**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

----

Form 10-Q

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

**Forthe quarterly period ended October 31, 2004**

**or**

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

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

**CommissionFile No. 0-26608**

----

CUTTER & BUCK INC.

(Exact Name of Registrantas Specified in Its Charter)

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

 

**701 N. 34thStreet, Suite 400Seattle, WA 98103**

(Address of PrincipalExecutive Offices, Including Zip Code)

**(206) 622-4191**

(Registrant’s TelephoneNumber, Including Area Code)

----

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x  No o

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in rule 12b-2 ofthe Exchange Act). Yes xNo

Thenumber of shares of Common Stock of the registrant outstanding as of December 6,2004 was 10,828,468.

 

----

 

**CUTTER &BUCK INC.Quarterly Report on Form 10-QFor the Quarter Ended October 31, 2004Index**
|                                         | ** **                                                                                  | **Page** |
|-----------------------------------------|---------------------------------------------------------------------------------------------|----------|
| PART I—FINANCIAL  INFORMATION |                                                                                        |     |
| Item 1.                                 | Financial  Statements:                                                                      |     |   |
|                                    | Condensed  Consolidated Balance Sheets                                                      | 3        |   |
|                                    | Condensed Consolidated  Statements of Operations                                            | 4        |   |
|                                    | Condensed  Consolidated Statements of Cash Flows                                            | 5        |   |
|                                    | Notes to Condensed Consolidated  Financial Statements                                       | 6        |   |
| Item 2.                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 10       |   |
| Item 3.                                 | Quantitative  and Qualitative Disclosures about Market Risk                                 | 19       |   |
| Item 4.                                 | Controls and  Procedures                                                                    | 20       |   |
| PART II—OTHER INFORMATION     |                                                                                        |     |
| Item 1.                                 | Legal Proceedings                                                                           | 21       |   |
| Item 2.                                 | Changes  in Securities and Use of Proceeds                                                  | 21       |   |
| Item 3.                                 | Defaults  Upon Senior Securities                                                            | 21       |   |
| Item 4.                                 | Submission  of Matters to a Vote of Security Holders                                        | 21       |   |
| Item 5.                                 | Other Information                                                                           | 21       |   |
| Item 6.                                 | Exhibits  and Reports on Form 8-K                                                      | 22       |   |
| SIGNATURES                              | 23                                                                                          |     |

 

2

----

**PART I—FINANCIAL INFORMATION**

**Item 1.   Financial Statements**

**CUTTER & BUCKINC.**

**CondensedConsolidated Balance Sheets**
| ** **                                                                                                                                                        | ** ** | ** October 31, 2004 ** | ** ** | ** April 30, 2004 ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **(unaudited)**                            | ** ** | ****                                     | ** ** |
| ***(in thousands, except share amounts)***                                                                                                    | ** ** |
| **Assets**                                                                                                                                                        |       |                                       |       |                                     |       |   |   |   |   |
| Current assets:                                                                                                                                                   |       |                                       |       |                                     |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                         |       |                                       | $          | 16,689                                   |       |   |   | $ | 19,715 |   |   |
| Short-term investments                                                                                                                                            |       |                                       | 25,880     |                                     |       |   | 17,952 |   |   |
| Accounts receivable, net of allowances for doubtful  accounts, returns and allowances of $2,317 at October 31, 2004 and $2,496  at April 30, 2004  |       |                                       | 19,216     |                                     |       |   | 22,502 |   |   |
| Inventories, net                                                                                                                                                  |       |                                       | 23,633     |                                     |       |   | 21,938 |   |   |
| Deferred income taxes                                                                                                                                             |       |                                       | 2,566      |                                     |       |   | 2,566 |   |   |
| Prepaid expenses and other current assets                                                                                                                         |       |                                       | 2,438      |                                     |       |   | 2,282 |   |   |
| Total current assets                                                                                                                                              |       |                                       | 90,422     |                                     |       |   | 86,955 |   |   |
| Furniture and  equipment, net                                                                                                                                     |       |                                       | 6,311      |                                     |       |   | 6,290 |   |   |
| Deferred income  taxes                                                                                                                                            |       |                                       | 376        |                                     |       |   | 376 |   |   |
| Other assets                                                                                                                                                      |       |                                       | 328        |                                     |       |   | 309 |   |   |
| Total assets                                                                                                                                                      |       |                                       | $          | 97,437                                   |       |   |   | $ | 93,930 |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                    |       |                                       |       |                                     |       |   |   |   |   |
| Current liabilities:                                                                                                                                              |       |                                       |       |                                     |       |   |   |   |   |
| Accounts payable                                                                                                                                                  |       |                                       | $          | 3,600                                    |       |   |   | $ | 2,940 |   |   |
| Accrued liabilities                                                                                                                                               |       |                                       | 5,624      |                                     |       |   | 7,161 |   |   |
| Income taxes payable                                                                                                                                              |       |                                       | 1,419      |                                     |       |   | 1,217 |   |   |
| Current portion of capital lease obligations                                                                                                                      |       |                                       | 315        |                                     |       |   | 557 |   |   |
| Total current liabilities                                                                                                                                         |       |                                       | 10,958     |                                     |       |   | 11,875 |   |   |
| Capital lease  obligations, less current portion                                                                                                                  |       |                                       | 28         |                                     |       |   | 111 |   |   |
| Other liabilities                                                                                                                                                 |       |                                       | 2,054      |                                     |       |   | 2,215 |   |   |
| 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: 10,819,143 issued and outstanding at October 31, 2004 and  10,752,552 at April 30, 2004      |       |                                       | 64,920     |                                     |       |   | 65,116 |   |   |
| Retained earnings                                                                                                                                                 |       |                                       | 19,477     |                                     |       |   | 14,613 |   |   |
| Total shareholders’ equity                                                                                                                                   |       |                                       | 84,397     |                                     |       |   | 79,729 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                  |       |                                       | $          | 97,437                                   |       |   |   | $ | 93,930 |   |   |

 

