U.S. SECURITIES AND EXCHANGE COMMISSION Washington,
DC 20549  
 Form 10-Q x
  QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
  ACT OF 1934  For
the quarterly period ended October 31, 2003 or o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934  For
the transition period from
to Commission
File No. 0-26608  
 CUTTER & BUCK INC. (Exact Name of Registrant as
Specified in Its Charter) Washington
  91-1474587(State or Other Jurisdiction of
  Incorporation or Organization)
  (I.R.S. Employer
  Identification No.)  701 N. 34th
Street, Suite 400
Seattle, WA 98103 (Address of Principal
Executive Offices, Including Zip Code) (206) 622-4191 (Registrants Telephone
Number, Including Area Code)  
 Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes x   No o Indicate by check mark whether the registrant is an
accelerated filer (as defined in rule 12b-2 of the Exchange Act).
Yeso   No x The number of shares of Common Stock of the registrant
outstanding as of December 11, 2003 was 10,703,242.


---

CUTTER &
BUCK INC.
Quarterly Report on Form 10-Q
For the Quarter Ended October 31, 2003 Index PagePART IFINANCIAL
  INFORMATIONItem 1.
  Financial Statements
  (unaudited):Condensed
  Consolidated Balance Sheets
  3Condensed
  Consolidated Statements of Operations
  4Condensed
  Consolidated Statements of Cash Flows
  5Notes
  to Condensed Consolidated Financial Statements
  6Item
  2.
  Managements
  Discussion and Analysis of Financial Condition and Results of Operations
  12Item
  3.
  Quantitative
  and Qualitative Disclosures about Market Risk
  21Item 4.
  Controls and
  Procedures
  21PART IIOTHER
  INFORMATIONItem 1.
  Legal Proceedings
  23Item
  2.
  Changes
  in Securities and Use of Proceeds
  23Item 3.
  Defaults Upon
  Senior Securities
  23Item
  4.
  Submission
  of Matters to a Vote of Security Holders
  23Item 5.
  Other Information
  24Item 6.
  Exhibits
  and Reports on Form 8-K
  24SIGNATURES
  25  2


---

PART IFINANCIAL
INFORMATION Item
1. Financial Statements CUTTER &
BUCK INC.
Condensed Consolidated Balance Sheets October 31, 2003
  
  April 30, 2003(unaudited)(in thousands, except share amounts)AssetsCurrent assets:Cash and cash equivalents
  
  
  $
  34,070
  
  
  
  $
  18,864Accounts receivable, net of allowances for doubtful
  accounts and returns of $2,884 at October 31, 2003 and $3,746 at
  April 30, 2003
  
  
  18,501
  
  
  
  24,333Inventories, net
  
  
  21,818
  
  
  
  34,539Deferred income taxes
  
  
  2,852
  
  
  
  3,586Prepaid expenses and other current assets
  
  
  3,189
  
  
  
  4,740Total current assets
  
  
  80,430
  
  
  
  86,062Furniture and
  equipment, net
  
  
  7,305
  
  
  
  8,894Deferred income
  taxes
  
  
  178
  
  
  
  178Other assets
  
  
  502
  
  
  
  544Total assets
  
  
  $
  88,415
  
  
  
  $
  95,678Liabilities
  and Shareholders EquityCurrent liabilities:Accounts payable
  
  
  $
  1,849
  
  
  
  $
  6,381Accrued liabilities
  
  
  7,362
  
  
  
  12,245Current portion of capital lease obligations
  
  
  817
  
  
  
  1,732Other current liabilities
  
  
  37
  
  
  
  82Total current liabilities
  
  
  10,065
  
  
  
  20,440Capital lease
  obligations, less current portion
  
  
  399
  
  
  
  702Other liabilities
  
  
  2,530
  
  
  
  2,548Commitments and
  contingencies
  
  
  
  
  
  
  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: 10,703,291 issued and outstanding at October 31, 2003 and
  10,634,132 at April 30, 2003
  
  
  65,017
  
  
  
  64,805Deferred compensation
  
  
  (5
  )
  
  
  (37
  )Retained earnings
  
  
  10,409
  
  
  
  7,220Total shareholders equity
  
  
  75,421
  
  
  
  71,988Total liabilities
  and shareholders equity
  
  
  $
  88,415
  
  
  
  $
  95,678  See accompanying notes 3


---

CUTTER & BUCK INC. Condensed
Consolidated Statements of Operations (Unaudited) Three Months Ended
  
  Six Months EndedOctober 31,
  
  October 31,
  
  October 31,
  
  October 31,2003
  
  2002
  
  2003
  
  2002(in thousands, except share and per share amounts)Net sales
  
  $
  34,747
  
  $
  36,505
  
  $
  67,484
  
  $
  69,812Cost of sales
  
  18,527
  
  21,740
  
  36,525
  
  41,099Gross profit
  
  16,220
  
  14,765
  
  30,959
  
  28,713Operating expenses:Depreciation
  
  1,051
  
  1,275
  
  2,113
  
  2,551Selling, general and administrative
  
  10,532
  
  11,031
  
  21,015
  
  21,640Restructuring and asset impairment
  
  
  
  76
  
  
  
  3,890Restatement expenses
  
  1,678
  
  1,254
  
  3,350
  
  1,254Total operating expenses
  
  13,261
  
  13,636
  
  26,478
  
  29,335Operating income
  (loss)
  
  2,959
  
  1,129
  
  4,481
  
  (622
  )Interest income (expense)Interest expense
  
  (44
  )
  (175
  )
  (102
  )
  (371
  )Interest income
  
  42
  
  85
  
  85
  
  145Net interest expense
  
  (2
  )
  (90
  )
  (17
  )
  (226
  )Income (loss) from
  continuing operations before income taxes
  
  2,957
  
  1,039
  
  4,464
  
  (848
  )Income tax expense
  (benefit)
  
  866
  
  354
  
  1,420
  
  (288
  )Net income (loss)
  from continuing operations
  
  2,091
  
  685
  
  3,044
  
  (560
  )Income (loss) from
  discontinued retail operations, net of tax
  
  
  
  (403
  )
  146
  
  (746
  )Net income (loss)
  
  $
  2,091
  
  $
  282
  
  $
  3,190
  
  $
  (1,306
  )Basic earnings
  (loss) per share:Net earnings
  (loss) from continuing operations
  
  $
  0.20
  
  $
  0.06
  
  $
  0.29
  
  $
  (0.05
  )Net earnings
  (loss) from discontinued retail operations
  
  $
  
  
  $
  (0.03
  )
  $
  0.01
  
  $
  (0.07
  )Net earnings
  (loss)
  
  $
  0.20
  
  $
  0.03
  
  $
  0.30
  
  $
  (0.12
  )Diluted earnings
  (loss) per share:Net earnings
  (loss) from continuing operations
  
  $
  0.19
  
  $
  0.06
  
  $
  0.28
  
  $
  (0.05
  )Net earnings
  (loss) from discontinued retail operations
  
  $
  
  
  $
  (0.03
  )
  $
  0.01
  
  $
  (0.07
  )Net earnings
  (loss)
  
  $
  0.19
  
  $
  0.03
  
  $
  0.29
  
  $
  (0.12
  )Shares used in
  computation of:Basic earnings (loss) per share
  
  10,701,012
  
  10,603,859
  
  10,682,863
  
  10,599,145Diluted earnings
  (loss) per share
  
  10,992,788
  
  10,629,048
  
  10,909,535
  
  10,599,145  See accompanying notes 4


---

CUTTER & BUCK INC. Condensed
Consolidated Statements of Cash Flows (Unaudited) Six Months EndedOctober 31, 2003
  
  October 31, 2002(in thousands)Operating activities:Net income (loss)
  
  
  $
  3,190
  
  
  
