charges was incurred in the CAD segment. Excluding the effect of restructuring, operating expenses for the third quarter were $19.5 million, or 50.2% of sales, as compared to $17.7 million, or 50.4% of sales, a year ago, an increase of 10.5%.

Operating income for the third quarter was $2.5 million compared to $2.2 million in 2007, an increase of 10.1%. Native contributed approximately $0.4 million of operating income in the third quarter. Exclusive of Native's operating income, the combined CAD and Costa Del Mar operating income was down 7.2% from the prior year. As discussed above; the COG segment typically records its highest sales and operating income in the second quarter of the fiscal year.

In the third quarter of 2008, the effective tax rate was 20.8%, which included approximately $218,000 of income tax benefit related to the net adjustment to the accrual of tax, interest and penalties in accordance with FIN 48. The effective tax rate also included approximately $38,000 of benefit to record the differences between the prior years' provision versus the actual tax returns. In the same period of 2007, the effective tax rate was a benefit of 4.1%, which included approximately $618,000 of income tax benefit related to the net adjustment to the accrual of tax, interest and penalties in accordance with FIN 48 and approximately $185,000 of benefit to record the difference between the prior years' provision versus the actual tax returns. The tax rate, excluding the effect related to the adjustment of the accrual of tax, interest and penalties in accordance with FIN 48 and the difference between the provision and actual tax returns, was 32.4% in the third quarter of 2008 compared to 31.3% in the same period of 2007.

Results of Operations Nine months Ended September 27, 2008 Compared to Nine months Ended September 29, 2007

In the nine months ended September 27, 2008, the Company reported net income of $4.2 million, or $0.28 per basic share and $0.27 per diluted share, compared to net income of $3.5 million, or $0.23 per basic share and $0.22 per diluted share, in the nine months ended September 29, 2007.

The following chart details net sales performance:

(THOUSANDS OF DOLLARS)               NINE MONTHS ENDED            PERCENTAGE
                          SEPTEMBER 27, 2008  SEPTEMBER 29, 2007    CHANGE
Cross Accessory Division              79,057              74,888        5.6%
Cross Optical Group                   39,382              29,274       34.5%
   Consolidated Net Sales           $118,439            $104,162       13.7%

The effect of foreign exchange was favorable to consolidated year-to-date 2008 sales results by approximately $2.4 million, or 2.3 percentage points. The effect of foreign exchange was favorable to CAD year-to-date 2008 sales results by approximately $2.4 million, or 3.3 percentage points.

CAD segment sales increase in the first nine months of 2008 was largely due to increased sales in the EMEA region and to a lesser extent increases in Asia and Latin America, somewhat offset by declines in U.S. retail. The EMEA sales increase was due to new product introductions, the success of Shop-in-Shops in Spain, increased sales to emerging markets in India and the Middle East and the favorable effect of foreign exchange. The decline in U.S. retail is due to the economic problems developing in the third quarter of 2008. The Asian market sales increase was largely due to foreign exchange.

COG sales in the first nine months of 2008 were favorably affected by the inclusion of Native Eyewear, which comprised $6.1 million in revenue or 20.8 percentage points of the year-to-date sales increase. The Costa Del Mar increase was due to new product introductions, expanded distribution outside of the core Southeast markets and increased repair revenue.

Consolidated gross margin for the first nine months of 2008 of 56.2% declined 20 basis points from the first nine months of 2007 gross margin of 56.4%. CAD segment gross margin in the first nine months was 54.4%, a decrease of 140 basis points due largely to the increased level of discontinued products sold to manage inventory and the shift of sales to lower gross margin channels during this period. COG segment gross margin in the first nine months of 2008 was 59.9%, a 200 basis point increase from the first nine months of 2007. This was due primarily to the higher gross margins generated by Native Eyewear since the date of acquisition.

Operating expenses were $59.9 million, or 50.6% of sales, in the first nine months of 2008; 10.2% higher than $54.3 million, or 52.2% of sales, in first nine months of 2007. CAD operating expenses were 2.6% higher in the first nine months of 2008 compared to the same period of 2007, largely due to the unfavorable effects of foreign exchange on foreign denominated expenses in Europe and Japan and the third quarter restructuring charges. COG segment operating expenses increased 37.5% in the first nine months of 2008 due to the expenses of Native Eyewear since the date of acquisition and sales related compensation costs.

In the first nine months of 2008, the effective tax rate was 30.2%, which included approximately $160,000 of income tax benefit related to the net adjustment to the accrual of tax, interest and penalties in accordance with FIN
48. The effective tax rate also included approximately $38,000 of benefit to record the differences between the prior years' provision versus the actual tax returns. In the same period of 2007, the effective tax rate was 16.6%, which included approximately $525,000 of income tax benefit related to the net adjustment to the accrual of tax, interest and penalties in accordance with FIN 48 and approximately $185,000 of benefit to record the difference between the prior years' provision versus the actual tax returns. The tax rate, excluding the effect related to the adjustment of the accrual of tax, interest and penalties in accordance with FIN 48 and the difference between the provision and actual tax returns, was 33.5% in the first nine months of 2008 compared to 33.7% in the same period of 2007.

