**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

----

**Form 10-Q**

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

**Forthe quarterly period ended July 31, 2006**

**or**

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

**Forthe transition period from **          * * to           * *

**CommissionFile No. 0-26608**

----

**CUTTER & BUCK INC.**

(Exact Name of Registrantas Specified in Its Charter)

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

 

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

**Seattle, WA 98103**

(Address of principalexecutive offices)

**(206) 622-4191**

(Registrant’s telephonenumber)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months and (2) has been subject to such filing requirements forthe past 90 days. x Yes  oNo

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated file” in Rule 12b-2 of the Exchange Act.(Check one):
| Large accelerated  filer o | Accelerated filer  x | Non-accelerated  filer o |
|---------------------------------|----------------------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act). oYes  xNo

Thenumber of shares of Common Stock of the registrant outstanding as of August 25,2006 was 10,572,578.

 

----

**CUTTER &BUCK INC.**

**QuarterlyReport on Form 10-Q**

**For the Quarter Ended July 31, 2006**

**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 |       | 11       |   |
| Item 3.                                 |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 17       |   |
| Item 4.                                 |       | Controls  and Procedures                                                                    |       | 17       |   |
| PART II—OTHER  INFORMATION    |       |                                                                                        |       |
| Item 1.                                 |       | Legal  Proceedings                                                                          |       | 18       |   |
| Item 1A.                                |       | Risk Factors                                                                                |       | 18       |   |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 18       |   |
| Item 3.                                 |       | Defaults  Upon Senior Securities                                                            |       | 18       |   |
| Item 4.                                 |       | Submission  of Matters to a Vote of Security Holders                                        |       | 18       |   |
| Item 5.                                 |       | Other  Information                                                                          |       | 18       |   |
| Item 6.                                 |       | Exhibits                                                                                    |       | 19       |   |
| SIGNATURES                              |       | 20                                                                                          |       |

 

----

**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**CUTTER &BUCK INC.Condensed Consolidated Balance Sheets**

| ** **                                                                                                                                                                                   | ** ** | **July 31, 2006**                                  | ** ** | **April 30, 2006** | ** ** | **July 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **(unaudited)**                                              | ** ** | ** **                   | ** ** | **(unaudited)**             | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(in thousands, except share amounts)** | ** ** |
| **Assets**                                                                                                                                                                                   | ** ** |                                                         | ** ** | ** **                   |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                              |       |                                                         |       | ** **                   |       |                        |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                    |       |                                                         | $          | 4,939                        | ** ** |                        |       | $ | 7,808 |   |   |   | $ | 12,845 |   |   |
| Short-term investments                                                                                                                                                                       |       |                                                         | 20,074     | ** **                   |       |                        | 12,314     |   |   |   | 30,275 |   |   |
| Accounts receivable, net of allowances for doubtful  accounts, returns, and allowances of $1,711 at July 31, 2006,  $1,732 at April 30, 2006 and $1,381 at July 31, 2005 |       |                                                         | 18,499     | ** **                   |       |                        | 22,993     |   |   |   | 18,188 |   |   |
| Inventories, net                                                                                                                                                                             |       |                                                         | 29,573     | ** **                   |       |                        | 25,659     |   |   |   | 28,687 |   |   |
| Income tax receivable                                                                                                                                                                        |       |                                                         | —     | ** **                   |       |                        | 88         |   |   |   | 507 |   |   |
| Deferred income taxes                                                                                                                                                                        |       |                                                         | 1,944      | ** **                   |       |                        | 1,993      |   |   |   | 2,328 |   |   |
| Prepaid expenses and other current assets                                                                                                                                                    |       |                                                         | 2,991      | ** **                   |       |                        | 2,701      |   |   |   | 2,678 |   |   |
| Total current assets                                                                                                                                                                         |       |                                                         | 78,020     | ** **                   |       |                        | 73,556     |   |   |   | 95,508 |   |   |
| Furniture and equipment, net                                                                                                                                                                 |       |                                                         | 6,274      | ** **                   |       |                        | 6,428      |   |   |   | 6,747 |   |   |
| Deferred income  taxes                                                                                                                                                                       |       |                                                         | 274        | ** **                   |       |                        | 264        |   |   |   | 171 |   |   |
| Other assets                                                                                                                                                                                 |       |                                                         | 1,396      | ** **                   |       |                        | 1,445      |   |   |   | 1,600 |   |   |
| Total assets                                                                                                                                                                                 |       |                                                         | $          | 85,964                       | ** ** |                        |       | $ | 81,693 |   |   |   | $ | 104,026 |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                               | ** ** |                                                         | ** ** | ** **                   |       |                        | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                         |       |                                                         |       | ** **                   |       |                        |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                             |       |                                                         | $          | 7,022                        | ** ** |                        |       | $ | 5,767 |   |   |   | $ | 5,107 |   |   |
| Income taxes payable                                                                                                                                                                         |       |                                                         | 672        | ** **                   |       |                        | —     |   |   |   | — |   |   |
| Accrued liabilities                                                                                                                                                                          |       |                                                         | 6,760      | ** **                   |       |                        | 5,934      |   |   |   | 7,177 |   |   |
| Total current liabilities                                                                                                                                                                    |       |                                                         | 14,454     | ** **                   |       |                        | 11,701     |   |   |   | 12,284 |   |   |
| Restructuring liability, net of current portion                                                                                                                                              |       |                                                         | 1,440      | ** **                   |       |                        | 1,575      |   |   |   | 1,815 |   |   |
| Deferred rent                                                                                                                                                                                |       |                                                         | 1,446      | ** **                   |       |                        | 1,431      |   |   |   | 1,379 |   |   |
| Total liabilities                                                                                                                                                                            |       |                                                         | 17,340     | ** **                   |       |                        | 14,707     |   |   |   | 15,478 |   |   |
| 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; 10,567,707 issued and outstanding at July 31, 2006,  10,476,069 at April 30, 2006, and 11,195,363 at July 31, 2005 |       |                                                         | 58,312     | ** **                   |       |                        | 58,041     |   |   |   | 67,082 |   |   |
| Deferred compensation                                                                                                                                                                        |       |                                                         | —     | ** **                   |       |                        | (61        | ) |   |   | (222 | ) |   |
| Retained earnings                                                                                                                                                                            |       |                                                         | 10,312     | ** **                   |       |                        | 9,006      |   |   |   | 21,688 |   |   |
| Total shareholders’ equity                                                                                                                                                              |       |                                                         | 68,624     | ** **                   |       |                        | 66,986     |   |   |   | 88,548 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                                             |       |                                                         | $          | 85,964                       | ** ** |                        |       | $ | 81,693 |   |   |   | $ | 104,026 |   |   |

 

See accompanying notes.

