<PAGE>
----------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB/A-1
----------------------------------------
/x/ Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for fiscal year ended April 30, 1996.
/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File No. 0-26608
CUTTER & BUCK INC.
(Name of Small Business Issuer in Its Charter)
Washington 91-1474587
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2701 First Avenue, Suite 500
Seattle, WA 98121
(Address of Principal Executive Offices, Including Zip Code)
(206) 622-4191
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
- --------------------------------------------------------------------------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----------------- -----------------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
The issuer's net sales the fiscal year ended April 30, 1996 were $21,645,202.
The aggregate market value as of July 25, 1996 of the voting stock held by
non-affiliates of the Registrant was approximately $17,000,000. As of
such date, there were 3,668,241 shares outstanding of the Registrant's
Common Stock, no par value per share.
Documents incorporated by reference:
(1) Portions of the registrant's 1996 Annual Report to Shareholders are
incorporated by reference into Parts II and IV hereof; and
(2) Portions of the registrant's definitive 1996 Proxy Statement to be filed
with the Securities and Exchange Commission are incorporated by reference
into Part III hereof.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Company's Annual Report to Shareholders for the year ended
April 30, 1996 and the 1996 definitive proxy materials, which will be filed
supplementally to this report, are not being filed as part of this report.
A. Financial Statements and Financial Statement Schedules:
1. Financial Statements (the financial statements listed below are
incorporated herein by reference to the Company's 1996 Annual Report
to Shareholders):
Independent Auditors' Report
Balance Sheets as of April 30, 1996 and 1995
Statements of Operations for the years ended April 30, 1996, 1995 and
1994
Statements of Stockholders' Equity for the years ended April 30, 1996,
1995 and 1994
Statements of Cash Flows for the years ended April 30, 1996, 1995 and
1994
Notes to Financial Statements
2. Financial Statement Schedules:
Financial Statement schedules are omitted because they are not
required or because the information is presented in the financial
statements or notes thereto.
B. Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter ended
April 30, 1996.
2
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C. Exhibits:
Exhibits required by Item 601 of Regulation S-K:
EXHIBIT NO.
-----------
3.1 Restated Articles of Incorporation (3.1)(1)
3.2 Bylaws (3.2)(1)
4.1 Specimen Common Stock Certificate (4.1)(1)
10.1 Promissory Note dated May 17, 1990 by Joey Rodolfo to the
Jones/Rodolfo Corporation (10.1)(1)
10.2 Stock Pledge Agreement dated April 1995 by Joey Rodolfo to the
Jones/Rodolfo Corporation(10.2)(1)
10.3 Lease dated May 22, 1994 between First and Cedar Associates and
Jones/Rodolfo Corporation d/b/a Cutter & Buck (10.3)(1)
10.4 Indenture of Lease dated August 10, 1993 between Lakeplace
Associates and Jones/Rodolfo Corporation (10.4)(1)
10.5 Factoring Agreement dated March 1, 1995 between Republic Factors
Corp. and Jones/Rodolfo Corporation (10.5)(1)
10.6 Form of Registration Rights Agreement between Cutter & Buck Inc.
and Roanoke Investors' Limited Partnership, Needham Capital SBIC,
L.P. and Needham Emerging Growth Partners, L.P. (10.6)(1)
10.7 Consulting Agreement dated April 20, 1995 between Joey Rodolfo and
Jones/Rodolfo Corporation (10.7)(1)
10.8 First Amendment to Consulting Agreement dated July 6, 1995 between
Joey Rodolfo and Jones/Rodolfo Corporation (10.8)(1)
10.9 1991 Stock Option Plan (10.9)(1)
10.10 1995 Nonemployee Director Stock Incentive Plan filed herewith
10.11 1995 Employee Stock Option Plan (10.11)(1)
10.12 1995 Employee Stock Purchase Plan incorporated by reference to the
Registrant's Registration Statement on Form S-8 (File No. 33-80783)
10.13 Form of Representatives' Warrant (10.13)(1)
10.14 Distribution Reacquisition Agreement dated February 2, 1996 between
Cutter & Buck Inc. and Re-Ward Limited filed herewith
10.15 Loan Agreement dated June 26, 1996 between Cutter & Buck Inc. as
Borrower, and Bank of America NW, N.A. d/b/a Seafirst Bank, as
Lender filed herewith
11.1 Statement of Computation of Net Income Per Share filed herewith
13.1 Specified Sections from the Registrant's 1996 Annual Report to
Shareholders filed herewith
21.1 Subsidiaries of the Registrant filed herewith
23.1 Consent of Ernst & Young LLP, independent auditors, filed herewith
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the exhibit shown in the preceding parentheses
and filed with the Registrant's Registration Statement on Form SB-2 (File
No. 33-94548-LA)
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CUTTER & BUCK INC.