See accompanying notes

3

----

**CUTTER &BUCK INC.Condensed Consolidated Statements of Operations (Unaudited)**
| ** **                                                                                  | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2004**                                           | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ***(in thousands, except share and per share amounts)*** | ** ** |
| Net sales                                                                                   |       | $                                                  | 35,538     |                                             | $          | 34,747 |   | $ | 67,437 |   | $ | 67,484 |   |
| Cost of sales                                                                               |       | 18,399                                             |       | 18,527                                           |       | 34,546 |   | 36,525 |   |
| Gross profit                                                                                |       | 17,139                                             |       | 16,220                                           |       | 32,891 |   | 30,959 |   |
| Operating expenses:                                                                         |       |                                               |       |                                             |       |   |   |   |   |
| Depreciation                                                                                |       | 691                                                |       | 1,051                                            |       | 1,457 |   | 2,113 |   |
| Selling, general and administrative                                                         |       | 11,609                                             |       | 10,532                                           |       | 21,623 |   | 21,015 |   |
| Restatement expenses                                                                        |       | 268                                                |       | 1,678                                            |       | 281 |   | 3,350 |   |
| Total operating expenses                                                                    |       | 12,568                                             |       | 13,261                                           |       | 23,361 |   | 26,478 |   |
| Operating income                                                                            |       | 4,571                                              |       | 2,959                                            |       | 9,530 |   | 4,481 |   |
| Interest income  (expense)                                                                  |       |                                               |       |                                             |       |   |   |   |   |
| Interest expense                                                                            |       | (13                                                | )          | (44                                              | )          | (30 | ) | (102 | ) |
| Interest income                                                                             |       | 149                                                |       | 42                                               |       | 253 |   | 85 |   |
| Net interest income (expense)                                                               |       | 136                                                |       | (2                                               | )          | 223 |   | (17 | ) |
| Income from  continuing operations before income taxes                                      |       | 4,707                                              |       | 2,957                                            |       | 9,753 |   | 4,464 |   |
| Income tax  expense                                                                         |       | 1,792                                              |       | 866                                              |       | 3,588 |   | 1,420 |   |
| Income from  continuing operations                                                          |       | 2,915                                              |       | 2,091                                            |       | 6,165 |   | 3,044 |   |
| Income from  discontinued retail operations, net of tax                                     |       | —                                             |       | —                                           |       | — |   | 146 |   |
| Net income                                                                                  |       | $                                                  | 2,915      |                                             | $          | 2,091 |   | $ | 6,165 |   | $ | 3,190 |   |
| Basic earnings  per share:                                                                  |       |                                               |       |                                             |       |   |   |   |   |
| Earnings from  continuing operations                                                        |       | $                                                  | 0.27       |                                             | $          | 0.20 |   | $ | 0.57 |   | $ | 0.29 |   |
| Earnings from  discontinued retail operations                                               |       | $                                                  | —     |                                             | $          | — |   | $ | — |   | $ | 0.01 |   |
| Net earnings                                                                                |       | $                                                  | 0.27       |                                             | $          | 0.20 |   | $ | 0.57 |   | $ | 0.30 |   |
| Diluted earnings  per share:                                                                |       |                                               |       |                                             |       |   |   |   |   |
| Earnings from  continuing operations                                                        |       | $                                                  | 0.26       |                                             | $          | 0.19 |   | $ | 0.54 |   | $ | 0.28 |   |
| Earnings from  discontinued retail operations                                               |       | $                                                  | —     |                                             | $          | — |   | $ | — |   | $ | 0.01 |   |
| Net earnings                                                                                |       | $                                                  | 0.26       |                                             | $          | 0.19 |   | $ | 0.54 |   | $ | 0.29 |   |
| Shares used in computation of:                                                              |       |                                               |       |                                             |       |   |   |   |   |
| Basic earnings per share                                                                    |       | 10,834,058                                         |       | 10,701,012                                       |       | 10,803,653 |   | 10,682,863 |   |
| Diluted earnings per share                                                                  |       | 11,363,125                                         |       | 10,992,788                                       |       | 11,330,887 |   | 10,909,535 |   |
| Cash dividends  paid per share of common stock outstanding                                  |       | $                                                  | 0.07       |                                             | $          | — |   | $ | 0.12 |   | $ | — |   |

 

See accompanying notes

4

----

**CUTTER &BUCK INC.**

**CondensedConsolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **October 31, 2004** | ** ** | **October 31, 2003** | ** ** |
| ***(in thousands)***                                                          | ** ** |
| **Operating activities:**                                                          |       |                           |       |   |   |   |   |   |   |
| Net income                                                                         |       |                           | $          | 6,165 |   |   |   | $ | 3,190 |   |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                           |       |   |   |   |   |   |   |
| Depreciation                                                                       |       |                           | 1,552      |   |   |   | 2,215 |   |   |
| Deferred gain on sale and leaseback of capital  assets                             |       |                           | (3         | ) |   |   | (45 | ) |   |
| Amortization of deferred compensation                                              |       |                           | —     |   |   |   | 19 |   |   |
| Loss on disposals of furniture and equipment                                       |       |                           | —     |   |   |   | 31 |   |   |
| Changes in assets  and liabilities:                                                |       |                           |       |   |   |   |   |   |   |
| Accounts receivable, net                                                           |       |                           | 3,286      |   |   |   | 5,832 |   |   |
| Inventories, net                                                                   |       |                           | (1,695     | ) |   |   | 12,721 |   |   |
| Prepaid expenses and other assets                                                  |       |                           | (175       | ) |   |   | 2,327 |   |   |
| Accounts payable, accrued liabilities and other liabilities                        |       |                           | (1,034     | ) |   |   | (9,433 | ) |   |
| Income taxes payable                                                               |       |                           | 201        |   |   |   | — |   |   |
| Net cash provided  by operating activities                                         |       |                           | 8,297      |   |   |   | 16,857 |   |   |
| **Investing  activities:**                                                         |       |                           |       |   |   |   |   |   |   |
| Purchases of  furniture and equipment                                              |       |                           | (1,573     | ) |   |   | (646 | ) |   |
| Purchases of  short-term investments                                               |       |                           | (42,316    | ) |   |   | — |   |   |
| Maturities of  short-term investments                                              |       |                           | 34,388     |   |   |   | — |   |   |
| Net cash used in  investing activities                                             |       |                           | (9,501     | ) |   |   | (646 | ) |   |
| **Financing  activities:**                                                         |       |                           |       |   |   |   |   |   |   |
| Principal  payments under capital lease obligations                                |       |                           | (325       | ) |   |   | (1,218 | ) |   |
| Payment of  dividends                                                              |       |                           | (1,300     | ) |   |   | — |   |   |
| Repurchases of  common stock                                                       |       |                           | (1,099     | ) |   |   | — |   |   |
| Issuance of  common stock                                                          |       |                           | 902        |   |   |   | 213 |   |   |
| Net cash used in  financing activities                                             |       |                           | (1,822     | ) |   |   | (1,005 | ) |   |
| Net increase (decrease) in cash and cash equivalents                               |       |                           | (3,026     | ) |   |   | 15,206 |   |   |
| Cash and cash  equivalents, beginning of period                                    |       |                           | 19,715     |   |   |   | 18,864 |   |   |
| Cash and cash  equivalents, end of period                                          |       |                           | $          | 16,689 |   |   |   | $ | 34,070 |   |   |

 

See accompanying notes

5

----

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

**Note 1.**   Basisof Presentation

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 financial statements. In the opinion of the Company’s management, alladjustments (consisting of normal recurring accruals) necessary for a fairpresentation have been included. The Company’s revenues are seasonal, andtherefore the results of operations for the six months ended October 31,2004 may not be indicative of the results for the full fiscal year. For furtherinformation, refer to the consolidated financial statements and footnotesthereto for the year ended April 30, 2004, included in the Company’sfiling on Form 10-K.

**Stock-Based Compensation**

The Company accounts for stock-based compensationusing the intrinsic value method prescribed in Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations. The Company has elected to apply the disclosure-onlyprovisions of Statement of Financial Accounting Standards (SFAS) No. 123, “Accountingfor Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting forStock-based Compensation—Transition and Disclosure.” Compensation expense forstock options is recognized over the vesting period of the grant based on theexcess, if any, of the market price of the Company’s common stock at the dateof grant over the stock option exercise price. Under the Company’s plans, stockoptions are generally granted at fair market value on the date of grant. TheCompany also has an Employee Stock Purchase Plan that allows eligible employeesto purchase Company stock at a 15% discount from market price utilizing payrolldeductions.

