**U.S. SECURITIES AND EXCHANGECOMMISSION**

 

**Washington, DC 20549**

 

**Form 10-Q  /A**

 
| **ý**                                                                                                                                                                                                                                                                                                                |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                      |   |                                                                                          |
| **For the quarterly period ended January 31, 2003**                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                      |   |                                                                                          |
|                                                                                                                                                                                                                                                                                                                      |   | **Or**                                                                                        |
|                                                                                                                                                                                                                                                                                                                      |   |                                                                                          |
| **o**                                                                                                                                                                                                                                                                                                                     |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                      |   |                                                                                          |
| **For the transition period  from                       to                       ** |

 

**Commission FileNo. 0-26608**

 

**CUTTER &BUCK INC.**

(Exact Name of Registrant as Specified in ItsCharter) 

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

 

**701 N. 34thStreet, Suite 400****Seattle, WA 98103**(Address of Principal Executive Offices, Including Zip Code)

 

**(206) 622-4191**(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý    No o

 

The number of shares of Common Stock of theregistrant outstanding as of March 14, 2003 was 10,634,132.

 

 

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**CUTTER & BUCK INC.**

 

**Quarterly Report on Form 10-Q /A**

 

**For the Quarter Ended January 31, 2003**

 

**Index**

 
| **PART I—FINANCIAL  INFORMATION** |
|----------------------------------------|
|                                   | **Item 1.** | **Financial Statements  (unaudited):** |
|                                   |   | **Condensed  Consolidated Balance Sheets** |
|                                   |   | **Condensed  Consolidated Statements of Operations** |
|                                   |   | **Condensed  Consolidated Statements of Cash Flows** |
|                                   |   | **Notes  to Condensed Consolidated Financial Statements** |
|                                   | **Item  2.** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |
|                                   | **Item 3.** | **Quantitative  and Qualitative Disclosures about Market Risk** |
|                                   | **Item 4.** | **Controls and Procedures** |
| **SIGNATURES**                         |
| **CERTIFICATIONS**                     |

 

i

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**PARTI—FINANCIAL INFORMATION**

 

**Item1. Financial Statements**

 

**CUTTER & BUCK INC.**

 

**Condensed Consolidated Balance Sheets**

 
|                                                                                                                                                    |   | **January 31,2003** |       | **April 30,2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|------------------------|--------|
|                                                                                                                                                    |   | **(unaudited)**          |       |                   |   |
| **Assets**                                                                                                                                              |   |                     |       |                   |   |
| Current assets:                                                                                                                                         |   |                     |       |                   |   |
| Cash and cash equivalents                                                                                                                               |   | $                        | 8,846,776  |                   | $      | 6,988,823 |   |
| Restricted cash                                                                                                                                         |   | 7,000,000                |       | —                 |   |
| Accounts receivable, net of allowances for doubtful  accounts and returns of $3,594,871 at January 31, 2003 and $4,239,645 at  April 30, 2002           |   | 15,904,889               |       | 41,904,527             |   |
| Inventories, net                                                                                                                                        |   | 37,810,858               |       | 26,207,917             |   |
| Deferred income taxes                                                                                                                                   |   | 3,915,399                |       | 3,525,006              |   |
| Other assets                                                                                                                                            |   | 13,184,594               |       | 10,763,992             |   |
|                                                                                                                                                    |   |                     |       |                   |   |
| Total current assets                                                                                                                                    |   | 86,662,516               |       | 89,390,265             |   |
| Furniture and equipment, net                                                                                                                            |   | 9,528,879                |       | 16,444,100             |   |
| Other assets                                                                                                                                            |   | 852,808                  |       | 934,765                |   |
|                                                                                                                                                    |   |                     |       |                   |   |
| Total assets                                                                                                                                            |   | $                        | 97,044,203 |                   | $      | 106,769,130 |   |
|                                                                                                                                                    |   |                     |       |                   |   |
| **Liabilities and Shareholders’  Equity**                                                                                                          |   |                     |       |                   |   |
| Current Liabilities:                                                                                                                                    |   |                     |       |                   |   |
| Accounts payable                                                                                                                                        |   | $                        | 8,994,128  |                   | $      | 7,272,511 |   |
| Accrued liabilities                                                                                                                                     |   | 7,359,120                |       | 6,854,000              |   |
| Current portion of capital lease obligations                                                                                                            |   | 2,400,464                |       | 3,212,563              |   |
| Other current liabilities                                                                                                                               |   | 446,290                  |       | 126,296                |   |
|                                                                                                                                                    |   |                     |       |                   |   |
| Total current liabilities                                                                                                                               |   | 19,200,002               |       | 17,465,370             |   |
| Capital lease obligations, less current portion                                                                                                         |   | 848,764                  |       | 3,716,424              |   |
| Deferred income taxes                                                                                                                                   |   | 803,819                  |       | 1,849,767              |   |
| Other liabilities                                                                                                                                       |   | 3,226,438                |       | 342,725                |   |
| 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; 10,634,132 issued and outstanding at January 31, 2003 and  10,589,810 at April 30, 2002 |   | 64,806,054               |       | 64,525,494             |   |
| Deferred compensation                                                                                                                                   |   | (52,500                  | )          | (348,590               | )      |
| Retained earnings                                                                                                                                       |   | 8,211,626                |       | 19,217,940             |   |
|                                                                                                                                                    |   |                     |       |                   |   |
| Total shareholders’ equity                                                                                                                         |   | 72,965,180               |       | 83,394,844             |   |
|                                                                                                                                                    |   |                     |       |                   |   |
| Total liabilities and shareholders’ equity                                                                                                         |   | $                        | 97,044,203 |                   | $      | 106,769,130 |   |

 

See accompanying notes

 

 

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**CUTTER & BUCK INC.**

 

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

 
|                                                                |   | **Three Months Ended**     |           | **Nine Months Ended**      |       |
|---------------------------------------------------------------------|--------|----------------------------|----------------|----------------------------|------------|
|                                                                |   | **January 31,  2003** |           | **January 31,  2002** |       | **January 31,  2003** |   | **January 31,  2002** |   |
|                                                                |   |                       |           | **(Restated)**             | ** ** |   | ** ** | **(Restated)** | ** ** |
| **Net sales**                                                       |   | **$**                      | **34,582,707** | ** **                 | **$**      | **33,282,538** | ** ** | **$** | **110,538,672** | ** ** | **$** | **118,312,422** | ** ** |
| **Cost of sales**                                                   |   | **19,720,002**             | ** **     | **22,216,350**             | ** ** | **63,613,827** | ** ** | **73,008,975** | ** ** |
|                                                                |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Gross profit**                                                    |   | **14,862,705**             | ** **     | **11,066,188**             | ** ** | **46,924,845** | ** ** | **45,303,447** | ** ** |
| **Operating expenses:**                                             |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Selling, general and  administrative**                            |   | **15,761,417**             | ** **     | **15,784,060**             | ** ** | **44,431,653** | ** ** | **50,508,180** | ** ** |
| **Restrucuring and asset impairment**                               |   | **(45,245**                | **)**          | **4,879,195**              | ** ** | **3,844,677** | ** ** | **4,879,195** | ** ** |
| **Retail store closure expenses**                                   |   | **9,556,071**              | ** **     | **2,502,987**              | ** ** | **9,556,071** | ** ** | **2,502,987** | ** ** |
| **Restatement expenses**                                            |   | **1,275,408**              | ** **     | **—**                 | ** ** | **2,529,387** | ** ** | **—** | ** ** |
|                                                                |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Total operating expenses**                                        |   | **26,547,651**             | ** **     | **23,166,242**             | ** ** | **60,361,788** | ** ** | **57,890,362** | ** ** |
|                                                                |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Operating loss**                                                  |   | **(11,684,946**            | **)**          | **(12,100,054**            | **)**      | **(13,436,943** | **)** | **(12,586,915** | **)** |
| **Interest expense, net of interest  income**                       |   | **(94,782**                | **)**          | **(336,290**               | **)**      | **(320,949** | **)** | **(1,280,329** | **)** |
|                                                                |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Loss before income taxes**                                        |   | **(11,779,728**            | **)**          | **(12,436,344**            | **)**      | **(13,757,892** | **)** | **(13,867,244** | **)** |
| **Income tax benefits**                                             |   | **(2,079,309**             | **)**          | **(3,934,264**             | **)**      | **(2,751,578** | **)** | **(4,532,536** | **)** |
|                                                                |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Net loss**                                                        |   | **$**                      | **(9,700,419** | **)**                      | **$**      | **(8,502,080** | **)** | **$** | **(11,006,314** | **)** | **$** | **(9,334,708** | **)** |
|                                                                |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Basic and diluted loss per share**                                |   | **$**                      | **(0.91**      | **)**                      | **$**      | **(0.80** | **)** | **$** | **(1.04** | **)** | **$** | **(0.88** | **)** |
|                                                                |   |                       | ** **     |                       | ** ** |   | ** ** |   | ** ** |
| **Shares used in computation of  basic and diluted loss per share** |   | **10,625,667**             | ** **     | **10,575,066**             | ** ** | **10,607,985** | ** ** | **10,563,814** | ** ** |

 

See accompanying notes

 

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**CUTTER & BUCK INC.**

 

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

 
|                                                                             |   | **Nine Months Ended**    |        |
|----------------------------------------------------------------------------------|--------|--------------------------|-------------|
|                                                                             |   | **January 31,2003** |        | **January 31,2002** |   |
|                                                                             |   |                     |        | **(Restated)** | ** ** |
| **Operating activities:**                                                        |   |                     |        |   |   |
| Net loss                                                                         |   | $                        | (11,006,314 | ) | $ | (9,334,708 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |   |                     |        |   |   |
| Depreciation and amortization                                                    |   | 4,611,678                |        | 4,804,762 |   |
| Amortization of deferred gain on sale and leaseback  of capital assets           |   | (94,722                  | )           | (94,722 | ) |
| Amortization of deferred compensation                                            |   | 359,090                  |        | 620,174 |   |
| Gain on sale of fixed assets                                                     |   | 95,572                   |        | — |   |
| Noncash compensation expense                                                     |   | 129,705                  |        | 38,860 |   |
| Noncash restructuring and asset impairment charges                               |   | 7,274,795                |        | 6,072,771 |   |
| Inventory write-downs related to restructuring                                   |   | —                   |        | 2,884,886 |   |
| Changes in assets and liabilities:                                               |   |                     |        |   |   |
| Receivables, net                                                                 |   | 25,999,638               |        | 20,711,963 |   |
| Inventories                                                                      |   | (11,602,941              | )           | 5,039,492 |   |
| Other current assets                                                             |   | (4,328,097               | )           | (3,762,288 | ) |
| Accounts payable, accrued liabilities and other  current liabilities             |   | 2,875,245                |        | (5,677,732 | ) |
|                                                                             |   |                     |        |   |   |
| Net cash provided by operating activities                                        |   | 14,313,649               |        | 21,303,458 |   |
| **Investing activities:**                                                        |   |                     |        |   |   |
| Purchases of furniture and equipment                                             |   | (1,945,751               | )           | (1,640,984 | ) |
| (Increase) decrease in trademarks, patents and  marketing rights                 |   | 81,959                   |        | (124,975 | ) |
|                                                                             |   |                     |        |   |   |
| Net cash used in investing activities                                            |   | (1,863,792               | )           | (1,765,959 | ) |
| **Financing activities:**                                                        |   |                     |        |   |   |
| Net repayments of short term borrowings                                          |   | —                   |        | (15,166,944 | ) |
| Principal payments under capital lease obligations                               |   | (3,679,759               | )           | (2,014,339 | ) |
| Transfer to restricted cash                                                      |   | (7,000,000               | )           | — |   |
| Issuance of common stock                                                         |   | 87,855                   |        | 187,124 |   |
|                                                                             |   |                     |        |   |   |
| Net cash used in financing activities                                            |   | (10,591,904              | )           | (16,994,159 | ) |
| Effects of foreign exchange rate on changes in cash                              |   | —                   |        | 59,559 |   |
|                                                                             |   |                     |        |   |   |
| Net increase in cash and cash equivalents                                        |   | 1,857,953                |        | 2,602,899 |   |
| Cash and cash equivalents, beginning of period                                   |   | 6,988,823                |        | 8,072,456 |   |
|                                                                             |   |                     |        |   |   |
| Cash and cash equivalents, end of period                                         |   | $                        | 8,846,776   |   | $ | 10,675,355 |   |

 

See accompanying notes

 

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**Cutter & Buck Inc.**

 

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

 

**Note 1.Basis of Presentation and Restatement of Financial Statements**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by Cutter & Buck Inc. (the Company) inaccordance with accounting principles generally accepted in the United Statesfor interim financial statements and in accordance with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they donot include all of the information and disclosures required by generallyaccepted accounting principles for complete financial statements. In ouropinion all adjustments (consisting of normal recurring accruals, restructuringand asset impairment charges, retail store closure expenses and restatementexpenses) necessary for a fair presentation have been included. Our revenuesare seasonal, and therefore the results of operations for the three months andnine months ended January 31, 2003 may not be indicative of the resultsfor the full fiscal year. For further information, refer to the consolidatedfinancial statements and footnotes thereto for the year ended April 30,2002, included in our filing on Form 10-K.

