**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**Form 10-Q**

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

 

**For the quarterly periodended October 31, 2005**

**or**

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

 

**Forthe transition period from                   to                   **

**CommissionFile No. 0-26608**

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**CUTTER & BUCK INC.**

(Exact Name of Registrantas Specified in Its Charter)

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

 

**701 N. 34thStreet, Suite 400**

**Seattle, WA 98103**

(Address of principalexecutive offices)

**(206) 622-4191**

(Registrant’s telephonenumber)

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months and (2) has been subject to such filing requirements forthe past 90 days.   Yes x   No o

Indicate by check markwhether the registrant is an accelerated filer (as defined in rule 12b-2of the Exchange Act).   Yes x   No o

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

Thenumber of shares of Common Stock of the registrant outstanding as of December 2,2005 was 10,934,304.

 

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**CUTTER & BUCK INC.**

**Quarterly Report on Form 10-Q**

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

**INDEX**

|                                         | ** ** | ** **                                                                                  | ** ** | **Page** |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| PART I—FINANCIAL  INFORMATION |       |                                                                                        |
| Item  1.                                |       | Financial  Statements (unaudited):                                                          |       |     |
|                                    |       | Condensed  Consolidated Balance Sheets                                                      |       | 1        |
|                                    |       | Condensed  Consolidated Statements of Income                                                |       | 2        |
|                                    |       | Condensed  Consolidated Statements of Cash Flows                                            |       | 3        |
|                                    |       | Notes to Condensed  Consolidated Financial Statements                                       |       | 4        |
| Item 2.                                 |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 10       |
| Item 3.                                 |       | Quantitative and Qualitative Disclosures about Market  Risk                                 |       | 18       |
| Item 4.                                 |       | Controls and Procedures                                                                     |       | 18       |
| PART II—OTHER  INFORMATION    |       |                                                                                        |
| Item 1.                                 |       | Legal Proceedings                                                                           |       | 20       |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 20       |
| Item 3.                                 |       | Defaults Upon  Senior Securities                                                            |       | 20       |
| Item 4.                                 |       | Submission of  Matters to a Vote of Security Holders                                        |       | 21       |
| Item 5.                                 |       | Other Information                                                                           |       | 21       |
| Item 6.                                 |       | Exhibits                                                                                    |       | 22       |
| SIGNATURES                              |       | 23                                                                                          |

 

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**PART I—FINANCIAL INFORMATION**

**Item 1.   Financial Statements**

**CUTTER &BUCK INC.**

**CondensedConsolidated Balance Sheets**

| ** **                                                                                                                                                                                         | ** ** | **October 31, 2005** | ** ** | **April 30, 2005** | ** ** | **October 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ***(in thousands, except share amounts)***                                                                                                                                     | ** ** | **(unaudited)**                | ** ** | ** **                   | ** ** | **(unaudited)**                | ** ** |
| **Assets**                                                                                                                                                                                         |       |                           |       |                         |       |                           |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                    |       |                           |       |                         |       |                           |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                         |       |                           | $          | 17,049                       |       |                           |       | $ | 11,752 |   |   |   | $ | 16,689 |   |   |
| Short-term investments                                                                                                                                                                             |       |                           | 23,260     |                         |       |                           | 28,831     |   |   |   | 25,880 |   |   |
| Accounts receivable, net  of allowances for doubtful accounts, returns, and allowances of $1,453 at  October 31, 2005, $1,455 at April 30, 2005 and $2,317 at  October 31, 2004     |       |                           | 19,511     |                         |       |                           | 21,814     |   |   |   | 19,216 |   |   |
| Inventories, net                                                                                                                                                                                   |       |                           | 24,984     |                         |       |                           | 25,398     |   |   |   | 23,633 |   |   |
| Income tax receivable                                                                                                                                                                              |       |                           | 536        |                         |       |                           | 919        |   |   |   | — |   |   |
| Deferred income taxes                                                                                                                                                                              |       |                           | 2,290      |                         |       |                           | 2,412      |   |   |   | 2,566 |   |   |
| Prepaid expenses and  other current assets                                                                                                                                                         |       |                           | 2,739      |                         |       |                           | 2,317      |   |   |   | 2,438 |   |   |
| Total current assets                                                                                                                                                                               |       |                           | 90,369     |                         |       |                           | 93,443     |   |   |   | 90,422 |   |   |
| Furniture and equipment,  net                                                                                                                                                                      |       |                           | 6,675      |                         |       |                           | 6,734      |   |   |   | 6,311 |   |   |
| Deferred income taxes                                                                                                                                                                              |       |                           | 174        |                         |       |                           | 165        |   |   |   | 376 |   |   |
| Other assets                                                                                                                                                                                       |       |                           | 1,552      |                         |       |                           | 1,614      |   |   |   | 1,812 |   |   |
| Total assets                                                                                                                                                                                       |       |                           | $          | 98,770                       |       |                           |       | $ | 101,956 |   |   |   | $ | 98,921 |   |   |
| **Liabilities and Shareholders’ Equity**                                                                                                                                                      |       |                           |       |                         |       |                           |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                               |       |                           |       |                         |       |                           |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                   |       |                           | $          | 4,202                        |       |                           |       | $ | 3,077 |   |   |   | $ | 3,600 |   |   |
| Accrued liabilities                                                                                                                                                                                |       |                           | 6,090      |                         |       |                           | 7,631      |   |   |   | 5,767 |   |   |
| Dividend payable                                                                                                                                                                                   |       |                           | 14,653     |                         |       |                           | —     |   |   |   | — |   |   |
| Income taxes payable                                                                                                                                                                               |       |                           | —     |                         |       |                           | —     |   |   |   | 1,419 |   |   |
| Current portion of  capital lease obligations                                                                                                                                                      |       |                           | 19         |                         |       |                           | 111        |   |   |   | 315 |   |   |
| Total current  liabilities                                                                                                                                                                         |       |                           | 24,964     |                         |       |                           | 10,819     |   |   |   | 11,101 |   |   |
| Other liabilities                                                                                                                                                                                  |       |                           | 3,125      |                         |       |                           | 3,262      |   |   |   | 3,423 |   |   |
| Total liabilities                                                                                                                                                                                  |       |                           | 28,089     |                         |       |                           | 14,081     |   |   |   | 14,524 |   |   |
| 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; 10,935,104 issued and outstanding at  October 31, 2005, 11,220,376 at April 30, 2005 and 10,819,143 at  October 31, 2004 |       |                           | 63,728     |                         |       |                           | 67,750     |   |   |   | 64,920 |   |   |
| Deferred compensation                                                                                                                                                                              |       |                           | (199       | )                            |       |                           | (246       | ) |   |   | — |   |   |
| Retained earnings                                                                                                                                                                                  |       |                           | 7,152      |                         |       |                           | 20,371     |   |   |   | 19,477 |   |   |
| Total shareholders’  equity                                                                                                                                                                   |       |                           | 70,681     |                         |       |                           | 87,875     |   |   |   | 84,397 |   |   |
| Total liabilities and shareholders’ equity                                                                                                                                                    |       |                           | $          | 98,770                       |       |                           |       | $ | 101,956 |   |   |   | $ | 98,921 |   |   |

 

See accompanying notes.