Ifcompensation costs for stock-based compensation had been recognized based onthe fair value method, the pro forma amounts of the Company’s net income andnet earnings per share would have been as follows:
| ** **                                                                                                            | ** ** | **Three Months Ended  October 31,**                   | ** ** | **Six Months Ended  October 31,**                     | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| ***(in thousands, except per share amounts)***                                               | ** ** |
| Net income, as  reported                                                                                              |       |                                                                 | $          | 2,915                                                                |       |   |   | $ | 2,091 |   |   |   | $ | 6,165 |   |   |   | $ | 3,190 |   |   |
| Deduct: Total  stock-based employee compensation expense determined under the fair value  based method for all awards |       |                                                                 | (116       | )                                                                    |       |   | (368 | ) |   |   | (240 | ) |   |   | (818 | ) |   |
| Pro forma net  income                                                                                                 |       |                                                                 | $          | 2,799                                                                |       |   |   | $ | 1,723 |   |   |   | $ | 5,925 |   |   |   | $ | 2,372 |   |   |
| Earnings per share:                                                                                                   |       |                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                |       |                                                                 | $          | 0.27                                                                 |       |   |   | $ | 0.20 |   |   |   | $ | 0.57 |   |   |   | $ | 0.30 |   |   |
| Basic—pro forma                                                                                                  |       |                                                                 | $          | 0.26                                                                 |       |   |   | $ | 0.16 |   |   |   | $ | 0.55 |   |   |   | $ | 0.22 |   |   |
| Diluted—as reported                                                                                              |       |                                                                 | $          | 0.26                                                                 |       |   |   | $ | 0.19 |   |   |   | $ | 0.54 |   |   |   | $ | 0.29 |   |   |
| Diluted—pro forma                                                                                                |       |                                                                 | $          | 0.25                                                                 |       |   |   | $ | 0.16 |   |   |   | $ | 0.52 |   |   |   | $ | 0.22 |   |   |

 

6

----

Thefair value for each option grant was estimated at the date of grant using theBlack-Scholes option pricing model, assuming a future dividend yield rangingfrom 0% to 2.5% annually depending on the date of grant, and the following weighted-averageassumptions:
| ** **               | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                           | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate |       | 3.4                                                | %          | 3.3                                              | %          | 3.4 | % | 2.6 | % |
| Volatility               |       | 33                                                 | %          | 51                                               | %          | 33 | % | 51 | % |
| Expected life            |       | 5 years                                            |       | 5 years                                          |       | 5 years |   | 5 years |   |

 

Thefair value for shares purchased under the Employee Stock Purchase Plan wasestimated at the date of purchase using the Black-Scholes option pricing model,assuming a future dividend yield ranging from 0% to 2.0% annually depending onthe date of purchase, and the following weighted-average assumptions. Sharesare purchased twice a year under this Plan, in the first and third fiscalquarters. No shares are purchased in the second or fourth fiscal quarters.
| ** **               | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|--------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                           | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate |       | —                                             |       | —                                           |       | 3.8 | % | 2.4 | % |
| Volatility               |       | —                                             |       | —                                           |       | 41 | % | 59 | % |
| Expected life            |       | —                                             |       | —                                           |       | 6 months |   | 6 months |   |

 

Stock compensation expense for options granted tonon-employees is determined in accordance with SFAS No. 123 and theEmerging Issues Task Force (EITF) consensus in Issue No. 96-18, “Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services” (EITF No. 96-18). Accordingly,expense is recognized over the vesting period of the grant based on the fairvalue of the consideration received or the fair value of the equity instrumentsissued, whichever is more reliably measured.

On March 31, 2004,the Financial Accounting Standards Board issued an Exposure Draft, “Share-BasedPayment—An Amendment of FASB Statements No. 123 and 95”, which is expectedto be finalized by December 31, 2004 and would be effective for periodsbeginning after June 15, 2005. The proposed statement would requirecompanies to recognize an expense for compensation costs related to share-basedcompensation arrangements, including stock options and employee stock purchaseplans. The Company is currently evaluating the effect of this proposedstatement. The proposed statement would be effective for periods beginningafter June 15, 2005, with early adoption encouraged.

**Segments**

The Company has oneoperating segment: the design, production, marketing and selling of sportswear,fashion and outerwear apparel. The information for this segment is theinformation used by the Company’s chief operating decision maker to evaluateoperating performance.

**Note 2.**   EarningsPer Share

Basic earnings per shareis based on the weighted average number of common shares outstanding. Dilutedearnings per share is based on the weighted average number of common shares andequivalents outstanding. Common share equivalents included in the computationrepresent shares issuable upon assumed exercise of outstanding stock optionsexcept when the effect of their inclusion would be antidilutive.

7

----

**Note 3.**   Short-terminvestments

Short-terminvestments held-to-maturity consisted of the following securities at October 31,2004, all of which mature within one year:
| ** **                      | ** ** | **Amortized cost** | ** ** | **Gross unrealized  gains** | ** ** | **Gross unrealized  losses** | ** ** | **Estimated fair  value** | ** ** |
|---------------------------------|------------|-------------------------|------------|----------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|
| ***(in thousands)***       | ** ** |
| U.S. Corporate  debt securities |       |                    | $          | 25,880                           |       |                              |       | $                              | 52         |   |   |   | $ | (1 | ) |   |   | $ | 25,931 |   |   |
|                                 |            |                         |            |                                  |            |                                   |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4.**   Debt

The Company has a loanagreement with Wells Fargo Bank, N.A. (Wells Fargo) as agent and Wells FargoCentury, an affiliate of Wells Fargo, as collateral agent and lender for a $35million line of credit that expires in March 2005. This agreement is collateralizedby a security interest in the Company’s accounts receivable, inventory,furniture and equipment, contract rights and general intangibles. The loanagreement contains certain restrictive covenants covering minimum net worth,minimum working capital and maximum capital expenditures. These financialcovenants require that the Company maintains a tangible net worth of at least$50 million and working capital of at least $35 million at all times, and limitcapital expenditures to not more than $4.0 million in fiscal year 2005. TheCompany obtained an amendment to its loan agreementfor the loan covenant which previously limited capital expenditures to $2.5million in fiscal 2005. The Company was in compliance with the currentcovenants at October 31, 2004. At October 31, 2004, letters of creditoutstanding against the line of credit totaled approximately $7.4 million andthere were no working capital advances outstanding. At October 31, 2003,letters of credit outstanding against the line of credit totaled approximately$6.0 million and there were no working capital advances outstanding.

**Note 5.**   Shareholders’Equity

During the six monthsended October 31, 2004, the Company sold 164,991 shares under its employeestock purchase plan and pursuant to the exercise of stock options. The Companyrepurchased 98,400 shares under its Stock Repurchase Program.

**Note 6.**   Restructuringand Asset Impairment Expenses

The Company had two restructuring plans, the 2002Restructuring Plan and the 2003 Restructuring Plan. These restructuring plansare now complete. The remaining liability recorded for the 2002 RestructuringPlan relates to the sublease of excess warehouse capacity at the distributioncenter, and will be amortized through the end of the lease term in 2011.

Forthe six months ended October 31, 2004, activity in the accrued liabilityaccount associated with the cash portion of charges in the 2002 RestructuringPlan consisted of the following:
| ** **                | ** ** | **Balance at  April 30,  2004** | ** ** | **Subsequent  Accruals,  Net** | ** ** | **Subsequent  Payments** | ** ** | **Balance at  October 31,  2004** | ** ** | **Due   Within   1 Year** | ** ** | **Due  After  1 Year** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|--------------------------------|------------|--------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|-----------------------------|------------|
| ***(in thousands)*** | ** ** |
| Lease obligations         |       |                                      | $          | 2,535                          |       |                     |       | $                                           | —     |                                     |       |                        | $          | (161 | ) |   |   | $ | 2,374 |   |   |   | $ | 320 |   |   | $ | 2,054 |   |
|                           |            |                                           |            |                                |            |                          |            |                                             |            |                                          |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 7.**   RestatementExpenses

In fiscal 2002, the Company restated certain financialstatements for irregularities and errors. As a result of the circumstancesunderlying the restatement, three shareholder class action lawsuits and ashareholder derivative lawsuit were filed, naming the Company and certain ofits current and former directors and officers as defendants. The Companysettled those lawsuits and recorded the $4.0 million 

8

----

settlement expense for the payment to theplaintiffs in fiscal 2003 and paid the settlement infiscal 2004. The Company also settled the previously announcedSecurities and Exchange Commission investigation of the Company arising fromthe circumstances underlying the restatement. That settlement did not requirepayment of any fines or penalties.

Although the restatementhas been completed, the Company expects to continue to incur legal and otherprofessional service costs in connection with the indemnification of formerofficers and the ongoing lawsuit against Genesis Insurance Company. Theseexpenses cannot be estimated at this time.

