**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**Form 10-Q**

 
| **ý** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended July 31,2005**

 

**or**

 
| **o** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition periodfrom          to**

 

**Commission File No. 0-26608**

 

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**CUTTER & BUCK INC.**

(Exact Name of Registrant as Specified in Its Charter)

 
| **Washington**           | ** ** | **91-1474587**                       |
|--------------------------|------------|--------------------------------------|
| (State of incorporation) |       | (I.R.S. Employer Identification No.) |

 

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

**Seattle, WA 98103**

(Address of principal executive offices)

 

**(206) 622-4191**

(Registrant’s telephone number)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in rule 12b-2of the Exchange Act).Yes ý No o

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yes ý No

 

Thenumber of shares of Common Stock of the registrant outstanding as of September 1,2005 was 11,145,238.

 

 

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**CUTTER & BUCK INC.**

**Quarterly Report on Form 10-Q**

**For the Quarter Ended July 31, 2005**

 

**INDEX**

 
|                                   | **Page**                                                                                    |
|----------------------------------------|---------------------------------------------------------------------------------------------|
| PART I—FINANCIAL INFORMATION |                                                                                        |
|                                   |                                                                                        |
| Item  1.                               | Financial Statements (unaudited):                                                           |   |
|                                   |                                                                                        |   |
|                                   | Condensed Consolidated  Balance Sheets                                                      | 1 |
|                                   |                                                                                        |   |
|                                   | Condensed Consolidated  Statements of Income                                                | 2 |
|                                   |                                                                                        |   |
|                                   | Condensed Consolidated  Statements of Cash Flows                                            | 3 |
|                                   |                                                                                        |   |
|                                   | Notes to Condensed Consolidated  Financial Statements                                       | 4 |
|                                   |                                                                                        |   |
| Item  2.                               | Management’s Discussion and  Analysis of Financial Condition and Results of Operations | 9 |
|                                   |                                                                                        |   |
| Item  3.                               | Quantitative and Qualitative  Disclosures about Market Risk                                 | 14 |
|                                   |                                                                                        |   |
| Item  4.                               | Controls and Procedures                                                                     | 14 |
|                                   |                                                                                        |   |
| PART II—OTHER INFORMATION    |                                                                                        |
|                                   |                                                                                        |
| Item 1.                                | Legal Proceedings                                                                           | 15 |
|                                   |                                                                                        |   |
| Item  2.                               | Unregistered Sales of Equity  Securities and Use of Proceeds                                | 16 |
|                                   |                                                                                        |   |
| Item  3.                               | Defaults Upon Senior  Securities                                                            | 16 |
|                                   |                                                                                        |   |
| Item  4.                               | Submission of Matters to a  Vote of Security Holders                                        | 16 |
|                                   |                                                                                        |   |
| Item 5.                                | Other Information                                                                           | 16 |
|                                   |                                                                                        |   |
| Item 6.                                | Exhibits                                                                                    | 17 |
|                                   |                                                                                        |   |
| SIGNATURES                             | 18                                                                                          |

 

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**PART I – FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**CUTTER & BUCK INC.**

**Condensed Consolidated Balance Sheets**

 
| ** **                                                                                                                                                                                   | ** ** | **July 31, 2005** | ** ** | **April 30, 2005** | ** ** | **July 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **(unaudited)**        | ** ** | ** **              | ** ** | **(unaudited)**        | ** ** |
| *(in thousands, except share amounts)*                                                                                                                                                       |       |                   |       |                    |       |                   |       |
| **Assets**                                                                                                                                                                                   |       |                   |       |                    |       |                   |       |
| Current assets:                                                                                                                                                                              |       |                   |       |                    |       |                   |       |
| Cash and cash equivalents                                                                                                                                                                    |       | $                      | 12,845     |                    | $          | 11,752                 |       | $ | 17,131 |   |
| Short-term investments                                                                                                                                                                       |       | 30,275                 |       | 28,831                  |       | 26,400                 |       |
| Accounts receivable, net of allowances for  doubtful accounts, returns,  and allowances of $1,381 at July 31, 2005, $1,455 at April 30, 2005  and $2,246 at July 31, 2004     |       | 18,188                 |       | 21,814                  |       | 18,118                 |       |
| Inventories, net                                                                                                                                                                             |       | 28,687                 |       | 25,398                  |       | 25,938                 |       |
| Income tax receivable                                                                                                                                                                        |       | 507                    |       | 919                     |       | —                 |       |
| Deferred income taxes                                                                                                                                                                        |       | 2,328                  |       | 2,412                   |       | 2,566                  |       |
| Prepaid expenses and other current assets                                                                                                                                                    |       | 2,678                  |       | 2,317                   |       | 2,232                  |       |
| Total current assets                                                                                                                                                                         |       | 95,508                 |       | 93,443                  |       | 92,385                 |       |
|                                                                                                                                                                                         |       |                   |       |                    |       |                   |       |
| Furniture and equipment, net                                                                                                                                                                 |       | 6,747                  |       | 6,734                   |       | 5,659                  |       |
| Deferred income taxes                                                                                                                                                                        |       | 171                    |       | 165                     |       | 376                    |       |
| Other assets                                                                                                                                                                                 |       | 1,600                  |       | 1,614                   |       | 1,819                  |       |
| Total assets                                                                                                                                                                                 |       | $                      | 104,026    |                    | $          | 101,956                |       | $ | 100,239 |   |
|                                                                                                                                                                                         |       |                   |       |                    |       |                   |       |
| **Liabilities and Shareholders’ Equity**                                                                                                                                                |       |                   |       |                    |       |                   |       |
| Current liabilities:                                                                                                                                                                         |       |                   |       |                    |       |                   |       |
| Accounts payable                                                                                                                                                                             |       | $                      | 5,107      |                    | $          | 3,077                  |       | $ | 5,321 |   |
| Accrued liabilities                                                                                                                                                                          |       | 7,131                  |       | 7,631                   |       | 6,011                  |       |
| Income taxes payable                                                                                                                                                                         |       | —                 |       | —                  |       | 2,279                  |       |
| Current portion of capital lease  obligations                                                                                                                                                |       | 46                     |       | 111                     |       | 449                    |       |
| Total current liabilities                                                                                                                                                                    |       | 12,284                 |       | 10,819                  |       | 14,060                 |       |
|                                                                                                                                                                                         |       |                   |       |                    |       |                   |       |
| Other liabilities                                                                                                                                                                            |       | 3,194                  |       | 3,262                   |       | 3,518                  |       |
| Total liabilities                                                                                                                                                                            |       | 15,478                 |       | 14,081                  |       | 17,578                 |       |
|                                                                                                                                                                                         |       |                   |       |                    |       |                   |       |
| Commitments 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; 11,195,363 issued and outstanding at July 31, 2005,  11,220,376 at April 30, 2005, and 10,822,418 at July 31, 2004 |       | 67,082                 |       | 67,750                  |       | 65,339                 |       |
| Deferred compensation                                                                                                                                                                        |       | (222                   | )          | (246                    | )          | —                 |       |
| Retained earnings                                                                                                                                                                            |       | 21,688                 |       | 20,371                  |       | 17,322                 |       |
| Total shareholders’ equity                                                                                                                                                              |       | 88,548                 |       | 87,875                  |       | 82,661                 |       |
| Total liabilities and shareholders’ equity                                                                                                                                              |       | $                      | 104,026    |                    | $          | 101,956                |       | $ | 100,239 |   |