1

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

| ** **                                                                                  | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2005**                                           | ** ** | **2004**                                         | ** ** | **2005** | ** ** | **2004** | ** ** |
| ***(in thousands, except share and per share amounts)*** | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                                                   |       | $                                                  | 33,669     |                                             | $          | 35,538 |   | $ | 63,410 |   | $ | 67,437 |   |
| Cost of sales                                                                               |       | 18,651                                             |       | 18,399                                           |       | 34,347 |   | 34,546 |   |
| Gross profit                                                                                |       | 15,018                                             |       | 17,139                                           |       | 29,063 |   | 32,891 |   |
| Operating  expenses:                                                                        |       |                                               |       |                                             |       |   |   |   |   |
| Selling, general and administrative                                                         |       | 13,401                                             |       | 11,609                                           |       | 24,317 |   | 21,623 |   |
| Depreciation                                                                                |       | 750                                                |       | 691                                              |       | 1,416 |   | 1,457 |   |
| Restatement expenses                                                                        |       | (165                                               | )          | 268                                              |       | (648 | ) | 281 |   |
| Total operating expenses                                                                    |       | 13,986                                             |       | 12,568                                           |       | 25,085 |   | 23,361 |   |
| Operating income                                                                            |       | 1,032                                              |       | 4,571                                            |       | 3,978 |   | 9,530 |   |
| Interest income  (expense)                                                                  |       |                                               |       |                                             |       |   |   |   |   |
| Interest income                                                                             |       | 345                                                |       | 149                                              |       | 653 |   | 253 |   |
| Interest expense                                                                            |       | (1                                                 | )          | (13                                              | )          | (9 | ) | (30 | ) |
| Net interest income (expense)                                                               |       | 344                                                |       | 136                                              |       | 644 |   | 223 |   |
| Pre-tax income                                                                              |       | 1,376                                              |       | 4,707                                            |       | 4,622 |   | 9,753 |   |
| Income tax  expense                                                                         |       | 485                                                |       | 1,792                                            |       | 1,629 |   | 3,588 |   |
| Net income                                                                                  |       | $                                                  | 891        |                                             | $          | 2,915 |   | $ | 2,993 |   | $ | 6,165 |   |
| Basic earnings  per share:                                                                  |       | $                                                  | 0.08       |                                             | $          | 0.27 |   | $ | 0.27 |   | $ | 0.57 |   |
| Diluted earnings per  share:                                                                |       | $                                                  | 0.08       |                                             | $          | 0.26 |   | $ | 0.26 |   | $ | 0.54 |   |
| Shares used in  computation of:                                                             |       |                                               |       |                                             |       |   |   |   |   |
| Basic earnings per share                                                                    |       | 11,044,913                                         |       | 10,834,058                                       |       | 11,104,655 |   | 10,803,653 |   |
| Diluted earnings per share                                                                  |       | 11,286,158                                         |       | 11,363,125                                       |       | 11,362,172 |   | 11,330,887 |   |
| Cash dividends  declared per share of common stock outstanding                              |       | $                                                  | 0.07       |                                             | $          | 0.07 |   | $ | 1.48 |   | $ | 0.12 |   |

 

See accompanying notes.

2

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

| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                                         | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ***(in thousands)***                                                          | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating activities:**                                                          |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                         |       | $                                | 891        |                           | $          | 2,915 |   | $ | 2,993 |   | $ | 6,165 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                             |       |                           |       |   |   |   |   |
| Depreciation                                                                       |       | 764                              |       | 740                            |       | 1,443 |   | 1,552 |   |
| Tax benefit on exercise of stock options                                           |       | 24                               |       | —                         |       | 189 |   | — |   |
| Deferred income taxes                                                              |       | 35                               |       | —                         |       | 113 |   | — |   |
| Deferred compensation                                                              |       | 23                               |       | —                         |       | 47 |   | — |   |
| Loss on fixed asset disposal                                                       |       | 40                               |       | —                         |       | 40 |   | — |   |
| Deferred gain on sale and leaseback of capital  assets                             |       | —                           |       | (2                             | )          | — |   | (3 | ) |
| Changes in assets  and liabilities:                                                |       |                             |       |                           |       |   |   |   |   |
| Accounts receivable, net                                                           |       | (1,323                           | )          | (1,098                         | )          | 2,303 |   | 3,286 |   |
| Inventories, net                                                                   |       | 3,703                            |       | 2,305                          |       | 414 |   | (1,695 | ) |
| Prepaid expenses and other assets                                                  |       | (13                              | )          | (225                           | )          | (360 | ) | (175 | ) |
| Accounts payable, accrued liabilities and other  liabilities                       |       | (2,015                           | )          | (2,002                         | )          | (553 | ) | (1,034 | ) |
| Income taxes payable                                                               |       | (29                              | )          | (861                           | )          | 383 |   | 201 |   |
| Net cash provided  by operating activities                                         |       | 2,100                            |       | 1,772                          |       | 7,012 |   | 8,297 |   |
| **Investing  activities:**                                                         |       |                             |       |                           |       |   |   |   |   |
| Purchases of  furniture and equipment                                              |       | (732                             | )          | (1,393                         | )          | (1,424 | ) | (1,573 | ) |
| Purchases of  short-term investments                                               |       | (10,895                          | )          | (21,898                        | )          | (37,203 | ) | (42,316 | ) |
| Maturities of  short-term investments                                              |       | 17,910                           |       | 22,418                         |       | 42,774 |   | 34,388 |   |
| Net cash provided  by (used in) investing activities                               |       | 6,283                            |       | (873                           | )          | 4,147 |   | (9,501 | ) |
| **Financing  activities:**                                                         |       |                             |       |                           |       |   |   |   |   |
| Issuance of  common stock                                                          |       | 110                              |       | 503                            |       | 593 |   | 902 |   |
| Repurchases of  common stock                                                       |       | (3,488                           | )          | (923                           | )          | (4,804 | ) | (1,099 | ) |
| Payment of  dividends                                                              |       | (774                             | )          | (759                           | )          | (1,559 | ) | (1,300 | ) |
| Principal  payments under capital lease obligations                                |       | (27                              | )          | (162                           | )          | (92 | ) | (325 | ) |
| Net cash used in  financing activities                                             |       | (4,179                           | )          | (1,341                         | )          | (5,862 | ) | (1,822 | ) |
| Net increase  (decrease) in cash and cash equivalents                              |       | 4,204                            |       | (442                           | )          | 5,297 |   | (3,026 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 12,845                           |       | 17,131                         |       | 11,752 |   | 19,715 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                | 17,049     |                           | $          | 16,689 |   | $ | 17,049 |   | $ | 16,689 |   |

 

See accompanying notes.

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

**Note 1.   Basis of Presentation**

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

The accompanying unauditedcondensed consolidated financial statements have been prepared by Cutter &Buck Inc. (the Company) in accordance with accounting principles generallyaccepted in the United States for interim financial statements and inaccordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the informationand disclosures required by generally accepted accounting principles forcomplete financial statements. In the opinion of the Company’s management, alladjustments (consisting of normal recurring accruals) necessary for a fairpresentation of the results for the interim periods have been included. TheCompany’s revenues are seasonal, and therefore the results of operations forthe six months ended October 31, 2005, may not be indicative of theresults for the full fiscal year. For further information, refer to theconsolidated financial statements and footnotes thereto for the fiscal yearended April 30, 2005, included in the Company’s filing on Form 10-K.

**Note 2.   Reclassifications**

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

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

**Note 3.   Short-term Investments**

Short-terminvestments held-to-maturity consists of United States government treasurybills and agency debt and U.S. corporate debt securities with maturity dateswithin one year of the purchase date. Amortized cost includes the initialpurchase amount plus accrued interest of $157,000, $96,000 and $59,000 as of October 31,2005, April 30, 2005, and October 31, 2004, respectively:

| ** **                      | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                      | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **October 31, 2005**  | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| ***(in thousands)***       | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** |
| U.S. corporate  debt            |       |          | $          | 17,908         |       |           |       | $             | —     |   |   |   | $ | (10 | ) |   |   | $ | 17,898 |   |   |
| U.S. government  treasury bills |       |          | 1,998      |           |       |           | —     |          |       |   | — |   |   |   | 1,998 |   |   |
| U.S government  agency debt     |       |          | 3,511      |           |       |           | —     |          |       |   | (23 | ) |   |   | 3,488 |   |   |
|                            |       |          | $          | 23,417         |       |           |       | $             | —     |   |   |   | $ | (33 | ) |   |   | $ | 23,384 |   |   |
|                                 |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

4

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

 

| ** **                     | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                     | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **October 31, 2004** | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| ***(in thousands)***      | ** ** | ** **    | ** ** | ** **     | ** ** | ** **     | ** ** | ** **    | ** ** |
| U.S. corporate  debt           |       |          | $          | 25,939         |       |           |       | $             | —     |   |   |   | $ | (8 | ) |   |   | $ | 25,931 |   |   |
|                           |       |          | $          | 25,939         |       |           |       | $             | —     |   |   |   | $ | (8 | ) |   |   | $ | 25,931 |   |   |
|                                |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4.   Debt**

In March 2005, theCompany entered into a three-year loan agreement with Wells Fargo HSBC TradeBank, N.A. for a $35 million line of credit. This line of credit is secured byall of the Company’s assets. Borrowings under this agreement bear interest atprime minus 1.0%. Covenants contained in this loan agreement includemaintaining a debt to equity ratio of not more than 1.0, a quick ratio of notless than 1.0, and net income of $5 million per year. Additionally, capitalexpenditures are limited to $4.0 million per fiscal year. The Company is incompliance with all terms and covenants of this agreement. On October 31,2005, letters of credit outstanding against this line of credit totaledapproximately $4,894,000 and there were no working capital advancesoutstanding.

