**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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Form 10-Q

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended January 31, 2005**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from              *** * to              

**CommissionFile No. 0-26608**

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CUTTER & BUCK INC.

(Exact Name of Registrantas Specified in Its Charter)

| **Washington**                                                   | **91-1474587**                        |
|------------------------------------------------------------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) | (I.R.S. Employer  Identification No.) |

**701N. 34th Street, Suite 400**

**Seattle, WA 98103**

(Address of PrincipalExecutive Offices, Including Zip Code)

**(206) 622-4191**

(Registrant’s TelephoneNumber, Including Area Code)

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2of the Exchange Act). Yes x No o

Thenumber of shares of Common Stock of the registrant outstanding as of March 7,2005 was 11,140,061.

 

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**CUTTER & BUCK INC.Quarterly Report on Form 10-QFor the Quarter Ended January 31, 2005**

**Index**
|                                        | ** ** | ** **                                                                                  | ** ** | **Page** |
|----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| PART I—FINANCIAL INFORMATION |       |                                                                                        |
| Item 1.                                |       | Financial Statements (unaudited):                                                           |       |     |
|                                   |       | Condensed  Consolidated Balance Sheets                                                      |       | 3        |
|                                   |       | Condensed  Consolidated Statements of Operations                                            |       | 4        |
|                                   |       | Condensed Consolidated Statements of Cash Flows                                             |       | 5        |
|                                   |       | Notes  to Condensed Consolidated Financial Statements                                       |       | 6        |
| Item 2.                                |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       | 11       |
| Item 3.                                |       | Quantitative and Qualitative  Disclosures about Market Risk                                 |       | 20       |
| Item 4.                                |       | Controls and Procedures                                                                     |       | 20       |
| PART II—OTHER INFORMATION    |       |                                                                                        |
| Item 1.                                |       | Legal Proceedings                                                                           |       | 22       |
| Item 2.                                |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                |       | 22       |
| Item 3.                                |       | Defaults Upon Senior  Securities                                                            |       | 22       |
| Item 4.                                |       | Submission of Matters to a  Vote of Security Holders                                        |       | 22       |
| Item 5.                                |       | Other Information                                                                           |       | 22       |
| Item 6.                                |       | Exhibits and Reports on  Form 8-K                                                      |       | 23       |
| SIGNATURES                             |       | 24                                                                                          |

 

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**PART I—FINANCIAL INFORMATION**

**Item 1.**                        FinancialStatements

**CUTTER &BUCK INC.Condensed Consolidated Balance Sheets**
| ** **                                                                                                                                                        | ** ** | **  January 31, 2005  **       | ** ** | **  April 30, 2004  ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **(unaudited)**                                              | ** ** | ** **                                           | ** ** |
| ** **                                                                                                                                                        | ** ** | **(in thousands, except share amounts)** | ** ** |
| **Assets**                                                                                                                                                        |       |                                                         |       |                                                 |       |   |   |   |   |
| Current assets:                                                                                                                                                   |       |                                                         |       |                                                 |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                         |       |                                                         | $          | 17,913                                               |       |   |   | $ | 19,715 |   |   |
| Short-term investments                                                                                                                                            |       |                                                         | 25,840     |                                                 |       |   | 17,952 |   |   |
| Accounts receivable, net of allowances for doubtful  accounts, returns and other allowances of $1,776 at January 31, 2005 and  $2,496 at April 30, 2004 |       |                                                         | 12,711     |                                                 |       |   | 22,502 |   |   |
| Inventories, net                                                                                                                                                  |       |                                                         | 28,930     |                                                 |       |   | 21,938 |   |   |
| Deferred income taxes                                                                                                                                             |       |                                                         | 2,590      |                                                 |       |   | 2,566 |   |   |
| Income taxes receivable                                                                                                                                           |       |                                                         | 374        |                                                 |       |   | — |   |   |
| Prepaid expenses and other current assets                                                                                                                         |       |                                                         | 3,137      |                                                 |       |   | 2,282 |   |   |
| Total current assets                                                                                                                                              |       |                                                         | 91,495     |                                                 |       |   | 86,955 |   |   |
| Furniture and  equipment, net                                                                                                                                     |       |                                                         | 6,408      |                                                 |       |   | 6,290 |   |   |
| Deferred income  taxes                                                                                                                                            |       |                                                         | 376        |                                                 |       |   | 376 |   |   |
| Other assets                                                                                                                                                      |       |                                                         | 326        |                                                 |       |   | 309 |   |   |
| Total assets                                                                                                                                                      |       |                                                         | $          | 98,605                                               |       |   |   | $ | 93,930 |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                    |       |                                                         |       |                                                 |       |   |   |   |   |
| Current liabilities:                                                                                                                                              |       |                                                         |       |                                                 |       |   |   |   |   |
| Accounts payable                                                                                                                                                  |       |                                                         | $          | 4,069                                                |       |   |   | $ | 2,940 |   |   |
| Accrued liabilities                                                                                                                                               |       |                                                         | 7,016      |                                                 |       |   | 7,161 |   |   |
| Income taxes payable                                                                                                                                              |       |                                                         | —     |                                                 |       |   | 1,217 |   |   |
| Current portion of capital lease obligations                                                                                                                      |       |                                                         | 185        |                                                 |       |   | 557 |   |   |
| Total current liabilities                                                                                                                                         |       |                                                         | 11,270     |                                                 |       |   | 11,875 |   |   |
| Capital lease  obligations, less current portion                                                                                                                  |       |                                                         | —     |                                                 |       |   | 111 |   |   |
| Other liabilities                                                                                                                                                 |       |                                                         | 1,975      |                                                 |       |   | 2,215 |   |   |
| Shareholders’  equity:                                                                                                                                       |       |                                                         |       |                                                 |       |   |   |   |   |
| Preferred stock, no par value, 6,000,000 shares  authorized: none issued and outstanding                                                                          |       |                                                         | —     |                                                 |       |   | — |   |   |
| Common stock, no par value, 25,000,000 shares  authorized; 11,138,018 issued and outstanding at Jaunuary 31, 2005 and 10,752,552  at April 30, 2004          |       |                                                         | 67,305     |                                                 |       |   | 65,116 |   |   |
| Deferred  compensation                                                                                                                                            |       |                                                         | (270       | )                                                    |       |   | — |   |   |
| Retained earnings                                                                                                                                                 |       |                                                         | 18,325     |                                                 |       |   | 14,613 |   |   |
| Total shareholders’ equity                                                                                                                                   |       |                                                         | 85,360     |                                                 |       |   | 79,729 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                  |       |                                                         | $          | 98,605                                               |       |   |   | $ | 93,930 |   |   |

 