  $
  (1,306
  )Adjustments to reconcile
  net income (loss) to net cash provided by operating activities:Depreciation
  
  
  2,215
  
  
  
  3,160Deferred gain on sale and leaseback of capital
  assets
  
  
  (45
  )
  
  
  (63
  )Loss on disposals of furniture and equipment
  
  
  19
  
  
  
  Amortization of deferred compensation
  
  
  31
  
  
  
  349Noncash compensation expense
  
  
  
  
  
  
  127Noncash restructuring and asset impairment charges
  
  
  
  
  
  
  3,604Changes in assets
  and liabilities:Accounts receivable, net
  
  
  5,832
  
  
  
  20,480Inventories, net
  
  
  12,721
  
  
  
  (7,142
  )Prepaid expenses and other assets
  
  
  2,327
  
  
  
  (2,051
  )Accounts payable, accrued liabilities and other
  liabilities
  
  
  (9,433
  )
  
  
  (466
  )Net cash provided
  by operating activities
  
  
  16,857
  
  
  
  16,692Investing
  activities:Purchases of
  furniture and equipment
  
  
  (646
  )
  
  
  (1,710
  )Decrease in
  trademark, patents and marketing rights
  
  
  
  
  
  
  14Net cash used in
  investing activities
  
  
  (646
  )
  
  
  (1,696
  )Financing
  activities:Principal
  payments under capital lease obligations
  
  
  (1,218
  )
  
  
  (1,592
  )Issuance of
  common stock
  
  
  213
  
  
  
  49Net cash used in
  financing activities
  
  
  (1,005
  )
  
  
  (1,543
  )Net increase in cash and cash equivalents
  
  
  15,206
  
  
  
  13,453Cash and cash
  equivalents, beginning of period
  
  
  18,864
  
  
  
  6,989Cash and cash
  equivalents, end of period
  
  
  $
  34,070
  
  
  
  $
  20,442  See accompanying notes 5


---

Cutter & Buck Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1.
Basis of Presentation The accompanying unaudited
condensed consolidated financial statements have been prepared by Cutter &
Buck Inc. (the Company) in accordance with accounting principles generally
accepted in the United States for interim financial statements and in
accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
and disclosures required by generally accepted accounting principles for
complete financial statements. In the opinion of the Companys management, all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation have been included. The Companys revenues are seasonal, and
therefore the results of operations for the three months and six months ended October 31,
2003 may not be indicative of the results for the full fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto for the year ended April 30, 2003, included in the Companys
filing on Form 10-K. Stock-Based
Compensation The Company accounts for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. The Company has elected to apply the disclosure-only
provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123), as amended by SFAS No. 148,
Accounting for Stock-based CompensationTransition and Disclosure.
Compensation expense for stock options is recognized over the vesting period of
the grant based on the excess, if any, of the market price of the Companys
common stock at the date of grant over the stock option exercise price. Under
the Companys plans, stock options are generally granted at fair market value.
The Company also has an Employee Stock Purchase Plan that allows eligible
employees to purchase Company stock at a 15% discount from market price
utilizing payroll deductions. If
compensation costs for stock-based compensation had been recognized based on
the fair value method, the pro forma amounts of the Companys net income (loss)
and net earnings (loss) per share would have been as follows: Three Months Ended
  
  Six Months EndedOctober 31,
  
  October 31,2003
  
  2002
  
  2003
  
  2002(in thousands, except per share amounts)Net income
  (loss), as reported
  
  $
  2,091
  
  $
  282
  
  $
  3,190
  
  $
  (1,306
  )Add: Stock-based
  compensation, as reported
  
  
  
  79
  
  
  
  79Deduct: Total
  stock-based employee compensation expense determined under the fair value
  based method for all awards
  
  (368
  )
  (351
  )
  (818
  )
  (672
  )Pro forma net
  income (loss)
  
  $
  1,723
  
  $
  10
  
  $
  2,372
  
  $
  (1,899
  )Earnings (loss)
  per share:Basicas reported
  
  $
  0.20
  
  $
  0.03
  
  $
  0.30
  
  $
  (0.12
  )Basicpro forma
  
  $
  0.16
  
  $
  
  
  $
  0.22
  
  $
  (0.18
  )Dilutedas
  reported
  
  $
  0.19
  
  $
  0.03
  
  $
  0.29
  
  $
  (0.12
  )Dilutedpro forma
  
  $
  0.16
  
  $
  
  
  $
  0.22
  
  $
  (0.18
  )  6    Cutter & Buck Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) Note 1. Basis of Presentation (Continued) The
fair value for each option grant was estimated at the date of grant using the
Black-Scholes option pricing model, assuming no future dividends and the
following weighted-average assumptions: Three Months Ended
  
  Six Months EndedOctober 31,
  
  October 31,2003
  
  2002
  
  2003
  
  2002Risk-free
  interest rate
  
  3.3
  %
  3.0
  %
  2.6
  %
  3.0
  %Volatility
  
  51
  %
  63
  %
  51
  %
  63
  %Expected life
  
  5 years
  
  5 years
  
  5 years
  
  5 years  The
fair value for shares purchased under the Employee Stock Purchase Plan was
estimated at the date of purchase using the Black-Scholes option pricing model,
assuming no future dividends and the following weighted-average assumptions.
Shares are purchased twice a year under this Plan, in the first and third
fiscal quarters. No shares are purchased in the second or fourth fiscal
quarters. Three Months Ended
  
  Six Months EndedOctober 31,
  
  October 31,2003
  
  2002
  
  2003
  
  2002Risk-free
  interest rate
  
  
  
  
  
  2.4
  %
  4.1
  %Volatility
  
  
  
  
  
  59
  %
  63
  %Expected life
  
  
  
  
  