 

In consultation with our independent auditors, we restated our auditedfinancial statements for the years ended April 30, 2000 and 2001, and ourunaudited financial statements for each of the quarters in those years and forthe quarters ended July 31, 2001, October 31, 2001 andJanuary 31, 2002. We initially announced our intention to restate certainfinancial statements on August 12, 2002. That announcement was made afterour new Chairman and Chief Executive Officer, appointed April 2002,discovered certain accounting irregularities. In early August, shortly afterher discovery, the Board of Directors appointed a Special Committee to investigatethese irregularities. The preliminary conclusion of the Special Committee wasthat approximately $5.8 million of shipments to three distributors made ona consignment basis during fiscal year 2000 had been recorded as sales ofinventory for that year. Subsequent to that announcement, the Special Committeecontinued its investigation in order to confirm whether any additionalaccounting irregularities had occurred. The Special Committee was assisted inits investigation by our regular outside legal counsel, special independentlegal counsel, a forensic accounting firm and our independent auditors.

 

Upon completion of the Special Committee’s restatement investigation,our restatement was expanded to include adjustment of certain othertransactions related to the timing of revenue recognition and accounting errorsdiscovered at our European subsidiary within the fiscal years 2000 and 2001 andeach of the periods noted above. We also recorded a cumulative-effectadjustment to retained earnings for amounts related to fiscal 1998 and 1999 of$250,541. Since the restatement adjustments related primarily to the timing ofthe recognition of revenue, the restatement had an insignificant impact on ourshareholders’ equity as of April 30, 2002. Refer to the Form 10-K forthe year ended April 30, 2002 for details of the restatement impact on theyears and quarters previously reported. All adjustments fell into the followingcategories:

 

*Restatement of distributor transactions:*    In the fourthquarter of fiscal 2000 we made shipments of product to three distributors on aconsignment basis and improperly recorded these shipments as sales. Some ofthis product was sold by the distributors during fiscal 2001 and cash wasremitted to us. At the end of fiscal 2001 the unsold product was returned to usand recorded as sales returns. The fiscal 2000 financial statements wererestated to reverse these sales and the fiscal 2001 financial statements wererestated to record sales by the distributors on a cash basis and to reverse thesales returns.

 

*Restatement of premature shipments:*    We generallyship our product to arrive on customer-specified delivery dates. In certaininstances, we shipped product to customers well in advance of the dateoriginally 

 

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specified by the customer. We restated our financial statements forfiscal years 2000 and 2001 and the first three quarters of fiscal 2002 torecord sales in the period that the customer requested the goods be received,taking into account a normal time to assure receipt in accordance with customerspecified terms.

 

In addition, on certain occasions we shipped product to third parties,who held the product until the customer specified dates, or shipped product inways that assured slow delivery. We have restated for all such sales to recordthe sales upon substantive transfer of the products to the customer.

 

*Restatement of European operations:*    Certainaccounting errors were discovered during the process of closing our Europeanoperations. We restated our financial statements for fiscal years 2000 and 2001and the first three quarters of fiscal 2002 related to an understatement ofaccrued expatriate compensation and overstatement of recoverable value addedtaxes.

 

*Income Taxes:*    We recorded theincome tax effects of the restatements in each period using the marginalfederal and state income tax rates.

 

The effect of the restatement on the consolidated financial statementsfor the quarter and nine months ended January 31, 2002 is summarized asfollows (in thousands, except per share data): 
|                                 |   | **For  the Quarter Ended January 31, 2002** |       | **For  the Nine Months Ended January 31,  2002** |       |
|--------------------------------------|--------|--------------------------------------------------|------------|--------------------------------------------------|------------|
|                                 |   | **As previouslyReported**                        |       | **As Restated**                                  |       | **As previouslyReported** |   | **As Restated** |   |
|                                 |   |                                             |       |                                             |       |   |   |   |   |
| **Net sales**                        |   | **$**                                            | **33,694** | ** **                                       | **$**      | **33,283** | ** ** | **$** | **117,331** | ** ** | **$** | **118,312** | ** ** |
| **Cost of sales**                    |   | **22,477**                                       | ** ** | **22,217**                                       | ** ** | **72,487** | ** ** | **73,009** | ** ** |
|                                 |   |                                             | ** ** |                                             | ** ** |   | ** ** |   | ** ** |
| **Gross profit**                     |   | **11,217**                                       | ** ** | **11,066**                                       | ** ** | **44,844** | ** ** | **45,303** | ** ** |
| **Total operating expenses**         |   | **23,085**                                       | ** ** | **23,166**                                       | ** ** | **57,647** | ** ** | **57,890** | ** ** |
|                                 |   |                                             | ** ** |                                             | ** ** |   | ** ** |   | ** ** |
| **Operating loss**                   |   | **(11,868**                                      | **)**      | **(12,100**                                      | **)**      | **(12,803** | **)** | **(12,587** | **)** |
| **Net loss**                         |   | **$**                                            | **(8,350** | **)**                                            | **$**      | **(8,502** | **)** | **$** | **(9,477** | **)** | **$** | **(9,335** | **)** |
| **Basic and diluted loss per share** |   | **$**                                            | **(0.79**  | **)**                                            | **$**      | **(0.80** | **)** | **$** | **(0.90** | **)** | **$** | **(0.88** | **)** |

 

Results identified in the above table as previously reported includereclassifications to conform to EITF 00-10 “Accounting for Shipping andHandling Fees and Costs” and SAB 101 “Revenue Recognition in FinancialStatements” that increased net sales and cost of sales for the quarter endedJanuary 31, 2002 by $965,000 ($3,795,000 for the nine months then ended)and to reclassify licensing and royalty income of $93,000 to net sales($269,000 for the nine months then ended).

 

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**Note 2.Recently Issued Pronouncements**

 

In June 2002, the Financial Accounting Standards Board (FASB)issued Statement of Financial Accounting Standards (SFAS) No. 146,“Accounting for Costs Associated with Exit or Disposal Activities”. Thestandard requires companies to recognize costs associated with exit or disposalactivities when they are incurred rather than at the date of a commitment to anexit or disposal plan. Examples of costs covered by the standard include leasetermination costs and certain employee severance costs that are associated witha restructuring, discontinued operation, plant closing, or exit or disposalactivity. SFAS No. 146 is to be applied prospectively to exit or disposalactivities initiated after December 31, 2002. We adopted SFAS No. 146prospectively on January 1, 2003 and it did not have a material impact onour consolidated results of operations or financial position.

 

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In December 2002, the FASB issued SFAS No. 148, “Accountingfor Stock-based Compensation—Transition and Disclosure”. The standard providesalternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock-based employee compensation. In addition, SFASNo. 148 amends the disclosure requirements for SFAS No. 123 torequire more prominent and more frequent disclosures in financial statementsabout the effects of stock-based compensation. SFAS No. 148 is effectivefor fiscal years ending after December 31, 2002. We do not expect theadoption of this pronouncement to have a material effect on the consolidatedresults of operations or financial position.

 

**Note 3.Reclassifications**

 

Certain prior year balances have been reclassified to conform tocurrent year presentation.

 

**Note 4.Earnings (Loss) Per Share**

 

Basic earnings (loss) per share is based on the weighted average numberof common shares outstanding. Diluted earnings (loss) per share is based on theweighted average number of common shares and equivalents outstanding. Commonshare equivalents included in the computation represent shares issuable uponassumed exercise of outstanding stock options except when the effect of theirinclusion would be antidilutive.

 

**Note 5.Comprehensive Income (Loss)**

 

The components of our total comprehensive loss were:
|                                          |   | **For  the Quarter Ended January 31,** |           | **For  the Nine Months Ended January 31,** |       |
|-----------------------------------------------|--------|---------------------------------------------|----------------|-------------------------------------------------|------------|
|                                          |   | **2003**                                    |           | **2002**                                        |       | **2003** |   | **2002** |   |
|                                          |   |                                        |           |                                            |       |   |   |   |   |
| **Net loss**                                  |   | **$**                                       | **(9,700,419** | **)**                                           | **$**      | **(8,502,080** | **)** | **$** | **(11,006,314** | **)** | **$** | **(9,334,708** | **)** |
| **Foreign currency translation  adjustments** |   | **—**                                  | ** **     | **69,255**                                      | ** ** | **—** | ** ** | **23,878** | ** ** |
|                                          |   |                                        |           |                                            |       |   |   |   |   |
| **Comprehensive loss**                        |   | **$**                                       | **(9,700,419** | **)**                                           | **$**      | **(8,432,825** | **)** | **$** | **(11,006,314** | **)** | **$** | **(9,310,830** | **)** |

 

 

**Note 6.Debt**

 

In March 2002, we entered into a loan agreement with WashingtonMutual Bank (Washington Mutual) to replace our $55 million line of creditwith a $35 million line of credit which expires on August 1, 2003.Washington Mutual included Bank of America, N.A. (Bank of America) in thearrangement as co-lender. Effective January 23, 2003, we renewed andmodified our loan agreement to reduce the line of credit to $20 millionand allow our co-lender, Bank of America to exit the agreement. The newagreement expires on March 31, 2003 and is collateralized by cashcollateral and a security interest in our accounts receivable, inventory,furniture and equipment, contract rights and general intangibles. Availabilityof funds under the line is determined by a borrowing formula and those fundsare to be used for general corporate purposes. Interest on borrowings ischarged and payable monthly at either the Prime rate or the LIBOR rate plus2.75%, each as defined in the loan agreement, at the borrower’s election. AtJanuary 31, 2003, letters of credit outstanding against this line 

 

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of credit totaledapproximately $13.1 million and there were no working capital advancesoutstanding. The loan agreement contains certain restrictive covenants coveringminimum working capital and tangible net worth. At January 31, 2003, wewere in compliance with these covenants. Under the terms of our renewed andmodified loan agreement with Washington Mutual we established a money marketaccount for cash collateral to be used as additional security. The$7.0 million balance of restricted cash is pledged through March 31,2003, the termination date of the renewed and modified loan agreement withWashington Mutual. Our loan agreement with Wells Fargo (described below)contains no requirement for a cash collateral account.

 

On March 13, 2003, we entered into a loan agreement with WellsFargo Bank, N.A (Wells Fargo) as agent and Century Business Credit Corp, anaffiliate of Wells Fargo, as collateral agent and lender for a $35 millionline of credit, replacing our previous line of credit with Washington Mutual.The availability of funds under the revolving line of credit is determined by aborrowing formula, and advances on the line are to be used for generalcorporate purposes. Interest on advances is charged at either the LIBOR rateplus 2.75% or the Wells Fargo Bank reference rate, each as defined in the loanagreement, at the borrower’s election. The line of credit expires onMarch 12, 2005, and may be renewed annually thereafter or terminated underthe terms of the agreement. The line is collateralized by a security interestin our accounts receivable, inventory, furniture and equipment, contract rightsand general intangibles. The loan agreement contains certain restrictivecovenants covering minimum net worth, minimum working capital and maximumcapital expenditures. We are currently in compliance with these covenants.

 

**Note 7.Shareholders’ Equity**

 

During the nine months ended January 31, 2003, we sold 29,057shares of common stock under our employee stock purchase plan and pursuant tothe exercise of stock options.

 

On November 14, 2002, we issued 17,500 shares of restricted stockand recorded deferred compensation relating to this grant of $63,000. Thedeferred compensation is being amortized over 12 months, the vestingperiod of the restricted stock.

 

**Note 8.Commitments**

 

We lease our office facilities, retail stores, a distribution centerand certain office equipment under operating leases. On December 3, 2002our board of directors decided to close our fourteen retail stores. We expectto be out of all of these stores and to settle all future rent obligationsrelating to these stores by April 30, 2003.

 

On January 24, 2001, we entered into a sale and leasebackagreement for approximately $6.7 million of capital assets. The resultingcommitment is accounted for as a capital lease, with terms between three andfive years. We deferred a gain of approximately $0.4 million, which isbeing amortized in proportion to the amortization of the leased assets. Inconjunction with closing our retail stores, we executed an early buyoutagreement on December 27, 2002 for those assets located at our retailstores. These assets will be liquidated as our stores are closed.

 

Partially as a result of our restructuring (described in Note 9),we have excess warehouse capacity at our distribution center. We have subleasedthis unused capacity to third parties, with lease terms between four and eightyears.

 

9

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Future minimum payments, by year and in the aggregate, under capitalleases and noncancelable operating leases consisted of the following atJanuary 31, 2003: 
| **As  of January 31,**                  |   | **Capital  Leases** |        | **Operating  Leases** |          |
|----------------------------------------------|--------|---------------------|-------------|-----------------------|---------------|
|                                         |   |                |        |                  |          |
| **2003**                                     |   | **$**               | **593,330** | ** **            | **$**         | **769,770** | ** ** |
| **2004**                                     |   | **2,108,185**       | ** **  | **3,053,468**         | ** **    |
| **2005**                                     |   | **634,442**         | ** **  | **3,079,194**         | ** **    |
| **2006**                                     |   | **114,433**         | ** **  | **3,023,473**         | ** **    |
| **2007**                                     |   | **—**          | ** **  | **2,123,097**         | ** **    |
| **Thereafter**                               |   | **—**          | ** **  | **4,247,108**         | ** **    |
|                                         |   |                | ** **  |                  | ** **    |
| **Minimum lease payments**                   |   | **3,450,390**       | ** **  | **16,296,110**        | ** **    |
| **Less sublease payments**                   |   | **—**          | ** **  | **(8,484,465**        | **)**         |
|                                         |   |                | ** **  |                  | ** **    |
| **Total minimum lease payments**             |   | **3,450,390**       | ** **  | **$**                 | **7,811,645** | ** ** |
|                                         |   |                | ** **  |                  | ** **    |
| **Less amount representing interest**        |   | **(201,162**        | **)**       |                  | ** **    |
|                                         |   |                | ** **  |                  | ** **    |
| **Present value of minimum lease  payments** |   | **3,249,228**       | ** **  |                  | ** **    |
| **Less: current portion**                    |   | **(2,400,464**      | **)**       |                  | ** **    |
|                                         |   |                | ** **  |                  | ** **    |
|                                         |   | **$**               | **848,764** | ** **            |          | ** ** |

 

As of March 31, 2003, six retail store leases were still beingnegotiated. The future remaining payments under these leases not included abovetotal approximately $4.2 million. We expect to negotiate terminating theseleases for substantially less than this amount.