See accompanying notes

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**CUTTER & BUCK INC.Condensed Consolidated Statements of Operations (Unaudited)**
| ** **                                                    | ** ** | **Three Months Ended**                                                          | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **January 31,**                                                                      | ** ** | **January 31,**            | ** ** |
| ** **                                                    | ** ** | **2005**                                                                                  | ** ** | **2004**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Net sales                                                     |       | $                                                                                         | 24,220     |                            | $          | 22,540 |   | $ | 91,657 |   | $ | 90,024 |   |
| Cost of sales                                                 |       | 13,272                                                                                    |       | 12,507                          |       | 47,818 |   | 49,033 |   |
| Gross profit                                                  |       | 10,948                                                                                    |       | 10,033                          |       | 43,839 |   | 40,991 |   |
| Operating expenses:                                           |       |                                                                                      |       |                            |       |   |   |   |   |
| Depreciation                                                  |       | 679                                                                                       |       | 1,040                           |       | 2,136 |   | 3,152 |   |
| Selling, general and administrative                           |       | 11,007                                                                                    |       | 9,025                           |       | 32,630 |   | 30,029 |   |
| Restructuring and asset impairment                            |       | —                                                                                    |       | (65                             | )          | — |   | (55 | ) |
| Restatement expenses                                          |       | 9                                                                                         |       | 1,172                           |       | 290 |   | 4,522 |   |
| Total operating expenses                                      |       | 11,695                                                                                    |       | 11,172                          |       | 35,056 |   | 37,648 |   |
| Operating income  (loss)                                      |       | (747                                                                                      | )          | (1,139                          | )          | 8,783 |   | 3,343 |   |
| Interest income  (expense)                                    |       |                                                                                      |       |                            |       |   |   |   |   |
| Interest expense                                              |       | (9                                                                                        | )          | (31                             | )          | (39 | ) | (134 | ) |
| Interest income                                               |       | 222                                                                                       |       | 108                             |       | 475 |   | 193 |   |
| Net interest income                                           |       | 213                                                                                       |       | 77                              |       | 436 |   | 59 |   |
| Income (loss)  from continuing operations before income taxes |       | (534                                                                                      | )          | (1,062                          | )          | 9,219 |   | 3,402 |   |
| Income tax  expense (benefit)                                 |       | (150                                                                                      | )          | (205                            | )          | 3,438 |   | 1,215 |   |
| Income (loss)  from continuing operations                     |       | (384                                                                                      | )          | (857                            | )          | 5,781 |   | 2,187 |   |
| Income from  discontinued retail operations, net of tax       |       | —                                                                                    |       | —                          |       | — |   | 146 |   |
| Net income (loss)                                             |       | $                                                                                         | (384       | )                               | $          | (857 | ) | $ | 5,781 |   | $ | 2,333 |   |
| Basic earnings  (loss) per share:                             |       |                                                                                      |       |                            |       |   |   |   |   |
| Earnings (loss)  from continuing operations                   |       | $                                                                                         | (0.04      | )                               | $          | (0.08 | ) | $ | 0.53 |   | $ | 0.21 |   |
| Earnings from  discontinued retail  operations                |       | $                                                                                         | —     |                            | $          | — |   | $ | — |   | $ | 0.01 |   |
| Net earnings  (loss)                                          |       | $                                                                                         | (0.04      | )                               | $          | (0.08 | ) | $ | 0.53 |   | $ | 0.22 |   |
| Diluted earnings  (loss) per share:                           |       |                                                                                      |       |                            |       |   |   |   |   |
| Earnings (loss)  from continuing operations                   |       | $                                                                                         | (0.04      | )                               | $          | (0.08 | ) | $ | 0.51 |   | $ | 0.20 |   |
| Earnings from  discontinued retail  operations                |       | $                                                                                         | —     |                            | $          | — |   | $ | — |   | $ | 0.01 |   |
| Net earnings  (loss)                                          |       | $                                                                                         | (0.04      | )                               | $          | (0.08 | ) | $ | 0.51 |   | $ | 0.21 |   |
| Shares used in  computation of:                               |       |                                                                                      |       |                            |       |   |   |   |   |
| Basic earnings (loss) per share                               |       | 10,926,355                                                                                |       | 10,706,372                      |       | 10,844,598 |   | 10,690,699 |   |
| Diluted earnings (loss) per share                             |       | 10,926,355                                                                                |       | 10,706,372                      |       | 11,396,594 |   | 11,067,931 |   |
| Cash dividends  paid per share of common stock outstanding    |       | $                                                                                         | 0.07       |                            | $          | — |   | $ | 0.19 |   | $ | — |   |

 

See accompanying notes

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**CUTTER & BUCK INC.Condensed Consolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                         | ** ** | **Nine Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                          | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                           | ** ** |
| **Operating activities:**                                                          |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 5,781      |   | $ | 2,333 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation                                                                       |       | 2,259                                             |       | 3,296 |   |
| Tax benefit from exercise of stock options                                         |       | 863                                               |       | — |   |
| Deferred income taxes                                                              |       | (24                                               | )          | — |   |
| Amortization of deferred compensation                                              |       | 11                                                |       | 37 |   |
| Noncash restructuring and asset impairment charges                                 |       | —                                            |       | (82 | ) |
| Loss on disposals of furniture and equipment                                       |       | —                                            |       | 19 |   |
| Changes in assets  and liabilities:                                                |       |                                              |       |   |   |
| Accounts receivable, net                                                           |       | 9,791                                             |       | 11,256 |   |
| Inventories, net                                                                   |       | (6,992                                            | )          | 10,022 |   |
| Prepaid expenses and other assets                                                  |       | (872                                              | )          | 2,387 |   |
| Accounts payable, accrued liabilities and other  liabilities                       |       | 744                                               |       | (3,753 | ) |
| Income taxes payable                                                               |       | (1,591                                            | )          | — |   |
| Net cash provided by operating activities                                          |       | 9,970                                             |       | 25,515 |   |
| **Investing  activities:**                                                         |       |                                              |       |   |   |
| Purchases of  furniture and equipment                                              |       | (2,377                                            | )          | (1,038 | ) |
| Purchases of short-term  investments                                               |       | (64,178                                           | )          | (26,933 | ) |
| Maturities of  short-term investments                                              |       | 56,290                                            |       | 7,980 |   |
| Net cash used in investing activities                                              |       | (10,265                                           | )          | (19,991 | ) |
| **Financing  activities:**                                                         |       |                                              |       |   |   |
| Issuance of  common stock                                                          |       | 3,074                                             |       | 251 |   |
| Repurchases of  common stock                                                       |       | (2,029                                            | )          | — |   |
| Payment of  dividends                                                              |       | (2,069                                            | )          | — |   |
| Principal  payments under capital lease obligations                                |       | (483                                              | )          | (1,581 | ) |
| Net cash used in financing activities                                              |       | (1,507                                            | )          | (1,330 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | (1,802                                            | )          | 4,194 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 19,715                                            |       | 18,864 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                 | 17,913     |   | $ | 23,058 |   |

 

See accompanying notes

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**Cutter &Buck Inc.Notes to Condensed Consolidated Financial Statements(Unaudited)**

**Note 1.   Basis of Presentation**

The accompanying unaudited condensed consolidatedfinancial statements have been prepared by Cutter & Buck Inc.(the Company) in accordance with accounting principles generally accepted inthe United States for interim financial statements and in accordance with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and disclosures required bygenerally accepted accounting principles for complete financial statements. Inthe opinion of the Company’s management, all adjustments (consisting of normalrecurring accruals) necessary for a fair presentation have been included. TheCompany’s revenues are seasonal; therefore the results of operations for thethree months and nine months ended January 31, 2005, may not be indicativeof the results for the full fiscal year. For further information, refer to theconsolidated financial statements and footnotes thereto for the year ended April 30,2004, included in the Company’s filing on Form 10-K.

The Company has oneoperating segment, the design, production, marketing, and sale of sportswear,fashion, and outerwear apparel. The information for this segment is theinformation used by the Company’s chief operating decision maker to evaluateoperating performance.

**Note2.   Significant Accounting Policies**

*Revenue Recognition*

Revenue, net ofpromotional discounts and rebates, is recognized at the time the product isshipped to the customer. The terms and conditions of sales agreements specifythat possession and risk of loss passes to customers when the product isdelivered to a third-party carrier. However, in cases where goods are shippedto customers prematurely, revenue is not recognized until the time the goodswould have normally been shipped to the customer. There is generally no rightto return for customers other than for defective or mis-shipped products. Undercertain circumstances, the Company does accept customer returns as part ofstock rotations, but such accommodations are made under limited pre-establishedprograms or on a case-by-case basis. An allowance for estimated sales returnsis provided as a reduction to sales when the related revenue is recorded. Forcertain golf tournaments, product is shipped on a consignment basis. Revenuefor these sales is recognized, not when the product is shipped, but when thecustomer sells the product to end users.

*Selling, general,and administrative expenses*

Purchasing and receivingcosts, warehousing costs, and other costs of distribution are included inoperating expenses and totaled $1.5 million and $1.4 million for the quartersended January 31, 2005 and 2004, respectively, and $4.6 million and $4.5million for the nine months ended January 31, 2005 and 2004, respectively.