 

See accompanying notes.

 

1

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**CUTTER & BUCK INC.**

**Condensed Consolidated Statements of Income (Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended**  | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                    | ** ** | **July 31,  2005** | ** ** | **July 31,  2004** | ** ** |
| *(in thousands, except share and per share amounts)*          |       |                    |       |   |   |
| Net sales                                                     |       | $                       | 29,741     |   | $ | 31,899 |   |
| Cost of sales                                                 |       | 15,696                  |       | 16,147 |   |
| Gross profit                                                  |       | 14,045                  |       | 15,752 |   |
|                                                          |       |                    |       |   |   |
| Operating expenses:                                           |       |                    |       |   |   |
| Selling, general and administrative                           |       | 10,916                  |       | 10,013 |   |
| Depreciation                                                  |       | 666                     |       | 766 |   |
| Restatement expenses                                          |       | (483                    | )          | 14 |   |
| Total operating expenses                                      |       | 11,099                  |       | 10,793 |   |
| Operating income                                              |       | 2,946                   |       | 4,959 |   |
|                                                          |       |                    |       |   |   |
| Interest income (expense)                                     |       |                    |       |   |   |
| Interest income                                               |       | 308                     |       | 104 |   |
| Interest expense                                              |       | (8                      | )          | (17 | ) |
| Net interest income (expense)                                 |       | 300                     |       | 87 |   |
| Pre-tax income                                                |       | 3,246                   |       | 5,046 |   |
| Income tax expense                                            |       | 1,144                   |       | 1,796 |   |
| Net income                                                    |       | $                       | 2,102      |   | $ | 3,250 |   |
|                                                          |       |                    |       |   |   |
| Basic earnings per share:                                     |       | $                       | 0.19       |   | $ | 0.30 |   |
| Diluted earnings per share:                                   |       | $                       | 0.18       |   | $ | 0.29 |   |
|                                                          |       |                    |       |   |   |
| Shares used in computation of:                                |       |                    |       |   |   |
| Basic earnings per share                                      |       | 11,164,397              |       | 10,773,247 |   |
| Diluted earnings per share                                    |       | 11,438,186              |       | 11,347,497 |   |
|                                                          |       |                    |       |   |   |
| Cash dividends declared per share of common stock outstanding |       | $                       | 1.41       |   | $ | 0.05 |   |

 

See accompanying notes.

 

2

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**CUTTER & BUCK INC.**

**Condensed Consolidated Statements of Cash Flows (Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **July 31, 2005** | ** ** | **July 31, 2004** | ** ** |
| *(in thousands)*                                                                   |       |                   |       |   |   |
| **Operating activities:**                                                          |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 2,102      |   | $ | 3,250 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                   |       |   |   |
| Depreciation                                                                       |       | 679                    |       | 812 |   |
| Tax benefit on exercise of stock options                                           |       | 165                    |       | — |   |
| Deferred income taxes                                                              |       | 78                     |       | — |   |
| Deferred compensation                                                              |       | 24                     |       | — |   |
| Deferred gain on sale and leaseback of  capital assets                             |       | —                 |       | (1 | ) |
| Changes in assets and liabilities:                                                 |       |                   |       |   |   |
| Accounts receivable, net                                                           |       | 3,626                  |       | 4,384 |   |
| Inventories, net                                                                   |       | (3,289                 | )          | (4,000 | ) |
| Prepaid expenses and other assets                                                  |       | (347                   | )          | 60 |   |
| Accounts payable, accrued liabilities and  other liabilities                       |       | 1,462                  |       | 958 |   |
| Income taxes payable                                                               |       | 412                    |       | 1,062 |   |
| Net cash provided by operating activities                                          |       | 4,912                  |       | 6,525 |   |
|                                                                               |       |                   |       |   |   |
| **Investing activities:**                                                          |       |                   |       |   |   |
| Purchases of furniture and equipment                                               |       | (692                   | )          | (180 | ) |
| Purchases of short-term investments                                                |       | (26,308                | )          | (20,418 | ) |
| Maturities of short-term investments                                               |       | 24,864                 |       | 11,970 |   |
| Net cash used in investing activities                                              |       | (2,136                 | )          | (8,628 | ) |
|                                                                               |       |                   |       |   |   |
| **Financing activities:**                                                          |       |                   |       |   |   |
| Issuance of common stock                                                           |       | 483                    |       | 399 |   |
| Repurchases of common stock                                                        |       | (1,316                 | )          | (176 | ) |
| Payment of dividends                                                               |       | (785                   | )          | (541 | ) |
| Principal payments under capital lease obligations                                 |       | (65                    | )          | (163 | ) |
| Net cash used in financing activities                                              |       | (1,683                 | )          | (481 | ) |
|                                                                               |       |                   |       |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       | 1,093                  |       | (2,584 | ) |
| Cash and cash equivalents, beginning of period                                     |       | 11,752                 |       | 19,715 |   |
| Cash and cash equivalents, end of period                                           |       | $                      | 12,845     |   | $ | 17,131 |   |

 

See accompanying notes.