  6 months
  
  6 months  Stock compensation expense
for options granted to non-employees is determined in accordance with SFAS No. 123
and the Emerging Issues Task Force (EITF) consensus in Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or in Conjunction with Selling, Goods or Services (EITF No. 96-18).
Accordingly, expense is recognized over the vesting period of the grant based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measured. Segments The Company has one
business segment, wholesale. This segment comprises sales to golf pro shops
and resorts, corporate accounts, upscale specialty retail stores, international
distributors and licensees and our e-commerce business. The results of this
segment are used by the Companys chief operating decision maker to evaluate
operating performance and allocate resources Note 2.
Reclassifications Certain prior year
balances have been reclassified to conform to current year presentation. These
reclassifications primarily reflect the closure of the Company-owned retail
stores in fiscal 2003. The historical results of retail operations are
presented as discontinued retail operations. Note 3.
Earnings (Loss) Per Share Basic earnings (loss) per share is based on the
weighted average number of common shares outstanding. Diluted earnings (loss)
per share is based on the weighted average number of common shares and
equivalents outstanding. Common share equivalents included in the computation
represent shares issuable upon assumed exercise of outstanding stock options
except when the effect of their inclusion would be antidilutive. 7    Cutter & Buck Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) Note 4. Debt The Company has a loan
agreement with Wells Fargo Bank, N.A. (Wells Fargo) as agent and Wells Fargo
Century, an affiliate of Wells Fargo, as collateral agent and lender for a $35
million line of credit that expires in March 2005. This agreement is
collateralized by a security interest in the Companys accounts receivable,
inventory, furniture and equipment, contract rights and general intangibles.
The loan agreement contains certain restrictive covenants covering minimum net
worth, minimum working capital and maximum capital expenditures. These
financial covenants require that the Company maintains a tangible net worth of
at least $50 million, working capital of at least $35 million at all times, and
limit capital expenditures to not more than $2.5 million in fiscal years 2004
and 2005. The Company was in compliance with these covenants at October 31,
2003. At October 31, 2003, letters of credit outstanding against this line
of credit totaled approximately $6 million and there were no working capital
advances outstanding. At October 31, 2002, letters of credit outstanding
against the previous line of credit totaled approximately $11 million and there
were no working capital advances outstanding. Note 5.
Shareholders Equity During the six months
ended October 31, 2003, the Company sold 69,159 shares under its employee
stock purchase plan and pursuant to the exercise of stock options. Note 6.
Restructuring, Asset Impairment and Discontinued Retail Operations Expenses The Company has two restructuring
plans, the 2002 Restructuring Plan and the 2003 Restructuring Plan. The 2002
Restructuring Plan included closing the Companys wholly-owned European
subsidiary, refining the Company-owned retail store strategy, closing four
Company-owned retail stores, consolidating and restructuring the womens line
sales forces, discontinuing certain product lines, recording losses on
subleases of excess warehouse capacity and certain management changes. The 2003
Restructuring Plan covered the closure of ten additional retail stores, so that
all Company-owned retail stores were closed by April 30, 2003. Costs
associated with the 2002 Restructuring Plan, excluding costs associated with
refining the Companys retail strategy and closing its retail stores, are included
in Restructuring and Asset Impairment Expenses. Costs associated with the 2003
Restructuring Plan and the costs associated with refining the Companys retail
strategy and closing its retail stores included in the 2002 Restructuring Plan
are included in Discontinued Retail Operations. (a) 2002 Restructuring Plan In the third quarter of fiscal 2002, the Company
implemented a restructuring plan to reduce its operating costs, streamline its
organizational structure and focus on those areas of its business that it
believes will provide the greatest growth and profit opportunities. A major
initiative of this restructuring plan included closing the Companys
wholly-owned European subsidiary, Cutter & Buck (Europe) B.V. and
establishing a third-party licensing relationship to serve key European
markets. Effective May 1, 2002, the Company entered into a license
agreement with Eurostyle Ltd. (Eurostyle) to distribute its mens and womens
Golf and Classic apparel collections and golf accessories throughout Europe.
The license agreement requires Eurostyle to make certain minimum royalty
payments and expires on June 30, 2005. Effective May 1, 2002, the
Company also entered into an asset purchase agreement with Eurostyle to sell
them inventory, certain accounts receivable balances and fixtures for a total
purchase price of $1.1 million. 8    Cutter & Buck Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) Note 6.
Restructuring, Asset Impairment and Discontinued Retail Operations Expenses
(Continued) This agreement covered substantially all of the
remaining inventory, fixturing, furniture and equipment in Europe. Under the
terms of the agreement, the total purchase price was paid in installments that
were substantially completed in July 2003. Other major initiatives under the plan included
refining the Company-owned retail store strategy, closing four under-performing
Company-owned retail stores in fiscal 2003, consolidating and restructuring the
womens line sales forces, discontinuing the golf shoe business, discontinuing
the dressier side of the womens line, recording losses on subleases of excess
warehouse capacity at the Companys distribution center and making certain
management changes. The
components of the 2002 Restructuring Plan charges were as follows: Three Months Ended
  
  Six Months EndedOctober 31,
  
  October 31,
  
  October 31,
  
  October 31,2003
  
  2002
  
  2003
  
  2002(in thousands)Lease obligations
  
  
  $
  
  
  
  
  $
  
  
  
  
  
  
  
  
  $
  3,281Asset impairment
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  323Foreign currency
  translation gain (loss)
  
  
  
  
  
  
  (13
  )
  
  
  
  
  
  
  43Other
  restructuring costs
  
  
  
  
  
  
  89
  
  
  
  16
  
  
  
  243Total charges
  under the 2002 Restructuring Plan
  
  
  
  
  
  
  76
  
  
  
  16
  
  
  
  3,890Reclassified to
  discontinued retail operations
  
  
  
  
  
  
  
  
  
  
  (16
  )
  
  
  Restructuring and asset
  impairment charges related to continuing operations
  
  
  $
  
  
  
  
  $
  76
  
  
  
  $
  
  
  
  
  $
  3,890  For
the six months ended October 31, 2003, activity in the accrued liability
account associated with the cash portion of charges in the 2002 Restructuring
Plan consisted of the following: Balance at
  
  Subsequent
  
  
  
  Balance at
  
  Due
  
  DueApril 30,
  
  Accruals,
  
  Subsequent
  
  October 31,
  
  Within
  
  After2003
  
  Net
  
  Payments
  
  2003
  
  1 Year
  
  1 Year(in thousands)Lease obligations
  
  
  $
  2,855
  
  
  
  $
  
  
  
  
  $
  (160
  )
  
  
  $
  2,695
  
  
  $
  320
  
  $
  2,375Other
  restructuring costs
  
  
  73
  
  
  
  16
  
  
  
  (77
  )
  
  
  12
  
  
  12
  
  $
  2,928
  
  
  
  $
  16
  
  
  
  $
  (237
  )
  
  
  $
  2,707
  
  
  $
  332
  
  $
  2,375  Total severance and termination benefits as a result
of the 2002 Restructuring Plan related to 63 employees, all of whom have been
terminated. Total cash paid for severance and termination benefits was
approximately $0.7 million and was fully paid in fiscal year 2003. (b) 2003 Restructuring Plan In the third quarter of fiscal 2003 the Company
announced plans to close its remaining ten retail stores, and all stores were
closed by April 30, 2003. This plan included lease termination costs,
termination and severance benefits paid as a result of the involuntary
termination of 88 employees located at both the retail stores and corporate
retail division, the write-down of other current assets, furniture and
equipment and deferred rent to net realizable value and other costs resulting
from the closure of the retail stores. 9    Cutter & Buck Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) Note 6.
Restructuring, Asset Impairment and Discontinued Retail Operations Expenses
(Continued) The
components of the 2003 Restructuring Plan charges were as follows: Three Months Ended
  
  Six Months EndedOctober 31,
  
  October 31,
  
  October 31,
  
  October 31,2003
  
  2002
  
  2003
  
  2002(in thousands)Lease obligations
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  (266
  )
  
  
  $
  Termination
  benefits
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  Other
  restructuring costs
  
  
  
  
  
  
  
  
  
  
  19
  
  
  
  Total charges
  under the 2003 Restructuring Plan
  
  
  
  
  
  
  
  
  
  
  (247
  )
  
  
  Reclassified to
  discontinued retail operations
  
  
  
  
  
  
  
  
  
  
  247
  
  
  
  Restructuring and
  asset impairment charges related to continuing operations
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
    For
the six months ended October 31, 2003, activity in the accrued liability
account associated with the cash portion of charges in the 2003 Restructuring
Plan consisted of the following: Balance at
  
  Subsequent
  
  
  
  Balance at
  
  Due
  
  DueApril 30,
  
  Accruals,
  
  Subsequent
  
  October 31,
  
  Within
  
  After2003
  
  Net
  
  Payments
  
  2003
  
  1 Year
  
  1 Year(in thousands)Lease obligations
  
  
  $
  435
  
  
  
  $
  (288
  )
  
  
  $
  (147
  )
  
  
  $
  
  
  
  
  $
  
  
  
  
  $
  Termination
  benefits
  
  
  31
  
  
  
  (1
  )
  
  
  (30
  )
  
  
  
  
  
  
  
  
  
  
  Other
  restructuring costs
  
  
  433
  
  
  
  42
  
  
  
  (444
  )
  
  
  31
  
  
  
  31
  
  
  
  $
  899
  
  
  
  $
  (247
  )
  
  
  $
  (621
  )
  
  
  $
  31
  
  
  
  $
  31
  
  
  
