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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended Commission File
July 31, 1996 No. 0-26608
CUTTER & BUCK INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Washington 91-1474587
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2701 First Avenue, Suite 500
Seattle, WA 98121
(Address of Principal Executive Offices)
(206) 622-4191
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock of the registrant outstanding as of
September 10, 1996 was 3,668,242.
Transitional Small Business Disclosure Format (Check One)
Yes No X
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Page 1 of 11
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CUTTER & BUCK INC.
Quarterly Report on Form 10-QSB
For the Quarter Ended July 31, 1996
INDEX
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited):
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Page 2
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
CUTTER & BUCK INC.
BALANCE SHEETS
ASSETS
April 30, July 31,
1996 1996
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(unaudited)
Current Assets:
Cash $2,010,047 $306,011
Due from factors 5,735,287 3,231,075
Other receivables, net of allowance for doubtful
accounts of $212,314 and $157,795
respectively 1,917,326 4,860,265
Inventories 4,693,433 7,448,618
Deferred income taxes 180,000 180,000
Prepaid expenses and other current assets 1,098,972 1,262,731
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Total current assets 15,635,065 17,288,700
Furniture and equipment 798,922 1,768,902
Other assets 735,931 678,874
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Total assets $17,169,918 $19,736,476
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,313,937 $2,550,535
Accrued liabilities 499,362 243,300
Income taxes payable 220,000 282,600
Loan payable to bank 114,119 2,070,541
Current portion of capital lease obligations 0 77,119
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Total current liabilities 3,147,418 5,224,095
Capital lease obligations 0 337,388
Shareholders' equity:
Common stock, no par value: 25,000,000 shares
authorized; 3,668,242 issued and
outstanding 15,156,702 15,167,432
Note receivable from shareholder (44,520) (44,520)
Accumulated deficit (1,089,682) (947,919)
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Total shareholders' equity 14,022,500 14,174,993
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Total liabilities and shareholders' equity $17,169,918 $19,736,476
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See accompanying notes.
Page 3
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CUTTER & BUCK INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
---------------------
July 31, July 31,
1995 1996
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Net sales $3,304,756 $7,999,639
Cost of sales 2,077,089 5,020,064
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Gross profit 1,227,667 2,979,575
Operating expenses:
Design and production 214,515 336,247
Selling and handling 668,189 1,711,920
General and administrative 410,924 713,321
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Total operating expenses 1,293,628 2,761,488
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Operating income (loss) (65,961) 218,087
Other income (expense):
Factor commissions and interest expense,
net of interest income (112,880) (111,545)
License and royalty income 115,516 96,221
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Total other income (expense) 2,636 (15,324)
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Income (loss) before income taxes (63,325) 202,763
Income taxes 0 (61,000)
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Net income (loss) ($63,325) $141,763
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Net income (loss) per share ($0.02) $0.04
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Shares used in computation of
net income (loss) per share 2,538,659 3,941,213
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See accompanying notes.
Page 4
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CUTTER & BUCK INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
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July 31, July 31,
1995 1996
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OPERATING ACTIVITIES
Net Income (loss) ($63,325) $141,763
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 40,904 179,669
Changes in assets and liabilities:
Receivables, net 1,302,206 (438,727)
Inventories (1,134,627) (2,755,185)
Prepaid expenses and other current
assets (99,664) (163,759)
Accounts payable and accrued
liabilities (41,442) (19,464)
Income taxes payable 0 62,600
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Net cash provided by (used for) operating activities 4,052 (2,993,103)
INVESTING ACTIVITIES
Purchases of furniture and equipment (211,723) (651,735)
Increase in trademarks and patents (580) (3,945)
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Net cash used in investing activities (212,303) (655,680)
FINANCING ACTIVITIES
Proceeds from loan from bank 0 1,956,422
Payments under capital lease obligations (9,442) (22,405)
Net decrease in advances from factor (839,199) 0
Issuance of preferred stock, net of offering costs 1,052,871 0
Issuance of common stock 0 10,730
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Net cash provided by financing activities 204,230 1,944,747
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Net decrease in cash (4,021) (1,704,036)
Cash, beginning of period 499,417 2,010,047
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Cash, end of period $495,396 $306,011
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SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $79,950 $53,165
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Cash paid during the period for income taxes $0 $178,400
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Noncash financing and investing activities:
Equipment acquired with capital leases $0 $436,912
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See accompanying notes.