 

3

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**Cutter & Buck Inc.**

**Notes to Condensed Consolidated Financial Statements (Unaudited)**

 

**Note 1. Basis of Presentation**

 

TheCompany has one operating segment, the design, sourcing, and marketing of men’sand women’s sportswear, fashion, and outerwear apparel. The information forthis segment is the information used by the Company’s chief operating decisionmaker to evaluate operating performance.

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by Cutter & Buck Inc. (the Company) in accordance withaccounting principles generally accepted in the United States for interimfinancial statements and in accordance with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and disclosures required by generally acceptedaccounting principles for complete financial statements. In the opinion of theCompany’s management, all adjustments (consisting of normal recurring accruals)necessary for a fair presentation of the results for the interim periods havebeen included. The Company’s revenues are seasonal, and therefore the resultsof operations for the three months ended July 31, 2005, may not beindicative of the results for the full fiscal year. For further information,refer to the consolidated financial statements and footnotes thereto for theyear ended April 30, 2005, included in the Company’s filing on Form 10-K.

 

**Note 2.Reclassifications**

 

Certainprior year amounts have been reclassified to conform to the current yearpresentation.

 

Pursuantto Statement of Financial Accounting Standards no. 13, *Accountingfor Leases*, the Company accounts for lease expense and subleaseincome on a straight-line basis over the terms of the related leases. Thisaccounting generally results in a deferred asset (for the sublease income) anda deferred liability (for the lease expense) recorded on the balance sheet.Prior to the first quarter of fiscal 2006, the Company has netted the deferred assetand liability and reported the net amount as a current liability. The Companyis now reporting the deferred asset ($1.4 million) and the deferred liability($1.4 million) as separate items. The prior year netted amounts have beenreclassified to conform to the current year presentation.

 

**Note 3. Short-term Investments**

 

Short-terminvestments held-to-maturity consists of United States government treasurybills and agency debt and U.S. corporate debt securities with maturity dateswithin one year of the purchase date. Amortized cost includes the initialpurchase amount plus accrued interest of $119,000, $96,000, and $42,000 as of July 31,2005, April 30, 2005, and July 31, 2004, respectively:

 
| **July 31,  2005**        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| *(in thousands)*               |       |                |       |                         |       |                          |       |                       |       |
| U.S. corporate debt            |       | $                   | 25,915     |                         | $          | —                        |       | $                          | (65        | ) | $ | 25,850 |   |
| U.S. government treasury bills |       | 3,980               |       | —                       |       | (3                            | )          | 3,977                      |       |
| U.S government agency debt     |       | 499                 |       | —                       |       | (2                            | )          | 497                        |       |
|                           |       | $                   | 30,394     |                         | $          | —                        |       | $                          | (70        | ) | $ | 30,324 |   |

 

4

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| **April 30,  2005**   | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|----------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| *(in thousands)*           |       |                |       |                         |       |                          |       |                       |       |
| U.S. corporate debt        |       | $                   | 27,880     |                         | $          | —                        |       | $                          | (12        | ) | $ | 27,868 |   |
| U.S government agency debt |       | 1,047               |       | —                       |       | (9                            | )          | 1,038                      |       |
|                       |       | $                   | 28,927     |                         | $          | —                        |       | $                          | (21        | ) | $ | 28,906 |   |

 
| **July 31,  2004** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|-------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| *(in thousands)*        |       |                |       |                         |       |                          |       |                       |       |
| U.S. corporate debt     |       | $                   | 26,442     |                         | $          | —                        |       | $                          | (9         | ) | $ | 26,433 |   |
|                    |       | $                   | 26,442     |                         | $          | —                        |       | $                          | (9         | ) | $ | 26,433 |   |

 

**Note 4. Debt**

 

OnMarch 10, 2005, the Company entered into a three-year loan agreement withWells Fargo HSBC Trade Bank, N.A. secured by all assets of the Company, for a$35 million line of credit. Borrowings under this agreement will bear interestat prime minus 1.0%. Covenants contained in this loan agreement includemaintaining a debt to equity ratio of not more than 1.0, a quick ratio of notless than 1.0, and profitability of $5 million per year. Additionally, capitalexpenditures are limited to $4.0 million per fiscal year. The company is incompliance with all terms and covenants of this agreement. On July 31,2005, letters of credit outstanding against this line of credit totaledapproximately $5,985,000 and there were no working capital advances outstanding.

 

**Note 5. Shareholders’ Equity**

 

Duringthe three months ended July 31, 2005, the Company sold 80,484 shares underits employee stock purchase plan and pursuant to the exercise of stock options.During the same period, the Company repurchased 105,497 shares under its stock repurchaseprogram.

 

OnSeptember 6, 2005, the Board declared a quarterly dividend of $0.07 pershare payable on October 12, 2005, to shareholders of record on September 28,2005.

 

OnJuly 5, 2005, the board of directors approved a special dividend of $1.34per share, subject to shareholder approval of stock plan amendments that willallow certain adjustments to employee stock-based compensation awards to offsetthe impact of this dividend. If these amendments are approved, the special cashdividend will be payable on November 16, 2005, to shareholders of recordon November 2, 2005.

 

## **Note 6. Restructuringand Asset Impairment**

##  

TheCompany had two restructuring plans, which are now complete. There is aliability recorded as a result of one of the plans for remaining lease paymentsdue for excess warehouse capacity, all of which is currently being subleasedand which management believes will continue to be subleased through the end ofthe Company’s lease term in 2011.