  $
    As of April 30, 2003
all of the retail store employees had been terminated. Approximately $0.2
million in severance and termination benefits relating to the retail store
closure was paid out by April 30, 2003 and the remainder was paid out
during the first half of fiscal 2004. The $0.3
million reduction in the lease obligation accrual during the first six months
of fiscal 2004 related to favorable lease termination negotiations and lower
than expected exit costs. Note 7. Restatement
Expenses In fiscal 2002, the Company restated certain financial
statements for irregularities and errors. As a result of the circumstances
underlying the restatement, three shareholder class action lawsuits and a
shareholder derivative lawsuit were filed, naming the Company and certain of
its current and former directors and officers as defendants. The Company has
settled these lawsuits and paid $4 million to the plaintiffs to disburse
settlement payments. The Company will also pay up to an additional $3 million
based on a formula applied to any recovery in the ongoing lawsuit against
Genesis Insurance Company (Note 8). The Company has settled the previously
announced Securities and Exchange Commission investigation of the Company
arising from the circumstances underlying the restatement. Restatement expenses amounted to approximately $1.7
million for the three months ended October 31, 2003 and included $1.3
million of legal and professional fees, of which $0.4 million we have advanced
in connection with the indemnification of former officers, and $0.4 million of
accrued retention bonuses to certain key employees. Restatement expenses
amounted to approximately $3.4 million for the first six months of fiscal 2004
and included $2.4 million of legal and professional fees, of which $0.8 million 10    Cutter & Buck Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) Note 7. Restatement Expenses (Continued) we have advanced in
connection with the indemnification of former officers, $0.7 million of accrued
retention bonuses to certain key employees and $0.3 million of amortization of
the premium for the replacement directors and officers liability insurance.
Although the restatement has been completed, the Company expects to continue to
incur legal and other professional service costs in connection with the
indemnification of former officers and the ongoing lawsuit against Genesis
Insurance Company. These expenses cannot be estimated at this time. In
addition, there will be an ongoing charge each quarter until October 2004
for the retention bonuses, which will aggregate to as much as $2.2 million
payable in fiscal 2004. Note 8. Litigation As previously disclosed,
following the announcement in 2002 that the Company would restate its
historical financial results, the Company and certain of its current and former
directors and officers were named defendants in three shareholder class actions
filed in United States District Court for the Western District of Washington
alleging violations of federal securities laws (the Securities Suits): Steven
Bourret v. Cutter & Buck Inc., Harvey N. Jones and Stephen S.
Lowber; Stanley Sved v. Cutter & Buck Inc. and Harvey N. Jones; and
Jason P. Hebert v. Cutter & Buck Inc., Harvey N. Jones and Stephen S.
Lowber. In addition, the Company and certain of its current and former
directors and officers were named defendants in a shareholder derivative suit
(the Derivative Suit) filed in the Superior Court of the State of Washington,
for King county: Morris Haimowitz Derivatively on behalf of Cutter &
Buck, Inc. [sic] v. Frances M. Conley, Michael S. Brownfield, Larry C.
Mounger, James C. Towne, Harvey N. Jones, Martin J. Marks, Stephen S.
Lowber and Cutter & Buck, Inc. [sic], with a companion suit
subsequently filed in the United States District Court for the Western District
of Washington. On September 12,
2003, the Company entered into a Stipulation and Agreement of Settlement with
the plaintiffs in the Securities Suits and the plaintiff in the Derivative
Suit. On December 2, 2003, the United States District Court for the
Western District of Washington granted final approval of this previously
announced settlement. The Company remains a
party to its lawsuit against Genesis Insurance Company in the United States
District Court for the Western District of Washington. The Companys complaint
alleges that Genesis attempt to recind the Companys primary Directors and
Officers liability insurance is unlawful, and seeks damages resulting from
Genesis breach of contract and the duty of good faith and fair dealing.
Discovery in this suit concluded on November 10, 2003, except that the
Court granted the parties the right to take certain depositions after that
date. Trial in this suit is scheduled to commence on March 8, 2004. The Company is also party
to other routine litigation incidental to its business. Management believes the
ultimate resolution of these other routine matters will not have a material
adverse effect on the Companys financial condition and results of operations. Note 9. Income Taxes The Company recorded
approximately $1.4 million of income tax expense in the first six months of
fiscal year 2004 compared to approximately $0.3 million of income tax benefit
in the first six months of fiscal year 2003. The Company has provided a
valuation allowance against deferred tax assets. This allowance is periodically
adjusted to reflect current estimates of taxable income and future deferred tax
assets, and the expected realization of those assets. As a result, the
effective rates for income taxes were 32% and 34% for the first six months of
fiscal years 2004 and 2003, respectively. 11


---

Item
2. Managements Discussion and Analysis of Financial Condition and Results of
Operations. Statements made in
this filing that are not historical facts are forward-looking statements. You
should be aware that our actual results could differ materially from those
contained in any forward-looking statements. These factors include, but
are not limited to the following:  our
ability to control costs and expenses; relations with and performance of
suppliers; our ability to carry out successful designs and effectively
advertise and communicate with the marketplace and to penetrate our chosen
distribution channels; competition; access to capital; risks related to the
timely performance of third parties, such as shipping companies, including
risks of strikes or labor disputes involving these third parties; maintaining
satisfactory relationships with our banking partners; political and trade
relations; the overall level of consumer spending on apparel; global economic
conditions and additional threatened terrorist attacks and responses thereto,
including war. Additional information on these and other factors that could
affect our financial results is set forth below and in our Form 10-K for
the year ended April 30, 2003. Finally, there may be other factors not mentioned
above or included in our SEC filings that may cause actual results to differ
materially from any forward-looking statements. You should not place
undue reliance on these forward-looking statements. We assume no
obligation to update any forward-looking statements as a result of new
information, future events or developments, except as required by  securities laws. All references to fiscal years are references to our
fiscal year ended April 30. Overview Cutter & Buck designs, sources, markets and
distributes high-quality mens and womens sportswear under the Cutter &
Buck brand. During fiscal 2003, we
discontinued our retail stores business segment. We now have one business
segment, wholesale; we sell our products primarily through golf pro shops and
resorts, corporate accounts, upscale specialty retail stores, and international
distributors and licensees. 12    Results of
Operations The
following table sets forth, for the periods indicated, certain consolidated
statements of operations data expressed as a percentage of net sales. For all
periods presented in this section, results of operations reflect the
classification of our Company-owned retail store operating results and income
or loss on the disposal of these stores as discontinued retail operations. Three Months Ended
  
  Six Months EndedOctober 31,
  
  October 31,
  
  October 31,
  
  October 31,2003
  
  2002
  
  2003
  
  2002Net sales
  
  
  100.0
  %
  
  
  100.0
  %
  
  
  100.0
  %
  
  
  100.0
  %Cost of sales
  
  
  53.3
  
  
  
  59.6
  
  
  
  54.1
  
  
  
  58.9Gross profit
  
  
  46.7
  
  
  
  40.4
  
  
  
  45.9
  
  
  
  41.1Operating expenses:Depreciation
  
  
  3.0
  
  
  
  3.5
  
  
  
  3.1
  
  
  
  3.7Selling, general and administrative
  
  
  30.3
  
  
  
  30.2
  
  
  
  31.1
  
  
  
  31.0Restructuring and asset impairment
  
  
  0.0
  
  
  
  0.2
  
  
  
  0.0
  
  
  
  5.6Restatement expenses
  
  
  4.8
  
  
  
  3.4
  
  
  
  5.0
  
  
  
  1.8Total operating expenses
  
  
  38.1
  
  
  
  37.3
  
  
  
  39.2
  
  
  
  42.1Operating income
  (loss)
  
  
  8.6
  
  
  
  3.1
  
  
  
  6.7
  
  
  
  (1.0
  )Net interest expense
  
  
  0.0
  
  
  
  (0.3
  )
  
  
  (0.1
  )
  
  
  (0.3
  )Income (loss)
  from continuing operations before income taxes
  
  
  8.6
  
  
  
