**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-K**

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

**Forthe fiscal year ended April 30, 2005**

**or**

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

**Forthe transition period from                to                **

**CommissionFile No. 0-26608**

**CUTTER & BUCK INC.**

(Exact name of registrantas specified in its charter)

| Washington                                                    | **91-1474587**                       |
|---------------------------------------------------------------|--------------------------------------|
| (State of incorporation)                                      | (I.R.S. Employer Identification No.) |
| **701  N. 34th Street, Suite 400**                       |
| **Seattle, WA 98103**                                         |
| (Address of Principal Executive Offices, Including  Zip Code) |
| **(206) 622-4191**                                       |
| (Registrant’s Telephone Number, Including Area Code)     |

 

Securities registeredpursuant to Section 12(b) of the Act: **None**

Securities registeredpursuant to Section 12(g) of the Act: **Commonstock, no par value**

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 mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

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

The aggregate market valueof common stock held by non-affiliates as of October 31, 2004, was$115,771,646, based on the last reported sale price of the Company’s commonstock on that day as reported by the NASDAQ National Market System.

The number of shares ofCommon Stock of the registrant outstanding as of July 7, 2005 was 11,195,354.

**Documentsincorporated by reference:  **Portions of the Company’sdefinitive 2005 Proxy Statement to be filed with the Securities and ExchangeCommission within 120 days of our fiscal year end are incorporated by referenceinto Part III hereof.

 

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**CUTTER &BUCK INC.**Annual Report on Form 10-KFor the fiscal year ended April 30, 2005

**INDEX**
|               | ** **                                                                                                          | **Page** |
|---------------|---------------------------------------------------------------------------------------------------------------------|----------|
| PART I   |                                                                                                                |     |
| Item 1.       | Business                                                                                                            | 1        |   |
| Item 2.       | Properties                                                                                                          | 7        |   |
| Item 3.       | Legal Proceedings                                                                                                   | 7        |   |
| Item  4.      | Submission of Matters to a  Vote of Security Holders                                                                | 7        |   |
| PART II  |                                                                                                                |     |   |
| Item  5.      | Market for Registrant’s  Common Equity, Related Shareholder Matters and Issuer Purchases of Equity  Securities | 8        |   |
| Item  6.      | Selected Financial Data                                                                                             | 10       |   |
| Item  7.      | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                    | 11       |   |
| Item  7A.     | Quantitative and Qualitative  Disclosures about Market Risk                                                         | 21       |   |
| Item  8.      | Financial Statements and  Supplementary Data                                                                        | 21       |   |
| Item  9.      | Changes in and Disagreements  With Accountants on Accounting and Financial Disclosure                               | 21       |   |
| Item  9A.     | Controls and Procedures                                                                                             | 22       |   |
| PART III |                                                                                                                |     |   |
| Item  10.     | Directors and Executive  Officers of the Registrant                                                                 | 24       |   |
| Item  11.     | Executive Compensation                                                                                              | 24       |   |
| Item  12.     | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                     | 24       |   |
| Item  13.     | Certain Relationships and  Related Transactions                                                                     | 24       |   |
| Item  14.     | Principal Accounting Fees  and Services                                                                             | 24       |   |
| Part IV  |                                                                                                                |     |   |
| Item  15.     | Exhibits, Financial Statement  Schedules                                                                            | 24       |   |
| SIGNATURES    | 47                                                                                                                  |     |

 

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**PART I**

**Item 1.**                        Business

**Overview**

Cutter & Buck Inc. (the “Company”), aWashington corporation formed in 1990, is based in Seattle, Washington. TheCompany designs, sources, markets, and distributes high-quality sportswearunder the Cutter & Buck brand.

In December 2004, theCompany hired a new CEO and President, John T. (“Tom”) Wyatt. Mr. Wyattbrings 30 years of experience from the retail and apparel industry, includinghis roles as President of Vanity Fair Intimates Coalition, President ofIntimate Apparel for Warnaco Intimate Apparel, and Chairman and CEO ofParisian, a division of Saks, Inc. Mr. Wyatt is charting a coursecommitted to developing a product line known for its world-class quality andleadership in design, customized textiles, finishing details, and construction.

**Brand and Products**

The Cutter & Buck mission is to build apremium global consumer apparel brand by creating distinctively originalproducts and achieving unsurpassed standards of excellence in our actions. Ourprimary market demographic is men and women over the age of 30 and active whowant to associate with a premium lifestyle brand. We reach our target marketthrough wholesalers and retailers that recognize the value of high-quality,technically innovative, branded apparel. Our products are sold primarilythrough corporate accounts, golf pro shops and resorts, and upscale specialtyand department stores. We also have agreements with several distributors andlicensees that sell our products internationally as well as certain licensednon-apparel items both internationally and domestically.

Cutter & Buck was the number one apparelsupplier at the 2004 Ryder Cup and 2004 PGA Championship. We were selected tobe the 2005 Official Golf Apparel Supplier of *The GolfChannel* cable television network. Twenty on-air announcers willshowcase Cutter & Buck’s full range of men’s and women’s apparel. *The Golf Channel* reaches 89% of the world’s golfers,covering 66 million households in the United States plus 20 million outside theUnited States. Cutter & Buck is also the official golf apparelsupplier to the *ESPN* golf broadcast team. We arethe official apparel sponsor of the LPGA Golf Clinics for Women. In August 2004,Cutter & Buck was named a “Top 40 Supplier”, out of 3,000 suppliers,by *The Counselor*, the leading tradepublication for the ad specialty industry. We were the only premium consumerapparel manufacturer in the top 40.

The foundation of our product line consists of our CBClassics and Seasonal Golf Basics lines, which are certain key sportswear itemsthat are in demand for several seasons, sometimes years. In addition to these “core”styles, we offer Spring and Fall seasonal collections. Each collection includesseveral “deliveries” that convey a theme or attitude through color, styling,and fabric. Our product lines offer sportswear suitable for golf and otheractive lifestyles, business and weekend casual, and casually elegant situations.Our lines include knit and woven shirts, pants and shorts, sweaters, vests,wind and rain apparel, outerwear, and accessories.

Our Corporate customers order mainly core styles, Men’sGolf customers order approximately 58% core styles, and Women’s Golf customersorder approximately 63% seasonal styles. Specialty Retail customers order moreheavily from our seasonal collections. Overall, our core styles accounted for76% of sales during fiscal 2005 and seasonal collections accounted for 24%. Cutter &Buck offers both Men’s and Women’s lines. During fiscal 2005, 83% of sales wereMen’s and 17% were Women’s.

In January 2005, we introduced our updatedassortment of technical fabrics and materials under the Cutter & BuckCB ProTec System, which includes CB DryTec, CB WindTec, CB WeatherTec, 

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CB SunTec, and CBThermaTec. CB DryTec provides moisture management, wicking moisture away withsoft lightweight fabric blends, such as cotton/nylon and cotton/polyester. CBWindTec provides advanced wind protection that acts as a lightweight definitivesecond layer for golfers. CB WeatherTec provides protection from cold,inclement weather via lightweight durable water repellant fabrics with texturedmicrofibers and performance polyester. CB ThermaTec provides optimaltemperature regulation.

Most of our Golf and Collegiateand Pro Sports customers and some of our Corporate and other Specialty Retailcustomers want their logos embroidered on our apparel. We offer a full range ofembroidery services, from developing the digital instructions for producing aspecific logo and choosing the logo colors that best enhance the colors of agarment to producing the embroidery. We also provide other value-added servicesthat allow our customers to sell our products without further processing. Theseservices include adding customer hang tags, folding products to specific measurements,gift and event boxes, or packing orders to particular specifications. Webelieve our ability to timely and efficiently process customized orders is acompetitive advantage.

**Design**

Our design team is charged with developinghigh-quality sportswear, pairing innovation with tradition and luxury. Westrive to elevate timeless designs with distinguishing marks of quality thatinvolve superior construction and subtle design details. We design our productsto look elegant and to wear well, emphasizing high-quality fabrics,particularly natural and technical performance fabrics. Our designs favorcomfort during active motion and are carefully constructed with details thatenhance longevity. We maintain consistent technical specifications, fitstandards, and global color matching. We have in-house specifications forcolor, construction methods, and finishing steps for each garment to ensurethat quality is built into all Cutter & Buck products.

For each seasonal collection, our design team createsnew products that are designed to appeal to our target consumer. Combiningmarket and trend research with feedback from end-consumers, our customers, andsalespeople, our upcoming collections emphasize colorful patterns intended toplace us at the forefront of evolving color, textile, and style trends. Wedesign many of our own unique textiles, developing our fabrics to fit thesecolors and concepts. Our products include Egyptian and Pima cottons, sandwashedsilks, and microfleece and microfibers, as well as our own custom-designedfabrics. We construct seasonal lines that are uniquely tailored for eachdistribution channel, but also include a number of common styles that arecomplementary across our entire offering.

Each year we update our CBClassics and Seasonal Golf Basics lines with gradual changes of fabric andsizing. These modifications provide stability in the design environment andconsistency in our product offerings, while allowing these products to endureover several seasons.

**Production and Distribution**

We contract with manufacturers who produce ourgarments to our high-quality standards. We do not own or operate anymanufacturing facilities. We use a combination of agents, sourcing companiesand factory-direct relationships to source our products. We contract topurchase our goods in United States dollars.

We do not have long-term contracts, but place ordersfor specific quantities as needed. We place a high value on long-term workingrelationships. During fiscal 2005, we used 39 factories in 11 countries,primarily Thailand and India, in which 53% and 16%, respectively, of our 2005production occurred.

Cutter & Buck also places a high value onsocial responsibility. To reinforce our commitment to excellence in corporatecitizenship, we have adopted SA8000 as our Social Accountability Platform. SA8000addresses all widely accepted labor rights and provides a fully operationalglobal and independent 

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certification system. TheSA8000 program was initiated by the Council of Economic PrioritiesAccreditation Agency, a 30 year old corporate social responsibility researchinstitute, to develop consensus-based voluntary standards, verify compliance,and implement these standards worldwide. For fiscal 2005, over 60% of thedollar value of our product came from factories that meet the stringent SA8000standards. We continue to encourage all of our primary suppliers to achieveSA8000 certification.

Pursuant to agreements negotiated under the frameworkestablished by the World Trade Organization (“WTO”), the United States andother WTO member countries were required, with few exceptions, to remove quotason goods from WTO member countries effective January 1, 2005. We do notanticipate that the recent reimplementation of quotas for China for theremainder of 2005 will have a material impact on our business. The removal ofthese quotas allows us to source our products without the need for ourfactories to purchase and obtain quotas.

All products bound to ourdomestic customers are first shipped to our distribution center in Renton,Washington, prior to shipment to our customers. The distribution center ishighly automated, providing us the ability to efficiently process both largeand relatively small orders.

**Sales and Marketing**

We sell our products through wholesale distributionchannels we believe will best reach our primary consumer market. We organizethese channels into our Golf, Corporate, and Specialty Retail business units,which are responsible for specific target markets. Each business unit isresponsible for identifying customers, managing the customer relationship, andselling the product. Virtually all of our sales representatives are independentand located throughout the country to be in close proximity with customers. Internationalsales and domestic sales of licensed products are handled through distributorsand licensees and are considered our International business unit.

We also have some direct toconsumer sales, primarily through our website at *www.cutterbuck.com*.This e-commerce site provides a selection of styles which may not be availablein local markets. These sales are currently classified with Other sales. We aremaking a significant investment to launch a new catalog and an enhanced websitethis fall in order to drive sales via this channel as well as support ouroverall brand positioning.

The apparel industry haslong product lead times. Orders for the Spring seasonal collections aregenerally taken from July through December of the preceding year,with product for that season shipped to customers from November throughApril. Orders for the Fall seasonal collections are generally taken from January throughJune, with product for that season shipped to customers from May throughOctober. Our domestic backlog, which consists of open, unfilled orders from theGolf, Corporate and Specialty Retail business units, was approximately $19.4million as of April 30, 2005, compared to approximately $20.2 millionas of April 30, 2004. Orders typically ship within nine months of the orderdate. Approximately 95% of orders are ultimately fulfilled, due to variousreasons common to the apparel industry, including occasional sold-out inventorypositions, credit issues, and other customer-related issues.

**Corporate**

Our Corporate business unit accounted for 44.9% of netsales during fiscal 2005. This unit sells primarily to promotional productsdistributors that then sell through to major corporations. These corporatecustomers tend to appreciate the association of their brands with the Cutter &Buck brand. Many of the garments sold to corporate customers are embroideredwith their corporate logo, however this embroidery is usually done by otherembroidery houses with which the promotional products distributors contract. Duringfiscal 2005, 15% of items sold to corporate customers were embroidered by us.

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Corporate customers tend to order at time of need. Therefore,we stock adequate inventories of the core styles that account for most of theirorders. We also maintain a web site where Corporate customers can see whatmerchandise we have available.

Marketing for this unitincludes catalogs, direct mail pieces, web-based initiatives, trade shows, andseminars for the promotional products distributors. We believe our Corporatesales benefit from the brand awareness and esteem built in the Golf businessunit, as many corporate executives are also golfers.

**Golf**

During fiscal 2005, Golf sales accounted for 27.5% ofour total net sales. The majority of these sales were to green grass pro shopsand at individual golf tournaments. We limit our Golf distribution to greengrass shops in order to enhance the long-term value of the brand. Most Golfcustomers have their club or event logos embroidered on the apparel they order.During fiscal 2005, we provided embroidery on 69% of items sold to thesecustomers. Golf customers tend to order well before the seasonal collectionsarrive, enabling us to adjust our production to reflect early indications ofdemand.

Our Golf sales declined 12.5% during fiscal 2005. Thisdecline was driven by the continuing challenge that we have experienced inproduct sell-through at retail, customers who are decreasing their overallinventory, as well as a decline in rounds of golf played. We are working tobecome the preferred vendor in this market in addition to the preferred brand. Althoughsales in this business unit have declined over the past several years, ourconsumer research indicates that our brand is still a preferred brand withgolfers. We believe we can regain market share by offering superior productsalong with superior service. As previously mentioned, our Spring and Fall 2005collections include technical performance-based fabrics in our CB ProTecSystem, designed for the serious golfer. We launched a new women’s golf collectioninspired by Annika Sorenstam, the “Annika Collection by Cutter & Buck”for our Fall 2004 season, featuring sporty, comfortable fashions for both onand off the golf course. This collection offers an extended range of feminine,sleek, and modern designs inspired by European fashion directions.

Marketing support for theGolf unit is provided through ads in golf trade and consumer magazines,catalogs for our customers, and sponsorships. We have renewed our sponsorshipof Annika Sorenstam, the world’s best female golfer, through 2006. She wearsthe Cutter & Buck exclusive Annika Collection styles in everytournament she plays. We sponsor Jerry Kelly and Bill Glasson on the PGA Tour,Pat Hurst and Mhairi McKay on the LPGA Tour, Dave Stockton on the ChampionsTour, and Jeff Gove on the Nationwide Tour. In addition to these sponsorships,we have strong tournament participation, working closely with the PGA. We aresupporters of the PGA, LPGA and USGA.

**Specialty Retail**

Sales through SpecialtyRetail channels accounted for 18.5% of net sales during fiscal 2005. Specialty Retailmarkets include over 1,600 men’s and women’s clothing retailers, includingNordstrom, Parisian, and Von Maur; big and tall catalogs and stores, such asCasual Male and Rochester Big and Tall; and collegiate and pro sports teamstores. We also have distinguished collegiate styles. Marketing for thisbusiness unit includes point-of-purchase, consumer promotions, catalogs anddirect mail pieces. Similar to our Golf customers, Specialty Retail customerstend to place their major orders before the seasonal collections are available,allowing us to adjust our production to reflect early indications of demand.

**International**

Our International business unit encompasses all of ourdistributor and licensing arrangements. 16% of sales from this business unitwere from domestic licensees. Net sales from licensing and distributorarrangements accounted for 2.5% of our total net sales during fiscal 2005. Wehave transitioned the majority of our distributor relationships to licenseerelationships. The products licensed from us are 

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generally identical to theproducts offered in the United States with certain licensees offering someproducts unique to their markets.

We have renewable contractsto license our products with international distributors and licensees to sellour products in Canada, Europe, Australia, New Zealand, China, Japan, Korea,Philippines, Southeast Asia, the Middle East, and South Africa. Theseagreements generally range in terms from three to ten years and enable us tobroaden the geographic distribution and type of products bearing the Cutter &Buck name in a cost-effective manner.

**Trademarks**

CUTTER & BUCK,the Cutter & Buck pennant logo, and the Cutter & Buck tour logoare all registered trademarks registered in the United States. CUTTER &BUCK is also registered for use on apparel and other products in over 50countries and both the Cutter & Buck pennant and tour logos aresimilarly registered in over 25 countries. We have also applied to registerthese marks in a number of other countries as well. We have applied to registerthe ANNIKA patch and the ANNIKA logo in over 40 countries.

**Competition**

The sportswear segment of the apparel industry ishighly competitive. Our two primary distribution channels, golf pro shops andpromotional products distributors, are highly fragmented. We encountersubstantial competition in all of our distribution channels from other apparelcompanies. We believe that our ability to compete effectively is basedprimarily on product differentiation, technical innovation, product quality,production flexibility, distribution capabilities, and embroidery and other value-addedservices.

We primarily compete in three market niches:customized apparel for corporations and corporate events, the golf apparelmarket, and specialty and department store retail. These niches are within themuch larger markets of corporate gifts and merchandise, golf equipment andmerchandise, and independent specialty and upscale fashion. Most of the datarelating to these markets is aggregated data; it is difficult to obtain marketdata that is relevant specifically to sportswear apparel. Over the last year,we believe the overall corporate market has increased along with overallcorporate spending. According to industry sources, rounds of golf played in theUnited States during our fiscal 2005 were down 3.2% from the prior year. Webelieve we have gained some market share of corporate apparel sales. Althoughwe believe we still maintain a strong position in the golf apparel market, we havelost some market share in that market.

