Overview

A.T. Cross Company is a leading designer and marketer of branded personal accessories including writing instruments, watches, reading glasses, personal and business accessories and sunglasses. The Company has been operating in a difficult economic environment in mature as well as competitive categories. The Company has challenged itself to build upon its unique attributes in order to develop a vibrant, diversified and forward-looking company poised for sustainable growth and long-term profit.

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, CAD offers a variety of personal and business accessories including leather goods, reading glasses, watches, desk sets, business totes, cufflinks, and stationery. CAD offers a lower-priced line of writing instruments and after-market refills under the brand name Penatia.

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 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 first quarter 2009 results when compared to the first quarter of 2008.

Results of Operations First Quarter 2009 Compared to First Quarter 2008

The following chart details net sales performance:

(THOUSANDS OF DOLLARS)                THREE MONTHS ENDED       PERCENTAGE
                                APRIL 4, 2009  MARCH 29, 2008    CHANGE
Cross Accessory Division (CAD)       18,765            26,529    (29.3)%
Cross Optical Group (COG)            12,075             9,728       24.1%
         Consolidated Net Sales    $ 30,840          $ 36,257     (14.9)%

Consolidated net sales were $30.8 million in the first quarter of 2009 compared to $36.3 million in the first quarter of 2008. Sales of Native Eyewear, part of the COG acquired on March 24, 2008, were favorable to the consolidated first quarter of 2009 sales results by 4.9 percentage points. The effect of foreign exchange was unfavorable to consolidated first quarter 2009 sales results by approximately $0.9 million, or 2.5 percentage points.

The continued weakness in worldwide economic conditions had a significant adverse effect on CAD sales in the first quarter of 2009 compared to the first quarter of 2008. Retailers have been very cautious about inventory levels and business gift sales are down. As a result, all major CAD divisions reported revenue declines in the first quarter of 2009 compared to 2008. In addition, the effect of foreign exchange was unfavorable to Cross Accessories Division ("CAD") first quarter 2009 sales results by approximately $0.9 million, or 3.5 percentage points.

The inclusion of Native Eyewear, acquired on March 24, 2008, comprised a significant portion of the COG sales increase. The Costa Del Mar brand continued to grow as nine new styles were introduced and a number of new accounts were added in the first quarter of 2009.

The following chart details gross profit margins:

                                           THREE MONTHS ENDED         PERCENTAGE POINT CHANGE
                                       APRIL 4, 2009     MARCH 29,
                                                            2008
    CAD                                  53.0%             54.0%               (1.0)
    COG                                  56.5%             58.0%               (1.5)
    Consolidated Gross Profit Margin     54.3%             55.1%               (0.8)

The decline in CAD gross profit was due primarily to the unfavorable effect of foreign exchange on revenue for the first quarter of 2009 compared to the first quarter of 2008. COG margins in the first quarter of 2009 were adversely effected by the US Dollar to Japanese Yen exchange rate changes compared to the prior year.

Operating expenses for the first quarter of 2009 were $18.8 million, or 61.1% of sales, as compared to $19.0 million, or 52.3% of sales, a year ago, a decrease of 0.6%. The COG segment operating expenses increased by 31.2%, primarily due to the acquisition of Native Eyewear. The CAD segment reduced operating expenses by 10.8%. Included in the CAD segment operating expenses are $0.1 million of restructuring charges. Excluding the effect of restructuring, consolidated operating expenses for the 2009 first quarter were 60.9% of sales, a decrease of approximately 1%, and CAD operating expenses for the 2009 first quarter were 11.2% lower than the first quarter of 2008.

In the first three months of 2009 the effective tax rate was 64.6%, which included approximately $0.8 million of income tax benefit related to the net adjustment to the accrual of tax, interest and penalties as a result of the conclusion of the Internal Revenue Service (IRS) audit of our 2005 Federal income tax return. It also included approximately $0.1 million of income tax benefit related to the net adjustment to the accrual of tax, interest and penalties in accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48"). As a result of the IRS audit, deferred taxes increased $0.1 million. In the first three months of 2008, the effective tax rate was 37.7%, which included approximately $29,000 of income tax expense related to the net adjustment to the accrual of tax, interest and penalties in accordance with FIN 48. The tax rate, excluding the effect related to the adjustment of the accrual of tax, interest and penalties related to the IRS audit and in accordance with FIN 48, was 31.9% and 34.7% in the first three months of 2009 and 2008, respectively.

Liquidity and Sources of Capital

Historically, the Company's sources of liquidity and capital resources have been its cash, cash equivalents and short-term investments ("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, restructuring programs, contributions to the retirement plans, stock repurchase programs and debt service. The Company expects its future cash needs in 2009 will be met by these historical sources of liquidity and capital.

The Company's cash balance of $16.7 million at April 4, 2009 decreased $3.1 million from January 3, 2009. The most significant factors affecting the Company's cash balance are discussed in this section.

Accounts receivable decreased since the end of fiscal 2008 by approximately $6.1 million to $23.0 million. CAD accounts receivable decreased $8.9 million and COG accounts receivable increased $2.8 million. The decline in CAD accounts receivable was primarily due to the lower sales volume in the first quarter of 2009 compared to the fourth quarter of 2008. The increase in COG accounts receivable was due primarily to the higher COG sales volume in the first quarter of 2009 compared to the fourth quarter of 2008.

Inventory was $31.2 million at April 4, 2009, an increase of $4.8 million since January 3, 2009. CAD inventory increased $1.9 million and COG inventory levels increased by $2.9 million from year end 2008. The increase in CAD segment inventory was due to planned increases to support sales volume in the last nine months of the year. The increase in COG inventory was due to the increase in stock levels to support product launches and anticipated higher sales volumes, as COG typically records its highest sales in the second quarter.

The Company has a $35 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 an annual 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. The unused and available portion of this line of credit was $13.3 million at April 4, 2009 and January 3, 2009. The Company was in compliance with its various debt covenants as of April 4, 2009.

The Company expects to contribute $0.7 million to its defined benefit pension plan, $1.0 million to its defined contribution retirement plan and $0.1 million to its excess benefit plan in 2009.

The Company believes that existing cash and cash provided by operations, supplemented as appropriate by the Company's borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements, the stock repurchase plan and contributions to the retirement plans. Should operating cash flows in 2009 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, capital projects and completion of the stock repurchase plan.

At April 4, 2009, cash available for domestic operations was approximately $11.6 million, while cash held offshore was approximately $5.1 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 January 3 2009:

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 2009 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 2008 Annual Report on Form 10-K.