<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 1996
PROSPECTUS
1,400,000 Shares
[LOGO]
Common Stock
------------
Of the shares of Common Stock offered hereby, 1,300,000 are being sold by
Cutter & Buck Inc. ("Cutter & Buck" or the "Company") and 100,000 shares are
being sold by the Selling Shareholders. The Company will not receive any
proceeds from the sale of shares by the Selling Shareholders. See "Principal and
Selling Shareholders." The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "CBUK." On September 25, 1996, the last
reported sale price of the Common Stock on the Nasdaq National Market was
$13.625 per share. See "Price Range of Common Stock."
-------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(3)
<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(4)................. $ $ $ $
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $450,000.
(3) The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 210,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If the Underwriters exercise
this option in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.
-------------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, and subject to the right of the Underwriters to reject any
order in whole or in part. It is expected that certificates for the shares of
Common Stock will be available for delivery in New York, New York, on or about
, 1996.
-------------------
Needham & Company, Inc. Wedbush Morgan Securities
The date of this Prospectus is , 1996.
<PAGE>
[PHOTOGRAPHS OF COMPANY PRODUCTS]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND
UNCERTAINTIES, AND ACTUAL RESULTS MAY DIFFER MATERIALLY. SEE "RISK FACTORS."
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
The Company designs, sources and markets its distinctive Cutter & Buck brand
sportswear and outerwear predominantly through golf pro shops and resorts,
upscale men's specialty stores and corporate sales accounts. The Company has
developed a colorful, innovative collection of sportswear apparel targeted to
the affluent 30- to 55-year-old men's market, projecting an updated American
traditional design evocative of a sporting lifestyle. The products' high-quality
fabrics and detailing reinforce the premium image of the brand while the
generous fit provides a feeling of comfort and versatility. Product marketing
connected with sports and leisure activities, particularly golf, helps the
Company create a positive lifestyle image that contributes to the brand's strong
appeal for its target consumers. The Company benefits from the trend toward
greater acceptance of relaxed standards of dress in the workplace that results
in sportswear representing a growing portion of consumer wardrobes. Since its
formation on January 5, 1990, the Company has achieved consistent annual sales
increases, realizing net sales of $21.6 million and net income of $1.0 million
in fiscal 1996, and net sales of $8.0 million and net income of $142,000 in the
first quarter of fiscal 1997.
The key elements of the Company's strategy to enhance its reputation as a
leading, premium brand in the men's sportswear apparel market are to: (i)
reinforce the desirability and prestige of the Cutter & Buck brand by blending
innovative design with extensive detailing and high-quality product construction
in fresh variations season to season while maintaining its signature design
identity; (ii) expand distribution of its products through golf pro shops, where
the Company believes its time-constrained target consumers are likely to shop
before and after playing golf; and (iii) merchandise its products, including
knit and woven sport shirts, pants, shorts, sweaters, sweatshirts, outerwear and
caps, in its customers' stores as a collection rather than as isolated
categories.
The Company currently offers its customers two collections a year, spring
and fall, composed of FASHION and complementary CLASSIC products. FASHION
products incorporate the latest innovations in color, fabric and styling and
tend to remain in the line for only one season. CLASSIC products are
predominantly solid-color garments with multi-season appeal. The Company
presents each season's collections to its customers in three or four groups of
distinct, coordinated merchandise. These groups are available for delivery to
customers during sequential time periods, typically from May to October for fall
collections and from November to April for spring collections. To enhance
consistency, quality and on-time delivery of its products, the Company works
with a select group of high-quality, reliable foreign and domestic contract
manufacturers that are knowledgeable and experienced in the intricate design and
manufacturing processes required to produce the Company's products.
"CUTTER & BUCK" and the Cutter & Buck pennant logo are registered trademarks
of the Company. All other trademarks appearing in this Prospectus are the
property of their respective holders.
The Company is incorporated in Washington. Its executive offices are located
at 2701 First Avenue, Suite 500, Seattle, Washington 98121, and its telephone
number is (206) 622-4191.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............... 1,300,000 shares
Common Stock offered by the Selling
Shareholders..................................... 100,000 shares
Common Stock to be outstanding after this
offering......................................... 4,971,741(1)
Use of proceeds................................... For working capital purposes, including repayment
of all outstanding borrowings under the Company's
revolving line of credit and increases in
inventory and trade receivables. See "Use of
Proceeds."
Nasdaq National Market symbol..................... CBUK
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED APRIL 30, ENDED JULY 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Net sales............................. $ 5,405 $ 8,036 $ 9,882 $ 13,435 $ 21,645 $ 3,305 $ 8,000
Gross profit.......................... 1,319 2,045 3,438 4,675 7,981 1,228 2,980
License and royalty income............ -- 39 285 497 457 116 96
Net income (loss)..................... $ (730) $ (538) $ 101 $ 239 $ 996 $ (63) $ 142
Net income (loss) per share........... $ 0.05 $ 0.12 $ 0.29 $ (0.02) $ 0.04
Shares used in computation of net
income (loss) per share (2).......... 1,933 2,034 3,476 2,539 3,941
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1996
-------------------------
ACTUAL AS ADJUSTED(3)
--------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................................................................... $ 12,065 $ 28,228
Total assets.......................................................................... 19,736 33,829
Short-term debt (4)................................................................... 2,148 77
Long-term debt........................................................................ 337 337
Total shareholders' equity............................................................ 14,175 30,338
</TABLE>
- ------------------------------
(1) Based on shares outstanding as of July 31, 1996. Excludes 270,574 shares of
Common Stock reserved for issuance pursuant to the Company's 1991 Stock
Option Plan (the "1991 Plan"), 208,140 shares of Common Stock reserved for
issuance pursuant to the Company's 1995 Employee Stock Option Plan (the
"1995 Plan"), 46,253 shares of Common Stock reserved for issuance pursuant
to the Company's 1995 Nonemployee Director Stock Incentive Plan (the "1995
Director Plan"), and 248,474 shares of Common Stock reserved for issuance
pursuant to the Company's 1995 Employee Stock Purchase Plan (the "Stock
Purchase Plan"). As of the date of this Prospectus, the Company has granted
options for an aggregate of 409,822 shares of Common Stock under these plans
at a weighted average exercise price of $5.11 per share. Also excludes
131,531 shares of Common Stock reserved for issuance pursuant to outstanding
warrants with an exercise price of $8.40 per share granted in connection
with the Company's initial public offering. Includes 3,500 shares issuable
upon exercise of options, which shares are to be sold by a Selling
Shareholder in this offering. See "Management -- Benefit Plans,"
"Description of Capital Stock" and Note 10 of Notes to Consolidated
Financial Statements.
(2) The basis for determining the number of shares used in computing net income
(loss) per share is described in Note 1 of Notes to Consolidated Financial
Statements.
(3) Adjusted to give effect to the anticipated application of the estimated net
proceeds to the Company of this offering based on the assumed public
offering price of $13.625 per share. See "Use of Proceeds."
(4) Includes borrowings of $2.1 million under the Company's revolving line of
credit, all of which will be repaid with a portion of the net proceeds of
this offering.
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK BEING OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. CERTAIN STATEMENTS UNDER THE CAPTIONS "PROSPECTUS SUMMARY," "USE
OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" AND "BUSINESS," AS WELL AS STATEMENTS MADE IN THE
FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS, CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: VOLATILITY OF THE APPAREL INDUSTRY; UNEXPECTED
CHANGES IN FASHION TRENDS; PRIOR SEASON INVENTORIES; COMPETITION; DEPENDENCE ON
KEY PERSONNEL; RELIANCE ON CONTRACTORS AND FOREIGN SOURCING; IMPORT
RESTRICTIONS; AND OTHER FACTORS REFERENCED IN THIS PROSPECTUS. IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK, INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS.
VOLATILITY OF APPAREL INDUSTRY. The apparel industry historically has been
subject to substantial cyclical variations. The Company and other apparel
manufacturers rely on the expenditure of discretionary income for most, if not
all, of their sales. Any downturn, whether real or perceived, in economic
conditions or prospects could adversely affect consumer spending habits and the
Company's sales and results of operations. During the past several years,
various retailers, including some of the Company's customers, have experienced
financial problems, which increases the risk of extending credit to such
retailers. The Company has historically assigned the credit risk of its customer
receivables to its factor. A customer's financial problems could cause the
Company's factor to limit the amount of customer receivables that the Company
may assign to the factor, and may cause the Company to assume more credit risk
relating to those receivables or to curtail business with the customer. The
Company has recently discontinued its use of the factor for management of its
accounts receivable credit and collection function associated with its sales to
the golf, corporate and international distribution channels. The Company plans
to use the factor's accounts receivable management exclusively for its sales to
the specialty store channel. The Company has only limited experience in managing
its credit and collection operations and there can be no assurance that the
increased assumption of this credit risk will not have a material adverse effect
on the Company's financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Domestic Distribution and Sales."
UNEXPECTED CHANGES IN FASHION TRENDS; PRIOR SEASON INVENTORIES. Fashion
trends can change rapidly, and the Company's business is particularly sensitive
to changes because the Company typically designs and arranges for the
manufacture of its apparel substantially in advance of sales of its products to
consumers. There can be no assurance that the Company will accurately anticipate
shifts in fashion trends and adjust its merchandise mix to appeal to changing
consumer tastes in a timely manner. If the Company misjudges the market for its
products or is unsuccessful in responding to changes in fashion trends or in
market demand, the Company could experience insufficient or excess inventory
levels, missed market opportunities or higher markdowns, any of which would have
a material adverse effect on the Company's financial condition and results of
operations. At the end of its fall and spring seasons, the Company has unsold
FASHION inventory as a consequence of making inventory available to satisfy
anticipated customer demand across a broad range of styles. The Company
historically has been able to sell this inventory approximately at cost through
sales to off-price retail accounts in subsequent seasons and recently, in
response to consolidation in the off-price channel, increased marketing of this
inventory to regular retail accounts. If the Company experiences increased
amounts of excess inventory, or if the Company's ability to dispose of its prior
season FASHION merchandise is impaired, due to abrupt changes in fashion trends
or for other reasons, the Company's financial condition and results of
operations could be materially adversely affected. See "Business -- Product
Development and Sourcing" and "-- Order Booking Cycle and Backlog."
5
<PAGE>
COMPETITION. The men's sportswear segment of the apparel industry is highly
competitive. The Company's future growth and financial success depend on the
Company's ability to further penetrate the golf distribution channel and
increase the size of its average annual net sales per account in that channel,
as well as its ability to penetrate and expand its four other distribution
channels. The Company encounters substantial competition in the golf
distribution channel from Ashworth, Izod Club and Polo/Ralph Lauren. Apparel
companies recently entering the golf distribution channel, such as Tommy
Hilfiger, will further increase the level of competition in that channel. During
fiscal 1996, the golf distribution channel represented approximately 53% of the
Company's net sales. Most of the Company's competitors are significantly larger
and more diversified than the Company and have substantially greater resources
available for developing and marketing their products. There can be no assurance
that the Company will be able to maintain its growth rate or to increase its
market share in the golf distribution channel at the expense of existing
competitors and other apparel manufacturers choosing to enter that market. In
addition, there can be no assurance that the Company will be able to achieve
significant growth in its other distribution channels. See "Business --
Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's success largely depends on the
personal efforts and abilities of key executives and consultants, including
Harvey N. Jones, the Company's President and Chief Executive Officer, Martin J.
Marks, the Company's Senior Vice President, Chief Operating Officer, Treasurer
and Secretary, and Joey Rodolfo, who is a former officer and employee of the
Company and now provides design services to the Company on an exclusive basis
under a Consulting Agreement. Mr. Jones and Mr. Rodolfo co-founded the Company
in January 1990. The loss of the services of any of Messrs. Jones, Marks or
Rodolfo could have a material adverse effect on the Company. The Company
maintains "key man" life insurance policies in the amount of $1.0 million on
each of Mr. Jones and Mr. Rodolfo. There can be no assurance that such insurance
will continue to be available at an acceptable cost, if at all, or would
adequately compensate the Company for a loss of services. The Company does not
have an employment agreement with either Mr. Jones or Mr. Marks. Mr. Rodolfo's
Consulting Agreement extends through July 1, 1997 and contains provisions
restricting Mr. Rodolfo's ability to compete with the Company in certain product
and geographic areas following termination of the Consulting Agreement. Although
the Company and Mr. Rodolfo have started to discuss an extension of his
Consulting Agreement, there can be no assurance that they will reach agreement
on any such extension, which may result in the Company hiring a new lead
designer. See "Business -- Product Development and Sourcing," "Management --
Directors and Executive Officers" and "Certain Transactions."
RELIANCE ON CONTRACTORS AND FOREIGN SOURCING. The Company obtains all of
its garments from independent foreign and domestic suppliers, and does not have
formal long-term contracts with any of its suppliers or agents. Currently, the
Company's production is sourced through an agent in Thailand, two agents in Hong
Kong coordinating Chinese suppliers, an agent managing other Asian sources of
supply and direct factory relationships in Asia and California. Approximately
45% of the Company's knit shirt production is currently managed by its agent in
Thailand. Due to the concentration of production and production control with
these parties, the Company would experience difficulty satisfying its production
requirements if any of them had an interruption of business or were unable or
unwilling to meet the Company's production needs. Furthermore, the Company could
experience delays in shifting production to other manufacturers or agents
because of the complex fabrication, unique trims and extensive detailing of its
products. In addition, there can be no assurance that the Company will not
experience difficulties with third parties in the manufacture of its products.
Delays in shipments to the Company, inconsistent or inferior garment quality and
other factors beyond the Company's control would adversely affect the Company's
relationships with its customers, its reputation in the industry and its sales
and results of operations. The Company has experienced production delays in the
past, and there can be no assurance that production delays will not occur in the
future. Because a substantial portion of the Company's products are manufactured
in China and Thailand, the Company's operations may also be affected by
economic, political, governmental and labor conditions in those countries. In
addition, changes in economic policies and political conditions in those
countries could result in disruption of trade, new or additional currency or
exchange controls or the
6
<PAGE>
imposition of other restrictions. The Company incurred increased expenses in its
first quarter of fiscal 1997 to expedite products from Chinese manufacturers due
to threatened trade sanctions. Furthermore, although the Company contracts to
purchase its products in United States dollars, changes in exchange rates could
increase the prices the Company pays for its products. Currently, the Company
does not engage in any hedging activities with respect to such exchange rate
risk. See "Business -- Product Development and Sourcing."
IMPORT RESTRICTIONS. The Company's import operations are subject to
constraints imposed by bilateral textile agreements between the United States
and each of China and Thailand. These agreements, which have been negotiated
under the framework established by the Arrangement Regarding International Trade
in Textiles, known as the Multifiber Agreement, impose quotas on the amount and
type of goods that can be imported into the United States from these countries.
Such agreements also allow the United States to impose at any time restraints on
the importation of categories of merchandise that, under the terms of the
agreements, are not subject to specified limits. The Company's imported products
also are subject to U.S. customs duties, which are a material portion of the
Company's cost of goods, and customs inspections, which could result in delays
in delivery of the Company's products. Partly as a result of changes to customs
laws enacted in December 1994, importers such as the Company may face increasing
scrutiny for the acts of their manufacturers, suppliers and agents. While to
date the Company has experienced no material disruption of its business due to
quota or customs restrictions, there can be no assurance that it will not face
such disruptions in the future. A substantial increase in customs duties or
decrease in quotas could have an adverse effect on the Company's results of
operations. Furthermore, the United States and the countries in which the
Company's products are manufactured may, from time to time, impose new quotas,
duties, tariffs or other restrictions, or adversely adjust presently prevailing
quota, duty or tariff levels. While the Company is not aware that any current
impositions, adjustments or increased scrutiny would adversely affect the
Company or its ability to continue to import products at current levels, it
cannot predict the likelihood or frequency of any such events occurring. See
"Business -- Product Development and Sourcing."
DEPENDENCE ON INDEPENDENT SALES REPRESENTATIVES. The Company sells its
products through a network of Company-employed and independent sales
representatives. The Company's independent sales representative agreements are
terminable for any reason by either party on 30 days' notice. The Company's
independent sales representatives typically also sell other noncompeting
products that may nonetheless divert the representatives' or the customers'
attention from the Company's line. The Company intends to increase the number of
sales representatives in the future, but anticipates that an increasing
proportion of its sales representatives will be Company employees selling Cutter
& Buck merchandise exclusively. There can be no assurance, however, that the
Company will be successful in retaining existing or recruiting additional sales
representatives, or that the addition of sales representatives will be an
effective means to increase the Company's net sales. See "Business -- Domestic
Distribution and Sales."
LIMITED HISTORY OF PROFITABILITY. The Company has a limited history of
profitable operations and at July 31, 1996 had an accumulated deficit of
approximately $950,000. There can be no assurance that the Company will be
profitable on either a quarterly or annual basis. In addition, the Company's
expense levels are based in part on anticipated future revenue levels. If
revenues fall below anticipated levels, operating results would be adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RISKS OF NEW INTERNATIONAL OPERATIONS. The Company has recently commenced
the direct distribution of its products in the United Kingdom and Continental
Europe through newly established subsidiaries. Although the Company's sales
outside of the United States totaled approximately $1.8 million in fiscal 1996,
the Company expects the amount of its international sales to increase.
International sales are subject to the inherent risks of doing business in a
foreign country, including fluctuations in local economies, fluctuating exchange
rates, difficulties in staffing and managing
7
<PAGE>
foreign operations, increased difficulty of inventory management, greater
difficulty in accounts receivable collection, unexpected changes in regulatory
requirements, tariffs and other trade barriers, and the burdens of complying
with a variety of foreign laws. In addition, the Company relies on international
distributors to distribute its products in some foreign countries. There can be
no assurance that these distributors will be able to provide a sufficient level
of support for the Company's products. The Company's inability to achieve a
sufficient level of sales from its foreign operations or the loss or insolvency
of any of its international distributors could have a material adverse effect on
the Company's financial condition and results of operations. See "Business --
Licensing and International Distribution."
SEASONALITY. The Company's business has been and will continue to be highly
seasonal, and its quarterly operating results have fluctuated primarily due to
the seasonality of its sales of sportswear. The Company's sales tend to be
highest during the Company's second and fourth quarters, ending October 31 and
April 30, respectively, and lowest during the Company's first and third
quarters, ending July 31 and January 31, respectively. With the exception of the
Company's third fiscal 1996 quarter ended January 31, 1996 and its most recent
fiscal quarter ended July 31, 1996, the Company has incurred net losses in its
first and third quarters, and may continue to incur losses in these and other
quarters. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results and Seasonality."