1

----

**CUTTER & BUCK INC.Condensed Consolidated Statements of Income (Unaudited)**

| ** **                                                     | ** ** | **Three Months Ended July 31,**                                   | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                                              | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except share and  per share amounts)** | ** ** |
| Net sales                                                      |       | $                                                                                     | 34,972     |   | $ | 29,741 |   |
| Cost of sales                                                  |       | 18,895                                                                                |       | 15,696 |   |
| Gross profit                                                   |       | 16,077                                                                                |       | 14,045 |   |
| Operating  expenses:                                           |       |                                                                                  |       |   |   |
| Selling, general and administrative                            |       | 12,605                                                                                |       | 10,916 |   |
| Depreciation                                                   |       | 642                                                                                   |       | 666 |   |
| Restatement expenses                                           |       | —                                                                                |       | (483 | ) |
| Total operating expenses                                       |       | 13,247                                                                                |       | 11,099 |   |
| Operating income                                               |       | 2,830                                                                                 |       | 2,946 |   |
| Interest income  (expense)                                     |       |                                                                                  |       |   |   |
| Interest income                                                |       | 312                                                                                   |       | 308 |   |
| Interest expense                                               |       | —                                                                                |       | (8 | ) |
| Net interest income                                            |       | 312                                                                                   |       | 300 |   |
| Pre-tax income                                                 |       | 3,142                                                                                 |       | 3,246 |   |
| Income tax  expense                                            |       | 1,100                                                                                 |       | 1,144 |   |
| Net income                                                     |       | $                                                                                     | 2,042      |   | $ | 2,102 |   |
| Basic earnings per share:                                      |       | $                                                                                     | 0.19       |   | $ | 0.19 |   |
| Diluted earnings  per share:                                   |       | $                                                                                     | 0.19       |   | $ | 0.18 |   |
| Shares used in  computation of:                                |       |                                                                                  |       |   |   |
| Basic earnings per share                                       |       | 10,483,261                                                                            |       | 11,164,397 |   |
| Diluted earnings per share                                     |       | 10,695,685                                                                            |       | 11,438,186 |   |
| Cash dividends  declared per share of common stock outstanding |       | $                                                                                     | 0.07       |   | $ | 1.41 |   |

 

See accompanying notes.

2

----

**CUTTER & BUCK INC.Condensed Consolidated Statements of Cash Flows (Unaudited)**

| ** **                                                                         | ** ** | **Three Months Ended July 31,**                              | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                                                          | ** ** |
| **Operating activities:**                                                          | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Net income                                                                         |       |                                                                             | $          | 2,042 |   |   |   | $ | 2,102 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                                                             |       |   |   |   |   |   |   |
| Depreciation                                                                       |       |                                                                             | 656        |   |   |   | 679 |   |   |
| Stock-based compensation                                                           |       |                                                                             | 56         |   |   |   | 24 |   |   |
| Deferred income taxes                                                              |       |                                                                             | 39         |   |   |   | 78 |   |   |
| Tax benefit from exercises of stock options                                        |       |                                                                             | 41         |   |   |   | 165 |   |   |
| Changes in assets  and liabilities:                                                |       |                                                                             |       |   |   |   |   |   |   |
| Accounts receivable, net                                                           |       |                                                                             | 4,494      |   |   |   | 3,626 |   |   |
| Inventories, net                                                                   |       |                                                                             | (3,914     | ) |   |   | (3,289 | ) |   |
| Prepaid expenses and other assets                                                  |       |                                                                             | (138       | ) |   |   | (347 | ) |   |
| Accounts payable, accrued liabilities and other  liabilities                       |       |                                                                             | 1,962      |   |   |   | 1,462 |   |   |
| Income taxes payable                                                               |       |                                                                             | 760        |   |   |   | 412 |   |   |
| Net cash provided  by operating activities                                         |       |                                                                             | 5,998      |   |   |   | 4,912 |   |   |
| **Investing  activities:**                                                         | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Purchases of  furniture and equipment                                              |       |                                                                             | (502       | ) |   |   | (692 | ) |   |
| Purchases of  short-term investments                                               |       |                                                                             | (15,680    | ) |   |   | (26,308 | ) |   |
| Maturities of  short-term investments                                              |       |                                                                             | 7,816      |   |   |   | 24,864 |   |   |
| Net cash used in  investing activities                                             |       |                                                                             | (8,366     | ) |   |   | (2,136 | ) |   |
| **Financing  activities:**                                                         | ** ** |                                                                             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Issuance of  common stock                                                          |       |                                                                             | 321        |   |   |   | 483 |   |   |
| Excess tax  benefit from exercises of stock options                                |       |                                                                             | 67         |   |   |   | — |   |   |
| Payment of  dividends                                                              |       |                                                                             | (736       | ) |   |   | (785 | ) |   |
| Repurchases of  common stock                                                       |       |                                                                             | (153       | ) |   |   | (1,316 | ) |   |
| Principal  payments under capital lease obligations                                |       |                                                                             | —     |   |   |   | (65 | ) |   |
| Net cash used in  financing activities                                             |       |                                                                             | (501       | ) |   |   | (1,683 | ) |   |
| Net (decrease) increase in cash and cash equivalents                               |       |                                                                             | (2,869     | ) |   |   | 1,093 |   |   |
| Cash and cash  equivalents, beginning of period                                    |       |                                                                             | 7,808      |   |   |   | 11,752 |   |   |
| Cash and cash  equivalents, end of period                                          |       |                                                                             | $          | 4,939 |   |   |   | $ | 12,845 |   |   |

 

See accompanying notes.

3

----

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

**Note 1.   Basisof Presentation**

Cutter & Buck Inc. (the “Company”) designsand markets upscale sportswear and outerwear, primarily through wholesalechannels. The Company has two wholly-owned subsidiaries, Cutter & BuckDirect LLC and Cutter & Buck (Europe) B.V. The accompanying condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated.

The accompanying unaudited condensed consolidatedfinancial statements have been prepared by 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 notinclude all of the information and disclosures required by generally acceptedaccounting principles for complete annual financial statements. In the opinionof the Company’s management, all adjustments (consisting of normal recurringaccruals) necessary for a fair presentation of the results for the interimperiods have been included. The preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

The Company’s revenues are seasonal, and therefore theresults of operations for the three months ended July 31, 2006, 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, 2006, included in the Company’s filing on Form 10-K.

Certain prior year amountshave been reclassified to conform with the current year presentation.