Some of our competitorsare significantly larger and more diversified than we are and havesubstantially greater resources available for developing and marketing theirproducts. We cannot provide assurance that we will be able to maintain orincrease our market share in our distribution channels at the expense ofexisting competitors or other apparel manufacturers choosing to enter thosemarkets.

**Information Systems**

During fiscal 2005, webegan upgrading and replacing some of our central organizational computersystems in order to provide better management information and support ourfuture operations. We successfully implemented our new enterprise resourceplanning (“ERP”) system and upgraded our warehouse management system in May 2005.Additional system functionality will be implemented in future periods to gainadditional operational efficiencies. The installation of new systems andupgrades of existing systems will continue to require investment of employeetime, as well as additional capital investment, over at least the next two years.

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**Employees**

As of April 30, 2005,we had 370 full-time and 4 part-time employees in the United States. Themajority of our sales force are independent agents. None of our employees is amember of a union and we consider our relations with our employees and agentsto be satisfactory.

**Risk Factors**

**Brand Integrity**

Because we position theCutter & Buck brand to consistently represent high-qualitypremium-branded apparel that is available at select locations, maintaining theintegrity of the Cutter & Buck brand is essential to our business. Weregard our name and logo as valuable assets, and critical to marketing ourproducts based on our brand image. Leading brands in the apparel industry havehistorically been subject to competition from imitators that infringe thetrademarks and trade dress of the brand. Although we do not believe we havebeen materially harmed by infringement of our trademarks or trade dress todate, we have experienced some instances of such infringement and have takenactions to protect our rights. If we are unable to successfully defend theintegrity of our brand, our business may be materially harmed.

**Design**

The success of Cutter &Buck is dependant on our ability to offer styles that please consumer tastesfor color, styles, and fabrics. If we misjudge these tastes, we couldexperience insufficient or excess inventory levels, missed marketopportunities, or higher markdowns. We are working towards becoming faster atbringing new products to market.

**Inventory Management**

Due to long lead times inthe apparel industry that result from the seasonal characteristics of ourbusiness, customer delivery schedules, and the shipping time from factories toour distribution center, which is generally four to six weeks, salesforecasting and inventory planning are of paramount importance. Our ability tocontinue to satisfy our Corporate customers is partially due to our ability tomeet their needs on demand. In order to meet the unique needs of all ourdistribution channels, the Company generally maintains inventory balances ofapproximately four to five months of sales. If we are unable to accuratelyforecast our sales or plan for appropriate levels of inventories, it may have amaterial adverse impact on our financial condition and results of operations.

**Overseas Production**

We have not experiencedany material difficulties as a result of foreign political, economic, or socialinstability, however we remain subject to the risks associated with foreignsuppliers, including, without limitation, economic, political, and health risks.We may experience delays in shipping from time to time, whether due tothird-party strikes or otherwise. Delays in shipments and other factors beyondour control could materially harm our relationships with our customers, our reputationin the industry, and our financial condition and operating results.

**Key Employees**

Because we position theCutter & Buck brand to represent high-quality, premium-brandedapparel, coupled with superior customer service, we rely on key employees in variousareas of our operations. We also operate on a strict seasonal merchandisecalendar that includes personnel from our design, product development,production, and sales groups. If we were to experience the loss of keyemployees in the future without orderly succession, our business might beharmed.

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**Available Information**

Copies of our annualreports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and proxy statements and information,as well as any amendments thereto, are available free of charge via the Company’swebsite, *www.cutterbuck.com*. In addition, as soonas reasonably practicable after they are filed with the Securities and ExchangeCommission, the reports are available on the Securities and Exchange Commissionwebsite: *www.sec.gov*.

**Item 2.**                        Properties

We lease our principalexecutive offices, which are located in Seattle, Washington, under a lease thatcovers approximately 49,000 square feet and expires in July 2010. We leaseapproximately 405,000 square feet of space for a distribution center andembroidery production facility in Renton, Washington, under a lease thatexpires in November 2011. We use approximately 170,500 square feet of theRenton facilities. The remainder is subleased in its entirety to three separatetenants. Two tenants occupy 80% of the subleased space under leases that arecoterminous with the Company’s lease. The remaining 20% is subleased through April 2007.We also lease approximately 2,900 square feet of space for a showroom in NewYork, New York, under a lease that expires December 31, 2005. Managementcurrently intends to renew this lease.

**Item 3.**                        LegalProceedings

The Company is a party to routine litigationincidental to its business. Management believes the ultimate resolution ofthese routine matters will not have a material adverse effect on the Company’sfinancial condition or results of operations.

As previously disclosed,the Company remains a party to its lawsuit against Genesis Insurance Company. TheCompany’s complaint, which was originally filed in the United States DistrictCourt for the Western District of Washington (“Court”), alleged that Genesis’2002 attempt to rescind the Company’s primary Directors’ and Officers’liability insurance was unlawful, and sought damages resulting from Genesis’breaches of contract and the duty of good faith and fair dealing. In February 2004,the Court entered an order granting Genesis’ motions for summary judgment and,accordingly, the Company’s claims against Genesis were dismissed by the Court. TheCompany has appealed the Court’s decision to the United States Circuit Court ofAppeals for the Ninth Circuit (“Court of Appeals”). The Company filed its Briefin the appeal in December 2004 and Genesis filed its answering brief in January 2005.The Company filed its reply to Genesis’ answering brief on March 7, 2005. TheCourt of Appeals has scheduled oral argument on the Company’s appeal for July 13,2005.

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

No matters were submitted to a vote of shareholdersduring the fourth quarter of fiscal 2005.

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**PART II**

**Item 5.**                        Market forRegistrant’s Common Equity, Related Shareholder Matters and Issuer Purchases ofEquity Securities

**Market Information**

Ourcommon stock is listed on the NASDAQ National Market under the symbol “CBUK.”The following table sets forth, for the periods indicated, the high and lowclosing prices of the common stock as reported on the NASDAQ National Market.
| **Fiscal 2005** | ** ** | ** ** | ** ** | **High**   | ** ** | **Low**   | ** ** |
|----------------------|------------|------------|------------|------------|------------|-----------|------------|
| **Quarter:**         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **First**            | ** ** | **$**      | **10.86**  | ** ** | **$**      | **9.15**  | ** ** |
| **Second**           | ** ** | **$**      | **12.12**  | ** ** | **$**      | **10.80** | ** ** |
| **Third**            | ** ** | **$**      | **15.16**  | ** ** | **$**      | **11.91** | ** ** |
| **Fourth**           | ** ** | **$**      | **16.10**  | ** ** | **$**      | **12.70** | ** ** |

 
| **Fiscal 2004** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| Quarter:             |       |       |       |     |       |
| First                |       | $          | 5.74       |     | $          | 3.45    |       |
| Second               |       | $          | 8.03       |     | $          | 4.74    |       |
| Third                |       | $          | 9.81       |     | $          | 7.31    |       |
| Fourth               |       | $          | 11.00      |     | $          | 9.50    |       |

 

**Holders**

As of July 7, 2005,there were approximately 3,670 holders of record of our common stock. Many ofour shares are held in “street name” and the number of holders of record maynot represent the actual number of shareholders.

**Dividends**

Thefollowing table lists all dividends paid by the Company since its inception.
| **Date Paid**    | ** ** | ** **               | ** ** | **Record Date** | ** ** | **Per Share** | ** ** |
|-----------------------|------------|--------------------------|------------|----------------------|------------|--------------------|------------|
| April 9,  2004   |       | March 26,  2004     |       |                 | $          | 0.05               |       |   |
| July 16,  2004   |       | July 8,  2004       |       |                 | $          | 0.05               |       |   |
| October 8,  2004 |       | September 24,  2004 |       |                 | $          | 0.07               |       |   |
| January 7,  2005 |       | December 23,  2004  |       |                 | $          | 0.07               |       |   |
| April 8, 2005    |       | March 24, 2005      |       |                 | $          | 0.07               |       |   |

 

On July 5, 2005, theboard of directors approved both a $.07 per share quarterly dividend and aspecial cash dividend of $1.34 per share. The quarterly dividend is payable on August 2,2005, to shareholders of record on July 19, 2005. The special cashdividend is subject to shareholder approval of stock plan amendments that willallow certain adjustments to employee stock-based compensation awards to offsetthe impact of this dividend. If these amendments are approved, the special cashdividend will be payable on November 16, 2005, to shareholders of recordon November 2, 2005.

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**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

Thefollowing table sets forth our equity compensation plan information:
| **Plan category**                                              | ** ** | ** ** | ** ** | **Number of securities  to be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders        |       |       | 743,651    |                                                                                                                                                 |       |                                                                                                             | $          | 8.43                                                                                        |       |   |   | 392,765 |   |   |
| Equity  compensation plans not approved by security holders(A) |       |       | 60,000     |                                                                                                                                                 |       |                                                                                                             | 4.11       |                                                                                        |       |   | — |   |   |
| Total                                                               |       |       | 803,651    |                                                                                                                                                 |       |                                                                                                             | $          | 8.13                                                                                        |       |   |   | 392,765 |   |   |

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(A)       Onboth November 15, 2002 and June 16, 2003, pursuant to the exemptionprovided in Section 4(2) of the Securities Act, the Company grantedoptions to purchase 30,000 shares of the Company’s common stock to newly hiredexecutives. The options are exercisable at prices of $3.67 and $4.55 per share,respectively, which were the closing prices of the Company’s common stock onthe dates of grant. Each option is exercisable for a period of 10 years,subject to earlier termination in the event of a change in the executive’semployment with the Company.

**Sales of Unregistered Securities**

On March 9, 2004, and July 8, 2004, pursuantto the exemption provided in Section 4(2) of the Securities Act, theCompany sold 2,500 and 5,000 shares, respectively, of Company common stock forcash at a price of $3.92 per share upon the exercise of options that had beengranted to consultants on October 16, 2002.

On July 26, 2004, andAugust 6, 2004, pursuant to the exemption provided in Section 4(2) ofthe Securities Act, the Company sold 300 and 22,200 shares, respectively, ofCompany common stock for cash at a price of $6.83 per share upon the exercisesof an option that had been granted to a newly hired executive on September 8,2003.

**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. During fiscal 2005, the Company repurchased 215,100 shares of its commonstock at a total cost of $2,749,000. Subsequent to year end through July 5,2005, the Company has repurchased an additional 72,297 shares at a total costof $878,000 bringing the total number of shares repurchased under this programsince its inception to 344,223 at a total cost of $4,210,000. On July 5,2005, the board of directors approved an increase in the stock repurchaseprogram to provide for up to $10.0 million of additional repurchases beyond the$4.2 million repurchased through July 5, 2005, bringing the totalrepurchase authorization since inception of the program to $14.2 million. In September 2004,the Company adopted a stock trading plan that is intended to follow theguidelines specified under Rule 10b5-1 of the Securities ExchangeAct of 1934, as amended. The stock repurchase program may be suspended ordiscontinued by the Board at any time without notice and it does not have anexpiration date.

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Thefollowing table sets forth our purchases of our common stock for the fiscalquarter ended April 30, 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** | ** ** |
|------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
| February  02/01/05- 02/28/05 |       |       | 0          |                                             |       |                                         | $          | 0.00                                                                                                             |       |                                                                                                                    |       | 0 |   |   |   | $ | 3,387,284 |   |   |
| March  03/01/05- 03/31/05    |       |       | 8,500      |                                             |       |                                         | $          | 13.86                                                                                                            |       |                                                                                                                    |       | 8,500 |   |   |   | $ | 3,269,461 |   |   |
| April  04/01/05- 04/30/05    |       |       | 44,400     |                                             |       |                                         | $          | 13.55                                                                                                            |       |                                                                                                                    |       | 44,400 |   |   |   | $ | 2,668,018 |   |   |
|                         |       |       | 52,900     |                                             |       |                                         |       |                                                                                                             |       |                                                                                                                    | 52,900     |   |   |   |   |   |   |

 

**Item 6.**                        SelectedFinancial Data
| **Year Ended April 30,**                       | ** ** | ** **                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                                    | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net sales                                                     |       | $                                                                     | 126,560    |     | $          | 128,374  |       | $        | 131,699    |     | $          | 161,113  |       | $ | 172,853 |   |
| Gross Profit                                                  |       | 60,606                                                                |       | 58,590   |       | 54,787   |       | 54,924   |       | 68,719   |       |
| Selling, general and administrative                           |       | 45,397                                                                |       | 41,376   |       | 42,400   |       | 52,350   |       | 53,429   |       |
| Depreciation                                                  |       | 2,767                                                                 |       | 3,988    |       | 5,109    |       | 5,423    |       | 4,340    |       |
| Restatement  expenses                                         |       | 368                                                                   |       | 4,968    |       | 8,169    |       | —   |       | —   |       |
| Restructuring and  asset impairment                           |       | —                                                                |       | (349     | )          | 3,806    |       | 5,524    |       | —   |       |
| Total operating expenses                                      |       | 48,532                                                                |       | 49,983   |       | 59,484   |       | 63,297   |       | 57,769   |       |
| Operating income (loss)                                       |       | 12,074                                                                |       | 8,607    |       | (4,697   | )          | (8,373   | )          | 10,950   |       |
| Net interest income (expense)                                 |       | 678                                                                   |       | 122      |       | (386     | )          | (1,599   | )          | (1,256   | )          |
| Income (loss)  from continuing operations before income taxes |       | 12,752                                                                |       | 8,729    |       | (5,083   | )          | (9,972   | )          | 9,694    |       |
| Income tax  expense (benefit)                                 |       | 4,138                                                                 |       | 944      |       | (65      | )          | (2,945   | )          | 3,684    |       |
| Income (loss)  from continuing operations                     |       | 8,614                                                                 |       | 7,785    |       | (5,018   | )          | (7,027   | )          | 6,010    |       |
| Income (loss)  from discontinued operations, net of tax       |       | —                                                                |       | 146      |       | (6,980   | )          | (3,346   | )          | (538     | )          |
| Net income (loss)                                             |       | 8,614                                                                 |       | 7,931    |       | (11,998  | )          | (10,373  | )          | 5,472    |       |
| Diluted earnings  (loss) per share:                           |       |                                                                  |       |     |       |     |       |     |       |     |       |
| From continuing operations                                    |       | $                                                                     | 0.75       |     | $          | 0.70     |       | $        | (0.47      | )        | $          | (0.66    | )          | $ | 0.57 |   |
| From discontinued operations                                  |       | $                                                                     | —     |     | $          | 0.01     |       | $        | (0.66      | )        | $          | (0.32    | )          | $ | (0.05 | ) |
| Net earnings (loss) per share                                 |       | $                                                                     | 0.75       |     | $          | 0.71     |       | $        | (1.13      | )        | $          | (0.98    | )          | $ | 0.52 |   |
| Cash dividends  declared per common share                     |       | $                                                                     | 0.26       |     | $          | 0.05     |       | $        | —     |     | $          | —   |       | $ | — |   |

 
| **April 30,**                            | ** ** | ** **              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| Working Capital                               |       | $                       | 82,672     |     | $          | 75,080   |       | $        | 65,622     |     | $          | 71,924   |       | $ | 78,475 |   |
| Total assets                                  |       | 100,226                 |       | 93,930   |       | 95,678   |       | 106,769  |       | 142,567  |       |
| Long-term debt  and capital lease obligations |       | —                  |       | 111      |       | 702      |       | 3,716    |       | 10,346   |       |
| Total shareholders’  equity              |       | 87,875                  |       | 79,729   |       | 71,988   |       | 83,394   |       | 92,349   |       |
|                                               |            |                         |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

 

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*You should readthis section together with “Selected Financial Data” and our consolidatedfinancial statements and related notes thereto in this report. In addition tothe historical information contained herein, this report containsforward-looking statements that involve risks and uncertainties. You should beaware that our actual results could differ materially from those contained inany forward-looking statements. Our actual results will depend upon a number offactors, including but not limited to the following: the special risk factorsset forth in Part I, Item 1 above; the ability of the Company to controlcosts and expenses, including 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 and the weather in general; competition; risks related tothe timely performance of third parties, such as shipping companies, includingrisks of strikes or labor disputes involving these third parties; maintainingthe integrity of the Company’s technology and information systems whileenhancing and changing systems; attracting and retaining employees; politicaland trade relations; changes in international trade quota systems for apparel;the overall level of consumer spending on apparel; global economic andpolitical conditions and additional threatened terrorist attacks and responsesthereto, including war. Under the Board’s $10 million stock repurchaseauthorization, the Company may repurchase all $10 million of its stock, or nofurther shares of its stock, or any amount in between, depending on the tradingprice of the Company’s stock, market conditions, or for any other reason. Additionalinformation on these and other factors that could affect our financial resultsis set forth below and in Part I, Item 1, above. Finally, there may beother factors not mentioned above or included elsewhere in this report that maycause actual results to differ materially from any forward-looking statements.You should not place undue reliance on any forward-looking statements. Weassume no obligation to update any forward-looking statements as a result ofnew information, future events or developments, except as required by thesecurities laws.*

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

**Overview**

Cutter & Buck designs, sources, markets, anddistributes high-quality men’s and women’s sportswear under the Cutter &Buck brand. We sell our products primarily through corporate accounts, golf proshops and resorts, upscale specialty and department retail stores, andinternational distributors and licensees. We focus on the needs of ourcustomers and end consumers and design products to meet those needs.