 

**Note 9.Restructuring, Asset Impairment and Retail Store Closure Expenses**

 

We have two restructuringplans and activities relating to these plans are as follows:

 

**(a)****          **2003 Restructuring Plan

 

In the third quarter offiscal 2003 we announced plans to close 10 additional retail stores, so thatall of our retail stores would be closed by April  30, 2003.  We recorded a charge of $8.5  millionrelating to store closure expenses for the additional 10 stores.  This charge included lease terminationcosts, termination and severance benefits to be paid as a result of theinvoluntary termination of approximately 88 employees located at both ourretail stores and corporate retail division, the write-down of other currentassets, furniture and equipment and deferred rent to net realizable value andother costs resulting from the closure of our retail stores.

 

For the three and nine months ended January 31, 2003, the components ofthe restructuring charge recorded were as follows:

 
| Lease Obligations         |   | $         | 3,916,026 |   |
|---------------------------|--------|-----------|-----------|--------|
| Asset Impairment          |   | 3,635,642 |      |
| Termination Benefits      |   | 185,383   |      |
| Other Restructuring Costs |   | 742,805   |      |
|                      |   | $         | 8,479,856 |   |

 

10

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Activity in the accrued liability associated with the cash portion ofthe 2003 Restructuring Plan consisted of the following:

 
|                      |   | **Total  Accrued  Liabilities** |      | **Payments** |   | **Balance  at  January 31,  2003** |   | **Due  Within  1 Year** |      | **Due  After  1 Year** |   |
|---------------------------|--------|---------------------------------|-----------|--------------|--------|------------------------------------|--------|-------------------------|-----------|------------------------|--------|
| Lease Obligations         |   | $                               | 3,916,026 |         | $      | (828,364                           | )      | $                       | 3,087,662 |                   | $      | 3,087,662 |   | $ | — |   |
| Termination Benefits      |   | 185,383                         |      | (12,035      | )      | 173,348                            |   | 173,348                 |      | —                 |   |
| Other Restructuring Costs |   | 685,550                         |      | (159,449     | )      | 526,101                            |   | 526,101                 |      | —                 |   |
|                      |   | $                               | 4,786,959 |         | $      | (999,848                           | )      | $                       | 3,787,111 |                   | $      | 3,787,111 |   | $ | — |   |

 

As of January 31,2003 one of the retail store employees had been terminated and $12,035 inseverance and termination benefits relating to the retail store closure hadbeen paid out.

 

The amounts recordedrepresent management’s best estimate of the costs to be incurred.  The actual amounts incurred will vary fromthese estimates to the extent future developments differ from the underlyingassumptions used in development of the accrual.  We currently expect the store closure charges to be at the lowend of our previous estimates, which were $12 to $15 million pre-tax.  The full tax effect of the charge has notyet been determined and to the extent losses cannot be carried back they willbe available to offset future profits. We originally estimated the after-tax charge to be in the range of $10to $13 million and the after-tax cash impact of the charge to be in the rangeof $5 to $7 million. We currently expect that these charges will be at the lowend of this range.  We expect tosubstantially complete the closure of our retail stores and to settle therelated liabilities by April  30, 2003.

 

In connection with the decision to close the retail stores we enteredinto an agreement with Hilco Merchant Resources, LLC (Hilco) to act as ouragent for conducting the liquidation of store inventories and to assist withnegotiations for termination of the store leases.  As a guaranty of Hilco’s performance we receive a guaranteedpayment of 31.2% of the aggregate retail price of the inventory being liquidated.  As compensation for its services, Hilcoreceives a base fee up to 2.5% of the retail price of the liquidation inventoryplus all expenses incurred in connection with the liquidation event (thisincludes store level operating expenses). To the extent the proceeds from the liquidation sales exceed the sum ofthe guaranteed payment plus all expenses (store operating and Hilco’s internalexpenses) plus Hilco’s base fee such excess proceeds are to be split 80% to usand 20% to Hilco.  As of January 31, 2003, the guaranteed payment totaled approximately $4.7  million andHilco’s fees totaled approximately $3.1  million.  The $3.1  million has been recorded inselling, general and administrative expenses and includes Hilco’s base fees,reimbursable expenses incurred by Hilco and certain store level operatingexpenses paid for by Hilco under the terms of the agreement.

 

(b)          2002 Restructuring Plan

 

In the third quarter of fiscal 2002, we implemented a restructuringplan to reduce our operating costs, streamline our organizational structure andfocus on those areas of our business that we believe provide the greatestgrowth and profit opportunities.  Themajor initiatives of this restructuring plan included closing our wholly-ownedEuropean subsidiary, Cutter & Buck (Europe) B.V., establishing a licensingrelationship to serve key European markets, refining our Company-owned retailstore strategy, consolidating and restructuring our women’s line sales forcesand discontinuing our golf shoe business, discontinuing the dressier side ofour women’s line, closing three under-performing Company-owned retail stores infiscal 2003, recording losses on subleases of

 

11

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our excess warehouse capacity at our distribution center and certainmanagement changes.  As a result ofimplementing our 2002 restructuring plan we recorded charges of approximately$8.5 million for the year ended April 30, 2002 and $4.9 million for the ninemonths ended January 31, 2003.

 

The components of the 2002Restructuring Plan were as follows:

 
|                              |   | **Nine  Months  Ended  January 31,  2003** |      | **Twelve  Months  Ended  April 30, 2002** |   |
|-----------------------------------|--------|--------------------------------------------|-----------|-------------------------------------------|--------|
| Lease Obligations                 |   | $                                          | 4,458,119 |                                      | $      | 1,046,638 |   |
| Asset Impairment                  |   | 376,863                                    |      | 4,986,718                                 |   |
| Termination Benefits              |   | (113,420                                   | )         | 1,025,793                                 |   |
| Foreign Currency Translation Loss |   | 43,181                                     |      | 539,717                                   |   |
| Other Restructuring Costs         |   | 156,150                                    |      | 920,906                                   |   |
|                              |   | $                                          | 4,920,893 |                                      | $      | 8,519,772 |   |

 

Of the $4.9 million recorded for the nine months ended January 31,2003, $3.3 million related to losses on subleases of our excess warehousecapacity at our distribution center, $1.2 million related to lease terminationcosts for the four stores identified for closure , $0.3 million related toadditional reserves against receivable balances with both our former Chief ExecutiveOfficer and our former President and $0.1 million related to additionalexpenses arising under the 2002 Restructuring Plan. The liability resultingfrom recognizing the losses on subleases has been recorded in other currentliabilities and other long-term liabilities on our Condensed ConsolidatedBalance Sheets.

 

Included in the $8.5 millionrestructuring charge recorded in fiscal 2002 is a charge related to ourEuropean operations of approximately $2.9 million.  This component of the charge included termination and severancebenefits, reserves necessary to write down that operation’s receivables due tolower than anticipated recoveries, the write down of other current assets,furniture and equipment and leasehold improvements to net realizable value, therecognition of accumulated translation losses and other costs resulting fromclosing our European subsidiary. Effective May 1, 2002, we entered into a license agreement withEurostyle Ltd. (Eurostyle) to distribute our men’s and women’s Golf andClassic apparel collections and golf accessories throughout Europe. The licenseagreement requires Eurostyle to make certain minimum royalty payments andexpires on June 30, 2005. Effective May 1, 2002 we also entered intoan asset purchase agreement with Eurostyle to sell inventory, certain accountsreceivable balances and fixtures for a total purchase price of $1.1million.  This agreement coveredsubstantially all of our remaining inventory in Europe, fixturing, furniture andequipment.  Under the terms of the agreement,the total purchase price will be paid in installments which will besubstantially complete by July 2003.

 

Also included in the $8.5million charge recorded in fiscal 2002 is a charge of approximately $3.1million related to refining our retail store strategy.  We engaged a consultant to assist us in thisprocess and decided to close three under-performing stores in 2003 and close afourth store at its lease escape date. We also adjusted the net book value of anotherfull-price store to its estimated fair value. The $3.1 million charge included store fixed asset write-downs(primarily leasehold improvements for all five stores), lease termination costsand store closure costs for the four stores we intended to close.

 

Our 2002 Restructuring Planalso included (i) consolidating and restructuring our women’s line salesforces.  The charge relating to thisactivity was $1.4 million relating to the write-off of commission draws andsample

 

12

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receivable balances (ii) discontinuation of our golf shoe business aswell as the dressier side of our women’s business.  The charge associated with this activity was $0.4 millionrelating to the write-off of prepaid sample expenses for our Fall 2002 fashionline and termination benefits (iii) a charge of $0.4 million relating to thetransition of two former executives (iv) a charge of $0.3 million relating tolosses on the sublease of excess warehouse capacity.

 

For the period January 31,2002 to April 30, 2002, activity in the accrued liability account associatedwith the cash portion of the restructuring charges consisted of the following:

 
|                      |   | **Total  Accrued  Liabilities** |      | **Payments** |   | **Balance  at  April 30,  2002** |   | **Due  Within  1 Year** |      | **Due  After  1 Year** |   |
|---------------------------|--------|---------------------------------|-----------|--------------|--------|----------------------------------|--------|-------------------------|-----------|------------------------|--------|
| Lease Obligations         |   | $                               | 1,177,153 |         | $      | —                           |   | $                       | 1,177,153 |                   | $      | 933,651 |   | $ | 243,502 |   |
| Termination Benefits      |   | 945,293                         |      | (139,259     | )      | 806,034                          |   | 806,034                 |      | —                 |   |
| Other Restructuring Costs |   | 920,906                         |      | (172,120     | )      | 748,786                          |   | 748,786                 |      | —                 |   |
|                      |   | $                               | 3,043,352 |         | $      | (311,379                         | )      | $                       | 2,731,973 |                   | $      | 2,488,471 |   | $ | 243,502 |   |

 

For the period April 30, 2002 to January 31, 2003, activity in theaccrued liability account associated with the cash portion of the restructuringcharges consisted of the following:

 
|                       |   | **Balance  at  April 30, 2002** |      | **Subsequent  Accruals, net** |   | **Subsequent  Payments** |   | **Balance  at  January 31, 2003** |       | **Due  within 1  Year** |   | **Due  after 1  Year** |   |
|----------------------------|--------|---------------------------------|-----------|-------------------------------|--------|--------------------------|--------|-----------------------------------|------------|-------------------------|--------|------------------------|--------|
| Lease  Obligations         |   | $                               | 1,177,153 |                          | $      | 4,458,119                |   | $                                 | (2,062,402 | )                       | $      | 3,572,870              |   | $ | 958,094 |   | $ | 2,614,776 |   |
| Termination  Benefits      |   | 806,034                         |      | (113,420                      | )      | (654,961                 | )      | 37,653                            |       | 37,653                  |   | —                 |   |
| Other  Restructuring Costs |   | 748,786                         |      | 232,234                       |   | (915,579                 | )      | 65,441                            |       | 65,441                  |   | —                 |   |
|                       |   | $                               | 2,731,973 |                          | $      | 4,576,933                |   | $                                 | (3,632,942 | )                       | $      | 3,675,964              |   | $ | 1,061,188 |   | $ | 2,614,776 |   |

 

Total severance and termination benefits as a result of the 2002Restructuring Plan related to approximately 63 employees, 35 of whom have beenterminated.  Total cash paid forseverance and termination benefits was approximately $0.7  million.

 

**Note 10.Restatement Expenses**

 

As described in Note 1 to our financial statements, we restated certainof our historical financial statements for irregularities and errors.  The restatements required a thoroughinvestigation of what had occurred and how it should be corrected.  In addition to the extensive efforts of ouremployees in this investigation, we utilized our regular outside legal counsel,special independent legal counsel, a forensic accounting firm, our independentauditors and other specialists for additional procedures.  The resulting professional fees plus accruedretention bonuses to certain key employees and amortization of the premium forthe replacement Directors’ and Officers’ liability insurance amounted toapproximately $1.3 million for the three months ended January 31, 2003($2.5 million for the nine months then ended). Included in this total isapproximately $0.4 million accrued for retention bonuses ($0.6 million for thenine months then ended).   Retentionbonuses will be accrued each period as they are earned through the term of the bonusplan, and total costs will aggregate to as much as $2.4 million, payablein March 2004. We will continue to incur substantial legal and otherprofessional service costs in connection with the shareholder lawsuits andresponding to the inquiries of the SEC.

 

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**Note 11.Litigation**

 

We are party to various legal proceedings, including the shareholderlawsuits that arose from the restatement of our financial statements.

