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.

Results of Operations Third Quarter 2009 Compared to Third Quarter 2008

In the third quarter of 2009, the Company reported net income of $0.9 million,
or $0.06 per basic and diluted share, compared to net income of $1.8 million, or
$0.12 per basic share and $0.11 per diluted share in the third quarter of 2008.

The following chart details net sales performance:

(THOUSANDS OF DOLLARS)           THREE MONTHS ENDED          PERCENTAGE
                        OCTOBER 3, 2009  SEPTEMBER 27, 2008    CHANGE
CAD                          $21,246               $ 26,633     (20.2)%
COG                           12,883                 12,341        4.4%
 Consolidated Net Sales      $34,129               $ 38,974     (12.4)%

Consolidated net sales were $34.1 million in the third quarter of 2009 compared to $39.0 million in the third quarter of 2008. The effect of foreign exchange was unfavorable to consolidated third quarter 2009 sales results by approximately $0.4 million, or approximately 1 percentage point.

Weakness in worldwide economic conditions continued to have an adverse effect on CAD sales in the third quarter of 2009 compared to the third quarter of 2008. Retailers have been strictly monitoring their inventory levels and business gift sales are down. As a result, all major CAD divisions reported revenue declines in the third quarter of 2009 compared to 2008. In addition, the effect of foreign exchange was unfavorable to CAD third quarter 2009 sales results by approximately $0.4 million, or 1.4 percentage points. The Costa Del Mar brand grew while sales of Native product were down in the third quarter compared to the prior year.

The following chart details gross profit margins:

                                            THREE MONTHS ENDED           PERCENTAGE POINT CHANGE
                                    OCTOBER 3, 2009   SEPTEMBER 27, 2008
          CAD                          50.6%               56.0%                  (5.4)
          COG                          55.9%               59.3%                  (3.4)
 Consolidated Gross Profit Margin      52.6%               57.0%                  (4.4)

The decline in CAD gross profit margin was due to the unfavorable effect of foreign exchange on revenue and shifts in product mix in the third quarter of 2009 compared to the third quarter of 2008. COG margins in the third quarter of 2009 were adversely affected by the US Dollar to Japanese Yen exchange rate changes compared to the prior year and changes in product mix.

Operating expenses for the third quarter of 2009 were $17.8 million, or 52.0% of sales, as compared to $19.8 million, or 50.7% of sales, a year ago, a decrease of 10.2%. The CAD segment reduced operating expenses by 14.9% in the third quarter of 2009 compared to 2008. Included in the CAD segment operating expenses are $0.3 million of restructuring charges. Excluding the effect of restructuring, consolidated operating expenses for the 2009 third quarter were 51.3% of sales, a decrease of approximately 10.5%, and CAD operating expenses for the 2009 third quarter were 15.4% lower than the third quarter of 2008. The COG segment operating expenses were 2.1% higher than last year.

In the third quarter of 2009, the effective tax rate was 53.8% as compared to 20.8% in the third quarter of 2008. Included in the third quarter of 2009 was approximately $0.2 million of income tax benefit related to the net adjustment to the accrual of tax, interest and penalties related to uncertain tax positions and $0.1 million of income tax benefit to record differences between the prior years' provision versus the actual returns. The effective tax rates excluding these adjustments were 25.2% for the third quarter of 2009 and 33.5% for the third quarter of 2008. The decrease is the result of a shift in the percentage of forecasted profitability to tax jurisdictions with lower tax rates.

Results of Operations Nine Months Ended October 3, 2009 Compared to Nine Months
Ended September 27, 2008

In the nine months ended October 3, 2009, the Company reported net income of
$0.6 million, or $0.04 per basic and diluted share, compared to net income of
$4.2 million, or $0.28 per basic share and $0.27 per diluted share, in the nine
months ended September 27, 2008.

The following chart details net sales performance:

(THOUSANDS OF DOLLARS)           NINE MONTHS ENDED           PERCENTAGE
                        OCTOBER 3, 2009  SEPTEMBER 27, 2008    CHANGE
CAD                            $ 60,773            $ 79,057     (23.1)%
COG                              41,502              39,382        5.4%
 Consolidated Net Sales        $102,275            $118,439     (13.6)%

Consolidated net sales were $102.3 million in the first nine months of 2009 compared to $118.4 million in the first nine months of 2008. Sales of Native Eyewear, part of the COG acquired on March 24, 2008, were favorable to the consolidated first nine months of 2009 sales results by 1.2 percentage points. The effect of foreign exchange was unfavorable to consolidated first nine months 2009 sales results by approximately $2.2 million, or 1.8 percentage points.

The continued weakness in worldwide economic conditions had a significant adverse effect on CAD sales in the first nine months of 2009 compared to the first nine months of 2008. Retailers have been very cautious about inventory levels and business gift sales are down. As a result, all CAD divisions reported revenue declines in the first nine months of 2009 compared to 2008. In addition, the effect of foreign exchange was unfavorable to CAD first nine months 2009 sales results by approximately $2.2 million, or 2.8 percentage points.