Management is currently focusing on strengthening theupscale positioning of the Cutter & Buck brand, and refining theexecution of all of our business processes to enable the highest level ofcustomer satisfaction and increase penetration into our target markets. Thegoal of this strategy is to increase net sales while maintaining strong grossprofit. A portion of the decrease in sales over the past few years can beattributed to our goal of foregoing less profitable business and improvinggross margins. Now, our long-term objective is to grow the business whilemaintaining strong gross margins. However, due in part to the long product leadtimes in this industry, we remain relatively cautious about sales in theupcoming year.

In order to implement this strategy, during fiscal2005, we have enhanced our design team and increased our marketing efforts toimprove our brand awareness and acceptance. We have conducted market studiesand focus groups to help us understand and meet the desires of consumers. Managementis committed to continuing its increased spending on marketing and brandingprograms in fiscal 2006. We are also investing in the development of managementinformation systems to improve our processes and continue our commitment tocustomer service. We expect the new systems to provide significantly 

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improved managementinformation and support for our future operations. We expect these costs toultimately be offset by increases in sales and improvements in operating efficiencies.

Duringfiscal 2003, we restructured our business to focus our efforts on our ongoingwholesale business and reduce our operating costs. To better understand theperformance of our ongoing wholesale business over the past three years,management considers it useful to review our operating results excluding coststhat are not elements of running our business on an ongoing basis, such asrestructuring and restatement expenses and costs related to our former retailstore and European operations. We also exclude the effects of income taxes inthis analysis, because we do not believe the historical effective rates forfinancial reporting are indicative of our ongoing effective rates due tofluctuations in valuation allowances against deferred tax assets. We adjust ournet income calculated in accordance with generally accepted accountingprinciples to exclude these items in order to give us better informationregarding the profitability of our ongoing wholesale business on a quarterlyand year-to-date basis.
| **Year Ended April 30,**                 | ** ** | ** **              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **                                              | ** ** | **(in thousands)** | ** ** |
| Net income (loss)  as reported                          |       | $                       | 8,614      |     | $          | 7,931    |       | $        | (11,998    | ) |
| (Income) loss  from discontinued retail operations      |       | —                  |       | (146     | )          | 6,980    |       |
| Income tax  expense (benefit)                           |       | 4,138                   |       | 944      |       | (65      | )          |
| Pre-tax (income)  expense of closed European operations |       | (36                     | )          | 13       |       | (376     | )          |
| Restructuring and  asset impairment expenses            |       | —                  |       | (349     | )          | 3,806    |       |
| Restatement  expenses                                   |       | 368                     |       | 4,968    |       | 8,169    |       |
| Ongoing wholesale  business income before tax           |       | $                       | 13,084     |     | $          | 13,361   |       | $        | 6,516      |   |

 

This analysis illustratesthe strong performance of the Company’s core wholesale business since the 2003restructuring and excluding the significant expenses in 2003 and 2004 relatedto the restatement. From 2003 to 2004, ongoing wholesale business income beforetax increased 105% despite a 2.5% decrease in net sales, reflecting the Company’simproved gross margins and more efficient operations. From 2004 to 2005, theongoing wholesale business income before tax was generally flat, despite aslight decrease in net sales and a $4.0 million increase in selling, generaland administrative expenses due to strategic initiatives and Sarbanes-Oxleycompliance. This was primarily due to continued improvement in gross margins.

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**Results of Operations**

Thefollowing table sets forth, for the fiscal years indicated, certainconsolidated statements of operations data expressed as a percentage of netsales. For all periods presented in this section, results of operations reflectthe classification of our Company-owned retail store operating results and losson disposal of these stores as discontinued retail operations.
| **Year Ended April 30,**                        | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Consolidated Statements  of Operations Data:                   |       |       |       |     |       |     |       |
| Net sales                                                      |       | 100.0      | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales                                                  |       | 52.1       |       | 54.4     |       | 58.4     |       |
| Gross profit                                                   |       | 47.9       |       | 45.6     |       | 41.6     |       |
| Operating expenses:                                            |       |       |       |     |       |     |       |
| Selling, general and administrative                            |       | 35.9       |       | 32.2     |       | 32.2     |       |
| Depreciation                                                   |       | 2.2        |       | 3.1      |       | 3.9      |       |
| Restatement expenses                                           |       | 0.3        |       | 3.9      |       | 6.2      |       |
| Restructuring and asset impairment                             |       | —     |       | (0.3     | )          | 2.9      |       |
| Total operating expenses                                       |       | 38.4       |       | 38.9     |       | 45.2     |       |
| Operating income  (loss)                                       |       | 9.5        |       | 6.7      |       | (3.6     | )          |
| Interest income  (expense)                                     |       |       |       |     |       |     |       |
| Interest expense                                               |       | —     |       | (0.1     | )          | (0.5     | )          |
| Interest income                                                |       | 0.6        |       | 0.2      |       | 0.2      |       |
| Net interest income (expense)                                  |       | 0.6        |       | 0.1      |       | (0.3     | )          |
| Income (loss)  from continuing operations before income taxes  |       | 10.1       |       | 6.8      |       | (3.9     | )          |
| Income tax  expense (benefit)                                  |       | 3.3        |       | 0.7      |       | —   |       |
| Income (loss)  from continuing operations                      |       | 6.8        |       | 6.1      |       | (3.9     | )          |
| Income (loss)  from discontinued retail operations, net of tax |       | —     |       | 0.1      |       | (5.3     | )          |
| Net income (loss)                                              |       | 6.8        | %          | 6.2      | %          | (9.2     | )%         |

 

**YearEnded April 30, 2005 Compared to the Year Ended April 30, 2004**

**NetSales**

Overall,sales have decreased over the past two years. Our Corporate, International, andSpecialty Retail sales have increased over this period, but our Golf and Othersales have declined. Although year over year net sales decreased during bothfiscal 2005 and 2004, our annual gross profit has increased $5.8 million(10.6%) over the same two-year period, because we have focused our efforts onimproving margins, including inventory management and reduced returns andallowances. The detail of net sales by business unit is as follows:
| **Year Ended April 30,** | ** ** | ** **                                                   | ** ** | **2005**   | ** ** | **2004** | ** ** | **Increase/   (Decrease) ** | ** ** | **Percent  Change** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------------------------|------------|---------------------|------------|
| ** **                              | ** ** | **(in millions, except percent change)** | ** ** | ** ** | ** ** |
| Corporate                               |       | $                                                            | 56.9       |       | $          | 53.9     |       |                                  | $          | 3.0                 |       |   | 5.4 | % |
| Golf                                    |       | 34.8                                                         |       | 39.7       |       |     | (4.9       | )                                     |       | -12.5               |       |
| Specialty Retail                        |       | 23.5                                                         |       | 22.5       |       |     | 1.0        |                                  |       | 4.2                 |       |
| International                           |       | 3.1                                                          |       | 2.7        |       |     | 0.4        |                                  |       | 16.5                |       |
| Other                                   |       | 8.3                                                          |       | 9.6        |       |     | (1.3       | )                                     |       | -12.4               |       |
| Total                                   |       | $                                                            | 126.6      |       | $          | 128.4    |       |                                  | $          | (1.8                | )          |   | -1.4 | % |

 

The Corporate business unit sells primarily topromotional products distributors. Corporate net sales, which represented 44.9%and 42.0% of sales for fiscal 2005 and 2004, respectively, demonstrated 

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continued strength in thischannel, primarily due to the sales and marketing of our updated product lineand as corporate customers began to increase spending on their events andprograms. In January 2004, we launched a new corporate catalog featuringnew designs, which had a positive impact on sales throughout the calendar year.

During fiscal years 2005 and 2004, Golf net salesrepresented 27.5% and 30.9% of total net sales, respectively. Within thisbusiness unit, men’s sales decreased $6.2 million (20.7%) from 2004 to 2005. Thisdecline was partially offset by increases to sales in our Women’s line, whichwere up $0.5 million (7.8%), and a $0.7 million increase in tournament sales,primarily resulting from $1.3 million of revenue from the Ryder Cup event in September 2004.

Net sales in our Golf business unit have been impactedby a slower economic recovery in the golf industry. Golf sales have also beenimpacted as we hired and trained sales representatives who were new to theCutter & Buck brand. Our Golf business unit remains our greatestchallenge and a high priority. We continue to strengthen our product offering,marketing efforts, and customer focus. During the year, we spent a great dealof time with consumers analyzing perceptions of the brand to more clearlyunderstand the needs and expectations of this channel. In addition, we areworking with our customers as we develop a more compelling product offering,supported by a more aggressive marketing strategy. These efforts are designedto raise the level of awareness of the features and benefits of our products tothe ultimate consumer.

The Specialty Retail business unit encompasses upscaleclothing retailers, big and tall catalogs and stores, and collegiate and prosports team stores. Specialty Retail net sales represent 18.5% and 17.5% oftotal net sales during fiscal 2005 and 2004, respectively. Sales through thisbusiness unit increased $1.0 million during fiscal 2005 compared to fiscal2004, primarily due to the continued success of our collegiate and pro sportssales programs. Our sell-through at traditional retail outlets also performedwell and we continue to be cautiously optimistic about our growth for thisbusiness unit.

International net sales, which represented 2.5% and2.1% of our total net sales during fiscal 2005 and 2004, respectively,increased during fiscal 2005, primarily due to the strength of our relationshipwith key licensees and their increased experience with our brand in theirmarketplaces coupled with improving economic conditions in certain of ourinternational markets.

Other net sales includeliquidation, e-commerce, and shipping revenue. These sales decreased duringfiscal 2005 compared to the prior year, primarily due to decreases inliquidation sales as we continued to focus on inventory management.

**Gross Profit**

Our Gross Profit percentage increased to 47.9% infiscal 2005, compared with 45.6% of net sales in fiscal 2004. Our marginscontinued to increase during 2005 as we improved our sourcing and adjusted ourpricing structure for certain products. We also had fewer liquidation sales infiscal 2005, due to more effective inventory management. Gross profit was alsofavorably impacted by changes in our sales mix to higher margin sales channels.Our Corporate sales are generally at higher margins than sales in our otherbusiness units. We have also shifted more of our international sales tolicensees, as opposed to distributors, whereby we incur fewer direct costs.

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 charges in cost of sales, and includedother costs of distribution in selling, general and administrative expenses.

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**Depreciation**

Depreciation expensedecreased during fiscal 2005, primarily due to the phase-out of investments inin-store fixturing that was completed in the prior year, as well as completionof several capital lease terms.

**Selling, General and Administrative**

Selling, general andadministrative expenses totaled $45.4 million in fiscal 2005 compared to $41.4 millionin 2004, an increase of $4.0 million or 9.7%. As a percentage of net sales,selling, general and administrative expenses increased from 32.2% in fiscal2004 to 35.9% in fiscal 2005. During fiscal 2005, we added personnel in theareas of product design, planning, and development and we increased marketingexpenditures, primarily in the areas of Corporate and Women’s Golf sales. Wealso invested in a new ERP system, which was operational as of the first quarterof fiscal 2006, and incurred significant costs to comply with new internalcontrol reporting requirements for public companies. We expect to continue toincur costs for technology enhancements and internal control reporting duringfiscal 2006, but at lesser amounts. We expect these investments to begincreating increased operational efficiencies during the upcoming fiscal year. Wealso incurred higher than normal costs during fiscal 2005 due to thetransitioning to a new CEO.

**Restructuring and Asset Impairment**

We had no restructuringexpenses in fiscal 2005. In fiscal 2004, we reversed $0.3 million of a reservewe had established for amounts due from former officers which were settled infiscal 2004. The remaining liability recorded for the 2002 Restructuring Planrelates to the sublease of our excess warehouse capacity at our distributioncenter, and will be amortized through the end of the lease term in 2011.

**Restatement Expenses**

In fiscal 2002, werestated certain of our historical financial statements for irregularities anderrors. As a result of the circumstances underlying the restatement, threeshareholder class action lawsuits and a shareholder derivative lawsuit werefiled, naming us and certain of our current and former directors and officersas defendants. Restatement expenses totaled approximately $5.0 million for theyear ended April 30, 2004 and included $3.5 million of legal andprofessional fees, of which $0.9 million was advanced in connection with theindemnification of former officers, and $1.2 million of accrued retentionbonuses to certain key employees. Although the restatement has been completed,we expect to continue to incur legal and other professional service costs inconnection with the appeal of our lawsuit against Genesis Insurance Company. Theseexpenses cannot be estimated at this time.

**Income Taxes**

We recorded approximately $4.1 million of income taxexpense for fiscal 2005 compared to $0.9 million of income tax expense forfiscal 2004. The effective rate for income taxes in fiscal 2004 was well belowour fiscal 2005 effective tax rate and below our anticipated ongoing effectivetax rate.

In fiscal 2004 we reversed a valuation allowanceagainst our deferred tax assets of $1.2 million, thereby significantly reducingthe effective tax rate. In addition, income tax expense for fiscal 2004 wasreduced by $0.9 million related to the reconciliation of the tax provision tothe income tax return as filed for fiscal 2003 and changes in estimates of ourincome tax liabilities.

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**YearEnded April 30, 2004 Compared to the Year Ended April 30, 2003**

**NetSales**

Duringfiscal 2004, net sales decreased approximately $3.3 million or 2.5% to $128.4million. During fiscal 2004, we focused on improving our gross profit. Becausewe have foregone some sales opportunities with lower gross profits, our netsales have decreased compared to fiscal 2003 although our gross profit hasincreased over the same period. The detail of net sales by business unit was asfollows:
| ** **                              | ** ** | ** **                                                   | ** ** | ** ** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|---------------|------------|----------------|------------|
| **Year Ended April 30,** | ** ** | ** **                                                   | ** ** | **2004**   | ** ** | **2003**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                              | ** ** | **(in millions, except percent change)** | ** ** |
| Corporate                               |       | $                                                            | 53.9       |       | $          | 54.6          |       |           | $          | (0.7 | ) |   |   | (1.2 | )% |   |
| Golf                                    |       | 39.7                                                         |       | 42.7       |       |          | (3.0       | )              |       |   | (7.0 | ) |   |
| Specialty Retail                        |       | 22.5                                                         |       | 22.2       |       |          | 0.3        |           |       |   | 1.5 |   |   |
| International                           |       | 2.7                                                          |       | 4.1        |       |          | (1.4       | )              |       |   | (35.1 | ) |   |
| Other                                   |       | 9.6                                                          |       | 8.1        |       |          | 1.5        |           |       |   | 18.0 |   |   |
| Total                                   |       | $                                                            | 128.4      |       | $          | 131.7         |       |           | $          | (3.3 | ) |   |   | (2.5 | )% |   |
|                                         |            |                                                              |            |            |            |               |            |                |            |  |  |  |  |  |  |  |  |  |

 

Net sales within our Corporate business unit decreased$0.7 million to $53.9 million from $54.6 million in the prior year. OurCorporate sales were affected in fiscal 2004 by cautious corporate spending onmarketing programs, changes in the cycle of new product releases anddiscontinuation of some designs. In January 2004, we launched a new Corporatecatalog featuring new designs, which has had a positive impact on sales. Ournet sales in this business unit increased 12.4% in the fourth quarter of fiscal2004 compared to the fourth quarter of fiscal 2003.

During fiscal year 2004, net sales within our Golfbusiness unit decreased by $3.0 million to $39.7 million from $42.7million in the prior year. Net sales in our Golf business unit were impacted bya slower economic recovery in the high-end golf apparel segment. Our sales werealso impacted as we hired and trained sales representatives who were new to theCutter & Buck brand.

Net sales within our Specialty Retail business unitincreased $0.3 million to $22.5 million from $22.2 million in the prioryear. This increase was primarily due to the success of our collegiate and prosports sales programs.

Net sales within our International business unitdecreased approximately $1.4 million to $2.7 million from $4.1 million in theprior year. Net sales within this business unit decreased as we continued toshift from distributor relationships to licensee relationships during fiscal2004. In addition, for fiscal 2003 net sales in our International business unitincluded approximately $0.7 million in revenue generated by selling inventoryto Eurostyle Ltd. in conjunction with establishing a licensing relationship withthem.

Other net sales increased$1.5 million to $9.6 million from $8.1 million in the prior year, primarily dueto increases in our e-commerce business and liquidation sales.

**Gross Profit**

In fiscal 2004, our gross profit was 45.6% of netsales, compared to 41.6% in fiscal 2003. Our margins increased as we focused onreducing our product returns and allowances, improved our sourcing, adjustedour pricing structure for certain products, and reduced discounting. Ourproduct returns and allowances decreased significantly during fiscal 2004 dueto intensive management. As a result, we updated the estimates we used tocalculate the reserve for product returns and allowances. These updatedestimates resulted in a reduction of charges to product returns and allowancesof $1.2 million. We also realized a reduction of approximately $1.0 million inour inbound freight and import costs.

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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 charges in cost of sales, and includedother costs of distribution in selling, general and administrative expenses.

**Depreciation**

Depreciation expense was$4.0 million in fiscal 2004 compared to $5.1 million in fiscal 2003. Depreciationexpense decreased during fiscal 2004 primarily due to investments in ourinventory management systems becoming fully depreciated, the disposal of assetsno longer used in our operations and phasing out investments in sales fixturing.This decrease was partially offset by an increase in depreciation expenserelated to new capital expenditures.

**Selling, General and Administrative**

Selling, general andadministrative expenses totaled $41.4 million in fiscal 2004 compared to $42.4 millionin 2003, a decrease of $1.0 million or 2.4%, and was unchanged as a percentageof net sales at 32.2% in fiscal 2004 and fiscal 2003. Salaries, salescommissions and related taxes decreased by approximately $1.8 million due to adecrease in sales, savings resulting from our restructuring plans, and internalcost-cutting measures. This decrease was offset by an increase in benefits,incentive bonuses and other employee expenses of $2.0 million. Sample expensesdecreased approximately $0.9 million and supply and printing expenses decreasedapproximately $0.3 million, primarily due to internal cost-cutting measures andlower sales levels. Rent expense decreased by approximately $0.3 million,primarily due to closing two showrooms and consolidating operations at ourcorporate headquarters and distribution center. Bad debt expense decreasedapproximately $0.4 million primarily due to increased management of creditexposures. These decreases were partially offset by increases of approximately$0.5 million in legal and other professional fees and $0.3 million inadvertising expenses.