**Note 3.   Share-based Payments**

The Company accounts for its share-based paymentsusing the intrinsic value method prescribed in Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. The Company has elected to apply the disclosure-onlyprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accountingfor Stock-based Compensation—Transition and Disclosure.” Compensation expensefor stock options is recognized over the vesting period of the grant based onthe 

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excess, if any, of themarket price of the Company’s common stock at the date of grant over the stockoption exercise price. Under the Company’s plans, stock options are generallygranted at fair market value on the date of grant.

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123(R), Share-Based Payment, which is arevision of SFAS No. 123 and supercedes APB No. 25. SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values. Proforma disclosure will no longer be a permitted alternative. SFAS No. 123(R) isrequired to be adopted in the first interim reporting period beginning after June 15,2005, which for the Company is no later than August 1, 2005 (its secondquarter of fiscal 2006), with early adoption permitted.

SFAS No. 123(R) permits two methods ofadoption, a “modified prospective” method and a “modified retrospective” method.Under the modified prospective method, compensation cost is recognized,beginning with the effective date, based on the requirements of SFAS No. 123(R) forall share-based payments granted after the effective date and based on therequirements of SFAS No. 123 for all awards granted prior to the effectivedate that remain unvested on the effective date. The “modified retrospective”method includes the above requirements of the modified prospective method andalso permits restatement of prior periods based on amounts previously reportedin pro forma disclosures pursuant to SFAS No. 123 for either all periodspresented or for only prior interim periods of the year of adoption.

Management is currently reviewing both the adoptionmethod and the timing of adoption of this new standard.

The impact of adoption of SFAS No. 123(R) onfuture periods cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future. However, based upon theunamortized portion of the fair value of options outstanding as of January 31,2005, as estimated as of their grant dates pursuant to SFAS No. 123, SFAS No. 123(R) isnot anticipated to have a significant impact on our results of operations orour overall financial position.

Ifcompensation costs for share-based payments had been recognized based on thefair value method, the pro forma amounts of the Company’s net income (loss) andnet earnings (loss) per share would have been as follows:
| ** **                                                                                                            | ** ** | **Three Months Ended  January 31,**                    | ** ** | **Nine Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **    2005    **              | ** ** | **   2004   **      | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| ** **                                                                                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income  (loss), as reported                                                                                       |       |                                                                  | $          | (384                                              | )          |   | $ | (857 | ) | $ | 5,781 |   | $ | 2,333 |   |
| Add: Stock-based  employee compensation expense, as reported                                                          |       |                                                                  | 7          |                                              |       | — |   | 7 |   | — |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  based method for all awards |       |                                                                  | (168       | )                                                 |       | (302 | ) | (408 | ) | (1,045 | ) |
| Pro forma net  income (loss)                                                                                          |       |                                                                  | $          | (545                                              | )          |   | $ | (1,159 | ) | $ | 5,380 |   | $ | 1,288 |   |
| Earnings (loss)  per share:                                                                                           |       |                                                                  |       |                                              |       |   |   |   |   |   |   |
| Basic—as reported                                                                                                |       |                                                                  | $          | (0.04                                             | )          |   | $ | (0.08 | ) | $ | 0.53 |   | $ | 0.22 |   |
| Basic—pro forma                                                                                                  |       |                                                                  | $          | (0.05                                             | )          |   | $ | (0.11 | ) | $ | 0.50 |   | $ | 0.12 |   |
| Diluted—as reported                                                                                              |       |                                                                  | $          | (0.04                                             | )          |   | $ | (0.08 | ) | $ | 0.51 |   | $ | 0.21 |   |
| Diluted—pro forma                                                                                                |       |                                                                  | $          | (0.05                                             | )          |   | $ | (0.11 | ) | $ | 0.47 |   | $ | 0.12 |   |

 

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Thefair value for each option grant was estimated at the date of grant using theBlack-Scholes option pricing model, assuming a future dividend yield rangingfrom 2.0% to 2.5% annually, depending on the date of grant, and the followingweighted-average assumptions:
| ** **               | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate |       | 3.6                                                | %          | 3.2                                               | %          | 3.5 | % | 2.6 | % |
| Volatility               |       | 61                                                 | %          | 47                                                | %          | 61 | % | 47 | % |
| Expected life            |       | 5 years                                            |       | 5 years                                           |       | 5 years |   | 5 years |   |

 

**Note 4.   Short-term investments**

Short-terminvestments held-to-maturity consisted of the following securities at January 31,2005, all of which mature within one year (amortized cost includes the initialpurchased amount of $25,840,000 plus accrued interest of $91,000):
| ** **                      | ** ** | **Amortized cost** | ** ** | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair  value** | ** ** |
|---------------------------------|------------|-------------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **(in thousands)** | ** ** |
| U.S. Corporate debt  securities |       |                    | $          | 25,931                       |       |                          |       | $                          | 1          |   |   |   | $ | 10 |   |   | $ | 25,922 |   |
| Total                           |       |                    | $          | 25,931                       |       |                          |       | $                          | 1          |   |   |   | $ | 10 |   |   | $ | 25,922 |   |

 

**Note 5.   Debt**

The Company’s previous loan agreement expired on March 10,2005. This agreement was collateralized by a security interest in the Company’saccounts receivable, inventory, furniture and equipment, contract rights, andgeneral intangibles and contained certain restrictive covenants coveringminimum net worth, minimum working capital, and maximum capital expenditures. TheCompany was in compliance with these covenants on January 31, 2005. On January 31,2005, letters of credit outstanding against this line of credit totaledapproximately $4.5 million and there were no working capital advancesoutstanding.

On March 10, 2005,the Company entered into a new three-year loan agreement with Wells Fargo HSBCTrade Bank, N.A. secured by all assets of the Company, for a $35 million lineof credit. Borrowings under this agreement will bear interest at prime minus1.0%. Covenants contained in this loan agreement include maintaining a debt toequity ratio of not more than 1.0, a quick ratio of not less than 1.0, and profitabilityof $5 million per year. Additionally, capital expenditures are limited to $4.5million in fiscal 2005 and $4.0 million per year thereafter.

**Note 6.   Income Taxes**

The Company has recorded a$150,000 income tax benefit and a $3.4 million income tax expense for the thirdquarter and nine months of fiscal year 2005, respectively, compared to a$205,000 income tax benefit and a $1.2 million income tax expense for the thirdquarter and nine months of fiscal year 2004, respectively. The effective ratesfor income taxes were 37.3% and 35.7% for the first nine months of fiscal years2005 and 2004, respectively. Income taxes receivable as of January 31,2005, are due to fiscal 2005 estimated payments in excess of the year to datecurrent tax liability.

**Note 7.   Shareholders’ Equity**

The Company sold 358,754 and 520,034 shares of commonstock pursuant to exercises of employee stock options during the three and ninemonths ended January 31, 2005, respectively. The Company sold 

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3,971 and 7,682 shares ofcommon stock under its employee stock purchase plan during the three and ninemonths ended January 31, 2005, respectively.

Under terms of the employment agreement with its newCEO, the Company awarded a restricted stock grant of 20,000 shares of commonstock in December 2005, which are to be issued in equal thirds on eachtwelve month anniversary of his continuous service to the Company.

The Company repurchased 63,800 and 162,200 shares ofcommon stock under its Stock Repurchase Program during the three months andnine months ended January 31, 2005, respectively.

The Company paid dividendstotaling $769,000 ($.07 per share) and $2,069,000 ($.19 per share) during thethree and nine months ended January 31, 2005, respectively. On March 8,2005, the Board of Directors approved a quarterly dividend of $.07 per sharefor shareholders of record on March 24, 2005, payable on April 8,2005.

**Note 8.   Earnings (Loss) Per Share**

Basic earnings (loss) per share is based on theweighted average number of common shares outstanding. Diluted earnings pershare is based on the weighted average number of common shares and equivalentsoutstanding. Common share equivalents included in the computation of dilutedearnings per share represent the restricted stock grant to the Company’s CEOand the net shares issuable upon assumed exercise of outstanding stock options,except when the effect of their inclusion would be antidilutive.

