**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

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**Form 10-Q**

 

| **x**                                                     | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
| **For the quarterly period ended January 31,  2006** |
| **or**                                                    |
| **o**                                                     | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

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

**Commission File No. 0-26608**

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**CUTTER & BUCK INC.**

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

**Seattle, WA 98103**

(Address of principalexecutive offices)

**(206) 622-4191**

(Registrant’s telephone number)

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months and (2) hasbeen subject to such filing requirements for the past 90 days. x Yes   o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated file” in Rule 12b-2of the Exchange Act. (Check one):

| Large accelerated  filer o |   | Accelerated  filer x |   | Non-accelerated  filer o |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act). o Yes  x No

The number of shares of common stock of the registrantoutstanding as of March 3, 2006 was 10,587,316.

 

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**CUTTER &BUCK INC.**

**QuarterlyReport on Form 10-Q**

**Forthe Quarter Ended January 31, 2006**

**INDEX**

|                                         | ** ** | ** **                                                                                  | ** ** | **Page** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| PART I—FINANCIAL  INFORMATION |       |                                                                                        |
| Item  1.                                |       | Financial  Statements (unaudited):                                                          |       |     |
|                                    |       | Condensed Consolidated Balance Sheets                                                       |       | 1        |
|                                    |       | Condensed Consolidated Statements of Operations                                             |       | 2        |
|                                    |       | Condensed Consolidated Statements of Cash Flows                                             |       | 3        |
|                                    |       | Notes to Condensed Consolidated Financial Statements                                        |       | 4        |
| Item 2.                                 |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       | 10       |
| Item 3.                                 |       | Quantitative and Qualitative Disclosures about Market  Risk                                 |       | 17       |
| Item  4.                                |       | Controls  and Procedures                                                                    |       | 17       |
| PART II—OTHER  INFORMATION    |       |                                                                                        |
| Item  1.                                |       | Legal Proceedings                                                                           |       | 18       |
| Item 2.                                 |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       | 18       |
| Item 3.                                 |       | Defaults Upon Senior Securities                                                             |       | 18       |
| Item 4.                                 |       | Submission of Matters to a Vote of Security Holders                                         |       | 18       |
| Item  5.                                |       | Other Information                                                                           |       | 18       |
| Item 6.                                 |       | Exhibits                                                                                    |       | 18       |
| SIGNATURES                              |       | 19                                                                                          |

 

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**PART I—FINANCIAL INFORMATION**

**Item 1. Financial Statements**

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

| ** **                                                                                                                                                                                         | ** ** | **January 31, 2006**                               | ** ** | **April 30, 2005** | ** ** | **January 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **(unaudited)**                                              | ** ** | ** **                   | ** ** | **(unaudited)**                | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(in thousands, except share amounts)** | ** ** |
| **Assets**                                                                                                                                                                                         |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                    |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                          |       |                                                         | $          | 6,006                        |       |                           |       | $ | 11,752 |   |   |   | $ | 17,913 |   |   |
| Short-term investments                                                                                                                                                                             |       |                                                         | 15,622     |                         |       |                           | 28,831     |   |   |   | 25,840 |   |   |
| Accounts receivable, net of allowances for doubtful  accounts, returns, and allowances of $1,533 at January 31, 2006, $1,455  at April 30, 2005, and  $1,776 at January 31, 2005    |       |                                                         | 18,577     |                         |       |                           | 21,814     |   |   |   | 12,711 |   |   |
| Inventories, net                                                                                                                                                                                   |       |                                                         | 27,755     |                         |       |                           | 25,398     |   |   |   | 28,930 |   |   |
| Income tax receivable                                                                                                                                                                              |       |                                                         | 809        |                         |       |                           | 919        |   |   |   | 374 |   |   |
| Deferred income taxes                                                                                                                                                                              |       |                                                         | 2,040      |                         |       |                           | 2,412      |   |   |   | 2,590 |   |   |
| Prepaid expenses and other current assets                                                                                                                                                          |       |                                                         | 3,206      |                         |       |                           | 2,317      |   |   |   | 3,137 |   |   |
| Total current assets                                                                                                                                                                               |       |                                                         | 74,015     |                         |       |                           | 93,443     |   |   |   | 91,495 |   |   |
| Furniture and  equipment, net                                                                                                                                                                      |       |                                                         | 6,345      |                         |       |                           | 6,734      |   |   |   | 6,408 |   |   |
| Deferred income  taxes                                                                                                                                                                             |       |                                                         | 252        |                         |       |                           | 165        |   |   |   | 376 |   |   |
| Other assets                                                                                                                                                                                       |       |                                                         | 1,505      |                         |       |                           | 1,614      |   |   |   | 1,778 |   |   |
| Total assets                                                                                                                                                                                       |       |                                                         | $          | 82,117                       |       |                           |       | $ | 101,956 |   |   |   | $ | 100,057 |   |   |
| **Liabilities and Shareholders’  Equity**                                                                                                                                                     |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                               |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                   |       |                                                         | $          | 5,347                        |       |                           |       | $ | 3,077 |   |   |   | $ | 4,069 |   |   |
| Accrued liabilities                                                                                                                                                                                |       |                                                         | 6,303      |                         |       |                           | 7,631      |   |   |   | 7,112 |   |   |
| Current portion of capital lease obligations                                                                                                                                                       |       |                                                         | —     |                         |       |                           | 111        |   |   |   | 185 |   |   |
| Total current liabilities                                                                                                                                                                          |       |                                                         | 11,650     |                         |       |                           | 10,819     |   |   |   | 11,366 |   |   |
| Other liabilities                                                                                                                                                                                  |       |                                                         | 3,069      |                         |       |                           | 3,262      |   |   |   | 3,331 |   |   |
| Total liabilities                                                                                                                                                                                  |       |                                                         | 14,719     |                         |       |                           | 14,081     |   |   |   | 14,697 |   |   |
| 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; 10,690,316 issued and outstanding at January 31, 2006,  11,220,376 at April 30, 2005, and 11,138,018 at January 31, 2005 |       |                                                         | 60,770     |                         |       |                           | 67,750     |   |   |   | 67,305 |   |   |
| Deferred compensation                                                                                                                                                                              |       |                                                         | (242       | )                            |       |                           | (246       | ) |   |   | (270 | ) |   |
| Retained earnings                                                                                                                                                                                  |       |                                                         | 6,870      |                         |       |                           | 20,371     |   |   |   | 18,325 |   |   |
| Total shareholders’ equity                                                                                                                                                                    |       |                                                         | 67,398     |                         |       |                           | 87,875     |   |   |   | 85,360 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                   |       |                                                         | $          | 82,117                       |       |                           |       | $ | 101,956 |   |   |   | $ | 100,057 |   |   |

 

See accompanying notes.