FUTURE STATUS OF HONG KONG AND CHINA. On July 1, 1997, China will resume
sovereignty over Hong Kong in accordance with the 1984 Sino-British Joint
Declaration (the "Joint Declaration"), and Hong Kong will become a Special
Administrative Region of China. Although the Joint Declaration provides for the
continuation of existing economic and social systems in Hong Kong through 2047,
there can be no assurance that Hong Kong will not experience political, economic
or social disruption as a result of the resumption of Chinese sovereignty. In
addition, there have been a number of recent trade disputes between China and
the United States during which the United States threatened to impose tariffs
and duties on some products imported from China and to withdraw China's "most
favored nation" trade status. Any significant disruption in the operations of
the Company's agents located in Hong Kong or the loss of most favored nation
trade status for China, where several of the Company's manufacturing sources are
located, could have a material adverse effect on the Company.
ANTITAKEOVER CONSIDERATIONS. The Company's Board of Directors has the
authority, without action by the shareholders, to issue up to 25,000,000 shares
of Common Stock and 6,000,000 shares of Preferred Stock and to fix the rights
and preferences of the Preferred Stock. This authority, together with certain
provisions of the Company's Restated Articles of Incorporation, may have the
effect of making it more difficult for a third party to acquire, or discouraging
a third party from attempting to acquire, control of the Company. The Company is
authorized to issue Preferred Stock, without shareholder approval, with rights
senior to those of the Common Stock. In addition, Washington law contains
certain provisions that may have the effect of delaying, deterring or preventing
a hostile takeover of the Company. See "Description of Capital Stock."
CONTROL BY EXISTING SHAREHOLDERS. The Company's executive officers,
directors and holders of more than 5% of the outstanding Common Stock and their
affiliates will beneficially own an aggregate of approximately 25.8% of the
outstanding shares of Common Stock after this offering (approximately 24.8% if
the Underwriters' over-allotment option is exercised in full). If the options
outstanding and exercisable within 60 days of September 25, 1996 were exercised,
these percentages would be 30.1% and 28.8%, respectively. As a result, these
shareholders, acting together, would be able to have significant influence over
most matters requiring approval by the Company's shareholders, including the
election of a majority of the Company's directors. These shareholders would also
be able to delay or deter a change in control of the Company. See "Principal and
Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE. The market price of the Common Stock could
be adversely affected by the availability for sale of shares now held by current
shareholders of the Company or shares that may be issued upon the exercise of
outstanding stock options and warrants or new options granted
8
<PAGE>
under the Company's stock option plans. There will be 4,971,741 shares of Common
Stock outstanding immediately following this offering, 3,118,901 of which will
be tradable without restriction and 205,521 of which will be eligible for sale
in the public market in reliance on Rule 144(k) under the Securities Act.
Certain of the Company's existing shareholders and option holders, representing
1,317,279 currently outstanding shares (including the shares to be sold by the
Selling Shareholders in this offering), have agreed with the representatives of
the Underwriters not to sell or otherwise dispose of any of their shares without
the prior written consent of Needham & Company, Inc. for a period of 120 days
after the closing date of this offering. On that date, 1,304,043 shares of
Common Stock will be eligible for sale in the public market subject to the
volume and other restrictions of Rule 144. In addition, 250,191 shares of Common
Stock will become eligible for sale in the public market in reliance on Rule 144
between the expiration of the lock-up agreements that expire 120 days after the
closing date of this offering, or earlier at the discretion of Needham &
Company, Inc. (the "Lock-up Agreements") and June 30, 1997 and thereafter an
additional 149,861 shares of Common Stock will become eligible for sale. Holders
of 1,572,782 shares of Common Stock, and the 131,531 shares of Common Stock
reserved for issuance pursuant to outstanding warrants, have registration rights
with respect to shares of Common Stock. The Company has registered all the
shares of Common Stock reserved for issuance under the 1991 Plan, the 1995 Plan
and the 1995 Director Plan. See "Management," "Shares Eligible for Future Sale"
and "Underwriting."
9
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
1,300,000 shares of Common Stock offered hereby (after deducting the estimated
offering expenses, including underwriting discounts and commissions) are
estimated to be approximately $16.2 million assuming a public offering price of
$13.625 per share (approximately $18.8 million if the Underwriters'
over-allotment option is exercised in full). The Company intends to use the net
proceeds to repay all outstanding borrowings under the Company's revolving line
of credit and to fund increases in working capital associated with continuing
sales growth, including increases in inventory and trade receivables. At
September 25, 1996, the outstanding balance on the Company's revolving line of
credit was $1.8 million, bearing interest at the bank's prime rate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Pending such uses, the Company
intends to invest the net proceeds in short-term, investment-grade,
interest-bearing securities. The Company will not receive any proceeds from the
sale of Common Stock by the Selling Shareholders. See "Principal and Selling
Shareholders."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "CBUK." The following table sets forth, for the periods indicated, the
high and low closing sale prices of the Common Stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
Fiscal 1996
Second Quarter (from August 15, 1995)..................... $ 8 1/2 $6
Third Quarter............................................. 9 7/8 6 3/8
Fourth Quarter............................................ 12 3/8 9 5/8
Fiscal 1997
First Quarter............................................. $15 1/2 $8 5/8
Second Quarter (through September 25, 1996)............... 14 1/8 8 7/8
</TABLE>
The closing sale price of the Common Stock as reported on the Nasdaq
National Market on September 25, 1996 was $13.625 per share. As of that date,
there were approximately 110 shareholders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock and does not
intend to pay any cash dividends in the foreseeable future.
10
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
31, 1996, and as adjusted to give effect to the sale by the Company of the
1,300,000 shares of Common Stock offered hereby at the assumed public offering
price of $13.625 per share and the application of the estimated net proceeds
therefrom (after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company).
<TABLE>
<CAPTION>
JULY 31, 1996
----------------------------
ACTUAL AS ADJUSTED
------------ --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (1)................................................................ $ 2,148 $ 77
------------ --------------
------------ --------------
Long-term debt..................................................................... $ 337 $ 337
Shareholders' equity:
Preferred Stock, no par value: 6,000,000 shares authorized; none outstanding..... -- --
Common Stock, no par value: 25,000,000 shares authorized; 3,668,241 shares issued
and outstanding actual; 4,971,741 shares issued and outstanding as
adjusted (2).................................................................... 15,167 31,330
Note receivable from shareholder................................................. (44) (44)
Accumulated deficit.............................................................. (948) (948)
------------ --------------
Total shareholders' equity..................................................... 14,175 30,338
------------ --------------
Total capitalization......................................................... $ 14,512 $ 30,675
------------ --------------
------------ --------------
</TABLE>
- ------------------------
(1) Includes borrowings of $2.1 million under the Company's revolving line of
credit, all of which will be repaid with a portion of the net proceeds of
this offering.
(2) Excludes 270,574 shares of Common Stock reserved for issuance pursuant to
the 1991 Plan, 208,140 shares of Common Stock reserved for issuance pursuant
to the 1995 Plan, 46,253 shares of Common Stock reserved for issuance
pursuant to the 1995 Director Plan, and 248,474 shares of Common Stock
reserved for issuance pursuant to the Stock Purchase Plan. As of the date of
this Prospectus, the Company has granted options for an aggregate of 409,822
shares of Common Stock under these plans at a weighted average exercise
price of $5.11 per share. Also excludes 131,531 shares of Common Stock
reserved for issuance pursuant to outstanding warrants with an exercise
price of $8.40 per share granted in connection with the Company's initial
public offering. As adjusted amount includes 3,500 shares issuable upon
exercise of options, which shares are to be sold by a Selling Shareholder in
this offering. See "Management -- Benefit Plans," "Description of Capital
Stock" and Note 10 of Notes to Consolidated Financial Statements.
11
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of April 30, 1995 and 1996, and for
each of the three years in the period ended April 30, 1996 are derived from the
consolidated financial statements of Cutter & Buck Inc., which have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
Prospectus. The following selected financial data with respect to the Company's
balance sheets as of April 30, 1993 and 1994 and with respect to the statement
of operations for the fiscal year ended April 30, 1993 are derived from the
Company's financial statements that were also audited by Ernst & Young LLP and
that are not included herein. The following selected financial data with respect
to the Company's statement of operations for the fiscal year ended April 30,
1992 and with respect to the Company's balance sheet as of April 30, 1992 are
derived from the Company's financial statements that were audited by other
independent auditors and that are not included herein. The financial data as of
July 31, 1996 and for the three-month periods ended July 31, 1995 and 1996 are
derived from unaudited consolidated financial statements that, in the opinion of
the management of the Company, reflect all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the financial
position and results of operations for these periods. Operating results for the
three-month period ended July 31, 1996 are not necessarily indicative of the
results that may be expected for the entire fiscal year ending April 30, 1997.
The data set forth below should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales............................................. $ 5,405 $ 8,036 $ 9,882 $ 13,435 $ 21,645 $ 3,305 $ 8,000
Cost of sales......................................... 4,086 5,991 6,444 8,760 13,664 2,077 5,020
--------- --------- --------- --------- --------- --------- ---------
Gross profit.......................................... 1,319 2,045 3,438 4,675 7,981 1,228 2,980
Operating expenses:
Design and production............................... 385 495 510 747 1,045 215 336
Selling and handling................................ 870 1,136 1,781 2,446 3,858 668 1,712
General and administrative.......................... 740 784 1,053 1,364 2,042 411 714
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.......................... 1,995 2,415 3,344 4,557 6,945 1,294 2,762
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............................... (676) (370) 94 118 1,036 (66) 218
Other income (expense):
Factor commissions and interest expense, net of
interest income.................................... (54) (207) (278) (376) (237) (113) (111)
License and royalty income.......................... -- 39 285 497 457 116 96
--------- --------- --------- --------- --------- --------- ---------
Total other income (expense)...................... (54) (168) 7 121 220 3 (15)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..................... (730) (538) 101 239 1,256 (63) 203
Income taxes.......................................... -- -- -- -- (260) -- (61)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss)..................................... $ (730) $ (538) $ 101 $ 239 $ 996 $ (63) $ 142
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) per share........................... $ 0.05 $ 0.12 $ 0.29 $ (0.02) $ 0.04
Shares used in computation of net income (loss) per
share (1)............................................ 1,933 2,034 3,476 2,539 3,941
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
----------------------------------------------------- JULY 31,
1992 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.......................................................... $ 455 $ 135 $ 327 $ 499 $ 2,010 $ 306
Working capital............................................... 1,555 998 1,058 3,209 12,488 12,065
Total assets.................................................. 2,435 1,818 2,488 5,693 17,170 19,736
Short-term debt (2)........................................... 120 66 580 24 114 2,148
Long-term debt................................................ 49 48 38 98 -- 337
Total shareholders' equity.................................... 1,822 1,285 1,387 3,566 14,023 14,175
</TABLE>
- --------------------------
(1) The basis for determining the number of shares used in computing net income
(loss) per share is described in Note 1 of Notes to Consolidated Financial
Statements.
(2) As of July 31, 1996, includes borrowings of $2.1 million under the Company's
revolving line of credit, all of which will be repaid with a portion of the
net proceeds of this offering.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED
NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO THE
HISTORICAL INFORMATION CONTAINED HEREIN, THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE
TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS." ALL REFERENCES TO FISCAL YEARS ARE REFERENCES TO THE COMPANY'S FISCAL
YEAR ENDED APRIL 30.
OVERVIEW
The Company markets its Cutter & Buck brand sportswear and outerwear
predominantly through golf pro shops and resorts, upscale men's specialty stores
and corporate sales accounts. The Company's sales to golf pro shops have
increased rapidly in the last three fiscal years to $11.4 million, representing
approximately 53% of the Company's net sales in fiscal 1996, as compared to
approximately 21% through specialty stores, the dominant channel of distribution
for the Company's products during its first few years. The Company has elected
to focus its sales effort on the golf distribution channel because (i) 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 and (ii) golf pro
shops are receptive to the Company's distinctive product, merchandising approach
and sales support. The Company believes that many of its target consumers play
golf and frequent golf and resort pro shops while engaging in the sport. Most
golf pro shops have welcomed quality apparel that is not broadly distributed
elsewhere as an important offset to declining sales of golf equipment due to
price competition from golf discounters. The Company assists golf pro shops,
which have generally not had experience in sophisticated apparel retailing, by
training them to merchandise Cutter & Buck products.
The Company's $5.7 million increase in net sales to the golf distribution
channel in fiscal 1996 represented approximately 69% of the Company's total
increase in net sales in that year. This growth in net sales to the golf
distribution channel is attributable to (i) an increase in the number of golf
pro shops purchasing the Company's products (approximately 1,800 golf pro shops
in fiscal 1996 compared to approximately 1,200 golf pro shops in fiscal 1995)
and (ii) an increase in the average annual net sales per golf pro shop. The
Company believes that the golf distribution channel comprises approximately
13,000 U.S. golf pro shops. The increase in the number of the Company's golf pro
shop customers is due to the penetration of new accounts by the Company's golf
pro shop sales representatives and to the growth in the size of the Company's
sales force for the golf distribution channel. The increase in average annual
net sales per customer for fiscal 1996 compared to fiscal 1995 is the result of
the Company's offering more product styles and increasing the average annual net
sales per style. The Company believes these increased purchasing levels by its
customers indicate the effectiveness of its sales force in establishing
cooperative working relationships with golf pro shops, particularly in
facilitating merchandising of coordinated themes and collections, as well as
consumer acceptance of, and increasing demand for, the Company's products. By
increasing the size and effectiveness of its sales force for the golf
distribution channel and further augmenting its product offerings, the Company
anticipates further growth in net sales to the golf distribution channel through
continuing penetration of new accounts and continuing increases in the average
annual net sales per account.
The Company increased its inventory levels in fiscal 1996 to support
anticipated sales growth, reducing inventory turns. The Company expects that
higher inventory levels will enable it to improve overall merchandise
availability. This will enable the Company to better accommodate in-season
orders for its FASHION merchandise across a broad range of styles, and to
satisfy increased demand from all distribution channels for quick delivery of
its CLASSIC merchandise. The ability to provide quick delivery of CLASSIC knit
shirts is of particular importance to the golf distribution and corporate sales
channels. The Company believes that its inventory turn is comparable to other
men's branded apparel companies.
13
<PAGE>
The Company believes that its fixturing program instituted in fiscal 1996,
which facilitates merchandising coordinated collections of Cutter & Buck
products, is contributing to the Company's sales growth. In the fourth quarter
of fiscal 1996, the Company reacquired the exclusive distribution rights for its
apparel in the United Kingdom and has recently established subsidiaries in the
United Kingdom and the Netherlands for the direct sale and distribution of
Cutter & Buck sportswear in Europe.
The Company also has repurchased the license for Cutter & Buck outerwear,
effective May 1, 1996. The Company believes that by assuming direct
responsibility for the design, sourcing and distribution of Cutter & Buck
outerwear, it can increase sales while broadening the Company's product
assortment sold through present channels of distribution.
In May 1996, the Company commenced its own warehouse operations in a newly
leased facility sufficient to handle current domestic distribution of its
product, as well as accommodate an in-house embroidery operation. The Company
has options to lease additional warehouse space as needed at the same location.
Previously, the Company had used third parties for warehouse operations. The
Company believes that operating its own warehouse and embroidery facility will
improve both its control over distribution and embroidery expenses and its level
of service to its customers.
As the volume of Cutter & Buck products has increased, the Company has been
able to negotiate improved cost arrangements with its suppliers that are
expected to have a positive impact on gross profit margins. The Company also
anticipates that its overhead costs as a percentage of net sales will decline
due to operating leverage as the Company continues to grow.
The Company historically has been able to sell FASHION merchandise from
prior seasons approximately at cost through sales to off-price retail accounts
in subsequent seasons. In fiscal 1996, a lower percentage of this merchandise
was sold through off-price apparel chains because of disruptions in this channel
due to consolidation and because of the Company's election to offer a greater
percentage of this merchandise to its primary customers as part of its marketing
strategy. The Company believes the availability of this merchandise benefits its
customers by enhancing their purchase options, but the Company's ability to
successfully dispose of prior season inventories through its primary
distribution channels has not been established.
14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statements
of operations data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY
FISCAL YEAR ENDED APRIL 30, 31,
------------------------------------- ------------------------
1994 1995 1996 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales.................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................ 65.2 65.2 63.1 62.8 62.8
----- ----- ----- ----- -----
Gross profit................................................. 34.8 34.8 36.9 37.2 37.2
Operating expenses:
Design and production...................................... 5.2 5.6 4.8 6.5 4.2
Selling and handling....................................... 18.0 18.2 17.8 20.3 21.4
General and administrative................................. 10.6 10.1 9.5 12.4 8.9
----- ----- ----- ----- -----
Total operating expenses................................. 33.8 33.9 32.1 39.2 34.5
----- ----- ----- ----- -----
Operating income............................................. 1.0 0.9 4.8 (2.0) 2.7
Other income (expense):
Factor commissions and net interest expense................ (2.8) (2.8) (1.1) (3.4) (1.4)
License and royalty income................................. 2.8 3.7 2.1 3.5 1.2
----- ----- ----- ----- -----
Total other income (expense)............................. 0.0 0.9 1.0 0.1 (0.2)
----- ----- ----- ----- -----
Income (loss) before income taxes............................ 1.0 1.8 5.8 (1.9) 2.5
Income taxes................................................. -- -- (1.2) -- (0.7)
----- ----- ----- ----- -----
Net income (loss)............................................ 1.0% 1.8% 4.6% (1.9)% 1.8%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED JULY 31, 1996 AND 1995
NET SALES
Net sales increased 142.1% in the three months ended July 31, 1996 (first
quarter of fiscal 1997) to $8.0 million from $3.3 million in the three months
ended July 31, 1995 (first quarter of fiscal 1996). For the first quarter of
fiscal 1997 compared to the first quarter of fiscal 1996, net sales in the
United States to the golf distribution channel increased $2.6 million to $4.1
million, net sales to the corporate channel increased $1.1 million to $1.6
million and net sales to the specialty store channel increased $640,000 to $1.4
million. 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 due to the Company's direct distribution in the United Kingdom and
Continental Europe totaled $333,000.
GROSS PROFIT MARGIN
Gross profit increased 142.7% in the three months ended July 31, 1996 to
$3.0 million from $1.2 million in the three months ended July 31, 1995. Gross
profit as a percentage of net sales was 37.2% for both the first quarter of
fiscal 1997 and the first quarter of fiscal 1996. The positive effect on gross
profit resulting from economies of scale and letter of credit financing was
offset by additional expenses to expedite delivery of goods from Chinese
manufacturers due to threatened trade sanctions, costs to ensure timely
deliveries during the Company's transition to its new warehouse facility,
amortization of the cost of repurchasing the Company's outerwear license and
United Kingdom distributorship rights and start-up expenses associated with the
Company's in-house embroidery operation and its new European operations. The
Company believes that its increasing number of international sourcing options
will result in further gross margin improvement.