 

These proceedings, are described in Part II, Item 1—LegalProceedings. We are not in a position at this time to quantify the amount orrange of any possible losses related to those claims.

 

On December 6, 2002, Genesis Insurance Company notified us that itintends to rescind our Directors’ and Officers’ liability insurance coverage asa result of alleged misrepresentations made in connection with the policyapplication. We do not believe the insurer is entitled to rescind the policy.We intend to dispute this action and, therefore, on December 26, 2002, wefiled suit against Genesis in the United States District Court for the WesternDistrict of Washington. We have subsequently obtained replacement Directors’and Officers’ liability insurance coverage from another carrier. This coveragewill not, however, protect us against liabilities arising from the existinglawsuits described in Part II, Item 1—Legal Proceedings.

 

On November 4, 2002, the Securities and Exchange Commission issueda Formal Order of Investigation with respect to the circumstances underlyingour decision in August 2002 to restate our historical financial results.We are cooperating in the investigation by the SEC and are not in a position atthis time to quantify the amount or range of any possible losses related to theSEC investigation.

 

We are also party to other routine litigation incidental to ourbusiness. Management believes the ultimate resolution of these other routinematters will not have a material adverse effect on our financial position andresults of operations.

 

**Note 12.Segment Reporting**

 

We have two operating segments: wholesale and retail. The wholesalesegment consists of designing, sourcing, and selling high quality sportswear togolf and specialty retailers, to corporations, and to our internationaldistributors and licensees. The retail segment reflects the operations of ourretail stores. Previously ecommerce operations were included with our retailsegment. However, with the closure of our retail stores we have changed the waywe look at our business and ecommerce is now included in our wholesale segment.The accounting policies of the segments are the same as those described in thesummary of significant accounting policies. These segments reflect thereporting basis used internally by senior management to evaluate performanceand allocate resources. The retail segment includes direct operating expensesbut does not include any overhead allocations. Financial information for oursegments is as follows:

 

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|                                             |   | **Three Months Ended January 31, 2003** |       | **Three Months Ended January 31, 2002** |       |
|--------------------------------------------------|--------|----------------------------------------------|------------|----------------------------------------------|------------|
|                                             |   | **Wholesale**                                |       | **Retail**                                   |       | **Total** |   | **Wholesale** |   | **Retail** |   | **Total** |   |
|                                             |   |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Net sales**                                    |   | **$**                                        | **25,583** | ** **                                   | **$**      | **9,000** | ** ** | **$** | **34,583** | ** ** | **$** | **28,401** | ** ** | **$** | **4,882** | ** ** | **$** | **33,283** | ** ** |
| **Gross profit**                                 |   | **9,975**                                    | ** ** | **4,888**                                    | ** ** | **14,863** | ** ** | **8,164** | ** ** | **2,902** | ** ** | **11,066** | ** ** |
| **Operating expenses:**                          |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Depreciation & amortization**              |   | **1,383**                                    | ** ** | **242**                                      | ** ** | **1,625** | ** ** | **1,167** | ** ** | **329** | ** ** | **1,496** | ** ** |
| **Other selling, general &  administrative** |   | **10,153**                                   | ** ** | **3,984**                                    | ** ** | **14,137** | ** ** | **11,923** | ** ** | **2,365** | ** ** | **14,288** | ** ** |
| **Restructuring and asset impairment**           |   | **(45**                                      | **)**      | **—**                                   | ** ** | **(45** | **)** | **4,879** | ** ** | **—** | ** ** | **4,879** | ** ** |
| **Retail store closure expenses**                |   | **—**                                   | ** ** | **9,556**                                    | ** ** | **9,556** | ** ** | **—** | ** ** | **2,503** | ** ** | **2,503** | ** ** |
| **Restatement expenses**                         |   | **1,275**                                    | ** ** | **—**                                   | ** ** | **1,275** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                                             |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total operating expenses**                     |   | **12,766**                                   | ** ** | **13,782**                                   | ** ** | **26,548** | ** ** | **17,969** | ** ** | **5,197** | ** ** | **23,166** | ** ** |
| **Interest expense**                             |   | **157**                                      | ** ** | **—**                                   | ** ** | **157** | ** ** | **382** | ** ** | **—** | ** ** | **382** | ** ** |
| **Other income**                                 |   | **(62**                                      | **)**      | **—**                                   | ** ** | **(62** | **)** | **(46** | **)** | **—** | ** ** | **(46** | **)** |
|                                             |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Loss before income taxes**                     |   | **$**                                        | **(2,886** | **)**                                        | **$**      | **(8,894** | **)** | **$** | **(11,780** | **)** | **$** | **(10,141** | **)** | **$** | **(2,295** | **)** | **$** | **(12,436** | **)** |
|                                             |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total assets at end of period**                |   | **$**                                        | **93,910** | ** **                                   | **$**      | **3,134** | ** ** | **$** | **97,044** | ** ** | **$** | **102,126** | ** ** | **$** | **9,191** | ** ** | **$** | **111,317** | ** ** |

 
|                                             |   | **Nine Months Ended January 31, 2003** |       | **Nine Months Ended January 31, 2002** |       |
|--------------------------------------------------|--------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                             |   | **Wholesale**                               |       | **Retail**                                  |       | **Total** |   | **Wholesale** |   | **Retail** |   | **Total** |   |
|                                             |   |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net sales**                                    |   | **$**                                       | **95,395** | ** **                                  | **$**      | **15,144** | ** ** | **$** | **110,539** | ** ** | **$** | **108,411** | ** ** | **$** | **9,901** | ** ** | **$** | **118,312** | ** ** |
| **Gross profit**                                 |   | **38,688**                                  | ** ** | **8,237**                                   | ** ** | **46,925** | ** ** | **39,467** | ** ** | **5,836** | ** ** | **45,303** | ** ** |
| **Operating expenses:**                          |   |                                        | ** ** |                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Depreciation & amortization**              |   | **3,935**                                   | ** ** | **677**                                     | ** ** | **4,612** | ** ** | **3,901** | ** ** | **903** | ** ** | **4,804** | ** ** |
| **Other selling, general &  administrative** |   | **31,822**                                  | ** ** | **7,998**                                   | ** ** | **39,820** | ** ** | **39,083** | ** ** | **6,621** | ** ** | **45,704** | ** ** |
| **Restructuring and asset impairment**           |   | **3,845**                                   | ** ** | **—**                                  | ** ** | **3,845** | ** ** | **4,879** | ** ** | **—** | ** ** | **4,879** | ** ** |
| **Retail store closure expenses**                |   | **—**                                  | ** ** | **9,556**                                   | ** ** | **9,556** | ** ** | **—** | ** ** | **2,503** | ** ** | **2,503** | ** ** |
| **Restatement expenses**                         |   | **2,529**                                   | ** ** | **—**                                  | ** ** | **2,529** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                                             |   |                                        | ** ** |                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total operating expenses**                     |   | **42,131**                                  | ** ** | **18,231**                                  | ** ** | **60,362** | ** ** | **47,863** | ** ** | **10,027** | ** ** | **57,890** | ** ** |
| **Interest expense**                             |   | **528**                                     | ** ** | **—**                                  | ** ** | **528** | ** ** | **1,349** | ** ** | **—** | ** ** | **1,349** | ** ** |
| **Other income**                                 |   | **(207**                                    | **)**      | **—**                                  | ** ** | **(207** | **)** | **(69** | **)** | **—** | ** ** | **(69** | **)** |
|                                             |   |                                        | ** ** |                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Loss before income taxes**                     |   | **$**                                       | **(3,764** | **)**                                       | **$**      | **(9,994** | **)** | **$** | **(13,758** | **)** | **$** | **(9,676** | **)** | **$** | **(4,191** | **)** | **$** | **(13,867** | **)** |
|                                             |   |                                        | ** ** |                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total assets at end of period**                |   | **$**                                       | **93,910** | ** **                                  | **$**      | **3,134** | ** ** | **$** | **97,044** | ** ** | **$** | **102,126** | ** ** | **$** | **9,191** | ** ** | **$** | **111,317** | ** ** |

 

 

**Note 13.Income Taxes**

 

We recorded approximately $2.7 million of income tax benefit inthe first nine months of fiscal 2003 compared to $4.5 million for the sameperiod of fiscal 2002. We have provided a valuation allowance against ourdeferred tax assets which include net operating loss carryforwards. As a result,the effective rates for income taxes were 20% and 33%, respectively.

 

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

*Statements made in this filing that are nothistorical facts are forward-looking statements that involve risks anduncertainties. Forward-looking statements typically are identified by the useof such terms as “may,” “will,” “expect,” “believe,” “anticipate,” “estimate,”“plan” and similar words, although some forward-looking statements areexpressed differently. You should be aware that our actual results could differmaterially from those contained in any forward-looking statement due to anumber of factors, which include, but are not limited to the following: thespecial risk factors and uncertainties set forth below; our ability tonegotiate lease termination agreements on favorable terms; our exposure toadditional costs resulting from the termination of retail operations, includingcosts associated with any related litigation; risks related to our ongoingshareholder lawsuits and SEC investigation and our suit against GenesisInsurance Company; risks related to a potential failure to realize anticipatedbenefits in connection with the liquidation of our products; our ability tocontrol costs and expenses; our ability to utilize tax losses; relations withand performance of suppliers; our ability to carry out successful designs andeffectively advertise and communicate with the marketplace and to penetratechosen distribution channels; competition; our ability to retain key employeesand to maintain the integrity of our technology and information systems; accessto capital; risks related to the timely performance of third parties, such asshipping companies, including risks of strikes or labor disputes involvingthese third parties; maintaining satisfactory relationships with our banks;political and trade relations; the overall level of consumer spending onapparel; global economic conditions and additional threatened terrorist attacksand responses thereto, including war. Additional information on these and otherfactors that could affect our financial results is set forth below and in ourForm 10-K for the year ended April 30, 2002. Finally, there may beother factors not mentioned above or included in our SEC filings that may causeour actual results to differ materially from those in any forward-lookingstatement. You should not place undue reliance on these forward-lookingstatements. We assume no obligation to update any forward-looking statements asa result of new information, future events or developments, except as requiredby federal securities laws.*

 

*All references to fiscal years are to our fiscalyears ended April 30.*

 

**Overview**

 

Cutter & Buck designs, sources and markets men’s and women’ssportswear, fashion and outerwear apparel. Our net sales are generated from ourtwo operating segments: wholesale and retail. The wholesale segment consists ofdesigning, sourcing, and selling high quality sportswear to golf and specialtyretailers, to corporations, and to our international distributors andlicensees. The retail segment reflects the operations of our retail stores. InDecember 2002, our Board of Directors decided we should focus on our wholesalesegment and close our fourteen retail stores. Closure of the retail stores ismore fully described below. Previously, ecommerce operations were included inour retail segment. However, with the closure of our retail stores we havechanged the way we look at our business and ecommerce is now included in ourwholesale segment.

 

**Restatement**

 

In consultation with our independent auditors, we restated our auditedfinancial statements for the years ended April 30, 2000 and 2001, and ourunaudited financial statements for each of the quarters in those years and thequarters ended July 31, 2001, October 31, 2001 and January 31,2002. We initially announced our intention to restate certain financialstatements on August 12, 2002. That announcement was made after our newChief Executive Officer, appointed April 2002, discovered certainaccounting irregularities. In early August, shortly after her discovery, theBoard of Directors appointed a Special Committee to investigate theseirregularities. The preliminary conclusion of the Special Committee was thatapproximately $5.8 million of 

 

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shipments to three distributors made on a consignment basis duringfiscal 2000 had been recorded as sales of inventory for that year. Subsequentto that announcement, the Special Committee continued its investigation inorder to confirm whether any additional accounting irregularities occurred. TheSpecial Committee was assisted in its investigation by our regular outside legalcounsel, special independent legal counsel, a forensic accounting firm and ourindependent auditors. Accordingly, the results of operations for the quarterand nine months ended January 31, 2003 included herein and referred tobelow are after restatement, which is more fully discussed in Note 1 tothe financial statements.

 

**SpecialRisk Factors and Uncertainties**

 

***We are currently defending severalshareholder lawsuits.***    Following the restatement of our financialresults, we have received notice of three class action lawsuits filed againstus and certain of our former directors and officers purportedly brought onbehalf of certain of our current and former shareholders. These suits generallyallege that we issued false and misleading statements during fiscal years 2000to 2002, in violation of federal securities laws. If we choose to settle thesesuits without going to trial, we may be required to pay the plaintiffs asubstantial sum in the form of damages. Alternatively, if these cases go totrial and we are ultimately adjudged to have violated federal securities laws,we may incur substantial losses as a result of an award of damages to theplaintiffs. In addition, we are party to a shareholder derivative suitpurportedly brought on our own behalf against our current and former directorsand officers, alleging among other things, breaches of fiduciary duty. Theindemnification provisions contained in our Articles of Incorporation mayrequire us to indemnify our current and former directors and officers who arenamed as defendants against the allegations contained in these suits.Regardless of the ultimate outcome of these suits, however, litigation of thistype is expensive and will require that we devote substantial resources andmanagement attention to defend these proceedings. Moreover, the mere presenceof these lawsuits may materially harm our business for the same reasons setforth in the following risks.