The Costa Del Mar brand grew in the first nine months of 2009 compared to 2008 as new styles were introduced and a number of new accounts were added. In addition, the inclusion of Native Eyewear, acquired on March 24, 2008, contributed to the COG sales increase.

The following chart details gross profit margins:

                                            NINE MONTHS ENDED           PERCENTAGE POINT CHANGE
                                   OCTOBER 3, 2009   SEPTEMBER 27, 2008
          CAD                          51.7%              54.4%                  (2.7)
          COG                          57.0%              59.9%                  (2.9)
 Consolidated Gross Profit Margin      53.9%              56.2%                  (2.3)

The decline in CAD gross profit margin was due to the unfavorable effect of foreign exchange, particularly the Euro and British Pound, on revenue for the first nine months of 2009 and changes in channel mix and shifts in the composition by geographic region compared to the first nine months of 2008. COG margins in the first nine months of 2009 were adversely affected by the US Dollar to Japanese Yen exchange rate changes compared to the prior year, and changes in product mix.

Operating expenses for the first nine months of 2009 were $55.5 million, or 54.3% of sales, as compared to $59.9 million, or 50.6% of sales, a year ago, a decrease of 7.3%. The COG segment operating expenses increased by 9.4%, primarily due to the acquisition of Native Eyewear. The CAD segment reduced operating expenses by 13.5%. Included in the CAD segment operating expenses are $1.0 million of restructuring charges. Excluding the effect of restructuring, consolidated operating expenses for the 2009 first nine months were 53.3% of sales, a decrease of approximately 8.7%, and CAD operating expenses for the 2009 first nine months would have been 15.5% lower than the first nine months of 2008.

In the first nine months of 2009, the effective tax rate was 175.9%, 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 $0.2 million of income tax benefit resulting from the net adjustment to the accrual of tax, interest and penalties related to uncertain tax positions as well as approximately $0.1 million of income tax benefit to record the differences between the prior years' provision compared to the actual tax returns filed. In the first nine months of 2008, the effective tax rate was 30.2%, which included approximately $0.2 million of income tax benefit resulting from the net adjustment to the accrual of tax, interest and penalties related to uncertain tax positions. The effective tax rates, excluding the effects of the IRS audit, adjustments of accrual of tax, interest and penalties related to uncertain tax positions and the prior years' provision to actual tax return adjustment were 25.2% and 33.5% in the first nine months of 2009 and 2008, respectively. The decrease is the result of a shift in the percentage of overall profitability toward jurisdictions with lower tax rates.

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 $16.4 million at October 3, 2009 decreased $3.4 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 $4.2 million to $24.9 million. CAD accounts receivable decreased $5.1 million and COG accounts receivable increased $0.9 million. The decline in CAD accounts receivable was primarily due to the seasonally lower sales volume in the third quarter of 2009 compared to the fourth quarter of 2008. The increase in COG accounts receivable was due primarily to the seasonally higher COG sales volume in the third quarter of 2009 compared to the fourth quarter of 2008.

Inventory was $30.2 million at October 3, 2009, an increase of $3.8 million since January 3, 2009. CAD inventory increased $2.4 million and COG inventory levels increased by $1.4 million from year end 2008. The increase in CAD segment inventory was due to planned increases to support sales volume in the fourth quarter, typically its strongest. The increase in COG inventory was due to the increased number of new styles introduced this year and lower than anticipated Native sales volumes.

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 unused and available portion of this line of credit was $15.3 million at October 3, 2009 and $13.3 million at January 3, 2009. The Company was in compliance with its various debt covenants as of October 3, 2009. The agreement requires the Company to maintain a minimum consolidated tangible net worth, computed at each year end, a maximum level of capital expenditures and a minimum ratio of adjusted EBITDA to required debt service payments over any four-quarter period, each of which is calculated in accordance with the agreement:

          Covenant                     Covenant                   Calculated Company
        Description                   Requirement                Value October 3, 2009
     Tangible Net Worth     Cannot be less than $40 million           $49 million
    Capital Expenditures   Cannot exceed the greater of $10           $3 million
                           million in a year or $10 million
                           plus prior year expenditures less
                                  the $10 million cap
     Consolidated Debt          Cannot exceed 2.5 to 1                  1.95:1
       Service Ratio

The Company expects to contribute $1.0 million to its defined benefit pension plans, $1.0 million to its defined contribution retirement plans and $0.1 million to its excess benefit plan in 2009. Additionally, the Company expects to meet or exceed its minimum funding requirements for its defined benefit plans in future years. The Company anticipates these future funding requirements to be between $1.0 million and $2.0 million per year.

As part of the acquisition of Native Eyewear, the Company assumed the liability of future payments associated with a "settlement in lieu of future royalties." The payments will be $0.2 million each January through 2012.

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 October 3, 2009, cash available for domestic operations was approximately $12.7 million, while cash held offshore was approximately $3.7 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:

Accounting Standards Updates

See Note B to the condensed consolidated financial statements in Part I, Item 1 for information related to accounting standards updates.

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.