**Note 5.   Shareholders’ Equity**

During the six months ended October 31, 2005, theCompany sold 95,525 shares pursuant to the exercise of stock options and underits employee stock purchase plan. During the same period, the Companyrepurchased 380,797 shares under its Stock Repurchase Program.

On July 6, 2005, the board of directors declareda special dividend of $1.34 per share that was conditioned upon shareholderapproval of stock plan amendments allowing certain adjustments to employeestock-based compensation awards to offset the economic impact of this specialdividend. On October 19, 2005, shareholders approved the stock planamendments and the special cash dividend was paid on November 16, 2005, toshareholders of record on November 2, 2005. The special dividend payablehas been recorded as a liability, with a corresponding reduction toshareholders’ equity, in the balance sheet as of October 31, 2005.

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

**Note 6.   Restructuring Liability**

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

5

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

Forthe six months ended October 31, 2005, activity in the accrued liabilityaccount consisted of the following:

| ** **                | ** ** | **Balance at** | ** ** | **Subsequent** | ** ** | ** **     | ** ** | **Balance at**  | ** ** | **Due**         | ** ** | **Due**         | ** ** |
|---------------------------|------------|---------------------|------------|----------------|------------|----------------|------------|----------------------|------------|-----------------|------------|-----------------|------------|
| ** **                | ** ** | **April 30,**  | ** ** | **Accruals,**  | ** ** | **Subsequent** | ** ** | **October 31,** | ** ** | **Within**      | ** ** | **After**       | ** ** |
| ** **                | ** ** | **2005**            | ** ** | **Net**        | ** ** | **Payments**   | ** ** | **2005**             | ** ** | **1 Year** | ** ** | **1 Year** | ** ** |
| ***(in thousands)*** | ** ** | ** **          | ** ** | ** **     | ** ** | ** **     | ** ** | ** **           | ** ** | ** **      | ** ** | ** **      | ** ** |
| Lease obligations         |       |                | $          | 2,215          |       |           |       | $                    | —     |            |       |            | $          | (160 | ) |   |   | $ | 2,055 |   |   |   | $ | 320 |   |   | $ | 1,735 |   |
|                           |            |                     |            |                |            |                |            |                      |            |                 |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 7.   Restatement Expenses**

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 in fiscal 2003.

On August 1, 2005,the United States Court of Appeals for the Ninth Circuit (“Court of Appeals”) affirmeda lower court’s dismissal of the Company’s lawsuit against Genesis InsuranceCompany. On August 22, 2005, the Company filed a petition for rehearingwith the Court of Appeals seeking to have the Court of Appeals reconsidercertain portions of its decision. On October 13, 2005, the Court ofAppeals denied the Company’s petition for rehearing. Previously, the Companyhad determined that it was probable that an insurance premium would need to berepaid to Genesis. Based on the court’s decision, management determined that itis not probable the Company will be required to repay the premium for thepolicy in question. Based upon this change to the estimate of probability, theCompany reversed amounts that had been recorded for this liability during thequarter ended July 31, 2005. During the quarter ended October 31,2005, with the conclusion of the lawsuit, the Company’s estimate of legalexpenses relating to these matters was reduced. These accruals were originallyrecorded as restatement expenses in the income statement, so the reversals werealso recorded as such.

**Note 8.   Income Taxes**

The Company recorded $485,000 of income tax expense inthe second quarter of fiscal year 2006 compared to $1,792,000 of income taxexpense in the second quarter of fiscal year 2005. The effective rates forincome taxes were 35.3% and 38.1% for the second quarters of fiscal years 2006and 2005, respectively.

The Company recorded $1,629,000 of income tax expensein the first six months of fiscal year 2006 compared to $3,588,000 of incometax expense in the first six months of fiscal year 2005. The effective ratesfor income taxes were 35.2% and 36.8% for the first six months of fiscal years2006 and 2005, respectively.

The effective rates differfrom the federal statutory rate primarily due to estimates of state income taxliabilities.

**Note 9.   Earnings Per Share**

Basic earnings per share is based on the weightedaverage number of common shares outstanding. Diluted earnings per share isbased on the weighted average number of common shares and equivalentsoutstanding, except when inclusion of these items would be antidilutive. Commonshare equivalents included in the computation represent the restricted stockgrant to the Company’s CEO and the net shares issuable upon assumed exercise ofoutstanding stock options.

6

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

| ** **                                                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                  | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **                                                                                  | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ***(in thousands, except share and per share amounts)*** | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator for basic and  diluted earnings per share:                                        |       |                             |       |                           |       |   |   |   |   |
| Net income                                                                                  |       | $                                | 891        |                           | $          | 2,915 |   | $ | 2,993 |   | $ | 6,165 |   |
| Denominator for basic  earnings per share:                                                  |       |                             |       |                           |       |   |   |   |   |
| Weighted average common shares                                                              |       | 11,044,913                       |       | 10,834,058                     |       | 11,104,655 |   | 10,803,653 |   |
| Dilutive effect  of employee stock options and awards                                       |       | 241,245                          |       | 529,067                        |       | 257,517 |   | 527,234 |   |
| Denominator for  diluted earnings per share                                                 |       | 11,286,158                       |       | 11,363,125                     |       | 11,362,172 |   | 11,330,887 |   |
| Basic earnings  per share                                                                   |       | $                                | 0.08       |                           | $          | 0.27 |   | $ | 0.27 |   | $ | 0.57 |   |
| Diluted earnings per  share                                                                 |       | $                                | 0.08       |                           | $          | 0.26 |   | $ | 0.26 |   | $ | 0.54 |   |

 

**Note 10.   Stock-Based Compensation**

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

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

The required adoption date of SFAS No. 123(R) forthe Company, as amended by the SEC in Securities Act Release 33-8568,dated April 15, 2005, is the beginning of fiscal 2007. SFAS No. 123(R) permitstwo methods of adoption, a “modified prospective” method and a “modifiedretrospective” method. Under the modified prospective method, compensation costis recognized, beginning with the effective date, based on the requirements ofSFAS No. 123(R) for all share-based payments granted after theeffective date and based on the requirements of SFAS No. 123 for allawards granted prior to the effective date that remain unvested on theeffective date. The modified retrospective method includes the aboverequirements of the modified prospective method and also permits restatement ofprior periods based on amounts previously reported in pro forma disclosurespursuant to SFAS No. 123 for either all periods presented or for onlyprior interim periods of the year of adoption. Management is currently planningto adopt this new standard in the first quarter of fiscal 2007 and is stillreviewing the adoption alternatives.

Based upon the unamortized portion of the fair valueof options outstanding as of October 31, 2005, as estimated as of theirgrant dates pursuant to SFAS No. 123, the adoption of SFAS No. 123(R) isnot anticipated to have a significant impact on our results of operations orour overall financial position. However, the impact of adoption of SFAS No. 123(R) onfuture periods cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future.