 

5

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Forthe three months ended July 31, 2005, activity in the accrued liabilityaccount consisted of the following:

 
| ** **        | ** ** | **Balance at  April 30,  2005** | ** ** | **Subsequent  Accruals,  Net** | ** ** | **Subsequent  Payments** | ** ** | **Balance at  July 31,  2005** | ** ** | **Due  Within  1 Year** | ** ** | **Due  After  1 Year** | ** ** |
|-------------------|------------|--------------------------------------|------------|--------------------------------|------------|--------------------------|------------|-------------------------------------|------------|-------------------------|------------|------------------------|------------|
| *(in thousands)*  |       |                                 |       |                           |       |                     |       |                                |       |                    |       |                   |       |
| Lease obligations |       | $                                    | 2,215      |                           | $          | —                   |       | $                                   | (80        | )                       | $          | 2,135                  |       | $ | 320 |   | $ | 1,815 |   |
|                   |            |                                      |            |                                |            |                          |            |                                     |            |                         |            |                        |            |  |  |  |  |  |  |

 

**Note 7. Restatement Expenses**

 

Infiscal 2002, the Company restated certain financial statements forirregularities and errors. As a result of the circumstances underlying therestatement, three shareholder class action lawsuits and a shareholderderivative lawsuit were filed, naming the Company and certain of its currentand former directors and officers as defendants. The Company settled thoselawsuits in fiscal 2003. Although the restatement has been completed, theCompany continues to incur legal costs in connection with the indemnificationof former officers and the lawsuit against Genesis Insurance Company. Future expensesrelated to these matters cannot be estimated at this time.

 

OnAugust 1, 2005, a decision by an appellate court reaffirmed a previousdecision in favor of Genesis. Previously, the Company had determined that itwas probable that an insurance premium would need to be repaid to Genesis. Althoughthe Company has petitioned for a rehearing of the appellate court decision, basedon the court’s decision, management determined that it is not probable theCompany will be required to repay the premium for the policy in question. Basedupon this change to the estimate of probability, the Company reversed the $585,000that had been recorded for this liability during the quarter ended July 31,2005.

 

**Note 8. Income Taxes**

 

The Company recorded $1,144,000 of income taxexpense in the first three months of fiscal year 2006 compared to $1,796,000 ofincome tax expense in the first three months of fiscal year 2005. The effectiverates for income taxes were 35.2% and 35.6% for the first three months offiscal years 2006 and 2005, respectively.

 

**Note 9. Earnings Per Share**

 

Basicearnings per share is based on the weighted average number of common sharesoutstanding. Diluted earnings per share is based on the weighted average numberof common shares and equivalents outstanding, except when inclusion of theseitems would be antidilutive. Common share equivalents included in thecomputation represent the restricted stock grant to the Company’s CEO and thenet shares issuable upon assumed exercise of outstanding stock options.

 

Thefollowing table sets forth the computation of basic and diluted earnings pershare for the three months ended July 31:

 
| ** **                                           | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------|------------|------------|------------|------------|------------|
| *(in thousands, except share and per share amounts)* | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for basic and diluted earnings per share:  |       |       |       |       |       |
| Net income                                           |       | $          | 2,102      |       | $          | 3,250 |   |
|                                                 |       |       |       |       |       |
| Denominator for basic earnings per share:            |       |       |       |       |       |
| Weighted average common shares                       |       | 11,164,397 |       | 10,773,247 |       |
| Dilutive effect of employee stock options and awards |       | 273,789    |       | 574,250    |       |
| Denominator for diluted earnings per share           |       | 11,438,186 |       | 11,347,497 |       |
|                                                 |       |       |       |       |       |
| Basic earnings per share                             |       | $          | 0.19       |       | $          | 0.30 |   |
| Diluted earnings per share                           |       | $          | 0.18       |       | $          | 0.29 |   |

 

6

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**Note 10. Stock-Based Compensation**

 

TheCompany accounts for its share-based payments using the intrinsic value methodprescribed in Accounting Principles Board Opinion (“APB”) No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations. The Company haselected to apply the disclosure-only provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123, “Accounting for Stock-BasedCompensation,” as amended by SFAS No. 148, “Accounting for Stock-basedCompensation — Transition and Disclosure.” Compensation expense for stockoptions 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 grantover the stock option exercise price. Under the Company’s plans, stock optionsare generally granted at fair market value on the date of grant. The Companyalso has an Employee Stock Purchase Plan that allows eligible employees topurchase Company stock at a 15% discount from market price utilizing payrolldeductions.

 

InDecember 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),Share-Based Payment, which is a revision of SFAS No. 123 and supercedesAPB No. 25. SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure will nolonger be a permitted alternative.

 

Therequired adoption date of SFAS No. 123(R) for the Company, as amended bythe SEC in Securities Act Release 33-8568, dated April 15, 2005, is thebeginning of fiscal 2007. SFAS No. 123(R) permits two methods of adoption,a “modified prospective” method and a “modified retrospective” method. Underthe modified prospective method, compensation cost is recognized, beginningwith 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 retrospectivemethod 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. Managementis currently planning to adopt this new standard in the first quarter of fiscal2007 and is still reviewing the adoption alternatives.

 

Basedupon the unamortized portion of the fair value of options outstanding as of July 31,2005, as estimated as of their grant dates pursuant to SFAS No. 123, theadoption of SFAS No. 123(R) is not anticipated to have a significantimpact on our results of operations or our overall financial position. However,the impact of adoption of SFAS No. 123(R) on future periods cannot bepredicted at this time because it will depend on levels of share-based paymentsgranted or modified in the future.

 

Ifcompensation costs for stock-based compensation had been recognized based onthe 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  July 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| *(in thousands, except per share amounts)*                                                                                        |       |                                  |       |   |   |
| Net income, as reported                                                                                                           |       | $                                     | 2,102      |   | $ | 3,250 |   |
| Add employee stock-based compensation expense, net of tax, as  reported                                                           |       | 16                                    |       | — |   |
| Deduct total stock-based employee  compensation expense, net of tax,  determined under the fair value based method for all awards |       | (76                                   | )          | (291 | ) |
| Pro forma net income                                                                                                              |       | $                                     | 2,042      |   | $ | 2,959 |   |
| Earnings per share:                                                                                                               |       |                                  |       |   |   |
| Basic - as reported                                                                                                               |       | $                                     | 0.19       |   | $ | 0.30 |   |
| Basic - pro forma                                                                                                                 |       | $                                     | 0.18       |   | $ | 0.27 |   |
| Diluted - as reported                                                                                                             |       | $                                     | 0.18       |   | $ | 0.29 |   |
| Diluted - pro forma                                                                                                               |       | $                                     | 0.18       |   | $ | 0.26 |   |

 