**Note 2.   RecentAccounting Pronouncement**

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”)48, *Accounting for Uncertainty in IncomeTaxes,*which prescribes a minimum “more likely than not” recognitionthreshold (i.e. greater than 50%) a tax position is required to meet beforebeing recognized in the financial statements. FIN 48 will be effectivebeginning with the first quarter of the Company’s next fiscal year. Thecumulative effect of an adjustment, if any, pursuant to adoption of FIN 48would be recorded in retained earnings as of the date of adoption. We have notyet evaluated the impact of implementation on our consolidated financialstatements.

**Note 3.   Stock-BasedCompensation**

Effective May 1, 2006, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment*. SFAS No. 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values. Pro formadisclosure is no longer a permitted alternative. The Company previouslyaccounted for its share-based payments using the intrinsic value methodprescribed in Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, electing to apply the disclosure-only provisions of SFAS No. 123,*Accounting for Stock-Based Compensation*,as amended by SFAS No. 148, *Accounting for Stock-basedCompensation—Transition and Disclosure*. Compensation expense forstock options was recognized over the vesting period of the grant based on theexcess, if any, of the market price of the Company’s common stock at the dateof grant over the stock 

4

----

option exercise price.Under the Company’s plans, stock options are generally granted at fair marketvalue on the date of grant.

The Company has adopted SFAS No. 123(R) usingthe modified prospective transition method. Under this method, compensationcost is recognized, beginning with the effective date, based on the grant datefair value estimated in accordance with the provisions of SFAS No. 123(R) forall share-based payments granted after the effective date and based on thegrant date fair value estimated in accordance with the provisions of SFAS No. 123for all awards granted prior to the effective date. Prior periods have not beenrestated.

The Company has historically utilized two types ofstock-based compensation, stock awards and option grants. The fair value ofstock awards is based on the market price of the stock on the grant date of theaward, net of the present value of the estimated dividends that will not bepaid on unvested awards. The fair value of option grants is based upon theBlack-Scholes option pricing model as of the grant date. For the compensationarrangements estimated to ultimately vest, the grant-date fair values areamortized on a straight-line basis over their vesting periods. For stock awardsand option grants that vest solely based on an employee maintaining employment,estimated forfeitures are based upon historical rates of employee attrition.For awards or grants subject to performance conditions, management alsoestimates the probability of those conditions being achieved and compensationcost is only accrued for the awards or grants that are considered probable tovest. These estimates are reviewed quarterly. Any change in these estimateswill result in a cumulative adjustment in the period in which the estimate ischanged, so that as of the end of a period, the cumulative compensation expenserecognized for an award or grant equals the amount that would be recognized ona straight-line basis as if the current estimates had been utilized since thebeginning of the service period.

During the first quarter of fiscal 2007, the Companyrecognized a total of $56,000 for stock compensation expense, which is includedin selling, general and administrative expense. Of this total, $8,000 ofcompensation expense resulting from stock options was recognized pursuant toSFAS No. 123(R) that would not have been recognized under theaccounting proscribed by APB No. 25. This did not have a material impacton our basic or diluted earnings per share. As of July 31, 2006, there is$486,000 of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements. This amount is expected to be recognizedover a weighted average period of 2.6 years.

Ifcompensation costs for stock-based compensation had been recognized based onthe fair value method during the three months ended July 31, 2005, the proforma amounts of the Company’s net income and net earnings per share would havebeen as follows:

| ** **                                                                                                                        | ** ** | **Three Months Ended**                                        | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **July 31, 2005**                                             | ** ** |
| ** **                                                                                                                        | ** ** | **(in thousands, except per   share amounts)** | ** ** |
| Net income as  reported                                                                                                           |       |                                                                    | $          | 2,102 |   |   |
| 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        | ) |   |
| Pro forma net  income                                                                                                             |       |                                                                    | $          | 2,042 |   |   |
| Earnings per  share:                                                                                                              |       |                                                                    |       |   |   |
| Basic—as reported                                                                                                            |       |                                                                    | $          | 0.19 |   |   |
| Basic—pro forma                                                                                                              |       |                                                                    | $          | 0.18 |   |   |
| Diluted—as reported                                                                                                          |       |                                                                    | $          | 0.18 |   |   |
| Diluted—pro forma                                                                                                            |       |                                                                    | $          | 0.18 |   |   |

 

5

----

Prior to adoption of SFAS No. 123(R), all taxbenefits resulting from the exercise of stock options were considered operatingcash flows. SFAS No. 123(R) requires the benefits of tax deductionsin excess of the compensation cost recognized for those awards (the “excess taxbenefit”) to be classified as financing cash flows on a prospective basis. As aresult, $67,000 of tax benefits from the exercise of stock options is shown asa financing cash flow in the statement of cash flows for the three months endedJuly 31, 2006.

Awardsof stock totaling up to 48,581 shares were granted during the three monthsended July 31, 2006. The number of these awards that will vest is subjectto the achievement of performance conditions measurable during fiscal 2007. Inaccordance with SFAS No. 123(R), management has estimated the probabilityof achieving each of the performance conditions and compensation cost has onlybeen recorded for the awards that are considered probable to vest based onmanagement’s estimate. Any awards for which performance conditions are met vestin equal amounts annually over a three year period. These awards were valued at$10.96 per share, which was the grant-date market price of the stock less thenet present value of estimated dividends that will be declared over the vestingperiod that will not be paid on unvested awards. The previous stock award of6,000 shares is not subject to any performance conditions. A summary of theCompany’s nonvested stock awards as of and for the three months ended July 31,2006, is as follows:

| ** **                       | ** ** | **Shares** | ** ** | **Weighted-Average   Grant-Date   Fair Value** | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------------------------------------|------------|
| Nonvested at  May 1, 2006   |       | 6,000      |       |                                                          | $          | 11.32 |   |   |
| Granted                          |       | 48,581     |       |                                                          | 10.96      |   |   |
| Nonvested at  July 31, 2006 |       | 54,581     |       |                                                          | $          | 11.00 |   |   |

 