**Restructuring and Asset Impairment**

We had a $0.3 millionreversal of previously recognized restructuring and asset impairment expenses duringfiscal 2004, compared to expenses of $3.8 million in fiscal 2003. The $0.3million reduction in expenses primarily related to reserve adjustments foraccounts receivable from former officers, which have now been settled. Ourrestructuring plans are now complete. In fiscal 2003, the $3.8 million inexpenses consisted of $3.3 million related to losses on subleases of our excesswarehouse capacity at our distribution center and $0.5 million related toadditional reserves against accounts receivable balances with former officers.

**Restatement Expenses**

In fiscal 2002, we restated certain of our historicalfinancial statements for irregularities and errors. As a result of thecircumstances underlying the restatement, three shareholder class actionlawsuits and a shareholder derivative lawsuit were filed, naming us and certainof our current and former directors and officers as defendants. We settledthose lawsuits and paid $4 million to the plaintiffs. We also settled thepreviously announced Securities and Exchange Commission investigation of theCompany arising from the circumstances underlying the restatement. Thatsettlement did not require payment of any fines or penalties.

Restatement expensestotaled approximately $5.0 million for the year ended April 30, 2004, andincluded $3.5 million of legal and professional fees, including $0.9 million weadvanced in connection with the indemnification of former officers, $1.2million of accrued retention bonuses to certain key employees, and $0.2 millionof amortization of the premium for the replacement directors’ and officers’liability 

17

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insurance.Retention bonuses totaled $1.9 million, the majority of which was paid out inthe fourth quarter of fiscal 2004.

**Income Taxes**

We recorded approximately$0.9 million of income tax expense in fiscal 2004 compared to $65,000 of incometax benefit in fiscal 2003. The effective rates for income taxes in fiscal 2004and 2003 were 10.8% and 1.0%, respectively. In fiscal 2003, we established avaluation allowance against our deferred tax assets. Based on the level of ourhistorical taxable income and forecasts for future taxable income over theperiods in which the temporary differences were anticipated to reverse,management believed at that time it was more likely than not that we would beunable to realize the full benefit of our deferred tax assets. Considering thefiscal 2004 results and forecasts for future taxable income, managementdetermined that it is now more likely than not that we will realize the benefitof these assets. Therefore, in fiscal 2004 we reversed the allowance of $1.2million. In addition, income tax expense for the year was reduced by $0.9 millionrelated to the reconciliation of the tax provision to the income tax return asfiled for fiscal 2003 and changes in estimates of our income tax liabilities.

**Liquidity and Capital Resources**

Our primary ongoing capital requirements are tofinance working capital and the continued growth and operations of ourbusiness, including investments in fixed assets. During fiscal 2005, our capitalrequirements were funded by operating activities. Net cash provided byoperating activities during fiscal 2005 was $8.8 million compared to$22.8 million during fiscal 2004. The decrease in net cash provided byoperating activities was primarily due to significant reductions in inventorylevels in fiscal 2004 as a result of an effort to manage inventory down tolevels more in line with our current sales levels.

Net cash used in investing activities was $14.2million compared to $19.7 million for fiscal 2004. The decrease was primarilydue to fewer net purchases of short-term investments in fiscal 2005. TheCompany continues to increase the amount of cash invested in short terminterest-bearing U.S. Government and high-quality corporate debt instruments. Wehold these instruments to maturity, which currently averages 100 days at thedate of purchase. At April 30, 2005 we held $28.8 million in short-terminvestments. To support our operations, capital expenditures totaling $3.3million were incurred during fiscal 2005. These capital expenditures primarilyconsist of information technology initiatives, as we upgrade and replace someof our computer systems. A similar level of capital expenditures is currentlyanticipated for fiscal 2006.

Net cash used in financing activities was $2.5million, which primarily consisted of dividends and repurchases of the company’scommon stock, offset by the proceeds from stock issued pursuant to the exerciseof employee stock options.

During fiscal 2005, we paid dividends totaling $0.26per share of common stock. On July 5, 2005, the board of directorsapproved a regular quarterly dividend of $.07 per share as well as a specialdividend of $1.34 per share. We may decide to discontinue or modify ourquarterly dividend payments at any time if we determine that other uses of ourcapital may be in the best interests of our shareholders.

Our share repurchase program, initiated in March 2004authorized the purchase of up to $6.0 million in company stock. During fiscal2005, we purchased 215,100 shares of our common stock at an average price of$12.78. Subsequent to year end through July 5, 2005, the Company hasrepurchased an additional 72,297 shares at a total cost of $878,000, bringingthe total number of shares repurchased under this program since its inceptionto 344,223 at a total cost of $4,210,000. On July 5, 2005, the board ofdirectors approved an increase in the stock repurchase program to provide forup to $10.0 million of additional repurchases beyond the $4.2 million repurchasedthrough July 5, 2005, bringing the total repurchase authorization sinceinception of the program to $14.2 million. The purchases may be made from timeto 

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time in the open market orin privately negotiated transactions. The stock repurchase program may besuspended at any time without notice. The timing of repurchases and the actualnumber of shares repurchased will depend on market conditions, alternative usesof capital, and other factors.

On March 10, 2005, the Company entered into a newthree-year loan agreement with Wells Fargo HSBC Trade Bank, N.A., secured byall assets of the Company, for a $35 million line of credit. Borrowings underthis agreement will bear interest at prime minus 1.0%. Covenants contained inthis loan agreement include maintaining a debt to equity ratio of not more than1.0, a quick ratio of not less than 1.0, and profitability of $5.0 million peryear. Additionally, capital expenditures are limited to $4.0 million per year. Asof April 30, 2005, the Company had no borrowings under this line of creditother than open letters of credit with suppliers totaling $8.0 million.

The special dividend and the additional sharerepurchases that were approved on July 5, 2005, represent approximately$25 million of capital the Company plans to return to shareholders. We believe that the remaining cash onhand and cash generated from operations, as well as our ability to borrow underbank lines of credit, will be sufficient to meet our cash requirements duringfiscal 2006. Also, we have the ability to suspend the stock repurchase programat any time, as well as alternative sources of financing available, includingfactoring our accounts receivable and financing our capital expenditures withleases. Although these methods of financing are currently available, we do notanticipate using alternative sources of financing during fiscal 2006. However,our capital needs will depend on many factors, including our growth rate, theneed to finance increased production and inventory levels, the success of ourvarious sales and marketing programs, expenses associated with the risks anduncertainties related to our restatement, and various other factors.

Thefollowing is a summary of our contractual obligations as of April 30,2005:
| ** **                       | ** ** | **Payments due by period** | ** ** |
|----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations** | ** ** | ** **                                | ** ** | ** Less than   1 year** | ** ** | **  1-3 years  ** | ** ** | **  3-5 years  ** | ** ** | **After  5 years** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(in thousands)**                   | ** ** |
| Purchase  Obligations(1)         |       |                                      | $          | 18,467 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   | $ | 18,467 |   |
| Letters of  credit(1)            |       |                                      | 7,991      |   |   |   | — |   |   |   | — |   |   | — |   | 7,991 |   |
| Operating leases(1)              |       |                                      | 3,354      |   |   |   | 6,711 |   |   |   | 6,994 |   |   | 3,874 |   | 20,933 |   |
| Restructuring  liabilities       |       |                                      | 320        |   |   |   | 750 |   |   |   | 640 |   |   | 505 |   | 2,215 |   |
| Capital leases                   |       |                                      | 114        |   |   |   | — |   |   |   | — |   |   | — |   | 114 |   |
| Retention bonuses                |       |                                      | 30         |   |   |   | — |   |   |   | — |   |   | — |   | 30 |   |
|                             |       |                                      | $          | 30,276 |   |   |   | $ | 7,461 |   |   |   | $ | 7,634 |   |   | $ | 4,379 |   | $ | 49,750 |   |
|                                  |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Theletters of credit, operating lease commitments, and purchase obligations arenot reflected on the consolidated balance sheets under accounting principlesgenerally accepted in the United States.

**Foreign Currency Exchange Risk**

In conjunction with theclosing of our European operations, we have some remaining assets andliabilities denominated in Euros. These balances are not material to ourconsolidated financial statements. We do not currently use derivative financialinstruments to reduce our exposure to changes in foreign exchange rates. To theextent we have assets and liabilities denominated in foreign currencies thatare not hedged, we are subject to foreign currency transaction gains andlosses.

**CriticalAccounting Policies and Use of Estimates**

Our significant accountingpolicies are described in Note 1 to the consolidated financial statementsincluded in the Company’s filing on Form 10-K for the year ended April 30,2005. Our discussion and 

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analysisof financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof the financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues, expenses, andrelated disclosures of contingent assets and liabilities. On an ongoing basis,we evaluate the estimates that we have made. These estimates are based upon ourhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances. Our actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting estimates affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

**Reserve for 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, additionalreserves may be required.

**Reserve for Product Returns**

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

20

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onestimates of cash flows, or multiples of earnings or revenues performancemeasures. The fair value of the asset could be different using differentestimates and assumptions in 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 taxable income over theperiods in which the temporary differences are anticipated to reverse. If ouractual results are lower than our forecasted future results, additionalallowances may be required.

**Item 7A.**                Quantitative andQualitative Disclosures about Market Risk

We are subject to certain market risks, includinginterest rate risks associated with financial instruments included in cash andcash equivalents and short-term investments. We invest in interest-bearing U.S.Government and high-quality corporate debt instruments and hold theseinstruments until maturity. 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 April 30, 2005, was 100 days. Due to the short-term nature ofthese instruments and our investment policies and procedures, we do not expectinterest rate fluctuations to have a material adverse effect on our results ofoperations.

We do not use derivative financial instruments tomanage interest rate risk, to reduce our exposure to changes in foreigncurrency exchange rates, or for speculative trading purposes.

Thefollowing table provides information about our marketable fixed incomesecurities classified as short-term investments, including principal cash flowsby expected maturity and the related weighted average interest rates at April 30,2005.
| U.S. Corporate debt securities |   | $28,831,000             |   |
|--------------------------------|--------|-------------------------|--------|
| Expected maturity  date        |   | By  August 9, 2005 |   |
| Average interest rate          |   | 2.79%                   |   |

 

**Item 8.**                        FinancialStatements and Supplementary Data

The financial statementsrequired pursuant to this item are filed under Part IV, Item 15(a)(1) ofthis report. The financial statement schedule required under Regulation S-X isfiled under Part IV, Item 15(a)(2) of this report.

**Item 9.**                        Changes inand Disagreements with Accountants on Accounting and Financial Disclosure

None.

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**Item 9A.**                Controls andProcedures

**Evaluationof Disclosure Controls and Procedures**

As of April 30, 2005,we evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in Rules 13a-15(e) under theSecurities and Exchange Act of 1934, as amended (“Exchange Act”). Based on thisevaluation, our principal executive and financial officers concluded that, asof April 30, 2005, our disclosure controls and procedures were effectivein timely alerting them to material information required to be included in ourperiodic reports.

**Management’sReport on Internal Control over Financial Reporting**

Management of the companyis responsible for establishing and maintaining adequate internal control overfinancial reporting for Cutter & Buck Inc., as defined in Rule 13a-15(f) ofthe Exchange Act. Management has assessed the effectiveness of the Company’sinternal control over financial reporting as of April 30, 2005, based onthe framework established in “*Internal Control—IntegratedFramework”*, issued by the Committee of Sponsoring Organizations ofthe Treadway Commission. Based on this evaluation, management has concludedthat the internal control of Cutter & Buck Inc. over itsfinancial reporting as of April 30, 2005, was effective in providingreasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. The independent registered publicaccounting firm that audited the financial statements included in this Form 10-Khas issued an attestation report, included herein.

**Changes in Internal Control**

There were no changes inour internal control over financial reporting as defined in Rule 13a-15(f) ofthe Exchange Act during our fourth quarter ended April 30, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**Limitationson Effectiveness of Controls**

The Company’s management, including its principalexecutive and financial officers, does not expect that our disclosure controlsand procedures or our internal control over financial reporting will prevent ordetect all errors and all fraud. A control system, no matter how well designedor operated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. The design of our control systemreflects the fact that there are resource constraints and the benefits of suchcontrols must be considered relative to their costs. Further, because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control failures and instances of fraud, ifany, within the Company have been detected. These inherent limitations includethe realities that judgments in decision-making can be faulty and thatbreakdowns can occur because of simple error or mistake. Additionally, controlscan be circumvented by the individual acts of some persons, by collusion of twoor more people, or by management override of the controls. The design of anysystem of controls is also based in part on certain assumptions about thelikelihood of future events and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions. Projectionsof management’s assessments of the current effectiveness of the Company’sdisclosure controls and procedures and its internal control over financialreporting are subject to risks.

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**REPORT OFERNST & YOUNG LLP,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andShareholdersCutter & Buck Inc.

We have audited management’sassessment included in the accompanying Management’s Report on Internal Controlover Financial Reporting that Cutter & Buck Inc. maintained effectiveinternal control over financial reporting, as of April 30, 2005, based oncriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (“COSO criteria”), Cutter & Buck Inc.’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In our opinion, management’sassessment that Cutter & Buck Inc. maintained effective internalcontrol over financial reporting as of April 30, 2005, is fairly stated,in all material respects, based on the COSO criteria. Also, in our opinion, Cutter &Buck Inc. maintained, in all material respects, effective internal control overfinancial reporting as of April 30, 2005, based on the COSO criteria.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Cutter & Buck Inc.as of April 30, 2005 and 2004, and the related consolidated statements ofoperations, shareholders’ equity, and cash flows for each of the three years inthe period ended April 30, 2005, and our report dated July 6, 2005,expressed an unqualified opinion thereon.
|                     | /s/ ERNST &  YOUNG LLP |
|---------------------|---------------------------------|
| Seattle, Washington |                            |
| July 6, 2005   |                            |

 

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**PART III**

**Item 10.**                 Directors andExecutive Officers of the Registrant

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2005,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

**Item 11.**                 ExecutiveCompensation

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2005,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2005,to be filed with the Securities and Exchange Commission within 120 days after theclose of our fiscal year.

**Item 13.**                 CertainRelationships and Related Transactions

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2005,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

**Item 14.**                 PrincipalAccounting Fees and Services

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2005,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules

a.      Financial Statements, Financial StatementSchedules
|        | ** ** | ** **                                                                                                          | ** ** | **Page** |
|--------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| **1.** | ** ** | **Consolidated Financial  Statements:**                                                                             |       |     |
|   |       | Report of Ernst & Young LLP,  Independent Registered Public Accounting Firm                                |       | 27       |   |
|   |       | Consolidated Balance Sheets as of  April 30, 2005 and 2004                                                     |       | 28       |   |
|   |       | Consolidated Statements of  Operations for the years ended April 30, 2005, 2004, and 2003                      |       | 29       |   |
|   |       | Consolidated Statements of  Shareholders’ Equity for the years ended April 30, 2005, 2004,  and 2003 |       | 30       |   |
|   |       | Consolidated Statements of  Cash Flows for the years ended April 30, 2005, 2004, and 2003                      |       | 31       |   |
|   |       | Notes to Consolidated  Financial Statements                                                                         |       | 32       |   |
| **2.** | ** ** | **Financial Statement  Schedule II—Valuation and Qualifying Accounts**                                         |       | 46       |   |

 

All other financialstatement schedules not listed are omitted because either they are notapplicable or not required, or the required information is included in theconsolidated financial statements or the notes thereto.