7

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Nooptions were granted during the quarter ended July 31, 2005. The fairvalue for options granted during the quarter ended July 31, 2004 wasestimated at the date of grant using the Black-Scholes option pricing modelusing the following weighted-average assumptions:

 
| ** **              | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|
| Risk-free interest rate |       | 2.6      | %          |
| Volatility              |       | 57       | %          |
| Expected life           |       | 5 years  |       |
| Dividend yield          |       | 2        | %          |

 

**Note 11. Litigation**

 

## **TheCompany is party to routine litigation incidental to its business. Managementbelieves the ultimate resolution of these routine matters will not have amaterial adverse effect on the Company’s financial condition and results ofoperations.**

 

TheCompany remains a party to its lawsuit against Genesis Insurance Company. The Company’scomplaint, which was originally filed in the United States District Court forthe Western District of Washington (“District Court”), alleged that Genesis’2002 attempt to rescind the Company’s primary Directors’ and Officers’liability insurance was unlawful, and sought damages resulting from Genesis’breaches of contract and the duty of good faith and fair dealing. In February 2004,the District Court entered an Order granting Genesis’ motions for summaryjudgment and, accordingly, the Company’s claims against Genesis were dismissedby the District Court. The Company appealed the District Court’s decision tothe United States Circuit Court of Appeals for the Ninth Circuit (“Court ofAppeals”). On August 1, 2005, the Court of Appeals affirmed the decisionof the District Court in favor of Genesis. On August 22, 2005, the Companyfiled a petition for rehearing with the Court of Appeals seeking to have theCourt of Appeals reconsider certain portions of its decision. It is uncertainwhen the Court of Appeals will act on the Company’s petition.

 

**Note 12. Subsequent Events**

 

Duringthe period from July 31, 2005, to August 26, 2005, the Company hasrepurchased 58,000 shares under its stock repurchase program at an averageprice of $13.29 per share.

 

TheCompany has a Shareholder Rights Plan (“Rights Plan”), under which a dividendof one Right was distributed for each outstanding share of common stock. TheRights Plan is currently set to expire in November 2008. On September 3,2005, as part of the Company’s ongoing review of its corporate governancepolicies, the board of directors voted to seek an amendment to the Rights Planso that it will expire three years early, on November 18, 2005.

 

8

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

 

*You should read this section together with our condensed consolidatedfinancial statements and related notes thereto in this report. In addition tothe historical information contained herein, this report containsforward-looking statements that involve risks and uncertainties. You should beaware that our actual results could differ materially from those contained in anyforward-looking statements. Our actual results will depend upon a number offactors, including but not limited to the following: the special risk factorsset forth in Part I, Item 1 of our annual report on Form 10-K for thefiscal year ended April 30, 2005; the ability of the Company to controlcosts and expenses; costs associated with the upgrade and replacement of someof our computer systems; costs associated with our marketing initiatives andcosts associated with regulatory compliance; the potential outcome of pendingand future audits by various taxing jurisdictions; our ability to maintain ourrelationships with our sponsored professional golfers; relations with andperformance of suppliers; the Company’s ability to carry out successful designsand effectively advertise and communicate with the marketplace and to penetrateour chosen distribution channels; the Company’s ability to appropriately priceits products; the number of golf rounds played, which may be impacted by severeweather-related disasters and the weather in general; competition; risksrelated to the timely performance of third parties, such as shipping companies,including risks of strikes or labor disputes involving these third parties;maintaining the integrity of the Company’s technology and information systemswhile enhancing and changing systems; attracting and retaining employees,including key management personnel; political and trade relations; changes ininternational trade quota systems for apparel; the overall level of consumerspending on apparel; global economic and political conditions and additionalthreatened terrorist attacks and responses thereto, including war. Finally,there may be other factors not mentioned above or included elsewhere in thisreport that may cause actual results to differ materially from anyforward-looking statements. You should not place undue reliance on anyforward-looking statements. We assume no obligation to update anyforward-looking statements as a result of new information, future events ordevelopments, except as required by the securities laws.*

 

*All references to fiscal years are references to our fiscal yearsending April 30.*

 

## **Overview**

 

Cutter &Buck designs, sources, markets, and distributes high-quality sportswear underthe Cutter & Buck brand. We sell our products primarily through corporateaccounts, golf pro shops and resorts, upscale specialty and department retailstores, and international distributors and licensees. Our mission is to build apremium global consumer apparel brand by creating distinctively originalproduct. Our business strategy focuses on strengthening the upscale positioningof the Cutter & Buck brand and increasing the penetration of ourtarget markets. We focus on the needs of our customers and end consumers anddesign products to meet those needs.

 

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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.

 
| ** **                          | ** ** | **Three Months Ended**  | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **July 31,  2005** | ** ** | **July 31,  2004** | ** ** |
| Net sales                           |       | 100.0                   | %          | 100.0 | % |
| Cost of sales                       |       | 52.8                    |       | 50.6 |   |
| Gross profit                        |       | 47.2                    |       | 49.4 |   |
|                                |       |                    |       |   |   |
| Operating expenses:                 |       |                    |       |   |   |
| Selling, general and administrative |       | 36.7                    |       | 31.4 |   |
| Depreciation                        |       | 2.2                     |       | 2.4 |   |
| Restatement expenses                |       | (1.6                    | )          | — |   |
| Total operating expenses            |       | 37.3                    |       | 33.8 |   |
| Operating income                    |       | 9.9                     |       | 15.6 |   |
| Net interest income (expense)       |       | 1.0                     |       | 0.2 |   |
| Pre-tax income                      |       | 10.9                    |       | 15.8 |   |
| Income tax expense                  |       | 3.8                     |       | 5.6 |   |
| Net income                          |       | 7.1                     | %          | 10.2 | % |

 

**Three Months Ended July 31, 2005 Compared With Three Months Ended July 31,2004**

 

## **Net Sales**

 