Therewere no options granted during the three months ended July 31, 2006 or2005. A summary of stock option activity as of and for the three months ended July 31,2006, is as follows:

| ** **                                         | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | ** **      | ** ** |
|----------------------------------------------------|------------|------------|------------|---------------------------|------------|-----------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **                | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | **Exercise**              | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **Options**                                        | ** ** | ** ** | ** ** | **Shares**                | ** ** | **Price**       | ** ** | **Term** | ** ** | **Value** | ** ** |
| ** **                                         | ** ** | ** ** | ** ** | ** **                | ** ** | ** **      | ** ** | **(in 000’s)** | ** ** |
| Outstanding,  May 1, 2006                     |       | 652,994    |       |                      | $          | 7.27            |       |   |   |   |   |   |   |   |   |   |
| Exercised                                          |       | (52,474    | )          |                      | 5.53       |            |       |   |   |   |   |   |   |   |   |
| Expired                                            |       | (29,683    | )          |                      | 12.62      |            |       |   |   |   |   |   |   |   |   |
| Outstanding,  July 31, 2006                   |       | 570,837    |       |                      | 7.15       |            |       |   | 5.1 |   |   |   | $ | 2,232 |   |   |
| Vested at  July 31, 2006, or expected to vest |       | 570,837    |       |                      | $          | 7.15            |       |   |   | 5.1 |   |   |   | $ | 2,232 |   |   |
| Exercisable at  July 31, 2006                 |       | 556,507    |       |                      | $          | 7.08            |       |   |   | 5.0 |   |   |   | $ | 2,222 |   |   |
|                                                    |            |            |            |                           |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4.   Short-termInvestments**

Short-terminvestments held-to-maturity consists of U.S. corporate debt securities andUnited States government agency debt with maturity dates within one year of thepurchase date. As of April 30, 2006, and July 31, 2005, amortizedcost includes amounts classified as accrued interest of $51,000, and $119,000,respectively (in thousands):

| ** **                   | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                   | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **July 31, 2006**  | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| U.S. corporate  debt         |       |          | $          | 19,674         |       |           |       | $             | —     |   |   |   | $ | (15 | ) |   |   | $ | 19,659 |   |   |
| U.S. government  agency debt |       |          | 400        |           |       |           | —     |          |       |   | — |   |   |   | 400 |   |   |
|                         |       |          | $          | 20,074         |       |           |       | $             | —     |   |   |   | $ | (15 | ) |   |   | $ | 20,059 |   |   |
|                              |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

6

----

 

| ** **                   | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                   | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **April 30, 2006** | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| U.S. corporate  debt         |       |          | $          | 10,957         |       |           |       | $             | —     |   |   |   | $ | (10 | ) |   |   | $ | 10,947 |   |   |
| U.S. government  agency debt |       |          | 1,408      |           |       |           | —     |          |       |   | (3 | ) |   |   | 1,405 |   |   |
|                         |       |          | $          | 12,365         |       |           |       | $             | —     |   |   |   | $ | (13 | ) |   |   | $ | 12,352 |   |   |
|                              |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                      | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                      | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **July 31, 2005**     | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| 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 |   |   |
|                                 |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 5.   Debt**

The Company has a loanagreement with Wells Fargo HSBC Trade Bank, N.A. for a $35 million line ofcredit, which expires March 10, 2008, and is secured by all assets of theCompany. Borrowings under this agreement, if any, bear interest at prime minus1.0%. Covenants contained in this loan agreement include maintaining a debt toequity ratio of not more than 1.0, a quick ratio of not less than 1.0, and netincome of $5.0 million per year. Additionally, capital expenditures are limitedto $4.0 million per fiscal year. The Company is in compliance with all termsand covenants of this agreement. On July 31, 2006, letters of creditoutstanding against this line of credit totaled approximately $1.0 million andthere were no working capital advances outstanding.

**Note 6.   Shareholders’Equity**

Restricted stock grants totaling up to 48,581 shareswere awarded during the three months ended July 31, 2006. During the sameperiod, the Company repurchased 12,585 shares under its Stock RepurchaseProgram. During the three months ended July 31, 2006, the Company sold3,168 shares under its employee stock purchase plan (“ESPP”) and 52,474 sharespursuant to the exercise of stock options. The aggregate intrinsic value of theshares issued under the ESPP was $6,000. The aggregate intrinsic value of theoptions exercised was $308,000.

On September 6, 2006,the board declared a quarterly dividend of $0.07 per share payable on October 12,2006, to shareholders of record on September 28, 2006.

**Note 7.   RestructuringLiability**

During fiscal year 2002, the Company adopted arestructuring plan. This restructuring plan has been completed, except forlosses that were previously recorded for excess warehouse capacity under leasethrough 2011. The Company has a liability remaining for its contractual leasepayments due for the excess warehouse capacity, net of estimated subleasepayments. Currently, all of the excess capacity is being subleased andmanagement believes it will continue to be subleased through the end of theCompany’s lease term in 2011.

7

----

Forthe three months ended July 31, 2006, activity in the accrued liabilityaccount consisted of the following:

| ** **                 | ** ** | **Balance at**     | ** ** | **Adjustmets** | ** ** | **Subsequent** | ** ** | **Balance at** | ** ** | **Due**         | ** ** | **Due**         | ** ** |
|----------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|---------------------|------------|-----------------|------------|-----------------|------------|
| ** **                 | ** ** | **April 30,**      | ** ** | **to**         | ** ** | **(Payments)** | ** ** | **July 31,**   | ** ** | **Within**      | ** ** | **After**       | ** ** |
| ** **                 | ** ** | **2006**                | ** ** | **Accrual**    | ** ** | **Receipts**   | ** ** | **2006**            | ** ** | **1 Year** | ** ** | **1 Year** | ** ** |
| ** **                 | ** ** | **(in thousands)** | ** ** |
| Lease obligations          |       |                    | $          | 7,922          |       |           |       | $                   | —     |            |       |            | $          | (354 | ) |   |   | $ | 7,568 |   |   | $ | 1,419 |   | $ | 6,149 |   |
| Estimated  sublease income |       |                    | (6,027     | )              |       |           | —     |                |       |            | 274        |            |       |   | (5,753 | ) |   | (1,044 | ) | (4,709 | ) |
|                       |       |                    | $          | 1,895          |       |           |       | $                   | —     |            |       |            | $          | (80 | ) |   |   | $ | 1,815 |   |   | $ | 375 |   | $ | 1,440 |   |

 

**Note 8.   IncomeTaxes**

The Company recorded$1,100,000 of income tax expense in the first three months of fiscal year 2007compared to $1,144,000 of income tax expense in the first three months offiscal year 2006. The effective rates for income taxes were 35.0% and 35.2% forthe first three months of fiscal years 2007 and 2006, respectively.