Thecomponents of basic and diluted earnings (loss) per share are as follows:
| ** **                                             | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income (loss)  from continuing operations              |       | $                                                  | (384,000   | )                                                 | $          | (857,000 | ) | $ | 5,781,000 |   | $ | 2,187,000 |   |
| Wtd. Average outstanding shares of common stock        |       | 10,926,355                                         |       | 10,706,372                                        |       | 10,844,598 |   | 10,690,699 |   |
| Dilutive effect  of employee stock options and grants  |       | —                                             |       | —                                            |       | 551,996 |   | 377,232 |   |
| Common stock and  common stock equivalents             |       | 10,926,355                                         |       | 10,706,372                                        |       | 11,396,594 |   | 11,067,931 |   |
| Earnings (loss) per share from continuing  operations: |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                  |       | $                                                  | (0.04      | )                                                 | $          | (0.08 | ) | $ | 0.53 |   | $ | 0.21 |   |
| Diluted                                                |       | $                                                  | (0.04      | )                                                 | $          | (0.08 | ) | $ | 0.51 |   | $ | 0.20 |   |

 

**Note 9.   Restructuring Liability**

The Company had two restructuring plans, the 2002Restructuring Plan and the 2003 Restructuring Plan. These restructuring plansare now complete. The remaining liability recorded for the 2002 RestructuringPlan relates to the remaining lease payments due for excess warehouse capacity,all of which is currently being subleased and which management believes willcontinue to be subleased through the end of the Company’s lease term in 2011.

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Forthe nine months ended January 31, 2005, activity in the other liabilityaccount associated with the 2002 Restructuring Plan consisted of the following:
| ** **        | ** ** | **Balance at  April 30,  2004** | ** ** | **Subsequent  Payments** | ** ** | **Balance at  January 31,  2005** | ** ** | **Due  Within  1 Year** | ** ** | **Due  After  1 Year** | ** ** |
|-------------------|------------|-------------------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **(in thousands)**                   | ** ** |
| Lease obligations |       |                                      | $          | 2,535                    |       |                                        |       | $                            | (240       | )                           |       |   | $ | 2,295 |   |   | $ | 320 |   | $ | 1,975 |   |
|                   |            |                                           |            |                          |            |                                             |            |                              |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 10.   Litigation**

As previously disclosed, the Company remains a partyto its lawsuit against Genesis Insurance Company. The Company’s complaint,which was originally filed in the United States District Court for the WesternDistrict of Washington, alleged that Genesis’ 2002 attempt to rescind theCompany’s primary Directors’ and Officers’ liability insurance was unlawful,and sought damages resulting from Genesis’ breach of contract and the duty ofgood faith and fair dealing. On February 11, 2004, the Court entered anOrder granting Genesis’ motions for summary judgment and, accordingly, theCompany’s claims against Genesis were dismissed by the Court on February 13,2004. The Company has appealed the Court’s decision to the United StatesCircuit Court of Appeals for the Ninth Circuit. The Company filed its Brief inthe appeal on December 20, 2004, and Genesis filed its answering Brief on January 19,2005. The Company filed its reply to Genesis’ answering Brief on March 7,2005.

In fiscal 2002, the Company restated certain financialstatements. Although the restatement has been completed, the Company expects tocontinue to incur legal and other professional service costs in connection withits ongoing lawsuit against Genesis Insurance Company. These expenses cannot beestimated at this time.

The Company is party to other routine litigationincidental to its business. Management believes the ultimate resolution ofthese other routine matters will not have a material adverse effect on theCompany’s financial condition and results of operations.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

*Statements made inthis filing that are not historical facts are forward-looking statements. Youshould be aware that our actual results could differ materially from thosecontained in any forward-looking statements. Our actual results willdepend upon a number of factors, including but not limited to the following:relations with and the performance of suppliers; our ability to control costsand expenses including costs associated with the upgrade and replacement ofsome of our computer systems and costs associated with regulatory complianceand personnel matters including management transition; the potential outcome ofpending and future audits by various taxing jurisdictions; our ability to carryout successful designs, effectively advertise and communicate with themarketplace and penetrate our chosen distribution channels; costs associatedwith the indemnification of former officers; competition; risks related to thetimely performance of third parties, such as shipping companies, includingrisks of strikes or labor disputes involving these third parties; our need tomaintain the integrity of our technology and information systems whileenhancing and replacing systems; our need to attract and retain employees; ourneed to maintain satisfactory relationships with our banking partners;political and trade relations; changes in international trade quota systems forapparel; the overall level of consumer spending on apparel; the effects ofweather-related or other natural disasters; global economic and politicalconditions and additional threatened terrorist attacks and responses thereto,including war. Additional information on these and other factors that couldaffect our financial results is set forth below and in our Form 10-K forthe year ended April 30, 2004. Finally, there may be other factors notmentioned above or included in our SEC filings that may cause actual results todiffer materially from any forward-looking statements. You should notplace undue reliance on any forward-looking statements. We assume noobligation to update any forward-looking statements as a result of newinformation, future events or developments, except as required by securitieslaws.*

*All references to fiscal years are references to ourfiscal year ended April 30.*

**Overview**

Cutter & Buck designs, sources, markets anddistributes high-quality men’s and women’s sportswear under the Cutter &Buck brand. We sell our products primarily through corporate accounts, golf proshops and resorts, upscale specialty retail stores, and internationaldistributors and licensees.

Our business strategy focuses on strengthening theupscale positioning of the Cutter & Buck brand and increasing thepenetration of our target markets. We focus on the needs of our customerswithin each strategic business unit (“SBU”), and design products to meet thoseneeds. In order to implement this strategy, during fiscal 2005 we have enhancedour design team and increased our marketing efforts to improve our brandawareness and acceptance.

To understand theperformance of our wholesale business, management considers it useful to reviewour operating results excluding costs that are not elements of running ourwholesale business on an ongoing basis, such as restatement expenses. We adjustour net income calculated in accordance with generally accepted accountingprinciples to exclude income and expense items that are not directly related toour wholesale business in order to give us better information regarding theprofitability of our wholesale 

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business. We use this analysis to compare pretaxwholesale business income on a quarterly and year-to-date basis.
| ** **                                                   | ** ** | **Three Months Ended  January 31,**       | ** ** | **Nine Months Ended  January 31,**                    | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                   | ** ** | **    2005    ** | ** ** | **     2004     ** | ** ** | **     2005     ** | ** ** | **     2004     ** | ** ** |
| ** **                                                   | ** ** | **(in thousands)**                                  | ** ** |
| Net income (loss)  as reported                               |       |                                                     | $          | (384                                                                 | )          |   |   | $ | (857 | ) |   |   | $ | 5,781 |   |   |   | $ | 2,333 |   |   |
| Less: income from  discontinued retail operations            |       |                                                     | —     |                                                                 |       |   | — |   |   |   | — |   |   |   | 146 |   |   |
| Add: income tax  expense (benefit)                           |       |                                                     | (150       | )                                                                    |       |   | (205 | ) |   |   | 3,438 |   |   |   | 1,215 |   |   |
| Add: pre-tax  (income) expense of closed European operations |       |                                                     | 2          |                                                                 |       |   | (5 | ) |   |   | (13 | ) |   |   | 67 |   |   |
| Add:  restructuring and asset impairment expenses            |       |                                                     | —     |                                                                 |       |   | (65 | ) |   |   | — |   |   |   | (55 | ) |   |
| Add: restatement  expenses                                   |       |                                                     | 9          |                                                                 |       |   | 1,172 |   |   |   | 290 |   |   |   | 4,522 |   |   |
| Ongoing wholesale  business income before tax                |       |                                                     | $          | (523                                                                 | )          |   |   | $ | 40 |   |   |   | $ | 9,496 |   |   |   | $ | 7,936 |   |   |

 

Overall, our year-to-date results reflect the workdone to optimize and restructure our business. During the third quarter,operating results of our wholesale business were impacted by increased SG&Acosts, partially offset by a higher gross margin, as discussed below. Weanticipate incurring additional SG&A expenses during the fourth quarter offiscal 2005 related to the implementation of a new ERP system, which isintended to improve management information, gain operational efficiencies, andprovide support for our future operations. We also anticipate incurringadditional SG&A expenses as we complete our initial documentation andtesting of our internal controls as required by Section 404 of theSarbanes-Oxley Act.