**Note 8.**   Litigation

As previously disclosed, the Company remains a partyto its lawsuit against Genesis Insurance Company. The Company’s complaint,which was originally filed in the United States District Court for the WesternDistrict of Washington, alleged that Genesis’ 2002 attempt to rescind theCompany’s primary Directors’ and Officers’ liability insurance was unlawful,and sought damages resulting from Genesis’ breach of contract and the duty ofgood faith and fair dealing. On February 11, 2004, the Court entered anOrder granting Genesis’ motions for summary judgment and, accordingly, theCompany’s claims against Genesis were dismissed by the Court on February 13,2004. The Company has appealed the Court’s decision to the United StatesCircuit Court of Appeals for the Ninth Circuit. The Company expects to file itsBrief in the appeal on or before December 20, 2004, and anticipates thatGenesis’ Answering Brief will be due on January 19,2005, with the Company’s reply to Genesis Answering Brief due February 2,2005.

The Company is also partyto other routine litigation incidental to its business. Management believes theultimate resolution of these other routine matters will not have a materialadverse effect on the Company’s financial condition and results of operations.

**Note 9.**   IncomeTaxes

The Company recordedapproximately $3.6 million of income tax expense in the first six months offiscal year 2005 compared to approximately $1.4 million of income tax expensein the first six months of fiscal year 2004. The effective rates for incometaxes were 36.8% and 31.8% for the first six months of fiscal years 2005 and2004, respectively.

**Note 10.**   SubsequentEvents

On December 9,2004, the Company entered into a Separation and Release Agreement with JimMcGehee, the Company’s former ExecutiveVice President and Manager of the SBU (Strategic Business Unit) Group. TheAgreement provides for payments totaling $184,000 to be made to Mr. McGehee,subject only to compliance with the terms of the Agreement.

9

----

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

*Statements made inthis filing that are not historical facts are forward-looking statements. Youshould be aware that our actual results could differ materially from those containedin any forward-looking statements. Our actual results will depend upon anumber of factors, including but not limited to the following: relations withand the performance of suppliers; our ability to control costs and expensesincluding costs associated with the upgrade and replacement of some of ourcomputer systems and costs associated with regulatory compliance and personnelmatters; our ability to carry out successful designs, effectively advertise andcommunicate with the marketplace and penetrate our chosen distributionchannels; costs associated with the indemnification of former officers;competition; access to capital; risks related to the timely performance ofthird parties, such as shipping companies, including risks of strikes or labor disputesinvolving these third parties; our need to maintain the integrity of ourtechnology and information systems while enhancing and replacing systems; ourneed to attract and retain employees during intensive organizational change;our need to maintain satisfactory relationships with our banking partners;political and trade relations; changes in international trade quota systems forapparel; the overall level of consumer spending on apparel; global economic andpolitical conditions and additional threatened terrorist attacks and responsesthereto, including war. Additional information on these and other factors thatcould affect our financial results is set forth below and in our Form 10-Kfor the year ended April 30, 2004. Finally, there may be other factors notmentioned above or included in our SEC filings that may cause actual results todiffer materially from any forward-looking statements. You should notplace undue reliance on any forward-looking statements. We assume noobligation to update any forward-looking statements as a result of newinformation, future events or developments, except as required by securitieslaws.*

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

**Overview**

Cutter & Buck designs, sources, markets anddistributes high-quality men’s and women’s sportswear under the Cutter &Buck brand. We sell our products primarily through golf pro shops and resorts,corporate accounts, upscale specialty retail stores, and internationaldistributors and licensees.

Our business strategy focuses on strengthening theupscale positioning of the Cutter & Buck brand and increasing thepenetration of our target markets. We focus on the needs of our customerswithin each strategic business unit (SBU), and design products to meet thoseneeds. In order to implement this strategy, during fiscal 2005 we have enhancedour design team and increased our marketing efforts to improve our brandawareness and acceptance.

Sales within our Corporate and Specialty Retail SBUare continuing to show some improvement as the economy improves. However, saleswithin our Golf SBU continue to lag. We have recently hired a new manager tolead sales in that SBU, and we have invested in market research and otherinformation gathering to provide data which we are using to create a strategicplan to realize the full potential of our brand in the golf market. Ourbusiness strategies are intended to provide long-term growth to our business. Duein part to the long product lead times in this industry, we remain relativelycautious about sales levels for fiscal 2005 in relation to last year.

10

----

Tounderstand the performance of our wholesale business, management considers ituseful to review our operating results excluding costs that are not elements ofrunning our wholesale business on an ongoing basis, such as restatementexpenses. We adjust our net income calculated in accordance with generallyaccepted accounting principles to exclude income and expense items that are notdirectly related to our wholesale business, in order to give us betterinformation regarding the profitability of our wholesale business. We use thisanalysis to compare pretax wholesale business income on a quarterly andyear-to-date basis.
| ** **                                     | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                     | ** ** | **2004**                                           | ** ** | **2003**                                         | ** ** | **2004** | ** ** | **2003** | ** ** |
| ***(in thousands)***                      | ** ** |
| Net income as  reported                        |       | $                                                  | 2,915      |                                             | $          | 2,091 |   | $ | 6,165 |   | $ | 3,190 |   |
| Income from  discontinued retail operations    |       | —                                             |       | —                                           |       | — |   | (146 | ) |
| Income tax  expense                            |       | 1,792                                              |       | 866                                              |       | 3,588 |   | 1,420 |   |
| Pre-tax expense  of closed European operations |       | (35                                                | )          | 24                                               |       | (15 | ) | 72 |   |
| Restatement  expenses                          |       | 268                                                |       | 1,678                                            |       | 281 |   | 3,350 |   |
| Ongoing wholesale  business income before tax  |       | $                                                  | 4,940      |                                             | $          | 4,659 |   | $ | 10,019 |   | $ | 7,886 |   |

                                                                                                                                                                                                                                                                                                                                                                                                

Overall, our second quarter and year-to-date resultsreflect the work done to optimize and restructure our business. We willcontinue to refine our business processes, and we anticipate incurringadditional expenses during fiscal 2005 as part of this process. We have begunto upgrade and replace some of our computer systems in order to improvemanagement information, gain operational efficiencies and provide support forour future operations. We expect this process to be substantially complete bythe end of fiscal 2005. We are also completing the documentation and testing ofour internal controls required by Section 404 of the Sarbanes-Oxley Act.

Finally, we are currentlyin the process of hiring a successor to our CEO. On September 15, 2004,our former CEO, Fran Conley, stepped down from that position, and Bill Swint,our Vice President and Manager of Order Fulfillment, became the InterimPresident and CEO. The board of directors, with the assistance of anoutside consultant, identified,reviewed and selected a short list of candidates to be interviewed. At thistime, the Board is in final discussions with the leadcandidate and believes that anannouncement is imminent. Once we have hired a permanent CEO,that individual will be responsible for positioning our brand in the market andcharting the Company’s strategic direction, which may result in some change inour current brand positioning and strategy.

**RecentDevelopments**

On December 9,2004, we announced that Jim McGehee, Executive Vice President and Manager ofthe SBU (Strategic Business Unit) Group has resigned from that positionand plans to leave the company on December 31, 2004. We haveentered into a Separation and Release Agreement with Mr. McGehee thatprovides for payments totaling $184,000 to be made to him, subject only tocompliance with the terms of the Agreement. In light of the ongoing discussionsconcerning the retention of a new CEO, we have elected to defer any decision onMr. McGehee’s replacement until our new CEO is in place and hashad an opportunity to evaluate the Company’s management team and structure.