(Registrant)
August 5, 1996 By /s/ Harvey N. Jones
-------------------------------
Harvey N. Jones, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
4
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-KSB/A-1) of Cutter & Buck Inc. of our report dated June 17, 1996, except
for the third paragraph of Note 7, as to which the date is July 8, 1996,
included in the 1996 Annual Report to Shareholders of Cutter & Buck Inc.
/s/ Ernst & Young LLP
Seattle, Washington
August 2, 1996
5
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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 Annual Report. In addition to the
historical information contained herein, this Annual Report 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, style changes and product
acceptance, product delays, relations with suppliers and independent sales
representatives, the ability of the Company to control costs and expenses,
shortages of raw materials such as cotton, the ability to penetrate its chosen
distribution channels, the positioning of the Company in its chosen market, the
impact of competitive selection and to a lesser extent pricing, and the effect
of interest rates, trade relations and general economic conditions. 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 as a
chosen recreational activity. 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 increase in net sales to the golf distribution channel of
$5.7 million 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 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 with variations in style mix for its Fashion merchandise, 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 anticipated inventory turn is
comparable to other, similarly situated, branded apparel companies.
1
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The Company believes that its fixturing program instituted in fiscal 1996,
which facilitates merchandising coordinated collections of Cutter & Buck
products, will contribute to future sales growth. In the fourth quarter of
fiscal 1996, the Company reacquired the exclusive distribution rights for its
apparel in the United Kingdom and initiated the formation of a new European
subsidiary for the direct marketing, sales and distribution of Cutter & Buck
sportswear in the United Kingdom and Europe. The Company's United Kingdom
office is located in northern England and its European operation will be based
in the Netherlands.
The Company also has repurchased the license for Cutter & Buck outerwear,
effective May 1, 1996. The Company feels that by repurchasing this license it
can increase sales for outerwear while broadening the Company's product
assortment sold through present channels of distribution.
Starting May 1, 1996, the Company has leased warehouse space 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. The Company believes that this
arrangement 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 as
the Company continues to grow due to increased efficiencies of scale. Finally,
the Company has been able to negotiate improved bank financing terms, which it
believes will permit reduced factor financing for accounts receivable and
expanded letter of credit financing and will bolster the Company's ability to
expand its business profitably.
Historically, the Company's Fashion merchandise from prior seasons has been
sold at a discount through the Company's retail store and to large discount
apparel chains. In fiscal 1996, a lower percentage of this merchandise was sold
through discount 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. As a result, inventory of the Company's Fashion merchandise from
seasons prior to Spring 1996 having a carrying value of approximately $500,000,
net of reserves, was available for sale as of April 30, 1996. While the Company
believes this discounted merchandise will enhance its product offerings in its
primary distribution channels, it has not previously offered such merchandise in
these quantities to these channels.
RESULTS OF OPERATIONS ---------------------------------
The following table sets forth for the fiscal years indicated certain statements
of operations data expressed as a percentage
of net sales:
FISCAL YEAR ENDED APRIL 30,
-------------------------------------
1994 1995 1996
-------------------------------------
STATEMENTS OF OPERATIONS DATA:
Net sales 100.0% 100.0% 100.0%
Cost of sales 65.2 65.2 63.1
---- ---- ----
Gross profit 34.8 34.8 36.9
Operating Expenses:
Design and production 5.2 5.6 4.8
Selling and handling 18.0 18.2 17.8
General and administrative 10.6 10.1 9.5
---- ---- ----
Total operating expenses 33.8 33.9 32.1
---- ---- ----
Operating income 1.0 0.9 4.8
Other income (expense):
Factor commissions and net
interest expense (2.8) (2.8) (1.1)
License and royalty income 2.8 3.7 2.1
--- --- ---
Total other income (expense) 0.0 0.9 1.0
--- --- ---
Income before income taxes 1.0 1.8 5.8
Income taxes 0.0 0.0 1.2
--- --- ---
Net income 1.0% 1.8% 4.6%
---- ---- ----
---- ---- ----
2
<PAGE>
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 closeout and discount 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 closeout and discount 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 closeout and discount retailer channel, the Company had
reduced opportunity to sell its seasonal remainder merchandise to discount
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 fiscal 1995 and 34.8% in 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 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 Company's increasing use of international
sourcing has also decreased costs of production.