Duringthe first quarter of fiscal 2006, net sales decreased approximately $2.2 million,or 6.8%, to $29.7 million from $31.9 million in the same period of theprior year. The detail of net sales by business unit was as follows:

 
| ** **                              | ** ** | **Three Months Ended July 31,** | ** ** | **Increase** | ** ** | **Percent**    | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                              | ** ** | **2005**                             | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| *(in thousands, except percent change)* |       |                                 |       |         |       |           |       |   |   |
| Corporate                               |       | $                                    | 13,742     |         | $          | 15,143         |       | $ | (1,401 | ) | (9.3 | )% |
| Golf                                    |       | 7,891                                |       | 8,827        |       | (936           | )          | (10.6 | ) |
| Specialty Retail                        |       | 5,478                                |       | 5,322        |       | 156            |       | 2.9 |   |
| International                           |       | 748                                  |       | 685          |       | 63             |       | 9.2 |   |
| Other                                   |       | 1,882                                |       | 1,922        |       | (40            | )          | (2.1 | ) |
| Total                                   |       | $                                    | 29,741     |         | $          | 31,899         |       | $ | (2,158 | ) | (6.8 | )% |

 

Netsales in our Corporate business unit decreased by $1.4 million, to $13.7 millionfrom $15.1 million in the same period of the prior year. The decline isattributed to increased competition for the corporate business, especially fromprivate-label brands. In January 2004, the Company launched a corporatecatalog featuring updated designs, which had a positive impact on sales throughthe third quarter of fiscal 2005. The Company’s 2005 Classics line does notfeature as many changes as the prior year and management believes this has alsoimpacted sales. Therefore, the Company has begun a process of phasing-out manyof its existing Classic styles and plans an extensive ‘refreshening’ of thisline for its calendar 2006 lines, which will begin shipping in the thirdquarter of fiscal 2006.

 

Inthe first quarter of fiscal 2006, net sales in our Golf business unit decreasedby $0.9 million, to $7.9 million from $8.8 million in the sameperiod of the prior year. This was primarily due to lower sales at tournaments($0.7 million). Tournament sales in the first quarter of fiscal 2005 weredriven by the Ryder Cup. The Company only generates sales from this event whenit is held in the United States, every fourth year. An additional $0.8 millionof revenue was generated by the Ryder Cup tournament during the second quarterof fiscal 2005. The opportunity for those

 

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saleswill not be present in the second quarter of fiscal 2006 and our tournamentrevenue will be lower as a result.

 

Netsales for the first quarter of fiscal 2006 in our other business units,Specialty Retail, International and Other, were consistent with the firstquarter of fiscal 2005.

 

## **Gross Profit**

 

Inthe first quarter of fiscal 2006, gross profit was 47.2% of net sales comparedto 49.4% in the same period of the prior year. Based on lower than expected salesof our Spring 2005 line during the first quarter of fiscal 2006, as well as afairly extensive ‘refreshing’ of our Classics line, the Company increased itsreserve for inventory by $0.5 million. The remaining decrease in gross marginis due to selective discounting and mix of sales among channels.

 

Ourgross profit may not be comparable to other companies, since some companies includeall costs related 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 andAdministrative Expense**

 

Selling,general and administrative expenses totaled $10.9 million in the first quarterof fiscal 2006 compared to $10.0 million in fiscal 2005, an increase of $0.9million. Salaries, wages, and related taxes increased approximately $0.7 million.This increase is primarily due to additional product design and developmentstaffing and marketing expenditures, which began in the middle of the priorfiscal year, and additional employees hired in May 2005 for the expansionof the direct to consumer sales channel, as well as annual salary increases andmerit pay. The company also recorded compensation expense during the firstquarter of fiscal 2006 for employee severance costs and increased costs ofrelocating its Chief Executive Officer. Professional fees for the first quarterof fiscal 2006 were approximately $0.2 million higher than the first quarter offiscal 2005 due to ongoing costs of compliance with the Sarbanes-Oxley act andconsulting fees for state and local tax planning.

 

## **Restatement Expenses**

 

Duringthe quarter, the Company lost its appeal in its lawsuit against Genesis InsuranceCompany. Although the Company did not recover the damages it was seeking, itwas not required to repay the premium for the policy in question and therefore theCompany reversed approximately $0.5 million that had been recorded for thisoutstanding liability.

 

## **Income Taxes**

 

Werecorded approximately $1.1 million of income tax expense in the first quarterof fiscal 2006 compared to $1.8 million in the first quarter of fiscal 2005. Theeffective rates for income taxes in the first quarters of fiscal 2006 and 2005were 35.2% and 35.6%, respectively.

 

**Liquidityand Capital Resources**

 

AtJuly 31, 2005, our cash and short-term investments totaled $43.1 millioncompared to $43.5 million at July 31, 2004. During the first quarter offiscal 2006, our capital requirements were funded by cash provided by operatingactivities. Net cash provided by operating activities in the first quarter offiscal 2006 was $4.9 million compared to $6.5 million for the first quarter offiscal 2005. The decrease in net cash provided by operating activities wasprimarily a result of the lower net income of $2.1 million in the first quarterof fiscal 2006, compared to $3.3 million in the first quarter of fiscal 2005,and our increased inventory balance as of July 31, 2005, resulting fromlower than anticipated sales. The Company is planning to launch its 2006corporate catalog in October, three months earlier than in fiscal 2005. Basedon this, coupled with the existing inventory levels, management anticipatesthat inventory will likely remain in excess of prior year levels through theend of the third quarter, but will return to seasonally normal levels by theend of the fiscal year.

 

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Netcash used in investing activities was $2.1 million in the first quarter offiscal 2006 compared to $8.6 million in the first quarter of fiscal 2005. The decreasewas primarily due to fewer net purchases of short-term investments in fiscal2006, as the Company already had a substantially larger proportion ofinvestments with maturities greater that 90 days at the end of fiscal 2005 thanfiscal 2004. The Company incurred $0.7 million of capital expenditures duringthe quarter ended July 31, 2005. These investments related primarily tothe implementation of the Company’s new enterprise resource planning (“ERP”)system and upgraded inventory warehousing system that were operational at thebeginning of June 2005. Management plans to continue to invest inadditional enhancements to these systems during the upcoming fiscal year. Tosupport our operations, capital expenditures totaling approximately $3.5million are planned for fiscal 2006. These capital expenditures will primarilyconsist of costs for information technology initiatives and our expanded directto consumer business.