7

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Noemployee options were granted during the quarter ended October 31, 2005.Each director who is not an officer or employee of the company received anoption grant to purchase 2,193 shares of our common stock on October 24,2005. The fair value for options granted during fiscal 2005 was estimated atthe date of grant using the Black-Scholes option pricing model using thefollowing weighted-average assumptions:

| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **               | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate |       | 4.4                              | %          | 3.5                            | %          | 4.4 | % | 3.5 | % |
| Volatility               |       | 58                               | %          | 61                             | %          | 58 | % | 61 | % |
| Dividend yield           |       | 2.5                              | %          | 2.2                            | %          | 2.5 | % | 2.2 | % |
| Expected life            |       | 6 years                          |       | 5 years                        |       | 6 years |   | 5 years |   |

 

As discussed in Note 5, on October 19, 2005, atthe annual meeting of shareholders, certain stock plan amendments were approvedto allow for certain adjustments to employee stock-based compensation awards tooffset the economic impact of the $1.34 special dividend. Under the accountingprescribed by APB No. 25 and FASB interpretation No. 44, “Accountingfor Certain Transactions involving Stock Compensation”, no compensation costwas recorded in the Company’s financial statements as a result of thismodification. If the Company were accounting for stock-based compensation underSFAS No. 123, compensation cost would have been recorded equal to the fairvalue of the modified option as of the modification date, less the value of theoriginal option at that date based upon the shorter of any remainder of itsexpected life as of the original grant date or the expected remaining life ofthe modified option. Because many of the modified options were fully vested,the entire estimated fair value of the modified option would be expensed as ofthe modification date, resulting in additional pro forma compensation expense,net of tax, of approximately $375,000 for the three months ended October 31,2005.

Thefair value of the modified options was estimated as of the modification dateusing the Black-Scholes option pricing model, assuming a future dividend yieldof 2.5% and the following weighted-average assumptions:

| Risk-free interest rate |   | 4.4%    |
|-------------------------|--------|---------|
| Volatility              |   | 48%     |
| Expected life           |   | 3 years |

 

8

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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** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                        | ** ** | **October 31,**        | ** ** | **October 31,**           | ** ** |
| ** **                                                                                                                        | ** ** | **2005**                    | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ***(in thousands, except per share amounts)***                                                           | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income, as  reported                                                                                                          |       | $                           | 891        |                           | $          | 2,915 |   | $ | 2,993 |   | $ | 6,165 |   |
| Add employee  stock-based compensation expense, net of tax, as reported                                                           |       | 14                          |       | —                         |       | 30 |   | — |   |
| Deduct total  stock-based employee compensation expense, net of tax, determined under the  fair value based method for all awards |       | (442                        | )          | (116                           | )          | (518 | ) | (240 | ) |
| Pro forma net  income                                                                                                             |       | $                           | 463        |                           | $          | 2,799 |   | $ | 2,505 |   | $ | 5,925 |   |
| Earnings per  share:                                                                                                              |       |                        |       |                           |       |   |   |   |   |
| Basic—as reported                                                                                                            |       | $                           | 0.08       |                           | $          | 0.27 |   | $ | 0.27 |   | $ | 0.57 |   |
| Basic—pro forma                                                                                                              |       | $                           | 0.04       |                           | $          | 0.26 |   | $ | 0.23 |   | $ | 0.55 |   |
| Diluted—as reported                                                                                                          |       | $                           | 0.08       |                           | $          | 0.26 |   | $ | 0.26 |   | $ | 0.54 |   |
| Diluted—pro forma                                                                                                            |       | $                           | 0.04       |                           | $          | 0.25 |   | $ | 0.22 |   | $ | 0.52 |   |

 

**Note 11.   Litigation**

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

The Company had acomplaint against Genesis Insurance Company, originally filed in the UnitedStates District Court for the Western District of Washington (“District Court”),alleging that Genesis’ 2002 attempt to rescind the Company’s primary Directors’and Officers’ liability insurance was unlawful, and sought damages resultingfrom Genesis’ breaches of contract and the duty of good faith and fair dealing.In February 2004, the District Court entered an Order granting Genesis’motions for summary judgment and, accordingly, the Company’s claims againstGenesis were dismissed by the District Court. The Company appealed the DistrictCourt’s decision to the United States Circuit Court of Appeals for the NinthCircuit (“Court of Appeals”). On August 1, 2005, the Court of Appealsaffirmed the decision of the District Court in favor of Genesis. On August 22,2005, the Company filed a petition for rehearing with the Court of Appealsseeking to have the Court of Appeals reconsider certain portions of itsdecision. On October 13, 2005, the Court of Appeals denied the Company’spetition for rehearing, effectively ending this lawsuit.

**Note 12.   Subsequent Events**

On December 7, 2005,the Board declared a quarterly dividend of $0.07 per share payable on January 6,2006, to shareholders of record on December 22, 2005.

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

*You should read this section together with ourcondensed consolidated financial statements and related notes thereto in thisreport. In addition to the historical information contained herein, this reportcontains forward-looking statements that involve risks and uncertainties. Youshould be aware that our actual results could differ materially from thosecontained in any forward-looking statements. Our actual results will dependupon a number of factors, including but not limited to the following: thespecial risk factors set forth in Part I, Item 1 of our annual report on Form 10-Kfor the fiscal year ended April 30, 2005; the ability of the Company tocontrol costs and expenses; costs associated with the upgrade and replacementof some of our computer systems; costs associated with our marketinginitiatives and costs associated with regulatory compliance; the potential outcome of pending and future auditsby various taxing jurisdictions; our ability to maintain ourrelationships with our sponsored professional golfers; relations with andperformance of suppliers; the Company’sability to carry out successful designs and effectively advertise andcommunicate with the marketplace and to penetrate our chosen distributionchannels; the Company’s ability to appropriately price its products; the numberof golf rounds played, which may be impacted by severe weather-related disastersand the weather in general; competition; risks related to the timelyperformance of third parties, such as shipping companies, including risks ofstrikes or labor disputes involving these third parties;  attracting and retaining employees, includingkey management personnel; political and trade relations; changes ininternational trade quota systems for apparel; the overall level of consumerspending on apparel; global economic and political conditions, includingimpacts of disease and terrorism and responses thereto, including war. Finally,there may be other factors not mentioned above or included elsewhere in thisreport that may cause actual results to differ materially from anyforward-looking statements. You should not place undue reliance on anyforward-looking statements. We assume no obligation to update anyforward-looking statements as a result of new information, future events ordevelopments, except as required by the securities laws.*

*All references to fiscal yearsare references to our fiscal years ending April 30.*

**Overview**

Cutter &Buck designs, sources, markets, and distributes high-quality sportswear underthe Cutter & Buck brand. We sell our products primarily throughwholesale channels, via corporate accounts, golf pro shops and resorts, upscalespecialty and department retail stores, and international distributors andlicensees. We also sell directly to end consumers through catalog and internetchannels. Our mission is to build a premium global consumer apparel brand bycreating distinctively original product. Our business strategy focuses onstrengthening the upscale positioning of the Cutter & Buck brand andincreasing the penetration of our target markets. We focus on the needs of ourcustomers and end consumers and design products to meet those needs.