OPERATING EXPENSES
Operating expenses increased to $2.8 million for the three months ended July
31, 1996 from $1.3 million for the three months ended July 31, 1995, but
decreased as a percentage of net sales to 34.5% in the first quarter of fiscal
1997 from 39.2% in the first quarter of fiscal 1996. Selling and handling
expenses increased by $1.0 million, constituting 71% of the overall increase in
operating expenses. The majority of the increase in selling and handling
expenses was due to increased sales
15
<PAGE>
commissions and staffing costs related to a higher sales volume and a larger
sales force. The Company has also converted more of its independent sales
representatives to employees, believing that the additional costs of direct
employment are warranted by anticipated greater productivity over time resulting
from a sales employee's exclusive focus on Cutter & Buck merchandise. The
Company has also increased the marketing component of its selling expense as a
percentage of net sales over the prior year period. In addition, the Company
incurred additional handling costs associated with establishing its own
warehouse facility in Seattle, Washington. Other increases in operating expenses
were primarily attributable to increases in management, design and facilities
costs to support the Company's expanded operations.
OTHER INCOME
License and royalty income earned under licensing contracts totaled $96,000
for the three months ended July 31, 1996 and $116,000 for the three months ended
July 31, 1995. The decline in license and royalty income is primarily due to the
Company's repurchase 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 $111,000 in the quarter ended July 31, 1996
compared to $113,000 in the quarter ended July 31, 1995. These costs were lower
as a percentage of net sales for the first quarter of fiscal 1997 compared to
the first quarter of 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 that period. As of July 31, 1996, $500,000 in net
operating loss carryforwards remained available to offset future taxable income,
all of which is expected to be utilized in fiscal 1997.
YEARS ENDED APRIL 30, 1996, 1995 AND 1994
NET SALES
During fiscal 1996 and 1995, net sales increased by 61.1% and 36.0%,
respectively. The expansion of the Company's golf distribution channel business
has had a significant impact on its sales growth. Sales to this channel
increased $5.7 million, or approximately 100%, to $11.4 million in fiscal 1996,
increased $2.9 million, or approximately 104%, to $5.7 million in fiscal 1995,
and increased $2.1 million, or approximately 300%, to $2.8 million in fiscal
1994. The Company's development of a directed sales effort in its corporate
sales channel beginning in the second half of fiscal 1995 has also had a
significant impact on its sales growth. Sales to the corporate sales channel
increased $2.2 million, or approximately 261%, to $3.0 million in fiscal 1996,
and increased approximately 263% to $831,000 in fiscal 1995 from $229,000 in
fiscal 1994. During fiscal 1996, 1995 and 1994, sales to upscale men's specialty
stores remained relatively flat, consequently declining as a percentage of net
sales to approximately 21% in fiscal 1996 from 36% in fiscal 1995 and 45% in
fiscal 1994. The Company's sales of seasonal remainder merchandise to off-price
retailers was approximately 3% of net sales in fiscal 1996, compared to
approximately 7% of net sales in both fiscal 1995 and 1994. The decline in sales
to off-price retailers in fiscal 1996 was primarily attributable to two factors.
First, due to expanded market penetration, the Company believes it has greater
opportunity to sell its seasonal merchandise remaining at the end of fiscal 1996
through its golf and corporate distribution channels in fiscal 1997. Second, as
a result of consolidation within the off-price retailer channel, the Company had
reduced opportunity to sell its seasonal remainder merchandise to off-price
retailers. The Company's sales to other distribution channels, including
international, were less than 10% of net sales in each of fiscal 1996, 1995 and
1994.
GROSS PROFIT MARGIN
In fiscal 1996, the Company's gross profit margin was 36.9% of net sales,
compared to 34.8% in both fiscal 1995 and fiscal 1994. The increase during
fiscal 1996 was primarily due to economies of scale. Higher production volumes
have given the Company increased negotiating leverage to purchase
16
<PAGE>
product at lower unit costs. Gross profit margin improvement in fiscal 1996 also
reflected cost of sales reductions resulting from greater use of letters of
credit, which eliminated financing costs previously included in product costs
charged by the Company's international sources.
The gross profit margin in fiscal 1995 was unchanged from fiscal 1994
because the improved margin due to sales channel mix and lower cost sourcing
arrangements was substantially offset by the late delivery of approximately 10
styles in the Company's spring collection that was caused by production delays
at a new foreign manufacturing resource, resulting in increased expediting costs
and markdowns.
The Company expects that its gross profit margin will improve as it
continues to achieve further cost of sales reductions through diversification of
international sourcing and increased sales through the golf distribution and
corporate sales channels. In May 1996, the Company established an in-house
embroidery operation. This facility will enable the Company to directly handle
the embroidered logo requirements of its golf, resort and corporate customers.
The Company expects to directly produce approximately 50% of its embroidery
requirements in fiscal 1997, resulting in embroidery cost savings and improved
gross margin.
DESIGN AND PRODUCTION EXPENSES
Design and production expenses increased by $298,000, or 39.8%, to $1.0
million in fiscal 1996 from $747,000 in fiscal 1995 and decreased as a
percentage of net sales to 4.8% in fiscal 1996 from 5.6% in fiscal 1995 and 5.2%
in fiscal 1994. The dollar increase in these expenses is attributable to
increased management and staffing costs associated with expansion of the
Company's product line and increased emphasis on embroidery designs and
production for the golf distribution and corporate channels. The decrease as a
percentage of net sales primarily resulted from the Company's ability to spread
its design and production development costs over increased sales volume in each
of its distribution channels and by selling the same product line across these
channels.
SELLING AND HANDLING EXPENSES
Selling and handling expenses increased by $1.4 million, or 57.7%, to $3.9
million in fiscal 1996 from $2.4 million in fiscal 1995, representing
approximately 18% of net sales in both years. The dollar amount increase was
primarily attributable to increased commissions, to management and advertising
expenses, and to increased cost of samples associated with the expanded sales
force and product line. The Company expanded the size of its golf sales force to
26 sales representatives, including regional managers, at the end of fiscal 1996
from 22 at the end of fiscal 1995. In April 1996, the Company reorganized the
management of its golf distribution sales channel by reducing its regional
managers' direct sales responsibilities to allow them to focus their attention
on sales management. This change allowed the Company to reduce the number of
regional managers from four to three. The Company believes this revised
organizational structure will provide more effective sales management in
generating the Company's planned sales growth. The Company also increased the
size of its sales force for the corporate channel to nine sales representatives
in fiscal 1996 from six in fiscal 1995 and increased the size of its sales force
for the specialty store channel to seven at the end of fiscal 1996 from five at
the end of fiscal 1995. The Company's sales representatives for the specialty
store channel also sell to the corporate channel.
Selling and handling expense increased by $665,000, or 37.3%, to $2.4
million in fiscal 1995 from $1.8 million in fiscal 1994, representing
approximately 18% of net sales in both years. The dollar amount increase
primarily resulted from increased commissions and, to a lesser extent, from
sales management and marketing expenses. The Company expanded the size of its
golf sales force to 22 sales representatives in fiscal 1995 from 17 in fiscal
1994. To provide the necessary management for this increase in sales
representatives, four of these sales representatives also assumed regional
management responsibilities, which resulted in an increase in sales management
expense. The Company also formed a sales force for the corporate channel in
fiscal 1995.
17
<PAGE>
During fiscal 1996, the Company purchased and installed $284,000 of
fixturing to enhance collection merchandising in 214 of its customers'
locations. The Company expects to purchase approximately $450,000 of fixturing
in fiscal 1997 to be targeted to an additional 300 locations, reaching a total
of 514 golf pro shop and men's upscale specialty stores by the end of fiscal
1997. Customer eligibility for the fixturing program is conditioned on minimum
order commitments for Cutter & Buck products. The investment in these fixtures
is being amortized as a marketing expense over a three-year period. This program
represents an intentional increase in the Company's level of marketing expense
as a component of selling and handling expenses and, to the extent it remains
successful, is expected to continue at comparable levels in future years.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $678,000, or 49.7%, to $2.0
million in fiscal 1996 from $1.4 million in fiscal 1995 and decreased as a
percentage of net sales to 9.5% in fiscal 1996 from 10.1% in fiscal 1995 and
10.6% in fiscal 1994. The dollar amount increase was primarily due to increased
management, staffing and facilities to support the Company's expanded
operations, along with additional insurance expense and professional fees
related to the Company's public reporting. In fiscal 1995, the increase in
general and administrative expenses was primarily due to increased management,
staffing and facilities to develop the infrastructure necessary to effectively
handle the Company's anticipated long-term sales growth.
FACTOR COMMISSIONS AND NET INTEREST EXPENSE
Factor commissions and net interest expense decreased by $139,000, or 36.9%,
to $237,000 in fiscal 1996 from $376,000 in fiscal 1995, representing 1.1% and
2.8% of net sales in fiscal 1996 and fiscal 1995, respectively. The reduction in
the dollar amount is primarily due to interest savings made possible by the
Company's ability to fund most of its working capital growth with the net
proceeds of the Company's initial public offering in August 1995. In fiscal
1995, factor commissions and net interest expense increased by $98,000, or
35.3%, to $376,000 from $278,000 in fiscal 1994, representing 2.8% of net sales
in both years. The dollar increase in fiscal 1995 was attributable to the
Company's use of credit to finance increased accounts receivable and inventories
associated with higher sales volume.
LICENSE AND ROYALTY INCOME
License and royalty income decreased by $39,000, or 7.9%, to $457,000,
representing 2.1% of net sales, in fiscal 1996, from $497,000 and 3.7% of net
sales in fiscal 1995. The reduction in royalty income reflects the Company's
shift toward direct international sales and exclusive distributor relationships
and away from licensing relationships. This decline in license and royalty
income in fiscal 1996 was also attributable to the Company's decision to
discontinue its relationship with its licensee for Central and South America.
The Company's repurchase of its outerwear license in December 1995, effective
May 1996, also resulted in a decline in outerwear sales and license income in
the transition period. In fiscal 1995, royalty income increased by $212,000, or
74.4%, to $497,000 from $285,000 in fiscal 1994. During fiscal 1995, this
increase in royalty income was directly related to increases in required annual
minimum payments and higher sales volumes achieved by the Company's licensees.
INCOME TAXES
The Company recorded $260,000 of income tax expense in fiscal 1996 and none
in fiscal 1995 and 1994 due to the utilization of net operating loss
carryforwards.
QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced its lowest levels of net sales in
its first and third quarters, ending July 31 and January 31, respectively.
Correspondingly, the Company's highest levels of sales are 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 upscale men's specialty stores in the second and fourth quarters.
Other factors contributing to the variability of the Company's quarterly results
include seasonal fluctuations in consumer demand, the timing and
18
<PAGE>
amount of orders from key customers, the timing of sales of seasonal remainder
merchandise and availability of product. This pattern of sales creates seasonal
profitability, working capital financing and liquidity issues, as the Company
generally must finance higher levels of inventory during the first and third
quarters, when sales are lowest. Regardless of seasonal fluctuations, there can
be no assurance that the Company will be profitable in any particular quarter.
The following tables set forth certain operating data of the Company,
including percentages of net sales, for the nine quarters ended July 31, 1996.
<TABLE>
<CAPTION>
FISCAL 1995 QUARTER ENDED FISCAL 1996 QUARTER ENDED
---------------------------------------------------- -------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1994 1994 1995 1995 1995 1995 1996
----------- ----------- ------------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales....................... $ 2,044 $ 3,407 $ 2,316 $ 5,668 $ 3,305 $ 5,131 $ 5,210
Cost of sales................... 1,275 2,205 1,613 3,667 2,077 3,197 3,377
----------- ----------- ------------- ----------- ----------- ----------- -----------
Gross profit.................... 769 1,202 703 2,001 1,228 1,934 1,833
Operating expenses:
Design and production......... 156 198 184 209 215 230 275
Selling and handling.......... 448 591 520 887 668 980 874
General and administrative.... 312 306 336 410 411 487 510
----------- ----------- ------------- ----------- ----------- ----------- -----------
Total operating expenses.... 916 1,095 1,040 1,506 1,294 1,697 1,659
----------- ----------- ------------- ----------- ----------- ----------- -----------
Operating income (loss)......... (147) 107 (337) 495 (66) 237 174
Other income (expense):
Factor commissions and
interest expense, net of
interest income.............. (59) (107) (99) (111) (113) (28) (12)
License and royalty income.... 100 113 130 154 116 83 102
----------- ----------- ------------- ----------- ----------- ----------- -----------
Total other income
(expense).................. 41 6 31 43 3 55 90
----------- ----------- ------------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes.......................... (106) 113 (306) 538 (63) 292 264
Income taxes.................... -- -- -- -- -- (50) (60)
----------- ----------- ------------- ----------- ----------- ----------- -----------
Net income (loss)............... $ (106) $ 113 $ (306) $ 538 $ (63) $ 242 $ 204
----------- ----------- ------------- ----------- ----------- ----------- -----------
----------- ----------- ------------- ----------- ----------- ----------- -----------
<CAPTION>
FISCAL 1995 QUARTER ENDED FISCAL 1996 QUARTER ENDED
---------------------------------------------------- -------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1994 1994 1995 1995 1995 1995 1996
----------- ----------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 62.4 64.7 69.7 64.7 62.8 62.3 64.8
----------- ----------- ------------- ----------- ----------- ----------- -----------
Gross profit.................... 37.6 35.3 30.3 35.3 37.2 37.7 35.2
Operating expenses:
Design and production......... 7.6 5.8 7.9 3.7 6.5 4.5 5.3
Selling and handling.......... 21.9 17.3 22.5 15.7 20.3 19.1 16.8
General and administrative.... 15.3 9.0 14.5 7.2 12.4 9.5 9.8
----------- ----------- ------------- ----------- ----------- ----------- -----------
Total operating expenses.... 44.8 32.1 44.9 26.6 39.2 33.1 31.9
----------- ----------- ------------- ----------- ----------- ----------- -----------
Operating income (loss)......... (7.2) 3.2 (14.6) 8.7 (2.0) 4.6 3.3
Other income (expense):
Factor commissions and
interest expense, net of
interest income.............. (2.9) (3.2) (4.3) (1.9) (3.4) (0.5) (0.2)
License and royalty income.... 4.9 3.3 5.7 2.7 3.5 1.6 2.0
----------- ----------- ------------- ----------- ----------- ----------- -----------
Total other income
(expense).................. 2.0 0.1 1.4 0.8 0.1 1.1 1.8
----------- ----------- ------------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes.......................... (5.2) 3.3 (13.2) 9.5 (1.9) 5.7 5.1
Income taxes.................... -- -- -- -- -- (1.0) (1.2)
----------- ----------- ------------- ----------- ----------- ----------- -----------
Net income (loss)............... (5.2)% 3.3% (13.2)% 9.5% (1.9)% 4.7% 3.9%
----------- ----------- ------------- ----------- ----------- ----------- -----------
----------- ----------- ------------- ----------- ----------- ----------- -----------
<CAPTION>
FISCAL 1997
QUARTER
ENDED
APRIL 30, JULY 31,
1996 1996
----------- -----------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net sales....................... $ 7,999 $ 8,000
Cost of sales................... 5,013 5,020
----------- -----------
Gross profit.................... 2,986 2,980
Operating expenses:
Design and production......... 325 336
Selling and handling.......... 1,336 1,712
General and administrative.... 634 714
----------- -----------
Total operating expenses.... 2,295 2,762
----------- -----------
Operating income (loss)......... 691 218
Other income (expense):
Factor commissions and
interest expense, net of
interest income.............. (84) (111)
License and royalty income.... 156 96
----------- -----------
Total other income
(expense).................. 72 (15)
----------- -----------
Income (loss) before income
taxes.......................... 763 203
Income taxes.................... (150) (61)
----------- -----------
Net income (loss)............... $ 613 $ 142
----------- -----------
----------- -----------
FISCAL 1997
QUARTER
ENDED
APRIL 30, JULY 31,
1996 1996
----------- -----------
<S> <C> <C>
AS A PERCENTAGE OF NET SALES:
Net sales....................... 100.0% 100.0%
Cost of sales................... 62.7 62.8
----------- -----------
Gross profit.................... 37.3 37.2
Operating expenses:
Design and production......... 4.1 4.2
Selling and handling.......... 16.7 21.4
General and administrative.... 7.9 8.9
----------- -----------
Total operating expenses.... 28.7 34.5
----------- -----------
Operating income (loss)......... 8.6 2.7
Other income (expense):
Factor commissions and
interest expense, net of
interest income.............. (1.1) (1.4)
License and royalty income.... 2.0 1.2
----------- -----------
Total other income
(expense).................. 0.9 (0.2)
----------- -----------
Income (loss) before income
taxes.......................... 9.5 2.5
Income taxes.................... (1.9) (0.7)
----------- -----------
Net income (loss)............... 7.6% 1.8%
----------- -----------
----------- -----------
</TABLE>
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds is to finance working capital. The
Company's increased working capital requirements during the three years ended
April 30, 1996 related to increasing accounts receivable and finished goods
inventory levels associated with growth in sales volume. To date, working
capital has been funded primarily by a combination of increased accounts
payable, accounts receivable financing through a factor, the private sale of
Preferred Stock, the public sale of Common Stock and borrowings under the
Company's revolving bank line of credit.
Net cash used in operating activities in the first quarter of fiscal 1997
was $3.0 million, resulting primarily from a $2.8 million increase in inventory
consisting principally of merchandise for the fall season for shipment in the
second quarter. Net cash used in operating activities in fiscal 1996 was $4.3
million, resulting primarily from an increase in accounts receivable of $3.0
million, an increase in inventory of $2.8 million and an increase in prepaid
expenses and other current assets of $585,000.
Net cash provided by financing activities in the first quarter of fiscal
1997 was $1.9 million, primarily from bank borrowings. In fiscal 1996, net cash
provided by financing activities was $7.1 million, resulting primarily from the
receipt of net proceeds of $8.4 million from the Company's initial public
offering of Common Stock and the private sale of $1.0 million of Series B
Preferred Stock, offset by a $2.3 million reduction in advances from the factor.
The Company's capital expenditures in the first quarter of fiscal 1997 was
approximately $1.1 million, primarily for in-store fixtures, warehouse
improvements and embroidery equipment. Net cash used in investing activities was
$1.3 million in fiscal 1996 and was substantially the result of an increased
investment in furniture and fixtures of $655,000 and payments of $657,000 made
to reacquire licenses and distribution rights.