11

----

**Results of Operations**

Thefollowing table sets forth, for the periods indicated, certain consolidatedstatements of operations data expressed as a percentage of net sales. For allperiods presented in this section, results of operations reflect theclassification of our Company-owned retail store operating results and incomeor loss on the disposal of these stores as discontinued retail operations.
| ** **                                              | ** ** | **Three Months Ended  October 31,**                   | ** ** | **Six Months Ended  October 31,**                     | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                              | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** | **     2004     ** | ** ** | **     2003     ** | ** ** |
| Net sales                                               |       |                                                                 | 100.0      | %                                                                    |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                                           |       |                                                                 | 51.8       |                                                                 |       |   | 53.3 |   |   |   | 51.2 |   |   |   | 54.1 |   |   |
| Gross profit                                            |       |                                                                 | 48.2       |                                                                 |       |   | 46.7 |   |   |   | 48.8 |   |   |   | 45.9 |   |   |
| Operating expenses:                                     |       |                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                            |       |                                                                 | 1.9        |                                                                 |       |   | 3.0 |   |   |   | 2.2 |   |   |   | 3.1 |   |   |
| Selling, general and administrative                     |       |                                                                 | 32.7       |                                                                 |       |   | 30.3 |   |   |   | 32.1 |   |   |   | 31.1 |   |   |
| Restatement expenses                                    |       |                                                                 | 0.8        |                                                                 |       |   | 4.8 |   |   |   | 0.4 |   |   |   | 5.0 |   |   |
| Total operating expenses                                |       |                                                                 | 35.4       |                                                                 |       |   | 38.1 |   |   |   | 34.7 |   |   |   | 39.2 |   |   |
| Operating income                                        |       |                                                                 | 12.8       |                                                                 |       |   | 8.6 |   |   |   | 14.1 |   |   |   | 6.7 |   |   |
| Net interest income (expense)                           |       |                                                                 | 0.4        |                                                                 |       |   | — |   |   |   | 0.4 |   |   |   | (0.1 | ) |   |
| Income from  continuing operations before income taxes  |       |                                                                 | 13.2       |                                                                 |       |   | 8.6 |   |   |   | 14.5 |   |   |   | 6.6 |   |   |
| Income tax  expense                                     |       |                                                                 | 5.0        |                                                                 |       |   | 2.5 |   |   |   | 5.3 |   |   |   | 2.1 |   |   |
| Income from  continuing operations                      |       |                                                                 | 8.2        |                                                                 |       |   | 6.1 |   |   |   | 9.2 |   |   |   | 4.5 |   |   |
| Income from  discontinued retail operations, net of tax |       |                                                                 | —     |                                                                 |       |   | — |   |   |   | — |   |   |   | 0.2 |   |   |
| Net income                                              |       |                                                                 | 8.2        | %                                                                    |       |   | 6.1 | % |   |   | 9.2 | % |   |   | 4.7 | % |   |

 

***Three Months Ended October 31, 2004 Compared WithThree Months Ended October 31, 2003***

**NetSales**

During the second quarter of fiscal 2005, net salesincreased approximately $0.8 million, or 2.3%, to $35.5 million from$34.7 million in the same period of the prior year.

Thedetail of net sales by SBU was as follows:
| ** **                                                      | ** ** | **Three Months Ended October 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2004**                                               | ** ** | **2003** | ** ** | **Increase/  (Decrease)** | ** ** | **Percent  Change** | ** ** |
| ***(in thousands, except percent change)*** | ** ** |
| Golf                                                            |       | $                                                      | 10,022     |   | $ | 9,872 |   |   | $ | 150 |   |   |   | 1.5 | % |   |
| Corporate                                                       |       | 14,559                                                 |       | 13,762 |   |   | 797 |   |   |   | 5.8 |   |   |
| Specialty Retail                                                |       | 8,350                                                  |       | 8,257 |   |   | 93 |   |   |   | 1.1 |   |   |
| International                                                   |       | 729                                                    |       | 660 |   |   | 69 |   |   |   | 10.5 |   |   |
| Other                                                           |       | 1,878                                                  |       | 2,196 |   |   | (318 | ) |   |   | (14.5 | ) |   |
| Total                                                           |       | $                                                      | 35,538     |   | $ | 34,747 |   |   | $ | 791 |   |   |   | 2.3 | % |   |

 

In the second quarter of fiscal 2005, net sales in ourGolf SBU increased approximately $0.2 million, to $10.0 million from$9.9 million in the same period of the prior year. This increase wasprimarily due to net sales at major golf tournaments, including the biennial Ryder Cup tournament,which occurred during the quarter. If net sales from the Ryder Cup were excludedfrom our quarter results, net sales in our Golf SBU would have decreasedapproximately $0.7 million or 6%. We are continuing to focus significantmanagement attention towards understanding our performance in this SBU, withthe goal of realizing the full potential of our brand within this SBU. Thisfocus includes analyzing our operational processes from 

12

----

the design to the sale of our product, reviewing ourselling programs, and increasing our marketing activities. We have added a newSBU manager and a senior golf merchandiser, expanded our marketing programs andare improving our customer service focus. However, due to our long product leadtimes, we do not expect to realize significant improvements in our Golf salesover the short term.

Net sales in our CorporateSBU increased approximately $0.8 million, to $14.6 million from$13.8 million in the same period of the prior year. Net sales in this SBUare showing improvement primarily due to the sales and marketing of our updatedproduct line, and as corporate customers begin to increase spending on theirevents and programs. Net sales in our Specialty Retail SBU increasedapproximately $0.1 million, to $8.4 million from $8.3 million inthe same period of the prior year, primarily due to the continued success ofour collegiate and pro sports sales programs as we expand our presence in thismarket. Net sales in our International SBU increased approximately $0.1million, to $0.7 million from $0.6 million in the same period of the prioryear, primarily due to our licensees’ increased experience with the brand intheir marketplaces and improving international economic conditions. Net salesin our Other SBU, including liquidation sales, shipping revenue and oure-commerce business, decreased approximately $0.3 million compared to the sameperiod of the prior year. The variance in this SBU is primarily due toadjustments made in the second quarter of fiscal 2004 to update our allowancesand returns reserves based on the decreases we experienced in our productreturns and allowances. These adjustments had the effect of increasing netsales in that quarter. Liquidation sales, shipping revenue and e-commerce saleshave not changed materially compared to the second quarter of fiscal 2004.

**Gross Profit**

In the second quarter of fiscal 2005, gross profitincreased to 48.2% of net sales compared to 46.7% in the same period of theprior year. Our margins have continued to increase compared to the prior yearas we improve our sourcing, focus on reducing our product returns andallowances and adjust our pricing structure for certain products. Gross marginsduring the second quarter have also been favorably impacted by fluctuations inour sales mix. However, we expect to liquidate out-of-season inventory in thethird and fourth quarters of fiscal 2005 as part of our normal business cycle,and as a result we expect our gross profit to be negatively impacted in thosequarters as compared to the second quarter.

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

**Selling, Generaland Administrative Expense**

Selling, general and administrative expenses totaled$11.6 million in the second quarter of fiscal 2005 compared to $10.5 million infiscal 2004, an increase of $1.1 million. Approximately $0.3 million of thisincrease is due to expenses related to the Sarbanes-Oxley Act of 2002 and theupgrade and replacement of some of our computer systems. Salaries increasedapproximately $0.2 million as a result of our investment in design talent andIT resources to support our computer system changes. Marketing expensesincreased approximately $0.4 million primarily due to tournament marketing,catalog production and print advertising campaign expenses.

During the remainder of fiscal 2005, we expectoperating expenses to continue to reflect increases compared to the prior yearas we expand our marketing programs, upgrade and replace some of our computersystems, and complete the documentation and testing of our internal controlsrequired by Section 404 of the Sarbanes-OxleyAct of 2002.