**Note 9.   EarningsPer Share**

Basic earnings per share is based on the weightedaverage number of common shares outstanding. Diluted earnings per share isbased on the weighted average number of common shares and equivalentsconsidered outstanding, except when inclusion of these items would beantidilutive. Common share equivalents included in the computation representunvested stock awards for which all performance conditions, if any, have beensatisfied and the net shares that would be issued upon assumed exercise ofoutstanding stock options. For the three months ended July 31, 2006 and2005, 127,559 and 161,778 outstanding stock options, respectively, wereexcluded from the calculation of diluted earning per share because the exerciseprices exceeded the average market value of the common shares. For the threemonths ended July 31, 2006, 40,487 stock awards were excluded from thecalculation of diluted earnings per share because their vesting is contingentupon achievement of certain performance conditions that, as of July 31,2006, had not been met.

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

| ** **                                            | ** ** | **Three Months Ended**                                                            | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **July 31,**                                                                           | ** ** |
| ** **                                            | ** ** | **2006**                                                                                    | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in thousands, except share and   per share amounts)** | ** ** |
| Numerator for  basic and diluted earnings per share:  |       |                                                                                        |       |   |   |
| Net income                                            |       | $                                                                                           | 2,042      |   | $ | 2,102 |   |
| Denominator for basic earnings per share:             |       |                                                                                        |       |   |   |
| Weighted average common shares                        |       | 10,483,261                                                                                  |       | 11,164,397 |   |
| Dilutive effect  of employee stock options and awards |       | 212,424                                                                                     |       | 273,789 |   |
| Denominator for  diluted earnings per share           |       | 10,695,685                                                                                  |       | 11,438,186 |   |
| Basic earnings per share                              |       | $                                                                                           | 0.19       |   | $ | 0.19 |   |
| Diluted earnings per  share                           |       | $                                                                                           | 0.19       |   | $ | 0.18 |   |

 

 

8

----

**Note 10.   SegmentInformation**

Cutter & Buck essentially has one productcategory, upscale sportswear and outerwear under the Cutter & Buckbrand name. We reach our end consumers primarily via wholesale channels in theUnited States and structure our business to manage the sell-through of ourproduct via various distribution channels that we believe will maximize ouroverall company-wide gross profit. These distribution channels are managed bybusiness units. For each business unit, we track net sales and gross profit.The measurement of net sales used by management at the business unit levelincludes shipping revenues and does not include intersegment revenues orreserves recorded for bad debts, returns, or allowances. The measurement ofgross profit at the business unit level does not include inventory writedownsor reserves or variances from our standard cost allocations for freight andembroidery.

All of our business units sell the same product,except for certain licensees which may design certain products or styles thatare unique to their territories. Our inventory is designed, purchased, handled,and distributed in the same manner for all business units by central overheaddepartments. The costs of these departments are not allocated to the businessunits. We do not allocate any assets to business units.

Corporate business unit sales are primarily topromotional product distributors. Golf business unit sales are to pro shops orat tournaments. Specialty Retail business unit sales are to clothing retailers,department stores, and college and professional team apparel stores. Salesthrough these wholesale business units are aggregated and reported as ourwholesale segment as they each have similar economic characteristics.

To a lesser extent, we sell directly to consumers viaa catalog and ecommerce website through our consumer direct business unit. Wealso have agreements with several distributors and licensees that sell ourproducts internationally as well as selected non-apparel and non-competingproducts both internationally and domestically through our International andLicensing business unit. Net sales and gross profit for these two businessunits, plus reserve adjustments, standard cost variances, and writedowns andliquidations of inventory are reported in the All Other category for segmentreporting, as their combined results are not material to the presentation ofour segment information.

Theaggregated net sales and gross profit of our operating segments are as follows:

| ** **   | ** ** | **Three Months Ended July 31,**  | ** ** |
|--------------|------------|------------------------------------------------------|------------|
| ** **   | ** ** | **2006**                                             | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
| ** **   | ** ** | **(in thousands except percentages)** | ** ** |
| Wholesale    |       | $                                                    | 31,165     |   | 89.1 |   | $ | 28,007 |   | 94.2 |   |
| All Other    |       | 3,807                                                |       | 10.9 |   | 1,734 |   | 5.8 |   |
| Net sales    |       | $                                                    | 34,972     |   |   |   | $ | 29,741 |   |   |   |
| Wholesale    |       | $                                                    | 14,643     |   | 91.1 |   | $ | 13,618 |   | 97.0 |   |
| All Other    |       | 1,434                                                |       | 8.9 |   | 427 |   | 3.0 |   |
| Gross profit |       | $                                                    | 16,077     |   | 46.0 |   | $ | 14,045 |   | 47.2 |   |

 

Areconciliation of total segment gross profit to the Company’s consolidated pre-taxincome is as follows:

| ** **                  | ** ** | **Three Months Ended July 31,**                              | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **      2006      ** | ** ** | **      2005      ** | ** ** |
| ** **                  | ** ** | **(in thousands)**                                                          | ** ** |
| Total segment  gross profit |       |                                                                             | $          | 16,077 |   |   |   | $ | 14,045 |   |   |
| Operating  expenses         |       |                                                                             | (13,247    | ) |   |   | (11,099 | ) |   |
| Net interest  income        |       |                                                                             | 312        |   |   |   | 300 |   |   |
| Pre-tax income              |       |                                                                             | $          | 3,142 |   |   |   | $ | 3,246 |   |   |

 

9

----

**Note 11.   Litigation**

The Company is party to routine litigation incidentalto its business. Management believes the ultimate resolution of these routinematters will not have a material adverse effect on the Company’s financialcondition and results of operations.

10

----

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

*You should readthis section together with our condensed consolidated financial statements andrelated notes thereto in this report. In addition to the historical informationcontained herein, this report contains forward-looking statements that involverisks and uncertainties. Our actual future results and trends may differmaterially from historical results or those projected in any forward-lookingstatements. Specifically, there are a number of factors that could cause actualfuture results to differ materially from those anticipated by any forwardlooking statements. Those factors include, but are not limited to, thefollowing: the risk factors set forth in Part I, Item 1A of our annualreport on Form 10-K for the fiscal year ended April 30, 2006;our ability to control costs and expenses, including costs associated with theongoing upgrade of some of our computer systems and our marketing initiativesand costs associated with regulatory compliance; the potential outcome of pending and future audits by various taxingjurisdictions; our ability to maintain our relationships with oursponsored professional golfers; relations with and performance of suppliers; our ability to carry out successfuldesigns and effectively advertise and communicate with the marketplace and topenetrate our chosen distribution channels; our ability to appropriately priceour 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;identifying, attracting and retaining employees, including key managementpersonnel; political and trade relations; the overall level of consumerspending on apparel; and global economic and political conditions, includingimpacts of increasing oil prices, disease and terrorism and responses thereto,including war. Finally, there may be other factors not mentioned above orincluded elsewhere in this report that may cause actual results to differmaterially from any forward-looking statements. You should not place undue relianceon any forward-looking statement. We assume no obligation to update anyforward-looking statement as a result of new information, future events ordevelopments, except as required by the securities laws.*

*All references to fiscal years are references to ourfiscal years ending April 30.*

**Overview**

Cutter & Buckdesigns and markets upscale sportswear and outerwear under the Cutter &Buck brand name. We sell our products primarily via our wholesale segment,which consists of our Corporate, Golf, and Specialty Retail business units. Wealso sell directly to consumers via a catalog and website and have agreementswith several distributors and licensees that sell our products internationallyas well as selected non-apparel and non-competing products both internationallyand domestically.