1

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

| ** **                                                     | ** ** | **Three Months Ended  January 31,**                                        | ** ** | **Nine Months Ended  January 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                                                  | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Net sales                                                      |       | $                                                                                         | 31,247     |                                              | $          | 24,220 |   | $ | 94,657 |   | $ | 91,657 |   |
| Cost of sales                                                  |       | 17,472                                                                                    |       | 13,272                                            |       | 51,819 |   | 47,818 |   |
| Gross profit                                                   |       | 13,775                                                                                    |       | 10,948                                            |       | 42,838 |   | 43,839 |   |
| Operating  expenses:                                           |       |                                                                                      |       |                                              |       |   |   |   |   |
| Selling, general and administrative                            |       | 12,601                                                                                    |       | 11,007                                            |       | 36,918 |   | 32,630 |   |
| Depreciation                                                   |       | 773                                                                                       |       | 679                                               |       | 2,189 |   | 2,136 |   |
| Restatement expenses                                           |       | —                                                                                    |       | 9                                                 |       | (648 | ) | 290 |   |
| Total operating expenses                                       |       | 13,374                                                                                    |       | 11,695                                            |       | 38,459 |   | 35,056 |   |
| Operating income  (loss)                                       |       | 401                                                                                       |       | (747                                              | )          | 4,379 |   | 8,783 |   |
| Interest income  (expense)                                     |       |                                                                                      |       |                                              |       |   |   |   |   |
| Interest income                                                |       | 312                                                                                       |       | 222                                               |       | 965 |   | 475 |   |
| Interest expense                                               |       | —                                                                                    |       | (9                                                | )          | (9 | ) | (39 | ) |
| Net interest income                                            |       | 312                                                                                       |       | 213                                               |       | 956 |   | 436 |   |
| Pre-tax income  (loss)                                         |       | 713                                                                                       |       | (534                                              | )          | 5,335 |   | 9,219 |   |
| Income tax  expense (benefit)                                  |       | 232                                                                                       |       | (150                                              | )          | 1,861 |   | 3,438 |   |
| Net income (loss)                                              |       | $                                                                                         | 481        |                                              | $          | (384 | ) | $ | 3,474 |   | $ | 5,781 |   |
| Basic earnings  (loss) per share:                              |       | $                                                                                         | 0.04       |                                              | $          | (0.04 | ) | $ | 0.32 |   | $ | 0.53 |   |
| Diluted earnings (loss)  per share:                            |       | $                                                                                         | 0.04       |                                              | $          | (0.04 | ) | $ | 0.31 |   | $ | 0.51 |   |
| Shares used in  computation of:                                |       |                                                                                      |       |                                              |       |   |   |   |   |
| Basic earnings (loss) per share                                |       | 10,851,639                                                                                |       | 10,926,355                                        |       | 11,020,316 |   | 10,844,598 |   |
| Diluted earnings (loss) per share                              |       | 11,143,454                                                                                |       | 10,926,355                                        |       | 11,277,677 |   | 11,396,594 |   |
| Cash dividends  declared per share of common stock outstanding |       | $                                                                                         | 0.07       |                                              | $          | 0.07 |   | $ | 1.55 |   | $ | 0.19 |   |

 

See accompanying notes.

2

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

| ** **                                                                         | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                            | ** ** |
| **Operating activities:**                                                          |       |                                               |       |                                              |       |   |   |   |   |
| Net income (loss)                                                                  |       | $                                                  | 481        |                                              | $          | (384 | ) | $ | 3,474 |   | $ | 5,781 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                               |       |                                              |       |   |   |   |   |
| Depreciation                                                                       |       | 787                                                |       | 707                                               |       | 2,230 |   | 2,259 |   |
| Deferred income taxes                                                              |       | 172                                                |       | (24                                               | )          | 285 |   | (24 | ) |
| Tax benefit on exercise of stock options                                           |       | 5                                                  |       | 863                                               |       | 194 |   | 863 |   |
| Amortization of deferred compensation                                              |       | 25                                                 |       | 11                                                |       | 72 |   | 11 |   |
| Loss on fixed asset disposal                                                       |       | 23                                                 |       | —                                            |       | 63 |   | — |   |
| Changes in assets  and liabilities:                                                |       |                                               |       |                                              |       |   |   |   |   |
| Accounts receivable, net                                                           |       | 934                                                |       | 6,505                                             |       | 3,237 |   | 9,791 |   |
| Inventories, net                                                                   |       | (2,771                                             | )          | (5,297                                            | )          | (2,357 | ) | (6,992 | ) |
| Income tax receivable                                                              |       | (273                                               | )          | (1,792                                            | )          | 110 |   | (1,591 | ) |
| Prepaid expenses and other assets                                                  |       | (420                                               | )          | (697                                              | )          | (780 | ) | (872 | ) |
| Accounts payable and accrued and other liabilities                                 |       | 1,302                                              |       | 1,781                                             |       | 749 |   | 744 |   |
| Net cash provided  by operating activities                                         |       | 265                                                |       | 1,673                                             |       | 7,277 |   | 9,970 |   |
| **Investing  activities:**                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Purchases of  furniture and equipment                                              |       | (480                                               | )          | (804                                              | )          | (1,904 | ) | (2,377 | ) |
| Purchases of  short-term investments                                               |       | (11,695                                            | )          | (21,862                                           | )          | (48,898 | ) | (64,178 | ) |
| Maturities of  short-term investments                                              |       | 19,333                                             |       | 21,902                                            |       | 62,107 |   | 56,290 |   |
| Net cash provided  by (used in) investing activities                               |       | 7,158                                              |       | (764                                              | )          | 11,305 |   | (10,265 | ) |
| **Financing  activities:**                                                         |       |                                               |       |                                              |       |   |   |   |   |
| Issuance of  common stock                                                          |       | 97                                                 |       | 2,172                                             |       | 690 |   | 3,074 |   |
| Payment of  dividends                                                              |       | (15,416                                            | )          | (769                                              | )          | (16,975 | ) | (2,069 | ) |
| Repurchases of  common stock                                                       |       | (3,128                                             | )          | (930                                              | )          | (7,932 | ) | (2,029 | ) |
| Principal  payments under capital lease obligations                                |       | (19                                                | )          | (158                                              | )          | (111 | ) | (483 | ) |
| Net cash (used in) provided by financing activities                                |       | (18,466                                            | )          | 315                                               |       | (24,328 | ) | (1,507 | ) |
| Net (decrease)  increase in cash and cash equivalents                              |       | (11,043                                            | )          | 1,224                                             |       | (5,746 | ) | (1,802 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 17,049                                             |       | 16,689                                            |       | 11,752 |   | 19,715 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                  | 6,006      |                                              | $          | 17,913 |   | $ | 6,006 |   | $ | 17,913 |   |

 

See accompanying notes.

3

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

**Note 1. Basis of Presentation**

The Company has one operating segment, the design,sourcing, and marketing of men’s and women’s sportswear, fashion, and outerwearapparel. The information for this segment is the information used by theCompany’s chief operating decision maker to evaluate operating performance.