 

***We may not have adequate Directors’and Officers’ liability insurance.***    On December 6,2002, Genesis Insurance Company notified us that it intends to rescind ourDirectors’ and Officers’ liability insurance coverage as a result of allegedmisrepresentations made in connection with the policy application. We do notbelieve the insurer is entitled to rescind the policy and filed suit againstGenesis to dispute this action. We have subsequently obtained replacementDirector’s and Officer’s liability insurance coverage from another carrier, butthis replacement coverage will not protect us against liabilities resultingfrom the existing shareholder lawsuits. If we are unable to reinstate liabilityinsurance with respect to the existing shareholder suits, our business andfinancial condition could be adversely affected.

 

***Our business has been adversely affectedby our decision to restate our financial results.***    Following  the announcement of our decision to restateour financial statements, we experienced a decrease in bookings. Our managementbelieves that some of this decrease may represent fears by customers that wewill become unreliable in supplying our products or that our brand image willbe harmed. If our customers lose confidence in our ability to supply qualityproducts reliably, our business may be materially harmed. In addition, thewillingness of suppliers to do business with us and changes in trade termscould negatively impact future margins and costs.

 

***We had a substantial loss in fiscalyear 2002 and the first nine months of fiscal 2003 and may continue to incurlosses in future periods.***    We incurred a net loss of approximately$10.4 million during the fiscal year ended April 30, 2002, includinga restructuring and asset impairment charge of approximately $8.5 millionbefore income tax effects. Our net loss for the nine months ended January 31,2003 was approximately $11.0 million including restructuring and retailstore closure charges of approximately $13.4 million and 

 

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restatement expenses of approximately $2.5 million before income taxeffects. As described in the notes to the financial statements, as part of ourrestructuring we have substantially streamlined our sales infrastructure andeliminated certain product lines and our retail stores. We believe theserestructuring and cost-cutting initiatives will reduce overall spending. If ourrestructuring efforts fail to adequately reduce costs, or if our sales are lessthan we project, we may continue to incur losses in future periods.

 

***We may have difficulty recruitingand retaining employees.***    Management believes that employee morale hasbeen impaired as a result of our recent management transition, shareholderlawsuits, earnings restatement as well as the attempted rescission of coverageby Genesis Insurance Company. As a result, we have provided financialincentives designed to retain certain key employees. For the nine months endedJanuary 31, 2003, restatement expenses include approximately$0.6 million of expenses relating to the retention bonus. There will be anongoing charge each quarter until April 2004 for the retention bonus,which will aggregate to as much as $2.4 million payable in March 2004*.* In addition, there will be recruitmentcosts to the extent departed officers are replaced and, under presentcircumstances, that recruitment could be difficult and costly.

 

***Our auditors have indicated thatthey believe there was a material weakness in our internal controls andprocedures.***    Followingour decision to restate our financial results, our independent auditors issueda letter to us indicating that they believed there was a material weakness, asdefined in authoritative auditing literature, in our internal accountingcontrols. The material weakness related to lack of compliance with orcircumvention of our procedures and controls by employees and management atvarious levels. In an effort to address these concerns, we brought in newmanagers, including a new Chief Financial Officer and have begun educating bothemployees and management about complying with procedures and controls andsetting the “tone at the top” to mitigate the risk that the events underlyingthe financial restatement will recur. There can be no assurance, however, thatthese efforts will be adequate to prevent future occurrences of the type givingrise to the restatement. If we fail to adequately address concerns regardingour internal controls and procedures, our business may be materially harmed.

 

***We have lost several key executiveswho had important relationships with our suppliers, customers and employees.***    Within thelast year we accepted the resignations of several of our key executives,including our former Chairman and Chief Executive Officer. These executives hadimportant relationships with our key suppliers, customers and employees. For usto execute our business plan, we must preserve and build upon our relationshipswith these suppliers, customers and employees in the absence of theseexecutives. While the terms of a Transition and Release Agreement prevent ourformer Chairman and Chief Executive Officer from competing with or solicitingbusiness or employees away from us, a court may refuse to enforce theprovisions of this agreement. In addition, we do not have similar agreementswith other former executives. If we are unable to preserve the relationshipswith our customers, suppliers and employees, or if any of our former executiveschoose to influence these individuals to our detriment, our business may bematerially harmed.

 

***We expect to incur substantial legaland other professional service costs.***    We have and willcontinue to incur substantial legal and other professional service costs inconnection with the shareholder lawsuits, responding to the inquiries of theSEC and as a result of our suit against Genesis. These costs cannot be determinedat this time.

 

***We may be required to indemnify ourcurrent and former officers.***    Former officers havemade indemnification claims against us related to the SEC and NASDAQinvestigations and the recent shareholder lawsuits. The ultimate cost of such indemnificationcannot currently be estimated nor can the extent to which any costs will becovered by insurance.

 

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***We liquidated our Europeansubsidiaries and now rely exclusively on relationships with a singledistributor for our European sales.***    As part of ourrestructuring, we completed the sale of substantially all of our Europeanassets to Eurostyle Ltd., a corporation formed under the laws of Ireland,and entered into a license agreement with Eurostyle. Following thesetransactions, we eliminated substantially all of our European sales force andliquidated our European subsidiaries, Cutter & Buck (Europe) B.V. andCutter & Buck GmbH. For the forseeable future, we intend to rely exclusivelyon our relationship with Eurostyle for the distribution and sale of ourproducts in Europe. We have less control over the marketing of our products byEurostyle and there can be no assurance that we will continue to achievehistorical levels of revenues in Europe pursuant to this new arrangement. If weare unable to effectively sell our products through this distributorship, ourbusiness may be materially harmed.

 

***We decided to close our retailstores.***    Ourboard of directors has decided to close all of our retail stores. We initiatedspecial sales events at our stores and expect to be out of these stores byApril 30, 2003. The closures involve special sales to liquidate storeinventories and negotiations with landlords to terminate lease obligations. Wecurrently expect the store closure charges to be at the low end of our previousestimates, which were $12 to $15 million pre-tax. If costs to liquidateinventory are greater than we currently estimate or the terms of leaseterminations are less favorable than estimated, expenses for closure of theretail stores could exceed our estimates. In addition, the stores were used toshowcase our products and provided brand recognition. If we are unable toshowcase our brand effectively without the use of our stores, our business maybe materially harmed.

 

**Results ofOperations**

 

***Three Months Ended January 31, 2003 Compared With Three MonthsEnded January 31, 2002***
|                                           |   | **Three Months Ended January 31, 2003** |       | **Three Months Ended January 31, 2002** |       |
|------------------------------------------------|--------|----------------------------------------------|------------|----------------------------------------------|------------|
|                                           |   | **Wholesale**                                |       | **Retail**                                   |       | **Total** |   | **Wholesale** |   | **Retail** |   | **Total** |   |
|                                           |   |                                         |       |                                         |       |   |   |   |   |   |   |   |   |
| **Net sales**                                  |   | **$**                                        | **25,583** | ** **                                   | **$**      | **9,000** | ** ** | **$** | **34,583** | ** ** | **$** | **28,401** | ** ** | **$** | **4,882** | ** ** | **$** | **33,283** | ** ** |
| **Gross profit**                               |   | **9,975**                                    | ** ** | **4,888**                                    | ** ** | **14,863** | ** ** | **8,164** | ** ** | **2,902** | ** ** | **11,066** | ** ** |
| **Operating expenses:**                        |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Depreciation & amortization**            |   | **1,383**                                    | ** ** | **242**                                      | ** ** | **1,625** | ** ** | **1,167** | ** ** | **329** | ** ** | **1,496** | ** ** |
| **Other selling, general and  administrative** |   | **10,153**                                   | ** ** | **3,984**                                    | ** ** | **14,137** | ** ** | **11,923** | ** ** | **2,365** | ** ** | **14,288** | ** ** |
| **Restructuring and asset impairment**         |   | **(45**                                      | **)**      | **—**                                   | ** ** | **(45** | **)** | **4,879** | ** ** | **—** | ** ** | **4,879** | ** ** |
| **Retail store closure expenses**              |   | **—**                                   | ** ** | **9,556**                                    | ** ** | **9,556** | ** ** | **—** | ** ** | **2,503** | ** ** | **2,503** | ** ** |
| **Restatement**                                |   | **1,275**                                    | ** ** | **—**                                   | ** ** | **1,275** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                                           |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total operating expenses**                   |   | **12,766**                                   | ** ** | **13,782**                                   | ** ** | **26,548** | ** ** | **17,969** | ** ** | **5,197** | ** ** | **23,166** | ** ** |
| **Interest expense**                           |   | **157**                                      | ** ** | **—**                                   | ** ** | **157** | ** ** | **382** | ** ** | **—** | ** ** | **382** | ** ** |
| **Other income**                               |   | **(62**                                      | **)**      | **—**                                   | ** ** | **(62** | **)** | **(46** | **)** | **—** | ** ** | **(46** | **)** |
|                                           |   |                                         | ** ** |                                         | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Loss before income taxes**                   |   | **$**                                        | **(2,886** | **)**                                        | **$**      | **(8,894** | **)** | **$** | **(11,780** | **)** | **$** | **(10,141** | **)** | **$** | **(2,295** | **)** | **$** | **(12,436** | **)** |

 

*Net Sales*    During the thirdquarter of fiscal 2003 net sales increased approximately $1.3 million or3.9% from $33.3 million in the same period of the prior year to$34.6 million. Net sales in our wholesale segment decreased$2.8 million or 9.9% compared to the same period in the prior year. Thisdecrease was more than

 

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offset by an increase of $4.1 million or 84.4% in net sales in ourretail segment. The detail of net sales by strategic business unit (SBU) was asfollows: 
|                   |   | **Three Months Ended January 31**  |       |
|------------------------|--------|-----------------------------------------|------------|
|                   |   | **2003**                                |       | **2002** |   | **Increase(Decrease)** |   | **Percent  Change** |   |
|                   |   | **In Thousands, except percent change** | ** ** |
| **Golf**               |   | **$**                                   | **5,808**  | ** ** | **$** | **7,021** | ** ** | **$** | **(1,213** | **)** | **(17.3** | **)%** |
| **Corporate**          |   | **12,963**                              | ** ** | **11,668** | ** ** | **1,295** | ** ** | **11.1** | ** ** |
| **Specialty**          |   | **4,020**                               | ** ** | **5,126** | ** ** | **(1,106** | **)** | **(21.6** | **)** |
| **International**      |   | **674**                                 | ** ** | **1,867** | ** ** | **(1,193** | **)** | **(63.9** | **)** |
| **Other**              |   | **2,118**                               | ** ** | **2,719** | ** ** | **(601** | **)** | **(22.1** | **)** |
|                   |   |                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total Wholesale**    |   | **25,583**                              | ** ** | **28,401** | ** ** | **(2,818** | **)** | **(9.9** | **)** |
| **Retail**             |   | **9,000**                               | ** ** | **4,882** | ** ** | **4,118** | ** ** | **84.4** | ** ** |
|                   |   |                                    | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total Consolidated** |   | **$**                                   | **34,583** | ** ** | **$** | **33,283** | ** ** | **$** | **1,300** | ** ** | **3.9** | **%** |

 

As mentioned in our “risks” section, some of the decline in sales ineach SBU may be attributable to customer’s fears about our stability after theannouncement of the need to restate earnings. In the third quarter of fiscal2003, net sales in our golf SBU decreased by $1.2 million or 17.3% to$5.8 million from $7.0 million in the same period of the prior year.Net sales in our golf SBU continued to be negatively impacted by the economy,flat demand, an oversupply of product in the golf marketplace and a decrease inthe number of rounds played. Net sales in our corporate SBU increased $1.3 millionor 11.1% to $13.0 million from $11.7 million in the same period ofthe prior year. During the first quarter of fiscal 2003 we launched a newcorporate catalog which had a positive impact on sales in the third quarter offiscal 2003. Net sales in our specialty SBU decreased $1.1 million or21.6% to $4.0 million from $5.1 million in the same period of theprior year. Specialty sales decreased as a result of the discontinuation of ourdressy women’s line and the difficult conditions facing independent specialtystores. Net sales in our international SBU decreased by approximately$1.2 million or 63.9% to $0.7 million from $1.9 million in thesame period of the prior year. For the quarter ended January 31, 2002, netsales in our international SBU included approximately $0.9 million insales generated by our European subsidiary. This subsidiary was closed andsubstantially liquidated at the end of fiscal 2002. As a result, net sales forthe three months ended January 31, 2003 does not include any European sales.Our European operations were replaced with a licensing relationship withEurostyle Ltd. (Eurostyle) effective May 1, 2002. We anticipate itwill take some time before this relationship gains momentum. Because we will nolonger sell directly in Europe, we will generate licensing revenues, instead ofdirect sales, on all future sales of our products in that market. Theselicensing revenues are calculated as a percentage of net sales of our productsby Eurostyle. The remaining $0.3 million decrease in net sales in ourinternational SBU is due to a decrease in licensing and royalty income. Netsales in our other SBU include liquidation sales and shipping income anddecreased $0.6 million or 22.1% to $2.1 million from$2.7 million in the same period of the prior year. This decrease wasprimarily due to lower liquidation sales in the third quarter of fiscal 2003compared to fiscal 2002.

 

Net sales in our retail segment increased to $9.0 million in thethird quarter of fiscal 2003 from $4.9 million in the third quarter offiscal 2002. This increase was due to the liquidation sales at the retailstores.