11

----

**Results ofOperations**

Thefollowing table sets forth, for the periods indicated, certain consolidatedincome statement data expressed as a percentage of net sales.

| ** **                          | ** ** | **Three Months  Ended July 31,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| Net sales                           |       | 100.0                                           | %          | 100.0 | % |
| Cost of sales                       |       | 54.0                                            |       | 52.8 |   |
| Gross profit                        |       | 46.0                                            |       | 47.2 |   |
| Operating expenses:                 |       |                                            |       |   |   |
| Selling, general and administrative |       | 36.0                                            |       | 36.7 |   |
| Depreciation                        |       | 1.8                                             |       | 2.2 |   |
| Restatement expenses                |       | —                                          |       | (1.6 | ) |
| Total operating expenses            |       | 37.8                                            |       | 37.3 |   |
| Operating income                    |       | 8.2                                             |       | 9.9 |   |
| Net interest income                 |       | 0.9                                             |       | 1.0 |   |
| Pre-tax income                      |       | 9.1                                             |       | 10.9 |   |
| Income tax  expense                 |       | 3.1                                             |       | 3.8 |   |
| Net income                          |       | 6.0                                             | %          | 7.1 | % |

 

**Three Months Ended July 31,2006 Compared With Three Months Ended July 31, 2005**

**Net Sales**

During the first quarter of fiscal 2007, net salesincreased approximately $5.2 million, or 17.6%, to $35.0 million from$29.7 million in the same period of the prior year. This increase isattributable to broad acceptance of our CB ProTec line of products; larger reordersfor our Spring 2006 fashion release toward the end of the Spring shippingseason, which we attribute to our earlier deliveries of the 2006 Spring fashionrelease; as well as continued growth in our Direct to Consumer business unit asa result of our catalog and website initiative.

Ourrevenues are seasonal and, therefore, the results of operations for the threemonths ended July 31, 2006, may not be indicative of the results for thefull fiscal year. Over the previous five years, an average of 24% of theCompany’s net sales have occurred during the first quarter. The detail of netsales by business unit is as follows:

| ** **                   | ** ** | **Three Months  Ended July 31,**               | ** ** | ** ** | ** ** | **Percent**  | ** ** |
|------------------------------|------------|---------------------------------------------------------------|------------|------------|------------|--------------|------------|
| ** **                   | ** ** | **2006**                                                      | ** ** | **2005**   | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in thousands, except percent change)** | ** ** |
| Corporate                    |       | $                                                             | 15,226     |       | $          | 13,742       |       |   | $ | 1,484 |   |   |   | 10.8 | % |   |
| Golf                         |       | 7,977                                                         |       | 7,891      |       |         | 86         |   |   |   | 1.1 |   |   |
| Specialty Retail             |       | 6,932                                                         |       | 5,478      |       |         | 1,454      |   |   |   | 26.5 |   |   |
| Direct to  Consumer          |       | 1,941                                                         |       | 489        |       |         | 1,452      |   |   |   | 296.9 |   |   |
| International and  Licensing |       | 807                                                           |       | 748        |       |         | 59         |   |   |   | 7.9 |   |   |
| Other                        |       | 2,089                                                         |       | 1,393      |       |         | 696        |   |   |   | 50.0 |   |   |
| Total                        |       | $                                                             | 34,972     |       | $          | 29,741       |       |   | $ | 5,231 |   |   |   | 17.6 | % |   |

 

Net sales in our Corporate business unit increased by$1.5 million to $15.2 million, from $13.7 million in the sameperiod of the prior year. The increase is attributed to our upgraded CB Classicsstyles, which have been well received, especially those incorporating CB ProTecand our women’s companion pieces.

12

----

In the first quarter of fiscal 2007, net sales in ourGolf business unit were consistent with the first quarter of fiscal 2006. Wehave seen a significant shift in our golf sales mix to our CB ProTec productline.

Specialty Retail sales increased approximately $1.5million from the three months ended July 31, 2005, to $6.9 million duringthe three months ended July 31, 2006. This is attributable to growth insales to big and tall retailers, other specialty retailers, and collegiate andpro sports teams and shops (“CPS”). The sales growth with specialty retailerswas due to strong reorders of our Spring fashion release with existingcustomers as well as earlier deliveries of our Fall 2006 fashion release, whichwe began shipping in June of the current year versus July in fiscal2006. We continue to see growth in the big and tall market; our brand andstyling have been well-received by customers in this market. CPS salesincreased due to strong acceptance of our CB ProTec knits and Spring fashionrelease, which created additional reorders.

Consumer Direct sales increased approximately $1.5million from the first quarter of fiscal 2006 to $1.9 million during the firstquarter of fiscal 2007 due to our consumer catalog initiative and enhancedwebsite, both of which were launched during the second quarter of fiscal 2006.

Other sales includeliquidation sales and shipping revenue. First quarter liquidation sales wereapproximately $0.4 million higher than the prior year due to liquidatingremaining product from our Fall 2005 fashion release and the phased-out CBClassics styles that remained at the end of our extensive line refreshening infiscal 2006. Also, shipping revenues increased approximately $0.2 million,consistent with our increased product sales.

**Gross Profit**

In the first quarter of fiscal 2007, gross margin was46.0% of net sales compared to 47.2% in the same period of the prior year.

In order to better serve our customers’ needs, wemoved up certain product delivery dates. Additionally, strong reorders of ourupdated CB Classics styles, created shortages in our on-hand product. In orderto meet these customer-driven demands, a higher percentage of our product wasimported via air versus ocean. The additional freight costs reduced our productmargins by approximately 1.1%. Based on our continued goals for earlier productdelivery dates, we believe that these higher air freight costs are likely tocontinue to impact our margin through the third quarter of the current fiscalyear. Increased liquidation sales decreased our overall gross margin by 0.6%.

These decreases to our gross margin percentage werepartially offset by lower inventory writedowns during the first quarter offiscal 2007 than the first quarter of fiscal 2006 and an increase in direct toconsumer sales, as a percentage of overall company sales, which have a highermarginal profit percentage.