The accompanying unauditedcondensed consolidated financial statements have been prepared by Cutter &Buck Inc. (the Company) in accordance with accounting principles generallyaccepted in the United States for interim financial statements and inaccordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand disclosures required by generally accepted accounting principles forcomplete annual financial statements. In the opinion of the Company’smanagement, all adjustments (consisting of normal recurring accruals) necessaryfor a fair presentation of the results for the interim periods have beenincluded. The Company’s revenues are seasonal, and therefore the results ofoperations for the three and nine months ended January 31, 2006, may notbe indicative of the results for the full fiscal year. For further information,refer to the consolidated financial statements and footnotes thereto for thefiscal year ended April 30, 2005, included in the Company’s filing on Form 10-K.

**Note 2. Reclassifications**

Certain prior year amounts have been reclassified toconform to the current year presentation.

Pursuant to Statement ofFinancial Accounting Standards No. 13, *Accounting for Leases*,the Company accounts for lease expense and sublease income on a straight-linebasis over the terms of the related leases. This accounting generally resultsin a deferred asset (for the sublease income) and a deferred liability (for thelease expense) recorded on the balance sheet. Prior to the first quarter offiscal 2006, the Company netted the deferred asset and liability and reportedthe net amount as a current liability. The Company is now reporting thedeferred asset ($1.3 million) and the deferred liability ($1.4 million) asseparate items on the balance sheet in other assets and other liabilities,respectively. The prior year netted amounts have been reclassified to conformto the current year presentation.

**Note 3. Short-term Investments**

Short-terminvestments held-to-maturity consists of United States government treasurybills and agency debt and U.S. corporate debt securities with maturity dateswithin one year of the purchase date. Amortized cost includes the initialpurchase amount plus accrued interest of $106,000, $96,000 and $91,000 as of January 31,2006, April 30, 2005, and January 31, 2005, respectively:

| **January 31, 2006** | ** ** | ** **              | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|-------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| U.S. corporate  debt           |       |                    | $          | 14,733              |       |                         |       | $                             | —     |                       |       |   | $ | (16 | ) |   |   | $ | 14,717 |   |   |
| U.S. government  agency debt   |       |                    | 995        |                |       |                         | —     |                          |       |                       | (2         | ) |   |   | 993 |   |   |
|                           |       |                    | $          | 15,728              |       |                         |       | $                             | —     |                       |       |   | $ | (18 | ) |   |   | $ | 15,710 |   |   |

 

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

 

| ** **                     | ** ** | ** **              | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                     | ** ** | **Amortized**           | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **January 31, 2005** | ** ** | ** **              | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
| U.S. corporate  debt           |       |                    | $          | 25,931         |       |           |       | $             | 1          |   |   |   | $ | (10 | ) |   |   | $ | 25,922 |   |   |
|                           |       |                    | $          | 25,931         |       |           |       | $             | 1          |   |   |   | $ | (10 | ) |   |   | $ | 25,922 |   |   |
|                                |            |                         |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4. Debt**

In March 2005, theCompany entered into a three-year loan agreement with Wells Fargo HSBC TradeBank, N.A. for a $35 million line of credit. This line of credit is secured byall of the Company’s assets. Borrowings under this agreement bear interest atprime minus 1.0%. Covenants contained in this loan agreement includemaintaining a debt to equity ratio of not more than 1.0, a quick ratio of notless than 1.0, and net income of $5.0 million per year. Additionally, capitalexpenditures are limited to $4.0 million per fiscal year. The Company is incompliance with all terms and covenants of this agreement. On January 31,2006, letters of credit outstanding against this line of credit totaledapproximately $3,133,000 and there were no working capital advancesoutstanding.

**Note 5. Shareholders’ Equity**

During the nine months ended January 31, 2006,the Company sold 114,937 shares pursuant to the exercise of stock options andunder its employee stock purchase plan. During the same period, the Companyrepurchased 650,997 shares under its Stock Repurchase Program.

In July 2005, the board of directors declared aspecial dividend of $1.34 per share that was conditioned upon shareholderapproval of stock plan amendments allowing certain adjustments to employeestock-based compensation awards to offset the economic impact of this specialdividend. On October 19, 2005, shareholders approved the stock plan amendmentsand the special cash dividend was paid on November 16, 2005, toshareholders of record on November 2, 2005. On December 7, 2005, theBoard declared a quarterly dividend of $0.07 per share, which was paid on January 6,2006, to shareholders of record on December 22, 2005.

On October 19, 2005,the Company and Mellon Investor Services, L.L.C. entered into a First Amendmentto Rights Agreement (the “Amendment”), which amended the Rights Agreementbetween the Company and Mellon Investor Services, L.L.C. dated November 20,1998 (the “Rights Agreement”). Under the terms of the Rights Agreement, theCompany distributed to the holders of the Company’s common stock certain rightsto acquire Company preferred stock at a discounted price upon the occurrence ofspecified triggering events (the “Rights”). Pursuant to the Amendment, theRights pursuant to the Rights Agreement expired on November 18, 2005,rather than the original expiration date of December 7, 2008.

**Note 6. Restructuring Liability**

The Company had two restructuring plans, which are nowcomplete. There is a liability recorded as a result of one of the plans forremaining lease payments due for excess warehouse capacity, all of which is 

5

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currently being subleasedand which management believes will continue to be subleased through the end ofthe Company’s  lease term in 2011.

For the nine months ended January 31, 2006,activity in the accrued liability account consisted of the following:

| ** **        | ** ** | **Balance at**     | ** ** | **Subsequent** | ** ** | ** **     | ** ** | **Balance at**  | ** ** | **Due**         | ** ** | **Due**         | ** ** |
|-------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|-----------------|------------|-----------------|------------|
| ** **        | ** ** | **April 30,**      | ** ** | **Accruals,**  | ** ** | **Subsequent** | ** ** | **January 31,** | ** ** | **Within**      | ** ** | **After**       | ** ** |
| ** **        | ** ** | **2005**                | ** ** | **Net**        | ** ** | **Payments**   | ** ** | **2006**             | ** ** | **1 Year** | ** ** | **1 Year** | ** ** |
| ** **        | ** ** | **(in thousands)** | ** ** |
| Lease obligations |       |                    | $          | 2,215          |       |           |       | $                    | —     |            |       |            | $          | (240 | ) |   |   | $ | 1,975 |   |   |   | $ | 320 |   |   | $ | 1,655 |   |
|                   |            |                         |            |                |            |                |            |                      |            |                 |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 7. Restatement Expenses**

In fiscal 2002, theCompany restated certain financial statements for irregularities and errors. Asa result of the circumstances underlying the restatement, three shareholderclass action lawsuits and a shareholder derivative lawsuit were filed, namingthe Company and certain of its current and former directors and officers asdefendants. The Company settled those lawsuits in fiscal 2003. During the quarter ended October 31, 2005,with the conclusion of the lawsuit, the Company’s estimate of legal expensesrelating to these matters was reduced. These accruals were originally recordedas restatement expenses in the income statement, so the reversals were alsorecorded as such.

**Note 8. Income Taxes**

The Company recorded $232,000 of income tax expense inthe third quarter of fiscal year 2006 compared to a $150,000 income tax benefitin the third quarter of fiscal year 2005. The effective rates for income taxeswere 32.6% and 28.0% for the third quarters of fiscal years 2006 and 2005,respectively.