 

*Gross Profit*    In the third quarterof fiscal 2003, gross profit increased to 43.0% of net sales 

 

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compared to 33.2% in the same period of the prior year.  The increase in gross profit was due to anincrease in gross profit from our wholesale segment partially offset by adecrease in gross profit from our retail segment.  Gross profit from our wholesale segment increased from 28.7% inthe prior year to 39.0% for the three months ended January  31, 2003.  For the third quarter of fiscal 2002, costof sales relating to our wholesale segment included inventory write-downsrelated to our fiscal 2002 restructuring plan. This restructuring plan included closure of our European operations andexiting our golf shoe business and the inventory write-downs were recordedbecause we expected inventory to be sold below cost.  For the three months ended January  31, 2003, cost of salesrelating to our wholesale segment did not include write-downs of the samenature hence, the improvement in gross profit. Gross profit for the three months ended January  31, 2003 alsoimproved due to lower liquidation sales compared to the same period of theprior year.

 

Gross profit from our retail segment decreased from 59.4% in the thirdquarter of fiscal 2002 to 54.3% in the third quarter of fiscal 2003.  In connection with the closure of the storeswe initiated special sales events that increased liquidation sales and had acorresponding decrease in gross profit.

 

Our gross profit maynot be comparable to other entities, since some entities include all costsrelated to their distribution network in the cost of sales.  We have consistently included inboundfreight charges in cost of sales, and included other costs of distribution inselling, general and administrative expenses.

 

*Depreciation and Amortization*    Depreciationand amortization increased $0.1  million or 8.6% from $1.5  millionto $1.6  million for the three months ended January  31, 2003.  For the wholesale segment, depreciation andamortization was $1.4  million compared to $1.2  million in the sameperiod of the prior year.  The increaseis primarily due to depreciation expense on new capital expenditures.  The prior year amount included approximately$0.1  million related to our European operations. For the retail segment,depreciation and amortization was $0.2  million compared to $0.3 million in the prior year.  The decreasein depreciation and amortization in the retail segment is due to the write-downof store assets in connection with the closure of the retail stores.  The write-down was recorded as part of theretail store closure expenses.

 

*Other Selling, General and Administrative Expense*    Otherselling, general and administrative expenses decreased $0.2  million or 1.1% compared to the same periodin the prior year.  For the wholesalesegment selling, general and administrative expenses decreased approximately$1.8  million.  Approximately$0.8  million of this decrease related to the closure of our Europeanoperations. Salaries, sales commissions and related taxes and benefitsdecreased by approximately $0.9 million due to lower sales levels and savingsresulting from our restructuring plan. Rent expense decreased by approximately $0.3 million primarily due tosubleasing abandoned warehouse space. Sales meeting and tradeshow costs decreased by approximately $0.2million, marketing expenses decreased by approximately $0.2 million and othergeneral and administrative expenses decreased by approximately $0.2 millionprimarily due to internal cost-cutting measures. These decreases were offset byincreases of approximately $0.1 million in insurance expense, approximately $0.4million in legal and other professional fees, approximately $0.1 million indirector fees, and approximately $0.2 million in tax expense.  Other selling, general and administrativeexpenses relating to our retail segment increased $1.6  million.  The increase is primarily due to expensesrelated to the Hilco agency agreement.

 

*Restructuring and Asset Impairment*    We have tworestructuring plans, the 2002 Restructuring Plan and the 2003 RestructuringPlan. The 2002 Restructuring Plan included closing our wholly-owned Europeansubsidiary, consolidating and restructuring our women’s line sales forces,discontinuing our golf shoe business, discontinuing the dressier side of ourwomen’s line, refining our Company-owned retail store strategy, closing 

 

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four under-performing Company-owned retail stores, recording losses onsubleases of excess warehouse capacity and certain management changes.  The 2003 Restructuring Plan covers theclosure of the remaining Company-owned retail stores.  Costs associated with the 2002 Restructuring Plan, excludingcosts associated with refining our retail strategy and closing our retailstores, are included in Restructuring and Asset Impairment Expenses.  Costs associated with the 2003 RestructuringPlan and the costs associated with refining our retail strategy and closing ourretail stores included in the 2002 Restructuring Plan are included in RetailStore Closure Expenses.

 

Restructuring andasset impairment expenses were $4.9  million for the three months endedJanuary  31, 2002 compared to a reversal of $45  thousand in thethird quarter of fiscal 2003. Of the $4.9  million recorded in fiscal2002, $3.3  million related to the closure of our European operations and$1.6  million related to the consolidation and restructuring of ourwomen’s line sales force.  The reversalof $45  thousand in the third quarter of fiscal 2003 is due to actualexpenses being lower that amounts previously accrued for.

 

*Retail store closure expenses *   Expenses in thisclassification include costs associated with the 2003 Restructuring Plan andthe costs associated with refining our retail strategy and closing our retailstores included in the 2002 Restructuring Plan.  Store closure expenses were $9.6  million ($8.5 million fromthe 2003 Plan and $1.1 million from the 2002 Plan) for the three months endedJanuary  31, 2003 and $2.5  million for the three months endedJanuary  31, 2002 (all from the 2002 Plan). Our fiscal 2002 restructuringplan included refining our retail strategy and evaluating the recoverability ofthe assets relating to our retail stores. We concluded from the results of the evaluation that a significantimpairment of long-lived assets had occurred and decided to close fourunder-performing full-price stores in fiscal 2003.  We also adjusted the net book value of another full-price storeto its estimated fair value.  As aresult we recorded a charge of $2.5  million in fiscal 2002 related tostore fixed asset write-downs (primarily leasehold improvements) and leasetermination costs.

 

In the third quarter of fiscal 2003 we announced plans to close theremaining 10 retail stores, so that all of our retail stores would be closed byApril  30, 2003.  We recorded anadditional charge of $8.5  million relating to store closure costs relatedto the 10 additional stores.  Thischarge included lease termination costs, termination and severance benefits tobe paid as a result of the involuntary termination of approximately 88employees at our retail stores and corporate retail division, the write-down ofother current assets, furniture and equipment and deferred rent to netrealizable value and other costs resulting from the closure of our retailstores.  We expect to substantiallycomplete the closure of our retail stores and to settle the related liabilitiesby April  30, 2003.  Also in thethird quarter of fiscal 2003, we recorded a $1.1 million charge from the 2002Plan related to additional closure costs for the four stores identified during fiscal2002 for closure.  Total retail storeclosure charges under both plans were $9.6 million for the three months endedJanuary 31, 2003.

 

In connection with the decision to close the retail stores we enteredinto an agreement with Hilco Merchant Resources, LLC (Hilco) to act as ouragent for conducting the liquidation of store inventories and to assist withnegotiations for termination of the store leases.  As a guaranty of Hilco’s performance we receive a guaranteedpayment of 31.2% of the aggregate retail price of the inventory beingliquidated.  As compensation for itsservices, Hilco receives a base fee up to 2.5% of the retail price of theliquidation inventory plus all expenses incurred in connection with theliquidation event (this includes store level operating expenses).  To the extent the proceeds from theliquidation sales exceed the sum of the guaranteed payment plus all expenses(store operating and Hilco’s internal expenses) plus Hilco’s base fee suchexcess proceeds are to be split 80% to us and 20% to Hilco.  As of January  31, 2003, the guaranteedpayment totaled approximately $4.7  million and Hilco’s fees totaledapproximately $3.1  million.  The$3.1  million has been recorded in selling, general and administrativeexpenses and includes Hilco’s base fees, reimbursable expenses incurred byHilco and certain store level operating expenses paid for by Hilco under theterms of the agreement.

 

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#### ***RestatementExpenses***    Asdescribed in Note 1 to our financial statements, we restated certain of ourhistorical financial statements for irregularities and errors.  The restatements required a thoroughinvestigation of what had occurred and how it should be corrected.  In addition to the extensive efforts of ouremployees in this investigation, we utilized our regular outside legal counsel,special independent legal counsel, a forensic accounting firm, our independentauditors and other specialists for additional procedures.  The resulting professional fees plus accruedretention bonuses to certain key employees and amortization of the premium forthe replacement Directors’ and Officers’ liability insurance amounted toapproximately $1.3 million for the three months ended January 31, 2003.Included in this total is approximately $0.4 million accrued for retentionbonuses.   Retention bonuses will beaccrued each period as they are earned through the term of the bonus plan, andtotal costs will aggregate to as much as $2.4 million, payable in March2004. We will continue to incur substantial legal and other professionalservice costs in connection with the shareholder lawsuits and responding to theinquiries of the SEC staff.

#### ** **

*Operating Loss*    As a result of theabove items, operating loss decreased $0.4  million or 3.4% to $11.7 million in the third quarter of fiscal 2003 compared to $12.1  million inthe third quarter of fiscal 2002.

 

*Income Taxes*    We recorded approximately$2.1  million of income tax benefit in the third quarter of fiscal 2003compared to $3.9  million in the third quarter of fiscal 2002.  We have provided a valuation allowanceagainst our deferred tax assets, which include net operating losscarryforwards.  As a result, theeffective rates for income taxes in the third quarter of fiscal 2003 and 2002were 18% and 32%, respectively.

 

***Nine Months Ended January 31, 2003 Compared With Nine Months EndedJanuary 31, 2002*********
|                                           |   | **Nine Months Ended January 31, 2003** |       | **Nine Months Ended January 31, 2002** |       |
|------------------------------------------------|--------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                           |   | **Wholesale**                               |       | **Retail**                                  |       | **Total** |   | **Wholesale** |   | **Retail** |   | **Total** |   |
|                                           |   |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| **Net sales**                                  |   | **$**                                       | **95,395** | ** **                                  | **$**      | **15,144** | ** ** | **$** | **110,539** | ** ** | **$** | **108,411** | ** ** | **$** | **9,901** | ** ** | **$** | **118,312** | ** ** |
| **Gross profit**                               |   | **38,688**                                  | ** ** | **8,237**                                   | ** ** | **46,925** | ** ** | **39,467** | ** ** | **5,836** | ** ** | **45,303** | ** ** |
| **Operating expenses:**                        |   |                                        | ** ** |                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Depreciation & amortization**            |   | **3,935**                                   | ** ** | **677**                                     | ** ** | **4,612** | ** ** | **3,901** | ** ** | **903** | ** ** | **4,804** | ** ** |
| **Other selling, general and  administrative** |   | **31,822**                                  | ** ** | **7,998**                                   | ** ** | **39,820** | ** ** | **39,083** | ** ** | **6,621** | ** ** | **45,704** | ** ** |
| **Restructuring and asset impairment**         |   | **3,845**                                   | ** ** | **—**                                  | ** ** | **3,845** | ** ** | **4,879** | ** ** | **—** | ** ** | **4,879** | ** ** |
| **Retail store closure expenses**              |   | **—**                                  | ** ** | **9,556**                                   | ** ** | **9,556** | ** ** | **—** | ** ** | **2,503** | ** ** | **2,503** | ** ** |
| **Restatement**                                |   | **2,529**                                   | ** ** | **—**                                  | ** ** | **2,529** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
|                                           |   |                                        | ** ** |                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Total operating expenses**                   |   | **42,131**                                  | ** ** | **18,231**                                  | ** ** | **60,362** | ** ** | **47,863** | ** ** | **10,027** | ** ** | **57,890** | ** ** |
| **Interest expense**                           |   | **528**                                     | ** ** | **—**                                  | ** ** | **528** | ** ** | **1,349** | ** ** | **—** | ** ** | **1,349** | ** ** |
| **Other income**                               |   | **(207**                                    | **)**      | **—**                                  | ** ** | **(207** | **)** | **(69** | **)** | **—** | ** ** | **(69** | **)** |
|                                           |   |                                        | ** ** |                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| **Loss before income taxes**                   |   | **$**                                       | **(3,764** | **)**                                       | **$**      | **(9,994** | **)** | **$** | **(13,758** | **)** | **$** | **(9,676** | **)** | **$** | **(4,191** | **)** | **$** | **(13,867** | **)** |

 

*Net Sales*    During the first ninemonths of fiscal 2003 net sales decreased approximately $7.8 million or6.6% to $110.5 million from $118.3 million in the prior year. Netsales in our wholesale segment decreased $13.0 million or 12.0% comparedto the same period in the prior year. This decrease was offset by an increaseof $5.2 million in net sales in our retail segment. The detail of netsales by strategic business unit (SBU) was as follows:  

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|                   |   | **Nine Months Ended January 31**   |        |
|------------------------|--------|-----------------------------------------|-------------|
|                   |   | **2003**                                |        | **2002** |   | **Increase  (Decrease)** |   | **Percent  Change** |   |
|                   |   | **In Thousands, except percent change** | ** **  |
| **Golf**               |   | **$**                                   | **29,734**  | ** ** | **$** | **33,372** | ** ** | **$** | **(3,638** | **)** | **(10.9** | **)%** |
| **Corporate**          |   | **41,330**                              | ** **  | **42,197** | ** ** | **(867** | **)** | **(2.1** | **)** |
| **Specialty**          |   | **16,358**                              | ** **  | **19,067** | ** ** | **(2,709** | **)** | **(14.2** | **)** |
| **International**      |   | **2,353**                               | ** **  | **6,048** | ** ** | **(3,695** | **)** | **(61.1** | **)** |
| **Other**              |   | **5,620**                               | ** **  | **7,727** | ** ** | **(2,107** | **)** | **(27.3** | **)** |
|                   |   |                                    | ** **  |   | ** ** |   | ** ** |   | ** ** |
| **Total Wholesale**    |   | **95,395**                              | ** **  | **108,411** | ** ** | **(13,016** | **)** | **(12.0** | **)** |
| **Retail**             |   | **15,144**                              | ** **  | **9,901** | ** ** | **5,243** | ** ** | **53.0** | ** ** |
|                   |   |                                    | ** **  |   | ** ** |   | ** ** |   | ** ** |
| **Total Consolidated** |   | **$**                                   | **110,539** | ** ** | **$** | **118,312** | ** ** | **$** | **(7,773** | **)** | **(6.6** | **)%** |