 

Netcash used in financing activities was $1.7 million in the first quarter offiscal 2006, which primarily consisted of stock repurchases and dividendpayments. The increase over the first quarter of fiscal 2005 was due toincreased repurchases of the Company’s common stock and an increase in thequarterly dividend rate from $0.05 per share to $0.07 per share

 

Duringthe quarter, the Company paid a cash dividend of $0.07 per share. On September 6,2005, the Board declared a quarterly dividend of $0.07 per share, payable on October 12,2005, to shareholders of record on September 28, 2005. We expect to paysimilar dividends in future quarters. However, we may decide to discontinue ormodify these quarterly dividend payments at any time if we determine that otheruses of our capital may be in the best interests of our shareholders.Additionally, on July 5, 2005, the board of directors approved a specialdividend of $1.34 per share, subject to shareholder approval of stock planamendments that will allow certain adjustments to employee stock-basedcompensation awards to offset the impact of this dividend. If these amendmentsare approved, the special cash dividend will be payable on November 16,2005, to shareholders of record on November 2, 2005.

 

TheCompany initiated a stock repurchase program in March 2004. On July 5,2005, the board extended this program to allow for an additional $10.0 millionof stock repurchases beyond those already made through July 5, 2005. Thepurchases will be made from time to time in the open market or in privatelynegotiated transactions. During the first quarter of fiscal 2006, we purchased105,497 shares of our common stock at an average price of $12.47, for a totalrepurchase of $1.3 million. Since the inception of the program through July 31,2005, we have purchased 377,423 shares at an average price of $12.31. We havepaid a total of $4.6 million to repurchase stock and, as of July 31, 2005,have authorization to make additional repurchases up to $9.6 million of stock.The repurchase program may be suspended at any time without notice. The timingof repurchases and the actual number of shares repurchased will depend onmarket conditions, alternative uses of capital and other factors. The specialdividend and the additional share repurchases represent approximately $25million of capital the Company plans to return to shareholders.

 

InMarch 2005, the Company entered into a three-year loan agreement withWells Fargo HSBC Trade Bank, N.A., secured by all assets of the Company, for a$35 million line of credit. Any borrowings under this agreement would bearinterest at prime minus 1.0%. Covenants contained in this loan agreementinclude maintaining a debt to equity ratio of not more than 1.0, a quick ratioof not less than 1.0, and profitability of $5.0 million per year. Additionally,capital expenditures are limited to $4.0 million per year. As of July 31,2005, the Company is in compliance with all of these covenants and there are noborrowings under this line of credit other than open letter of credit totalingapproximately $6.0 million.

 

Ourprimary ongoing capital requirements are to finance working capital and thecontinued growth and operations of our business, including investments in fixedassets. We believe the remaining cash on hand and cash generated fromoperations, as well as our ability to borrow under bank lines of credit, willbe sufficient to meet our cash requirements during fiscal 2006. Shouldmanagement determine that cash on hand is insufficient to support continuationof the Company’s stock repurchase program, we have the ability to suspend theprogram at any time. We also have available alternative sources of financing,including factoring our accounts receivable and financing our capital expenditureswith leases. Although these methods of financing are currently available to us,we do not anticipate using alternative sources of financing during fiscal 2006.However, our capital needs will depend on many

 

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factors,including our growth rate, the need to finance increased production andinventory 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.

 

**CriticalAccounting Policies and Use of Estimates**

 

Ourcritical accounting policies are described in Item 7 in the Company’s filing onForm 10-K for the year ended April 30, 2005. Our discussion andanalysis of financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof the financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues, expenses, andrelated disclosures of contingent assets and liabilities. On an ongoing basis,we evaluate the estimates that we have made. These estimates are based upon ourhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Our actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting estimates affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

 

**Reserve for Product Returns**

 

Wemaintain a reserve for probable future product returns related to currentperiod product receivables. We analyze the rate of historical returns andtrends in changes to the rate, if any, when evaluating the adequacy of thisreserve. The estimate for product returns is included in our calculation of netsales. If we were to experience an increase in our product returns, additionalreserves may be required.

 

**Reserve for Sales Allowances**

 

Wemaintain a reserve for future sales allowances related to current period sales.We analyze the rate of historical sales allowances and changes in salesprograms when evaluating the adequacy of this reserve. The estimate for salesallowances is included in our calculation of net sales. If we were to grantadditional sales allowances, additional reserves may be required.

 

#### ***Allowancesfor Doubtful Accounts***

 

Wemaintain an allowance for accounts that are doubtful to be ultimatelycollected, resulting from the inability of our customers to make requiredpayments. These losses are included in bad debt expense. We determine theadequacy of this allowance by regularly reviewing our accounts receivable agingand evaluating individual customer receivables, considering customers’financial condition, credit history and current economic conditions. If thefinancial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

 

#### ***Inventories***

 

Inventories,which are predominantly finished goods, are valued at the lower of cost ormarket, with cost determined using the weighted average method. We perform a detailedanalysis of inventory on a quarterly basis to identify unsold out-of-seasonmerchandise. We estimate the net realizable value of the out-of-seasonmerchandise based upon disposition plans and historical experience. A valuationallowance is established to reduce the carrying amount of out-of-seasonmerchandise to its estimated net realizable value. If actual market conditionsare less favorable than those we project, additional allowances may berequired.

 

#### ***Impairment ofLong-Lived Assets***

 

Wereview the carrying values of our long-lived assets whenever events or changesin circumstances indicate that such carrying values may not be recoverable.Unforeseen events and changes in circumstances and

 

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marketconditions and changes in estimates of future cash flows could negativelyaffect the fair value of our assets and result in an impairment charge. Fairvalue is the amount at which the asset could be bought or sold in a currenttransaction between willing parties and may be estimated using a number oftechniques, including quoted market prices or valuations by third parties,present value techniques based on estimates of cash flows, or multiples ofearnings or revenues performance measures. The fair value of the asset could bedifferent using different estimates and assumptions in these valuationtechniques.

 

#### ***RestructuringLiabilities***

 

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 estimates based on currently available information.