  2.8
  
  
  
  6.6
  
  
  
  (1.3
  )Income tax
  expense (benefit)
  
  
  2.5
  
  
  
  1.0
  
  
  
  2.1
  
  
  
  (0.4
  )Net income (loss)
  from continuing operations
  
  
  6.1
  
  
  
  1.8
  
  
  
  4.5
  
  
  
  (0.9
  )Income (loss)
  from discontinued retail operations, net of tax
  
  
  0.0
  
  
  
  (1.1
  )
  
  
  0.2
  
  
  
  (1.1
  )Net income (loss)
  
  
  6.1
  %
  
  
  0.7
  %
  
  
  4.7
  %
  
  
  (2.0
  )%  Three Months Ended October  31, 2003
Compared With Three Months Ended October 31, 2002 Net Sales During
the second quarter of fiscal 2004 net sales decreased approximately
$1.8 million or 4.8% to $34.7 million from $36.5 million in the
same period of the prior year. The detail of net sales by strategic business
unit (SBU) was as follows: Three Months Ended October 31,Increase/
  
  Percent2003
  
  2002
  
  (Decrease)
  
  Change(in thousands, except percent change)Golf
  
  $
  9,872
  
  $
  11,399
  
  
  $
  (1,527
  )
  
  
  (13.4
  )%Corporate
  
  13,762
  
  15,112
  
  
  (1,350
  )
  
  
  (8.9
  )%Specialty Retail
  
  8,257
  
  7,441
  
  
  816
  
  
  
  11.0
  %International
  
  660
  
  954
  
  
  (294
  )
  
  
  (30.8
  )%Other
  
  2,196
  
  1,599
  
  
  597
  
  
  
  37.3
  %Total
  
  $
  34,747
  
  $
  36,505
  
  
  $
  (1,758
  )
  
  
  (4.8
  )%  In the second
quarter of fiscal 2004, net sales in our Golf SBU decreased by
$1.5 million, or 13.4%, to $9.9 million from $11.4 million in
the same period of the prior year. Net sales in our Golf SBU continue to be
negatively impacted by flat demand as the number of golf rounds played
continues to drop and pro shops are generally reducing their overall inventory
levels, and by an oversupply of products in the golf marketplace. Net sales in
our Corporate SBU decreased by $1.4 million, or 8.9%, to
$13.8 million from 13    $15.1 million in the
same period of the prior year. During the first quarter of fiscal 2003 we
launched a new corporate catalog that had a positive impact on sales during the
second quarter of fiscal 2003. Although the Corporate SBU experienced an
overall positive impact in sales from the new catalog, corporate customers
continue to spend less on marketing programs resulting in an overall decrease
in net sales for the second quarter of fiscal 2004. Net sales in our Specialty
Retail SBU increased $0.8 million, or 11.0%, to $8.3 million from
$7.4 million in the same period of the prior year. Economic conditions
faced by department stores and specialty retail stores are beginning to
improve, and net sales in this SBU are improving as a result. Net sales in our International
SBU decreased by $0.3 million, or 30.8%, to $0.7 million from $1.0 million
in the same period of the prior year, primarily due to our ongoing shift from
distributor relationships to licensee relationships during fiscal 2004. Net
sales in our Other SBU include liquidation sales, shipping revenue and our
e-commerce business and increased $0.6 million, or 37.3%, to
$2.2 million from $1.6 million in the same period of the prior year. During fiscal 2003 and the
first six months of fiscal 2004, our strategy has focused on managing our gross
profit and the profitability of our core business. Because we have positioned
the Cutter & Buck brand to represent the highest-quality product
available at select locations, we have passed up some sales opportunities that
would have generated a lower gross profit. The next stage of our strategy
focuses on increasing net sales while maintaining our gross profit. We are
focusing on the needs of our customers within each SBU, and updating our styles
and adding products to meet those needs. This is a long-term strategy to grow
our business and, due in part to the long product lead times in this industry,
we do not expect to realize the full effect of this stage of our strategy for
several quarters. Gross Profit In the second quarter of fiscal 2004, gross profit
increased to 46.7% of net sales compared to 40.4% in the same period of the
prior year. In fiscal 2003, our gross profit was negatively impacted by lower
margins on off-price sales. In fiscal 2004, our margins have increased as we
improved our sourcing, intensively managed our product returns and allowances,
adjusted our pricing structure for certain products and reduced discounting.
Our product returns and allowances have decreased significantly during the
year, and as a result we updated our estimates used to calculate the allowance
for product returns and allowances. Using these updated estimates, we reduced
our allowance for product returns and allowances and increased our gross profit
by $0.7 million in the second quarter of fiscal 2004. However, we expect
to liquidate out-of-season inventory in the third and fourth quarters of fiscal
2004 as part of our normal business cycle, and as a result we expect our gross
profit to be negatively impacted in those quarters. Our gross profit may not
be comparable to other entities, since some entities include all costs related
to their distribution network in the cost of sales. We have consistently
included inbound freight, import charges and embroidery costs in cost of sales,
and included other costs of distribution in selling, general and administrative
expenses. Depreciation Depreciation expense was
$1.1 million in the second quarter of fiscal 2004 compared to $1.3 million in
the second quarter of fiscal 2003. Depreciation expense decreased during fiscal
2004 primarily due to the disposal of certain assets used at our previous
corporate headquarters. This decrease was partially offset by an increase in
depreciation expense for new capital expenditures. Selling, General
and Administrative Expense Selling, general and
administrative expenses totaled $10.5 million in the second quarter of fiscal
2004 compared to $11.0 million in the second quarter of fiscal 2003, a decrease
of $0.5 million. Sales commissions, salaries and related taxes decreased
approximately $0.7 million, primarily due to a decrease in net sales, savings
resulting from our restructuring plans and internal cost-cutting measures. This 14    decrease
was partially offset by an increase in benefits of approximately $0.5 million.
Bad debt expense decreased approximately $0.3 million primarily due to a
decrease in net sales and increased management of credit exposures. Rent
expense decreased by approximately $0.2 million primarily due to subleasing
abandoned warehouse space and the expiration of certain operating leases.
Sample expenses decreased by approximately $0.1 million, sales meeting and
tradeshow costs decreased by approximately $0.1 million and supply costs
decreased by approximately $0.1 million primarily due to internal cost-cutting
measures and improved operational efficiencies. These decreases were partially
offset by increases of approximately $0.5 million in accounting, legal and
other professional fees, and an increase of approximately $0.1 million in
director fees and investor relations expenses. Restructuring and
Asset Impairment We have two restructuring plans, the 2002
Restructuring Plan and the 2003 Restructuring Plan. The 2002 Restructuring Plan
included closing our wholly-owned European subsidiary, refining our
Company-owned retail store strategy, closing four under-performing
Company-owned retail stores, consolidating and restructuring our womens line
sales forces, discontinuing our golf shoe business, discontinuing the dressier
side of our womens line, recording losses on subleases of excess warehouse
capacity and certain management changes. The 2003 Restructuring Plan covered
the closure of ten additional retail stores, resulting in all Company-owned
retail stores being closed by April 30, 2003. Costs associated with the 2002 Restructuring Plan,
excluding costs associated with refining our retail strategy and closing our
retail stores, are included in Restructuring and Asset Impairment Expenses.
Costs associated with the 2003 Restructuring Plan and the costs associated with
refining our retail strategy and closing our retail stores included in the 2002
Restructuring Plan are included in Discontinued Retail Operations. There were no
restructuring and asset impairment expenses in the second quarter of fiscal
2004, compared to $0.1 million in the second quarter of fiscal 2003. The $0.1
million in expenses for the second quarter of fiscal 2003 related primarily to
additional asset write-downs. Restatement
Expenses In fiscal 2002, we restated certain of our historical
financial statements for irregularities and errors. As a result of the
circumstances underlying the restatement, three shareholder class action
lawsuits and a shareholder derivative lawsuit were filed, naming us and certain
of our current and former directors and officers as defendants. We have settled
these lawsuits and paid $4 million to the plaintiffs to disburse settlement
payments. We will also pay up to an additional $3 million based on a formula
applied to any recovery in our ongoing lawsuit against Genesis Insurance
Company. We have also settled the previously announced Securities and Exchange
Commission investigation of the Company arising from the circumstances
underlying the restatement. Restatement expenses
amounted to approximately $1.7 million for the second quarter of fiscal 2004
and included $1.3 million of legal and professional fees, of which $0.4 million
we have advanced in connection with the indemnification of former officers, and
$0.4 million of accrued retention bonuses to certain key employees. Although
the restatement has been completed, we expect to continue to incur legal and
other professional service costs in connection with the indemnification of
former officers and our ongoing lawsuit against Genesis Insurance Company.
These expenses cannot be estimated at this time. In addition, there will be an
ongoing charge each quarter until October 2004 for the retention bonuses,
which will aggregate to as much as $2.2 million payable in fiscal 2004. 15    Operating Income As a result of the above
items, operating income increased $1.8 million to $2.9 million in the second
quarter of fiscal 2004 compared to $1.1 million in the second quarter of fiscal
2003. Income Taxes We recorded approximately
$0.9 million of income tax expense in the second quarter of fiscal 2004
compared to $0.4 million in the second quarter of fiscal 2003. We have provided
a valuation allowance against our deferred tax assets. This allowance is
periodically adjusted to reflect our current estimates of taxable income and
future deferred tax assets and the expected realization of those assets. As a
result the effective rates for income taxes in the second quarter of fiscal
2004 and 2003 were 32% and 34%, respectively. Loss from
Discontinued Retail Operations, net of tax During fiscal 2003, our
Board of Directors determined that we should focus our resources on our
wholesale business and close our retail stores. Although the retail stores
provided a showcase for our product lines, the operation of the stores did not
provide a satisfactory financial return. All of our stores were closed and all
retail store operations ceased as of April 30, 2003. There was no income
or loss from discontinued retail operations in the second quarter of fiscal
2004. The second quarter of fiscal 2003 loss from discontinued retail
operations, net of tax, was $0.4 million, which resulted from retail store
operations during the quarter. Six Months Ended October 31, 2003 Compared With
Six Months Ended October 31, 2002 Net Sales During the first six months of fiscal 2004 net sales
decreased approximately $2.3 million or 3.3% to $67.5 million from
$69.8 million in the same period of the prior year. The detail of net
sales by strategic business unit (SBU) is as follows: Six Months Ended October 31,Increase/
  