The Financial AccountingStandards Board has issued an Exposure Draft, “Share-Based Payment—An Amendmentof FASB Statements No. 123 and 95”, which is expected to be finalized by December 31,

13

----

2004 andwould be effective for periods beginning after June 15, 2005, or the firstquarter of our fiscal 2006. The proposed statement would require companies torecognize an expense for compensation costs related to share-based compensationarrangements, including stock options and employee stock purchase plans. We arecurrently evaluating the effect of this proposed statement. The proposed statementwould be effective for periods beginning after June 15, 2005, with earlyadoption encouraged.

**Restatement**

Restatement expensestotaled $0.3 million in the second quarter of fiscal 2005 compared to $1.7million in fiscal 2004, a decrease of $1.4 million. Restatement expenses in thesecond quarter of fiscal 2005 included $0.2 million of legal and professionalfees incurred in connection with the indemnification of former officers and$0.1 million related to the ongoing lawsuit against Genesis Insurance Company. Restatementexpenses in the second quarter of fiscal 2004 included legal and professionalfees of $1.3 million and $0.4 million of accrued retention bonuses to certainkey employees. The majority of legal issues have been resolved, and themajority of retention bonuses were paid in March 2004. We expect tocontinue to incur legal and other professional service costs in connection withthe indemnification of former officers and the ongoing lawsuit against GenesisInsurance Company. These expenses cannot be estimated at this time.

**OperatingIncome**

As a result of the aboveitems, our operating income was $4.6 million in the second quarter of fiscal2005 compared to $3.0 million in the second quarter of fiscal 2004.

**IncomeTaxes**

We recorded approximately$1.8 million of income tax expense in the second quarter of fiscal 2005compared to $0.9 million in the second quarter of fiscal 2004. The effectiverates for income taxes in the second quarters of fiscal 2005 and 2004 were38.1% and 29.3%, respectively. The lower tax rate in the second quarter offiscal 2004 was related to the reconciliation of the tax provision to theincome tax return as filed for fiscal 2003 and changes in estimates of our incometax liabilities.

***Six Months Ended October 31, 2004 Compared WithSix Months Ended October 31, 2003***

**NetSales**

During the first six months of fiscal 2005, net salesdecreased slightly to $67.4 million from $67.5 million in the sameperiod of the prior year.

Thedetail of net sales by SBU was as follows:
| ** **                                                      | ** ** | **Six Months Ended October 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                      | ** ** | **2004**                                             | ** ** | **2003** | ** ** | **Increase/  (Decrease)** | ** ** | **Percent  Change** | ** ** |
| ***(in thousands, except percent change)*** | ** ** |
| Golf                                                            |       | $                                                    | 18,849     |   | $ | 20,919 |   |   | $ | (2,070 | ) |   |   | (9.9 | )% |   |
| Corporate                                                       |       | 29,701                                               |       | 28,038 |   |   | 1,663 |   |   |   | 5.9 |   |   |
| Specialty Retail                                                |       | 13,672                                               |       | 13,264 |   |   | 408 |   |   |   | 3.1 |   |   |
| International                                                   |       | 1,415                                                |       | 1,230 |   |   | 185 |   |   |   | 15.0 |   |   |
| Other                                                           |       | 3,800                                                |       | 4,033 |   |   | (233 | ) |   |   | (5.8 | ) |   |
| Total                                                           |       | $                                                    | 67,437     |   | $ | 67,484 |   |   | $ | (47 | ) |   |   | (0.1 | )% |   |

 

In the first six months of fiscal 2005, net sales inour Golf SBU decreased approximately $2.1 million, to $18.8 millionfrom $20.9 million in the same period of the prior year. These resultsinclude increases in 

14

----

year-to-date net salesmade at major golf tournaments, including the biennial Ryder Cup tournamentwhich occurred during the second quarter. If net sales from the Ryder Cup wereexcluded from our year-to-date results, net sales in our Golf SBU would havedecreased approximately $3.3 million or 16%. We are continuing to focussignificant management attention towards understanding our performance in thisSBU, with the goal of realizing the full potential of our brand within this SBU.This focus includes analyzing our operational processes from the design to thesale of our product, reviewing our selling programs, and increasing ourmarketing activities. We have added a new SBU manager and a senior golfmerchandiser, expanded our marketing programs and are improving our customerservice focus. However, due to our long product lead times, we do not expect torealize significant improvements in our Golf sales over the short term.

Net sales in our CorporateSBU increased approximately $1.7 million, to $29.7 million from$28.0 million in the same period of the prior year. Net sales in this SBUare showing improvement primarily due to the sales and marketing of our updatedproduct line, and as corporate customers begin to increase spending on theirevents and programs. Net sales in our Specialty Retail SBU increasedapproximately $0.4 million, to $13.7 million from $13.3 millionin the same period of the prior year, primarily due to the continued success ofour collegiate and pro sports sales programs as we expand our presence in thismarket. Net sales in our International SBU increased approximately $0.2million, to $1.4 million from $1.2 million in the same period of the prioryear, primarily due to our licensees’ increased experience with the brand intheir marketplaces and improving international economic conditions. Net salesin our Other SBU, including liquidation sales, shipping revenue and oure-commerce business, decreased approximately $0.2 million compared to the sameperiod of the prior year. The variance in this SBU is primarily due toadjustments made in the second quarter of fiscal 2004 to update our allowancesand returns reserves based on the decreases we experienced in our productreturns and allowances. These adjustments had the effect of increasing netsales in that quarter. Liquidation sales, shipping revenue and e-commerce saleshave not changed materially compared to the first six months of fiscal 2004.

**Gross Profit**

In the first six months of fiscal 2005, gross profitincreased to 48.8% of net sales compared to 45.9% in the same period of theprior year. Our margins have continued to increase compared to the prior yearas we improve our sourcing, focus on reducing our product returns andallowances and adjust our pricing structure for certain products. Gross marginsduring the first six months have also been favorably impacted by fluctuationsin our sales mix. However, we expect to liquidate out-of-season inventory inthe third and fourth quarters of fiscal 2005 as part of our normal businesscycle, and as a result we expect our gross profit to be negatively impacted inthose quarters as compared to the first six months of fiscal 2005.

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

**Selling, Generaland Administrative Expense**

Selling, general and administrative expenses totaled$21.6 million in the first six months of fiscal 2005 compared to $21.0 millionin fiscal 2004, an increase of $0.6 million. Approximately $0.4 million of thisincrease is due to expenses related to the Sarbanes-Oxley Act of 2002 and theupgrade and replacement of some of our computer systems. Salaries increasedapproximately $0.4 million as a result of our investment in design talent andIT resources to support our computer system changes. Marketing expensesincreased approximately $0.6 million primarily due to tournament marketing,catalog production and print advertising campaign expenses.

15

----

During the remainder of fiscal 2005, we expectoperating expenses to continue to reflect increases compared to the prior yearas we expand our marketing programs, upgrade and replace some of our computersystems, and complete the documentation and testing of our internal controlsrequired by Section 404 of the Sarbanes-Oxley Act of 2002.

The Financial AccountingStandards Board has issued an Exposure Draft, “Share-Based Payment—An Amendmentof FASB Statements No. 123 and 95”, which is expected to be finalized by December 31,2004 and would be effective for periods beginning after June 15, 2005, orthe first quarter of our fiscal 2006. The proposed statement would requirecompanies to recognize an expense for compensation costs related to share-basedcompensation arrangements, including stock options and employee stock purchaseplans. . We are currently evaluating the effect of this proposed statement. Theproposed statement would be effective for periods beginning after June 15,2005, with early adoption encouraged.