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

**Selling, Generaland Administrative Expense**

Selling, general and administrative expenses (“SG&A”)totaled $12.6 million in the first quarter of fiscal 2007 compared to $10.9million in fiscal 2006, an increase of $1.7 million. As a percentage of sales,SG&A decreased 0.7%. Approximately $1.1 million of the increase was due tothe costs incurred for our direct to consumer catalog and website initiatives.Commissions and other incentive-based pay increased approximately $0.6 millionas a result of our increased sales and profitability. As a percentage of sales,commissions are consistent with the prior year.

13

----

We adopted SFAS No. 123(R) duringthe first quarter of fiscal 2007. Adoption of this new accounting standard didnot have a significant impact on our results of operations for the quarter and,based on the number of unvested stock options currently outstanding, is notanticipated to have a material impact on future results. However, the impact ofSFAS No. 123(R) on future periods will depend upon the types andquantities of share-based payments made in the future. During the three monthsended July 31, 2006, restricted stock grants were awarded to executivesand other key employees. The expense for these awards also did not have amaterial impact on our results of operations during the three months ended July 31,2006. These share-based payments would have resulted in compensation expenseunder the previous accounting standard.

**Restatement Expenses**

During the first quarterof fiscal 2006, the Company lost its appeal in its lawsuit against GenesisInsurance Company. Although we did not recover the damages we were seeking, wewere not required to repay the premium for the policy in question and thereforereversed approximately $0.5 million that had been recorded for this outstandingliability.

**Income Taxes**

We recorded approximately$1.1 million of income tax expense in the first quarter of fiscal 2007 comparedto $1.1 million in the first quarter of fiscal 2006. The effective rates forincome taxes in the first quarters of fiscal 2007 and 2006 were 35.0% and35.2%, respectively.

**Liquidity andCapital Resources**

At July 31, 2006, our cash and short-terminvestments totaled $25.0 million compared to $20.1 million at April 30,2006, and $43.1 million at July 31, 2005. The decrease during the twelvemonths ended July 31, 2006, is primarily attributable to $27.2 million ofcapital returned to shareholders in the form of cash dividends and stockrepurchases.

During the first quarter of fiscal 2007, our capitalrequirements were funded by cash provided by operating activities. Net cashprovided by operating activities in the first quarter of fiscal 2007 was$6.0 million compared to $4.9 million for the first quarter of fiscal2006. The increase in net cash provided by operating activities was primarily aresult of a higher reduction of accounts receivable during the first quarter offiscal 2007 than the first quarter of fiscal 2006 as the accounts receivable balanceat April 30, 2006, was approximately $1.2 million higher than it was as ofApril 30, 2005.

Net cash used in investing activities was $8.4 millionin the first quarter of fiscal 2007 compared to $2.1 million in the firstquarter of fiscal 2006. This increase is attributable to increased short-terminvestments in securities with maturities greater than 90 days beyond thepurchase date. In fiscal 2006, we were beginning to shorten the time tomaturity of our investments in anticipation of the special dividend that wasapproved by shareholders during the second quarter of fiscal 2006.

Net cash used in financing activities was $0.5 millionin the first quarter of fiscal 2007, which primarily consisted of the quarterly$0.07 per share dividend payment. The decrease from the $1.7 million used inthe first quarter of fiscal 2006 was due to fewer repurchases of the Company’scommon stock, as we had utilized the Board’s entire repurchase authorization.On September 6, 2006, the Board declared a quarterly dividend of $0.07 pershare, payable on October 12, 2006, to shareholders of record on September 28,2006. We expect to pay similar dividends in future quarters. However, we maydecide to discontinue or modify these quarterly dividend payments at any timeif we determine that other uses of our capital may be in the best interests ofour shareholders.

14

----

The Company has a loan agreement with Wells Fargo HSBCTrade Bank, N.A., through March 10, 2008, secured by all assets of theCompany, for a $35 million line of credit. Borrowings under this agreement, ifany, would bear interest at prime minus 1.0%. Covenants contained in this loanagreement include maintaining a debt to equity ratio of not more than 1.0, aquick ratio of not less than 1.0, and net income of $5.0 million per year.Additionally, capital expenditures are limited to $4.0 million per year. As of July 31,2006, the Company is in compliance with all of these covenants and there are noborrowings under this line of credit other than open letters of credit.

Our primary ongoingcapital requirements are to finance working capital and the continued growthand operations of our business, including investments in fixed assets. Webelieve the remaining cash on hand and cash generated from operations, as wellas our ability to borrow under bank lines of credit, will be sufficient to meetour cash requirements. We also have available alternative sources of financing,including factoring our accounts receivable and financing our capitalexpenditures with leases. Although these methods of financing are currentlyavailable to us, we do not anticipate using alternative sources of financingduring fiscal 2007. However, our capital needs will depend on many factors,including our growth rate, the need to finance increased production andinventory levels, the success of our various sales and marketing programs, andvarious other factors.

**Off-Balance SheetArrangements**

As of July 31, 2006,pursuant to its loan agreement with Wells Fargo HSBC Trade Bank, N.A., theCompany had open letters of credit with suppliers totaling approximately $1.0million.

**Critical AccountingPolicies and Use of Estimates**

Our critical accountingpolicies are described in Item 7 in the Company’s filing on Form 10-Kfor the year ended April 30, 2006. Our discussion and analysis offinancial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues, expenses, and relateddisclosures of contingent assets and liabilities. On an ongoing basis, weevaluate 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 ProductReturns**

We maintain a reserve forprobable future product returns. We analyze the rate of historical returns andtrends in changes to the rate, if any, when evaluating the adequacy of thisreserve. The rate of returns in our wholesale segment has remained consistentover the past several years. The direct to consumer business unit has a higherrate of returns than the wholesale segment. However, as of July 31, 2006,this higher rate does not have a material impact on our reserve for futureproduct returns. The estimate for product returns is included in ourcalculation of net sales. If we were to experience an increase in our productreturns or changes in our sales mix, additional reserves may be required.

**Allowances forDoubtful Accounts**

We maintain an allowancefor accounts that are doubtful to be ultimately collected, resulting from theinability of our customers to make required payments. These losses are includedin bad debt expense. We determine the adequacy of this allowance by regularlyreviewing our accounts receivable aging and 

15

----

evaluatingindividual customer receivables, considering customers’ financial condition,credit history and current economic conditions. If the financial condition ofour customers were to deteriorate, resulting in an impairment of their abilityto make payments, additional allowances may be required.