  Percent2003
  
  2002
  
  (Decrease)
  
  Change(in thousands, except percent change)Golf
  
  $
  20,919
  
  $
  23,176
  
  
  $
  (2,257
  )
  
  
  (9.7
  )%Corporate
  
  28,038
  
  28,367
  
  
  (329
  )
  
  
  (1.2
  )%Specialty Retail
  
  13,264
  
  12,338
  
  
  926
  
  
  
  7.5
  %International
  
  1,230
  
  2,428
  
  
  (1,198
  )
  
  
  (49.3
  )%Other
  
  4,033
  
  3,503
  
  
  530
  
  
  
  15.1
  %Total
  
  $
  67,484
  
  $
  69,812
  
  
  $
  (2,328
  )
  
  
  (3.3
  )%  In the first six
months of fiscal 2004, net sales in our Golf SBU decreased by
$2.3 million, or 9.7%, to $20.9 million from $23.2 million in
the same period of the prior year. Net sales in our Golf SBU continue to be
negatively impacted by flat demand as the number of golf rounds played
continues to drop and pro shops are generally reducing their overall inventory
levels, and by an oversupply of products in the golf marketplace. Net sales in
our Corporate SBU decreased by $0.3 million, or 1.2%, to
$28.0 million from $28.4 million in the same period of the prior
year. During the first quarter of fiscal 2003 we launched a new corporate
catalog that had a positive impact on sales during the second quarter of fiscal
2003. Although the Corporate SBU experienced an overall positive impact in
sales from the new catalog, corporate customers continue to spend less on
marketing programs resulting in an overall decrease in net sales for the six
months ended October 31, 2003. Net sales in our Specialty Retail SBU
increased $0.9 million, or 7.5%, to $13.3 million from
$12.3 million in the same period of the prior year. Economic conditions
faced by 16    department stores and
specialty retail stores are beginning to improve, and net sales in this SBU are
improving as a result. Net sales in our International SBU decreased by $1.2
million, or 49.3%, to $1.2 million from $2.4 million in the same period of the
prior year. For the six months ended October 31, 2002, net sales in our
International SBU included approximately $0.7 million in revenue generated by
selling inventory to Eurostyle Ltd. in conjunction with establishing a
licensing relationship with them. Net sales in this SBU also decreased as we
continue to shift from distributor relationships to licensee relationships
during fiscal 2004. Net sales in our Other SBU include liquidation sales,
shipping revenue and our e-commerce business and increased $0.5 million, or
15.1%, to $4.0 million from $3.5 million in the same period of the
prior year. During fiscal 2003 and the
first six months of fiscal 2004, our strategy has focused on managing our gross
profit and the profitability of our core business. Because we have positioned
the Cutter & Buck brand to represent the highest-quality product
available at select locations, we have passed up some sales opportunities that
would have generated a lower gross profit. The next stage of our strategy
focuses on increasing net sales while maintaining our gross profit. We are
focusing on the needs of our customers within each SBU, and updating our styles
and adding products to meet those needs. This is a long-term strategy to grow
our business and, due in part to the long product lead times in this industry,
we do not expect to realize the full effect of this stage of our strategy for
several quarters. Gross Profit In the first six months of
fiscal 2004, gross profit increased to 45.9% of net sales compared to 41.1% in
the same period of the prior year. In fiscal 2003, our gross profit was
negatively impacted by lower margins on off-price sales. In fiscal 2004, our
margins have increased as we improved our sourcing, intensively managed our
product returns and allowances, adjusted our pricing structure for certain
products and reduced discounting. Our product returns and allowances have
decreased significantly during the year, and as a result we updated our
estimates used to calculate the allowance for product returns and allowances.
Using these updated estimates, we reduced our allowance for product returns and
allowances and increased our gross profit by $0.7 million in the first six
months of fiscal 2004. However, we expect to liquidate out-of-season inventory
in the third and fourth quarters of fiscal 2004 as part of our normal business
cycle, and as a result we expect our gross profit to be negatively impacted in those
quarters. Our gross profit may not
be comparable to other entities, since some entities include all costs related
to their distribution network in the cost of sales. We have consistently
included inbound freight, import charges and embroidery costs in cost of sales,
and included other costs of distribution in selling, general and administrative
expenses. Depreciation Depreciation expense was
$2.1 million in the first six months of fiscal 2004 compared to $2.6 million in
the first six months of fiscal 2003. Depreciation expense decreased during
fiscal 2004 primarily due to the disposal of certain assets used at our
previous corporate headquarters. This decrease was partially offset by an
increase in depreciation expense for new capital expenditures. Selling, General
and Administrative Expense Selling, general and
administrative expenses totaled $21.0 million in the first six months of fiscal
2004 compared to $21.6 million in the first six months of fiscal 2003, a
decrease of $0.6 million. Sales commissions, salaries and related taxes
decreased approximately $1.5 million, primarily due to a decrease in net sales,
savings resulting from our restructuring plans and internal cost-cutting
measures. This decrease was partially offset by an increase in benefits of
approximately $0.9 million. Bad debt expense decreased approximately $0.5
million primarily due to a decrease in net sales and increased management 17    of
credit exposures. Rent expense decreased by approximately $0.3 million
primarily due to subleasing abandoned warehouse space and the expiration of
certain operating leases. Sample expenses decreased by approximately $0.2
million, sales meeting and tradeshow costs decreased by approximately $0.3
million and supply costs decreased by approximately $0.2 million primarily
due to internal cost-cutting measures and improved operational efficiencies. These
decreases were partially offset by increases of approximately $1.0 million in
accounting, legal and other professional fees, an increase of approximately
$0.2 million in business tax expense and an increase of approximately $0.2
million in director fees and investor relations expenses. Restructuring and
Asset Impairment We have two restructuring plans, the 2002
Restructuring Plan and the 2003 Restructuring Plan. The 2002 Restructuring Plan
included closing our wholly-owned European subsidiary, refining our
Company-owned retail store strategy, closing four under-performing
Company-owned retail stores, consolidating and restructuring our womens line
sales forces, discontinuing our golf shoe business, discontinuing the dressier
side of our womens line, recording losses on subleases of excess warehouse
capacity and certain management changes. The 2003 Restructuring Plan covered
the closure of ten additional retail stores, resulting in all Company-owned
retail stores being closed by April 30, 2003. Costs associated with the 2002 Restructuring Plan,
excluding costs associated with refining our retail strategy and closing our
retail stores, are included in Restructuring and Asset Impairment Expenses.
Costs associated with the 2003 Restructuring Plan and the costs associated with
refining our retail strategy and closing our retail stores included in the 2002
Restructuring Plan are included in Discontinued Retail Operations. There were no restructuring
and asset impairment expenses in the first six months of fiscal 2004, compared
to $3.9 million in the first six months of fiscal 2003. Of the
$3.9 million recorded in fiscal 2003, $3.3 million related to losses
on subleases of excess warehouse capacity at our distribution center,
$0.3 million related to additional reserves against receivable balances
for both our former Chief Executive Officer and our former President, $0.2
million related to the charge-off of certain deferred compensation for our
former Chief Executive Officer and $0.1 million related to additional
asset write-downs. Restatement
Expenses In fiscal 2002, we restated certain of our historical
financial statements for irregularities and errors. As a result of the
circumstances underlying the restatement, three shareholder class action
lawsuits and a shareholder derivative lawsuit were filed, naming us and certain
of our current and former directors and officers as defendants. We have settled
these lawsuits and paid $4 million to the plaintiffs to disburse settlement
payments. We will also pay up to an additional $3 million based on a formula
applied to any recovery in our ongoing lawsuit against Genesis Insurance
Company. We have also settled the previously announced Securities and Exchange
Commission investigation of the Company arising from the circumstances
underlying the restatement. Restatement expenses
amounted to approximately $3.4 million for the first six months of fiscal 2004
and included $2.4 million of legal and professional fees, of which $0.8 million
we have advanced in connection with the indemnification of former officers,
$0.7 million of accrued retention bonuses to certain key employees and $0.3
million of amortization of the premium for the replacement directors and
officers liability insurance. Although the restatement has been completed, we expect
to continue to incur legal and other professional service costs in connection
with the indemnification of former officers and our ongoing lawsuit against
Genesis Insurance Company. These expenses cannot be estimated at this time. In
addition, there will be an ongoing charge each quarter until October 2004
for the retention bonuses, which will aggregate to as much as $2.2 million
payable in fiscal 2004. 18    Operating Income
(Loss) As a result of the above
items, operating income increased $5.1 million to $4.5 million in the
first six months of fiscal 2004 compared to an operating loss of
$0.6 million in the first six months of fiscal 2003. Income Taxes We recorded approximately
$1.4 million of income tax expense in the first six months of fiscal 2004
compared to $0.3 million  of income tax
benefit in the first six months of fiscal 2003. We have provided a valuation