The Company recorded $1,861,000 of income tax expensein the first nine months of fiscal year 2006 compared to $3,438,000 in thefirst nine of fiscal year 2005. The effective rates for income taxes were 34.9%and 37.3% for the first nine months of fiscal years 2006 and 2005,respectively.

The effective rates differfrom the federal statutory rate primarily due to changes in estimates of stateincome tax liabilities.

**Note 9. Earnings (Loss) Per Share**

Basic earnings (loss) per share is based on theweighted average number of common shares outstanding. Diluted earnings (loss)per share is based on the weighted average number of common shares andequivalents outstanding, except when inclusion of these items would beantidilutive. Common share equivalents included in the computation representrestricted stock grants and the net shares issuable upon assumed exercise ofoutstanding stock options. For the three months ended January 31, 2006,176,000 outstanding stock options were excluded from the calculation of dilutedearning per share because the exercise prices exceeded the average market valueof the common shares. For the three months ended January 31, 2005, 553,000potentially dilutive securities were excluded from the calculation of dilutedloss per share because the Company was in a loss position and their inclusionwould be antidilutive.

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

| ** **                                            | ** ** | **Three Months Ended  January 31,**                                        | ** ** | **Nine Months Ended  January 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                                                                  | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Numerator for  basic and diluted earnings per share:  |       |                                                                                      |       |                                              |       |   |   |   |   |
| Net income (loss)                                     |       | $                                                                                         | 481        |                                              | $          | (384 | ) | $ | 3,474 |   | $ | 5,781 |   |
| Denominator for basic earnings per share:             |       |                                                                                      |       |                                              |       |   |   |   |   |
| Weighted average common shares                        |       | 10,851,639                                                                                |       | 10,926,355                                        |       | 11,020,316 |   | 10,844,598 |   |
| Dilutive effect  of employee stock options and awards |       | 291,815                                                                                   |       | —                                            |       | 257,361 |   | 551,996 |   |
| Denominator for  diluted earnings per share           |       | 11,143,454                                                                                |       | 10,926,355                                        |       | 11,277,677 |   | 11,396,594 |   |
| Basic earnings per share                              |       | $                                                                                         | 0.04       |                                              | $          | (0.04 | ) | $ | 0.32 |   | $ | 0.53 |   |
| Diluted earnings per  share                           |       | $                                                                                         | 0.04       |                                              | $          | (0.04 | ) | $ | 0.31 |   | $ | 0.51 |   |

 

**Note 10. Stock-Based Compensation**

The Company accounts for its share-based paymentsusing the intrinsic value method prescribed in Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. The Company has elected to apply the disclosure-onlyprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accountingfor Stock-based Compensation—Transition and Disclosure.” Compensation expensefor stock options is recognized over the vesting period of the grant based onthe excess, if any, of the market price of the Company’s common stock at thedate of grant over the stock option exercise price. Under the Company’s plans,stock options are generally granted at fair market value on the date of grant.The Company also has an Employee Stock Purchase Plan that allows eligibleemployees to purchase Company stock at a 15% discount from market priceutilizing payroll deductions.

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123(R), Share-Based Payment, which is arevision of SFAS No. 123 and supercedes APB No. 25. SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values.Pro forma disclosure will no longer be a permitted alternative.

The required adoption date of SFAS No. 123(R) forthe Company, as amended by the SEC in Securities Act Release 33-8568, isthe beginning of fiscal 2007. SFAS No. 123(R) permits two methods ofadoption, a “modified prospective” method and a “modified retrospective”method. Under the modified prospective method, compensation cost is recognized,beginning with the effective date, based on the requirements of SFAS No. 123(R) forall share-based payments granted after the effective date and based on therequirements of SFAS No. 123 for all awards granted prior to the effectivedate that remain unvested on the effective date. The modified retrospectivemethod includes the above requirements of the modified prospective method andalso permits restatement of prior periods based on amounts previously reportedin pro forma disclosures pursuant to SFAS No. 123. Management is currentlyplanning to adopt this new standard in the first quarter of fiscal 2007 andis  reviewing the adoption alternatives.

Based upon the unamortized portion of the fair valueof options outstanding as of January 31, 2006, as estimated as of theirgrant dates pursuant to SFAS No. 123, the adoption of SFAS No. 123(R) isnot anticipated to have a significant impact on our results of operations orour overall financial position. 

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However, the impact ofadoption of SFAS No. 123(R) on future periods cannot be predicted atthis time because it will depend on levels of share-based payments granted inthe future.

Options to purchase 1,200 shares were granted duringthe quarter ended January 31, 2006. A restricted stock grant of 6,000shares was awarded during the quarter. Both of these grants were issuedpursuant to approved shareholder plans and vest in equal amounts annually overa three year period. The fair value for options granted during the periodspresented was estimated at the date of grant using the Black-Scholes optionpricing model using the following weighted-average assumptions:

| ** **               | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **               | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free  interest rate |       | 4.4                                                | %          | 3.6                                               | %          | 4.4 | % | 3.5 | % |
| Volatility               |       | 48                                                 | %          | 61                                                | %          | 57 | % | 61 | % |
| Dividend yield           |       | 2.5                                                | %          | 2.0                                               | %          | 2.5 | % | 2.1 | % |
| Expected life            |       | 4 years                                            |       | 5 years                                           |       | 5 years |   | 5 years |   |

 

If compensation costs for stock-based compensation hadbeen recognized based on the fair value method, the pro forma amounts of theCompany’s net income and net earnings per share would have been as follows:

| ** **                                                                                                                        | ** ** | **Three Months Ended  January 31,**                    | ** ** | **Nine Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**                                                              | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                                        | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income  (loss), as reported                                                                                                   |       | $                                                                     | 481        |                                              | $          | (384 | ) | $ | 3,474 |   | $ | 5,781 |   |
| Add employee  stock-based compensation expense, net of tax, as reported                                                           |       | 17                                                                    |       | 7                                                 |       | 47 |   | 7 |   |
| Deduct total  stock-based employee compensation expense, net of tax, determined under the  fair value based method for all awards |       | (107                                                                  | )          | (168                                              | )          | (249 | ) | (408 | ) |
| Pro forma net  income                                                                                                             |       | $                                                                     | 391        |                                              | $          | (545 | ) | $ | 3,272 |   | $ | 5,380 |   |
| Earnings per share:                                                                                                               |       |                                                                  |       |                                              |       |   |   |   |   |
| Basic—as reported                                                                                                            |       | $                                                                     | 0.04       |                                              | $          | (0.04 | ) | $ | 0.32 |   | $ | 0.53 |   |
| Basic—pro forma                                                                                                              |       | $                                                                     | 0.04       |                                              | $          | (0.05 | ) | $ | 0.30 |   | $ | 0.50 |   |
| Diluted—as reported                                                                                                          |       | $                                                                     | 0.04       |                                              | $          | (0.04 | ) | $ | 0.31 |   | $ | 0.51 |   |
| Diluted—pro forma                                                                                                            |       | $                                                                     | 0.04       |                                              | $          | (0.05 | ) | $ | 0.29 |   | $ | 0.47 |   |