The Company incurred capital expenditures of $655,000, $119,000 and $67,000
in fiscal 1996, 1995 and 1994, respectively. In fiscal 1996, expenditures for
capital assets included $284,000 for in-store fixtures, $116,000 for
construction of a new trade show booth and other furniture and equipment
purchases totaling $255,000. In fiscal 1995 and 1994, capital expenditures were
primarily for the acquisition of office furniture and equipment for the
Company's corporate headquarters. Capital expenditures of $1.7 million are
planned for fiscal 1997, including investment in in-store fixturing and
embroidery equipment of $450,000 and $950,000, respectively.
The Company has a $7.0 million revolving line of credit with Bank of America
NW, N.A. d/b/a Seafirst Bank ("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. In addition, the amounts available to the Company
under the Seafirst Bank line of credit are subject to certain limitations based
on such items as the level of qualified accounts receivable and inventory. At
July 31, 1996, letters of credit outstanding totaled $2.7 million and working
capital advances totaled $2.1 million.
Pursuant to an agreement (the "Factoring Agreement") with Republic Factors
Corp. ("Republic"), Republic acts as the Company's sole factor in the United
States for its accounts receivable. The Factoring Agreement provides that the
Company can sell its qualified accounts receivable to Republic and Republic will
pay the Company an amount equal to the gross amount of the Company's accounts
receivable from customers reduced by certain offsets, including, among other
things, discounts and returns and a .95% commission payable by the Company to
Republic. An intercreditor agreement between Seafirst Bank and Republic
prohibits the Company from taking advances under the Factoring Agreement.
Subject to its credit review procedures, Republic also may decline to accept the
credit risk on certain accounts receivable. The Factoring Agreement continues in
force from year to year and may be terminated by Republic on any anniversary of
its effective date (April 7) or by the Company at
20
<PAGE>
any time, provided that in each case the terminating party gives 60 days' prior
written notice. In fiscal 1996, the Company increased its internal credit and
accounts receivable management and staffing in preparation for decreasing its
reliance on its factoring arrangements with Republic. In fiscal 1997, the
Company expects to directly manage the accounts receivable credit and collection
function associated with its sales to the golf, corporate and international
distribution channels. The Company plans to use Republic's accounts receivable
management exclusively for its sales to the specialty store channel. The Company
believes that this change in its credit management practices will enable it to
decrease its overall collection costs. The Company, however, has limited
experience in managing credit and collection operations. Consequently, there can
be no assurance that this change will ultimately benefit the Company's financial
condition and results of operations.
The Company believes that cash generated from operations, together with
borrowings under its credit line, and the net proceeds from this offering will
be sufficient to meet its working capital needs in fiscal 1997. However, the
Company's capital needs will depend on many factors, including the Company's
growth rate, the need to finance increased production and inventory levels, the
success of the Company's various sales and marketing programs and various other
factors. Depending upon its growth and working capital needs, the Company may
require additional financing in the future through debt or equity offerings,
which may or may not be available or may be dilutive. The Company continues to
analyze its various financing alternatives. The Company's ability to obtain
additional financing will depend on its operations, financial condition and
business prospects, as well as conditions then prevailing in the relevant
capital markets.
21
<PAGE>
BUSINESS
OVERVIEW
The Company designs, sources and markets its distinctive Cutter & Buck brand
sportswear and outerwear predominantly through golf pro shops and resorts,
upscale men's specialty stores and corporate sales accounts. The Company has
developed a colorful, innovative collection of sportswear apparel targeted to
the affluent 30- to 55-year-old men's market, projecting an updated American
traditional design evocative of a sporting lifestyle. The products' high-quality
fabrics and detailing reinforce the premium image of the brand while the
generous fit provides a feeling of comfort and versatility. Product marketing
connected with sports and leisure activities, particularly golf, helps the
Company create a positive lifestyle image that contributes to the brand's strong
appeal for its target consumers. The Company benefits from the trend toward
greater acceptance of relaxed standards of dress in the workplace that results
in sportswear representing a growing portion of consumer wardrobes. Since its
formation on January 5, 1990, the Company has achieved consistent annual sales
increases, realizing net sales of $21.6 million and net income of $1.0 million
in fiscal 1996, and net sales of $8.0 million and net income of $142,000 in the
first quarter of fiscal 1997.
The Company has intentionally selected golf pro shops as its primary channel
of distribution, believing this to be an effective venue for reaching its target
consumers. Most golf pro shops have welcomed quality apparel that is not broadly
distributed elsewhere as an important offset to declining sales of golf
equipment due to price competition from golf discounters. By providing training
in merchandising Cutter & Buck products, the Company assists golf pro shops,
which have generally not had experience in sophisticated apparel retailing. More
than half of the Company's products sold to golf pro shops are embroidered with
the name or logo of the club with which the pro shop is affiliated, which
enhances the club's image due to the quality and uniqueness of the Cutter & Buck
product and simultaneously builds Cutter & Buck's exclusive brand identity. The
Company sells Cutter & Buck products to approximately 1,800 of the estimated
13,000 U.S. golf pro shops. The golf distribution channel accounted for
approximately 53% of the Company's net sales in fiscal 1996, and the Company
expects continuing growth of sales to this channel. The Company also distributes
its products primarily through four other distribution channels: upscale men's
specialty stores, corporate sales accounts, its European subsidiaries and other
international distributors. The Company believes that its other distribution
channels are synergistic with the golf distribution channel, since they have
compatible merchandising and pricing practices, sell the same product line and
create heightened awareness of the Cutter & Buck brand among the Company's
target consumers, who tend to shop in more than one of these channels.
The Company currently markets its products each year as two seasonal
collections, spring and fall, presenting each collection in three or four groups
of distinct, coordinated products available for delivery to customers during
sequential time periods.
MARKET
According to industry estimates, sales of men's apparel at retail was $46.0
billion in 1995. Within this market, the Company targets affluent men, age 30 to
55, who are sports-minded and want casual clothing that reflects an active
lifestyle. The Company believes that these consumers also want comfortable,
distinctively styled, high-quality apparel. The Company believes that, with an
increase in the number of working women, men are purchasing more of their own
clothing. Many of these men are busy professionals who prefer to spend their
limited free time pursuing sports and recreational activities such as golf,
rather than spending time shopping in traditional retail outlets, such as
department stores and shopping malls. The Company believes these
time-constrained consumers are inclined to purchase apparel relating to their
sporting interests if available at a sport location such as a golf course. The
Company believes the market for men's golf apparel is highly fragmented, with no
single brand representing more than 10% of the market.
Sportswear represents a growing portion of consumers' wardrobes as a result
of a trend toward greater acceptance of relaxed standards of dress in the
workplace. A recent independent survey
22
<PAGE>
indicated that one out of every four apparel dollars spent by white-collar male
professionals in 1995 was for casual business attire. This segment of the market
has grown faster than the overall men's apparel market in the past two years.
Knit sport shirts as a category is also showing above-average sales growth,
which the Company believes is in part attributable to this trend.
STRATEGY
The Company's goals are to continue its rapid sales growth and to enhance
its reputation as a leading, premium sportswear brand in the men's sportswear
apparel market. The key elements of its strategy to realize these goals are:
- QUALITY BRAND IDENTITY. Inherent to Cutter & Buck's brand identity are:
(i) its signature design philosophy of creating bold, original garments in
a broad range of fabrications (knits, wovens) and colors (complex prints,
dyes) that project classic themes evocative of a sporting lifestyle and
(ii) the use of extensive detailing and high-quality product construction.
The Company is committed to creating innovative designs and maintaining
quality standards from season to season.
- GOLF PRO SHOP DISTRIBUTION CHANNEL. The Company's strategy is to link not
only its product but also purchase occasions for its product to a sporting
lifestyle. The Company has selected golf pro shops as its primary
distribution channel since many of its target consumers frequent golf pro
shops and resorts while engaging in golf as a recreational activity. The
Company's focused distribution also includes selling its product line to
the upscale men's specialty retail and corporate sales channels. The
Company believes that these distribution channels are synergistic with the
golf distribution channel and create heightened awareness of the Cutter &
Buck brand among the Company's target consumers, who tend to shop in more
than one of these channels.
- COLLECTION MERCHANDISING. The Company works closely with golf pro shops,
resorts and upscale men's specialty stores to merchandise its shirts,
sweaters, sweatshirts, pants, shorts, caps and outerwear as a collection
rather than as isolated categories. Consequently, the consumer is more
likely to notice and respond to the Cutter & Buck sporting lifestyle
theme. The Company has initiated a product fixturing program to create a
Cutter & Buck display area within a store and facilitate merchandising the
products as a collection, thereby separating them from competing products.
These fixtures have been installed in 325 stores since the program's
inception in fiscal 1996, and have, the Company believes, contributed to
an increase in average order size in the golf and specialty store
distribution channels.
- EXPANSION. The Company plans to grow by increasing both the number of golf
pro shop accounts it services and the average account order size. The
Company's strategy to achieve these goals is to increase the size of its
sales force working exclusively with the Company's product, expand its
fixturing and advertising programs and maintain its product quality and
innovative designs, which the Company believes will result in increased
market penetration and heightened consumer awareness of the Cutter & Buck
brand name. Based upon changed market opportunities and increased design,
marketing and financial capabilities, the Company has made selective
extensions of its product offerings, particularly outerwear, and in fiscal
1996, assumed direct control of its product distribution in Europe, which
the Company anticipates will also contribute to the achievement of its
growth objectives.
PRODUCTS
Cutter & Buck is a lifestyle brand of outdoor-oriented, sports-inspired
men's apparel. The Company's distinctive products use strong, clear colors,
natural fiber textiles, rich detailing, innovative fabrications and trims and
specialized printing and embroidery to achieve this identity. The Company
merchandises its products as color- and design-coordinated collections
comprising knit and woven sport shirts, pants, shorts, sweaters, sweatshirts,
outerwear and caps. The Company expanded its product offerings to include
outerwear by buying back its outerwear license in December 1995, effective May
1, 1996. The Company frequently uses golf and fly-fishing as sporting themes
that evoke the Cutter & Buck lifestyle.
23
<PAGE>
Cutter & Buck's high-quality products use fine-gauge combed cotton or virgin
wool yarns, unique trims, special fabric finishes and washes, and extra
needlework. They are manufactured in factories selected for their resources and
their ability to ensure quality in the production process. The products are
generously sized, providing a feeling of comfort and versatility.
The Company offers two collections a year, spring and fall, composed of
FASHION and complementary CLASSIC products. FASHION products incorporate the
latest innovations in color, fabric and styling and tend to remain in the line
for only one season. The Company develops proprietary fabrications, artwork for
its complex prints and distinctive trim components in cooperation with
experienced sources worldwide.
CLASSIC products are predominantly solid-color garments with multi-season
appeal. The Company relies on the styling, detailing, coloration and quality of
its fabrics to distinguish its CLASSIC products from competitive products. The
Company generally prices its CLASSIC products at levels lower than its FASHION
products, which permits its customers to offer Cutter & Buck products at a range
of price points. Higher per-item volumes for CLASSIC products allow the Company
to achieve production efficiencies and lower costs. CLASSIC products are sold
throughout the year to all of the Company's distribution channels. Continuity of
demand allows the Company to maintain consistent stock levels of CLASSIC
products.
The Company presents each season's collections to its customers in three or
four groups of distinct, coordinated merchandise. These groups are available for
delivery to customers during sequential time periods, typically from May to
October for fall collections and from November to April for spring collections.
Customer-initiated product reorders can often extend the delivery period for a
season by up to three months. The product mix changes seasonally, including more
sweater styles in fall collections and more short-sleeve shirts in spring
collections. The Company's ability to offer merchandise collections is a
strategic advantage over many of its competitors since its customers generally
prefer to purchase compatible assortments rather than assembling coordinated
merchandise from various brands that do not share common colors and themes.
A substantial percentage of the Company's products that are shipped to the
golf distribution channel are embroidered with golf club names or logos. In May
1996, the Company established an in-house embroidery operation to reduce costs,
shorten delivery time and enhance quality control of its embroidered products.
The Company's increasing volume of sales to the corporate sales channel also
involves embroidery of the product with corporate logos, either performed by
Cutter & Buck or arranged by its corporate customers. The Company believes its
customers' strong interest in affiliating their identities with Cutter & Buck
brand products affirms the desirability and distinctiveness of its merchandise.
DOMESTIC DISTRIBUTION AND SALES
The Company's products are distributed in the United States predominantly
through three channels: golf pro shops and resorts, upscale men's specialty
stores and corporate sales accounts. Each of these channels uses CLASSIC and
FASHION products from the Company's seasonal collections. The Company believes
that these channels are synergistic, since they have compatible merchandising
and pricing practices, sell the same product line and create heightened
awareness of the Cutter & Buck brand among the Company's target consumers, who
tend to shop in more than one of these channels. For example, many of the
Company's corporate sales leads have come through corporate executives who have
purchased the Company's products at golf pro shops and resorts.
The Company sells to golf pro shops and resorts through a commissioned sales
force. As of the end of the first quarter of fiscal 1997, the Company's sales
force for this channel was composed of 26 sales representatives (14 of whom are
independent and 12 of whom are Company-employed) and three regional managers.
These representatives present the Company's collections to the Company's
customers with the aid of full sample lines and pictorial line sheets, which
offer critical information needed by the customer. These presentations are made
at the twice-yearly PGA Merchandise Show, at
24
<PAGE>
regional trade shows and at the customer's shop or resort. The Company's three
regional sales managers collectively cover the entire United States and report
to the Company's Vice President of Sales.
The Company employs seven additional sales representatives, who sell to
upscale men's specialty stores. These representatives present the Company's
collections each season at national and regional trade shows and at the
customers' stores. They sell both FASHION and CLASSIC products using the same
line sheets as the golf pro shop and resort representatives. These specialty
store representatives also report to the Company's Vice President of Sales.
The Company also sells its merchandise to major corporations using 11
independent, multi-line sales representatives, whose efforts are coordinated by
a manager employed by the Company. The seven specialty store sales
representatives also sell to the corporate channel. CLASSIC products and in-
stock FASHION products are sold to corporate customers, since these customers
typically demand immediate delivery. The products are used for corporate golf
events, stores, catalogs and recognition programs. Nearly all these products
include embroidery with the corporate logo, which is either performed by the
Company or arranged by its corporate customers. Corporate customers purchase
products for female as well as male employees. The Company manages its corporate
sales through a Corporate Sales Manager, who reports to the Company's Vice
President of Sales.
Each sales representative is responsible for serving targeted accounts in a
specific geographical territory through merchandise consultation and training,
and for meeting specific account growth and average-order-size goals set by
management. They are also responsible for implementing the Company's recently
instituted merchandise fixturing program with all suitable golf pro shops,
resorts and specialty stores. Sales representatives employed by the Company
receive a base salary, sales commissions and benefits. Because the Company
believes that its Company-employed sales representatives generate higher
productivity than independent sales representatives, the Company intends to
continue to increase the percentage of its sales representatives who are
Company-employed.
The Company's customer service department consists of a manager and nine
employees who support the Company's sales representatives by taking order and
reorder information from the sales representatives or directly from the
customer.
At the end of its fall and spring seasons, the Company has unsold FASHION
inventory as a consequence of making inventory available to satisfy anticipated
customer demand across a broad range of styles. The Company historically has
been able to sell this inventory approximately at cost through sales to
off-price retail accounts in subsequent seasons, but recent consolidation among
these retailers has restricted the Company's access to this channel. The Company
believes its expanded market penetration in the golf and corporate distribution
channels presents an opportunity to sell prior season FASHION merchandise
through its sales force to these channels on more favorable terms than can be
realized in the off-price retail channel.
MARKETING
The Company's marketing goal is to build a strong brand name and image with
both its customers and the end consumer, specifically targeting the 30- to
55-year-old affluent male consumer. The Company expects to build strength in its
brand name through the use of sporting theme associations favored by its target
market, lifestyle merchandising and in-store marketing techniques, endorsements
and advertising.
The Company portrays its brand image of an American sporting lifestyle by
creating seasonal merchandise collections that are theme- and color-related.
Themes commonly used by the Company are the sports of golf and fly-fishing,
which reinforce the Company's high-quality, exclusive image. The Company
believes that, by featuring these sports, its products will appeal not only to
participants, but also to those who aspire to this relaxed lifestyle.
25
<PAGE>
These lifestyle merchandise presentations are sold and shipped to customers
in collection groups in order to reinforce the overall conceptual strength of
the product offerings. The Company's distinctive in-store fixturing program
showcases these collections and enhances its brand image at the point of sale.
The fixtures, which are identified with the Cutter & Buck trademark logo, are
designed to display assorted elements of the Company's collections and allow the
consumer to easily assemble and purchase coordinated outfits of shirts, pants,
shorts, sweaters, sweatshirts and outerwear. The Company also offers display
mannequins, logo signage and antique sporting props in order to complement the
fixturing and create an environment that enhances the Cutter & Buck brand image.
The Company's sales representatives are available to assist customers in
merchandising the Company's product lines. This is particularly important at
golf pro shops, where the customers have generally not had experience in
sophisticated apparel merchandising and selling techniques. The Company's
representatives also organize and participate in sales contests, special event
mailings and fashion shows with their customers.
The Company is committed to responding flexibly to the special needs of pro
shops, tournament organizers and corporate customers who order the Company's
products. The Company has developed an in-house embroidery operation and also
works with independent embroiderers to service the needs of golf pro shops and
resorts, which generally prefer that the products they order be pre-embroidered
with the name or logo of the golf club or resort. This customized embroidery
creates exclusiveness that reinforces the prestige of the Cutter & Buck brand
and simultaneously enhances the customer's image through the quality and
uniqueness of the Cutter & Buck product. Virtually all of the Company's products
sold through the corporate sales channel are sold with a corporate logo, which
similarly enhances both the Cutter & Buck brand and the corporation's image. The
placement of the Cutter & Buck embroidered logo on the left sleeve or at the top
center back of its knit shirts allows the Company to accommodate more easily the
desire of pro shops, tournaments and corporations to have their name or logo
placed on the shirt's left chest.
Cutter & Buck supplies its apparel to a number of promising professional
golfers on the PGA tour, the Nike tour and other tours. It is expected that
these professional athletes will influence the golf apparel preferences of pro
shop customers and consumers. The Cutter & Buck logo is positioned prominently
on the Company's shirts and sweaters worn by these golfers, making it visible to
those watching tournament play, either on site or on television. Beyond the cost
of making its apparel available to professional golfers, the Company has not
spent, and does not expect to spend, significant marketing funds on professional
endorsement contracts due to the high cost and risks of associating the Cutter &
Buck brand with the performance of only a few top-ranked golfers.