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**3.   Exhibits**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                   | ** ** | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| 3.1              |       | Restated Articles of Incorporation (incorporated by  reference to exhibit 3.1 filed with the Registrant’s Form 10-K for the  year ended April 30, 2004)                                                                                                                       |
| 3.2              |       | Bylaws of Cutter & Buck, Inc. , as  amended and restated March 3, 2005 (incorporated by reference to exhibit  99.2 filed with the Registrant’s Form 8-K on March 7, 2005)                                                                                  |
| 4.1              |       | Specimen Common Stock Certificate (4.1)(1)                                                                                                                                                                                                                                                   |
| 4.2              |       | Shareholder Rights Plan (incorporated by reference  to exhibit 1 filed with the Registrant’s Form 8-K on November 25,  1998)                                                                                                                                                  |
| 10.1             |       | Industrial Lease dated May 27, 1999 between  Cutter & Buck Inc. and Zelman Renton, LLC (incorporated by reference  to exhibit 10.19 filed with the Registrant’s Annual Report on Form 10-K  for the year ended April 30, 1999)                                  |
| 10.2             |       | First Amendment dated October 6, 1999 to  Industrial Lease dated May 27, 1999 between Cutter & Buck Inc.  and Zelman Renton, LLC (incorporated by reference to exhibit 10.1 filed with  the Registrant’s Form 10-Q for the quarter ended January 31, 2000) |
| 10.3             |       | Amendment dated May 16, 2001 to lease dated  May 27, 1999 (See Exhibit 10.3) between Zelman Renton, LLC and  Cutter & Buck Inc. (10.24)(2)                                                                                                                           |
| 10.4             |       | Lease dated May 16, 2001 between Zelman Renton,  LLC and Cutter & Buck Inc. (10.23)(2)                                                                                                                                                                                         |
| 10.5             |       | Lease dated April 30, 2002 between Adobe  Systems Incorporated and Cutter & Buck Inc. (10.22)(2)                                                                                                                                                                               |
| 10.6             |       | First Amendment to Lease between Adobe Systems  Incorporated and Cutter & Buck Inc. dated October 27, 2004  (filed herewith)                                                                                                                                                   |
| 10.7             |       | 1995 Nonemployee Director Stock Incentive Plan  (10.10)(1)                                                                                                                                                                                                                                   |
| 10.8             |       | 1995 Employee Stock Option Plan (10.11)(1)                                                                                                                                                                                                                                                   |
| 10.9             |       | 1995 Employee Stock Purchase Plan (incorporated by  reference to the Registrant’s Registration Statement on Form S-8 (File  No. 333-80783))                                                                                                                                   |
| 10.10            |       | 1997 Stock Incentive Plan (incorporated by reference  to the Registrant’s Registration Statement on Form S-8 (File  No. 333-43145))                                                                                                                                           |
| 10.11            |       | 1999 Nonemployee Director Stock Incentive Plan  (incorporated by reference to the Registrant’s Registration Statement on  Form S-8 (File No. 333-88627))                                                                                                                      |
| 10.12            |       | 2000 Transition Stock  Incentive Plan for Officers (incorporated by reference to the Registrant’s  Registration Statement on Form S-8 (File No. 333-48264))                                                                                                                   |
| 10.13            |       | 2000 Stock Incentive Plan (incorporated by reference  to the Registrant’s Registration Statement on Form S-8 (File  No. 333-48264))                                                                                                                                           |
| 10.14            |       | Stock Bonus Plan (incorporated by reference to  exhibit 10.16 filed with the Registrant’s Form 10-Q for the quarter  ended October 31, 1998)                                                                                                                                  |
| 10.15            |       | Retention Incentive Program (10.26)(2)                                                                                                                                                                                                                                                       |
| 10.16            |       | Retention Incentive Grant Letter dated  November 15, 2002 from the Company to Ernest R. Johnson (10.24)(3)                                                                                                                                                                              |
| 10.17            |       | Change in Control Agreement as amended  November 15, 2002 between Cutter & Buck Inc. and Ernest R.  Johnson (10.19)(3)                                                                                                                                                         |
| 10.18            |       | Employment Agreement between Cutter & Buck  Inc. and John T. Wyatt as amended July 5, 2005 (filed herewith)                                                                                                                                                                    |
| 10.19            |       | Change in Control Agreement between  Cutter & Buck Inc. and John T. Wyatt dated December 11, 2004  (99.2)(4)                                                                                                                                                                   |
| 10.20            |       | Credit Agreement dated March 10, 2005 between  Cutter & Buck Inc. and Wells Fargo HSBC Trade Bank,  N.A.(incorporated by reference to exhibit 10.1 filed with the Registrant’s  Form 8-K on March 16, 2005)                                                     |

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| 10.21* |   | Endorsement Agreement  dated July 15, 2003 between Cutter & Buck Inc. and Esch &  Stam Inc. regarding Annika Sorenstam (10.26)(3)                               |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.22  |   | Memorandum of Understanding dated June 13, 2003  between Cutter & Buck Inc., Harvey N. Jones and Stephen S. Lowber  and the Lead Plaintiff Tilson Growth Fund (10.25)(3) |
| 23.1   |   | Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm  (filed herewith)                                                                            |
| 31.1   |   | Certification of the Company’s Chief Executive  Officer required by Section 302(a) of the Sarbanes-Oxley Act of  2002(5)                                                |
| 31.2   |   | Certification of the Company’s Chief Financial  Officer required by Section 302(a) of the Sarbanes-Oxley Act of  2002(5)                                                |
| 32.1   |   | Certification of the Company’s Chief Executive  Officer required by Section 906 of the Sarbanes-Oxley Act of 2002(5)                                                         |
| 32.2   |   | Certification of the Company’s Chief Financial  Officer required by Section 906 of the Sarbanes-Oxley Act of 2002(5)                                                         |

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*                    CONFIDENTIALTREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.

(1)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Registration Statement on Form SB-2 (File No. 33-94540-LA)

(2)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Form 10-K for the year ended April 30, 2002

(3)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Form 10-K for the year ended April 30, 2003

(4)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Form 8-K on December 14, 2004

(5)          a signed original ofthis written statement has been provided to the Company and will be retained bythe Company and furnished to the SEC or its staff upon request

26

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**REPORT OFERNST & YOUNG LLP,**INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors andShareholdersCutter & Buck Inc.

We have audited the accompanying consolidated balancesheets of Cutter & Buck Inc. as of April 30, 2005 and 2004, andthe related consolidated statements of operations, shareholders’ equity, andcash flows for each of the three years in the period ended April 30, 2005.Our audits also included the financial statement schedule listed in the Indexat Item 15(a)2. These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Cutter & Buck Inc. at April 30, 2005 and 2004, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended April 30, 2005, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Cutter &Buck Inc.’s internal control over financial reporting as of April 30,2005, based on criteria established in Internal Control- Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission,and our report dated July 6, 2005, expressed an unqualified opinionthereon.
|                | /s/ ERNST &  YOUNG LLP |
|---------------------|---------------------------------|
| Seattle, Washington |                            |
| July 6, 2005   |                            |

 

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**CONSOLIDATEDBALANCE SHEETS**
| ** **                                                                                                                                                   | ** ** | **April 30,**                                                                           | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **       2005       ** | ** ** | **      2004      ** | ** ** |
| ** **                                                                                                                                                   | ** ** | **(in thousands,  except share amounts)**                                     | ** ** |
| **Assets**                                                                                                                                                   |       |                                                                                         |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                              |       |                                                                                         |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                    |       |                                                                                         | $          | 11,752 |   |   |   | $ | 19,715 |   |   |
| Short-term investments                                                                                                                                       |       |                                                                                         | 28,831     |   |   |   | 17,952 |   |   |
| Accounts receivable, net of allowances of $1,770 at  April 30, 2005, and $2,496 at April 30, 2004                                                  |       |                                                                                         | 21,499     |   |   |   | 22,502 |   |   |
| Inventories, net                                                                                                                                             |       |                                                                                         | 25,398     |   |   |   | 21,938 |   |   |
| Income tax receivable                                                                                                                                        |       |                                                                                         | 919        |   |   |   | — |   |   |
| Deferred income taxes                                                                                                                                        |       |                                                                                         | 2,412      |   |   |   | 2,566 |   |   |
| Prepaid expenses and other current assets                                                                                                                    |       |                                                                                         | 2,317      |   |   |   | 2,282 |   |   |
| Total current assets                                                                                                                                         |       |                                                                                         | 93,128     |   |   |   | 86,955 |   |   |
| Furniture and equipment, net                                                                                                                                 |       |                                                                                         | 6,734      |   |   |   | 6,290 |   |   |
| Deferred income  taxes                                                                                                                                       |       |                                                                                         | 165        |   |   |   | 376 |   |   |
| Other assets                                                                                                                                                 |       |                                                                                         | 199        |   |   |   | 309 |   |   |
| Total assets                                                                                                                                                 |       |                                                                                         | $          | 100,226 |   |   |   | $ | 93,930 |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                               |       |                                                                                         |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                             |       |                                                                                         | $          | 3,077 |   |   |   | $ | 2,940 |   |   |
| Accrued liabilities                                                                                                                                          |       |                                                                                         | 7,268      |   |   |   | 7,161 |   |   |
| Income taxes payable                                                                                                                                         |       |                                                                                         | —     |   |   |   | 1,217 |   |   |
| Current portion of capital lease obligations                                                                                                                 |       |                                                                                         | 111        |   |   |   | 557 |   |   |
| Total current liabilities                                                                                                                                    |       |                                                                                         | 10,456     |   |   |   | 11,875 |   |   |
| Capital lease obligations, less current portion                                                                                                              |       |                                                                                         | —     |   |   |   | 111 |   |   |
| Other liabilities                                                                                                                                            |       |                                                                                         | 1,895      |   |   |   | 2,215 |   |   |
| Total liabilities                                                                                                                                            |       |                                                                                         | 12,351     |   |   |   | 14,201 |   |   |
| Commitments and contingencies                                                                                                                                |       |                                                                                         | —     |   |   |   | — |   |   |
| Shareholders’  equity:                                                                                                                                  |       |                                                                                         |       |   |   |   |   |   |   |
| Preferred stock, no par value, 6,000,000 shares  authorized: none issued                                                                                     |       |                                                                                         | —     |   |   |   | — |   |   |
| Common stock, no par value, 25,000,000 shares  authorized: 11,220,376  issued and outstanding at April 30, 2005, and 10,752,552 at  April 30, 2004 |       |                                                                                         | 67,750     |   |   |   | 65,116 |   |   |
| Deferred Compensation                                                                                                                                        |       |                                                                                         | (246       | ) |   |   | — |   |   |
| Retained earnings                                                                                                                                            |       |                                                                                         | 20,371     |   |   |   | 14,613 |   |   |
| Total shareholders’ equity                                                                                                                              |       |                                                                                         | 87,875     |   |   |   | 79,729 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                             |       |                                                                                         | $          | 100,226 |   |   |   | $ | 93,930 |   |   |

 

See accompanying notes.

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS**
| ** **                                                     | ** ** | **Year Ended April 30,**                                                      | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                     | ** ** | **       2005       ** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except per share amounts)**                        | ** ** |
| Net sales                                                      |       |                                                                                         | $          | 126,560 |   |   | $ | 128,374 |   | $ | 131,699 |   |
| Cost of sales                                                  |       |                                                                                         | 65,954     |   |   | 69,784 |   | 76,912 |   |
| Gross profit                                                   |       |                                                                                         | 60,606     |   |   | 58,590 |   | 54,787 |   |
| Operating expenses:                                            |       |                                                                                         |       |   |   |   |   |   |   |
| Selling, general and administrative                            |       |                                                                                         | 45,397     |   |   | 41,376 |   | 42,400 |   |
| Depreciation                                                   |       |                                                                                         | 2,767      |   |   | 3,988 |   | 5,109 |   |
| Restatement expenses                                           |       |                                                                                         | 368        |   |   | 4,968 |   | 8,169 |   |
| Restructuring and asset impairment                             |       |                                                                                         | —     |   |   | (349 | ) | 3,806 |   |
| Total operating expenses                                       |       |                                                                                         | 48,532     |   |   | 49,983 |   | 59,484 |   |
| Operating income  (loss)                                       |       |                                                                                         | 12,074     |   |   | 8,607 |   | (4,697 | ) |
| Interest income  (expense):                                    |       |                                                                                         |       |   |   |   |   |   |   |
| Interest expense                                               |       |                                                                                         | (44        | ) |   | (155 | ) | (627 | ) |
| Interest income                                                |       |                                                                                         | 722        |   |   | 277 |   | 241 |   |
| Net interest income (expense)                                  |       |                                                                                         | 678        |   |   | 122 |   | (386 | ) |
| Income (loss)  from continuing operations before income taxes  |       |                                                                                         | 12,752     |   |   | 8,729 |   | (5,083 | ) |
| Income tax  expense (benefit)                                  |       |                                                                                         | 4,138      |   |   | 944 |   | (65 | ) |
| Income (loss)  from continuing operations                      |       |                                                                                         | 8,614      |   |   | 7,785 |   | (5,018 | ) |
| Income (loss)  from discontinued retail operations, net of tax |       |                                                                                         | —     |   |   | 146 |   | (6,980 | ) |
| Net income (loss)                                              |       |                                                                                         | $          | 8,614 |   |   | $ | 7,931 |   | $ | (11,998 | ) |
| Basic earnings  (loss) per share:                              |       |                                                                                         |       |   |   |   |   |   |   |
| Earnings (loss) from continuing operations                     |       |                                                                                         | $          | 0.79 |   |   | $ | 0.73 |   | $ | (0.47 | ) |
| Earnings (loss) from discontinued retail operations            |       |                                                                                         | $          | — |   |   | $ | 0.01 |   | $ | (0.66 | ) |
| Net earnings (loss)                                            |       |                                                                                         | $          | 0.79 |   |   | $ | 0.74 |   | $ | (1.13 | ) |
| Diluted earnings  (loss) per share:                            |       |                                                                                         |       |   |   |   |   |   |   |
| Earnings (loss) from continuing operations                     |       |                                                                                         | $          | 0.75 |   |   | $ | 0.70 |   | $ | (0.47 | ) |
| Earnings (loss) from discontinued retail operations            |       |                                                                                         | $          | — |   |   | $ | 0.01 |   | $ | (0.66 | ) |
| Net earnings  (loss)                                           |       |                                                                                         | $          | 0.75 |   |   | $ | 0.71 |   | $ | (1.13 | ) |

 

See accompanying notes.

29

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**CONSOLIDATEDSTATEMENTS OF SHAREHOLDERS’ EQUITY**
| ** **                                                 | ** ** | **Common Stock**                                        | ** ** | **Deferred** | ** ** | **Retained**     | ** ** | ** **   | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------|------------|--------------|------------|------------------|------------|--------------|------------|
| ** **                                                 | ** ** | **Shares**                                                   | ** ** | **Amount**   | ** ** | **Compensation** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| ** **                                                 | ** ** | **(in thousands, except share amounts)** | ** ** |
| Balance,  April 30, 2002                              |       | 10,589,810                                                   |       | $            | 64,525     |             |       | $            | (349       | ) |   | $ | 19,218 |   | $ | 83,394 |   |
| Stock issued  under employee stock purchase plan           |       | 25,213                                                       |       | 81           |       |             | —     |         |       | — |   | 81 |   |
| Exercise of stock  options                                 |       | 3,844                                                        |       | 7            |       |             | —     |         |       | — |   | 7 |   |
| Tax benefit on  exercise of stock options                  |       | —                                                       |       | 3            |       |             | —     |         |       | — |   | 3 |   |
| Expense relating  to stock options granted to non-employee |       | —                                                       |       | 47           |       |             | —     |         |       | — |   | 47 |   |
| Non-cash  compensation expense                             |       | —                                                       |       | 79           |       |             | —     |         |       | — |   | 79 |   |
| Deferred compensation relating to restricted stock  grants |       | 15,265                                                       |       | 63           |       |             | (63        | )            |       | — |   | — |   |
| Amortization of  deferred compensation                     |       | —                                                       |       | —       |       |             | 375        |         |       | — |   | 375 |   |
| Net loss                                                   |       | —                                                       |       | —       |       |             | —     |         |       | (11,998 | ) | (11,998 | ) |
| Balance, April 30, 2003                               |       | 10,634,132                                                   |       | 64,805       |       |             | (37        | )            |       | 7,220 |   | 71,988 |   |
| Stock issued  under employee stock purchase plan           |       | 17,323                                                       |       | 65           |       |             | —     |         |       | — |   | 65 |   |
| Exercise of stock  options                                 |       | 157,923                                                      |       | 593          |       |             | —     |         |       | — |   | 593 |   |
| Tax benefit on  exercise of stock options                  |       | —                                                       |       | 236          |       |             | —     |         |       | — |   | 236 |   |
| Amortization of  deferred compensation                     |       | —                                                       |       | —       |       |             | 37         |         |       | — |   | 37 |   |
| Repurchase of  common stock                                |       | (56,826                                                      | )          | (583         | )          |             | —     |         |       | — |   | (583 | ) |
| Dividends on  common stock  ($0.05 per share)              |       | —                                                       |       | —       |       |             | —     |         |       | (538 | ) | (538 | ) |
| Net income                                                 |       | —                                                       |       | —       |       |             | —     |         |       | 7,931 |   | 7,931 |   |
| Balance, April 30, 2004                               |       | 10,752,552                                                   |       | 65,116       |       |             | —     |         |       | 14,613 |   | 79,729 |   |
| Stock issued  under employee stock purchase plan           |       | 7,632                                                        |       | 64           |       |             | —     |         |       | — |   | 64 |   |
| Exercise of stock  options                                 |       | 655,292                                                      |       | 3,579        |       |             | —     |         |       | — |   | 3,579 |   |
| Tax benefit on  exercise of stock options                  |       | —                                                       |       | 1,459        |       |             | —     |         |       | — |   | 1,459 |   |
| Repurchase of  common stock                                |       | (215,100                                                     | )          | (2,749       | )          |             | —     |         |       | — |   | (2,749 | ) |
| Deferred compensation relating to restricted stock  grants |       | 20,000                                                       |       | 281          |       |             | (281       | )            |       | — |   | — |   |
| Amortization of  deferred compensation                     |       | —                                                       |       | —       |       |             | 35         |         |       | — |   | 35 |   |
| Dividends on  common stock  ($0.26 per share)              |       | —                                                       |       | —       |       |             | —     |         |       | (2,856 | ) | (2,856 | ) |
| Net income                                                 |       | —                                                       |       | —       |       |             | —     |         |       | 8,614 |   | 8,614 |   |
| Balance, April 30,  2005                              |       | 11,220,376                                                   |       | $            | 67,750     |             |       | $            | (246       | ) |   | $ | 20,371 |   | $ | 87,875 |   |

 

See accompanying notes.