 

**11. Litigation**

**The Company is party to routinelitigation incidental to its business. Management believes the ultimate resolutionof these routine matters will not have a material adverse effect on the Company’sfinancial condition and results of operations.**

The Company had acomplaint against Genesis Insurance Company, originally filed in the UnitedStates District Court for the Western District of Washington (“District Court”),alleging that Genesis’ 2002 attempt to rescind the Company’s primary Directors’and Officers’ liability insurance was unlawful, and sought damages resultingfrom Genesis’ breaches of contract and the duty of good faith and fair dealing.In February 2004, the District Court entered an Order granting Genesis’motions for summary judgment and, accordingly, the Company’s claims againstGenesis were dismissed by the District Court. The Company appealed the DistrictCourt’s decision to the United States Circuit Court of Appeals for the NinthCircuit (“Court of Appeals”). In August 2005, the Court of Appealsaffirmed the decision of the District Court in favor of Genesis and, therefore,the Company filed a petition for rehearing with the Court of Appeals 

8

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seekingto have the Court of Appeals reconsider certain portions of its decision. In October 2005,the Court of Appeals denied the Company’s petition for rehearing, effectivelyending this lawsuit.

**Note 12. Subsequent Event**

On March 8, 2006, the Board declared a quarterlydividend of $0.07 per share payable on April 7, 2006, to shareholders ofrecord on March 23, 2006.

 

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*You should readthis section together with our condensed consolidated financial statements andrelated notes thereto in this report. In addition to the historical informationcontained herein, this report contains forward-looking statements that involverisks and uncertainties. You should be aware that our actual results coulddiffer materially from those contained in any forward-looking statements. Ouractual results will depend upon a number of factors, including but not limitedto the following: the special risk factors set forth in Part I, Item 1 ofour annual report on Form 10-K for the fiscal year ended April 30,2005; our ability to control costs and expenses, costs associated with theupgrade and replacement of some of our computer systems, costs associated withour marketing initiatives, and costs associated with regulatory compliance; the potential outcome of pending and future auditsby various taxing jurisdictions; our ability to maintain ourrelationships with our sponsored professional golfers; relations with andperformance of suppliers; our ability to carryout successful designs, effectively advertise and communicate with themarketplace, and penetrate our chosen distribution channels; our ability toappropriately price our products; the number of golf rounds played, which maybe impacted by severe weather-related disasters and the weather in general;competition; risks related to the timely performance of third parties, such asshipping companies, including risks of strikes or labor disputes involvingthese third parties; maintaining the integrity of our technology andinformation systems while enhancing and changing systems; identifying,attracting, and retaining employees, including key management personnel;political and trade relations; changes in international trade quota systems forapparel; the overall level of consumer spending on apparel; global economic andpolitical conditions, including impacts of disease and terrorism and responsesthereto, including war. Under the Board’s remaining $2.9 million stockrepurchase authorization, we may repurchase $2.9 million of our stock, nofurther shares of stock, or any amount in between, depending on the tradingprice of our stock, market conditions, or for any other reason. Finally, theremay be other factors not mentioned above or included elsewhere in this reportthat may cause actual results to differ materially from any forward-lookingstatements. You should not place undue reliance on any forward-lookingstatements. We assume no obligation to update any forward-looking statements asa result of new information, future events or developments, except as requiredby the securities laws.*

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

**Overview**

Cutter & Buck designs, sources, markets, anddistributes high-quality sportswear under the Cutter & Buck brand. Wesell our products primarily through wholesale channels, via corporate accounts,golf pro shops and resorts, upscale specialty and department retail stores, andinternational distributors and licensees, all of whom ultimately sell ourproducts to the end consumer. We also sell directly to end consumers throughcatalog and internet channels. Our mission is to build a premium globalconsumer apparel brand by creating distinctively original product. Our businessstrategy focuses on strengthening the upscale positioning of the Cutter &Buck brand and increasing the penetration of our target markets. We focus onthe needs of our customers and end consumers and design products to meet thoseneeds.

On February 7, 2006,John T. Wyatt, our CEO, President, and member our board of directors, announcedhis resignation, effective March 8, 2006, in order to become President ofGapBody. Following discussions with an outside consultant and a review of theCompany’s operational and management structure, on March 7, 2006, theboard of directors appointed Ernest R. Johnson, the Company’s former SeniorVice President and Chief Financial Officer, to the position of Chief ExecutiveOfficer. In addition, the board appointed Kaia Akre, who previously oversaw theCompany’s marketing efforts, to the position of President. Finally, the boardappointed Michael Gats, who previously oversaw the Company’s ManagementReporting & Analysis function, to the position of Vice President,Chief Financial Officer, and Secretary. Each of these appointments was madeeffective March 9, 2006. As part of the above-described reorganization,the position of Chief Operations Officer, previously held by William B. Swint,was eliminated, and Mr. Swint has decided to leave the Company.

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**Results of Operations**

The following table sets forth, for the periodsindicated, certain consolidated income statement data expressed as a percentageof net sales.

| ** **                          | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net sales                           |       | 100.0                                              | %          | 100.0                                             | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 55.9                                               |       | 54.8                                              |       | 54.7 |   | 52.2 |   |
| Gross profit                        |       | 44.1                                               |       | 45.2                                              |       | 45.3 |   | 47.8 |   |
| Operating expenses:                 |       |                                               |       |                                              |       |   |   |   |   |
| Selling, general and administrative |       | 40.3                                               |       | 45.5                                              |       | 39.0 |   | 35.6 |   |
| Depreciation                        |       | 2.5                                                |       | 2.8                                               |       | 2.3 |   | 2.3 |   |
| Restatement expenses                |       | —                                             |       | —                                            |       | (0.7 | ) | 0.3 |   |
| Total operating expenses            |       | 42.8                                               |       | 48.3                                              |       | 40.6 |   | 38.2 |   |
| Operating income  (loss)            |       | 1.3                                                |       | (3.1                                              | )          | 4.7 |   | 9.6 |   |
| Net interest income                 |       | 1.0                                                |       | 0.9                                               |       | 1.0 |   | 0.5 |   |
| Pre-tax income  (loss)              |       | 2.3                                                |       | (2.2                                              | )          | 5.7 |   | 10.1 |   |
| Income tax  expense (benefit)       |       | 0.7                                                |       | (0.6                                              | )          | 2.0 |   | 3.8 |   |
| Net income (loss)                   |       | 1.6                                                | %          | (1.6                                              | )%         | 3.7 | % | 6.3 | % |

 