Page 5
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NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Cutter & Buck Inc. ("Company"), in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation have been included. The Company's revenues are
seasonal, and therefore the results of operations for the three months ended
July 31, 1996 may not be indicative of the results for the full fiscal year.
For further information, refer to the financial statements and footnotes thereto
for the year ended April 30, 1996, included in the Company's filing on Form
10-KSB.
2. NET INCOME PER SHARE
Net income per share has been computed by dividing net income by the
weighted average number of common shares and equivalents outstanding. Common
share equivalents included in the computation represent shares issuable upon
assumed exercise of stock options and warrants except when the effect of their
inclusion would be antidilutive.
3. DUE FROM FACTOR
Pursuant to the terms of factoring agreements, the Company assigns a
portion of its qualifying accounts receivable to factors on a preapproved,
nonrecourse basis. The amount due from factors consisted of the following:
April 30, 1996 July 31, 1996
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Unmatured receivables:
Nonrecourse $ 5,779,659 $ 3,147,258
With recourse 55,385 50,056
Matured receivables 160,331 308,232
Reserve for sales returns and allowances (260,088) (274,471)
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$ 5,735,287 $ 3,231,075
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4. INCOME TAXES
The Company's deferred tax assets include the benefit to be derived from
unused net operating tax loss carryforwards of approximately $600,000 at April
30, 1996. The net operating loss carryforwards begin to expire in 2006. A
valuation allowance has been recorded for financial reporting purposes to
recognize the Company's net deferred tax assets at their estimated realizable
value.
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5. LINE OF CREDIT
On July 8, 1996, the Company entered into a loan agreement with Bank of
America NW, N.A. d/b/a Seafirst Bank (Seafirst Bank) for a $7 million line of
credit, replacing the Company's previous line of credit. The line of credit
with Seafirst Bank is used for international letters of credit, bankers'
acceptances and working capital advances. Interest on borrowings is charged and
payable monthly at Seafirst Bank's prime rate. The line of credit is
collateralized by a security interest in the Company's inventory, accounts
receivable, contract rights and general intangibles. The loan agreement
contains certain restrictive covenants covering minimum working capital,
tangible net worth and accounts receivable turnover, as well as a maximum
debt-to-equity ratio. Seafirst Bank and Republic Factors Corp. have entered
into an intercreditor agreement allocating between them priority as to the
Company's assets in which both financial institutions have a security interest.
At July 31, 1996, letters of credit outstanding totaled $2,727,813 and
working capital advances totaled $2,070,541.
6. EUROPEAN OPERATIONS
The Company formed a United Kingdom subsidiary in February, 1996 for direct
marketing, sales and distribution of the Company's sportswear and outerwear in
the United Kingdom and is in the process of forming a Netherlands subsidiary for
its operations in Europe.
7. SHAREHOLDERS' EQUITY
The Company has three stock option plans that provide for the granting
of options to employees, officers and directors of the Company to purchase up
to 525,313 shares of Common Stock. Options granted under the 1991 plan
provide for 50% vesting on the first anniversary from the date of grant and
25% vesting on each of the second and third anniversaries. Options granted
under the 1995 employee plan generally provide for vesting over a five-year
period with vesting at 20% each year. Options granted under the 1995
director plan become exercisable six months after the date of grant. Options
under the plans expire after 10 years and have been granted at fair market
value on the date of grant. At July 31, 1996, 409,822 options to purchase
shares of Common Stock were outstanding under these plans, 160,722 of which
were exercisable, and 115,145 shares under the plans remained available for
future grant.