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**Results of Operations**

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

| ** **                          | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **October 31,**         | ** ** | **October 31,**       | ** ** |
| ** **                          | ** ** | **2005**                     | ** ** | **2004**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                           |       | 100.0                        | %          | 100.0                      | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 55.4                         |       | 51.8                       |       | 54.2 |   | 51.2 |   |
| Gross profit                        |       | 44.6                         |       | 48.2                       |       | 45.8 |   | 48.8 |   |
| Operating expenses:                 |       |                         |       |                       |       |   |   |   |   |
| Selling, general and administrative |       | 39.8                         |       | 32.7                       |       | 38.4 |   | 32.1 |   |
| Depreciation                        |       | 2.2                          |       | 1.9                        |       | 2.2 |   | 2.2 |   |
| Restatement expenses                |       | (0.5                         | )          | 0.8                        |       | (1.0 | ) | 0.4 |   |
| Total operating expenses            |       | 41.5                         |       | 35.4                       |       | 39.6 |   | 34.7 |   |
| Operating income                    |       | 3.1                          |       | 12.8                       |       | 6.2 |   | 14.1 |   |
| Net interest income (expense)       |       | 1.0                          |       | 0.4                        |       | 1.0 |   | 0.4 |   |
| Pre-tax income                      |       | 4.1                          |       | 13.2                       |       | 7.2 |   | 14.5 |   |
| Income tax expense                  |       | 1.4                          |       | 5.0                        |       | 2.6 |   | 5.3 |   |
| Net income                          |       | 2.7                          | %          | 8.2                        | %          | 4.6 | % | 9.2 | % |

 

**ThreeMonths Ended October 31, 2005 Compared With Three Months Ended October 31,2004**

**Net Sales**

Duringthe second quarter of fiscal 2006, net sales decreased approximately$1.9 million, or 5.3%, to $33.7 million from $35.5 million in thesame period of the prior year. The detail of net sales by business unit was asfollows: 

| ** **                                                      | ** ** | **Three Months Ended  October 31,** | ** ** | **Increase** | ** ** | **Percent**    | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                                      | ** ** | **2005**                                           | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ***(in thousands, except percent change)*** | ** ** | ** **                                         | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Corporate                                                       |       | $                                                  | 13,995     |         | $          | 14,559         |       |   | $ | (564 | ) |   |   | (3.9 | )% |   |
| Golf                                                            |       | 7,322                                              |       | 10,022       |       |           | (2,700     | ) |   |   | (26.9 | ) |   |
| Specialty Retail                                                |       | 8,885                                              |       | 8,350        |       |           | 535        |   |   |   | 6.4 |   |   |
| Consumer Direct                                                 |       | 1,149                                              |       | 355          |       |           | 794        |   |   |   | 223.7 |   |   |
| International                                                   |       | 806                                                |       | 729          |       |           | 77         |   |   |   | 10.6 |   |   |
| Other                                                           |       | 1,512                                              |       | 1,523        |       |           | (11        | ) |   |   | (0.7 | ) |   |
| Total                                                           |       | $                                                  | 33,669     |         | $          | 35,538         |       |   | $ | (1,869 | ) |   |   | (5.3 | )% |   |

 

Net sales in our Corporate business unit decreased by$0.6 million, to $14.0 million from $14.6 million in the sameperiod of the prior year. This is a continuation of the trend we have seen overthe previous two quarters and may continue through the third quarter of thisfiscal year. The decline is attributed to increased competition for thecorporate business, especially from private-label brands. Also, our 2005 Classicsline did not feature many new styles, which we believe impacted sales.Therefore, we have been phasing-out many of our existing Classic styles at adiscount through normal sales channels and, in October, introduced an extensive‘refreshening’ of this line, which begins shipping toward the end of the thirdquarter of fiscal 2006.

In the second quarter offiscal 2006, net sales in our Golf business unit decreased by$2.7 million, to $7.3 million from $10.0 million in the sameperiod of the prior year. This decrease was due to poor 

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acceptanceof our Fall 2005 fashion collections and lower sales at tournaments. Tournamentsales in the second quarter of fiscal 2005 were driven by the Ryder Cup. Weonly generate sales from this event when it is held in the United States, everyfourth year. Excluding the Ryder Cup, golf sales decreased 21.4% from the prioryear.

Net sales in our SpecialtyRetail business unit increased approximately $0.5 million, to$8.9 million from $8.4 million in the same period of the prior year,primarily due to our strong presence in the premium Big & Tall market.

Consumer Direct salesincreased $0.8 million over the second quarter of fiscal 2005 due to our newconsumer catalog initiative and enhanced website, both of which were launchedat the beginning of September 2005.

Other sales includeliquidation sales and shipping revenue.

**Gross Profit**

In the second quarter offiscal 2006, gross profit was 44.6% of net sales compared to 48.2% in the sameperiod of the prior year. The decrease is primarily due to markdowns ondiscontinued Classics. In October 2005, we introduced a significant changeto our Classics line that included many new men’s styles and added new women’s “companion”pieces to the line. In conjunction with the upgraded line, we discontinued anumber of slow-selling Classics styles and began selling them at discountedprices through normal channels beginning in August 2005. This was done tohelp reduce the amount of discontinued inventory that will ultimately beliquidated during the third and fourth quarters of fiscal year 2006. Duringfiscal year 2005, the changes to the Classics line were not as significant andwe did not begin discounting the discontinued styles until October. Also duringthe second quarter of fiscal 2006, we recorded net writedowns of approximately$0.2 million to our inventories of fashion collections.

Margins through theremainder of fiscal 2006 are likely to be lower than prior year as we continueto sell the discontinued Classics at a discount during the third quarter andliquidate the prior season fashion collections and any phased-out Classicsstyles that remain unsold at the end of the third quarter and through thefourth 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,General and Administrative Expense**

Selling, general andadministrative expenses totaled $13.4 million in the second quarter of fiscal2006 compared to $11.6 million in fiscal 2005, an increase of $1.8 million. Thisincrease is primarily due to $1.5 million of additional marketing andconsumer catalog costs. Of this, $1.1 million is associated with the new directto consumer catalog. The consumer catalog costs are expensed entirely on thedate they are mailed to consumers. The three catalog drops during the threemonths ended October 31, 2005, occurred primarily toward the latter halfof the quarter and the revenue that will be generated from those catalogs hasnot yet been fully realized as of October 31, 2005. Also, we believe theper book cost of our first catalog drops was higher than our ongoing cost willbe, as we will be able to leverage the upfront costs of the initial catalogs. Theremainder of the year-over-year increase in marketing costs is primarily due tothe earlier release date of the annual Corporate catalog, which was distributedduring the third quarter in the prior year. The Corporate catalog was launchedearlier in the current year in order to put our updated Classics line in frontof buyers as early as possible.

We incurred approximately$0.3 million in costs associated with corporate governance and othershareholder matters that were initiated by a letter from our largestshareholder, including reimbursement 

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to thisshareholder for its costs of pursuing these initiatives. Also, we accruedapproximately $0.3 million for anticipated one-time cash payments to directorsin order to compensate them for stock option shortfalls in theshareholder-approved director stock incentive plans. Professional fees for thesecond quarter of fiscal 2006 were approximately $0.4 million lower than thesecond quarter of fiscal 2005, due to lower costs associated with compliancewith the Sarbanes-Oxley Act and lower executive search fees than in fiscal 2005when we were conducting a search for a new CEO.

**Restatement Expenses**

Restatement expensestotaled $0.3 million in the second quarter of fiscal 2005 for legal andprofessional fees incurred in connection with the lawsuit against GenesisInsurance Company and indemnification of former officers compared to a reversalof $0.2 million in the second quarter of fiscal 2006 for the remaining accrualsresulting from the conclusion of the Genesis lawsuit and other matterssurrounding the restatement.

**Income Taxes**

We recorded approximately$0.5 million of income tax expense in the second quarter of fiscal 2006compared to $1.8 million in the second quarter of fiscal 2005. The effectiverates for income taxes in the second quarters of fiscal 2006 and 2005 were35.3% and 38.1%, respectively.