**ThreeMonths Ended January 31, 2006 Compared With Three Months Ended January 31,2005**

**Net Sales**

During the third quarter of fiscal 2006, net salesincreased approximately $7.0 million, or 29.0%, to $31.2 million from$24.2 million in the same period of the prior year. The third quartersales growth is a combination of discounted sales of our discontinued Classicsstyles and positive trends toward the end of the quarter in our new Classicsand Fashion collections. The third quarter is historically our lowest sales quarterof the year due to seasonality. The detail of net sales by sales channel is asfollows:

| ** **       | ** ** | **Three Months Ended  January 31,**            | ** ** | **Increase** | ** ** | **Percent**    | ** ** |
|------------------|------------|---------------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **       | ** ** | **2006**                                                      | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **       | ** ** | **(in thousands, except percent change)** | ** ** |
| Corporate        |       | $                                                             | 14,548     |         | $          | 12,578         |       |   | $ | 1,970 |   |   |   | 15.7 | % |   |
| Golf             |       | 5,008                                                         |       | 4,375        |       |           | 633        |   |   |   | 14.5 |   |   |
| Specialty Retail |       | 5,859                                                         |       | 4,090        |       |           | 1,769      |   |   |   | 43.3 |   |   |
| Consumer Direct  |       | 2,405                                                         |       | 753          |       |           | 1,652      |   |   |   | 219.4 |   |   |
| International    |       | 754                                                           |       | 858          |       |           | (104       | ) |   |   | (12.1 | ) |   |
| Other            |       | 2,673                                                         |       | 1,566        |       |           | 1,107      |   |   |   | 70.7 |   |   |
| Total            |       | $                                                             | 31,247     |         | $          | 24,220         |       |   | $ | 7,027 |   |   |   | 29.0 | % |   |

 

Net sales in our Corporate sales channel increased by$2.0 million, to $14.5 million, from $12.6 million in the sameperiod of the prior year. The increase is primarily due to sales of ourdiscontinued styles at a discount. At the end of the quarter, we began seeingthe positive impact on net sales from our 2006 Classics collection. Thisenhanced collection features an expanded offering of women’s product, new itemsfrom our CB ProTec performance apparel collection, and luxury pieces from ourSignature Collection.

In the third quarter of fiscal 2006, net sales in ourGolf sales channel increased by $0.6 million, to $5.0 million from$4.4 million in the same period of the prior year. This increase isprimarily due to sales of discontinued styles. In January, we began seeingpositive year over year improvement in our Spring fashion line driven bytechnical offerings and our new Signature Collection.

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Net sales in our Specialty Retail sales channelincreased approximately $1.8 million, to $5.9 million from$4.1 million in the same period of the prior year. Consistent withprevious quarters this fiscal year, our strong presence in the premium Big &Tall market continues to generate growth. Increased sales to our specialtydepartment store customers during the quarter have also driven growth in ourspecialty retail sales channel. Also, we offered an additional seasonaldelivery this year that started shipping right after Christmas. In the prioryear our first Spring deliveries began toward the end of January.

Consumer Direct sales increased approximately $1.7million to $2.4 million from $0.8 million in the same period of theprior year due to our new consumer catalog initiative and enhanced website,both of which were launched during the second quarter of fiscal 2006.

Other sales includeliquidation sales and shipping revenue. Liquidation sales were higher than theprior year due to the significant quantity of discontinued styles in ourClassics line. We were able to liquidate a portion of the discontinued Classicsduring the third quarter and anticipate liquidating the remaining discontinuedstyles in the fourth quarter. Last year, liquidation sales of discontinuedClassics occurred only during the fourth quarter.

**Gross Profit**

In the third quarter of fiscal 2006, gross profit was44.1% of net sales compared to 45.2% in the same period of the prior year. Thedecrease was primarily due to markdowns and liquidations of discontinuedClassics. In October 2005, we introduced a significant change to ourClassics line that included many new men’s styles and added new women’s “companion”pieces to the line. In conjunction with the upgraded line, we discontinued anumber of slow-selling Classics styles. In order to reduce the amount ofliquidation sales of these discontinued styles, we sold them at discountedprices through our primary sales channels throughout most of the third quarter.The first sales at liquidation prices occurred toward the end of January.

Margins for the fourth quarter of fiscal 2006 arelikely to be more in line with the prior year as the amount of fourth quarterliquidation sales are expected to be consistent with the prior year.

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

**Selling,General and Administrative Expense**

Selling, general andadministrative expenses totaled $12.6 million in the third quarter of fiscal2006 compared to $11.0 million in fiscal 2005, an increase of $1.6 million.This increase is primarily due to additional costs related to our new consumercatalog. Also, our expenses related to information technology have increasedfrom the third quarter of the prior year.

**Income Taxes**

We recorded approximately $0.2 million of income taxexpense in the third quarter of fiscal 2006 compared to a $0.2 million benefitin the third quarter of fiscal 2005. The effective rates for income taxes inthe third quarters of fiscal 2006 and 2005 were 32.6% and 28.0%, respectively.The effective rate for the third quarter of fiscal 2006 is lower than ourexpected annual effective rate, primarily due to adjustments to our net taxassets based upon filing of our fiscal 2005 tax return during the quarter. Theeffective rate for the third quarter of fiscal 2005 is lower than the statutoryrate as a result of changing our estimates of expected future state taxliabilities.

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**NineMonths Ended January 31, 2006 Compared With Nine Months Ended January 31,2005**

**Net Sales**

During the first ninemonths of fiscal 2006, net sales increased approximately $3.0 million, or3.3%, to $94.7 million from $91.7 million in the same period of the prioryear. The detail of net sales by sales channel is as follows:

| ** **       | ** ** | **Nine Months Ended  January 31,**             | ** ** | **Increase** | ** ** | **Percent**    | ** ** |
|------------------|------------|---------------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **       | ** ** | **2006**                                                      | ** ** | **2005**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **       | ** ** | **(in thousands, except percent change)** | ** ** |
| Corporate        |       | $                                                             | 42,285     |         | $          | 42,279         |       |   | $ | 6 |   |   |   | 0.0 | % |   |
| Golf             |       | 20,221                                                        |       | 23,224       |       |           | (3,003     | ) |   |   | (12.9 | ) |   |
| Specialty Retail |       | 20,222                                                        |       | 17,762       |       |           | 2,460      |   |   |   | 13.8 |   |   |
| Consumer Direct  |       | 4,043                                                         |       | 1,464        |       |           | 2,579      |   |   |   | 176.2 |   |   |
| International    |       | 2,308                                                         |       | 2,273        |       |           | 35         |   |   |   | 1.5 |   |   |
| Other            |       | 5,578                                                         |       | 4,655        |       |           | 923        |   |   |   | 19.8 |   |   |
| Total            |       | $                                                             | 94,657     |         | $          | 91,657         |       |   | $ | 3,000 |   |   |   | 3.3 | % |   |

 

Over the first nine monthsof fiscal 2006, net sales in our Corporate sales channel are flat compared withprior year. The declines experienced during the first two quarters were offsetby the increase during the third quarter. Our 2005 Classics line did notfeature many new styles, which negatively impacted sales during the first sixmonths of fiscal 2006. During the third quarter of fiscal 2006, we continued toheavily promote our discontinued styles and, in October, we introduced our new Classicsline. The combination of these two factors resulted in increased sales comparedwith the prior year for the third quarter.