Page 7
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
OVERVIEW
The Company designs, sources and markets updated, traditional men's
sportswear and outerwear. It distributes its products predominantly through
golf pro shops and resorts, upscale men's specialty stores and corporate sales
accounts. The Company continues to emphasize the golf distribution channel
because it believes this is an effective way to reach its target market of
affluent, sports-minded 30- to 55-year-old men and build brand identity. The
Company has found golf pro shops to be receptive to its distinctive product,
merchandising approach and sales support.
Historically, the Company has experienced its lowest level of net sales and
profitability in its first and third quarters, ending July 31 and January 31,
respectively. Correspondingly, the Company's highest level of sales and
profitability have been achieved in its second and fourth quarters, ending
October 31 and April 30, respectively. This seasonality has resulted primarily
from the timing of shipments to golf pro shops and men's specialty stores due to
seasonal fluctuations in consumer demand, the timing and amount of orders from
key customers, the timing of sales of seasonal remainder merchandise and
availability of product. This pattern of sales affects working capital
requirements and liquidity, as the Company generally must finance higher levels
of inventory during the first and third quarters, when sales are lowest.
RESULTS OF OPERATIONS
NET SALES increased 142.1% in the three months ended July 31, 1996 to
$7,999,639 from $3,304,756 in the three months ended July 31, 1995. For the
first quarter of fiscal year 1997 compared to the first quarter of fiscal
year 1996, increases in net sales in the United States to the golf
distribution, corporate and specialty store channels were $2,635,719,
$1,054,635 and $639,745, respectively. Increases in these three channels
accounted for approximately 92% of the overall increase in net sales. In
addition to these channels, for the three months ended July 31, 1996,
international distributor sales also increased and net sales of the Company's
direct distribution in the United Kingdom and Europe totaled $332,723.
GROSS PROFIT increased 142.7% in the three months ended July 31, 1996 to
$2,979,575 from $1,227,667 in the three months ended July 31, 1995. Gross
profit as a percentage of net sales was 37.2% for the first quarter of fiscal
1997 and 37.1% for the first quarter of fiscal year 1996. The expected
improvement in gross profit due to volume and letter of credit financing were
offset by additional expenses to expedite delivery of goods from Chinese
manufacturers due to threatened trade sanctions, costs to assure timely
deliveries during the Company's transition to its new distribution facility and
start-up expenses associated with an in-house embroidery operation and the
Company's new European operations.
OPERATING EXPENSES increased to $2,761,488 for the three months ended July
31, 1996 from $1,293,628 for the three months ended July 31, 1995, but
decreased as a percentage of sales, to 34.5% in the first quarter of fiscal year
1997 from 39.1% in the first quarter of fiscal year 1996. The increase in
operating expenses was due primarily to increases in management, staffing and
facilities costs to support the Company's expanded operations. Selling and
handling costs increased by $1,043,731, making up 71% of the overall increase in
operating expenses. The majority of the increase in selling and handling costs
was due to increased sales commissions and staffing costs related to a higher
sales volume and a larger sales force. The Company also has shifted more of its
sales force to exclusive sales representation of the Company's products. In
addition, the Company incurred additional handling costs associated with
establishing its own warehouse facility in Seattle.
Page 8
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OTHER INCOME License and royalty income earned under licensing contracts
totaled $96,221 for the three months ended July 31, 1996 and $115,516 for the
three months ended July 31, 1995. The decline in license and royalty income is
primarily due to the Company's re-purchase of its outerwear license effective
May 1, 1996 which now allows the Company to directly design and market Cutter &
Buck outerwear. Factor commissions and interest expense was $111,545 in the
quarter ended July 31, 1996 compared to $112,880 in the quarter ended July 31,
1995. These costs were comparable for the two periods despite increased sales
volume in fiscal 1996 due to a reduction in the proportion of sales factored .