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 at least 50% of its embroidered sales in
fiscal 1997 and, in the future, expects to realize embroidery cost savings,
which will contribute to gross margin improvement.
- ------------------------ 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 by
selling the same product line through each of its distribution 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 fiscal 1996 and fiscal 1995. The dollar
amount increase was primarily
3
<PAGE>
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 24 sales
representatives in fiscal 1996 from 22 in 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 11
independent sales representatives in fiscal 1996 from six in fiscal 1995 and
none in fiscal 1994.
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, to
management and advertising expenses. The Company expanded the size of its golf
sales force to 22 independent 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.
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 an additional $324,000 of fixturing
in fiscal 1997 targeted to an additional 236 locations, reaching a total of 450
golf pro shops 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 largely to fund 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 and 2.8% of net sales 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.
4
<PAGE>
- ------------------------ 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. As of April 30, 1996, $1.1 million in net operating loss
carryforwards remain available to offset future taxable income, the utilization
of which is limited to approximately $500,000 per year pursuant to applicable
tax regulations, based upon ownership changes that occurred in connection with
the Company's initial public offering in August 1995.
- ------------------------ QUARTERLY RESULTS AND SEASONALITY
Historically, the Company has experienced its lowest level 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 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 eight quarters ended April 30, 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, April 30,
1994 1994 1995 1995 1995 1995 1996 1996
---------------------------------------------- -----------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net Sales $2,044 $3,407 $2,316 $5,668 $3,305 $5,131 $5,210 $7,999
Cost of sales 1,275 2,205 1,613 3,667 2,077 3,197 3,377 5,013
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 769 1,202 703 2,001 1,228 1,934 1,833 2,986
Operating expenses:
Design and production 156 198 184 209 215 230 275 325
Selling and handling 448 591 520 887 668 980 874 1,336
General and administrative 312 306 336 410 411 487 510 634
--- --- --- --- --- --- --- -----
Total operating expenses 916 1,095 1,040 1,506 1,294 1,697 1,659 2,295
--- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) (147) 107 (337) 495 (66) 237 174 691
Other income (expense):
Factor commissions and
interest expense, net of
interest income ( 59) (107) (99) (111) (113) (28) (12) (84)
License and royalty income 100 113 130 154 116 83 102 156
--- --- --- --- --- -- --- -----
Total other income (expense) 41 6 31 43 3 55 90 72
-- - -- -- - -- -- -----
Income (loss) before income taxes (106) 113 (306) 538 (63) 292 264 763
Income taxes 0 0 0 0 0 (50) (60) (150)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) $(106) $ 113 $(306) $ 538 $ (63) $ 242 $ 204 $ 613
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
FISCAL 1995 QUARTER ENDED FISCAL 1996 QUARTER ENDED
---------------------------------------------- -----------------------------------------------
July 31, October 31, January 31, April 30, July 31, October 31, January 31, April 30,
1994 1994 1995 1995 1995 1995 1996 1996
---------------------------------------------- -----------------------------------------------
<S> <C> <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% 100.0%
Cost of sales 62.4 64.7 69.7 64.7 62.8 62.3 64.8 62.7
---- ---- ---- ---- ---- ---- ---- ----
Gross profit 37.6 35.3 30.3 35.3 37.2 37.7 35.2 37.3
Operating expenses:
Design and production 7.6 5.8 7.9 3.7 6.5 4.5 5.3 4.1
Selling and handling 21.9 17.3 22.5 15.7 20.3 19.1 16.8 16.7
General and administrative 15.3 9.0 14.5 7.2 12.4 9.5 9.8 7.9
---- ---- ---- ---- ---- ---- ---- ---
Total operating expenses 44.8 32.1 44.9 26.6 39.2 33.1 31.9 28.7
---- ---- ---- ---- ---- ---- ---- ----
Operating income (loss) (7.2) 3.2 (14.6) 8.7 (2.0) 4.6 3.3 8.6
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) (1.1)
License and royalty income 4.9 3.3 5.7 2.7 3.5 1.6 2.0 2.0
--- --- --- --- --- --- --- ---
Total other income (expense) 2.0 0.1 1.4 0.8 0.1 1.1 1.8 0.9
--- --- --- --- --- --- --- ---
Income (loss) before income taxes (5.2) 3.3 (13.2) 9.5 (1.9) 5.7 5.1 9.5
Income taxes 0.0 0.0 0.0 0.0 0.0 (1.0) (1.2) (1.9)
--- --- --- --- --- --- --- ---
Net income (loss) (5.2)% 3.3% (13.2)% 9.5% (1.9)% 4.7% 3.9% 7.6%
------ ---- ------- ---- ------ ---- ---- ----
------ ---- ------- ---- ------ ---- ---- ----
</TABLE>
5
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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 and the public sale of Common Stock.