allowance against our deferred tax assets. This allowance is periodically
adjusted to reflect our current estimates of taxable income and future deferred
tax assets and the expected realization of those assets. As a result the
effective rates for income taxes in the first six months of fiscal 2004 and
2003 were 33% and 34%, respectively. Loss from
Discontinued Retail Operations, net of tax During fiscal 2003, our
Board of Directors determined that we should focus our resources on our
wholesale business and close our retail stores. Although the retail stores
provided a showcase for our product lines, the operation of the stores did not
provide a satisfactory financial return. All of our stores were closed and all
retail store operations ceased as of April 30, 2003. The income from
discontinued retail operations, net of tax, for the first six months of fiscal
2004 was $0.1 million. This income resulted primarily from the final settlement
of certain lease obligations at favorable amounts. The first six months of
fiscal 2003 loss from discontinued retail operations, net of tax, was $0.7
million, which resulted from retail store operations during the period. Liquidity and
Capital Resources Net cash provided by operating activities for the
first six months of fiscal 2004 was approximately $16.9 million compared
to approximately $16.7 million for the first six months of fiscal 2003.
Net cash used in investing activities was approximately $0.6 million for the
first six months of fiscal 2004 compared to approximately $1.7 million for the
first six months of fiscal 2003. Net cash used in financing activities was
approximately $1.0 million for the first six months of fiscal 2004 compared to
approximately $1.5 million for the first six months of fiscal 2003. Capital expenditures totaling approximately $2.5
million are planned for fiscal 2004, including amounts for information
technology initiatives, computer hardware, software, and furniture and office
equipment. On March 13, 2003 we entered into a loan
agreement with Wells Fargo Bank, N.A. (Wells Fargo) as agent and Wells Fargo
Century, an affiliate of Wells Fargo, as collateral agent and lender for a $35
million line of credit that expires in March 2005. This replaced our
previous line of credit that expired on March 31, 2003. Our current loan
agreement contains certain restrictive covenants covering minimum net worth,
minimum working capital and maximum capital expenditures. These financial
covenants require that we maintain a tangible net worth of at least $50 million
and working capital of at least $35 million at all times; and limit capital
expenditures to not more than $2.5 million in the fiscal years 2004 and 2005.
We were in compliance with these covenants at October 31, 2003. We believe that cash on
hand and cash generated from operations, as well as the ability to borrow under
bank lines of credit will be sufficient to meet our cash requirements during
the current fiscal year. We also have available alternative sources of
financing, including factoring our accounts receivable and financing our
capital expenditures with leases. Although these methods of financing are
currently available to us, we do not anticipate using alternative sources of
financing during the current fiscal year. However, our capital needs will
depend on many factors, including our growth rate, the need to finance
increased 19    production
and inventory levels, the success of our various sales and marketing programs,
expenses associated with the risks and uncertainties related to our restatement
and various other factors. Foreign Currency
Exchange Risk We do not currently use
derivative financial instruments to reduce our exposure to changes in foreign
exchange rates. In conjunction with the closing of our European operations, we
have some remaining assets and liabilities denominated in Euros. These balances
are not material to our consolidated financial statements. To the extent we
have assets and liabilities denominated in foreign currencies that are not
hedged, we are subject to foreign currency transaction gains and losses. Critical Accounting
Policies Our significant accounting
policies are described in Note 1 to the consolidated financial statements
included in the Companys filing on Form 10-K for the year ended April 30,
2003. Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of the financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, expenses, and related disclosures of contingent assets
and liabilities. On an on-going basis, we evaluate the estimates that we have
made. These estimates have been based upon our historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. We believe the following critical accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements. Allowances for
Doubtful Accounts and Returns We maintain an allowance
for doubtful accounts for estimated losses resulting from the inability of our
customers to make required payments, which is included in bad debt expense. We
determine the adequacy of this allowance by regularly reviewing our accounts
receivable aging and evaluating individual customer receivables, considering
customers financial condition, credit history and current economic conditions.
If the financial condition of our customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. We also maintain an estimate of potential future product returns
related to current period sales. We analyze the rate of historical returns when
evaluating the adequacy of the allowance for returns, which is included with
the allowance for doubtful accounts on our balance sheets. Inventories Inventories, which are
predominantly finished goods, are valued at the lower of cost or market, with
cost determined using the weighted average method. A detailed analysis of
inventory is performed on a quarterly basis to identify unsold out-of-season
golf and specialty retail merchandise. The net realizable value of the
out-of-season merchandise is estimated based on disposition plans and
historical experience. A valuation allowance is established to reduce the
carrying amount of out-of-season merchandise to its estimated net realizable
value. If actual market conditions are less favorable than those projected by
management, additional allowances may be required. Impairment of
Long-Lived Assets We review the carrying
values of our long-lived assets whenever events or changes in circumstances
indicate that such carrying values may not be recoverable. Unforeseen events
and changes in circumstances and market conditions and changes in estimates of
future cash flows could negatively affect the fair value of our assets and
result in an impairment charge. Fair value is the amount at which the asset
could be 20    bought
or sold in a current transaction between willing parties and may be estimated
using a number of techniques, including quoted market prices or valuations by
third parties, present value techniques based on estimates of cash flows, or
multiples of earnings or revenues performance measures. The fair value of the
asset could be different using different estimates and assumptions in these
valuation techniques. Restructuring
Liabilities and Retail Store Closure Expenses Restructuring-related
liabilities and retail store closure expenses include estimates for anticipated
disposition of lease obligations and other costs. Key variables in determining
such estimates include the anticipated timing of sublease rentals, estimates of
sublease rental payment amounts and estimates for brokerage and other related
costs. We periodically evaluate and, if necessary, adjust our estimates based
on currently available information. Item
3. Quantitative and Qualitative Disclosures about Market Risk We are subject to certain market risks, including
interest rate risks associated with financial instruments included in cash and
cash equivalents. We invest our excess cash in interest-bearing U.S. Government
and high-quality corporate instruments and hold these instruments for 90 days
or less. Changes in interest rates may affect the fair market value of these
instruments. Due to the short-term nature of these instruments and our
investment policies and procedures, we do not expect interest rate fluctuations
to have a material adverse effect on our results of operations. We do not use
derivative financial instruments to manage interest rate risk. We do not use derivative
financial instruments to reduce our exposure to changes in foreign currency
exchange rates, and we do not use derivatives for speculative trading purposes. Item
4. Controls and Procedures Evaluation
of the Companys Disclosure Controls and Procedures.   As
of October 31, 2003, we evaluated the effectiveness of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities and Exchange Act of 1934, as amended (the Exchange Act). This
evaluation was done under the supervision and with the participation of
management, including our Chief Executive Officer and Chief Financial Officer.
The evaluation included inquiring of senior managers whether our records and
reports were correct and complete. It also included an independent accounting
firm (not our independent auditors) continuing their initial review of our
internal controls, and performing limited testing of those controls. This
independent review was based on employees reports of their processes, analysis
of our documentation, and limited testing to validate our processes and
documentation. Limitations
on the Effectiveness of Controls.Our management does not expect that
our disclosure controls or our internal controls will prevent all errors and
all fraud. A control system, no matter how well conceived or operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. The design of our control system reflects the fact that
there are resource constraints and the benefits of such controls were
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control failures and instances of fraud, if any, within the Company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of control. The design of any system of controls is also
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected. 21    Conclusions.Based on our evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. Changes
in Internal Controls.   There were no changes in
our internal control over financial reporting (as defined in Rules 13a-15(f) or
15d-15(f) of the Exchange Act) during the fiscal quarter ended October 31,
2003 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting. 22


