Per your request.
June 8, 1998
Mightier Than the Pen
A.T. Cross
By Barry Henderson
Market Action
The techies must have been snickering behind John
Buckley's back when he showed up at the Comdex
computer show in Las Vegas last November. After all,
what business did the chief operating officer of A.T. Cross
-- the pen company -- have operating a booth at the most
celebrated high-tech confab in the world? It sounded like a
corporate debacle waiting to happen.
If that's what the computer cognoscenti expected, they were
dead wrong. The company's CrossPad, a kind of portable
electronic notepad, was a big hit. When all was said and
done, Buckley's exhibit had been named one of the four
best at Comdex. More importantly, he'd had a visit and a
short heart-to-heart with the grand pooh-bah of
computerdom -- Bill Gates.
"He came over and told me he wanted the first one off the
assembly line," Buckley recalls. That's heady stuff for a
company that just started launching high-tech products two
years ago. So, what caught Gates's fancy? The pad is an
unassuming black plastic tablet containing an 8
1/2-by-11-inch legal pad that comes with what looks like a
standard black-and-gold ballpoint pen. Here's the hook:
The plastic pad can store an electronic copy of your
handwritten notes, which then can be transferred to your
personal computer. Once they're downloaded, you can
rearrange them, search them by keyword, E-mail, print or
fax them, just as you would a word-processing file, even
though what you'll see on your PC monitor is an image of
your scribblings. Some of the handwritten notes also can
be converted into a computer text file. Sure, you could
accomplish the same thing with a laptop computer; but try
and type on the keyboard inconspicuously at your next
meeting.
The pad weighs about 2.2
pounds and contains enough
memory to store 50 pages of
single-spaced notes or 100
pages of loose notes or
diagrams. It's powered by four
AAA batteries; the electronic
pen that comes with it takes one
AAAA battery. You also need
Windows 95 for it to work on
your PC.
The whole shebang sells for $399, although at least one
retailer we talked to was willing to part with the high-tech
tablet for $360 when we pushed for lowest possible price
on the item.
Buckley is convinced that this product will jump-start
Cross's earnings, which have been moribund in recent
years. "The vision is really to reinvent the writing
instrument," he says. "You might say, 'John, that sounds
ridiculous,' but communication is moving down the
electronic highway." He's certain that Cross, which claims
to have a lock on 46% of the "quality writing instrument"
market, can bridge the gap between pens and computers in
a unique way. He expects the Pen Computing Group to
bring in $25 million, and most of those revenues will come
from the CrossPad. Introduced in March, the product now
is available in 1,600 retail locations, including Staples,
CompUSA and Computer City. The number of outlets will
ramp up to 3,000 in the next few months, according to
Buckley.
He's hesitant to project his exact sales targets, although he
says the PalmPilot -- the popular PDA, or personal digital
assistant -- is a useful guide. PalmPilot sold approximately
300,000 units during the initial year of its launch. Sales
more than quadrupled in its second year out of the block,
eventually climbing to about 1.3 million. "If we could do
that with the CrossPad, we could triple the size of this
company" in revenues, says Buckley. (Cross had revenues
of $154.7 million last year.)
Buckley seems to have a shot at hitting these numbers, if
our recent conversations with retailers are any indication.
Barron's contacted four computer retail outlets (two
Staples and two CompUSA stores), where employees said
the CrossPads were turning heads. Steffan Sonneveldt, a
Staples manager in the Georgetown section of Washington,
says he's been selling three to five of the new electronic
notepads a week. "The sell-through has been fantastic," he
adds. Sonneveldt even sold one to his aunt, a travel agent.
Interest in the CrossPad is not
necessarily confined to the
professional crowd, however. Students
also have been coming in to the store
for a look-see, he says. "I think people
all across the spectrum are interested
because it's not like anything else out there," he observes.
It also might provide a welcome boost to earnings, which
long-suffering Cross shareholders have been awaiting for
some time. Indeed, for the past several years, Cross has
been hurt as it lost market share in its core business to
Montblanc and other high-end pen makers. "They didn't
think Montblanc was a serious threat," says Mark Boyar, a
value investor who heads a firm bearing his name and
who's the largest institutional shareholder of the company.
"They didn't think people were going to pay $150 for a
plastic pen, when you could buy theirs, which was made
out of precious metal, for $50," Boyar said. Ignoring that
threat hurt the company dearly. Perhaps even more
troubling: The entire market for high-end pens and pencils
began to stagnate.