INCOME TAXES The Company recorded $61,000 of income tax expense in the
three months ended July 31, 1996 and none in the three months ended July 31,
1995 due to the operating loss incurred during the period. As of April 30,
1996, $600,000 in net operating loss carryforwards remain available to offset
future taxable income.
As a result of the foregoing factors, the Company had NET INCOME of
$141,763 for the three months ended July 31, 1996 compared to a net loss of
$63,325 for the three months ended July 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds is to finance working capital
associated with growth in sales volume, specifically accounts receivable and
finished goods inventory including the Company's CLASSIC products with
multi-season appeal. Working capital for the quarter ended July 31, 1996 has
been funded primarily by collections of accounts receivable and bank
borrowing.
Net cash used for operating activities was $2,993,103 for the three months
ended July 31, 1996 compared to cash provided by operating activities of $4,052
for the three months ended July 31, 1995. For the quarter ended July 31, 1996,
cash was used to support an increase in inventory of $2,755,185 and a net
increase in accounts receivable of $438,727. For the quarter ended July 31,
1995, cash was provided primarily by a net reduction of accounts receivable that
was offset by the use of cash to support an increase in inventory.
Net cash used in investing activities of $655,680 for the three months
ended July 31, 1996 was primarily attributable to an investment in warehouse
equipment and leasehold improvements totaling $203,652, in-store fixtures of
$350,828 and other furniture and equipment totaling $97,255. For the quarter
ended July 31, 1995, the Company purchased in-store fixtures totaling $138,260
and other furniture and equipment totaling $73,463.
Net cash provided by financing activities for the three months ended July
31, 1996 increased to $1,944,747 compared to $204,230 during the three
months ended July 31, 1995. The three months ended July 31, 1996 included
$1,956,422 generated by bank borrowing and the issuance of capital stock under
the Company's employee stock purchase plan. For the three months ended July 31,
1995, cash provided by financing activities included $1,052,871 generated by the
issuance of Series B Preferred Stock offset by $839,199 in reduced advances from
the factor.
The Company has a $7 million line of credit with Bank of America NW, N.A.
d/b/a Seafirst Bank for international letters of credit, bankers' acceptances
and working capital advances. Interest on borrowings is charged and payable
monthly at Seafirst Bank's prime rate. The line of credit is collateralized by
a security interest in the Company's inventory, accounts receivable, contract
rights and general intangibles. The loan agreement contains certain
restrictive covenants covering minimum working capital, tangible net worth
and accounts receivable turnover, as well as a maximum debt-to-equity ratio.
At July 31, 1996, letters of credit outstanding totaled $2,727,813 and
working capital advances totaled $2,070,541.
Page 9
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
Page 10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CUTTER & BUCK INC.
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(Registrant)
Dated: September 16, 1996 By /s/ Martin J. Marks
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Martin J. Marks
Senior Vice-President,
Chief Operating Officer,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Page 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> JUL-31-1996
<CASH> 306,011
<SECURITIES> 0
<RECEIVABLES> 8,091,340
<ALLOWANCES> (157,795)
<INVENTORY> 7,448,618
<CURRENT-ASSETS> 17,288,700
<PP&E> 2,400,833
<DEPRECIATION> (631,931)
<TOTAL-ASSETS> 19,736,476
<CURRENT-LIABILITIES> 5,224,095
<BONDS> 0
0
0
<COMMON> 15,167,432
<OTHER-SE> (44,520)
<TOTAL-LIABILITY-AND-EQUITY> 19,736,476
<SALES> 7,999,639
<TOTAL-REVENUES> 7,999,639
<CGS> 5,020,064
<TOTAL-COSTS> 5,020,064
<OTHER-EXPENSES> 2,761,488
<LOSS-PROVISION> (26,022)
<INTEREST-EXPENSE> 111,545
<INCOME-PRETAX> 202,763
<INCOME-TAX> 61,000
<INCOME-CONTINUING> 141,763
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,763
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