Net sales in our Golfsales channel have decreased by $3.0 million to $20.2 million from$23.2 million in the same period of the prior year. The decline includes$1.2 million of sales driven by the Ryder Cup in fiscal 2005. Sales are onlygenerated from this event when it is held in the United States, every fourthyear. The remaining decrease is primarily attributable to poor acceptance ofour Fall 2005 fashion collections.

Year to date sales in ourSpecialty Retail sales channel have increased approximately $2.5 million,to $20.2 million from $17.8 million in the same period of the prior year,primarily due to our strong presence in the premium Big & Tall marketand favorable initial acceptance of our Spring 2006 fashion collection.

Consumer Direct salesincreased $2.6 million over fiscal 2005, primarily due to our new consumercatalog initiative and enhanced website, both of which were launched during thesecond quarter of fiscal 2006.

Other sales includeliquidation sales and shipping revenue. Year to date liquidation sales havebeen higher than the prior year due to the commencement of liquidatingremaining units of our discontinued Classics styles during the third quarter offiscal 2006. In fiscal year 2005, the discontinued styles were liquidated inthe fourth quarter. We anticipate that fourth quarter liquidations will beconsistent with the prior year.

**Gross Profit**

During the first ninemonths of fiscal 2006, gross profit was 45.3% of net sales compared to 47.8% inthe same period of the prior year. In October 2005, we introduced asignificant change to our Classics line that included many new men’s styles andadded new women’s “companion” pieces to the line. In conjunction with theupgraded line, we discontinued a number of slow-selling styles and beganselling them at discounted prices through our primary channels beginning in August 2005.This action was taken to reduce the amount of Classics styles and slow-movingfashion styles to be sold at liquidation prices. We began selling thediscontinued styles at liquidation prices at the end of the third quarter offiscal year 2006 and will continue selling at liquidation pricing in the fourthquarter. 

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During fiscal year 2005,the changes to the Classics line were not as significant and we did not begindiscounting our discontinued styles until October. Consequently, we did notbegin liquidating the discontinued styles for fiscal year 2005 until the fourthquarter. Margins for the fourth quarter of fiscal 2006 are likely to be more inline with the prior year as fourth quarter liquidation sales are expected to beconsistent with the prior year.

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

**Selling,General and Administrative Expense**

Selling, general andadministrative expenses totaled $36.9 million in the first nine months of fiscal2006 compared to $32.6 million in fiscal 2005. This increase is largely due to$3.3 million of additional costs associated with the new consumer catalog. Theremainder of the increase is primarily due to increased compensation costs foradditional product design and development staffing added in the second quarterof fiscal 2005, as well as increased costs during the third quarter of fiscal2006 for commissions and other costs of distribution resulting from ourincreased sales.

**RestatementExpenses**

The Company was notsuccessful in its appeal in its lawsuit against Genesis Insurance Company.Although we did not recover the damages we were seeking, we have not beenrequired to repay the premium for the policy in question and therefore wereversed the approximately $0.5 million that had been recorded for thisoutstanding liability, plus some additional accruals for legal and otherestimated costs, during the first nine months of fiscal 2006.

**Income Taxes**

We recorded approximately$1.9 million of income tax expense in the first nine months of fiscal 2006compared to $3.4 million in fiscal 2005. The effective rates for income taxesin the first nine months of fiscal 2006 and 2005 were 34.9% and 37.3%,respectively. The effective rates differ from the federal statutory rate due toestimates of state income tax liabilities.

**Liquidityand Capital Resources**

At January 31, 2006,our cash and short-term investments totaled $21.6 million compared to $43.8million at January 31, 2005, and $40.6 million at April 30, 2005.During the first nine months of fiscal 2006, the Company paid dividendstotaling $17.0 million, including a $14.7 million special dividend that was paid on November 16, 2005. Additionally, theCompany has repurchased 650,997 shares of stock at a total cost of $7.9 millionduring the first nine months of fiscal 2006.

During the first ninemonths of fiscal 2006, our capital requirements were funded by cash provided byoperating activities. Net cash provided by operating activities in the firstnine months of fiscal 2006 was $7.3 million compared to $10.0 million in thefirst nine months of fiscal 2005. The decrease in net cash provided byoperating activities was primarily a result of the lower net income of $3.5million during the first nine months of fiscal 2006, compared to $5.8 millionin the first nine months of fiscal 2005.

Net cash provided byinvesting activities was $11.3 million in the first nine months of fiscal 2006compared to $10.3 million used in the first nine months of fiscal 2005. Thechange was primarily due to fewer net purchases of short-term investments infiscal 2006, as we were transitioning these to cash equivalents in anticipationof payment of the special dividend in November. We incurred $1.9 million ofcapital expenditures during the nine months ended January 31, 2006. Theseinvestments relate primarily to 

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theimplementation of our new enterprise resource planning (“ERP”) system, upgradedinventory warehousing system, a new product design management system, and newcommunication systems and software to help manage our expanded direct toconsumer business. We plan to continue to invest in additional enhancements toour systems during the remainder of this fiscal year and next. Total capitalexpenditures for fiscal 2006 are not anticipated to exceed $3.0 million.

Net cash used in financingactivities was $24.3 million in the first nine months of fiscal 2006, whichprimarily consisted of stock repurchases and dividend payments. We initiated ashare repurchase program in March 2004. In July 2005, the boardextended this program to allow for an additional $10.0 million of sharerepurchases beyond those already made for a total cumulative repurchaseauthorization of $14.2 million. Since the inception of the program through January 31,2006, we have paid a total of $11.3 million to repurchase stock and, as of January 31,2006, have remaining authorization for additional repurchases of up to $2.9million of stock. The repurchase program may be suspended at any time withoutnotice. The purchases will be made from time to time in the open market or inprivately negotiated transactions. The timing of repurchases and the actualnumber of shares repurchased will depend on market conditions, alternative usesof capital, and other factors.

During the quarter ended January 31,2006, we paid a regular cash dividend of $0.07 per share and a special cashdividend of $1.34 per share. On March 8, 2006, the Board declared aquarterly dividend of $0.07 per share, payable on April 7, 2006, toshareholders of record on March 23, 2006. We expect to pay similar regularcash dividends in future quarters. However, we may decide to discontinue ormodify these regular dividend payments at any time if we determine that otheruses of our capital may be in the best interests of our shareholders.

In March 2005, weentered into a three-year loan agreement with Wells Fargo HSBC Trade Bank, N.A.for a $35 million line of credit. This line of credit is secured by all of theCompany’s assets. Any borrowings under this agreement bear interest at primeminus 1.0%. Covenants contained in this loan agreement include maintaining adebt to equity ratio of not more than 1.0, a quick ratio of not less than 1.0,and net income of $5.0 million per year. Additionally, capital expenditures arelimited to $4.0 million per year. As of January 31, 2006, we are incompliance with all of these covenants and there are no borrowings under thisline of credit other than open letters of credit totaling approximately $3.1million.