In December 2004, wehired Tom Wyatt as our new CEO. Mr. Wyatt most recently served asPresident of Intimate Apparel for The Warnaco Group, Inc., aninternational designer, manufacturer and seller of intimate apparel, swimwearand sportswear. Mr. Wyatt has also held executive management positionswith other companies in the retail and apparel industries, including VFCorporation, which he was with for 23 years, and Saks Incorporated. Mr. Wyattis reviewing our brand positioning in the market and working with themanagement team to chart the Company’s strategic direction.

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**Results of Operations**

Thefollowing table sets forth, for the periods indicated, certain consolidatedstatements of operations data expressed as a percentage of net sales. For allperiods presented in this section, results of operations reflect theclassification of our Company-owned retail store operating results and incomeor loss on the disposal of these stores as discontinued retail operations.
| ** **                                                    | ** ** | **Three Months Ended  January 31,**       | ** ** | **Nine Months Ended  January 31,**        | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Net sales                                                     |       |                                                     | 100.0      | %                                                        |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                                                 |       |                                                     | 54.8       |                                                     |       |   | 55.5 |   |   |   | 52.2 |   |   |   | 54.5 |   |   |
| Gross profit                                                  |       |                                                     | 45.2       |                                                     |       |   | 44.5 |   |   |   | 47.8 |   |   |   | 45.5 |   |   |
| Operating expenses:                                           |       |                                                     |       |                                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                  |       |                                                     | 2.8        |                                                     |       |   | 4.6 |   |   |   | 2.3 |   |   |   | 3.5 |   |   |
| Selling, general and  administrative                          |       |                                                     | 45.5       |                                                     |       |   | 40.0 |   |   |   | 35.6 |   |   |   | 33.4 |   |   |
| Restructuring and asset  impairment                           |       |                                                     | 0.0        |                                                     |       |   | (0.3 | ) |   |   | 0.0 |   |   |   | (0.1 | ) |   |
| Restatement expenses                                          |       |                                                     | 0.0        |                                                     |       |   | 5.2 |   |   |   | 0.3 |   |   |   | 5.0 |   |   |
| Total operating expenses                                      |       |                                                     | 48.3       |                                                     |       |   | 49.5 |   |   |   | 38.2 |   |   |   | 41.8 |   |   |
| Operating income (loss)                                       |       |                                                     | (3.1       | )                                                        |       |   | (5.0 | ) |   |   | 9.6 |   |   |   | 3.7 |   |   |
| Net interest income                                           |       |                                                     | 0.9        |                                                     |       |   | 0.4 |   |   |   | 0.5 |   |   |   | 0.1 |   |   |
| Income (loss) from  continuing operations before income taxes |       |                                                     | (2.2       | )                                                        |       |   | (4.6 | ) |   |   | 10.1 |   |   |   | 3.8 |   |   |
| Income tax expense  (benefit)                                 |       |                                                     | (0.6       | )                                                        |       |   | (0.9 | ) |   |   | 3.8 |   |   |   | 1.3 |   |   |
| Income (loss) from  continuing operations                     |       |                                                     | (1.6       | )                                                        |       |   | (3.7 | ) |   |   | 6.3 |   |   |   | 2.5 |   |   |
| Income from discontinued  retail operations, net of tax       |       |                                                     | 0.0        |                                                     |       |   | 0.0 |   |   |   | 0.0 |   |   |   | 0.2 |   |   |
| Net income (loss)                                             |       |                                                     | (1.6       | )%                                                       |       |   | (3.7 | )% |   |   | 6.3 | % |   |   | 2.7 | % |   |

 

***Three Months Ended January 31, 2005 Compared WithThree Months Ended January 31, 2004***

**NetSales**

During the third quarter of fiscal 2005, net salesincreased approximately $1.7 million, or 7.5%, to $24.2 million from $22.5million in the same period of the prior year. This was primarily due toincreases in corporate, e-commerce, international, and specialty retail sales,partially offset by the decline in sales from the golf SBU. The third quarteris historically the Company’s lowest sales quarter of the year due toseasonality.

Thedetail of net sales by SBU was as follows:
| ** **       | ** ** | **Three Months Ended January 31,**        |
|------------------|------------|---------------------------------------------------------------|
| ** **       | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **Increase/  (Decrease)** | ** ** | **Percent  Change** |
| ** **       | ** ** | **(in thousands, except percent change)** | ** ** |
| Corporate        |       | $                                                             | 12,578 |   | $ | 11,010 |   |   | $ | 1,568 |   |   | 14.2 |   | % |
| Golf             |       | 4,375                                                         |   | 4,877 |   |   | (502 | ) |   | (10.3 | ) | % |
| Specialty Retail |       | 4,090                                                         |   | 3,926 |   |   | 164 |   |   | 4.2 |   | % |
| International    |       | 858                                                           |   | 641 |   |   | 217 |   |   | 33.9 |   | % |
| Other            |       | 2,319                                                         |   | 2,086 |   |   | 233 |   |   | 11.2 |   | % |
| Total            |       | $                                                             | 24,220 |   | $ | 22,540 |   |   | $ | 1,680 |   |   | 7.5 |   | % |

 

Our Corporate SBU, which represented 51.9% of netsales in the third quarter, performed well showing an increase of 14.2% for thequarter, demonstrating continued strength in this channel. We anticipate thatdue to the strength of our brand, our product offering, and our competitivebusiness model we will continue to see growth in this channel.

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Our Golf SBU, representing 18.1% of the quarter’s netsales, continued to be challenged with a sales decline of 10.3%. As we havementioned over the previous few quarters, the golf channel remains our greatestchallenge and our highest priority. We continue to strengthen the productoffering, marketing efforts and customer focus to turn this business around. Weare spending a great deal of time with consumers analyzing perceptions of thebrand to more clearly understand the needs and expectations of this channel. Inaddition, we are working with our customers as we develop a more compellingproduct offering, supported by a more aggressive marketing strategy. Theseefforts are designed to raise the level of awareness of the features andbenefits of our products to the ultimate consumer. However, a major portion ofour sales in the golf SBU are from our biannual seasonal collections, as aresult, improvement in golf SBU sales will be hampered until new seasonalcollections reflecting the above activities are introduced to the market.

For the quarter, net sales in our Specialty Retail SBUthat represented 16.9% of the sales, increased $164,000, or 4.2%, compared withthe same period of the prior year. Our sell-through at retail is performingwell and we continue to be cautiously optimistic about our growth in thischannel.

Net sales in our International SBU representing 3.5%of our third quarter sales increased approximately 34% for the quarter. Thisincrease was driven primarily by the strength of our licensee and distributorpartnerships.

Sales within our Other SBUrepresenting 9.6% of sales for the quarter consist primarily of liquidationsales, which are down versus the prior year, and also include freight revenueand e-commerce sales, which have increased over the prior year.

**Gross Profit**

In the third quarter of fiscal 2005, gross profitincreased to 45.2% of net sales compared to 44.5% in the same period of theprior year. Our margins have continued to increase compared to the prior yearas we improved our sourcing, managed our inventory levels for the 2004 fashionlines, and adjusted our pricing structure for certain products. Gross marginsduring the third quarter have also been favorably impacted by fluctuations inour sales mix. Corporate sales, which made up a larger percentage of ouroverall sales during the third quarter of this year, are generally at highermargins than the other channels. Also, we have shifted more of ourinternational sales to licensees as opposed to distributors, whereby we incurfewer direct costs. A portion of these increases to the overall gross marginwas offset by additional allowances recorded related to the success of loyaltyprograms that reward customers for sales growth.

Our gross profit may notbe comparable to that of other companies since some companies include all costsrelated to their distribution network in the cost of sales. We haveconsistently included inbound freight, import charges, and embroidery costs incost of sales and included other costs of distribution in selling, general, andadministrative expenses.