Net cash used in operating activities in fiscal 1996 was $4.3 million.
This resulted 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. The increase in accounts receivable was
primarily attributable to the Company's sales growth. The Company's inventory
increased as a consequence of sales growth and the need to increase inventory
levels of Classic products to satisfy increased demand from all distribution
channels for quick merchandise delivery and from the golf distribution and
corporate sales channels for Classic knit shirts in particular. The increase in
prepaid expenses and other current assets of $585,000 largely represented
advance payments to factories and increased investment in sales samples to
support increased sales and a larger sales force.
In fiscal 1996, net cash provided by financing activities was $7.1 million,
primarily as a result of 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 Series B Preferred Stock, offset by a $2.3 million reduction in
advances from the factor.
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.
On July 8, 1996, the Company entered into a loan agreement with Bank of
America NW, N.A. d/b/a Seafirst Bank ("Seafirst Bank") for a $7.0 million line
of credit, replacing the Company's line of credit with The Commerce Bank. The
Seafirst Bank line of credit will be used for international letters of credit,
bankers' acceptances and working capital advances. Interest on borrowings is
charged and payable monthly at Seafirst Bank's prime rate. The line of credit
is collateralized by a security interest in the Company's inventory, accounts
receivable, contract rights and general intangibles. The loan agreement
contains certain restrictive covenants covering minimum working capital,
tangible net worth and accounts receivable turnover, as well as a maximum debt
to equity ratio. In addition, the amount available to the Company under the
Seafirst Bank line of credit is subject to certain limitations based on such
items as the level of qualified accounts receivable and inventory. Seafirst
Bank and Republic Factors Corp. ("Republic") 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.
Pursuant to an agreement (the "Factoring Agreement") with 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. The 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 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 arrangement 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 distributor channels. The Company plans to exclusively use the
factor for its sales to the specialty retail store channel. In conjunction
with this change to its accounts receivable management and financing, the
Company plans to primarily use the Seafirst Bank line of credit to fund its
anticipated working capital needs. The Company believes that this change in
its credit practices will enable it to decrease its overall collection costs.
The Company, however, has limited experience in managing credit and
collections operations. Consequently, there can be no assurance that this
change will utimately benefit the Company's financial condition and results
of operations. The Company anticipates that the Seafirst Bank line of
credit, in combination with its existing capital resources, will be adequate
to support the Company's financing requirements in fiscal 1997.
6
<PAGE>
The Company made 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 additional investment in in-store fixturing
and the purchase of embroidery equipment of $324,000 and $923,000, respectively.
As of June 30, 1996, the Company had working capital of approximately
$12.5 million. The Company's principal source of liquidity in fiscal 1997 is
expected to be the Seafirst Bank line of credit in the amount of $7 million, of
which the Company had a loan balance of $850,000 and open letters of credit in
the amount of $3,364,000 as of July 12, 1996.
The Company believes that cash generated from operations and borrowings
under its working capital line of credit will be sufficient to meet its
operating 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'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.