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PART IIOTHER
INFORMATION Item
1. Legal Proceedings As previously disclosed, following the announcement in
2002 that the we would restate our historical financial results, we and certain
of our current and former directors and officers were named defendants in three
shareholder class actions filed in United States District Court for the Western
District of Washington alleging violations of federal securities laws (the
Securities Suits): Steven Bourret v. Cutter & Buck Inc., Harvey N.
Jones and Stephen S. Lowber; Stanley Sved v. Cutter & Buck Inc. and
Harvey N. Jones; and Jason P. Hebert v. Cutter & Buck Inc., Harvey N.
Jones and Stephen S. Lowber. In addition, 
we and certain of our current and former directors and officers were
named defendants in a shareholder derivative suit (the Derivative Suit) filed
in the Superior Court of the State of Washington, for King county: Morris
Haimowitz Derivatively on behalf of Cutter & Buck, Inc. [sic] v.
Frances M. Conley, Michael S. Brownfield, Larry C. Mounger, James C. Towne,
Harvey N. Jones, Martin J. Marks, Stephen S. Lowber and Cutter & Buck, Inc.
[sic], with a companion suit subsequently filed in the United States District
Court for the Western District of Washington. On September 12, 2003, we entered into a Stipulation
and Agreement of Settlement with the plaintiffs in the Securities Suits and the
plaintiff in the Derivative Suit. On December 2, 2003, the United States
District Court for the Western District of Washington granted final approval of
this previously announced settlement. We remain a party to our lawsuit against Genesis
Insurance Company in the United States District Court for the Western District
of Washington. Our complaint alleges that Genesis attempt to rescind our
primary Directors and Officers liability insurance is unlawful, and seeks
damages resulting from Genesis breach of contract and the duty of good faith and
fair dealing. Discovery in this suit concluded on November 10, 2003,
except that the Court granted the parties the right to take certain depositions
after that date. Trial in this suit is scheduled to commence on March 8,
2004. We are also party to other
routine litigation incidental to our business. Management believes the ultimate
resolution of these other routine matters will not have a material adverse
effect on our financial condition and results of operations. Item
2. Changes in Securities and Use of Proceeds None Item
3. Defaults Upon Senior Securities None Item
4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of
Shareholders was held on October 7, 2003. Out of the Companys 10,698,398
shares of Common Stock entitled to vote at the meeting, 9,845,878 were
represented, either in person or by proxy. Proposal Number 1Election of Class III
directors Nominee
  
  
  
  
  For
  
  
  
  AgainstHenry L. (Skip)
  Kotkins, Jr.
  
  9,749,767
  
  96,111James C. Towne
  
  9,751,072
  
  94,806  23    Proposal Number 2Ratification of
Appointment of Auditors For
  
  9,703,040Against
  
  126,245Withheld
  
  16,593  Item
5. Other Information None Item
6. Exhibits and Reports on Form 8-K a)     Exhibits Exhibit Number
  
  Description31.1
  
  Certification of
  the Companys Chief Executive Officer required by Section 302(a) of
  the Sarbanes-Oxley Act of 200231.2
  
  Certification of
  the Companys Chief Financial Officer required by Section 302(a) of
  the Sarbanes-Oxley Act of 200232.1
  
  Certification of
  the Companys Chief Executive Officer required by Section 906 of the
  Sarbanes-Oxley Act of 200232.2
  
  Certification of
  the Companys Chief Financial Officer required by Section 906 of the
  Sarbanes-Oxley Act of 200299.1
  
  Change in control
  agreement dated September 8, 2003 between Cutter & Buck Inc.
  and Henry Fielding (filed herewith)  b)     Reports on
Form 8-K The Company filed a Form 8-K on September 10,
2003 to announce financial results for the first quarter of fiscal year 2004,
and the appointment of Henry Fielding as Vice President and Manager of the
Products Group. 24


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SIGNATURES Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized. Cutter & Buck Inc.
  (Registrant)Dated: December 15, 2003
  By
  /s/ Ernest R. JohnsonErnest R. JohnsonSenior Vice President and Chief Financial Officer
  (Principal Accounting and Financial Officer)  25


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