The Company believes that it can accelerate brand recognition through
increased expenditures of targeted magazine advertising and point-of-sale
promotions to create consumer demand for its products. Consistent with its
expansion strategy, the Company advertises in national and regional trade
magazines and produces photographic renditions of its new product lines for
national distribution to its existing customers to expand their awareness of the
Company's product lines. The Company also produces a catalog of its CLASSIC
products to be shipped to its customers for in-stock reordering purposes. In
addition, the Company has initiated an Internet home page on the World Wide Web,
where it provides information about and pictures of its products and responds to
inquiries about the Company and its products.
LICENSING AND INTERNATIONAL DISTRIBUTION
Cutter & Buck is emerging as a desirable consumer brand for specialty
markets for products in addition to sportswear and outerwear, and in foreign
countries. As a result, the Company has been able to enter into license
agreements that broaden the product line and introduce its fashions
internationally, without making a significant capital commitment. License and
royalty income from such agreements was approximately $457,000 in fiscal 1996
and approximately $497,000 in fiscal 1995. The reduction in royalty income
reflects the Company's shift toward direct international sales and exclusive
distribution relationships and away from licensing relationships. In particular,
the
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<PAGE>
decline in license and royalty income in fiscal 1996 was primarily attributable
to the Company's decision to discontinue its relationship with its licensee for
Central and South America. In fiscal 1994, the Company had approximately
$285,000 of license and royalty income. The Company currently has licensing
agreements covering collections for the big- and tall-size market, luggage and
hosiery.
The Company works closely with each licensee on concept and color so that
the licensed products complement the Company's apparel offerings as part of the
overall lifestyle collection. The Company retains final approval over design and
quality of each licensed product. In addition to the product licensees, the
Company also has licensees that have contracted for the right to manufacture and
market Cutter & Buck designs in specified international markets, including
Japan, Hong Kong, China and Canada. Cutter & Buck license agreements generally
provide for three-year terms and provide for royalties as a percentage of sales.
Most agreements contain annual royalty minimums, and all agreements give Cutter
& Buck final control over product design and quality. These licensing
arrangements enable the Company to increase the number and geographic
distribution of products bearing the Cutter & Buck name, thereby expanding the
image and brand awareness of Cutter & Buck.
In addition, Cutter & Buck has agreements with international distributors in
Australia, Greece, Lebanon, Singapore, Malaysia and Indonesia. These
distributors buy the Company's products at reduced cost for resale in their
respective markets. The products offered for distribution in these territories
are identical to the products offered in the United States, and these
distributors often use the Company's marketing technique of offering the
products in collections, as identified on pictorial line sheets. The Company's
relationships with its distributors are managed by an International Merchandise
Manager, who reports to the Company's President.
The Company has subsidiaries in the United Kingdom and the Netherlands for
the purpose of marketing and selling its products in Europe. In fiscal 1996, the
Company repurchased the rights to distribute its products in the United Kingdom
from Re-Ward Limited. The Company believes that it can better manage its
expansion plans in the European Union through direct control and distribution of
its products rather than through third-party distributors.
PRODUCT DEVELOPMENT AND SOURCING
The Company's concept of updated traditional sportswear and outerwear is an
established category within the apparel field, relying upon historical American
design sensibilities. Changes of color, fabric and body shapes in this category
are not rapid, thereby allowing the Company's product development team to
evolve, rather than re-invent, the product each season. This provides stability
in the design environment and consistency in the Company's conceptual offerings
to its customers. The Company's product development team comprises Mr. Jones,
President and Chief Executive Officer; Jim C. McGehee, Vice President of Sales;
Patricia A. Nugent, Vice President of Merchandise and Design; Julie Snow,
International Merchandise Manager; Pamela Robinson, Senior Designer; Mr.
Rodolfo, design consultant; and the Company's design staff, all of whom have
significant product development and brand building experience for each seasonal
collection (spring and fall). The team's purpose is to determine product
strategy, color and fabric selection and assortment of styles, which is
accomplished through a series of meetings which occur over a three- to
four-month period. The team's first meeting for each season includes a review of
overall trends in the market, the Company's sales experience from the same
season of the previous year and other ideas relevant to color, fabric and
pattern. Subsequent meetings are focused on specific color, textile and style
choices within the framework of a desired seasonal assortment. These meetings
culminate in orders for sample production. Because of the length of its
production and sales cycles, the Company generally strives to complete the
design process and place orders for product samples at least 10 to 15 months
prior to delivering product to its customers. Effective management and timely
fulfillment of the Company's anticipated product development and production
schedule are important to each season's success. Deviations from the schedule
can result in delays in product delivery and in the manufacture of products that
do not meet the Company's normal quality standards, and may lead to increased
levels
27
<PAGE>
of closeout and liquidation sales, which have an adverse effect on the Company's
profitability. These deviations have occurred from time to time in the past, and
there can be no assurance that they will not occur in the future.
The design staff is responsible for generating an innovative group of
products for the Company's two seasonal collections. The design staff uses a
computer-aided design system to create products and to translate those designs
into sample prototype depictions. The designers also use the Company's growing
product and fabric libraries, especially when designing FASHION products. During
the design process the Company's manufacturing sources develop new seasonal
textiles in association with the design team. This enables the Company to source
a wide variety of textile and printed artwork designs, many of which the Company
acquires for its exclusive use. The Company's working partnerships with its key
suppliers have enhanced its ability to develop distinctive and innovative
apparel.
The Company makes a final determination concerning pricing and the
composition of the seasonal lines upon receipt of samples, which is
approximately four months after sample orders are placed. The Company's sales
representatives use the samples to market the new season's products to Company
customers. The Company then places production orders, which usually require four
months to fill, taking into account market feedback to adjust order quantities
for deliveries later in the season. To enhance consistency, quality and on-time
delivery of its products, the Company works with a select group of high-quality,
reliable domestic and foreign manufacturers who are knowledgeable and
experienced in the intricate design and manufacturing processes required to
produce the Company's products. Using these independent manufacturers allows the
Company to maximize production flexibility while avoiding significant capital
expenditures, work-in-process inventory buildups and the costs of managing a
large production work force. Currently, the Company's production is sourced
through an agent in Thailand, two agents in Hong Kong coordinating Chinese
suppliers, an agent managing other Asian sources of supply and direct factory
relationships in Asia and California.
In May 1996, the Company established an in-house embroidery operation in
order to reduce costs, shorten delivery time and enhance quality control of its
embroidered products. The Company believes that this will significantly reduce
the Company's reliance on independent embroiderers to customize its products.
The Company currently contracts with approximately five independent domestic
embroiderers during peak embroidery production and shipping periods. The Company
believes its in-house embroidery manufacturing operation will be capable of
handling approximately 50% of the embroidered logo requirements of its golf pro
shop and corporate customers in fiscal 1997. The Company is realizing embroidery
production cost savings from its in-house embroidery activities.
The Company does not have formal long-term contracts with any of its
suppliers or agents. Although to date the Company has experienced only limited
difficulty in satisfying its production requirements using this outsourcing
strategy, the loss of any of the Company's suppliers or agents could have a
significant adverse effect on the Company's immediate operating results.
Approximately 45% of the Company's knit shirt production is currently managed by
its agent in Thailand. The Company has on occasion experienced significant
production delays attributable to its suppliers, and there can be no assurance
that such delays will not occur in the future.
The Company's production department oversees its sourcing arrangements. The
production department is responsible for on-time delivery of the Company's
products and negotiating costs consistent with the Company's desired profit
margins on each style. Department personnel inspect and critique prototypes of
each item prior to the commencement of actual production in order to maintain
the Company's high-quality standards. Where feasible, the production department
obtains a commitment from the sourcing manufacturer to dedicate a production
line to manufacture the Company's products from season to season. Production
department personnel travel to factories to conduct inspections of the
manufacturer prior to shipment of finished product. They also monitor tariff and
quota-related developments, where appropriate.
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<PAGE>
INFORMATION SYSTEM, INVENTORY MANAGEMENT AND WAREHOUSING
In addition to the computer-aided design system used by its product
development team, the Company has a fully integrated, real-time management
information system that is specifically designed for the apparel industry. The
system includes important features such as manufacturing resource requirements
planning, production scheduling, detailed product tracking, standard costs
system planning and control, and detailed perpetual inventory systems. As
original purchases are tracked through various factory production phases by the
Company's production personnel, sales are tracked by the Company's Vice
President of Merchandise and Design in order to compare purchases against
availability, thereby allowing the Company to react quickly to changes and
trends. Available quantities of every style offered are sent to all salespeople
weekly. Customer service personnel receive this information daily and have
access to real-time inventory availability.
This comprehensive information system serves users in every operating area
of the Company, and can be accessed by personal computers to create costing
models, specification sheets and embroidery layout sheets. The manufacturing
module integrates with the general ledger accounting and financial module. The
Company's information system also provides detailed product gross margin
information that assists the Company in managing product profitability. The
system runs on a UNIX platform with IBM's RISC 6000 hardware, which allows for
the fast processing of critical information, and has the capability of serving a
much greater number of users as the Company grows. To fully utilize the system,
the Company employs an MIS manager, who has prior experience with this
management information system at a larger apparel company.
In May 1996, the Company commenced its own warehouse operations in a newly
leased 45,720 square-foot facility in Seattle, Washington, and hired an
additional 20 persons to conduct its warehouse operations.
ORDER BOOKING CYCLE AND BACKLOG
The Company receives its orders for a season over a 10-month period
beginning when samples are first shown to customers and continuing into the
season. The Company must schedule production in advance of order placement. The
Company maintains CLASSIC products in stock to enable it to quickly fill orders
for these products.
The Company begins to take orders for its fall collection in January for
delivery between May and October and for its spring collection in July for
delivery between November and April. The Company's domestic backlog, which
consists of open, unfilled customer orders from the golf and specialty stores
distribution channels, was $11.8 million as of September 25, 1996. Because of
the Company's history of accepting order cancellations in certain circumstances,
and a lack of contractual provisions prohibiting such cancellations, the Company
typically does not expect to ship all of its backlog.
COMPETITION
The men's sportswear segment of the apparel industry is highly competitive.
The Company encounters substantial competition in its primary distribution
channel, golf pro shops, from Ashworth, Izod Club and Polo/Ralph Lauren. Apparel
companies recently entering the golf distribution channel, such as Tommy
Hilfiger, will further increase the level of competition in that channel. Most
of the Company's competitors are significantly larger and more diversified than
the Company and have substantially greater resources available for developing
and marketing their products. Some of the Company's competitors primarily target
either a younger or older consumer than the Company. To maintain its growth
rate, the Company will need to increase its market share at the expense of
existing competitors and other established apparel manufacturers choosing to
enter the market. There can be no assurance, however, that the Company will be
successful in increasing its market share.
Management believes that the Company's ability to compete effectively is not
based primarily on price, but on brand image, product differentiation, product
quality and production flexibility. The
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<PAGE>
Company's products are also differentiated from a number of others in the
industry by their updated traditional American appearance and imaginative use of
color and trims. In addition, the Company believes that its products are of a
higher quality than those of many of its competitors.
TRADEMARKS
"CUTTER & BUCK" and the Cutter & Buck pennant logo are trademarks of the
Company and are registered for use on apparel and other products in Argentina,
Australia, the Bahamas, Benelux, Canada, Denmark, the Dominican Republic,
France, Germany, Hong Kong, the Netherlands Antilles, Norway, Paraguay, the
United Kingdom, the United States and Uruguay. The Company also has applied for
registration in a number of other countries. The Company's name and logo are
regarded as valuable assets and critical to marketing its products. Leading
brands in the apparel industry have historically been subject to competition
from imitators that infringe the trademarks and trade dress of the brand. While
the Company to date has not been aware of a high level of imitation of the
Cutter & Buck brand, there can be no assurance that its business will not suffer
from such imitation in the future.
EMPLOYEES
As of July 31, 1996, the Company had 149 full-time and five part-time
employees, of whom 23 were primarily engaged in administration, 31 in sales, 82
in warehousing and embroidery, seven in production, five in design and six in
the operation of the Company's outlet store. None of the Company's employees is
a member of a union. The Company considers its relations with its employees to
be excellent.
PROPERTIES
The Company leases its principal executive offices, which are located in
Seattle, Washington, under a lease that covers 11,518 square feet and expires in
October 1999. The Company also leases for its warehouse and embroidery operation
approximately 45,720 square feet of space in Seattle, Washington, under a lease
that expires in April 2001. The Company's lease of its outlet store space in
Lake Oswego, Oregon, a suburb of Portland, covers 2,925 square feet and expired
in August 1996. The Company has initiated discussions with its landlord
regarding renewal of this lease and continues to lease the space on a
month-to-month basis. The Company leases additional office space and uses
contract warehouse facilities for its European distribution. The Company also
leases a small apartment in New York, New York that functions as a sales
showroom.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------
<S> <C> <C>
Harvey N. Jones (1) 45 President, Chief Executive Officer and Director
Martin J. Marks 47 Senior Vice President, Chief Operating Officer,
Treasurer and Secretary
Jim C. McGehee 46 Vice President of Sales
Patricia A. Nugent 42 Vice President of Merchandise and Design
Jon P. Runkel 39 Vice President of Production
Geoffrey N. Cornish 41 Vice President -- Europe
Neil D. Johnson 40 Controller
Michael S. Brownfield (1) 56 Director
Frances M. Conley (1)(2)(3) 53 Director
Larry C. Mounger (2)(3) 59 Director
Joey Rodolfo 44 Director
James B. Slayden (2)(3) 71 Director
</TABLE>
- ------------------------
(1) Member of the Nominating Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Mr. Jones, a co-founder of the Company, has been President, Chief Executive
Officer and a director of the Company since its inception in January 1990.
Mr. Marks, Senior Vice President, Chief Operating Officer, Treasurer and
Secretary of the Company, joined the Company as Chief Financial Officer in
January 1991. From March 1988 to November 1990, he was the Chief Financial
Officer of E-Machines, Inc., a developer and manufacturer of high-resolution
display systems for the Macintosh computer. Mr. Marks has a bachelor's degree in
business administration from Portland State University and is a certified public
accountant.
Mr. McGehee, Vice President of Sales of the Company, joined the Company in
February 1990. Mr. McGehee has a bachelor's degree in business (marketing) from
Auburn University.
Ms. Nugent, Vice President of Merchandise and Design of the Company, joined
the Company in December 1993 and served as Vice President of Production from
April 1994 to May 1995. From 1983 to 1993, she was a private consultant to
various clothing and textile firms, including Demetre Inc., a sweater company,
and Roffe Inc., a skiwear company. Ms. Nugent has a bachelor's degree in
clothing and textile design from the University of Washington and a design
certificate from the Modeschule der StadtWien in Vienna, Austria.
Mr. Runkel, Vice President of Production of the Company, joined the Company
in April 1995 and served as Operations Manager from April 1995 to June 1995.
From October 1994 to April 1995, he was a production manager of Organik
Technologies, Inc., an apparel manufacturer, producing contract work for such
names as Patagonia, Eddie Bauer, Timberland and Jantzen, and from March 1993 to
September 1994, he was a consultant on operations/production for Susan Barry
Designs, a women's "bridge" line, consulting in such areas as distribution,
sample making, contract management, finance and sales. Prior to that, he was a
private manufacturer and consultant to the apparel industry.
Mr. Cornish, Vice President -- Europe of the Company, joined the Company in
March 1996. From March 1994 to March 1996, he was a Managing Director for
Ashworth Europe B.V., a European
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subsidiary of Ashworth, a golf and sportswear apparel manufacturer. From
December 1992 to March 1994, he was International Sales and Marketing Director
for Bad Boys B.V., a textile marketing company. From February 1992 to October
1992, he was the European Marketing Director for AVIA International, a sports
footwear and active wear company. From 1982 to 1992, he was General Manager of
Neil Pryde Ltd., a Hong Kong-based sporting goods and textiles manufacturer. Mr.
Cornish has a bachelors degree in business administration from the University of
Kent, England.
Mr. Johnson has been Controller of the Company since December 1994. From
1987 to 1994, he was Controller of Union Bay Clothing Company. Mr. Johnson has a
bachelor's degree in business administration (accounting) from the University of
Washington and is a certified public accountant.
Mr. Brownfield has been a director of the Company since May 1995. He is a
private investor and has a bachelor's degree in chemistry from the University of
Oregon. Mr. Brownfield is the Chairman of Accurate Molded Plastics, a private
manufacturer of tooling and injection-molded plastics, and also serves on the
boards of directors of Heartsmart, Inc., a private biomedical company, Northwest
Cascade, Inc., a private construction company, Kitsap Entertainment Corporation,
a private restaurant franchisee, Kam-Ko Bio-Pharm Trading Co., Ltd. --
Australasia, a private biomedical company, Pantheon, Inc., a private software
integration company, and Global Tel Resources, Inc., a private
telecommunications company.
Ms. Conley has been a director of the Company since July 1990. Since 1982,
she has been a shareholder, director and principal of Roanoke Capital, Ltd.
("Roanoke Capital"), the general partner of Roanoke Investors' Limited
Partnership ("Roanoke"), a venture capital limited partnership. She has a
bachelor's degree in music from Emmanuel College and a master's degree in
business administration from the Harvard Graduate School of Business
Administration. Ms. Conley serves on the boards of directors of Edmark
Corporation, a publicly held educational software developer, and Data I/O
Corporation, an electronics manufacturing company.
Mr. Mounger has been a director of the Company since July 1990. From January
1993 to October 1995, he served as President, Chief Executive Officer and a
director of Sun Sportswear, Inc., a publicly held garment screenprinter. From
June 1963 to January 1993, he held numerous positions, most recently President,
Chairman and Chief Executive Officer, at Pacific Trail, Inc., an outerwear
manufacturer. He has a bachelor's degree in business administration and a juris
doctor degree from the University of Washington. Mr. Mounger serves on the
boards of directors of Sun Sportswear, Inc., Advanced Research Management, a
clinical research management company, and Prepak, a distributor of
emergency-preparedness packs.
Mr. Rodolfo, a co-founder of the Company, has been a director of the Company
since its inception in January 1990. Mr. Rodolfo was Senior Vice President and
Secretary of the Company from its inception until May 1995. He is currently an
independent consultant on design matters, working exclusively for the Company.
In 1986, he co-founded JGH, where he worked until 1989. From May 1984 to October
1986, he served as Senior Design Director of the Young Men's Division of Union
Bay Clothing Company.
Mr. Slayden has been a director of the Company since July 1990. He has been
retired since 1985. Prior to that time, he held numerous executive positions
with J. W. Robinson, Marshall Field & Co., Bullocks and The May Company. He has
a bachelor's degree in business administration from the University of Washington
and a master's degree in business administration from the University of Southern
California.