Liquidity and Sources of Capital

The Company's sources of liquidity and capital resources are its cash and cash equivalents ("cash"), cash generated from operations and amounts available under the Company's line of credit. These sources have been sufficient in the past to support the Company's routine operating requirements, capital projects, contributions to retirement plans, stock repurchase program and debt service. The Company expects its future cash needs in 2008 will be met by these sources of liquidity and capital.

The Company's cash balance of $14.0 million at September 27, 2008 increased $0.4 million from December 29, 2007, principally due to the following:

Accounts receivable decreased since the end of fiscal 2007 by approximately $3.1 million to $28.3 million. CAD accounts receivable decreased $5.5 million and COG accounts receivable increased $2.4 million. The decline in CAD accounts receivable was primarily due to the typically lower sales volume in August and September 2008 compared to November and December 2007, as the CAD segment records its highest sales in the fourth quarter, October through December, of the fiscal year. The increase in optical segment accounts receivable was due primarily to the higher Costa Del Mar sales volume in the August and September 2008 compared to November and December 2007. In addition, $0.9 million of the COG accounts receivable increase was due to the acquisition of Native.

Inventory was $32.3 million at September 27, 2008, an increase of $0.5 million since December 29, 2007. CAD inventory decreased $1.5 million and COG inventory levels increased by $2.0 million from year end 2007. The decrease in CAD segment inventory was due to efforts to better manage the supply chain on products manufactured in China and the increased sales of discontinued products. Of the increase in COG inventory, $1.3 million was due to the acquisition of Native and the remainder was due largely to the increase in stock levels to support product launches and anticipated higher sales volumes.

In 2002, the Company's Board of Directors authorized a plan to repurchase up to 10% of the Company's outstanding Class A common stock. Under this plan, 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. Through September 27, 2008, the Company had repurchased 1,245,000 shares under this plan for approximately $6.9 million at an average price per share of $5.53. In the third quarter of 2008, the Company repurchased 5,800 shares under this plan for approximately $41,000 at an average price per share of $7.05.

The Company has a $35.0 million secured line of credit with a bank. Under this agreement, the Company has the option to borrow at various interest rates depending upon the type of borrowings made and the Company's consolidated leverage ratio. The agreement requires the Company to maintain a minimum consolidated tangible net worth, a minimum ratio of adjusted EBITDA to required debt service payments, and a maximum ratio of debt to consolidated EBITDA over any four-quarter period, each of which is calculated in accordance with the agreement. At September 27, 2008, the Company was in compliance with all covenants. The unused and available portion of this line of credit was $13.3 million at September 27, 2008. In the first quarter of 2008, the Company borrowed approximately $18.8 million on its secured line of credit agreement in order to finance the acquisition of Native Eyewear, Inc.

The Company expects to contribute $1.2 million to its defined benefit pension plan, $0.9 million to its defined contribution retirement plan and $0.1 million to its excess benefit plan in 2008. At September 27, 2008, approximately $0.9 million had been contributed to the defined benefit pension plan and approximately $0.7 million had been contributed to the defined contribution retirement plan.

The Company believes that existing cash and funds from operations, supplemented as appropriate by the Company's borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements, purchases under its stock repurchase plan and contributions to the retirement plans. Should operating cash flows in 2008 not materialize as projected, the Company has a number of planned 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 and delaying non-critical research and development and capital projects.

At September 27, 2008, cash available for domestic operations was approximately $6.6 million, while cash held offshore was approximately $7.4 million.

Critical Accounting Policies

There have been no changes to our critical accounting policies and estimates from the information provided in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Form 10-K for the fiscal year ended December 29, 2007, except as follows:

Purchase Price Allocation: We account for our acquisitions under the purchase method of accounting in accordance with SFAS No. 141 "Business Combinations" (SFAS 141), which provides that purchase prices be allocated to the net assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. In the case of Native Eyewear, Inc.'s assets acquired, we allocated the purchase price to the assets acquired and liabilities assumed at their estimated fair values as of the date of acquisition, and the excess of the purchase price paid over the estimated fair value of net assets acquired and the estimated transaction costs is recorded as residual goodwill. We completed our purchase of Native Eyewear, Inc. on March 24, 2008 for a total preliminary purchase price of approximately $19.0 million including assumed debt of approximately $1.0 million. As of September 27, 2008 we were in the process of finalizing a valuation of Native Eyewear, Inc.'s intangible assets. The values of certain assets and liabilities are based on preliminary valuations that are subject to adjustment as additional information on management's estimates and assumptions are obtained and the valuation is finalized.

Forward-Looking Statements

Statements contained herein 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. In addition, words such as "believes," "anticipates," "expects," "will" and similar expressions are intended to identify forward-looking statements, including but not limited to statements related to the availability of sources of cash; anticipated compliance with laws and regulations (including but not limited to environmental laws); and anticipated sufficiency of available working capital. The Company cautions that a number of important factors could cause the Company's actual results for fiscal 2008 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements involve a number of risks and uncertainties. For a discussion of certain of other of those risks, see "Risk Factors" in Item 1A of the Company's 2007 Annual Report on Form 10-K.