**Restatement**

Restatement expensestotaled $0.3 million in the first six months of fiscal 2005 compared to $3.4million in fiscal 2004, a decrease of $3.1 million. Restatement expenses in thefirst six months of fiscal 2005 included $0.2 million of legal and professionalfees incurred in connection with the indemnification of former officers and$0.1 million related to the ongoing lawsuit against Genesis Insurance Company. Restatementexpenses in the first six months of fiscal 2004 included legal and professionalfees of $2.4 million, $0.7 million of accrued retention bonuses to certain keyemployees and $0.3 million of amortization of the premium for the replacementdirectors’ and officers’ liability insurance. The majority of legal issues havebeen resolved, and the majority of retention bonuses were paid in March 2004.We expect to continue to incur legal and other professional service costs inconnection with the indemnification of former officers and the ongoing lawsuitagainst Genesis Insurance Company. These expenses cannot be estimated at thistime.

**Operating Income**

As a result of the aboveitems, our operating income was $9.5 million in the first six months of fiscal2005 compared to $4.5 million in the first six months of fiscal 2004.

**Income Taxes**

We recorded approximately$3.6 million of income tax expense in the first six months of fiscal 2005compared to $1.4 million in the first six months of fiscal 2004. The effectiverates for income taxes in the first six months of fiscal 2005 and 2004 were36.8% and 31.8%, respectively. The lower tax rate in the first six months offiscal 2004 was related to the reconciliation of the tax provision to theincome tax return as filed for fiscal 2003 and changes in estimates of ourincome tax liabilities.

**Liquidity and Capital Resources**

Our primary ongoing capital requirements are tofinance working capital, the continued growth and operations of our business,including investments in fixed assets, our stock repurchase program and cashdividends. During the first six months of fiscal 2005, our capital requirementswere funded by cash provided by operating activities. Net cash provided byoperating activities in the first six months of fiscal 2005 was $8.3 millioncompared to $16.9 million for the first six months of fiscal 2004. The decreasein net cash provided by operating activities was primarily due to a slightseasonal increase in our inventory balance in the first six months of fiscal2005 compared to a significant decrease in inventory in the first six months offiscal 2004, partially offset by an increase in net income, a smaller increasein our accounts receivable and a smaller decrease in our accounts payable andaccrued liabilities balances. The decrease in inventory during fiscal 2004 wasthe result of focused efforts to align inventory balances with sales which 

16

----

produced significantdecreases in inventory balances. We believe our inventory balances are now inline with our sales, and we do not expect to have significant inventoryfluctuations in the future beyond our normal seasonal fluctuations. Thereduction in inventory was partially offset by a related decrease in ouraccounts payable in fiscal 2004 which was not repeated in fiscal 2005. Ouraccrued liabilities were reduced in fiscal 2004 by the $4.0 million payment tothe plaintiffs in the shareholder lawsuits related to our restatement ofcertain financial statements.

Net cash used in investing activities was $9.5 millionin the first six months of fiscal 2005 compared to $0.6 million in the firstsix months of fiscal 2004. The increase was primarily due to the purchase ofshort-term investments in fiscal 2005. We invest in interest-bearing U.S.Government and high-quality corporate debt instruments and hold theseinstruments to maturity, which currently averages 103 days at the date ofpurchase. At October 31, 2004 we held $25.9 million in short-terminvestments. Net cash used in financing activities was $1.8 million in thefirst six months of fiscal 2005, which primarily consisted of dividendpayments, stock repurchases, and payments under capital lease obligations,partially offset by stock option exercises and purchases under the employeestock purchase plan. At October 31, 2004, our cash and cash equivalentswere $16.7 million compared to $34.1 million at October 31, 2003.

On March 13, 2003 we entered into a loanagreement with Wells Fargo Bank, N.A. (Wells Fargo) as agent and Wells FargoCentury, an affiliate of Wells Fargo, as collateral agent and lender for a $35million line of credit that expires in March 2005. The amount of creditavailable to us under this agreement is determined by a formula based on ouraccounts receivable and inventory balances. The amount of our available creditfluctuates as these balances fluctuate, and may at times be less than themaximum $35 million available under the agreement. We use this line of creditto support our trade financing with letters of credit. We may also use the linefor operating expenses, although we do not currently do so. This loan agreementalso contains certain restrictive covenants covering minimum net worth, minimumworking capital and maximum capital expenditures. These financial covenantsrequire that we maintain a tangible net worth of at least $50 million andworking capital of at least $35 million at all times, and limit capitalexpenditures to not more than $4.0 million in fiscal 2005. We obtained an amendment to the loan agreementfor the loan covenant which previously limited our capital expenditures to $2.5million in fiscal 2005. We were in compliance with the current covenants at October 31,2004.

To support our operations, capital expenditurestotaling approximately $4.0 million are planned for fiscal 2005. These capitalexpenditures will primarily consist of information technology initiatives, aswe plan to upgrade and replace some of our computer systems. Other significantuses of cash included the payment of retention bonuses, payment of cashdividends, repurchases of our common stock, and payments under our TransitionAgreement with our CEO. In fiscal 2005, we will pay approximately $0.6 millionin retention bonuses plus approximately $0.5 million under our TransitionAgreement with our CEO. The Board declared a dividend of $0.07 per share ofcommon stock, payable on January 7, 2005 to shareholders of record on December 23,2004. We expect to pay similar dividends in future quarters. However, we maydecide to discontinue or modify the dividend payment at any time if wedetermine that other uses of our capital may be in the best interests of ourshareholders. The share repurchase program authorizes the purchase of up to $6million in company stock. The purchases may be made from time to time in theopen market or in privately negotiated transactions. During the first sixmonths of fiscal 2005, we purchased 98,400 shares of our common stock at anaverage price of $11.10, for a year-to-date repurchase of $1.1 million. Sincethe inception of the program, we have purchased 155,226 shares at an averageprice of $10.78. We have paid a total of $1.7 million to repurchase stock andhave authorization to make additional repurchases up to $4.3 million of stock.The repurchase program may be suspended at any time without notice. The timingof repurchases and the actual number of shares repurchased will depend onmarket conditions, alternative uses of capital and other factors.

We believe that cash onhand and cash generated from operations, as well as our ability to borrow underbank lines of credit will be sufficient to meet our cash requirements duringfiscal 2005. We also have 

17

----

availablealternative sources of financing, including factoring our accounts receivableand financing our capital expenditures with leases. Although these methods offinancing are currently available to us, we do not anticipate using alternativesources of financing during fiscal 2005. However, our capital needs will dependon many factors, including our growth rate, the need to finance increasedproduction and inventory levels, the success of our various sales and marketingprograms, expenses associated with the risks and uncertainties related to ourrestatement and various other factors.

**Foreign Currency Exchange Risk**

We do not currently usederivative financial instruments to reduce our exposure to changes in foreignexchange rates. In conjunction with the closing of our European operations, wehave some remaining assets and liabilities denominated in Euros. These balancesare not material to our consolidated financial statements. To the extent wehave assets and liabilities denominated in Euros that are not hedged, we aresubject to foreign currency transaction gains and losses.

**Critical Accounting Policies**

Our significant accountingpolicies are described in Note 1 to the consolidated financial statementsincluded in the Company’s filing on Form 10-K for the year ended April 30,2004. Our discussion and analysis of financial condition and results ofoperations are based upon our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of our financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues, expenses, and related disclosures of contingent assetsand liabilities. On an on-going basis, we evaluate the estimates that we havemade. These estimates have been based upon our historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accountingpolicies affect the more significant judgments and estimates used in thepreparation of our consolidated financial statements.

*Allowances for Doubtful Accounts*

We maintain an allowancefor doubtful accounts for estimated losses resulting from the inability of ourcustomers to make required payments. These losses are included in bad debtexpense. We determine the adequacy of this allowance by regularly reviewing ouraccounts receivable aging and evaluating individual customer receivables,considering customers’ financial condition, credit history and current economicconditions. If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances may be required.