Directors hold office until the next annual meeting of shareholders of the
Company or until their successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors.
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<PAGE>
BOARD COMMITTEES
The Board of Directors maintains an Audit Committee, a Compensation
Committee and a Nominating Committee. These committees do not have formal
meeting schedules, but are required to meet at least once each year. During
fiscal 1996, there were six meetings of the Board of Directors, and one meeting
each of the Audit Committee, the Compensation Committee and the Nominating
Committee.
Current members of the Audit Committee are Ms. Conley, Chair, and Messrs.
Mounger and Slayden. The Audit Committee is responsible for recommending the
Company's independent auditors and reviewing the scope, costs and results of the
audit engagement.
Current members of the Compensation Committee are Mr. Mounger, Chair, Ms.
Conley and Mr. Slayden. The Compensation Committee is responsible for
determining the overall compensation levels of the Company's executive officers
and administering the Company's stock option plans.
Current members of the Nominating Committee are Mr. Brownfield, Chair, Ms.
Conley and Mr. Jones. The Nominating Committee is primarily responsible for
recommending director nominees to the Company's Board of Directors. The
Nominating Committee will consider recommendations by shareholders for vacancies
on the Board, which recommendations may be submitted to the Company's Secretary.
DIRECTOR COMPENSATION
The Company currently pays $350 per Board meeting attended to each director
who is not an officer or employee of the Company or an affiliate of a venture
capital firm with an interest in the Company. Directors are not currently paid
any additional compensation for attending Committee meetings. All directors are
entitled to reimbursement for expenses incurred in traveling to and from Board
meetings. In each of the last four years, Messrs. Mounger and Slayden have each
been granted an option under the 1991 Plan to purchase 2,312 shares of Common
Stock at an exercise price equal to the fair market value of the Common Stock on
the date of grant. See "-- Benefit Plans -- 1991 Plan." In addition, pursuant to
the 1995 Director Plan, directors who are not officers, employees or independent
consultants of the Company are eligible to receive annual option grants to
purchase 2,312 shares of Common Stock at the fair market value of the Common
Stock on the date of grant. In fiscal 1996, Messrs. Brownfield, Mounger and
Slayden and Ms. Conley each were granted options to purchase 2,312 shares of
Common Stock pursuant to the 1995 Director Plan. See "-- Benefit Plans -- 1995
Director Plan." In addition, in October 1995, Messrs. Mounger and Slayden each
were granted one-time awards of $5,000 as compensation for services provided to
the Company.
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<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
earned by the Company's President and Chief Executive Officer and the other
officers of the Company who earned salary and bonus of at least $100,000 (the
"Named Executive Officers") for services rendered to the Company in all
capacities during fiscal 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
FISCAL ------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(1) OPTIONS (#) ($)(2)
- ------------------------------------------------ --------- ----------- ------------ ------------- ---------------
<S> <C> <C> <C> <C> <C>
Harvey N. Jones 1996 $ 120,000 -- 30,000 $ 552
President and Chief Executive Officer 1995 $ 117,000 -- 46,253 $ 552
Martin J. Marks 1996 $ 110,000 -- 25,000 $ 552
Senior Vice President, Chief Operating Officer, 1995 $ 105,000 -- 69,380 $ 488
Treasurer and Secretary
Jim C. McGehee 1996 $ 110,000 $ 20,774 15,000 $ 552
Vice President of Sales 1995 $ 107,667 $ 36,361 30,064 $ 539
</TABLE>
- ------------------------
(1) Bonus amounts received by Mr. McGehee represent sales commissions.
(2) Represents term life insurance premiums.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information as of April 30, 1996
concerning stock options granted to the Named Executive Officers for the fiscal
year then ended. The hypothetical gains or "option spreads" that would exist for
the respective options are set forth in accordance with the rules of the
Securities and Exchange Commission (the "Commission"). These gains are based on
the assumed rates of annual compound stock price appreciation of 5% and 10% from
the date the option was granted over the full option term.
OPTION GRANTS IN FISCAL 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------------- VALUE AT ASSUMED ANNUAL
PERCENT OF RATES OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR OPTION
SECURITIES GRANTED TO EXERCISE TERM (2)
UNDERLYING OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------------------------- ------------------- -------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Harvey N. Jones 30,000 21% $10.75 3/12/06 $ 202,800 $ 513,900
Martin J. Marks 25,000 17% $10.75 3/12/06 $ 169,000 $ 428,250
Jim C. McGehee 15,000 10% $10.75 3/12/06 $ 101,400 $ 256,950
</TABLE>
- ------------------------
(1) Represents nonqualified stock options granted under the 1995 Plan. The
option exercise price is equal to the fair market value of the underlying
Common Stock on the date of grant. To the extent not already vested, the
options generally become fully vested and exercisable upon a change in
control of the Company. The options have 10-year terms. See "-- Benefit
Plans -- 1995 Plan."
(2) The actual value realized may be greater or less than the potential
realizable values set forth in the table.
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<PAGE>
FISCAL 1996 YEAR-END OPTION VALUES
The following table sets forth certain information as of April 30, 1996
regarding options held by each of the Named Executive Officers. None of the
Named Executive Officers exercised any options during the fiscal year ended
April 30, 1996.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE- MONEY OPTIONS
YEAR-END (#) AT FISCAL YEAR-END ($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Harvey N. Jones 23,126 53,126 $ 227,560 $ 265,070
Martin J. Marks 48,566 59,690 $ 477,890 $ 372,600
Jim C. McGehee 21,970 30,032 $ 216,185 $ 166,665
</TABLE>
- ------------------------
(1) Based on the closing price of the Company's Common Stock as quoted on the
Nasdaq National Market on April 30, 1996 ($12.00), less the exercise price.
The actual value realized may be greater or less than the potential
realizable values set forth in the table.
BENEFIT PLANS
1991 PLAN. The 1991 Plan was adopted by the Company's Board of Directors on
June 28, 1991. As of April 30, 1996, there were outstanding options under the
1991 Plan to purchase an aggregate of 252,074 shares of Common Stock at an
exercise price of $2.16 per share and 18,500 options to purchase shares of
Common Stock at an exercise price of $4.74 per share. Of the outstanding options
to purchase an aggregate of 270,574 shares under the 1991 Plan, options to
purchase 206,973 shares are exercisable within 60 days of September 25, 1996.
The Board of Directors has determined that no further grants will be made under
the 1991 Plan.
1995 PLAN. The 1995 Plan was adopted by the Company's Board of Directors on
June 27, 1995 and was approved by the Company's shareholders on July 20, 1995.
The Company has reserved 208,140 shares of Common Stock for issuance under the
1995 Plan. The 1995 Plan permits the granting of incentive stock options
("ISOs") or nonqualified stock options at the discretion of the Compensation
Committee, which administers the 1995 Plan. While serving on the Compensation
Committee, members are not eligible to receive any options under the 1995 Plan.
Subject to the terms of the 1995 Plan, the Compensation Committee determines the
terms and conditions of options granted, including the exercise price. The
exercise price for stock options granted may not be less than the fair market
value per share of Common Stock on the date of grant and each ISO must expire
within 10 years from the date of grant. If, however, ISOs are granted to persons
owning more than 10% of the Company's voting stock, the term of such ISOs may
not exceed five years and the exercise price must not be less than 110% of the
fair market value per share of Common Stock on the date of grant. At the
discretion of the Compensation Committee, options may be exercised by (i)
delivery to the Company of already owned Common Stock having a value equal to
the exercise price or (ii) delivery of an irrevocable order to the optionee's
broker to sell the underlying Common Stock and deliver to the Company a portion
of the sale proceeds equal to the exercise price. Unless otherwise provided by
the Compensation Committee, the 1995 Plan provides that options are to vest 20%,
40%, 60%, 80% and 100% on the first, second, third, fourth and fifth
anniversaries of the date of grant, respectively. To the extent not already
exercisable, the options generally become exercisable upon certain changes in
control of the Company pursuant to the terms of the 1995 Plan. As of the date of
this Prospectus, options to purchase 127,500 shares of Common Stock have been
granted under the 1995 Plan.
STOCK PURCHASE PLAN. The Stock Purchase Plan was adopted by the Company's
Board of Directors on October 25, 1995 and approved by the Company's
shareholders on December 1, 1995. The Stock Purchase Plan covers 250,000 shares
of Common Stock and consists of consecutive six-month
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<PAGE>
offerings, until the earlier of December 31, 2000 and the date when the shares
of Common Stock authorized to be delivered upon exercise of options granted
under the Stock Purchase Plan have been delivered. The first offering under the
Stock Purchase Plan commenced on January 1, 1996 and ended on June 30, 1996.
Subsequent offering periods commence on each July 1 and January 1. With certain
exceptions, all employees, excluding executive officers, who have been employed
by the Company or one of its participating subsidiaries for at least six months
are eligible to participate in the Stock Purchase Plan. As of September 25,
1996, approximately 38 employees are eligible to participate. The price at which
an employee may purchase Common Stock is 85% of the closing bid for the Common
Stock as reported by the Nasdaq National Market on the day the offering
commences or on the day the offering terminates, whichever is lower. An employee
may elect to have up to 10% of his or her base pay withheld for the purpose of
purchasing stock under the Stock Purchase Plan. Unless the participant elects to
withdraw from the offering, each participant who continues to be employed by the
Company on the date the offering terminates is deemed to have purchased on such
date the number of shares (subject to the maximum number covered by his or her
option) as may be purchased with the amount of his or her payroll deductions at
the offering price. The Board of Directors of the Company may at any time
terminate or amend the Stock Purchase Plan. Except as provided below, no such
termination or amendment may change any previously granted rights which would
adversely affect the rights of any participant. The Stock Purchase Plan is
administered by the Compensation Committee, which is authorized to make rules
and regulations for the administration and interpretation of the Stock Purchase
Plan. As of the date of this Prospectus, 1,526 shares of Common Stock have been
granted pursuant to the Stock Purchase Plan.
1995 DIRECTOR PLAN. The 1995 Director Plan was adopted by the Company's
Board of Directors on June 27, 1995 and approved by the Company's shareholders
on July 20, 1995. The Company has reserved 46,253 shares of Common Stock for
issuance under the 1995 Director Plan. Pursuant to the 1995 Director Plan, each
nonemployee director of the Company is granted an option to purchase 2,312
shares of Common Stock immediately following each annual meeting of shareholders
of the Company. The exercise price of options granted under the 1995 Director
Plan is equal to the fair market value per share of Common Stock on the date of
grant. Options granted under the 1995 Director Plan are exercisable beginning
six months after the date of grant for a 10-year period from the date of grant.
As of the date of this Prospectus, options to purchase 18,496 shares of Common
Stock have been granted under the 1995 Director Plan.
36
<PAGE>
CERTAIN TRANSACTIONS
In May 1990, Mr. Rodolfo executed a promissory note in favor of the Company
evidencing a loan in the original principal amount of $50,020 with interest at
prime (9% at April 30, 1995) in connection with his purchase of Common Stock.
The loan is secured by the pledge of 23,126 shares of Common Stock owned by Mr.
Rodolfo and is payable on demand. The maximum amount of indebtedness, including
accrued interest, outstanding under the loan during fiscal 1996 was $68,175.
In April 1995, Mr. Rodolfo resigned as the Company's Senior Vice President
and Secretary and entered into a Consulting Agreement with the Company. Under
the Consulting Agreement, the Company has retained Mr. Rodolfo as a design
consultant, working exclusively on behalf of the Company, through July 1, 1997.
The Consulting Agreement provides that Mr. Rodolfo receive a consulting fee of
$120,000 per year and a bonus, which does not depend on any performance
standards, of $15,000 on each April 30 during the term of the Consulting
Agreement, beginning April 30, 1996, and be reimbursed for his expenses in
performing his duties under the Consulting Agreement. The Consulting Agreement
contains provisions that prevent Mr. Rodolfo from engaging directly or
indirectly in the business of designing, manufacturing or selling certain
apparel products in competition with the Company in the United States and
numerous other countries for a period of 12 months after termination of the
Consulting Agreement, subject to certain limitations during that period which
would allow him to compete in all lines of women's wear, swimwear, neckwear,
shoes, men's dress shirts and men's suits. The Consulting Agreement also
contains restrictions on Mr. Rodolfo's ability to solicit or offer employment to
Company employees.
On May 12, 1995, Michael S. Brownfield, a director of the Company, and the
Brownfield 1991 Irrevocable Trust, of which Mr. Brownfield's adult children are
the sole beneficiaries, purchased securities in an equity offering of the
Company for $109,600 and $109,403, respectively. The purchases were at the same
price per share available to other investors in the equity offering.
The Company believes that the transactions between it and its officers,
directors, employees and affiliates were on terms no less favorable to the
Company than could have been obtained from unaffiliated third parties.
37
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of September 25, 1996 and as adjusted to
reflect the sale of the Common Stock offered hereby, certain information with
respect to the beneficial ownership of the Company's Common Stock by (i) the
Selling Shareholders, (ii) each person known by the Company to own beneficially
more than 5% of the Common Stock, (iii) each of the Named Executive Officers,
(iv) each of the Company's directors, and (v) all directors and executive
officers as a group. Except as otherwise noted, the named beneficial owner has
sole voting and investment power.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING SHARES TO AFTER OFFERING
---------------------- BE SOLD IN ----------------------
NAME AND ADDRESS NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------------------------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Frances M. Conley (1) ................................... 921,507 25.1% -- 921,507 18.5%
Roanoke Investors' Limited Partnership
c/o Roanoke Capital, Ltd.
1111 Third Avenue
Suite 2220
Seattle, WA 98101
Harvey N. Jones (2) ..................................... 226,658 6.2% -- 226,658 4.6%
c/o Cutter & Buck Inc.
2701 First Avenue, Suite 500
Seattle, WA 98121
Joey Rodolfo (2) ........................................ 184,550 5.0% 35,000 149,550 3.0%
c/o Cutter & Buck Inc.
2701 First Avenue, Suite 500
Seattle, WA 98121
Martin J. Marks (3)...................................... 65,911 1.8% 3,500 62,411 1.3%
Michael S. Brownfield (4)................................ 55,813 1.5% -- 55,813 1.1%
Jim C. McGehee (3)....................................... 29,486 * -- 29,486 *
Larry C. Mounger (5)..................................... 20,001 * -- 20,001 *
James B. Slayden (3)..................................... 11,560 * -- 11,560 *
Duffy Waldorf (6)........................................ 23,126 * 9,250 13,876 *
Michael G. Foster........................................ 16,881 * 16,881 -- *
Phillip F. Frink, Jr., as Trustee, ...................... 8,556 * 4,556 4,000 *
First Washington Corporation PST
Robert E. Chapman, as Trustee of ........................ 8,441 * 3,441 5,000 *
the Robert Earl Chapman Revocable Trust
Other Selling Shareholders as a group (7)................ 27,372
All directors and executive officers as a group (12
persons)(8)............................................. 1,533,032 41.8% 38,500 1,494,532 30.1%
</TABLE>
- ------------------------
* Less than 1%.
(1) Of these shares, 919,195 are held of record by Roanoke. Ms. Conley, a
director of the Company, is a shareholder, director and principal of Roanoke
Capital, the general partner of Roanoke. The only other shareholder,
director and principal of Roanoke Capital is Gerald R. Conley, Ms. Conley's
husband. Ms. Conley disclaims beneficial ownership of Roanoke's shares that
exceed Roanoke Capital's interest in those shares. Includes 2,312 shares
subject to options exercisable within 60 days of September 25, 1996 held
directly by Ms. Conley.
(2) Includes 34,689 shares subject to options exercisable within 60 days of
September 25, 1996.
(3) Represents shares subject to options exercisable within 60 days of September
25, 1996.
38
<PAGE>
(4) Excludes 32,141 shares held by the Brownfield 1991 Irrevocable Trust, of
which Mr. Brownfield's adult children are the sole beneficiaries. Includes
2,312 shares subject to options exercisable within 60 days of September 25,
1996.
(5) Includes 11,560 shares subject to options exercisable within 60 days of
September 25, 1996.
(6) 13,876 of these shares are held of record by Cotton & Cabs, a general
partnership of which Mr. Waldorf is a partner.
(7) Includes certain former holders of the Company's Series B Preferred Stock
who have registration rights with respect to this offering. These
shareholders have until October 17, 1996 to notify the Company of their
intention to participate in the offering. The Company has registered an
aggregate of 100,000 shares to satisfy anticipated selling shareholder
demand.
(8) Includes 215,065 shares subject to options exercisable within 60 days of
September 25, 1996.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 25,000,000 shares of
Common Stock, no par value, and 6,000,000 shares of Preferred Stock, no par
value.
COMMON STOCK
As of July 31, 1996, 3,668,241 shares of Common Stock were issued and
outstanding and held by approximately 110 holders of record. After completion of
this offering, there will be 4,971,741 shares of Common Stock issued and
outstanding, assuming no exercise of the Underwriters' over-allotment option or
outstanding stock options. Holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of shareholders. Holders of Common
Stock are entitled to receive ratably such dividends as may be legally declared
by the Board of Directors. In the event of liquidation, dissolution or winding
up of the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities. Holders of Common Stock have no
preemptive, subscription, redemption or conversion rights. All the outstanding
shares of Common Stock are, and all shares of Common Stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 6,000,000 shares of
Preferred Stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights thereof,
including dividend rights, conversion rights, voting rights, redemption terms,
liquidation preferences and the number of shares constituting each such series,
without any further vote or action by the Company's shareholders. The issuance
of Preferred Stock could adversely affect the rights of holders of Common Stock.
The issuance of Preferred Stock in certain circumstances may have the effect of
delaying, deterring or preventing a change in control of the Company, may
discourage bids for the Common Stock at a premium over the market price of the
Common Stock and may adversely affect the market price of, and the voting and
other rights of the holders of, the Common Stock. At present, the Company has no
plans to issue any shares of Preferred Stock.
COMMON STOCK PURCHASE WARRANTS
In connection with the Company's initial public offering in August 1995, the
Company issued warrants to purchase up to 131,531 shares of Common Stock at an
exercise price of $8.40 per share (equal to 120% of the initial public offering
price). See "Shares Eligible for Future Sale."
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock and Preferred Stock are
available for future issuance without shareholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefits.
The existence of authorized but unissued and unreserved Common Stock and
Preferred Stock may enable the Board of Directors to issue shares to persons
friendly to current management, which could render more difficult or discourage
an attempt to obtain control of the Company by means of a proxy contest, tender
offer, merger or otherwise, and thereby protect the continuity of the Company's
management.