**SixMonths Ended October 31, 2005 Compared With Six Months Ended October 31,2004**

**Net Sales**

Duringthe first six months of fiscal 2006, net sales decreased approximately$4.0 million, or 6.0%, to $63.4 million from $67.4 million in thesame period of the prior year. The detail of net sales by business unit was asfollows: 

| ** **                                                      | ** ** | **Six Months Ended  October 31,** | ** ** | **Increase** | ** ** | **Percent**    | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                                                      | ** ** | **2005**                                         | ** ** | **2004**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ***(in thousands, except percent change)*** | ** ** | ** **                                       | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Corporate                                                       |       | $                                                | 27,737     |         | $          | 29,701         |       |   | $ | (1,964 | ) |   |   | (6.6 | )% |   |
| Golf                                                            |       | 15,213                                           |       | 18,849       |       |           | (3,636     | ) |   |   | (19.3 | ) |   |
| Specialty Retail                                                |       | 14,363                                           |       | 13,672       |       |           | 691        |   |   |   | 5.1 |   |   |
| Consumer Direct                                                 |       | 1,638                                            |       | 711          |       |           | 927        |   |   |   | 130.4 |   |   |
| International                                                   |       | 1,554                                            |       | 1,415        |       |           | 139        |   |   |   | 9.8 |   |   |
| Other                                                           |       | 2,905                                            |       | 3,089        |       |           | (184       | ) |   |   | (6.0 | ) |   |
| Total                                                           |       | $                                                | 63,410     |         | $          | 67,437         |       |   | $ | (4,027 | ) |   |   | (6.0 | )% |   |

 

In the first six months of fiscal 2006, net sales inour Corporate business unit decreased by $2.0 million, to$27.7 million from $29.7 million in the same period of the prioryear. The decline is attributed to increased competition for the corporatebusiness and may continue through the third quarter of this fiscal year. Also,our 2005 Classics line did not feature many new styles, which we believeimpacted sales. Therefore, we have been phasing-out many of our existingClassic styles at a discount through normal sales channels and, in October,introduced an extensive ‘refreshening’ of the Classics line, which beginsshipping toward the end of the third quarter of fiscal 2006.

Net sales in our Golf business unit decreased by$3.6 million to $15.2 million from $18.8 million in the sameperiod of the prior year. The decline includes $1.2 million of sales driven bythe Ryder Cup in fiscal 2005. Sales are only generated from this event when itis held in the United States, every fourth year. The remaining decrease isprimarily attributable to poor acceptance of our Fall 2005 fashion collections.

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Excluding the Ryder Cup,golf sales decreased 13.6% from the prior year during the first six months offiscal 2006.

Year to date sales in our Specialty Retail businessunit have increased approximately $0.7 million, to $14.4 million from$13.7 million in the same period of the prior year, primarily due to ourstrong presence in the premium Big & Tall market.

Consumer Direct sales increased $0.9 million overfiscal 2005, primarily due to our new consumer catalog initiative and enhancedwebsite, both of which were launched at the beginning of September.

Other sales includeliquidation sales and shipping revenue.

**Gross Profit**

During the first six months of fiscal 2006, grossprofit was 45.8% of net sales compared to 48.8% in the same period of the prioryear. In October 2005, we introduced a significant change to our Classicsline that included many new men’s styles and added new women’s “companion”pieces to the line. In conjunction with the upgraded line, we discontinued anumber of slow-selling Classics styles and began selling them at discountedprices through normal channels beginning in August 2005. This was done tohelp reduce the amount of discontinued inventory that will ultimately beliquidated during the third and fourth quarters of fiscal year 2006. Duringfiscal year 2005, the changes to the Classics line were not as significant andwe did not begin discounting the discontinued styles until October. Also, basedon lower than expected sales of our Spring and Fall 2005 fashion lines, as wellas the fairly extensive ‘refreshing’ of our Classics line, we have recordedadditional reserves against inventory of $0.7 million during fiscal 2006.

Margins through the remainder of fiscal 2006 arelikely to be lower than prior year as we continue to sell the discontinuedClassics at a discount during the third quarter and liquidate prior seasonfashion collections and any phased-out Classics styles that remain unsold at adiscount at the end of the third quarter and through the fourth 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,General and Administrative Expense**

Selling, general and administrative expenses totaled$24.3 million in the first six months of fiscal 2006 compared to $21.6 millionin fiscal 2005, an increase of $2.7 million. This increase is primarily due to$1.5 million of additional marketing costs during the second quarter offiscal 2006. Of this, $1.1 million is associated with the new direct toconsumer catalog. The consumer catalog costs are expensed entirely on the datethey are mailed to consumers. Our first three catalog drops occurred toward thelatter half of the second quarter and the revenue that will be generated from thosecatalogs has not yet been fully realized as of October 31, 2005. Also, webelieve the per book cost of our first catalog drops was higher than ourongoing cost will be, as we will be able to leverage the upfront costs of theinitial catalogs. The remainder of the increased marketing costs is primarilydue to the earlier release date of the annual Corporate catalog, which wasdistributed during the third quarter in the prior year. The Corporate catalogwas launched earlier in the current year in order to put our updated Classicsline in front of buyers as early as possible.

Salaries, wages, and related taxes have increasedapproximately $0.9 million over the prior year. This increase is primarily dueto employees hired during the first quarter of fiscal 2006 for the expansion ofthe direct to consumer sales channel and additional product design anddevelopment staffing, which were added beginning in the second quarter offiscal 2005.

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**Restatement Expenses**

The Company was not successful in its appeal in itslawsuit against Genesis Insurance Company. Although we did not recover thedamages we were seeking, we have not been required to repay the premium for thepolicy in question and therefore the approximately $0.5 million that had beenrecorded for this outstanding liability, plus some additional accruals forlegal and other estimated costs, was reversed during the first six months offiscal 2006.

**Income Taxes**

We recorded approximately$1.6 million of income tax expense in the first six months of fiscal 2006compared to $3.6 million in fiscal 2005. The effective rates for income taxesin the first six months of fiscal 2006 and 2005 were 35.2% and 36.8%,respectively.

**Liquidity and Capital Resources**

At October 31, 2005, our cash and short-terminvestments totaled $40.3 million compared to $42.6 million at October 31,2004, and $40.6 million at April 30, 2005.

On July 6, 2005, the board of directors declareda special dividend of $1.34 per share, conditioned upon shareholder approval ofstock plan amendments allowing certain adjustments to employee stock-basedcompensation awards to offset the economic impact of this special dividend. On October 19, 2005, shareholders approvedthe stock plan amendments and the special cash dividend totaling $14.7 millionwas paid on November 16, 2005, to shareholders of record on November 2,2005.

During the first six months of fiscal 2006, ourcapital requirements were funded by cash provided by operating activities. Netcash provided by operating activities in the first six months of fiscal 2006was $7.0 million compared to $8.3 million in the first six months offiscal 2005. The decrease in net cash provided by operating activities wasprimarily a result of the lower net income of $3.0 million during the first sixmonths of fiscal 2006, compared to $6.2 million in the six months of fiscal2005, offset by a net $0.4 million decrease in inventory during the firstsix months of fiscal 2006 compared to a net $1.7 million increase in inventoryduring the first six months of fiscal 2005.

Net cash provided by investing activities was $4.1million in the first six months of fiscal 2006 compared to $9.5 million used inthe first six months of fiscal 2005. The change was primarily due to fewer netpurchases of short-term investments in fiscal 2006, as we were transitioningthese to cash equivalents in anticipation of payment of the special dividend inNovember. We incurred $1.4 million of capital expenditures during the sixmonths ended October 31, 2005. These investments relate primarily to theimplementation of our new enterprise resource planning (“ERP”) system, upgradedinventory warehousing system, and new communication systems and software tohelp manage our expanded direct to consumer business. The ERP and inventorywarehouse systems became operational at the beginning of June 2005. Weplan to continue to invest in additional enhancements to these systems duringthe remainder of the fiscal year. These capital expenditures will primarilyconsist of costs for information technology initiatives and our expanded directto consumer business. Capital expenditures totaling less than $3.5 million arecurrently planned for fiscal 2006.