7
<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 Annual Report. The following selected financial data as of April 30,
1993 and 1994 and for the year ended April 30, 1993 are derived from the
Company's financial statements which were also audited by Ernst & Young LLP and
that are not included herein. The following selected financial data with respect
to the Company's statements of operations for the 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 data should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales $ 5,405 $ 8,036 $ 9,882 $13,435 $21,645
Cost of sales 4,086 5,991 6,444 8,760 13,664
------- ------- ------- ------- -------
Gross profit 1,319 2,045 3,438 4,675 7,981
Operating expenses:
Design and production 385 495 510 747 1,045
Selling and handling 870 1,136 1,781 2,446 3,858
General and administrative 740 784 1,053 1,364 2,042
------- ------- ------- ------- -------
Total operating expenses 1,995 2,415 3,344 4,557 6,945
------- ------- ------- ------- -------
Operating income (loss) (676) (370) 94 118 1,036
Other income (expense):
Factor commissions and interest expense,
net of interest income (54) (207) (278) (376) (237)
License and royalty income -- 39 285 497 457
------- ------- ------- ------- -------
Total other income (expense) (54) (168) 7 121 220
------- ------- ------- ------- -------
Income (loss) before income taxes (730) (538) 101 239 1,256
Income taxes -- -- -- -- (260)
------- ------- ------- ------- -------
Net income (loss) $ (730) $ (538) $ 101 $ 239 $ 996
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss) per share (1) $ .05 $ .12 $ .29
Shares used in computation of net income (loss)
per share (1) 1,933 2,034 3,476
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
-----------------------------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash $ 455 $ 135 $ 327 $ 499 $ 2,010
Receivables(2) 679 635 981 2,335 7,653
Inventories 972 598 561 1,890 4,693
Working capital 1,555 998 1,058 3,209 12,488
Total assets 2,435 1,818 2,488 5,693 17,170
Long-term debt 49 48 38 98 --
Total shareholders' equity 1,822 1,285 1,387 3,566 14,023
</TABLE>
(1) Such Amounts for 1992 and 1993 are not considered meaningful.
(2) Includes factored receivables, net of factor advances. See Note 3 to Notes
to Consolidated Financial Statements.
8
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
APRIL 30,
--------------------------
1995 1996
--------------------------
Current assets:
Cash (Note 7) $ 499,417 $ 2,010,047
Receivables:
Due from factors (Note 3) 1,100,478 5,735,287
Other receivables, net of allowance for
doubtful accounts of $69,955 in 1995 and
$212,314 in 1996 1,234,680 1,917,326
Inventories 1,889,615 4,693,433
Deferred income taxes (Note 8) - 180,000
Prepaid expenses and other current assets (Note 2) 514,243 1,098,972
--------------------------
Total current assets 5,238,433 15,635,065
Furniture and equipment (Note 4) 331,013 798,922
Other assets 123,853 735,931
--------------------------
Total assets $ 5,693,299 $ 17,169,918
--------------------------
--------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,887,817 $ 2,313,937
Accrued liabilities 118,224 499,362
Income taxes payable - 220,000
Loan payable to bank (Note 6) - 114,119
Current portion of capital lease obligations 23,887 -
--------------------------
Total current liabilities 2,029,928 3,147,418
Capital lease obligations 97,676 -
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 1995 and 3,666,715 in 1996 100,790 15,156,702
Note receivable from shareholder (Note 5) (44,520) (44,520)
Accumulated deficit (2,086,032) (1,089,682)
--------------------------
Total shareholders' equity 3,565,695 14,022,500
--------------------------
Total liabilities and shareholders' equity $ 5,693,299 $ 17,169,918
--------------------------
--------------------------
See accompanying notes.