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**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**
| ** **                                                                                | ** ** | **Year Ended April 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                | ** ** | **(in thousands)**                 | ** ** |
| **Operating activities:**                                                                 |       |                                    |       |   |   |   |   |
| Net income (loss)                                                                         |       | $                                       | 8,614      |   | $ | 7,931 |   | $ | (11,998 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                                    |       |   |   |   |   |
| Depreciation                                                                              |       | 2,904                                   |       | 4,179 |   | 5,872 |   |
| Tax benefit on exercise  of stock options                                                 |       | 1,459                                   |       | 236 |   | 3 |   |
| Deferred income taxes                                                                     |       | 365                                     |       | 822 |   | — |   |
| Amortization of deferred  compensation                                                    |       | 35                                      |       | 37 |   | 375 |   |
| Deferred gain on sale  and leaseback of capital assets                                    |       | (10                                     | )          | (72 | ) | (144 | ) |
| Loss on disposals of  furniture and equipment                                             |       | —                                  |       | 164 |   | 311 |   |
| Noncash compensation  expense                                                             |       | —                                  |       | — |   | 126 |   |
| Loss on disposal of  discontinued retail operations                                       |       | —                                  |       | — |   | 4,158 |   |
| Noncash restructuring  and asset impairment charges                                       |       | —                                  |       | (363 | ) | 4,035 |   |
| Changes in assets and liabilities:                                                        |       |                                    |       |   |   |   |   |
| Accounts receivable, net                                                                  |       | 1,003                                   |       | 2,194 |   | 17,571 |   |
| Inventories, net                                                                          |       | (3,460                                  | )          | 12,601 |   | (8,331 | ) |
| Prepaid expenses and  other assets                                                        |       | 75                                      |       | 2,695 |   | 4,179 |   |
| Accounts payable,  accrued liabilities and other liabilities                              |       | (66                                     | )          | (8,871 | ) | 2,500 |   |
| Income taxes  receivable/payable                                                          |       | (2,136                                  | )          | 1,217 |   | — |   |
| Net cash provided by  operating activities                                                |       | 8,783                                   |       | 22,770 |   | 18,657 |   |
| **Investing activities:**                                                                 |       |                                    |       |   |   |   |   |
| Purchases of furniture  and equipment                                                     |       | (3,348                                  | )          | (1,702 | ) | (2,820 | ) |
| Purchases of short-term  investments                                                      |       | (91,023                                 | )          | (44,885 | ) | — |   |
| Maturities of short-term  investments                                                     |       | 80,144                                  |       | 26,933 |   | — |   |
| Proceeds from disposals  of furniture and equipment                                       |       | —                                  |       | — |   | 298 |   |
| Decrease in trademark,  patents and marketing rights                                      |       | —                                  |       | — |   | 147 |   |
| Net cash used in  investing activities                                                    |       | (14,227                                 | )          | (19,654 | ) | (2,375 | ) |
| **Financing activities:**                                                                 |       |                                    |       |   |   |   |   |
| Issuance of common stock                                                                  |       | 3,643                                   |       | 658 |   | 88 |   |
| Payment of dividends                                                                      |       | (2,856                                  | )          | (538 | ) | — |   |
| Repurchases of common  stock                                                              |       | (2,749                                  | )          | (583 | ) | — |   |
| Principal payments under  capital lease obligations                                       |       | (557                                    | )          | (1,802 | ) | (4,495 | ) |
| Net cash used in  financing activities                                                    |       | (2,519                                  | )          | (2,265 | ) | (4,407 | ) |
| Net increase (decrease)  in cash and cash equivalents                                     |       | (7,963                                  | )          | 851 |   | 11,875 |   |
| Cash and cash  equivalents, beginning of period                                           |       | 19,715                                  |       | 18,864 |   | 6,989 |   |
| Cash and cash  equivalents, end of period                                                 |       | $                                       | 11,752     |   | $ | 19,715 |   | $ | 18,864 |   |
| Supplemental information:                                                                 |       |                                    |       |   |   |   |   |
| Cash paid during the  year for interest                                                   |       | $                                       | 38         |   | $ | 155 |   | $ | 465 |   |
| Cash paid during the  year for income taxes                                               |       | $                                       | 4,441      |   | $ | 30 |   | $ | 149 |   |
| Noncash financing and investing activities:                                               |       |                                    |       |   |   |   |   |
| Deferred compensation  for issuance of restricted stock                                   |       | $                                       | 281        |   | $ | — |   | $ | 63 |   |
| Equipment acquired under  capital leases                                                  |       | $                                       | —     |   | $ | 37 |   | $ | — |   |

 

See accompanying notes.

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**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Note1. Description of the Business and Summary of Significant Accounting Policies**

**Descriptionof the Business and Basis of Presentation**

Cutter & Buck Inc. (the “Company”) has oneoperating segment, the design, sourcing, and marketing of men’s and women’ssportswear, fashion, and outerwear apparel. The information for this segment isthe information used by the Company’s chief operating decision maker toevaluate operating performance. The Company’s trade customers are principallygolf pro shops and resorts, corporate accounts and specialty retail stores. Throughthe end of April 2003, the Company also operated Company-owned retailstores. These stores were closed by April 30, 2003, and are presented asdiscontinued operations throughout the consolidated financial statements (Note13).

The Company has one wholly-owned subsidiary, Cutter &Buck (Europe) B.V., which ceased operations on April 30, 2002, inconjunction with the 2002 Restructuring Plan (see Note 13). The accompanyingconsolidated financial statements include the accounts of the Company and thiswholly-owned subsidiary. All significant intercompany accounts and transactionshave been eliminated.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results could differ from those estimates.

**CashEquivalents and Short-Term Investments**

The Company invests in interest-bearing U.S.Government and high-quality corporate debt instruments. The Company considersall short-term investments with maturities of 90 days or less at purchase to becash equivalents.

At April 30, 2005,the Company’s investment portfolio was classified as held-to-maturity. TheCompany has the positive intent and ability to hold the securities to maturity.The investment portfolio is carried at amortized cost, which approximates fairmarket value. Management regularly reviews the carrying value of investments inorder to identify and record losses when events and circumstances indicate thatdeclines in the fair value of such assets below amortized cost areother-than-temporary. Declines in fair market value below amortized cost werenot material as of April 30, 2005.

**Accounts Receivable**

The Company extends creditto customers in the normal course of business, subject to established creditlimits. Accounts receivable, net, in the consolidated balance sheets, consistsof amounts due from customers net of allowances for doubtful accounts andreserves for returns and sales allowances. The allowance for doubtful accountsis determined by reviewing the accounts receivable aging and evaluating individualcustomer receivables, considering customers’ financial condition and credithistory, and current economic conditions. The reserves for returns and salesallowances are determined by an analysis of the historical rate of returns andsales allowances.

**Concentrations of Credit Risk**

The Company sells itsproducts to approved customers on an open account basis, subject to establishedcredit limits, cash in advance, or cash on delivery terms. The company issubject to credit risk on the majority of its receivables. These receivablesare geographically disbursed, primarily throughout the 

32

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UnitedStates, as well as in Europe and other foreign countries where formal licensingor distributor agreements exist.

**Inventories**

Inventories, which arepredominantly finished goods, are valued at the lower of cost or market, withcost determined under the weighted average method. A detailed analysis ofinventory is performed on a quarterly basis to identify slow-moving andout-of-season merchandise. The net realizable value of this merchandise isestimated based upon disposition plans and historical experience. A valuationallowance is established to reduce the carrying amount of slow-movingmerchandise to its estimated net realizable value.

**Samples**

The Company capitalizesthe costs of merchandise samples that relate to goods to be sold in futureselling seasons. These samples are amortized on a straight-line basis over therespective selling seasons of six months. The amortization of samples ischarged to selling expenses over the revenue-generating period.

**Furniture and Equipment**

Furniture and equipmentare stated at historical cost less accumulated depreciation. Depreciation iscalculated on a straight-line basis over the estimated useful lives of therelated assets. Machinery and equipment are depreciated over three to sevenyears. Furniture and equipment are depreciated over three to five years. Leaseholdimprovements are depreciated over the lesser of the lease term or the estimatedeconomic useful life of the asset, generally five to ten years. Furniture andequipment acquired under capital leases are amortized on a straight-line basisover the lesser of the lease term or the estimated economic useful life of theasset.

**Long-Lived Assets**

The carrying values oflong-lived assets are reviewed for impairment whenever events or changes incircumstances indicate that such carrying values may not be recoverable. TheCompany does not perform a periodic assessment of assets for impairment in theabsence of such information or indicators. Currently, management has noindication of any events or circumstances that would significantly impair anyof its long-lived assets, primarily furniture and equipment. Impairmentcharges, if any, would be recorded as an impairment charge for the excess ofthe carrying value of an asset over its estimated fair value, as determinedbased upon estimates of future cash flows, third-party valuation, or othermeasures deemed appropriate for the circumstances.

**Income Taxes**

The Company accounts forincome taxes using the liability method, whereby deferred tax assets andliabilities are determined based on differences between financial reporting andtax bases of assets and liabilities measured using enacted tax rates and lawsthat will be in effect when the differences are expected to reverse. Avaluation allowance is provided for deferred tax assets if it is more likelythan not that the balance of these assets will not be fully realizable.

**Fair Value of Financial Instruments**

The fair value of theCompany’s financial instruments, including its capital lease obligations,accounts receivable, and accounts payable approximated their carrying amount asof April 30, 2005 and 2004.

33

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**Revenue Recognition**

Revenue, net ofpromotional discounts and rebates, is recognized at the time the product isshipped to the customer. The terms and conditions of sales agreements specifythat possession and risk of loss passes to customers when the product isdelivered to a third-party carrier. However, in cases where goods are shippedto customers prior to the contractually agreed ship date, revenue is notrecognized until the date the goods were initially planned to be shipped. Thereis generally no right to return for customers, other than for defective ormis-shipped products. Under certain circumstances, the Company does acceptcustomer returns as part of stock rotations, but such accommodations are madeunder limited pre-established programs or on a case-by-case basis. An allowancefor estimated sales returns is provided as a reduction to sales when therelated revenue is recorded. For certain golf tournaments, product is shippedon a consignment basis. Revenue for these sales is recognized, not when theproduct is shipped, but when the customer sells the product to end consumers.

**Cost of Sales**

Cost of sales includes theexpenses incurred to acquire and produce inventory for sale, including productcosts, inbound freight costs, import costs, and embroidery costs, as well asreserves for slow-moving and out-of-fashion merchandise. Inbound freight,import and embroidery costs totaled $17.0 million, $16.7 million, and$19.2 million for the years ended April 30, 2005, 2004, and 2003,respectively. Purchasing and receiving costs, warehousing costs, and othercosts of distribution are included in selling, general, and administrativeexpenses and totaled $6.2 million, $6.1 million, and $7.2 million for the yearsended April 30, 2005, 2004, and 2003, respectively.

**Advertising**

Catalogs and point ofpurchase displays are recorded as prepaid expenses until delivered to customersor the season to which they relate has passed, whichever is sooner. All otheradvertising costs, including media buys, direct mail, sponsorships, andcooperative advertising are expensed at the time the advertising takes placeor, in the case of sponsorships, as performance is received. Advertising costsincluded in prepaid expenses totaled $294,000 and $366,000 as of April 30,2005 and 2004, respectively. Advertising expense is included within selling,general and administrative expenses and totaled $2.3 million, $1.7 millionand $1.4 million for the years ended April 30, 2005, 2004 and 2003,respectively.

**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 expense for stock options isrecognized over the vesting period of the grant based on the excess, if any, ofthe market price of the Company’s common stock at the date of grant over thestock option exercise price. Under the Company’s plans, stock options aregenerally granted at fair market value on the date of grant.

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. Proforma disclosure will no longer be a permitted alternative.

The required adoption date of SFAS No. 123(R) forthe Company, as amended by the SEC with its release 33-8568, dated April 15,2005, is the beginning of fiscal 2007. SFAS No. 123(R) permits two 

34

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methods of adoption, a “modifiedprospective” method and a “modified retrospective” method. Under the modifiedprospective method, compensation cost is recognized, beginning with theeffective date, based on the requirements of SFAS No. 123(R) for allshare-based payments granted after the effective date and based on therequirements of SFAS No. 123 for all awards granted prior to the effectivedate that remain unvested on the effective date. The modified retrospectivemethod includes the above requirements of the modified prospective method andalso permits restatement of prior periods based on amounts previously reportedin pro forma disclosures pursuant to SFAS No. 123 for either all periodspresented or for only prior interim periods of the year of adoption. Managementis currently planning to adopt this new standard in the first quarter of fiscal2007 and is still reviewing the adoption alternatives.

Based upon the unamortized portion of the fair valueof options outstanding as of April 30, 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 or modified in the future.

Ifcompensation costs for stock-based compensation had been recognized based onthe fair value method, the pro forma amounts of the Company’s net income (loss)and net earnings (loss) per share would have been as follows:
| ** **                                                                                                                        | ** ** | **Year Ended April 30,**                               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **     2005     **  | ** ** | **     2004     ** | ** ** | **       2003       ** | ** ** |
| ** **                                                                                                                        | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income  (loss), as reported                                                                                                   |       |                                                                  | $          | 8,614 |   |   |   | $ | 7,931 |   |   |   | $ | (11,998 | ) |   |
| Add employee  stock-based compensation expense,  net of tax, as reported                                                          |       |                                                                  | 24         |   |   |   | 24 |   |   |   | 378 |   |   |
| Deduct total stock-based employee compensation  expense, net of tax, determined under the fair value based method for all  awards |       |                                                                  | (631       | ) |   |   | (1,511 | ) |   |   | (1,890 | ) |   |
| Pro forma net  income (loss)                                                                                                      |       |                                                                  | $          | 8,007 |   |   |   | $ | 6,444 |   |   |   | $ | (13,510 | ) |   |
| Earnings (loss) per share:                                                                                                        |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Basic—as reported                                                                                                            |       |                                                                  | $          | 0.79 |   |   |   | $ | 0.74 |   |   |   | $ | (1.13 | ) |   |
| Basic—pro forma                                                                                                              |       |                                                                  | $          | 0.73 |   |   |   | $ | 0.60 |   |   |   | $ | (1.27 | ) |   |
| Diluted—as reported                                                                                                          |       |                                                                  | $          | 0.75 |   |   |   | $ | 0.71 |   |   |   | $ | (1.13 | ) |   |
| Diluted—pro forma                                                                                                            |       |                                                                  | $          | 0.70 |   |   |   | $ | 0.58 |   |   |   | $ | (1.27 | ) |   |

 

Thefair value for each option grant was estimated at the date of grant using theBlack-Scholes option pricing model, with the following weighted-averageassumptions. The dividend yield was assumed to be 0.0% until the fourth quarterof fiscal 2004, when the Board of Directors first authorized a quarterlydividend.
| ** **                                    | ** ** | **Year Ended April 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate                      |       | 3.5                                     | %          | 2.6 | % | 3.0 | % |
| Volatility                                    |       | 61                                      | %          | 57 | % | 63 | % |
| Dividend yield                                |       | 2.1                                     | %          | 0.1 | % | 0.0 | % |
| Expected life                                 |       | 5 years                                 |       | 5 years |   | 5 years |   |
| Weighted average  fair value of option grants |       | $                                       | 6.03       |   | $ | 2.42 |   | $ | 1.95 |   |
|                                               |            |                                         |            |  |  |  |  |  |  |  |

 

35

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**Note 2. Short-term Investments**

Short-terminvestments held-to-maturity as of April 30, 2005 and 2004, consisted ofU.S. corporate debt securities with maturity dates within one year of thepurchase date (amortized cost includes the initial purchase amount plus accruedinterest of $96,000 and $10,000 as of April 30, 2005 and 2004,respectively):
| ** **               | ** ** | **April 30,**  | ** ** |
|--------------------------|------------|---------------------|------------|
| ** **               | ** ** | **2005**            | ** ** | **2004** | ** ** |
| ** **               | ** ** | **(in  thousands)** | ** ** |
| Amortized cost           |       | $                   | 28,927     |   | $ | 17,962 |   |
| Gross unrealized  gains  |       | —              |       | 1 |   |
| Gross unrealized  losses |       | (21                 | )          | (5 | ) |
| Estimated fair value     |       | $                   | 28,906     |   | $ | 17,958 |   |

 

**Note 3. Property and Leases**

Furnitureand equipment consisted of the following:
| ** **                                      | ** ** | **April 30,**  | ** ** |
|-------------------------------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **2005**            | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in  thousands)** | ** ** |
| Computer software                               |       | $                   | 6,496      |   | $ | 4,309 |   |
| Furniture and  fixtures                         |       | 4,727               |       | 4,675 |   |
| Computer hardware                               |       | 4,045               |       | 3,411 |   |
| Machinery and  equipment                        |       | 3,625               |       | 3,523 |   |
| Sales fixtures                                  |       | 2,799               |       | 2,526 |   |
| Leasehold  improvements                         |       | 1,171               |       | 1,071 |   |
|                                            |       | 22,863              |       | 19,515 |   |
| Less accumulated  depreciation and amortization |       | (16,129             | )          | (13,225 | ) |
|                                            |       | $                   | 6,734      |   | $ | 6,290 |   |

 

The total cost of leased equipment capitalized at April 30,2005 and 2004, was $1.1 million and $2.7 million, respectively, withrelated accumulated amortization of $1.0 million and $1.8 million,respectively.

The Company leases its office facilities, adistribution center, and certain office equipment under operating leases, mostof which contain renewal options. Total rent expense amounted to $3.8 million,$3.7 million and $3.5 million for the years ended April 30, 2005,2004, and 2003 respectively. Included in these amounts is additional rent forcommon area maintenance and other building operating expenses totaling $.6million, $.3 million, and $.4 million for the years ended April 30, 2005,2004, and 2003, respectively. The Company sub-leases unused space within its distributioncenter and office facilities. Sublease rental income amounted to $1.1 millionfor the years ended April 30, 2005 and 2004, and $0.7 million for theyear ended April 30, 2003.