Net cash used in financing activities was $5.9 millionin the first six months of fiscal 2006, which primarily consisted of stockrepurchases and dividend payments. The increase over the first six months offiscal 2005 was primarily due to increased repurchases of our common stock. Weinitiated a share repurchase program in March 2004. On July 5, 2005,the board extended this program to allow for an additional $10.0 million ofshare repurchases beyond those already made through July 5, 2005. Thepurchases will be made from time to time in the open market or in privatelynegotiated transactions. During the first six months of fiscal 2006, wepurchased 380,797 shares of our common stock at an average price of $12.62, fora total repurchase of $4.8 million. Since the inception of the program through 

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October 31, 2005, wehave purchased 652,723 shares at an average price of $12.46. We have paid atotal of $8.1 million to repurchase stock and, as of October 31, 2005,have authorization to make additional repurchases up to $6.1 million of stock.The repurchase program may be suspended at any time without notice. The timingof repurchases and the actual number of shares repurchased will depend onmarket conditions, alternative uses of capital and other factors. The special dividend and the additional sharerepurchases authorization represent approximately $25 million of capital to bereturned to shareholders.

During the quarter, we paid a cash dividend of $0.07per share. On December 7, 2005, the Board declared a quarterly dividend of$0.07 per share, payable on January 6, 2006, to shareholders of record on December 22,2005. We expect to pay similar dividends in future quarters. However, we maydecide to discontinue or modify these quarterly dividend payments at any timeif we determine that other uses of our capital may be in the best interests ofour shareholders.

In March 2005, we entered into a three-year loanagreement with Wells Fargo HSBC Trade Bank, N.A. for a $35 million line ofcredit. This line of credit is secured by all of the Company’s assets. Anyborrowings under this agreement bear interest at prime minus 1.0%. Covenantscontained in this loan agreement include maintaining a debt to equity ratio ofnot more than 1.0, a quick ratio of not less than 1.0, and net income of $5.0million per year. Additionally, capital expenditures are limited to $4.0million per year. As of October 31, 2005, we are in compliance with all ofthese covenants and there are no borrowings under this line of credit otherthan open letters of credit totaling approximately $4.9 million.

Our primary ongoingcapital requirements are to finance working capital and the continued growthand operations of our business, including investments in fixed assets. Webelieve the remaining cash on hand and cash generated from operations, as wellas our ability to borrow under bank lines of credit, will be sufficient to meetour cash requirements during fiscal 2006. Should management determine that cashon hand is insufficient to support continuation of the stock repurchaseprogram, we have the ability to suspend the program at any time. We also haveavailable alternative sources of financing, including factoring our accountsreceivable and financing our capital expenditures with leases. Although thesemethods of financing are currently available to us, we do not anticipate usingalternative sources of financing during fiscal 2006. However, our capital needswill depend on many factors, including our growth rate, the need to financeincreased production and inventory levels, the success of our various sales andmarketing programs, expenses associated with the risks and uncertaintiesrelated to our restatement, and various other factors.

**CriticalAccounting Policies and Use of Estimates**

Our critical accountingpolicies are described in Item 7 in the Company’s annual report on Form 10-Kfor the year ended April 30, 2005. Our discussion and analysis offinancial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues, expenses, and relateddisclosures of contingent assets and liabilities. On an ongoing basis, weevaluate the estimates that we have made. These estimates are based upon ourhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Our actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting estimates affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

**Reserve for Product Returns**

We maintain a reserve forprobable future product returns related to current period product receivables.We analyze the rate of historical returns and trends in changes to the rate, ifany, when 

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evaluatingthe adequacy of this reserve. The estimate for product returns is included inour calculation of net sales. If we were to experience an increase in ourproduct returns, additional reserves might be required.

**Reserve for Sales Allowances**

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

**Allowances for Doubtful Accounts**

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

**Inventories**

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

**Impairment of Long-Lived Assets**

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

**Restructuring Liabilities**

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

**ValuationAllowance in Deferred Income Tax Assets**

We periodically review theneed for a valuation allowance to reduce our deferred income tax asset balancesto their net realizable value. To the extent we determine an allowance isrequired, we determine the adequacy of this allowance by regularly reviewingour historical taxable income and forecasts of future 

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taxableincome over the periods in which the temporary differences are anticipated toreverse. As of October 31, 2005, we have determined that no allowance isrequired. If our actual results are lower than our forecasted future results,an allowance might be required.

**Item 3.   Quantitative and Qualitative Disclosuresabout 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 fixed-rate debt instruments and holdthese instruments until maturity. Changes in interest rates may affect the fairmarket value of these instruments. Investments with maturities beyond ninetydays as of the purchase date are classified as short-term investments. Theaverage time to maturity as of the purchase date for short-term investmentsheld as of October 31, 2005, was 125 days and the weighted averageinterest rate was 3.5%. Due to the short-term nature of these instruments andour investment policies and procedures, we do not expect interest ratefluctuations to have a material adverse effect on our results of operations.

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

**Item 4.   Controls and Procedures**

**Evaluationof Disclosure Controls and Procedures**

As of October 31,2005, we evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) under the Securities and Exchange Act of 1934, as amended.Based on this evaluation, our principal executive and financial officersconcluded that, as of October 31, 2005, our disclosure controls andprocedures were effective in timely alerting them to material informationrequired to be included in our periodic reports.

**Changes in Internal Controls**

During the first quarter of fiscal 2006, the Companyimplemented SAP R/3 Enterprise System, an enterprise resource planning (“ERP”)system, which will serve as its new general ledger of record going forward. Theimplementation of this ERP system provides the Company a more technologicallyadvanced information technology architecture that can be utilized throughoutthe organization and leveraged to interface with other computer systems. Theimplementation of the ERP system has significantly impacted the Company’soperations by eliminating certain manual processes and interfaces andautomating and streamlining certain tasks.

During the second quarter of fiscal 2006, the Company implementeda new ecommerce software platform and a web-based platform for managinginternational trade transactions with our foreign suppliers. The implementationof the ecommerce platform has improved the Company’s reporting capabilitiesregarding its direct to consumer business, but has not significantly changedthe underlying internal controls. The implementation of the financial supplychain automation has eliminated certain manual processes and automated andstreamlined certain tasks.

Other than as mentionedabove, during our most recently completed fiscal quarter, there have been nochanges in our internal control over financial reporting as defined in Rules 13a-15(f) or15d-15(f) under the Securities and Exchange Act of 1934, as amended,that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

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**Limitationson the Effectiveness of Controls**

Our management does not expect that our disclosurecontrols or our internal controls will prevent all errors and all fraud. Acontrol system, no matter how well conceived or operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. The design of our control system reflects the fact that there are resourceconstraints and the benefits of such controls were considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control failuresand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty and that breakdowns can occur because of simple error or mistake.Additionally, controls can be circumvented by the individual acts of somepersons, by collusion of two or more people, or by management override ofcontrol. The design of any system of controls is also based in part on certainassumptions about the likelihood of future events, and there can be no assurancethat any design will succeed in achieving its stated goals under all potentialfuture conditions. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not bedetected.

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**PART II—OTHER INFORMATION**

**Item 1.   Legal Proceedings**

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

The Company had acomplaint against Genesis Insurance Company, originally filed in the UnitedStates District Court for the Western District of Washington (“District Court”),alleging that Genesis’ 2002 attempt to rescind the Company’s primary Directors’and Officers’ liability insurance was unlawful, and sought damages resultingfrom Genesis’ breaches of contract and the duty of good faith and fair dealing.In February 2004, the District Court entered an Order granting Genesis’motions for summary judgment and, accordingly, the Company’s claims againstGenesis were dismissed by the District Court. The Company appealed the DistrictCourt’s decision to the United States Court of Appeals for the Ninth Circuit (“Courtof Appeals”). On August 1, 2005, the Court of Appeals affirmed thedecision of the District Court in favor of Genesis. On August 22, 2005,the Company filed a petition for rehearing with the Court of Appeals seeking tohave the Court of Appeals reconsider certain portions of its decision. On October 13,2005, the Court of Appeals denied the Company’s petition for rehearing,effectively ending this lawsuit.