 

**Valuation Allowance in Deferred Income Tax Assets**

 

Weperiodically review the need for a valuation allowance to reduce our deferredincome tax asset balances to their net realizable value. To the extent wedetermine an allowance is required, we determine the adequacy of this allowanceby regularly reviewing our historical taxable income and forecasts of futuretaxable income over the periods in which the temporary differences areanticipated to reverse. If our actual results are lower than our forecastedfuture results, additional allowances may be required.

 

## **Item 3. Quantitative and Qualitative Disclosuresabout Market Risk**

 

Weare subject to certain market risks, including interest rate risks associatedwith financial instruments included in cash and cash equivalents and short-terminvestments. We invest in interest-bearing U.S. Government and high-qualitycorporate fixed-rate debt instruments and hold these instruments until maturity.Changes in interest rates may affect the fair market value of theseinstruments. Investments with maturities beyond ninety days as of the purchasedate are classified as short-term investments. The average time to maturity asof the purchase date for short-term investments held as of July 31, 2005,was 113 days and the weighted average interest rate was 3.1%. Due to theshort-term nature of these instruments and our investment policies andprocedures, we do not expect interest rate fluctuations to have a materialadverse effect on our results of operations.

 

Wedo not use derivative financial instruments to manage interest rate risk, toreduce our exposure to changes in foreign currency exchange rates, or forspeculative trading purposes.

 

**Item 4.Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Asof July 31, 2005, we evaluated the effectiveness of the design andoperation 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. Basedon this evaluation, our principal executive and financial officers concludedthat, as of July 31, 2005, our disclosure controls and procedures wereeffective in timely alerting them to material information required to beincluded in our periodic reports.

 

**Changes in Internal Controls**

 

During the first quarter of fiscal 2006, the Companyimplemented SAP R/3 Enterprise System, an enterprise resource planning (“ERP”) system,which will serve as its new general ledger of record going forward. The

 

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implementationof this ERP system provides the Company a more technologically advanced informationtechnology architecture that can be utilized throughout the organization andleveraged to interface with other computer systems. The implementation of theERP system has significantly impacted the Company’s operations by eliminatingcertain manual processes and interfaces and automating and streamlining certaintasks.

 

Other than as mentioned above, during ourmost recently completed fiscal quarter, there have been no changes in ourinternal control over financial reporting as defined in Rules 13a-15(f) or15d-15(f) under the Securities and Exchange Act of 1934, as amended, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Limitationson 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. The design of ourcontrol system reflects the fact that there are resource constraints and the benefitsof such controls were considered relative to their costs. 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 limitations in a cost-effective control system, misstatements dueto error or fraud may occur and not be detected.

 

**PART II—OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

## **TheCompany is party to routine litigation incidental to its business. Managementbelieves the ultimate resolution of these routine matters will not have amaterial adverse effect on the Company’s financial condition and results ofoperations.**

##  

TheCompany remains a party to its lawsuit against Genesis Insurance Company. TheCompany’s complaint, which was originally filed in the United States DistrictCourt for the Western District of Washington (“District Court”), alleged thatGenesis’ 2002 attempt to rescind the Company’s primary Directors’ and Officers’liability insurance was unlawful, and sought damages resulting from Genesis’breaches of contract and the duty of good faith and fair dealing. In February 2004,the District Court entered an Order granting Genesis’ motions for summaryjudgment and, accordingly, the Company’s claims against Genesis were dismissedby the District Court. The Company appealed the District Court’s decision tothe United States Circuit Court of Appeals for the Ninth Circuit (“Court ofAppeals”). On August 1, 2005, the Court of Appeals affirmed the decisionof the District Court in favor of Genesis. On August 22, 2005, the Companyfiled a petition for rehearing with the Court of Appeals seeking to have theCourt of Appeals reconsider certain portions of its decision. It is uncertainwhen the Court of Appeals will act on the Company’s petition.

 

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## **Item 2. Unregistered Sales of Equity Securities andUse of Proceeds**

 

**Purchasesof Equity Securities by the Issuer**

 

InMarch 2004, the Company announced a stock repurchase program, allowing forthe repurchase of up to $6.0 million of common stock. On July 5, 2005, theboard of directors approved an increase in the stock repurchase program toprovide for up to $10.0 million of additional repurchases beyond the $4.2million repurchased through July 5, 2005, bringing the total repurchaseauthorization since inception of the program to $14.2 million. 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 stock repurchase program may be suspended or discontinuedby the Board at any time without notice and it does not have an expirationdate.

 

Thefollowing table sets forth our purchases of our common stock for the fiscalquarter ended July 31, 2005:

 
| **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** | ** ** |
|--------------------------|------------|----------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| May  05/01/05- 05/31/05  |       | 72,297                                 |       | $                                 | 12.14      |                                                                         | 72,297     |                                                                             | $          | 1,790,487 |   |
| June  06/01/05- 06/30/05 |       | 0                                      |       | $                                 | 0.00       |                                                                         | 0          |                                                                             | $          | 1,790,487 |   |
| July  07/01/05- 07/31/05 |       | 33,200                                 |       | $                                 | 13.20      |                                                                         | 33,200     |                                                                             | $          | 9,561,726 |   |
|                     |       |                                   |       |                              |       |                                                                         |       |                                                                             |       |
|                     |       | 105,497                                |       |                              |       | 105,497                                                                      |       |                                                                             |       |

 

## **Item 3. Defaults Upon Senior Securities**

 

None

 

## **Item 4. Submission of Matters to a Vote of Security Holders**

 

None

 

## **Item5. Other Information**

##  

None

 

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## **Item 6. Exhibits**

##  

a)                                      Exhibits

 
| **Exhibit  Number** | ** ** | **Description**                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------|
|                |       |                                                                                             |
| 31.1                |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Executive Officer |
| 31.2                |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Financial Officer |
| 32.1                |       | Section 1350  Certifications of the Company’s Chief Executive Officer                  |
| 32.2                |       | Section 1350  Certifications of the Company’s Chief Financial Officer                  |

 

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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:  September 9, 2005 | By                                         |   |   | /s/ Ernest R. Johnson |   |   |
|                           |                                       |   |   |   |   |   |
|                           |                                       | Ernest R. Johnson |
|                           |                                       | *Chief Financial Officer and Senior Vice President* |
|                           |                                       | *(Principal Accounting and Financial Officer)* |

 

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