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Futureminimum obligations, by year and in the aggregate, under capital leases andnoncancelable operating leases with initial or remaining terms of one year ormore consisted of the following at April 30, 2005:
| ** **                                              | ** ** | **Capital** | ** **          | ** Operating ** | ** ** |
|---------------------------------------------------------|------------|-------------|---------------------|---------------------------|------------|
| **Year Ended April 30,**                 | ** ** | ** **  | ** **          | **Leases**                | ** ** | **Leases** | ** ** |
| ** **                                              | ** ** | ** **  | **(in  thousands)** | ** **                |       |
| 2006                                                    |       |        | $                   | 114                       |       |   |   | $ | 3,354 |   |   |
| 2007                                                    |       |        | —              |                      |       |   | 3,299 |   |   |
| 2008                                                    |       |        | —              |                      |       |   | 3,412 |   |   |
| 2009                                                    |       |        | —              |                      |       |   | 3,429 |   |   |
| 2010                                                    |       |        | —              |                      |       |   | 3,565 |   |   |
| Thereafter                                              |       |        | —              |                      |       |   | 3,874 |   |   |
| Minimum lease obligations                               |       |        | 114                 |                      |       |   | 20,933 |   |   |
| Less sublease  obligations                              |       |        | —              |                      |       |   | (6,303 | ) |   |
| Total minimum lease obligations                         |       |        | 114                 |                      |       |   | $ | 14,630 |   |   |
| Less amount  representing interest                      |       |        | (3                  | )                         |       |   |   |   |   |
| Present value of net  minimum capital lease obligations |       |        | $                   | 111                       |       |   |   |   |   |   |
|                                                         |            |             |                     |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4. Accrued Liabilities**

AccruedLiabilities consisted of the following:
| ** **                                      | ** ** | **April 30,**      | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Accrued salaries  and related expenses          |       | $                       | 2,625      |   | $ | 3,007 |   |
| Accrued operating  expenses                     |       | 1,174                   |       | 808 |   |
| Accrued  restructuring and restatement expenses |       | 1,053                   |       | 1,217 |   |
| Accrued volume  discount awards                 |       | 944                     |       | 870 |   |
| Accrued  professional fees                      |       | 764                     |       | 753 |   |
| Other accrued  expenses                         |       | 708                     |       | 506 |   |
|                                            |       | $                       | 7,268      |   | $ | 7,161 |   |

 

**Note 5. Debt**

On March 10, 2005, theCompany entered into a three-year loan agreement with Wells Fargo HSBC TradeBank, N.A. secured by all assets of the Company, for a $35 million line ofcredit. This line of credit replaced the previous $35 million line of creditthat expired on March 10, 2005. Borrowings under this agreement will bearinterest at prime minus 1.0%. Covenants contained in this loan agreementinclude maintaining a debt to equity ratio of not more than 1.0, a quick ratioof not less than 1.0, and profitability of $5 million per year. Additionally,capital expenditures are limited to $4.0 million per fiscal year. The companyis in compliance with all terms and covenants of this agreement. On April 30,2005, letters of credit outstanding against this line of credit totaledapproximately $8.0 million and there were no working capital advancesoutstanding.

37

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**Note 6. Income Taxes**

Theprovision (benefit) for income taxes on continuing operations consisted of thefollowing:
| ** **                      | ** ** | **Year Ended April 30,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **(in thousands)**                 | ** ** |
| Current tax provision (benefit) |       |                                    |       |   |   |   |   |
| Federal                         |       | $                                       | 4,372      |   | $ | 91 |   | $ | (214 | ) |
| State                           |       | (599                                    | )          | 31 |   | 149 |   |
|                            |       | 3,773                                   |       | 122 |   | (65 | ) |
| Deferred federal tax  provision |       | 365                                     |       | 822 |   | — |   |
|                            |       | $                                       | 4,138      |   | $ | 944 |   | $ | (65 | ) |

 

In 2005, the Company completed a study of its statetax liabilities resulting in an overall reduction in the accrual for statetaxes of $225,000 and a reclassification of $425,000 of state tax liabilitiesfrom income taxes to sales and franchise tax liabilities. As a result, currentstate income tax expense includes a reduction of $650,000. The $425,000 accrualfor the sales and franchise taxes is included in selling, general andadministrative expenses.

Theprovision for income taxes on continuing operations differs from the amount oftax determined by applying the federal statutory rate for the followingreasons:
| ** **                                             | ** ** | **Year Ended April 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                 | ** ** |
| Tax provision (benefit)  at federal statutory tax rate |       | $                                       | 4,364      |   | $ | 2,968 |   | $ | (1,627 | ) |
| State income tax  (benefit)                            |       | (371                                    | )          | 236 |   | 98 |   |
| Non-deductible expenses                                |       | 24                                      |       | (7 | ) | 63 |   |
| Reconciliation of tax  provision to income tax return  |       | (24                                     | )          | (783 | ) | — |   |
| Valuation allowance                                    |       | —                                  |       | (1,186 | ) | 1,186 |   |
| Foreign tax credit  carryforwards                      |       | —                                  |       | (75 | ) | — |   |
| Other                                                  |       | 145                                     |       | (209 | ) | 215 |   |
|                                                   |       | $                                       | 4,138      |   | $ | 944 |   | $ | (65 | ) |

 

Significantcomponents of the Company's deferred tax assets and liabilities were follows:
| ** **                                                     | ** ** | **April 30,**      | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **2005**                | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | **(in thousands)** | ** ** |
| Deferred income tax  assets:                                   |       |                    |       |   |   |
| Unicap                                                         |       | $                       | 1,166      |   | $ | 1,073 |   |
| Restructuring and asset impairment accruals                    |       | 780                     |       | 1,128 |   |
| Reserve for doubtful accounts, returns and  allowances         |       | 615                     |       | 988 |   |
| Reserve for inventory obsolescence                             |       | 433                     |       | 404 |   |
| State net operating loss carryforwards, net of  federal effect |       | 69                      |       | 304 |   |
| Other                                                          |       | 370                     |       | 3 |   |
| Total deferred  income tax assets                              |       | 3,433                   |       | 3,900 |   |
| Deferred income  tax liabilities:                              |       |                    |       |   |   |
| Depreciation                                                   |       | (660                    | )          | (774 | ) |
| Prepaid expenses and other                                     |       | (196                    | )          | (184 | ) |
| Total deferred  income tax liabilities                         |       | (856                    | )          | (958 | ) |
| Net deferred  income tax assets                                |       | $                       | 2,577      |   | $ | 2,942 |   |

 

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In fiscal 2003, theCompany established a valuation allowance of $1.2 million to reduce itsdeferred tax assets to their estimated realizable value. Based on the level ofhistorical taxable income and forecasts for future taxable income over theperiods in which the temporary differences were anticipated to reverse,management believed it was more likely than not that the Company would beunable to realize the full benefit of its deferred tax assets. In fiscal 2004,results and forecasts for future taxable income improved and managementdetermined that it was then more likely than not that the Company would realizethe benefit of its tax assets. Therefore, in fiscal 2004, the allowance wasreversed.

**Note 7. Shareholders’ Equity**

**Stock Repurchase Program**

In2004, the Company had authorized a stock repurchase program to repurchase up to$6.0 million in company common stock. The Company repurchased 215,100and 56,826 shares of common stock under its Stock Repurchase Program duringfiscal 2005 and 2004, respectively.  Subsequentto year end through July 5, 2005, the Company has repurchased an additional72,297 shares at a total cost of $878,000 bringing the total number of sharesrepurchased under this program since its inception to 344,223 at a total costof $4,210,000. On July 5, 2005, the board of directors approved an increase inthe stock repurchase program to provide for up to $10.0 million of additionalrepurchases beyond the $4.2 million repurchased through July 5, 2005, bringingthe total repurchase authorization since inception of the program to $14.2million. Therepurchases may be made from time to time in the open market or in privatelynegotiated transactions, and the repurchase program may be suspended at anytime without notice. 

**Dividends**

The Company paid dividendstotaling $2,856,000 ($.26 per share) and $538,000 ($.05 per share) duringfiscal 2005 and 2004, respectively. On July 5, 2005, the Board of Directorsapproved a quarterly dividend of $.07 per share for shareholders of record onJuly 19, 2005, payable on August 2, 2005, and a special dividend of $1.34 pershare that, subject to shareholder approval of stock plan amendments that willallow certain adjustments to employee stock-based compensation awards to offsetthe impact of this dividend, will be payable on November 16, 2005 toshareholders of record on November 2, 2005.

**Employee Stock Purchase Plan**

The Company has anEmployee Stock Purchase Plan which allows eligible employees to buy Companystock at a 15% discount from market price utilizing payroll deductions. As ofApril 30, 2005, 187,036 shares had been issued under that plan and 187,964shares remain reserved for future issuance. 

**Stock Plans**

The Company has stock awards available for grant underseven plans that provide for the granting of options, stock, or stockappreciation rights to employees, officers, and directors of the Company forthe equivalent of up to 2,194,710 shares of common stock. There are 392,765awards available for future issuance as of April 30, 2005, primarily under the2000 plan, which generally provides for equal vesting over a four-year period.Some of the plans limit the types and quantities of the awards. Of the awardsavailable for future issuance as of April 30, 2005, the plans, in theaggregate, allow for up to 62,210 in the form of stock grants, up to 287,963 inthe form of stock appreciation rights, and up to 391,740 in the form of stockoptions. Options under the plans expire after 10 years and have been granted atfair value on the date of grant.

39

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The Company also has aStock Bonus Plan that permits eligible employees receiving cash bonuses to electto receive shares of Restricted Stock of the Company in lieu of all or aportion of their cash bonus. Up to 37,500 shares of Restricted Stock can beissued under the Stock Bonus Plan and no more than 11,250 shares of RestrictedStock can be issued to any one participant in any one year.

*Options*

Asummary of Company stock option activity and related information is as follows:
| ** **                  | ** ** | **Year Ended April 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **2005**                                | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                  | ** ** | **Options**                             | ** ** | **Wtd Avg  Exercise  Price ** | ** ** | **Options ** | ** ** | **Wtd Avg  Exercise  Price ** | ** ** | **Options ** | ** ** | **Wtd Avg  Exercise  Price ** | ** ** |
| Balance,  beginning of year |       | 1,471,163                               |       | $ | 6.45 |   | 1,486,535 |   |   | $ | 7.03 |   |   | 1,720,694 |   |   | $ | 8.96 |   |   |
| Granted                     |       | 144,500                                 |       | 12.86 |   | 410,000 |   |   | 4.91 |   |   | 592,500 |   |   | 3.43 |   |   |
| Exercised                   |       | (655,292                                | )          | 5.46 |   | (157,923 | ) |   | 3.75 |   |   | (3,844 | ) |   | 1.86 |   |   |
| Canceled                    |       | (156,720                                | )          | 7.83 |   | (267,449 | ) |   | 8.77 |   |   | (822,815 | ) |   | 8.61 |   |   |
| Balance, end of  year       |       | 803,651                                 |       | $ | 8.13 |   | 1,471,163 |   |   | $ | 6.45 |   |   | 1,486,535 |   |   | $ | 7.03 |   |   |
| Exercisable at end of  year |       | 620,832                                 |       | $ | 7.62 |   | 909,334 |   |   | $ | 7.35 |   |   | 806,501 |   |   | $ | 8.67 |   |   |

 

Thefollowing information is provided for options outstanding and exercisable atApril 30, 2005:
| ** **                                  | ** ** | **Outstanding** | ** ** | **Exercisable**           | ** ** |
|---------------------------------------------|------------|-----------------|------------|---------------------------|------------|
| ** **                                  | ** ** | ** **      | ** ** | **Weighted Average** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of Exercise Prices** | ** ** | ** **      | ** ** | **Options**               | ** ** | **Remaining  Contractual  Life** | ** ** | **Exercise  Price** | ** ** | **Options** | ** ** | **Average  Exercise  Price** | ** ** |
| $3.31 - $3.81                               |       | 106,400         |       |                      | 7.4        |   |   | $ | 3.61 |   | 100,566 |   |   | $ | 3.61 |   |   |
| 3.99 - 3.99                                 |       | 154,878         |       |                      | 8.0        |   |   | 3.99 |   | 133,162 |   |   | 3.99 |   |   |
| 4.55 - 6.29                                 |       | 140,340         |       |                      | 6.7        |   |   | 5.67 |   | 93,405 |   |   | 5.59 |   |   |
| 7.17 - 10.25                                |       | 149,312         |       |                      | 4.9        |   |   | 9.14 |   | 135,978 |   |   | 9.03 |   |   |
| 10.82 - 13.79                               |       | 144,785         |       |                      | 6.2        |   |   | 12.41 |   | 129,785 |   |   | 12.59 |   |   |
| 14.05 - 16.83                               |       | 107,936         |       |                      | 8.2        |   |   | 14.60 |   | 27,936 |   |   | 16.19 |   |   |
|                                        |       | 803,651         |       |                      |       |   |   |   |   | 620,832 |   |   |   |   |   |
|                                             |            |                 |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Restricted Stock*

Under terms of theemployment agreement with its new CEO, the Company awarded a restricted stockgrant of 20,000 shares of common stock in December 2004, which are to be issuedin equal thirds on each twelve month anniversary of his continuous service tothe Company. The Company has recorded deferred compensation related torestricted stock of $246,000 as of April 30, 2005. This amount will beamortized over the remaining 32 months of the initial vesting period. Compensationexpense relating to all restricted stock awards was $35,000, $37,000, and $375,000for the years ended April 30, 2005, 2004, and 2003, respectively.

*Non-employee Stock Options*

In January 2001, under theterms of an endorsement agreement, the Company granted an option to purchase60,000 shares of Company Common Stock. These options are fully vested andexpire in September 2007.

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**Shareholder Rights Plan**

The Company has a Shareholder Rights Plan (“RightsPlan”) designed to protect shareholders from certain takeover tactics. Underthe Rights Plan, a dividend of one Right was distributed for each outstandingshare of common stock.

The Rights are not exercisable or transferable separatelyfrom shares of common stock until the earlier of: (1) 10 days following apublic announcement that a person or group has acquired, or obtained the rightto acquire, beneficial ownership of a designated percentage of the outstandingshares of the common stock or (2) 10 business days following the commencementor announcement of an intention to make a tender or exchange offer that wouldresult in an acquiring person or group beneficially owning a designatedpercentage of outstanding shares of common stock, unless the Board of Directorssets a later date, referred to as the Distribution Date. The Board of Directorshas the option to redeem the Rights at a nominal cost or prevent the Rightsfrom being triggered by designating offers for all outstanding common stock asa permitted offer. The Company may redeem the Rights during the initial 180days after a triggering event generally only by a majority of directors who aredirectors before any person or group obtains or acquires the right to acquire adesignated percentage of outstanding shares of common stock.

The Rights expire onNovember 20, 2008, unless earlier redeemed by the Company. Each Right, otherthan those Rights held by an acquiring person or group, when exercisable, wouldentitle its holders to purchase one one-hundredth of a share of class A juniorpreferred stock, subject to adjustment, or in certain instances, othersecurities of the Company. In certain circumstances, if the Company, in amerger or consolidation, is not the surviving entity or disposes of more than50% of the Company's assets or earnings power, the Rights would entitle theirholders, other than an acquiring person or group, to purchase the highestpriority voting shares in the surviving entity or its affiliates having a marketvalue of two times the exercise price of the Rights. 

**Note 8. Earnings (Loss) Per Share**

Basic earnings (loss) per share is based on theweighted average number of common shares outstanding. Diluted earnings pershare is based 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 of diluted earnings per sharerepresent the restricted stock grant to the Company’s CEO and the net sharesissuable upon assumed exercise of outstanding stock options. As of April 30,2005 and 2004, 152,000 and 425,000 outstanding stock options, respectively,were excluded from the calculation of diluted earnings per share because theexercise prices exceeded the average market value of the common shares. As ofApril 30, 2003, 1,487,000 outstanding stock options were excluded from thecalculation of diluted loss per share, because the Company was in a lossposition.

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Thefollowing table sets forth the computation of basic and diluted earnings (loss)per share from continuing operations:
| ** **                                                       | ** ** | **Year Ended April 30,**                                                   | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                                                       | ** ** | **      2005      **                    | ** ** | **      2004      ** | ** ** | **      2003      ** | ** ** |
| ** **                                                       | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Numerator for basic and  diluted earnings (loss) per share: |       |                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss) from continuing operations                         |       |                                                                                      | $          | 8,614 |   |   |   | $ | 7,785 |   |   |   | $ | (5,018 | ) |   |
| Denominator for  basic earnings (loss) per share:                |       |                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Weighted average common shares                                   |       |                                                                                      | 10,923,188 |   |   |   | 10,704,517 |   |   |   | 10,615,073 |   |   |
| Dilutive effect  of employee stock options and awards            |       |                                                                                      | 512,506    |   |   |   | 457,592 |   |   |   | 0 |   |   |
| Denominator for  diluted earnings (loss) per share               |       |                                                                                      | 11,435,694 |   |   |   | 11,162,109 |   |   |   | 10,615,073 |   |   |
| Basic earnings (loss) per share from continuing  operations      |       |                                                                                      | $          | 0.79 |   |   |   | $ | 0.73 |   |   |   | $ | (0.47 | ) |   |
| Diluted earnings (loss)  per share from continuing operations    |       |                                                                                      | $          | 0.75 |   |   |   | $ | 0.70 |   |   |   | $ | (0.47 | ) |   |

 

**Note 9. Defined Contribution Plan**

The Company has a salarydeferral 401(k) plan covering substantially all of its employees. The planallows eligible employees to contribute a percentage of their pretax earningsannually, subject to limitations imposed by the Internal Revenue Service. Beginningin fiscal 2004, the Company matches 50% of employee contributions up to thefirst 3% of compensation that was deferred by an employee. The plan also allowsthe Company to contribute an amount at its discretion. The Company contributed$169,000 and $211,000 for the years ended April 30, 2005 and 2004,respectively. Prior to fiscal 2004, the Company had made no contributions tothe plan. 