 

As mentioned in our “risks” section, some of the decline in sales ineach SBU may be attributable to customer’s fears about our stability after theannouncement of the need to restate earnings. For the nine months endedJanuary 31, 2003 net sales in our golf SBU decreased by $3.6 millionor 10.9% to $29.7 million from $33.4 million in the same period ofthe prior year. Net sales in our golf SBU continued to be negatively impactedby the economy, flat demand, an oversupply of product in the golf marketplaceand a decrease in the number of rounds played. Net sales in our corporate SBUdecreased by $0.9 million or 2.1% to $41.3 million from$42.2 million in the same period of the prior year. In the first quarterof fiscal 2003 net sales in our corporate SBU decreased by $1.9 million ascorporate customers spent less on marketing programs. A new corporate catalogwas launched in the first quarter of fiscal 2003 but the increase in sales as aresult of the new catalog occurred in the second and third quarters of fiscal2003. The increases in these quarters partially offset the first quarterdecrease. Net sales in our specialty SBU decreased $2.7 million or 14.2%to $16.4 million from $19.1 million in the same period of the prioryear. Specialty sales decreased as a result of the discontinuation of ourdressy women’s line, the loss of a customer and the difficult conditions facingindependent specialty stores. Net sales in our international SBU decreased byapproximately $3.7 million or 61.1% to $2.4 million from$6.0 million in the same period of the prior year. For the nine monthsended January 31, 2002, net sales in our international SBU includedapproximately $3.4 million in sales from our European subsidiary. Thissubsidiary was closed and substantially liquidated at the end of fiscal 2002.As a result, net sales for the nine months ended January 31, 2003 does notinclude any European sales. Our European operations were replaced with alicensing relationship with Eurostyle Ltd. (Eurostyle) effectiveMay 1, 2002. We anticipate it will take some time before this relationshipgains momentum. Because we will no longer sell directly in Europe, we willgenerate licensing revenues, instead of direct sales, on all future sales ofour products in that market. These licensing revenues are calculated as apercentage of net sales of our products by Eurostyle. The remaining$0.3 million decrease in sales in our international SBU is due to adecrease in licensing and royalty income. Net sales in our other SBU includeliquidation sales and shipping income and decreased $2.1 million or 27.3%to $5.6 million from $7.7 million in the same period of the prioryear. This decrease was primarily due to lower liquidation sales for the ninemonths ended January 31, 2003 compared to January 31, 2002.

 

Net sales in our retail segment increased to $15.1 million for thenine months ended January 31, 2003 compared to $9.9 million in theprior year. This increase was due to the impending closure of our retail storesand the related increase in liquidation sales from sales events at the stores.

 

*Gross Profit*       In the first nine months of fiscal 2003,gross profit increased to 42.5% of net sales compared to 38.3% in the sameperiod of the prior year. The increase in gross profit was due to an increasein gross profit from our wholesale segment partially offset by a decrease ingross profit from our retail segment. Gross profit from our wholesale segment increased to 40.6% from 36.4% inthe prior year.  This increase in grossprofit was primarily due to lower cost of sales in our wholesale segment.  For the first nine months of 

 

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fiscal 2002, cost of sales relating to our wholesale segment includedinventory write-downs related to the closure of our European operations andexiting our golf shoe business and the write-downs were recorded because weexpected inventory to be sold below cost. For the nine months endedJanuary  31, 2003, cost of sales relating to our wholesale segment did notinclude inventory write-downs of the same nature.  Gross profit for the first nine months of fiscal 2003 was alsofavorably impacted by lower liquidation sales and a gain on sale of inventoryto Eurostyle.

 

Gross profit from our retail segment decreased to 54.4% from 58.9% inthe prior year.  This decrease was dueto higher liquidation sales as a result of the closure of our retail stores andan increase in promotions on a wider selection of merchandise in the stores.

 

Our gross profit may not be comparable to other entities, since someentities include all costs related to their distribution network in the cost ofsales.  We have consistently includedinbound freight charges in cost of sales, and included other costs ofdistribution in selling, general and administrative expenses.

 

*Depreciation and Amortization*      Depreciation and amortization expense decreased$0.2  million compared to the prior year. This was primarily due to a decrease in depreciation and amortizationexpense for the retail segment. Depreciation and amortization expense for the wholesale segment remainedrelatively unchanged for the nine months ended January  31, 2003 and2002.  The decrease in depreciation andamortization expense related to the closure of our European operations was$0.3  million and this decrease was offset by increased depreciation andamortization from new capital expenditures as well as accelerated depreciationon our old corporate facilities.

 

*Other Selling, General and Administrative Expense*      Other selling, general and administrativeexpenses decreased $5.9  million or 12.9% to $39.8  million or 36.0%of net sales from $45.7  million or 38.6% of net sales in the prioryear.  Other selling, general andadministrative expenses in our wholesale segment decreased approximately$7.3  million or 18.6%.  Thisdecrease was partially offset by a $1.4  million increase in selling,general and administrative expenses from our retail segment.  Approximately $2.6  million of thedecrease in other selling, general and administrative expenses from ourwholesale segment was due to the closure of our European operations.  Salaries, sales commissions and relatedtaxes and benefits decreased by approximately $2.9 million due to lower saleslevels and savings resulting from our restructuring plan.  Rent expense decreased by approximately $0.3million primarily due to subleasing abandoned warehouse space.  Sales meeting and tradeshow costs decreasedby approximately $0.2 million, marketing expenses decreased by approximately$1.2 million and other general and administrative expenses decreased byapproximately $0.8 million primarily due to internal cost-cutting measures.These decreases were offset by increases of approximately $0.6 million ininsurance expense and approximately $0.7 million in legal and otherprofessional fees.  Other selling, generaland administrative expenses in our retail segment increased $1.4 million.  The increase is primarily dueto the fees paid to Hilco for conducting the liquidation sales at our retailstores which were partially offset by decreased store level operating expenses.

 

*Restructuring and Asset Impairment* We have two restructuring plans, the 2002 Restructuring Plan and the2003 Restructuring Plan. The 2002 Restructuring Plan included closing ourwholly-owned European subsidiary, consolidating and restructuring our women’sline sales forces, discontinuing our golf shoe business, discontinuing thedressier side of our women’s line, refining our Company-owned retail storestrategy, closing four under-performing Company-owned retail sures, recordinglosses on subleases of excess warehouse capacity and certain managementchanges.  The 2003 Restructuring Plancovers the closure of the remaining Company-owned retail stores.  Costs associated with the 2002 RestructuringPlan, excluding costs associated 

 

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with refining our retail strategy and closing our retail stores, areincluded in Restructuring and Asset Impairment Expenses.  Costs associated with the 2003 RestructuringPlan and the costs associated with refining our retail strategy and closing ourretail stores included in the 2002 Restructuring Plan are included in RetailStore Closure Expenses.

 

For the nine months ended January  31, 2003 we recorded arestructuring charge of $3.8 million compared to $4.9  million in theprior year. The restructuring charge in both years related to our wholesalesegment.  Of the $3.8 millionrecorded in fiscal 2003, $3.3 million related to losses on subleases ofour excess warehouse capacity at our distribution center, $0.3 millionrelated to additional reserves against receivable balances with both our formerChief Executive Officer and our former President and $0.2 million relatedto additional expenses resulting directly from our restructuring plan. Theliability resulting from recognizing the losses on subleases has been recordedin other current liabilities and other long term liabilities on the CondensedConsolidated Balance Sheets.  For thenine month period ended January  31, 2002 restructuring and assetimpairment charges were $4.9  million. Of the $4.9  million recorded in fiscal 2002, $3.3  millionrelated to the closure of our European operations and $1.6  millionrelated to the consolidation and restructuring of our women’s line salesforce.  The charge related to ourEuropean operations included termination and severance benefits, reservesnecessary to write-down trade receivables due to lower than anticipatedrecoveries, the write-down of other current assets, furniture and equipment andleasehold improvements to net realizable value and other costs resulting fromclosure of the operations.  Theconsolidation and restructuring of our women’s line sales force resulted in thewrite-off of commission draws and sample receivable balances.

 

Effective May 1, 2002, we entered into a license agreement withEurostyle to distribute our men’s and women’s Golf and Classic apparelcollections and golf accessories throughout Europe. The license agreementrequires Eurostyle to make certain minimum royalty payments and expires onJune 30, 2005. Effective May 1, 2002 we also entered into an assetpurchase agreement with Eurostyle to sell inventory, certain accountsreceivable balances and fixtures.

 

*Retail Store Closure Expenses** ***Expenses in this classificationinclude costs associated with the 2003 Restructuring Plan and the costsassociated with refining our retail strategy and closing our retail storesincluded in the 2002 Restructuring Plan. Retail store closure expenses were $9.6  million for the ninemonths ended January  31, 2003 ($8.5 million from the 2003 Plan and $1.1million from the 2002 Plan) and $2.5  million for the nine months endedJanuary  31, 2002 (all from the 2002 Plan). In December  2002 weannounced plans to close the remaining retail stores, so that all of our retailstores would be closed by April 30, 2003. We recorded a charge of $8.5 million relating to store closure costs for these stores.  This charge included lease terminationcosts, termination and severance benefits to be paid as a result of the involuntarytermination of approximately 88 employees at our retail stores, the write-downof other current assets, furniture and equipment and deferred rent to netrealizable value and other costs resulting from the closure of our retailstores.  We expect to substantiallycomplete the closure of our retail stores and to settle the related liabilitiesby April  30, 2003.  Also for thenine months ended January 31, 2003 we recorded a $1.1 million charge from the2002 Plan related to additional closure costs for the four stores identifiedduring fiscal 2002 for closure.  Totalretail store charges under both plans were $9.6 million for the nine monthsended January 31, 2003.

 

In connection with the decision to close the retail stores we enteredinto an agreement with Hilco Merchant Resources, LLC (Hilco) to act as ouragent for conducting the liquidation of store inventories and to assist withnegotiations for termination of the store leases.  As a guaranty of Hilco’s performance we receive a guaranteedpayment of 31.2% of the aggregate retail price of the inventory beingliquidated.  As compensation for itsservices, Hilco receives a base fee up to 2.5% of the retail price of the liquidation inventory plus all 

 

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expenses incurred in connection with the liquidation event (thisincludes store level operating expenses). To the extent the proceeds from the liquidation sales exceed the sum ofthe guaranteed payment plus all expenses (store operating and Hilco’s internalexpenses) plus Hilco’s base fee such excess proceeds are to be split 80% to usand 20% to Hilco.  As of January 31, 2003, the guaranteed payment totaled approximately $4.7 million and Hilco’sfees totaled approximately $3.1  million. The $3.1  million has been recorded in selling, general and administrativeexpenses and includes Hilco’s base fees, reimbursable expenses incurred byHilco and certain store level operating expenses paid for by Hilco under theterms of the agreement.

 

Costs to close retail stores were $2.5 million for the nine monthsended January  31, 2002.  Ourfiscal 2002 restructuring plan included refining our retail strategy andevaluating the recoverability of the assets relating to our retail stores.  We concluded from the results of theevaluation that a significant impairment of long-lived assets had occurred anddecided to close four under-performing full-price stores and adjusted the netbook value of another full-price store to its estimated fair value.  As a result we recorded a charge of $2.5million related to store fixed asset write-downs (primarily leaseholdimprovements) and lease termination costs in fiscal 2002.

 

*Restatement Expenses*      As described in Note 1 to our financialstatements, we restated certain of our historical financial statements forirregularities and errors.  Therestatements required a thorough investigation of what had occurred and how itshould be corrected.  In addition to theextensive efforts of our employees in this investigation, we utilized ourregular outside legal counsel, special independent legal counsel, a forensicaccounting firm, our independent auditors and other specialists for additionalprocedures.  The resulting professionalfees plus accrued retention bonuses to certain key employees and amortizationof the premium for the replacement Directors’ and Officers’ liability insuranceamounted to approximately $2.5 million for the nine months ended January31, 2003. Included in this total is approximately $0.6 million accrued forretention bonuses.   Retention bonuseswill be accrued each period as they are earned through the term of the bonusplan, and total costs will aggregate to as much as $2.4 million, payablein March 2004. We will continue to incur substantial legal and otherprofessional service costs in connection with the shareholder lawsuits andresponding to the inquiries of the SEC staff.

 

*Operating Loss*      As a result of the above items, ouroperating loss increased $0.9 million to $13.4 million in the firstnine months of fiscal 2003 from $12.6 million in the first nine months offiscal 2002.

 

*Income Taxes*    * *Werecorded approximately $2.8 million of income tax benefits in the firstnine months of fiscal 2003 compared to $4.5  million in the first ninemonths of fiscal 2002.  We have provideda valuation allowance against our deferred tax assets which include netoperating loss carryforwards. As a result, the effective rates for income taxesin the first nine months of fiscal 2003 and 2002 were 20% and 33%,respectively.