**Item 2.   Unregistered Sales of Equity Securitiesand Use of Proceeds**

**Purchasesof Equity Securities by the Issuer**

In March 2004, the Company announced a stockrepurchase program, allowing for the repurchase of up to $6.0 million of commonstock. On July 5, 2005, the board of directors approved an increase in thestock repurchase program to provide for up to $10.0 million of additionalrepurchases beyond the $4.2 million already repurchased through July 5,2005, bringing the total repurchase authorization since inception of theprogram to $14.2 million. In September 2004, the Company adopted a stocktrading plan that is intended to follow the guidelines specified under Rule 10b5-1of the Securities Exchange Act of 1934, as amended. The stock repurchaseprogram may be suspended or discontinued by the Board at any time withoutnotice and it does not have an expiration date.

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

| **Period**                   | ** ** | ** ** | ** ** | **Total number  of shares  purchased** | ** ** | **Average price  paid per share** | ** ** | **Total number of  shares purchased as  part of a publicly  announced plan** | ** ** | **Maximum dollar  value of shares that  may yet be  purchased under  the plan** | ** ** |
|------------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| August

08/01/05-08/31/05    |       |       | 58,000     |                                             |       |                                             | $          | 13.29                                                                                                                |       |                                                                                                                    |       | 58,000 |   |   |   | $ | 8,791,000 |   |   |
| September

09/01/05-09/30/05 |       |       | 145,600    |                                             |       |                                             | $          | 12.46                                                                                                                |       |                                                                                                                    |       | 145,600 |   |   |   | $ | 6,977,000 |   |   |
| October

10/01/05-10/31/05   |       |       | 71,700     |                                             |       |                                             | $          | 12.60                                                                                                                |       |                                                                                                                    |       | 71,700 |   |   |   | $ | 6,074,000 |   |   |
|                         |       |       | 275,300    |                                             |       |                                             |       |                                                                                                                 |       |                                                                                                                    | 275,300    |   |   |   |   |   |   |

 

**Item 3.   Defaults Upon Senior Securities**

None

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**Item 4.   Submission of Matters to a Vote ofSecurity Holders**

Our Annual Meeting of Shareholders was held on October 19,2005. Out of the Company’s 11,155,838 shares of Common Stock entitled to voteat the meeting, 10,658,496 were represented, either in person or by proxy.

Proposal Number 1—Election of Class II directors,to serve until the 2006 annual meeting of shareholders:

| **Nominee**          | ** ** | ** ** | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|-----------|------------|--------------|------------|
| Douglas G.  Southern |       | 9,613,064  |       | 1,045,432 |       |
| John T. Wyatt        |       | 9,621,942  |       | 1,036,554 |       |

 

Until the next annual meeting, the other directorsremain Henry L. (Skip) Kotkins, Larry C. Mounger, Whitney R. Tilson, and JamesC. Towne

ProposalNumber 2—Approval of amendments to the Cutter & Buck Inc. Articles ofIncorporation to eliminate the Company’s present three-year staggeredterms of directors and eliminate the super-majority voting provision requiredto amend, alter or repeal the staggered terms:

| For              |   | 8,257,274 |
|------------------|--------|-----------|
| Against          |   | 47,749    |
| Abstain          |   | 50,099    |
| Broker Non-votes |   | 2,800,716 |

 

ProposalNumber 3—Approval of amendments to the Cutter & Buck Inc. 1997Stock Incentive Plan, 1995 Employee Stock Option Plan, 2000 Transition StockIncentive Plan for Officers, 2000 Transition Stock Incentive Plan forNon-officers, and the individual option agreements for Ernest R. Johnson andWilliam B. Swint:

| For              |   | 7,438,881 |
|------------------|--------|-----------|
| Against          |   | 899,418   |
| Abstain          |   | 16,823    |
| Broker Non-votes |   | 2,800,716 |

 

Proposal Number 4—Approvalof Ernst & Young LLP as independent auditors for fiscal 2006:

| For              |   | 10,434,815 |
|------------------|--------|------------|
| Against          |   | 214,830    |
| Abstain          |   | 8,851      |
| Broker Non-votes |   | 497,342    |

 

**Item 5.   Other Information**

As previously described in our proxy statement, aportion of the 2005 annual option grants to nonemployee directors will be paidin cash since there are insufficient shares in our director stock incentiveplans to fully fund those grants. Of the regular annual 7,500 share optiongrant to each nonemployee director for 2005, 2,193 have been granted and the5,307 share balance will be paid in cash based on the Black-Scholes valuationmodel.

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It was also discovered that this same share capacitylimitation precluded the Company from making the full 7,500 annual optiongrants to our nonemployee directors in both 2003 and 2004. As a result, optionsof 7,223 shares for 2003 and 4,387 shares for 2004 were granted to eachnonemployee director.

On December 7, 2005,the Board of Directors approved the amount of the cash payment for the 2005option deficits using the Black-Scholes model. The Board also approved the samevaluation method for the 277 and 3,113 option deficits in 2003 and 2004. As aresult, in addition to the reduced annual option awards described above, eachnonemployee director will receive (i) $31,660 for 2005, (ii) $18,367for 2004, and (iii) $1,884 for 2003. Mr. Tilson was not a director in2003 and does not receive any director compensation for that year. Theresulting cash payments to our nonemployee directors totaled $257,668.

**Item 6.   Exhibits**

**a) Exhibits**

| Exhibit  Number  | ** ** | Description                                                                                                                                  | ** ** | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|    3.1 |       | Articles of Amendment,  dated October 19, 2005, to the Restated Articles of Incorporation of  Cutter & Buck Inc.               |
|  10.1*      |       | Endorsement Agreement  dated October 18, 2005, between the Company and Club 59, Inc.                                               |
|  10.2       |       | Cutter &Buck  Inc. 1995 Employee Stock Option Plan, as amended and restated as of October 19,  2005 (10.1)(1)                  |
|  10.3       |       | Cutter &Buck  Inc. 1995 Non-Employee Director Stock Incentive Plan (10.2)(1)                                                        |
|  10.4       |       | Cutter &Buck  Inc. 1997 Stock Incentive Plan, as amended and restated as of  October 19, 2005 (10.3)(1)                        |
|  10.5       |       | Cutter &Buck  Inc. 1999 Non-Employee Director Stock Incentive Plan (10.4)(1)                                                        |
|  10.6       |       | Cutter &Buck  Inc. 2000 Stock Incentive Plan (10.5)(1)                                                                              |
|  10.7       |       | Cutter &Buck  2000 Transition Stock Incentive Plan for Officers, as amended and restated as  of October 19, 2005 (10.6)(1)     |
|  10.8       |       | Cutter &Buck 2000  Transition Stock Incentive Plan for Non-Officers, as amended and restated as  of October 19, 2005 (10.7)(1) |
|  10.9       |       | Ernest R. Johnson Stock  Option Agreement, as amended and restated as of October 19, 2005  (10.8)(1)                                    |
|  10.10      |       | William B. Swint Stock  Option Agreement, as amended and restated as of October 19, 2005  (10.9)(1)                                     |
|  31.1       |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Executive Officer                                             |
|  31.2       |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Financial Officer                                             |
|  32.1       |       | Section 1350  Certifications of the Company’s Chief Executive Officer                                                              |
|  32.2       |       | Section 1350 Certifications of the Company’s  Chief Financial Officer                                                              |

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*                    CONFIDENTIAL TREATMENTHAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT AND THE CONFIDENTIAL PORTIONSHAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION

(1)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Registration Statement on Form S-8 (File No. 333-129399)

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.
|                               |   | CUTTER & BUCK INC.  (Registrant) |
|-------------------------------|--------|-------------------------------------------|
| Dated: December 9,  2005 |   | By                                        |   | /s/  ERNEST R. JOHNSON |
|                          |   |                                      |   | Ernest R. Johnson*Chief Financial Officer and Senior Vice President  (Principal Accounting and Financial Officer)* |

 

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