**Selling,General, and Administrative Expense**

Selling, general and administrative expenses totaled$11.0 million in the third quarter of fiscal 2005 compared to $9.0 million infiscal 2004. This increase is primarily due to approximately $0.5 million ofincreased costs for additional product development, design, and marketing;approximately $0.5 million of costs associated with transitioning to a new CEO,the separation agreement with a former executive vice president and otheremployment matters; and approximately $0.5 million of costs to implement ournew ERP system and comply with Section 404 of the Sarbanes-Oxley Act. Duringthe remainder of fiscal 2005, we expect operating expenses to continue toreflect these increases as we expand our marketing programs, upgrade andreplace some of our computer systems, complete the documentation and testing ofour internal controls required by Section 404 of the Sarbanes-Oxley Act, and complete thetransition to our new CEO.

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In December 2004, theFinancial Accounting Standards Board issued SFAS 123(R) “Share-BasedPayment—An Amendment of FASB Statements No. 123 and 95”. Management andthe board of directors are currently reviewing the adoption alternativesprovided by the statement. The statement requires companies to recognize anexpense for compensation costs related to share-based compensationarrangements, including stock options and employee stock purchase plans. Thisexpense will impact SG&A costs upon adoption.

**Restatement Expenses**

Restatement expenses inthe third quarter of fiscal 2004 included legal and professional fees andaccrued retention bonuses to certain key employees. The majority of legalissues have been resolved and all of the retention bonuses have been paid.

**Net Interest Income**

Net interest income hasincreased substantially over the prior year, primarily due to the ability ofthe Company to invest more of its cash in short-term investments with higherreturns and an overall increase in short-term interest rates.

**Income Taxes**

The effective rates forincome taxes in the third quarters of fiscal 2005 and 2004 were 28.0% and19.3%, respectively and resulted in a net tax benefit for those quarters. Theeffective rate for the third quarter of fiscal 2005 is lower than the statutoryrate as a result of changing our estimates of expected future state taxliabilities. As of January 31, 2004, the Company had a valuation allowanceagainst its deferred tax assets. The lower tax rate during the third quarter offiscal 2004 is due to adjustments to this allowance.

***Nine Months Ended January 31, 2005 Compared WithNine Months Ended January 31, 2004***

**NetSales**

Duringthe first nine months of fiscal 2005, net sales have increased approximately$1.6 million, or 1.8%, over the same period of the prior year.  The detail of net sales by SBU is as follows:
| ** **       | ** ** | **Nine Months Ended January 31,**         |
|------------------|------------|---------------------------------------------------------------|
| ** **       | ** ** | ** **                                                    | ** ** | ** ** | ** ** | **Increase/** | ** ** | **Percent** |
| ** **       | ** ** | **2005**                                                      | ** ** | **2004** | ** ** | **(Decrease)** | ** ** | **Change** |
| ** **       | ** ** | **(in thousands, except percent change)** | ** ** |
| Corporate        |       | $                                                             | 42,279 |   | $ | 39,048 |   |   | $ | 3,231 |   |   |   | 8.3 |   | % |
| Golf             |       | 23,224                                                        |   | 25,796 |   |   | (2,572 | ) |   |   | (10.0 | ) | % |
| Specialty Retail |       | 17,762                                                        |   | 17,190 |   |   | 572 |   |   |   | 3.3 |   | % |
| International    |       | 2,273                                                         |   | 1,871 |   |   | 402 |   |   |   | 21.5 |   | % |
| Other            |       | 6,119                                                         |   | 6,119 |   |   | 0 |   |   |   | 0.0 |   | % |
| Total            |       | $                                                             | 91,657 |   | $ | 90,024 |   |   | $ | 1,633 |   |   |   | 1.8 |   | % |

 

Net sales in our Corporate SBU, which representapproximately 46% of our year to date revenue, increased by $3.2 million, or8.3%, over the same period of the prior year, demonstrating the continuingstrength of our brand in this channel.

In the first nine months of fiscal 2005, net sales inour Golf SBU represented 25.3% of net sales and decreased $2.6 million, or10%. We continue to strengthen our product offering, marketing efforts, andcustomer focus with the goal of realizing the full potential of our brand. Weare spending a great deal of time with consumers analyzing the competitiveterrain to more clearly understand the needs and 

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expectations of thischannel in order to raise the level of awareness of the unique features of ourproducts and the benefits to the ultimate consumer.

Net sales in our Specialty Retail SBU represents 19.4%of net revenue year to date and has increased 3.3% year-to-date over the priorfiscal year, primarily due to strong second quarter sales in the collegiatemarket and third quarter sales to our specialty retail channel.

Net sales in our International SBU comprising 2.5% ofour year-to-date sales have increased approximately 21% over the prior year,primarily due to the strength of our relationships with our key licensees anddistributors.

Sales within our Other SBUrepresented 6.7% of the nine months sales. These sales consist primarily ofliquidation sales, which were down versus the prior year, and also includefreight revenue and e-commerce sales, which have increased over the prior year.

**Gross Profit**

In the first nine months of fiscal 2005, gross profitincreased to 47.8% of net sales compared to 45.5% during the same period of theprior year. In 2005, our margins have continued to increase compared to theprior year as we improve our sourcing, focus on reducing our product returnsand allowances, and adjust our pricing structure for certain products. Grossmargins during the first nine months have also been favorably impacted byfluctuations in our sales mix.

Our gross profit may notbe comparable to that of other companies since some companies include all costsrelated to their distribution network in the cost of sales. We haveconsistently included inbound freight, import charges, and embroidery costs incost of sales and included other costs of distribution in selling, general, andadministrative expenses.

**Selling,General, and Administrative Expense**

Selling, general, and administrative expenses totaled$32.6 million in the first nine months of fiscal 2005 compared to $30.0 millionin the first nine months of fiscal 2004, an increase of $2.6 million. Part ofthis increase reflects our ongoing investment in design talent and marketingresources. Approximately $0.9 million of the increase is due to expensesrelated to the Sarbanes-Oxley Act of 2002 and the upgrade and replacement ofsome of our computer systems. Also, during the third quarter, we incurredapproximately $0.5 million of expenses associated with transitioning to a newCEO, the separation agreement with a former executive vice president, and otheremployment matters.

During the remainder of fiscal 2005, we expectoperating expenses to continue to reflect these increases as we expand ourmarketing programs, upgrade and replace some of our computer systems, completethe documentation and testing of our internal controls required by Section 404of the Sarbanes-Oxley Act, and completethe transition to our new CEO.

In December 2004, theFinancial Accounting Standards Board issued SFAS 123(R) “Share-BasedPayment—An Amendment of FASB Statements No. 123 and 95” in December 2004.Management and the board of directors are currently reviewing the adoptionalternatives provided by the statement. The statement requires companies torecognize an expense for compensation costs related to share-based compensationarrangements, including stock options and employee stock purchase plans. Thisexpense will impact SG&A costs upon adoption.

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**Restatement Expenses**

Restatement expensestotaled $0.3 million in the first nine months of fiscal 2005 compared to $4.5million in fiscal 2004. Restatement expenses in the first nine months of fiscal2005 included legal and other professional fees incurred in connection with theindemnification of former officers and the ongoing lawsuit against GenesisInsurance Company. Restatement expenses in the first nine months of fiscal 2004included legal and other professional fees of $3.3 million, $1.0 million of accruedretention bonuses to certain key employees and $0.2 million of amortization ofthe premium for the replacement directors’ and officers’ liability insurance. Themajority of legal issues relating to the restatement, other than the claimagainst Genesis, have been resolved and the retention bonuses have been paid.

**Income Taxes**

The effective rates forincome taxes in the first nine months of fiscal 2005 and 2004 were 37.3% and35.7%, respectively. The higher tax rate in the first nine months of fiscal 2005was the result of changing our estimates of expected future state taxliabilities.

**Liquidity and Capital Resources**

Our primary ongoing capital requirements are tofinance working capital and the continued growth and operations of ourbusiness, including investments in fixed assets. During the first nine monthsof fiscal 2005, our capital requirements were funded by cash provided byoperating activities.