WASHINGTON ANTITAKEOVER STATUTE
Washington law contains certain provisions that may have the effect of
delaying or discouraging a hostile takeover of the Company. Chapter 23B.17 of
the Washington Business Corporation Act prohibits, subject to certain
exceptions, a merger, sale of assets or liquidation of a corporation involving
an "Interested Shareholder" (defined as a person who owns beneficially 20% or
more of the corporation's voting securities) unless determined to be at a "fair
price" or otherwise approved by a majority of the corporation's disinterested
directors or the holders of two-thirds of the corporation's outstanding voting
securities, other than those of the Interested Shareholder. A corporation may,
in its articles of
40
<PAGE>
incorporation, exempt itself from coverage of this provision. The Company has
not done so. In addition, Chapter 23B.19 of the Washington Business Corporation
Act prohibits a corporation, with certain exceptions, from engaging in certain
significant business transactions with an "Acquiring Entity" (defined as a
person who acquires 10% or more of the corporation's voting securities without
the prior approval of the corporation's board of directors) for a period of five
years after such acquisition. The prohibited transactions include, among others,
a merger with, disposition of assets to, or issuance or redemption of stock to
or from, the Acquiring Entity, or allowing the Acquiring Entity to receive any
disproportionate benefit as a shareholder. A corporation may not "opt out" of
this statute. These provisions may have the effect of delaying, deterring or
preventing a change in control of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Restated Articles of Incorporation include a provision
permitted by Washington law that limits the liability of the Company's
directors. Under the provision, no director shall be personally liable to the
Company or its shareholders for monetary damages for conduct as a director,
excluding, however, liability for acts or omissions involving intentional
misconduct or knowing violations of law, illegal distributions or transactions
from which the director receives benefits to which the director is not legally
entitled. In addition, Washington law provides for broad indemnification by the
Company of its officers and directors. The Company's Restated Articles of
Incorporation implement this indemnification to the extent permitted by law.
Insofar as the indemnity for liabilities arising under the Securities Act may be
permitted to directors or officers of the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
TRANSFER AGENT
The transfer agent for the Common Stock is ChaseMellon Shareholder Services,
Ridgefield Park, New Jersey.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 4,971,741 shares of
Common Stock outstanding (5,181,741 shares assuming the Underwriters'
over-allotment option is exercised in full). Of these shares, 3,118,901 shares
(including the 1,400,000 shares sold in this offering) will be freely tradable
without restriction under the Securities Act. An additional 1,852,840 shares may
be sold subject to the limitations of Rule 144 under the Securities Act,
1,317,279 of which are subject to lock-up agreements that expire 120 days after
the closing date of this offering, or earlier at the discretion of Needham &
Company, Inc. (the "Lock-up Agreements").
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares (as
that term is defined in Rule 144) for at least two years, including any person
who may be deemed to be an affiliate of the Company, is entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of
1% of the then-outstanding shares of Common Stock (approximately 49,700 shares
immediately after this offering) or the average weekly trading volume in the
Common Stock as reported by Nasdaq during the four calendar weeks preceding such
sale. Sales pursuant to Rule 144 also are subject to certain other requirements
relating to the volume, manner of sale, and other limitations under Rule 144 and
notice and availability of current public information about the Company.
Affiliates may publicly sell shares not constituting restricted securities under
Rule 144 in accordance with the foregoing volume limitations and other
restrictions, but without regard to the two-year holding period. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding a sale by such person, and who
has beneficially owned restricted shares for at least three years, is entitled
to sell such shares under Rule 144 without regard to any of the limitations
described above.
As of September 25, 1996, there were stock options outstanding to purchase
an aggregate of 408,022 shares of Common Stock, 217,377 shares of which were
subject to then exercisable options. The shares issued upon exercise of these
options may be resold in the public market without restriction under the
Securities Act, in some cases subject to the expiration of the Lock-up
Agreements and/ or in accordance with Rule 144.
Roanoke, which currently holds 919,195 shares of Common Stock, is entitled
to certain rights with respect to the registration of such shares under the
Securities Act. Under the terms of an agreement between the Company and Roanoke,
Roanoke may require the Company, subject to the Lock-up Agreements, on not more
than two occasions to file a registration statement under the Securities Act at
the Company's expense with respect to Roanoke's shares of Common Stock, and the
Company is required to use commercially reasonable efforts to effect such
registration, subject to certain conditions and limitations. In addition, if the
Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of Roanoke, the holders of an
additional 653,587 shares of Common Stock are entitled to notice of such
registration and to include shares of Common Stock held by them therein,
provided, among other conditions, that the underwriters of any offering have the
right to limit the number of such shares included in such registration.
In connection with the Company's initial public offering, the Company issued
to Needham & Company, Inc. and Wedbush Morgan Securities Inc., the
representatives of the Underwriters of this offering (the "Representatives"),
certain warrants (the "Representatives' Warrants") to purchase up to 131,531
shares of Common Stock at an exercise price of $8.40 per share (equal to 120% of
the initial public offering price). The Representatives' Warrants are
exercisable until August 14, 2000. The holders of shares of Common Stock issued
upon exercise or conversion of the Representatives' Warrants will have certain
rights to obtain the registration of those shares under the Securities Act. If
the Company registers any shares of Common Stock for its own account or for the
account of other holders, the holders of shares issued upon exercise or
conversion of the Representatives' Warrants are entitled to include their shares
of Common Stock in the registration, subject to certain limitations.
42
<PAGE>
The holders of the shares issued upon exercise or conversion of the
Representatives' Warrants may on one occasion require the Company to register
such shares, subject to certain limitations. The Company will bear all fees,
costs and expenses of the registrations contemplated by this paragraph (other
than underwriting discounts and commissions), subject to certain limitations.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing shareholders could adversely affect prevailing market prices.
43
<PAGE>
UNDERWRITING
The Underwriters named below, acting through the Representatives, Needham &
Company, Inc. and Wedbush Morgan Securities Inc., have severally agreed with the
Company, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company and the Selling Shareholders the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- -----------
<S> <C>
Needham & Company, Inc...........................................................
Wedbush Morgan Securities Inc....................................................
-----------
Total.................................................................... 1,400,000
-----------
-----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share, of which
$ may be reallowed to other dealers. After the public offering, the
public offering price, concession and reallowance to dealers may be reduced by
the Representatives. No such reduction shall change the amount of proceeds to be
received by the Company or the Selling Shareholders as set forth on the cover
page of this Prospectus.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 210,000
additional shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
1,400,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 1,400,000
shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Selling Shareholders and the Company against certain civil
liabilities, including liabilities under the Securities Act.
As of the date of this Prospectus, Needham Capital SBIC, L.P. and Needham
Emerging Growth Partners, L.P., affiliates of Needham & Company, Inc.,
beneficially owned an aggregate of 84,404 shares of Common Stock. These shares
were purchased at $5.92 per share between April 30, 1995 and August 14, 1995 in
reliance upon the exemption from registration set forth in Section 4(2) of the
Securities Act relating to sales by an issuer not involving any public offering.
Needham & Company, Inc. and certain of its affiliates may be deemed to own
14,058 of the shares held by Needham Capital SBIC, L.P. and Needham Emerging
Growth Partners, L.P. as a result of ownership interests in such partnerships.
44
<PAGE>
Pursuant to the terms of the Lock-up Agreements, the officers and directors
and certain shareholders and option holders of the Company have agreed with the
Representatives that, until 120 days after the closing date of this offering,
they will not, directly or indirectly, sell, contract to sell, make any short
sale, pledge or otherwise dispose of any shares of Common Stock, options to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock, exclusive of securities purchased in connection
with this offering or in the public trading market, without the prior written
consent of Needham & Company, Inc. The Company has also agreed until 120 days
after the closing date of this offering not to issue, offer, sell, grant options
to purchase or otherwise dispose of any shares of the Company's equity
securities or any other securities convertible into or exchangeable for Common
Stock or any other equity security, except with the prior written consent of
Needham & Company, Inc. See "Shares Eligible for Future Sale."
In connection with the Company's initial public offering in August 1995, the
Company issued the Representatives' Warrants to purchase up to 131,531 shares of
Common Stock at an exercise price of $8.40 per share (equal to 120% of the
initial public offering price). The holders of shares of Common Stock issuable
upon exercise or conversion of the Representatives' Warrants have certain rights
with respect to registration of those shares.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
In connection with this offering, certain Underwriters and selling group
members (if any) may engage in passive market-making transactions in the Common
Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule 10b-6A
permits, upon the satisfaction of certain conditions, underwriters and selling
group members participating in a distribution that are also Nasdaq market makers
in the security being distributed to engage in limited market-making
transactions during the period when Rule 10b-6 under the Exchange Act would
otherwise prohibit such activity. Rule 10b-6A prohibits underwriters and selling
group members engaged in passive market-making, generally, from entering a bid
or effecting a purchase at a price that exceeds the highest bid for those
securities displayed on Nasdaq by a market maker that is not participating in
the distribution. Under Rule 10b-6A, each underwriter or selling group member
engaged in passive market-making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of the
registration statement under the Securities Act pertaining to the security to be
distributed.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon by Lane
Powell Spears Lubersky LLP, Seattle, Washington. Certain legal matters will be
passed upon for the Underwriters by Perkins Coie, Seattle, Washington.
EXPERTS
The consolidated financial statements of Cutter & Buck Inc. as of April 30,
1995 and 1996, and for each of the three years in the period ended April 30,
1996, appearing in this Prospectus and the Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.
45
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") on Form S-1 under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus, which constitutes part of the
Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedule thereto on file with the
Commission pursuant to the Securities Act and the rules and regulations of the
Commission thereunder. The Company also files periodic reports and proxy
material with the Commission pursuant to the Exchange Act. The Registration
Statement, including the exhibits and schedule thereto, and such other
materials, may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following regional offices of the Commission: New York
Regional Office, Seven World Trade Center, Suite 1300, New York, New York 10048,
and Chicago Regional Office, Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. The Common Stock is quoted on the Nasdaq National
Market. Reports and other information concerning the Company may be inspected
and copied at the National Association of Securities Dealers, Inc., 9513 Key
West Avenue, Rockville, Maryland 20850. The Commission maintains a Web site that
contains reports, proxy and information statements and other information of the
Company at http://www.sec.gov. Statements contained in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
46
<PAGE>
CUTTER & BUCK INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets................................................................................ F-3
Consolidated Statements of Income.......................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................ F-5
Consolidated Statements of Cash Flows...................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cutter & Buck Inc.
We have audited the accompanying consolidated balance sheets of Cutter &
Buck Inc. as of April 30, 1995 and 1996, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended April 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, 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 to above present fairly,
in all material respects, the consolidated financial position of Cutter & Buck
Inc. at April 30, 1995 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 17, 1996, except for
Note 7, as to which the
date is July 8, 1996
F-2
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
------------------------
1995 1996
----------- -----------
JULY 31,
1996
-----------
(UNAUDITED)
Current assets:
<S> <C> <C> <C>
Cash (Note 7)................................... $ 499,417 $ 2,010,047 $ 306,011
Receivables:
Due from factors (Note 3)..................... 1,100,478 5,735,287 3,231,075
Other receivables, net of allowance for
doubtful accounts of $69,955 in April 1995,
$212,314 in April 1996 and $157,795 in July
1996......................................... 1,234,680 1,917,326 4,860,265
Inventories..................................... 1,889,615 4,693,433 7,448,618
Deferred income taxes (Note 8).................. -- 180,000 180,000
Prepaid expenses and other current assets (Note
2)............................................. 514,243 1,098,972 1,262,731
----------- ----------- -----------
Total current assets........................ 5,238,433 15,635,065 17,288,700
Furniture and equipment (Note 4).................. 331,013 798,922 1,768,902
Other assets...................................... 123,853 735,931 678,874
----------- ----------- -----------
Total assets................................ $ 5,693,299 $17,169,918 $19,736,476
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 1,887,817 $ 2,313,937 $ 2,550,535
Accrued liabilities............................. 118,224 499,362 243,300
Income taxes payable............................ -- 220,000 282,600
Loan payable to bank (Note 6)................... -- 114,119 --
Borrowings under bank line of credit (Note 7)... -- -- 2,070,541
Current portion of capital lease obligations.... 23,887 -- 77,119
----------- ----------- -----------
Total current liabilities................... 2,029,928 3,147,418 5,224,095
Capital lease obligations......................... 97,676 -- 337,388
Commitments (Note 9)
Shareholders' equity (Note 10)
Convertible preferred stock, no par value,
6,000,000 shares authorized:
Series A: 2,932,000 shares authorized;
2,932,000 issued and outstanding in 1995..... 3,655,988 -- --
Series B: 1,200,000 shares authorized; 735,510
issued and outstanding in 1995............... 1,939,469 -- --
Common stock, no par value:
25,000,000 shares authorized; 327,819 issued
and outstanding in April 1995, 3,666,715 in
April 1996 and 3,668,241 in July 1996........ 100,790 15,156,702 15,167,432
Note receivable from shareholder (Note 5)....... (44,520) (44,520) (44,520)
Accumulated deficit............................. (2,086,032) (1,089,682) (947,919)
----------- ----------- -----------
Total shareholders' equity.................. 3,565,695 14,022,500 14,174,993
----------- ----------- -----------
Total liabilities and shareholders'
equity..................................... $ 5,693,299 $17,169,918 $19,736,476
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30, THREE MONTHS ENDED JULY 31,
--------------------------------------------- ----------------------------
1994 1995 1996 1995 1996
------------- -------------- -------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 9,881,663 $ 13,434,788 $ 21,645,202 $ 3,304,756 $ 7,999,639
Cost of sales...................... 6,443,209 8,759,623 13,664,607 2,077,089 5,020,064
------------- -------------- -------------- ------------- -------------
Gross profit....................... 3,438,454 4,675,165 7,980,595 1,227,667 2,979,575
Operating expenses:
Design and production............ 509,751 747,381 1,044,692 214,515 336,247
Selling and shipping............. 1,781,274 2,445,951 3,858,184 668,189 1,711,920
General and administrative....... 1,053,216 1,364,053 2,042,194 410,924 713,321
------------- -------------- -------------- ------------- -------------
Total operating expenses....... 3,344,241 4,557,385 6,945,070 1,293,628 2,761,488
------------- -------------- -------------- ------------- -------------
Operating income................... 94,213 117,780 1,035,525 (65,961) 218,087
Other income (expense):
Factor commission and interest
expense......................... (286,948) (384,181) (371,877) (112,880) (111,545)
Interest income.................. 8,434 8,538 134,915 -- --
License and royalty income....... 285,120 497,095 457,787 115,516 96,221
------------- -------------- -------------- ------------- -------------
Total other income (expense)... 6,606 121,452 220,825 2,636 (15,324)
------------- -------------- -------------- ------------- -------------
Income (loss) before income
taxes............................. 100,819 239,232 1,256,350 (63,325) 202,763
Income taxes (Note 8).............. -- -- (260,000) -- (61,000)
------------- -------------- -------------- ------------- -------------
Net income (loss).................. $ 100,819 $ 239,232 $ 996,350 $ (63,325) $ 141,763
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
Net income (loss) per share........ $ 0.05 $ 0.12 $ 0.29 $ (0.02) $ 0.04
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
Shares used in computation of net
income (loss) per share (Note
1)................................ 1,933,438 2,034,210 3,475,581 2,538,659 3,941,213
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
------------------------------------------------
NOTE
SERIES A SERIES B COMMON STOCK RECEIVABLE
----------------------- ----------------------- ---------------------- FROM ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDER DEFICIT
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30,
1993.................... 2,932,000 $ 3,655,988 -- $ -- 327,473 $ 100,040 $ (44,520) $(2,426,083)
Exercise of stock
options............... -- -- -- -- 346 750 -- --
Net income............. -- -- -- -- -- -- -- 100,819
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
BALANCE, APRIL 30,
1994.................... 2,932,000 3,655,988 -- -- 327,819 100,790 (44,520) (2,325,264)
Sale of Series B
convertible preferred
stock, net of offering
expenses of $75,828... -- -- 529,530 1,375,084 -- -- -- --
Conversion of loan and
note payable,
including accrued
interest, to Series B
preferred stock....... -- -- 205,980 564,385 -- -- -- --
Net income............. -- -- -- -- -- -- -- 239,232
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
BALANCE, APRIL 30,
1995.................... 2,932,000 3,655,988 735,510 1,939,469 327,819 100,790 (44,520) (2,086,032)
Sale of Series B
convertible preferred
stock, net of offering
expenses of $66,288... -- -- 403,618 1,039,625 -- -- -- --
Conversion of Series A
and B convertible
preferred stock to
common stock.......... (2,932,000) (3,655,988) (1,139,128) (2,979,094) 1,883,021 6,635,082 -- --
Sale of common stock,
net of offering
expenses of
$1,770,295............ -- -- -- -- 1,455,875 8,420,830 -- --
Net income............. -- -- -- -- -- -- -- 996,350
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
BALANCE, APRIL 30,
1996.................... -- -- -- -- 3,666,715 15,156,702 (44,520) (1,089,682)
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
Sale of common stock
(unaudited)........... -- -- -- -- 1,526 10,730 -- --
Net income
(unaudited)........... -- -- -- -- -- -- -- 141,763
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
BALANCE, JULY 31, 1996
(UNAUDITED)............. -- $ -- -- $ -- 3,668,241 $15,167,432 $ (44,520) $ (947,919)
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
---------- ----------- ---------- ----------- --------- ----------- ----------- ------------
<CAPTION>
TOTAL
-----------
<S> <C>
BALANCE, APRIL 30,
1993.................... $ 1,285,425
Exercise of stock
options............... 750
Net income............. 100,819
-----------
BALANCE, APRIL 30,
1994.................... 1,386,994
Sale of Series B
convertible preferred
stock, net of offering
expenses of $75,828... 1,375,084
Conversion of loan and
note payable,
including accrued
interest, to Series B
preferred stock....... 564,385
Net income............. 239,232
-----------
BALANCE, APRIL 30,
1995.................... 3,565,695
Sale of Series B
convertible preferred
stock, net of offering
expenses of $66,288... 1,039,625
Conversion of Series A
and B convertible
preferred stock to
common stock.......... --
Sale of common stock,
net of offering
expenses of
$1,770,295............ 8,420,830
Net income............. 996,350
-----------
BALANCE, APRIL 30,
1996.................... 14,022,500
-----------
Sale of common stock
(unaudited)........... 10,730
Net income
(unaudited)........... 141,763
-----------
BALANCE, JULY 31, 1996
(UNAUDITED)............. $14,174,993
-----------
-----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, JULY 31,
----------------------------------- ------------------------
1994 1995 1996 1995 1996
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................... $ 100,819 $ 239,232 $ 996,350 $ (63,325) $ 141,763
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization................. 102,898 133,220 231,487 40,904 179,669
Deferred income taxes......................... -- -- (180,000) -- --
Changes in assets and liabilities:
Receivables, net............................ (444,742) (2,255,894) (2,996,564) 1,302,206 (438,727)
Inventories................................. 36,831 (1,328,793) (2,803,818) (1,134,627) (2,755,185)
Prepaid expenses and other current assets... (104,156) (312,178) (584,729) (99,664) (163,759)
Accounts payable and accrued liabilities.... 57,862 1,542,453 807,258 (41,442) (19,464)
Income taxes payable........................ -- -- 220,000 -- 62,600
--------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities..................................... (250,488) (1,981,960) (4,310,016) 4,052 (2,993,103)
INVESTING ACTIVITIES
Purchase of furniture and equipment............. (67,109) (119,004) (654,723) (211,723) (651,735)
Increase in trademarks, patents and marketing
rights......................................... (25,559) (4,122) (656,751) (580) (3,945)
--------- ----------- ----------- ----------- -----------
Net cash used in investing activities........... (92,668) (123,126) (1,311,474) (212,303) (655,680)
FINANCING ACTIVITIES
Proceeds from loan from principal shareholder... 500,000 -- -- -- --
Proceeds from note payable to bank.............. -- -- 114,119 -- 1,956,422
Principal payments under capital lease
obligation..................................... (29,975) (40,787) (121,563) (9,442) (22,405)
Net increase (decrease) in advances from
factor......................................... 63,742 943,642 (2,320,891) (839,199) --
Issuance of preferred stock..................... -- 1,375,084 1,039,625 1,052,871 --
Issuance of common stock........................ 750 -- 8,420,830 -- 10,730
--------- ----------- ----------- ----------- -----------
Net cash provided by financing activities....... 534,517 2,277,939 7,132,120 204,230 1,944,747
--------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash................. 191,361 172,853 1,510,630 (4,021) (1,704,036)
Cash, beginning of period....................... 135,203 326,564 499,417 499,417 2,010,047
--------- ----------- ----------- ----------- -----------
Cash, end of period............................. $ 326,564 $ 499,417 $ 2,010,047 $ 495,396 $ 306,011
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
SUPPLEMENTAL INFORMATION
Cash paid during the period for interest........ $ 283,164 $ 259,133 $ 173,502 $ 79,950 $ 53,165
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Cash paid during the period for income taxes.... $ -- $ -- $ 40,000 $ -- $ 178,400
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Noncash financing and investing activities:
Equipment acquired with capital leases........ $ 33,897 $ 89,184 $ -- $ -- $ 436,912
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Conversion of loan and note payable to
shareholders, including accrued interest, to
Series B preferred stock..................... $ -- $ 564,385 $ -- $ -- $ --
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Cutter & Buck Inc. (the "Company") designs, sources and markets men's
sportswear and outerwear apparel. The Company's trade customers are principally
golf pro shops and resorts, and upscale men's specialty stores. During 1995, the
Company changed its name from Jones/Rodolfo Corporation to Cutter & Buck Inc.