**Reserve for SalesAllowances**

We maintain a reserve forfuture sales allowances related to current period sales. We analyze the rate ofhistorical sales allowances and changes in sales programs when evaluating theadequacy of this reserve. The estimate for sales allowances is included in ourcalculation of net sales. If we were to grant additional sales allowances,additional reserves may be required.

**Accrued Rebates**

The Company offers certainsales incentives, including cash rebates, which are recorded as reductions tonet sales, and free product, which are recorded as cost of goods sold. Some ofthese incentives are earned upon customers achieving certain annual sales milestonesor sales growth. Although these incentives are due to customers only if andwhen the sales targets are achieved, we accrue a liability for the estimatedincentives to be earned ratably over all of a customer’s projected sales on acustomer by customer basis. If actual customer sales differ from the projectedsales used to accrue the liabilities, net sales or gross margins may bematerially impacted.

**Inventories**

Inventories, which arepredominantly finished goods, are valued at the lower of cost or market. Weperform a detailed analysis of inventory on a quarterly basis to identifyunsold out-of-season or discontinued merchandise. We estimate the netrealizable value of this merchandise based upon disposition plans andhistorical experience and a valuation allowance is established to reduce thecarrying amount to its estimated net realizable value. Additionally, we reservea portion of our seasonal lines as it is received based on our historical rateof product that ultimately is sold below cost due to incomplete color andsizing runs. If actual market conditions are less favorable than those weproject or if our color and size runs of our fashion lines are not consistentwith customer purchases, additional writedowns may be required.

**RestructuringLiability**

The remainingrestructuring liability pertains to estimated losses pursuant to long-termleases due to excess warehouse capacity. Key variables in determining thisestimate include the anticipated timing of sublease rentals, estimates ofsublease rental payment amounts, and estimates for brokerage and other relatedcosts. We periodically evaluate and, if necessary, adjust our estimates basedon currently available information. Should the creditworthiness of oursubtenants deteriorate or if the timing and rental rates for lease renewalsdiffer from our estimates, this liability would need to be adjusted.

**Valuation Allowancein Deferred Income Tax Assets**

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

16

----

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

We are subject to certain market risks, includinginterest rate risks associated with financial instruments included in cash andcash equivalents and short-term investments and foreign currency exchange raterisk on some of our receivables due from foreign licensees. None of thesefinancial instruments are entered into for trading purposes and we do not usederivative financial instruments to manage interest rate risk, to reduce ourexposure to changes in foreign currency exchange rates, or for speculativetrading purposes.

We invest in interest-bearing U.S. Government andhigh-quality corporate fixed-rate debt instruments and hold these instrumentsuntil maturity. Changes in interest rates may affect the fair market value ofthese instruments. 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, 2006,was 126 days and the weighted average interest rate was 5.2%. 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.

Some of our licensing agreements compute the royaltiesdue to us in the functional currency of the country in which the licenseeoperates. From the date of licensee sales until the date on which we are paid,typically within 70 days, the revenues we earn are subject to foreign currencyexchange rate risk. Additionally, we do have some remaining assets andliabilities from our closed European operations that are denominated in Euros.Neither of these items is material to our consolidated financial statements asof July 31, 2006.

We do not use derivativefinancial instruments to manage interest rate risk to reduce our exposure tochanges in foreign currency exchange rates or for speculative trading purposes.

**Item 4.**                        Controlsand Procedures

**Disclosure Controlsand Procedures**

As of July 31, 2006,with the participation of our principal executive and financial officers, weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities and Exchange Act of 1934, as amended (“Exchange Act”). Based onthat evaluation, our principal executive and financial officers concluded that,as of the end of the period covered by this report, our disclosure controls andprocedures were effective in providing reasonable assurance that materialinformation required to be disclosed in our reports filed under the ExchangeAct is recorded, processed, summarized, and reported within the time periodsspecified in SEC rules and forms.

**Changes in InternalControl over Financial Reporting**

During the first quarter ended July 31, 2006,there have been no changes in our internal control over financial reporting asdefined in Rules 13a-15(f) or 15d-15(f) of theExchange Act that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

17

----

**PART II—OTHERINFORMATION**

**Item 1.**                        LegalProceedings

The Company is party toroutine litigation incidental to its business. Management believes the ultimateresolution of these routine matters will not have a material adverse effect onthe Company’s financial condition and results of operations.

**Item 1A.**                RiskFactors

There have been nomaterial changes from the risk factors previously disclosed in Item 1A of Part Iof the Company’s annual report on Form 10-K for the year ended April 30,2006.

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

**Purchases of EquitySecurities by the Issuer**

The Company had a stock repurchase program, allowingfor the repurchase of up to $14.2 million of common stock. In May 2006,the Company utilized the remaining repurchase authorization and, at this time,has no plans to implement a new repurchase program.

Thefollowing table sets forth our purchases of our common stock for the fiscalquarter ended July 31, 2006:

| **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  05/01/06-05/31/06  |       |       | 12,585     |                                                         |       |                                               | $          | 12.14                                                                                                                |       |                                                                                                                        |       | 12,585 |   |   |   | $ | — |   |   |
| June  06/01/06-06/30/06 |       |       | —     |                                                         |       |                                               | $          | —                                                                                                               |       |                                                                                                                        |       | — |   |   |   | $ | — |   |   |
| July  07/01/06-07/31/06 |       |       | —     |                                                         |       |                                               | $          | —                                                                                                               |       |                                                                                                                        |       | — |   |   |   | $ | — |   |   |
|                    |       |       | 12,585     |                                                         |       |                                               |       |                                                                                                                 |       |                                                                                                                        | 12,585     |   |   |   |   |   |   |

 

**Item 3.**                        DefaultsUpon Senior Securities

None

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

None

**Item 5.**                        OtherInformation

None

18

----

**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(1) |
| 31.2            |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Financial Officer(1) |
| 32.1            |       | Section 1350  Certifications of the Company’s Chief Executive Officer(1)                  |
| 32.2            |       | Section 1350 Certifications of the Company’s  Chief Financial Officer(1)                  |

----

       (1) A signed original of this written statement has been provided to theCompany and will be retained by the Company and furnished to the SEC or itsstaff upon request.

19

----

**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 thereuntoduly authorized.
|                                | CUTTER & BUCK INC.(Registrant) |
|--------------------------------|-----------------------------------------|
| Dated:  September 7, 2006 | By                                      | /s/  MICHAEL GATS |
|                           |                                    | Michael Gats*Chief Financial Officer and Vice President  (Principal Accounting and Financial Officer)* |

 

20

----