*Reserve for Product Returns*

We maintain an estimate ofpotential future product returns related to current period product receivables.We analyze the rate of historical returns when evaluating the adequacy of thisreserve, and update our estimate based on our actual results. The estimate forproduct returns is included in our calculation of net sales. If we were toexperience an increase in our product returns, additional reserves may berequired.

*Reserve for SalesAllowances*

We maintain an estimate offuture sales allowances related to current period sales. We analyze the rate ofhistorical sales allowances when evaluating the adequacy of this reserve, andupdate our estimate based on our actual results. The estimate for salesallowances is included in our calculation of net sales. If we were to grantadditional sales allowances, additional reserves may be required.

18

----

*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 or slow-movingproducts. We estimate the net realizable value of these products based upondisposition plans and historical experience. A valuation allowance isestablished to reduce the carrying amount of these products to their estimatednet realizable value. If actual market conditions are less favorable than thosewe project, additional allowances may be required.

*Impairment ofLong-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 of futurecash flows could negatively affect the fair value of our assets and result inan impairment charge. Fair value is the amount at which the asset could bebought or sold in a current transaction between willing parties and may beestimated using a number of techniques, including quoted market prices orvaluations 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.

*RestructuringLiabilities*

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

*Valuation Allowancein Deferred Income Tax Assets*

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

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

We are subject to certain market risks, includinginterest rate risks associated with financial instruments included in cash andcash equivalents and short-term investments. We invest in interest-bearing U.S.Government and high-quality corporate debt instruments and hold theseinstruments until maturity, which currently averages 103 days at the date ofpurchase. Changes in interest rates may affect the fair market value of theseinstruments. Due to the short-term nature of these instruments and ourinvestment policies and procedures, we do not expect interest rate fluctuationsto have a material adverse effect on our results of operations. We do not usederivative financial instruments to manage interest rate risk.

We do not use derivative financial instruments toreduce our exposure to changes in foreign currency exchange rates, and we donot use derivatives for speculative trading purposes.

19

----

Thefollowing table provides information about our cash equivalent and marketablefixed income securities, including principal cash flows by expected maturityand the related weighted average interest rates at October 31, 2004.
| U.S. Corporate  debt securities *(in thousands)* |   | $           | 25,880 |   |
|--------------------------------------------------|--------|-------------|--------|--------|
| Expected maturity  date                          |   | Fiscal 2005 |   |
| Average interest rate                            |   | 1.6         | %      |

 

**Item 4.   Controls and Procedures**

*Evaluationof the Company’s Disclosure Controls and Procedures.**  *As of October 31, 2004, we evaluated theeffectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934, as amended(the “Exchange Act”). This evaluation was done under the supervision and withthe participation of management, including our Chief Executive Officer andChief Financial Officer. The evaluation included inquiring of senior managerswhether our records and reports were correct and complete. We are continuing todevelop internal processes for documenting, testing and monitoring ourdisclosure procedures. These internal processes are based on employees’ reportsof their processes, analysis of our documentation, and limited testing tovalidate our processes and documentation.

*Limitationson the Effectiveness of Controls.**  *Ourmanagement does not expect that our disclosure controls or our internalcontrols will prevent all errors and all fraud. A control system, no matter howwell conceived or operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control failures and instances of fraud, ifany, within the Company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of control. The design of any systemof controls is also based in part on certain assumptions about the likelihoodof future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Because ofthe inherent limitations in a cost-effective control system, misstatements dueto error or fraud may occur and not be detected.

*Conclusions.**  *Based on our evaluation, our Chief Executive Officerand Chief Financial Officer concluded that our disclosure controls andprocedures are effective to ensure that information required to be disclosed byus in reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in SEC rules andforms.

*Changesin Internal Controls.  *There were no changes inour internal control over financial reporting (as defined in Rules 13a-15(f) or15d-15(f) of the Exchange Act) during the quarter ended October 31,2004 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

20

----

**PART II—OTHER INFORMATION**

**Item 1.   Legal Proceedings**

As previously disclosed, we remain a party to ourlawsuit against Genesis Insurance Company. Our complaint, which was originallyfiled in the United States District Court for the Western District of Washington,alleged that Genesis’ 2002 attempt to rescind our primary Directors’ andOfficers’ liability insurance was unlawful, and sought damages resulting fromGenesis’ breach of contract and the duty of good faith and fair dealing. On February 11,2004, the Court entered an Order granting Genesis’ motions for summary judgmentand, accordingly, our claims against Genesis were dismissed by the Court on February 13,2004. We have appealed the Court’s decision to the United States Circuit Courtof Appeals for the Ninth Circuit. We expect to file our Brief in the appeal onor before December 20, 2004, and anticipate that Genesis’ AnsweringBrief will be due on January 19, 2005, with our reply to Genesis AnsweringBrief due February 2, 2005.

We are also party to otherroutine litigation incidental to our business. Management believes the ultimateresolution of these other routine matters will not have a material adverseeffect on our financial condition and results of operations.

**Item 2.   Changes in Securities and Use ofProceeds**

None

**Item 3.   Defaults Upon Senior Securities**

None

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

Our Annual Meeting of Shareholders was held on October 21,2004. Out of the Company’s 10,927,194 shares of Common Stock entitled to voteat the meeting, 10,238,104 were represented, either in person or by proxy.

ProposalNumber I—Election of Class I directors
| **Nominee**       | ** ** | ** ** | ** ** | **For** | ** ** | **Against** | ** ** |
|-------------------|------------|------------|------------|---------|------------|-------------|------------|
| Larry C. Mounger  |       | 10,164,057 |       | 74,047  |       |
| Whitney R. Tilson |       | 10,208,566 |       | 29,538  |       |

 

ProposalNumber 2—Ratification of Appointment of Auditors
| For      |   | 10,150,066 |   |
|----------|--------|------------|--------|
| Against  |   | 82,013     |   |
| Withheld |   | 6,025      |   |

 

**Item 5.**   OtherInformation

None

21

----

**Item 6.**   Exhibitsand Reports on Form 8-K

a)   Exhibits
| Exhibit  Number |   | **Description**                                                                                                                      |
|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |   | Separation and Release Agreement dated  December 9, 2004 between Jim C. McGehee and Cutter & Buck,  Inc.          |
| 31.1            |   | Certification of the  Company’s Chief Executive Officer required by Section 302(a) of the  Sarbanes-Oxley Act of 2002 |
| 31.2            |   | Certification of the  Company’s Chief Financial Officer required by Section 302(a) of the  Sarbanes-Oxley Act of 2002 |
| 32.1            |   | Certification of the  Company’s Chief Executive Officer required by Section 906 of the  Sarbanes-Oxley Act of 2002         |
| 32.2            |   | Certification of the  Company’s Chief Financial Officer required by Section 906 of the  Sarbanes-Oxley Act of 2002         |

 

b)   Reports onForm 8-K

The Company filed a Form 8-K on August 30,2004 to announce the appointment of Bill Swint to the position of InterimPresident and Chief Executive Officer, the appointment of Doug Southern to theposition of Chairman of the Board and the appointment of Whitney Tilson to theBoard of Directors effective September 16, 2004.

The Company filed a Form 8-K onSeptember 10, 2004 to announce financial results for the fourth quarterand year ended April 30, 2004 and an increase in the quarterly dividend.

The Company filed a Form 8-K onSeptember 21, 2004 to announce the adoption of a stock trading plan thatis intended to follow the guidelines specified under rule 10b5-1 of theSecurities Exchange Act of 1934, as amended.

22

----

 

**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: December 10,  2004 | By                                        | /s/  ERNEST R. JOHNSON |
|                           |                                      | Ernest R. Johnson |
| * *                       |                                      | *Senior  Vice President and Chief Financial Officer  (Principal Accounting and Financial Officer)* |

 

23

----