In March 1996, the Company formed a wholly owned subsidiary, Cutter & Buck
(UK) Ltd., for the purpose of direct marketing, sales and distribution of Cutter
& Buck sportswear in the United Kingdom. The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary
from the date of formation. All significant intercompany accounts and
transactions have been eliminated.
INTERIM FINANCIAL INFORMATION
The financial information as of July 31, 1996 and for the three-month
periods ended July 31, 1995 and 1996 is unaudited but includes all adjustments
(consisting only of normal recurring accruals) that the Company considers
necessary for a fair presentation of the financial position at such date and the
operating results and cash flows for those periods. Operating results for the
three months ended July 31, 1996 are not necessarily indicative of the results
that may be expected for the entire year.
INVENTORIES
Inventories, which are predominantly finished goods, are valued at the lower
of cost or market, with cost determined under the first-in, first-out method.
SAMPLE COSTS
The Company defers costs to produce samples that relate to goods to be sold
in future selling seasons. Such costs are charged to expense in the season to
which the samples relate.
FURNITURE AND EQUIPMENT
Furniture and equipment is valued at cost. Depreciation is provided on a
straight-line basis over estimated useful lives of five years. Furniture and
equipment acquired under capital leases is amortized on a straight-line basis
over the lesser of the lease term or the estimated economic useful life of the
asset. Store fixtures are depreciated on a straight-line basis over three years.
INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
STOCK OPTIONS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." Statement No. 123 is effective beginning fiscal 1997. Under
Statement No. 123, stock-based compensation expense is measured using either the
intrinsic value method, as prescribed by Accounting Principles Board Opinion No.
25, or the fair value method described in Statement No. 123. Companies choosing
the
F-7
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
intrinsic value method will be required to disclose the pro forma impact of the
fair value method on net income and earnings per share. The Company plans to
implement Statement No. 123 in fiscal 1997 using the intrinsic value method.
CONCENTRATIONS OF CREDIT RISK
The Company is subject to credit risk on receivables that are not factored.
These other receivables are geographically disbursed throughout the United
States and selected foreign countries where formal distributor agreements exist.
All sales are denominated in U.S. dollars. The Company sells its products to
approved customers on an open account basis, subject to established credit
limits, cash in advance, or cash on delivery terms. Generally, the receivables
are insured or are supported by letters of credit.
REVENUE RECOGNITION
Revenue is recognized at the time the product is shipped to the customer.
There is no right to return for customers, other than for defective products.
Allowances for these estimated sales returns are provided when the related
revenue is recorded.
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common shares outstanding and gives effect to the following adjustments: (i)
common stock equivalents, consisting of Common Stock options, warrants and
Preferred Stock, are included in the weighted average number of shares
outstanding, except when the effect of their inclusion would be antidilutive;
(ii) pursuant to the rules of the Securities and Exchange Commission, Common
Stock and common stock equivalents issued during the 12 months immediately
preceding the filing date of the Company's initial public offering are included
in the calculation as if they were outstanding for all periods presented using
the treasury stock method and the initial public offering price; and (iii) all
outstanding shares of Preferred Stock are included on an as-converted-to-Common
Stock basis.
Historical net income per share information for fiscal 1992 and 1993 is not
presented because it is not considered meaningful.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts from the prior year financial statements have been
reclassified to conform to the current year presentation.
F-8
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
2. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
APRIL 30,
-------------------------- JULY 31,
1995 1996 1996
----------- ------------- -------------
<S> <C> <C> <C>
Prepaid expenses............................................. $ 102,301 $ 461,524 $ 668,931
Sample costs................................................. 380,849 588,869 576,622
Other........................................................ 31,093 48,579 17,178
----------- ------------- -------------
$ 514,243 $ 1,098,972 $ 1,262,731
----------- ------------- -------------
----------- ------------- -------------
</TABLE>
3. DUE FROM FACTORS
Pursuant to the terms of factoring agreements, the Company assigns
substantially all of its qualifying accounts receivable to factors on a
preapproved, nonrecourse basis. The factors' charges, totaling $255,393 for the
fiscal year ended April 30, 1996 ($257,829 in fiscal 1995 and $218,762 in fiscal
1994), include a commission on net sales and interest on advances at prime, plus
1 1/2% (9 3/4% at April 30, 1996). The amount due from factors consisted of the
following:
<TABLE>
<CAPTION>
APRIL 30,
----------------------------- JULY 31,
1995 1996 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Unmatured receivables:
Nonrecourse............................................. $ 3,603,139 $ 5,779,659 $ 3,147,258
With recourse........................................... 40,280 55,385 50,056
Matured receivables....................................... -- 160,331 308,232
Reserve for sales returns and allowances.................. (222,050) (260,088) (274,471)
Advances.................................................. (2,320,891) -- --
-------------- ------------- -------------
$ 1,100,478 $ 5,735,287 $ 3,231,075
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------- JULY 31,
1995 1996 1996
------------ ------------- -------------
<S> <C> <C> <C>
Leasehold improvements...................................... $ 23,762 $ 33,382 $ 155,363
Equipment................................................... 358,106 534,925 1,106,812
Store fixtures.............................................. -- 284,257 635,085
Furniture and other fixtures................................ 272,079 459,621 503,573
------------ ------------- -------------
653,947 1,312,185 2,400,833
Less accumulated depreciation and amortization.............. (322,934) (513,263) (631,931)
------------ ------------- -------------
$ 331,013 $ 798,922 $ 1,768,902
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
5. NOTE RECEIVABLE FROM SHAREHOLDER
A note receivable from a shareholder of $44,520 is due upon demand, with
interest at prime (8 1/4% at April 30, 1996). Accrued interest receivable of
$19,867 and $23,655 was outstanding at April 30,
F-9
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
5. NOTE RECEIVABLE FROM SHAREHOLDER (CONTINUED)
1995 and 1996, respectively. The note is secured by 23,126 shares of the
shareholder's Common Stock. The proceeds of the note were used to purchase
Common Stock. Accordingly, the note receivable is classified as a component of
shareholders' equity.
6. LOAN PAYABLE TO BANK
At April 30, 1996, the Company had a credit facility with a United Kingdom
bank for general working capital needs of the Company's United Kingdom
subsidiary. The line expired on May 31, 1996 and was paid in full as of that
date.
7. LINE OF CREDIT
As of April 30, 1996 the Company had a $4.0 million revolving line of credit
with a bank, which was replaced on July 8, 1996 with a new $7.0 million line of
credit with another bank. The Company uses its bank line of credit for
international letters of credit, bankers' acceptances and working capital
advances. Letters of credit outstanding at April 30, 1996 totaled $2,146,378. At
April 30, 1996, the Company was required under its previous agreement to
maintain a deposit of $1,646,378 for the excess of the amount of letters of
credit and bankers' acceptances over $500,000. This requirement does not apply
under the current agreement. Under the current agreement, interest on borrowings
is charged and payable monthly at the 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 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. The bank and the Company's factor 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.
8. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current tax provision:
Federal..................................................... $ -- $ -- $ 340,000
State....................................................... -- -- 100,000
------------ ------------ ------------
-- -- 440,000
Deferred federal tax benefit.................................. -- -- (180,000)
------------ ------------ ------------
$ -- $ -- $ 260,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
8. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount of tax determined by
applying the federal statutory rate for the following reasons:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30,
------------------------------------
1994 1995 1996
---------- ---------- ------------
<S> <C> <C> <C>
Tax provision at federal statutory tax rate...................... $ 34,278 $ 81,338 $ 427,159
Decrease in valuation allowance.................................. (46,639) (91,838) (259,569)
State income taxes, net of federal benefit....................... -- -- 66,000
Other............................................................ 12,361 10,500 26,410
---------- ---------- ------------
$ -- $ -- $ 260,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The Company's deferred tax assets consist primarily of the benefit to be
derived from unused net operating tax loss carryforwards of approximately $1.1
million at April 30, 1996. The use of the carryforwards, which expire beginning
in 2006, is limited to approximately $500,000 per year pursuant to the ownership
change regulations of the Internal Revenue Code of 1986, as amended. To the
extent that any single-year loss is not utilized to the full amount of the
limitation, such remaining unused limitation is carried over to a subsequent
year prior to the expiration of the relevant carryforward period. During fiscal
1996, the Company utilized approximately $500,000 of these operating loss
carryforwards. Due to the uncertainty regarding the Company's ability to
generate taxable income in the future to realize the benefit from its net
deferred tax assets, a valuation allowance has been recorded for financial
reporting purposes to recognize the Company's net deferred tax assets at their
estimated realizable value. Significant components of the Company's deferred
income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
APRIL 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Deferred income tax assets:
Reserve for doubtful accounts............................................. $ 102,200 $ 152,616
Reserve for inventory obsolescence........................................ 45,657 68,517
Net operating loss carryforwards.......................................... 572,174 387,114
Other..................................................................... 1,334 25,588
------------ ------------
Total deferred income tax assets............................................ 721,365 633,835
Valuation reserve for deferred tax assets................................... (699,847) (440,278)
------------ ------------
Net deferred tax assets..................................................... 21,518 193,557
Deferred income tax liabilities:
Accelerated depreciation.................................................. (21,518) (13,557)
------------ ------------
Total deferred income tax liabilities....................................... (21,518) (13,557)
------------ ------------
Net deferred taxes.......................................................... $ -- $ 180,000
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
9. COMMITMENTS
The Company leases its office facilities and an outlet store under operating
leases. Total rent expense amounted to $112,924 in fiscal 1994, $154,096 in
fiscal 1995, and $217,292 in fiscal 1996. During 1996, the Company entered into
a lease for a warehouse and embroidery production facility commencing May 1,
1996.
Future minimum rental payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING APRIL 30,
- ---------------------------------------------------------------------
<S> <C>
1997................................................................. $ 346,105
1998................................................................. 387,296
1999................................................................. 286,240
2000................................................................. 197,108
2001................................................................. 186,000
-------------
$ 1,402,749
-------------
-------------
</TABLE>
10. SHAREHOLDERS' EQUITY
PREFERRED STOCK: During fiscal 1995, the Company authorized the sale of
1,200,000 shares of Series B Preferred Stock to qualified investors at $2.74 per
share. As of April 30, 1995, 735,510 shares of Series B Preferred Stock were
issued and outstanding.
During fiscal 1996, an additional 403,618 shares of Series B Preferred Stock
were sold. Of the total, 933,148 shares were sold through subscription
agreements. Proceeds to the Company, net of offering expenses of $142,117,
amounted to $2,979,094. The remaining 205,980 shares were issued as a result of
the conversion of a loan and note payable to shareholders and accrued interest,
aggregating $564,385.
Conversion of the Preferred Stock into Common Stock occurred automatically
upon the closing of the Company's initial public offering of Common Stock.
Effective as of the closing of the initial public offering, every 2.162 shares
of Preferred Stock were converted into one share of Common Stock.
COMMON STOCK: On July 20, 1995, the Company's shareholders adopted Restated
Articles of Incorporation and Bylaws affecting shareholders' equity, including
increasing the number of authorized shares of Common Stock to 25,000,000,
increasing the number of authorized shares of Preferred Stock to 6,000,000, and
implementing a 1 for 2.162 reverse stock split of the issued and outstanding
shares of Common Stock. The number of shares of Common Stock presented in the
accompanying consolidated financial statements has been restated to reflect the
stock split.
In August 1995, the Company sold 1,250,000 shares of Common Stock at an
initial public offering price of $7 per share. Pursuant to the exercise of the
Underwriters' over-allotment option, the Company sold an additional 205,875
shares of Common Stock at $7 per share in September 1995. Proceeds to the
Company, net of offering expenses of $1,770,295, amounted to $8,420,830.
COMMON STOCK WARRANTS: In connection with the Company's initial public
offering, the Company issued warrants to the underwriters of the offering to
purchase 131,531 shares of Common Stock at an exercise price of $8.40 per share.
The warrants are exercisable for four years beginning August 1996.
F-12
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
10. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLANS: The Company has three stock option plans that provide
for the granting of nonqualified and incentive 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 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 have been granted at fair value on the date of
grant and expire after 10 years. Stock option activity and option price
information for the two years ended April 30, 1996 are as follows:
<TABLE>
<CAPTION>
RANGE OF OPTION
OPTIONS PRICES
--------- ---------------
<S> <C> <C>
Balance, April 30, 1994.......................................... 34,686 $ 2.16
Granted........................................................ 238,202 2.16
Canceled....................................................... (20,814) 2.16
---------
Balance, April 30, 1995.......................................... 252,074 2.16
Granted........................................................ 157,748 4.74 - 10.75
---------
Balance, April 30, 1996.......................................... 409,822 2.16 - 10.75
---------
---------
</TABLE>
At April 30, 1996, 142,224 options were exercisable and 115,145 shares were
available for future grant.
EMPLOYEE STOCK PURCHASE PLAN: In December 1995, the Company adopted an
Employee Stock Purchase Plan which allows eligible employees to buy Common Stock
at a 15% discount from market price utilizing payroll deductions. A total of
250,000 shares have been reserved for issuance under this plan. During fiscal
1996, no shares of Common Stock were purchased by employees under this plan.
11. CONSULTING AGREEMENT
The Company has a consulting agreement with a common shareholder. The
agreement contains, among other items, certain provisions relating to consulting
duties and responsibilities, compensation, and noncompetition terms. The
agreement expires July 1, 1997.
12. EMPLOYEE BENEFITS
Effective January 1, 1995, the Company implemented a salary deferral 401(k)
plan for substantially all of its employees. The plan allows employees to
contribute a percentage of their pretax earnings annually, subject to
limitations imposed by the Internal Revenue Service. The plan also allows the
Company to contribute an amount at its discretion. To date, the Company has made
no contributions to the plan.
F-13
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JULY 31, 1996 AND FOR THE THREE-MONTH
PERIODS ENDED JULY 31, 1995 AND 1996 IS UNAUDITED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial results by quarter for the fiscal years ended April 30, 1995, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
JULY 31 OCTOBER 31 JANUARY 31 APRIL 30
--------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1995
Net sales............................................... $ 2,044 $ 3,407 $ 2,316 $ 5,668
Gross profit............................................ 769 1,202 703 2,001
Net income (loss)....................................... (106) 113 (306) 538
Net income (loss) per share............................. (0.06) 0.06 (0.15) 0.25
1996
Net sales............................................... $ 3,305 $ 5,131 $ 5,210 $ 7,999
Gross profit............................................ 1,228 1,934 1,833 2,986
Net income (loss)....................................... (63) 242 204 613
Net income (loss) per share............................. (0.02) 0.07 0.05 0.16
1997
Net sales............................................... $ 8,000
Gross profit............................................ 2,980
Net income.............................................. 142
Net income per share.................................... 0.04
</TABLE>
F-14
<PAGE>
[Photographs of Company Products]
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN
OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................................. 3
Risk Factors........................................ 5
Use of Proceeds..................................... 10
Price Range of Common Stock......................... 10
Dividend Policy..................................... 10
Capitalization...................................... 11
Selected Financial Data............................. 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 13
Business............................................ 22
Management.......................................... 31
Certain Transactions................................ 37
Principal and Selling Shareholders.................. 38
Description of Capital Stock........................ 40
Shares Eligible for Future Sale..................... 42
Underwriting........................................ 44
Legal Matters....................................... 45
Experts............................................. 45
Additional Information.............................. 46
Index to Consolidated Financial Statements.......... F-1
</TABLE>
1,400,000 Shares
[LOGO]
Common Stock
--------------
P R O S P E C T U S
-----------------
Needham & Company, Inc.
Wedbush Morgan Securities
--------------
, 1996
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