 

**Liquidityand Capital Resources**

 

Net cash provided by operating activities for the nine months endedJanuary 31, 2003 was approximately $14.3 million compared toapproximately $21.3 million for the nine months ended January 31,2002. Net cash used in investing activities was approximately $1.9 millionfor the nine months ended January 31, 2003 and $1.8 million for thenine months ended January 31, 2002. Net cash used in financing activitiesfor the nine months ended January 31, 2003 was approximately$10.6 million compared to $17.0 million in the prior year.

 

We have aloan agreement with Washington Mutual (see Note 6) to provide a$20 million line of credit which expires on March 31, 2003. Theamount available under the line of credit is limited by our borrowing 

 

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base calculation. Outstanding letters of creditunder this agreement totaled approximately $13.1 million and afteradjustments required by our borrowing base calculation the amount availableunder our line of credit is $6.8 million. The loan agreement containscertain restrictive covenants covering minimum working capital and tangible networth. At January 31, 2003 we were in compliance with these covenants.Under the terms of our loan agreement we established a money market account forcash collateral to be used as additional security. The $7.0 millionbalance of restricted cash is pledged through March 31, 2003, thetermination date of the renewed and modified loan agreement with WashingtonMutual. On March  13, 2003 we entered into a loan agreement with WellsFargo Bank, N.A (Wells Fargo) for a $35  million line of credit, replacingour previous line of credit with Washington Mutual.   The loan agreement contains certain restrictive covenants coveringminimum net worth, minimum working capital and maximum capitalexpenditures.   These financialcovenants require that we maintain a tangible net worth of at least $50 millionand working capital of at least $35 million at all times; and capitalexpenditures are not to exceed $3 million in the fiscal year 2003 and $2.5million for each year in fiscal years 2004 and 2005.  We are currently in compliance with these covenants. Our loanagreement with Wells Fargo contains no requirement for a cash collateral account.

 

As described in Note 9 to our financial statements we are closingall of our retail stores. We currently expect the store closure charges to beat the low end of our previous estimates, which were $12 to $15 millionpre-tax. The full tax effect of the charge has not been determined and to theextent losses cannot be carried back they will be available to offset futureprofits. We currently estimate the after-tax charge to be in the range of $10to $13 million. The after-tax cash impact of the charge is expected to be$5 to $7 million. These charges are in addition to the $2.5 millionpre-tax charge take in fiscal year 2002 to write-down certain retail stores asimpaired assets.

 

InFebruary 2003 we received approximately $4.7 million in federal taxrefunds. We believe that cash on hand and cash generated from ongoingoperations, as well as the ability to borrow under bank lines of credit will besufficient to meet our cash requirements in the short-term and during the nextfiscal year.   We also have availablealternative sources of financing including factoring our accounts receivableand financing our capital expenditures with leases.  Although these methods of financing are currently available tous, we do not anticipate using alternative sources of financing in theshort-term or during the next fiscal year. However, our capital needs will depend on many factors, including ourgrowth rate, the need to finance increased production and inventory levels, thesuccess of our various sales and marketing programs, expenses associated withthe risks and uncertainties related to our restatement, including those risksand uncertainties set forth above and various other factors.

 

**CriticalAccounting Policies**

 

Our significant accounting policies are described in Note 1 to theconsolidated financial statements included in the Company’s filing onForm 10-K for the year ended April 30, 2002. Our discussion andanalysis of financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof the financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues, expenses, andrelated disclosure of contingent assets and liabilities. On an on-going basis,we evaluate the estimates that we have made. These estimates are based upon ourhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Our actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

 

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*Allowancefor Doubtful Accounts and Returns*

 

We maintain an allowance for doubtful accounts for estimated lossesresulting from the inability of our customers to make required payments, whichis included in bad debt expense. We determine the adequacy of this allowance byregularly reviewing our accounts receivable aging and evaluating individualcustomer receivables, considering customers’ financial condition, credithistory and current economic conditions. If the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake payments, additional allowances may be required. We also maintain anestimate of potential future product returns related to current period productreceivables. We analyze the rate of historical returns when evaluating theadequacy of the allowance for sales returns, which is included with theallowance for doubtful accounts on our balance sheets.

 

*Inventories*

 

Inventories, which are predominantly finished goods, are valued at thelower of cost or market, with cost determined using the first-in, first-outmethod. A detailed analysis of inventory is performed on a quarterly basis toidentify unsold out-of-season fashion merchandise. The net realizable value ofthe out-of-season merchandise is estimated based upon disposition plans andhistorical experience. A valuation allowance is established to reduce thecarrying amount of out-of-season merchandise to its estimated net realizablevalue. If actual market conditions are less favorable than those projected bymanagement, additional allowances may be required.

 

*Impairmentof Long-Lived Assets*

 

We review the carrying values of our long-lived assets whenever eventsor changes in circumstances indicate that such carrying values may not berecoverable. Unforeseen events and changes in circumstances and marketconditions and changes in estimates of future cash flows could negativelyaffect the fair value of our assets and result in an impairment charge. Fairvalue is the amount at which the asset could be bought or sold in a currenttransaction between willing parties and may be estimated using a number oftechniques, including quoted market prices or valuations by third parties,present value techniques based on estimates of cash flows, or multiples ofearnings or revenues performance measures. The fair value of the asset could bedifferent using different estimates and assumptions in these valuationtechniques.

 

*RestructuringLiabilities, Retail Store Closure Expenses*

 

Restructuring related liabilities and retail store closure expensesinclude estimates for termination benefits, anticipated disposition of leaseobligations and other costs. Key variables in determining such estimatesinclude the anticipated timing of sublease rentals, estimates of subleaserental payment amounts and estimates for brokerage and other related costs. Weperiodically evaluate and, if necessary, adjust our estimates based oncurrently available information. 

**Item 3. Quantitative and Qualitative Disclosures aboutMarket Risk**

 

None 

 

**Item4. Controls and Procedures**

 

*Evaluation of the Company’s Controls and Procedures.*    Within the90 days prior to the original filing 

 

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date of this Quarterly Report on Form 10-Q (the “EvaluationDate”), we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures (“Disclosure Controls”) and our internalcontrols and procedures for financial reporting (“Internal Controls”). Thisevaluation (the “Controls Evaluation”) was done under the supervision and withthe participation of management, including our Chief Executive Officer andChief Financial Officer. Rules adopted by the Securities and ExchangeCommission require that we present in this section of our Quarterly Report theconclusions of our CEO and CFO about the effectiveness of our DisclosureControls and Internal Controls based on and as of the date of the ControlsEvaluation.

 

*CEO and CFO Certifications.*    Appearingimmediately following the Signatures section of this Quarterly Report there aretwo separate forms of “Certifications” of the CEO and the CFO. The first formof Certification is required in accordance with Section 302 of the Sarbanes-OxleyAct of 2002 (the Section 302 Certification). This portion of our QuarterlyReport is our disclosure of the results of our Controls Evaluation, referred toin the Section 302 Certifications and this information should be read inconjunction with the Section 302 Certifications for a more completeunderstanding of the topics presented.

 

*Disclosure Controls and Internal Controls.*    DisclosureControls are procedures that are designed with the objective of ensuring thatinformation required to be disclosed in the Company’s reports filed under theSecurities Exchange Act of 1934 (the “Exchange Act”), such as this QuarterlyReport, is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Disclosure Controls are also designedwith the objective of ensuring that such information is accumulated andcommunicated to our management, including the CEO and CFO, as appropriate toallow timely decisions regarding required disclosure. Internal Controls are procedureswhich are designed with the objective of providing reasonable assurance thatour transactions are properly authorized, our assets are safeguarded againstunauthorized or improper use and our transactions are properly recorded andreported, all to permit the preparation of our financial statements inconformity with generally accepted accounting principles.

 

*Limitations on the Effectiveness of Controls.*    Ourmanagement, including, without limitation, our CEO and CFO, does not expectthat our Disclosure Controls or our Internal Controls will prevent all errorsand all fraud.  A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met.  While our control systems provide thisreasonable assurance level, the design of our control system reflects the factthat there are resource constraints and the benefits of such controls wereconsidered relative to their costs. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofcontrol.  The design of any system ofcontrols is also based in part on certain assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.   Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

*Scope of the Evaluation of Disclosure Controls*.  We operated without a CFO from August 8, 2002 to November 15,2002. During that time, our current CEO served as our principal accountingofficer in addition to acting in her official capacity as CEO.  Our current CEO was appointed in lateApril 2002.  Throughout the 

 

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majority of her tenure, we have been undertaking the restructuring ofour operations and the restatement of certain of our historical financialresults, and responding to the resulting shareholder lawsuits, SECinvestigation, Nasdaq investigation and Nasdaq delisting proceedings.

 

Our current CFO was appointed to that position on November 15,2002, and has had only a short time to affect our current controls andprocedures. While he has assisted in our most recent evaluation efforts, hisevaluation of our controls and procedures has relied heavily on the reports ofothers within the Company.

 

As stated above, management, including the CEO and CFO, evaluated theeffectiveness of the registrant’s Disclosure Controls as of the EvaluationDate.  That evaluation includedinquiring of senior managers whether the quarterly reports are correct andcomplete.  It also included anindependent accounting firm’s performing their initial review of our internalcontrols. This review was based on employees’ reports of their processes.  The review has indicated some areas forimprovement, and we are planning follow-up activities as well as continuing theaccounting firm’s review.

 

In previous quarters, our evaluation emphasized our investigation intoaccounting irregularities and errors leading to the restatement of certain ofour historical financial statements. With the assistance of our legal advisors,special legal counsel and the accountants for the special legal counsel, weconducted an investigation for any errors in our financial statements, whichwould in turn lead to identifying data errors, controls problems or acts offraud and to confirming that appropriate corrective action, including processimprovements, was being undertaken. Our independent auditors also performednumerous tests to satisfy themselves on the same issues.

 

*Conclusions.*    As reported inNote 1 to our financial statements, we recently restated our financialresults for the fiscal years ended April 30, 2000 and 2001, and for thequarters ended July 31, 2001, October 31, 2001 and January 31,2002, as a result of accounting irregularities stemming from a failure of ourinternal controls and procedures. During the course of our restatement, ourindependent auditors indicated to us that they believe there was a material weaknessin our Internal Controls, as evidenced by the ability of our former managementto override our Internal Controls.

 

Even before this communication by our independent auditors, we startedto institute corrective measures to ensure that all of our managers andemployees follow our policies and procedures. These measures included bringingin new managers, implementing new procedures for transaction reporting,establishing a confidential reporting procedure by which employees can reportconcerns directly to the CEO or the audit committee and holding management andemployee meetings at which expectations of integrity were explicitly discussed.

 

After the extensive investigative work of our staff, our auditors, ourcounsel, independent counsel, and the independent counsel’s accountants, as ofthe Evaluation Date we had not found irregularities other than those previouslydisclosed. This lack of additional indications of irregularities is a principalfactor in our belief that for the quarter and up to the Evaluation Date, ourInternal Controls are adequate to permit the preparation of our financialstatements in conformity with generally accepted accounting principles. Basedon the same factors, the CEO and CFO believe that our Disclosure Controls areeffective to ensure that material information is made known to management,including the CEO and CFO, particularly during the period in which thisquarterly report is being prepared. However, we see areas where additionalcontrols would provide welcome additional 

 

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assurance. We intend to continue to assess our controls and to improvethem. We do not yet have formal written controls and procedures in place forall of our internal operations. We engaged a firm of accountants to assist usin the documentation of our controls and procedures. This work is the firstphase of establishing our internal audit function. Our intent is that theDisclosure Controls and Internal Controls will be maintained as dynamic systemsthat change and improve as conditions and resources warrant. We willperiodically reevaluate our controls so that our conclusions concerningcontrols’ effectiveness can be reported in our Quarterly reports onForm 10-Q and Annual Report on Form 10-K.

 

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|                |   | Cutter & Buck Inc.(Registrant)                                                                |                             |
|---------------------|--------|---------------------------------------------------------------------------------------------------|----------------------------------|
| Dated: July 3, 2003 |   | By                                                                                                | /s/  ERNEST R. JOHNSON |   |
|                |   | Ernest R. Johnson                                                                                 |                             |
|                |   | *Senior Vice president and Chief Financial Officer  (Principal Accounting and Financial Officer)* |                             |
|                     |        |                                                                                                   |                                  |  |

 

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**CERTIFICATIONS**

 

I, Frances M. Conley, Chairman and Chief Executive Officer ofCutter & Buck Inc., certify that:

 

•                  I have reviewed this quarterly report onForm 10-Q of Cutter & Buck Inc.;

 

•                  Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report;

 

•                  Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report.

 

 
| Dated: July 3, 2003 |   | /s/  FRANCES M.  CONLEY           |
|---------------------|--------|---------------------------------------------|
|                |   | Frances M. Conley, Chief  Executive Officer |

 

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**CERTIFICATIONS**

** **

I, Ernest R. Johnson, Senior Vice President and Chief Financial Officerof Cutter & Buck Inc., certify that:

 

•                                          I have reviewed this quarterly reporton Form 10-Q of Cutter & Buck Inc.;

 

•                                          Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

•                                          Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report.

 

 
| Dated:  July 3, 2003 | /s/  ERNEST R.  JOHNSON           |
|---------------------------|---------------------------------------------|
|                      | Ernest R. Johnson, Chief  Financial Officer |

 

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