Net cash provided by operating activities during thefirst nine months of fiscal 2005 was $10.0 million compared to $25.5 millionfor the first nine months of fiscal 2004. The decrease in operating cash flowis primarily due to significant decreases in inventory levels in the first ninemonths of fiscal 2004 and the seasonal increase in our inventory balance in thethird quarter of fiscal 2005. Inventories are slightly higher than desirablelevels, but the majority of product is for Classics. We expect our inventorybalance to decline from current levels by the end of the current fiscal year. Thedecrease in inventory during fiscal 2004 was the result of focused efforts toalign inventory balances with sales which produced significant decreases ininventory balances. The reduction in inventory in the prior year was partiallyoffset by the $4.0 million payment to the plaintiffs in the shareholderlawsuits related to our restatement of certain financial statements.   During the third quarter, we experienced ournormal seasonal decrease in accounts receivable.

Net cash used in investing activities was $10.3 millionin the first nine months of fiscal 2005 compared to $20.0 million in the firstnine months of fiscal 2004. The fluctuation is due to the purchase ofshort-term investments commencing in fiscal 2004. The Company continues toincrease the amount of cash invested in short term high-quality corporate debtinstruments. We hold these instruments to maturity, which currently averages104 days at the date of purchase. At January 31, 2005 we held $25.8million in short-term investments. To support our operations, capitalexpenditures totaling approximately $3.5 to $4.0 million are planned for fiscal2005. Through January 31, 2005, we spent $2.4 million on these initiatives.These capital expenditures primarily consist of information technologyinitiatives, as we plan to upgrade and replace some of our computer systems.

Net cash used in financing activities was $1.5 millionin the first nine months of fiscal 2005, which primarily consisted of dividendpayments and stock repurchases, which have been funded to a certain extent bystock option exercises and purchases under the employee stock purchase plan. Duringthe nine months ended January 31, 2005, we paid dividends totaling $0.19per share of common stock. We may decide to discontinue or modify the dividendpayment at any time if we determine that other uses of our capital may be inthe best interests of our shareholders. The share repurchase program authorizesthe purchase of up to $6 million in company stock. The purchases may be madefrom time to time in the open market or in privately negotiated transactions. Duringthe first nine months of fiscal 2005, we purchased 

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162,200 shares of ourcommon stock at an average price of $12.51, for a year-to-date repurchase of$2.0 million. Since the inception of the program, we have paid a total of $2.6million to repurchase 219,026 shares of stock and have authorization to makeadditional repurchases up to $3.4 million of stock. The repurchase program maybe suspended at any time without notice. The timing of repurchases and theactual number of shares repurchased will depend on market conditions,alternative uses of capital and other factors.

The Company’s previous loan agreement expired on March 10,2005. This agreement was collateralized by a security interest in the Company’saccounts receivable, inventory, furniture and equipment, contract rights, andgeneral intangibles and contained certain restrictive covenants coveringminimum net worth, minimum working capital, and maximum capital expenditures. TheCompany was in compliance with these covenants on January 31, 2005. On January 31,2005, letters of credit outstanding against this line of credit totaledapproximately $4.5 million and there were no working capital advancesoutstanding.

On March 10, 2005, the Company entered into a newthree-year loan agreement with Wells Fargo HSBC Trade Bank, N.A., secured byall assets of the Company, for a $35 million line of credit. Borrowings underthis agreement will bear interest at prime minus 1.0%. Covenants contained inthis loan agreement include maintaining a debt to equity ratio of not more than1.0, a quick ratio of not less than 1.0, and profitability of $5 million peryear. Additionally, capital expenditures are limited to $4.5 million in fiscal2005 and $4.0 million per year thereafter.

We believe that cash onhand and cash generated from operations, as well as our ability to borrow underbank lines of credit will be sufficient to meet our cash requirements duringthe remainder of fiscal 2005 and 2006. We also have available alternativesources of financing, including factoring our accounts receivable and financingour capital expenditures with leases. Although these methods of financing arecurrently available to us, we do not anticipate using alternative sources offinancing during fiscal 2005 or 2006. However, our capital needs will depend onmany factors, including our growth rate, the need to finance increasedproduction and inventory levels, the success of our various sales and marketingprograms, expenses associated with the risks and uncertainties related to ourrestatement, and various other factors.

**Foreign Currency Exchange Risk**

We do not currently usederivative financial instruments to reduce our exposure to changes in foreignexchange rates. In conjunction with the closing of our European operations, wehave some remaining assets and liabilities denominated in Euros. These balancesare not material to our consolidated financial statements. To the extent wehave assets and liabilities denominated in foreign currencies that are nothedged, we are subject to foreign currency transaction gains and losses.

**CriticalAccounting Policies and Use of Estimates**

Our significant accountingpolicies are described in Note 1 to the consolidated financial statementsincluded in the Company’s filing on Form 10-K for the year ended April 30,2004. Our discussion and analysis of financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of our financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses, and related disclosures of contingent assetsand liabilities. On an ongoing basis, we evaluate the estimates that we havemade. These estimates have been based upon our historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under 

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differentassumptions or conditions. We believe the following critical accountingpolicies affect the more significant judgments and estimates used in thepreparation of our consolidated financial statements.

*Allowances for Doubtful Accounts*

We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. These losses are included in bad debtexpense. We determine the adequacy of this allowance by regularly reviewing ouraccounts receivable aging and evaluating individual customer receivables,considering the customer’s financial condition, credit history, and currenteconomic conditions. If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.

*Reserve for ProductReturns*

We maintain an estimate ofpotential future product returns related to current period product receivables.We analyze the rate of historical returns when evaluating the adequacy of thisreserve, and update our estimate based on our actual results. The estimate forproduct returns is included in our calculation of net sales. If we were toexperience an increase in our product returns, additional reserves may berequired.

*Reserve for SalesAllowances*

We maintain an estimate offuture sales allowances related to current period sales. We analyze the rate ofhistorical sales allowances when evaluating the adequacy of this reserve, andupdate our estimate based on our actual results. The estimate for salesallowances is included in our calculation of net sales. If we were to grantadditional sales allowances, additional reserves may be required.

*Inventories*

Inventories, which are predominantlyfinished goods, are valued at the lower of cost or market, with cost determinedusing a weighted average method. We perform a detailed analysis of inventory ona quarterly basis to identify unsold or slow-moving products. We estimate thenet realizable value of these products based upon disposition plans andhistorical experience. A valuation allowance is established to reduce thecarrying amount of these products to their estimated net realizable value. Ifactual market conditions are less favorable than those we project, additionalallowances may be required.

*Impairment of Long-Lived Assets*

We review the carryingvalues of our long-lived assets whenever events or changes in circumstancesindicate that such carrying values may not be recoverable. Unforeseen events,changes in circumstances, market conditions, and changes in estimates of futurecash flows could negatively affect the fair value of our assets and result inan impairment charge.

*Restructuring Liabilities*

Restructuring-relatedliabilities consist of estimates for losses on anticipated disposition of leaseobligations. Key variables in determining this estimate include the anticipatedtiming of sublease rentals, estimates of sublease rental payment amounts, andestimates for brokerage and other related costs. We periodically evaluate and,if necessary, adjust our estimate based on currently available information.

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*Valuation Allowancein Deferred Income Tax Assets*

We periodically review theneed for a valuation allowance to reduce our deferred income tax asset balancesto their net realizable value. To the extent we determine an allowance isrequired, we determine the adequacy of this allowance by regularly reviewingour historical taxable income and forecasts of future taxable income over theperiods in which the temporary differences are anticipated to reverse. If ouractual results are lower than our forecasted future results, additionalallowances may be required.