**Note 10. 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 remains aparty to its lawsuit against Genesis Insurance Company. The Company’scomplaint, which was originally filed in the United States District Court forthe Western District of Washington (“Court”), alleged that Genesis’ 2002attempt to rescind the Company’s primary Directors’ and Officers’ liabilityinsurance was unlawful, and sought damages resulting from Genesis’ breaches ofcontract and the duty of good faith and fair dealing. In February 2004,the Court entered an Order granting Genesis’ motions for summary judgment and,accordingly, the Company’s claims against Genesis were dismissed by the Court. TheCompany has appealed the Court’s decision to the United States Circuit Court ofAppeals for the Ninth Circuit (“Court of Appeals”). The Company filed its Briefin the appeal in December 2004 and Genesis filed its answering Brief in January 2005.The Company filed its reply to Genesis’ answering Brief on March 7, 2005. TheCourt of Appeals has scheduled oral argument on the Company’s appeal for July 13,2005.

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**Note 11. Related Party Transactions**

The Company had a Transition and Release Agreementwith a former officer and director, pursuant to which this former officerexecuted promissory notes in favor of the Company in the amounts of $80,000 and$165,223. In March 2004, in accordance with the term of the Agreement, theCompany cancelled the $80,000 promissory note and the former officer repaid the$165,223 promissory note, which had been recorded in accounts receivable.

The Company also had aloan arrangement with a former officer which had been recorded in accountsreceivable and totaled $294,037, including interest. The outstanding balance onthis loan was satisfied in February 2004.

**Note 12. 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 and paid $4.0 million to the plaintiffs. The Companyalso settled a Securities and Exchange Commission investigation of the Companyarising from the circumstances underlying the restatement. That settlement didnot require payment of any fines or penalties.

Restatement expenses amounted to approximately $0.4million for the year ended April 30, 2005, primarily for legal and otherprofessional service costs incurred in connection with the indemnification offormer officers and the ongoing lawsuit against Genesis Insurance Company.

Restatement expenses amounted to approximately $5.0million for the year ended April 30, 2004. Included in this total isapproximately $3.5 million of legal and professional fees, of which $0.9million we have advanced in connection with the indemnification of formerofficers, and $1.2 million of accrued retention bonuses for certain keyemployees. Retention bonuses totaled $1.9 million, the majority of which waspaid out in the fourth quarter of fiscal 2004.

For the year ended April 30, 2003, restatementexpenses of $8.2 million included legal and other professional fees, accruedemployee retention bonuses, amortization of the premium for the replacementDirectors’ and Officers’ liability insurance, and the $4.0 million shareholderlawsuit settlement.

Although the restatementhas been completed, the Company will continue to incur legal and otherprofessional service costs in connection with the ongoing lawsuit againstGenesis Insurance Company. These costs cannot be estimated at this time.

**Note13. Restructuring and Asset Impairment**

TheCompany had two restructuring plans, which are now complete. There is aliability recorded as a result of one of the plans for remaining lease paymentsdue for excess warehouse capacity, all of which is currently being subleasedand which management believes will continue to be subleased through the end ofthe Company’s lease term in 2011. For the year ended April 30, 2005,activity in the accrued liability account consisted of the following:
| ** **        | ** ** | **Balance at**     | ** ** | **Subsequent** | ** ** | ** **     | ** ** | **Balance at** | ** ** | **Due**                | ** ** | **Due**         | ** ** |
|-------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|---------------------|------------|------------------------|------------|-----------------|------------|
| ** **        | ** ** | **April 30,**      | ** ** | **Accruals,**  | ** ** | **Subsequent** | ** ** | **April 30,**  | ** ** | ** Within ** | ** ** | **After**       | ** ** |
| ** **        | ** ** | **2004**                | ** ** | **Net**        | ** ** | **Payments**   | ** ** | **2005**            | ** ** | **1 Year**        | ** ** | **1 Year** | ** ** |
| ** **        | ** ** | **(in thousands)** | ** ** |
| Lease obligations |       |                    | $          | 2,535          |       |           |       | $                   | —     |                   |       |            | $          | (320 | ) |   |   | $ | 2,215 |   |   |   | $ | 320 |   |   | $ | 1,895 |   |
|              |       |                    | $          | 2,535          |       |           |       | $                   | —     |                   |       |            | $          | (320 | ) |   |   | $ | 2,215 |   |   |   | $ | 320 |   |   | $ | 1,895 |   |

 

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**Note 14.Discontinued Retail Operations**

In the fourth quarter of fiscal 2003, the closure ofthe Company-owned retail stores was completed. The revenues and expensesassociated with retail store operations have been presented as discontinuedretail operations in the Statement of Operations for the year ended April 30,2004 and prior periods.

Lossfrom discontinued retail operations, loss on disposal, and revenues were asfollows:
| **April 30,**                                     | ** ** | ** **              | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** | **      2003      ** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| Loss from  discontinued retail operations              |       |                    | $          | —                                       |       |                                         |       | $                                                                                | —     |   |   |   | $ | (124 | ) |   |
| Income tax  benefit                                    |       |                    | —     |                                         |       |                                         | —     |                                                                             |       |   | 31 |   |   |
| Net loss from discontinued retail operations           |       |                    | —     |                                         |       |                                         | —     |                                                                             |       |   | (93 | ) |   |
| Income (loss) on disposal                              |       |                    | $          | —                                       |       |                                         |       | $                                                                                | 231        |   |   |   | $ | (9,193 | ) |   |
| Income tax  (expense) benefit                          |       |                    | —     |                                         |       |                                         | (85        | )                                                                                |       |   | 2,306 |   |   |
| Net income (loss) on disposal                          |       |                    | —     |                                         |       |                                         | 146        |                                                                             |       |   | (6,887 | ) |   |
| Net income (loss) from discontinued retail  operations |       |                    | $          | —                                       |       |                                         |       | $                                                                                | 146        |   |   |   | $ | (6,980 | ) |   |
| Revenues from  discontinued retail operations          |       |                    | $          | —                                       |       |                                         |       | $                                                                                | —     |   |   |   | $ | 18,293 |   |   |

 

**Note 15. QuarterlyFinancial Data (unaudited)**

Thefollowing quarterly information is unaudited. In the opinion of management, allmaterial adjustments necessary to present fairly the results of operations ofthe Company, for the periods presented, have been made. All such adjustmentswere of a normal, recurring nature.
| **2005 Quarter Ended**                         | ** ** | ** **                                                            | ** ** | **Jul. 31, 2004** | ** ** | **Oct. 31, 2004** | ** ** | **Jan. 31, 2005** | ** ** | **Apr. 30, 2005** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net sales                                                |       |                                                                  | $          | 31,899                      |       |                        |       | $                           | 35,538     |                        |       |   | $ | 24,220 |   |   |   | $ | 34,903 |   |   |
| Cost of sales                                            |       |                                                                  | 16,147     |                        |       |                        | 18,399     |                        |       |                        | 13,272     |   |   |   | 18,136 |   |   |
| Gross profit                                             |       |                                                                  | $          | 15,752                      |       |                        |       | $                           | 17,139     |                        |       |   | $ | 10,948 |   |   |   | $ | 16,767 |   |   |
| Total operating expenses                                 |       |                                                                  | $          | 10,793                      |       |                        |       | $                           | 12,568     |                        |       |   | $ | 11,695 |   |   |   | $ | 13,476 |   |   |
| Income (loss) from continuing operations                 |       |                                                                  | $          | 3,250                       |       |                        |       | $                           | 2,915      |                        |       |   | $ | (384 | ) |   |   | $ | 2,833 |   |   |
| Income from discontinued  retail operations,  net of tax |       |                                                                  | —     |                        |       |                        | —     |                        |       |                        | —     |   |   |   | — |   |   |
| Net income (loss)                                        |       |                                                                  | $          | 3,250                       |       |                        |       | $                           | 2,915      |                        |       |   | $ | (384 | ) |   |   | $ | 2,833 |   |   |
| Basic earnings  (loss) per share:                        |       |                                                                  |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Earnings (loss) from continuing operations               |       |                                                                  | $          | 0.30                        |       |                        |       | $                           | 0.27       |                        |       |   | $ | (0.04 | ) |   |   | $ | 0.25 |   |   |
| Earnings from discontinued retail operations             |       |                                                                  | $          | —                      |       |                        |       | $                           | —     |                        |       |   | $ | — |   |   |   | $ | — |   |   |
| Net earnings (loss)                                      |       |                                                                  | $          | 0.30                        |       |                        |       | $                           | 0.27       |                        |       |   | $ | (0.04 | ) |   |   | $ | 0.25 |   |   |
| Diluted earnings  (loss) per share:                      |       |                                                                  |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Earnings (loss) from continuing operations               |       |                                                                  | $          | 0.29                        |       |                        |       | $                           | 0.26       |                        |       |   | $ | (0.04 | ) |   |   | $ | 0.25 |   |   |
| Earnings from discontinued retail operations             |       |                                                                  | $          | —                      |       |                        |       | $                           | —     |                        |       |   | $ | — |   |   |   | $ | — |   |   |
| Net earnings  (loss)                                     |       |                                                                  | $          | 0.29                        |       |                        |       | $                           | 0.26       |                        |       |   | $ | (0.04 | ) |   |   | $ | 0.25 |   |   |

 

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| **2004 Quarter Ended**                         | ** ** | ** **                                                            | ** ** | **Jul. 31, 2003** | ** ** | **Oct. 31, 2003** | ** ** | **Jan. 31, 2004** | ** ** | **Apr. 30, 2004** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                               | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net sales                                                |       |                                                                  | $          | 32,737                      |       |                        |       | $                           | 34,747     |                        |       |   | $ | 22,540 |   |   |   | $ | 38,350 |   |   |
| Cost of sales                                            |       |                                                                  | 17,999     |                        |       |                        | 18,526     |                        |       |                        | 12,508     |   |   |   | 20,751 |   |   |
| Gross profit                                             |       |                                                                  | $          | 14,738                      |       |                        |       | $                           | 16,221     |                        |       |   | $ | 10,032 |   |   |   | $ | 17,599 |   |   |
| Total operating expenses                                 |       |                                                                  | $          | 13,216                      |       |                        |       | $                           | 13,262     |                        |       |   | $ | 11,170 |   |   |   | $ | 12,335 |   |   |
| Income (loss) from continuing operations                 |       |                                                                  | $          | 952                         |       |                        |       | $                           | 2,092      |                        |       |   | $ | (857 | ) |   |   | $ | 5,598 |   |   |
| Income from discontinued  retail operations,  net of tax |       |                                                                  | 146        |                        |       |                        | —     |                        |       |                        | —     |   |   |   | — |   |   |
| Net income (loss)                                        |       |                                                                  | $          | 1,098                       |       |                        |       | $                           | 2,092      |                        |       |   | $ | (857 | ) |   |   | $ | 5,598 | (1) |   |
| Basic earnings  (loss) per share:                        |       |                                                                  |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Earnings (loss) from continuing operations               |       |                                                                  | $          | 0.09                        |       |                        |       | $                           | 0.20       |                        |       |   | $ | (0.08 | ) |   |   | $ | 0.52 |   |   |
| Earnings (loss) from discontinued retail operations      |       |                                                                  | $          | 0.01                        |       |                        |       | $                           | —     |                        |       |   | $ | — |   |   |   | $ | — |   |   |
| Net earnings (loss)                                      |       |                                                                  | $          | 0.10                        |       |                        |       | $                           | 0.20       |                        |       |   | $ | (0.08 | ) |   |   | $ | 0.52 |   |   |
| Diluted earnings  (loss) per share:                      |       |                                                                  |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Earnings (loss) from continuing operations               |       |                                                                  | $          | 0.09                        |       |                        |       | $                           | 0.19       |                        |       |   | $ | (0.08 | ) |   |   | $ | 0.49 |   |   |
| Earnings (loss) from discontinued retail operations      |       |                                                                  | $          | 0.01                        |       |                        |       | $                           | —     |                        |       |   | $ | — |   |   |   | $ | — |   |   |
| Net earnings  (loss)                                     |       |                                                                  | $          | 0.10                        |       |                        |       | $                           | 0.19       |                        |       |   | $ | (0.08 | ) |   |   | $ | 0.49 |   |   |

 

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(1)          In the fourth quarter offiscal 2003, a valuation allowance of $1.2 million was established to reducedeferred tax assets to their estimated realizable value. In the fourth quarterof fiscal 2004, the valuation allowance was reversed.

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**SCHEDULE II**VALUATION AND QUALIFYING ACCOUNTS
| ** **                                             | ** ** | **Balance**             | ** ** | **Charged to**     | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance**     | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|---------------------|------------|----------------|------------|-----------------|------------|
| ** **                                             | ** ** | **beg. of**        | ** ** | **revenue, costs** | ** ** | **other**           | ** ** | ** **     | ** ** | **end of** | ** ** |
| ** **                                             | ** ** | **period**              | ** ** | **or expenses**    | ** ** | **accounts**        | ** ** | **Deductions** | ** ** | **period**      | ** ** |
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| *Year Ended April 30, 2005*                            |       |                    |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Reserves and allowances  deducted from asset accounts: |       |                    |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Allowance for doubtful accounts                        |       | $                       | 705        |                    |       | $                   | (102       | )              |       |            | $          | — |   |   |   | $ | 290 | (A) |   | $ | 313 |   |
| Reserve for returns                                    |       | $                       | 972        |                    |       | $                   | 2,898      |           |       |            | $          | — |   |   |   | $ | 3,040 | (B) |   | $ | 830 |   |
| Reserve for sales allowances                           |       | $                       | 819        |                    |       | $                   | 2,463      |           |       |            | $          | — |   |   |   | $ | 2,655 | (C) |   | $ | 627 |   |
| Reserve for inventory obsolescence                     |       | $                       | 697        |                    |       | $                   | 690        |           |       |            | $          | — |   |   |   | $ | 230 | (D) |   | $ | 1,157 |   |
| *Year  Ended April 30, 2004*                           |       |                    |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Reserves and allowances  deducted from asset accounts: |       |                    |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Allowance for doubtful accounts                        |       | $                       | 1,541      |                    |       | $                   | (287       | )              |       |            | $          | — |   |   |   | $ | 549 | (A) |   | $ | 705 |   |
| Reserve for returns(1)                                 |       | $                       | 1,215      |                    |       | $                   | 3,122      |           |       |            | $          | — |   |   |   | $ | 3,365 | (B) |   | $ | 972 |   |
| Reserve for sales allowances(1)                        |       | $                       | 990        |                    |       | $                   | 2,290      |           |       |            | $          | — |   |   |   | $ | 2,461 | (C) |   | $ | 819 |   |
| Reserve for inventory obsolescence                     |       | $                       | 1,056      |                    |       | $                   | 218        |           |       |            | $          | — |   |   |   | $ | 577 | (D) |   | $ | 697 |   |
| Reserve for deferred income tax assets                 |       | $                       | 1,186      |                    |       | $                   | —     |           |       |            | $          | — |   |   |   | $ | 1,186 | (E) |   | $ | — |   |
| *Year  Ended April 30, 2003*                           |       |                    |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Reserves and allowances  deducted from asset accounts: |       |                    |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Allowance for doubtful accounts                        |       | $                       | 2,063      |                    |       | $                   | 893        |           |       |            | $          | — |   |   |   | $ | 1,415 | (A) |   | $ | 1,541 |   |
| Allowance for returns and other                        |       | $                       | 2,176      |                    |       | $                   | 8,173      |           |       |            | $          | — |   |   |   | $ | 8,144 | (B,C) |   | $ | 2,205 |   |
| Reserve for inventory obsolescence                     |       | $                       | 1,557      |                    |       | $                   | 344        |           |       |            | $          | — |   |   |   | $ | 845 | (D) |   | $ | 1,056 |   |
| Reserve for deferred  income tax assets                |       | $                       | —     |                    |       | $                   | 1,186      |           |       |            | $          | — |   |   |   | $ | — |   |   | $ | 1,186 |   |

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(1)          In fiscal year 2004, weseparated our allowance for returns into two components:  allowance for returns and reserve for salesallowances.

(A)       Deductions consist ofwrite-offs of uncollectible accounts, net of recoveries. 

(B)        Deductions consist ofcharges for sales returns and other credits allowed. 

(C)        Deductions consist ofcharges for sales allowances. 

(D)       Deductions consist ofinventory sold at a loss. 

(E)        Deductions consist ofreversals of the valuation allowance for deferred income tax assets.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized. 
|               | CUTTER & BUCK INC. (Registrant) |
|---------------|-------------------------------------|
| July 14, 2005 | By:                                 | /s/ JOHN T. WYATT |
|          |                                | John T. Wyatt |
|          |                                | *President and  Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.
| /s/ JOHN T. WYATT            |   | President, Director, and Chief |   | July 14, 2005 |
|------------------------------|--------|--------------------------------|--------|---------------|
| John T. Wyatt                |   | Executive Officer              |   |          |
|                         |   | (Principal Executive Officer)  |   |          |
| /s/   ERNEST R. JOHNSON |   | Chief Financial Officer        |   | July 14, 2005 |
| Ernest R. Johnson            |   | (Principal  Financial and      |   |          |
|                         |   | Accounting  Officer)           |   |          |
| /s/ DOUGLAS  G. SOUTHERN     |   | Chairman                       |   | July 14, 2005 |
| Douglas G. Southern          |   |                           |   |          |
| /s/ HENRY  L. KOTKINS, JR.   |   | Director                       |   | July 14, 2005 |
| Henry L. Kotkins, Jr.        |   |                           |   |          |
| /s/ LARRY  C. MOUNGER        |   | Director                       |   | July 14, 2005 |
| Larry C. Mounger             |   |                           |   |          |
| /s/ WHITNEY  R. TILSON       |   | Director                       |   | July 14, 2005 |
| Whitney R. Tilson            |   |                           |   |          |
| /s/ JAMES  C. TOWNE          |   | Director                       |   | July 14, 2005 |
| James C. Towne               |   |                           |   |          |

 

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