Our primary ongoing capitalrequirements are to finance working capital and the continued growth andoperations of our business, including investments in fixed assets. We believethe remaining cash on hand and cash generated from operations, as well as ourability to borrow under bank lines of credit, will be sufficient to meet ourcash requirements during the remainder of fiscal 2006 and 2007. Shouldmanagement determine that cash on hand is insufficient to support continuationof the stock repurchase program, we have the ability to suspend the program atany time. We also have available alternative sources of financing, includingfactoring our accounts receivable and financing our capital expenditures withleases. Although these methods of financing are currently available to us, wedo not anticipate using alternative sources of financing during fiscal 2006 or2007. 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, and various otherfactors.

**CriticalAccounting Policies and Use of Estimates**

Our critical accountingpolicies are described in Item 7 in the Company’s annual report on Form 10-Kfor the year ended April 30, 2005. Our discussion and analysis offinancial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues, expenses, and relateddisclosures of contingent assets and liabilities. On an ongoing 

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basis,we evaluate the estimates that we have made. These estimates are based upon ourhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Our actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting estimates affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

**Reserve for ProductReturns**

We maintain a reserve forprobable future product returns related to current period product receivables.We analyze the rate of historical returns and trends in changes to the rate, ifany, when evaluating the adequacy of this reserve. The estimate for productreturns is included in our calculation of net sales. If we were to experiencean increase in our product returns, additional reserves might be required.

**Reservefor Sales Allowances**

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

**Allowancesfor Doubtful Accounts**

We maintain an allowancefor accounts that are doubtful to be ultimately collected, resulting from theinability of our customers to make required payments. These losses are includedin bad debt expense. We determine the adequacy of this allowance by regularlyreviewing our accounts receivable aging and evaluating individual customerreceivables, considering customers’ financial condition, credit history andcurrent economic conditions. If the financial condition of our customers wereto deteriorate, resulting in an impairment of their ability to make payments,additional allowances might be required.

**Inventories**

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

**Impairmentof Long-Lived Assets**

We review the carryingvalues of our long-lived assets whenever events or changes in circumstancesindicate that such carrying values may not be recoverable. Unforeseen eventsand changes in circumstances and market conditions and changes in estimates offuture cash flows could negatively affect the fair value of our assets andresult in an impairment charge. Fair value is the amount at which the assetcould be bought or sold in a current transaction between willing parties andmay be estimated using a number of techniques, including quoted market pricesor valuations by third parties, present value techniques based on estimates ofcash flows, or multiples of earnings or revenues performance measures. The fairvalue of the asset could be different using different estimates and assumptionsin these valuation techniques.

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**RestructuringLiabilities**

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

**ValuationAllowance in Deferred Income Tax Assets**

We periodically review theneed for a valuation allowance to reduce our deferred income tax asset balancesto their net realizable value. To the extent we determine an allowance isrequired, we determine the adequacy of this allowance by regularly reviewingour historical taxable income and forecasts of future taxable income over theperiods in which the temporary differences are anticipated to reverse. As of January 31,2006, we have determined that no allowance is required. If our actual resultsare lower than our forecasted future results, an allowance might be required.

**Item3. Quantitative and Qualitative Disclosures about Market Risk**

We are subject to certainmarket risks, including interest rate risks associated with financialinstruments included in cash and cash equivalents and short-term investments.We invest in interest-bearing U.S. Government and high-quality corporatefixed-rate debt instruments and hold these instruments until maturity. Changesin interest rates may affect the fair market value of these instruments.Investments with maturities beyond ninety days as of the purchase date areclassified as short-term investments. The average time to maturity as of thepurchase date for short-term investments held as of January 31, 2006, was124 days and the weighted average interest rate was 4.2%. Due to the short-termnature of these instruments and our investment policies and procedures, we donot expect interest rate fluctuations to have a material adverse effect on ourresults of operations.

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

**Item4. Controls and Procedures**

**Evaluationof Disclosure Controls and Procedures**

As of January 31,2006, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934, as amended(“Exchange Act”). Based on this evaluation, our principal executive andfinancial officers concluded that, as of January 31, 2006, our disclosurecontrols and procedures were effective in providing reasonable assurance thatmaterial information required to be disclosed in our reports filed under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in SEC rules and forms.

**Changesin Internal Controls**

During the third quarterended January 31, 2006, there have been no changes in our internal controlover financial reporting as defined in Rules 13a-15(f) or 15d-15(f) underthe Securities and Exchange Act of 1934, as amended, that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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**PART II—OTHER INFORMATION**

**Item 1. Legal Proceedings**

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

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

**Purchasesof Equity Securities by the Issuer**

The Company has a stock repurchase program, allowingfor the repurchase of up to $14.2 million of common stock. Pursuant to thisprogram, the Company adopted a stock trading plan that is intended to followthe guidelines specified under Rule 10b5-1 of the SecuritiesExchange Act of 1934, as amended. The stock repurchase program may be suspendedor discontinued by the Board of Directors at any time without notice and itdoes not have an expiration date.

The following table sets forth our purchases of ourcommon stock for the fiscal quarter ended January 31, 2006:

| **Period**                    | ** ** | ** ** | ** ** | **Total number of**

**shares purchased** | ** ** | **Average price  paid per share** | ** ** | **Total number of shares  purchased as part of a  publicly announced plan** | ** ** | **Maximum dollar  value of shares that  may yet be purchased  under the plan** | ** ** |
|-------------------------------|------------|------------|------------|----------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| November  11/01/05 - 11/30/05 |       |       | 800        |                                                     |       |                                             | $          | 12.00                                                                                                                    |       |                                                                                                                        |       | 800 |   |   |   | $ | 6,064,000 |   |   |
| December  12/01/05 - 12/31/05 |       |       | 106,200    |                                                     |       |                                             | $          | 11.43                                                                                                                    |       |                                                                                                                        |       | 106,200 |   |   |   | $ | 4,850,000 |   |   |
| January  01/01/06 - 01/31/06  |       |       | 163,200    |                                                     |       |                                             | $          | 11.67                                                                                                                    |       |                                                                                                                        |       | 163,200 |   |   |   | $ | 2,945,000 |   |   |
|                          |       |       | 270,200    |                                                     |       |                                             |       |                                                                                                                     |       |                                                                                                                        | 270,200    |   |   |   |   |   |   |

 

**Item 3. Defaults Upon Senior Securities**

**None**

**Item 4. Submission of Matters to a Vote of SecurityHolders**

**None**

**Item 5. Other Information**

None

**Item 6. Exhibits**

a)               Exhibits

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

 

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

|                            |   | Cutter & Buck Inc.  (Registrant) |
|----------------------------|--------|-------------------------------------------|
| Dated: March 8,  2006 |   | By                                        |   | /s/  ERNEST R. JOHNSON |
|                       |   |                                      |   | Ernest R. Johnson*Chief Financial Officer and Senior Vice President  (Principal Accounting and Financial Officer)* |

 

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