**Item 3.**                        Quantitativeand Qualitative Disclosures about Market Risk

We are subject to certain market risks, includinginterest rate risks associated with financial instruments included in cash andcash equivalents and short-term investments. We invest in interest-bearing U.S.Government and high-quality corporate debt instruments and hold theseinstruments until maturity. Changes in interest rates may affect the fairmarket value of these instruments. Investments with maturities beyond ninetydays as of the purchase date are classified as short-term investments. Theaverage time to maturity as of the purchase date for short-term investmentsheld as of January 31, 2005, was 104 days. Due to the short-term nature ofthese instruments and our investment policies and procedures, we do not expectinterest rate fluctuations to have a material adverse effect on our results ofoperations.

We do not use derivative financial instruments tomanage interest rate risk, to reduce our exposure to changes in foreigncurrency exchange rates, or for speculative trading purposes.

Thefollowing table provides information about our marketable fixed incomesecurities classified as short-term investments, including principal cash flowsby expected maturity and the related weighted average interest rates at January 31,2005.
| U.S. Corporate  debt securities *(in thousands)* |   | $25,840           |   |
|--------------------------------------------------|--------|-------------------|--------|
| Expected maturity  date                          |   | prior to 5/4/2005 |   |
| Average interest rate                            |   | 2.2%              |   |

 

**Item 4.**                        Controlsand Procedures

*Evaluation of the Company’s Disclosure Controls andProcedures.  *As of January 31, 2005, we evaluatedthe effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934, as amended(the “Exchange Act”). This evaluation was done under the supervision and withthe participation of management, including our Chief Executive Officer andChief Financial Officer. The evaluation included inquiring of senior managerswhether our records and reports were correct and complete. We have developedinternal processes for documenting, testing and monitoring our disclosureprocedures. These internal processes are based on employees’ reports of theirprocesses, analysis of our documentation, and limited testing to validate ourprocesses and documentation.

*Limitations on the Effectiveness of Controls.  *Ourmanagement does not expect that our disclosure controls or our internalcontrols will prevent all errors and all fraud. A control system, no matter howwell conceived or operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control failures and instances of fraud, ifany, within the Company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of control. The design of any systemof controls is also based in part on certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Because ofthe inherent 

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limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

*Conclusions.  *Based on ourevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms.

*Changes in Internal Controls.  *Therewere no changes in our internal control over financial reporting (as defined inRules 13a-15(f) or 15d-15(f) of the Exchange Act)during the quarter ended January 31, 2005, that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

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**PART II—OTHER INFORMATION**

**Item 1.**                        LegalProceedings

As previously disclosed, the Company remains a partyto its lawsuit against Genesis Insurance Company. The Company’s complaint,which was originally filed in the United States District Court for the WesternDistrict of Washington, alleged that Genesis’ 2002 attempt to rescind theCompany’s primary Directors’ and Officers’ liability insurance was unlawful,and sought damages resulting from Genesis’ breach of contract and the duty ofgood faith and fair dealing. On February 11, 2004, the Court entered anOrder granting Genesis’ motions for summary judgment and, accordingly, theCompany’s claims against Genesis were dismissed by the Court on February 13,2004. The Company has appealed the Court’s decision to the United StatesCircuit Court of Appeals for the Ninth Circuit. The Company filed its Brief inthe appeal on December 20, 2004, and Genesis filed its answering Brief on January 19,2005. The Company filed its reply to Genesis’ answering Brief on March 7, 2005.

The Company is party toother routine litigation incidental to its business. Management believes theultimate resolution of these other routine matters will not have a materialadverse effect on the Company’s financial condition and results of operations.

**Item 2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

(C) Common StockRepurchases
| Period            | ** ** | ** ** | ** ** | **Total number  of shares  purchased** | ** ** | **Average price  paid per share** | ** ** | **Total number of  shares purchased as  part of a publicly  announced plan** | ** ** | **Maximum dollar  value of shares  that may yet be  purchased under  the plan** | ** ** |
|-------------------|------------|------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| November          |       |       |       |                                             |       |                                             |       |                                                                                                                 |       |                                                                                                                    |       |   |   |   |   |   |   |
| 11/01/04-11/30/04 |       |       | 0          |                                             |       |                                             | $          | 0.00                                                                                                                 |       |                                                                                                                    |       | 0 |   |   |   | $ | 4,318,011 |   |   |
| December          |       |       |       |                                             |       |                                             |       |                                                                                                                 |       |                                                                                                                    |       |   |   |   |   |   |   |
| 12/01/04-12/31/04 |       |       | 33,800     |                                             |       |                                             | $          | 14.55                                                                                                                |       |                                                                                                                    |       | 33,800 |   |   |   | $ | 3,826,343 |   |   |
| January           |       |       |       |                                             |       |                                             |       |                                                                                                                 |       |                                                                                                                    |       |   |   |   |   |   |   |
| 01/01/05-01/31/05 |       |       | 30,000     |                                             |       |                                             | $          | 14.64                                                                                                                |       |                                                                                                                    |       | 30,000 |   |   |   | $ | 3,387,284 |   |   |
|              |       |       | 63,800     |                                             |       |                                             |       |                                                                                                                 |       |                                                                                                                    | 63,800     |   |   |   |   |   |   |

 

In September 2004,the Company adopted a stock trading plan that is intended to follow theguidelines specified under Rule 10b5-1 of the Securities Exchange Act of1934, as amended. The Company previously announced its intention to repurchaseup to $6 million of its Common Stock. The value of shares repurchased by theCompany under the stock trading plan will not exceed the remaining repurchaseauthorization of $3.4 million. The stock repurchase program may be discontinuedby the Board at any time.

**Item 3.**                        DefaultsUpon Senior Securities

None

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

None

**Item 5.**                        OtherInformation

None

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**Item 6.**                        Exhibitsand Reports on Form 8-K

a)     Exhibits
| Exhibit  Number | ** ** | ** **                                                                                                                                                                                                                               | **Description** |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|
| 3.1             |       | Bylaws of Cutter & Buck, Inc. as  amended and restated on March 3, 2005 (incorporated by reference to  exhibit 99.2 to Form 8-K filed with the commission on March 7,  2005)                                |
| 10.1            |       | Employment Agreement  between Cutter & Buck, Inc. and John T. Wyatt dated  December 11, 2004 (incorporated by reference to exhibit 99.1 to  Form 8-K filed with the Commission on December 14, 2004)        |
| 10.2            |       | Change in Control  Agreement between Cutter & Buck, Inc. and John T. Wyatt dated  December 11, 2004 (incorporated by reference to exhibit 99.2 to  Form 8-K filed with the Commission on December 14, 2004) |
| 31.1            |       | Certification of the  Company’s Chief Executive Officer required by Section 302(a) of the  Sarbanes-Oxley Act of 2002                                                                                                     |
| 31.2            |       | Certification of the  Company’s Chief Financial Officer required by Section 302(a) of the  Sarbanes-Oxley Act of 2002                                                                                                     |
| 32.1            |       | Certification of the  Company’s Chief Executive Officer required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                             |
| 32.2            |       | Certification of the  Company’s Chief Financial Officer required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                             |
|                 |            |                                                                                                                                                                                                                                          |                 |  |

 

b)     Reports onForm 8-K

The Company filed a Form 8-K on December 9,2004 to announce financial results for the second quarter and first six monthsof the fiscal year 2005 and the declaration of a quarterly dividend and theresignation of Jim C. McGehee from the position of Executive Vice President andManager SBU Group.

The Company filed a Form 8-K on December 13,2004 to announce the hiring of John T. Wyatt to the position of President andChief Executive Officer of Cutter & Buck for an initial term of twoyears.

The Company filed a Form 8-K on January 25,2005 to announce the increase to the amount of the annual retainer payable tothe Chairman of the Board during the current year.

The Company filed a Form 8-K on March 7,2005 to announce the appointment of John T. Wyatt to the Board of Directors andamended the company’s bylaws to increase the number of directors from five tosix.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                        | CUTTER & BUCK INC.  (Registrant) |
|-----------------------------|-------------------------------------------|
| Dated: March 11,  2005 | By                                        | /s/  ERNEST R. JOHNSON |
|                        |                                      | Ernest R. Johnson |
| * *                    |                                      | *Senior  Vice President and Chief Financial Officer (Principal Accounting and  Financial Officer)* |

 

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