After exhibiting stellar growth -- 15.2% compounded
annually from 1972 to 1989 -- Cross got hammered. In
1990, the company's sales and earnings slipped
precipitously, for only the second time since the company
went public in 1971. Sales dropped to $222.7 million, a
decrease of 10% from the previous year's level, while
earnings slipped to $27.2 million, or $1.62 per share,
down 24.4% from 1989. Since then, the stock has been on
a slow decline. From a high of $41 per share in August
1989, it skidded all the way down to 8 3/8 earlier this
year.
The company has been trying to shore up its core pen
business in recent years. In addition to its Century line --
the traditional, narrow pen and mechanical pencil, which
sell for $10-$50 -- Cross has also entered the top end of
the market with several other models that have been
moderately successful. It came out with the wider, heftier
Townsend pen in 1993 and the Pinnacle in 1997. As a
frontal attack on Montblanc, the company introduced its
first resin-based products -- Solo and Solo Classic -- in
1994. These new models range in price from $55 to $250.
Although these models enjoyed some
popularity, they've hardly been the big
hits the company was looking for.
Indeed, in the third quarter of last year,
Cross decided to spend more on
marketing and advertising to try to
boost revenues. Buckley says the
company has revamped its marketing
approach. He's decided to pull away
from the mass-market retailers. "At one point we had Cross
pens in 50,000 stores, and that's when we began to lose the
'image accounts' like Neiman-Marcus," he continues. To
win back those high-end "carriage trade" accounts, the
company has decided to reserve its high-end models for
tony stores, keeping these implements out of the likes of
Wal-Mart and Target. He's convinced this will restore the
brand's cachet.
These efforts weren't readily apparent in Cross's financial
results last year because the company got hammered by the
Asian currency crisis. By the end of 1997, sales to
Thailand, Singapore, Malaysia, Korea, Hong Kong and
Japan were off 27%, helping to contribute to '97's red ink.
While the company has taken steps to shore up its core
business, it's clear that Cross executives are looking to the
Pen Computing Group to get back on track. Besides the
CrossPad, the company also makes what it calls the
DigitalWriter, which is essentially a pen that acts as a
special stylus for the PalmPilot personal digital assistant.
(The stylus that comes with the product is a plastic stub
some users don't like very much.) The other offering in this
family of products is the Cross iPen, which can mark up
and edit documents on a Windows 95 PC while also
functioning as a computer mouse. In 1997, this product took
in $1 million in revenues. More importantly, Cross
executives say it gave the company the necessary
credibility with the computer industry to launch the
CrossPad.
In the wake of his apparent
initial success with the
CrossPad, Buckley is already
talking about improvements
and modifications to the
original design. He's
especially excited about a
software package IBM has
written for the device that will
allow corporate customers to
develop customized
applications for their
employees. "If you're an
insurance adjuster and you fill
out the same kind of forms, this software will allow the
company to put the form in the system," which makes it
easier to file and sort the electronic documents. The
company's also working on a smaller 6-by-9-inch version
tailor-made for police departments across the country.
Instead of worrying about carbon copies that have to be
sorted and keyed into a computer, a police officer could
file a ticket into his department's computer system with the
push of a button. "This is a real productivity tool," Buckley
gushes.
Some investors are feeling confident enough about the Pen
Computing Group that they're willing to assign it a value in
their analysis of the stock. Boyar puts the stock's total
"private market value" at $28 a share, one-quarter of the
value of which comes from the Pen Computing Group.
What's even more valuable, at least by Boyar's reckoning,
is the company's still-pristine brand name. And he's
convinced that there are any number of companies that
would pay handsomely for it.
In the past, Hallmark Cards and Gillette have been
mentioned as possible suitors. Boyar thinks Cross would
even be a welcome addition to Fortune Brands. On the face
of it, any one of these combinations make some sense.
Cross already has extensive agreements with Hallmark to
sell some of its pens in Hallmark stores. Gillette would
presumably be a good corporate parent for Cross, given its
existing stable of pen lines including Papermate and
Waterman, among others.
One major snag: The Boss family, which owns all of the
Class B common stock along with all the voting rights of
the company, has said repeatedly they aren't interested in
selling out. "We've had some calls [about selling] but the
Boss family has said that they're not interested, and that's
where we stand today," says Buckley.
Boyar doesn't necessarily take that response at face value.
At some point, he thinks the family will want to maximize
its return on investment. And he thinks that could happen
sooner or later. "I can't tell you how many CEOs I've
talked to over the years who have told me that -- and turned
around a few months later and sold the company when the
right offer came along."
|