9
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-----------------------------------------
1994 1995 1996
-----------------------------------------
<S> <C> <C> <C>
Net sales $ 9,881,663 $13,434,788 $21,645,202
Cost of sales 6,443,209 8,759,623 13,664,607
-----------------------------------------
Gross profit 3,438,454 4,675,165 7,980,595
Operating expenses:
Design and production 509,751 747,381 1,044,692
Selling and shipping 1,781,274 2,445,951 3,858,184
General and administrative 1,053,216 1,364,053 2,042,194
-----------------------------------------
Total operating expenses 3,344,241 4,557,385 6,945,070
-----------------------------------------
Operating income 94,213 117,780 1,035,525
Other income (expense):
Factor commission and interest expense,
net of interest income of $8,434 in 1994,
$8,538 in 1995, and $134,915 in 1996 (278,514) (375,643) (236,962)
License and royalty income 285,120 497,095 457,787
-----------------------------------------
Total other income 6,606 121,452 220,825
-----------------------------------------
Income before income taxes 100,819 239,232 1,256,350
Income taxes (Note 8) - - 260,000
-----------------------------------------
Net income $ 100,819 $ 239,232 $ 996,350
-----------------------------------------
-----------------------------------------
Net income per share $ 0.05 $ 0.12 $ 0.29
-----------------------------------------
-----------------------------------------
Shares used in computation of net
income per share (Note 1) 1,933,438 2,034,210 3,475,581
-----------------------------------------
-----------------------------------------
</TABLE>
10
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
SERIES A SERIES B COMMON STOCK
------------------------------------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1993 2,932,000 $3,655,988 - $ - 327,473 $ 100,040
Exercise of stock options - - - - 346 750
Net income - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance, April 30, 1994 2,932,000 3,655,988 - - 327,819 100,790
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 - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance, April 30, 1995 2,932,000 3,655,988 735,510 1,939,469 327,819 100,790
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 - - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance, April 30, 1996 - $ - - $ - 3,666,715 $15,156,702
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
NOTE
RECEIVABLE
FROM ACCUMULATED
SHAREHOLDER DEFICIT TOTAL
----------- ------------ -----------
<S> <C> <C> <C>
Balance, April 30, 1993 $ (44,520) $(2,426,083) $ 1,285,425
Exercise of stock options - - 750
Net income - 100,819 100,819
--------- ----------- -----------
Balance, April 30, 1994 (44,520) (2,325,264) 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 - 239,232 239,232
--------- ----------- -----------
Balance, April 30, 1995 (44,520) (2,086,032) 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 - 996,350 996,350
--------- ----------- -----------
Balance, April 30, 1996 $ (44,520) $(1,089,682) $14,022,500
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
See accompanying notes.
11
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------
1994 1995 1996
--------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 100,819 $ 239,232 $ 996,350
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 102,898 133,220 231,487
Deferred income taxes - - (180,000)
Changes in assets and liabilities:
Receivables, net (444,742) (2,255,894) (2,996,564)
Inventories 36,831 (1,328,793) (2,803,818)
Prepaid expenses and other current assets (104,156) (312,178) (584,729)
Accounts payable and accrued liabilities 57,862 1,542,453 807,258
Income taxes payable - - 220,000
--------------------------------------------
Net cash used in operating activities (250,488) (1,981,960) (4,310,016)
INVESTING ACTIVITIES
Purchase of furniture and equipment (67,109) (119,004) (654,723)
Increase in trademarks, patents and marketing rights (25,559) (4,122) (656,751)
--------------------------------------------
Net cash used in investing activities (92,668) (123,126) (1,311,474)
FINANCING ACTIVITIES
Proceeds from loan from principal shareholder 500,000 - -
Proceeds from note payable to bank - - 114,119
Principal payments under capital lease obligation (29,975) (40,787) (121,563)
Net increase (decrease) in advances from factor 63,742 943,642 (2,320,891)
Issuance of preferred stock - 1,375,084 1,039,625
Issuance of common stock 750 - 8,420,830
--------------------------------------------
Net cash provided by financing activities 534,517 2,277,939 7,132,120
--------------------------------------------
Net increase in cash 191,361 172,853 1,510,630
Cash, beginning of year 135,203 326,564 499,417
--------------------------------------------
Cash, end of year $ 326,564 $ 499,417 $2,010,047
--------------------------------------------
--------------------------------------------
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 283,164 $ 259,133 $ 173,502
--------------------------------------------
--------------------------------------------
Cash paid during the year for income taxes $ - $ - $ 40,000
--------------------------------------------
--------------------------------------------
Noncash financing and investing activities:
Equipment acquired with capital leases $ 33,897 $ 89,184 $ -
--------------------------------------------
--------------------------------------------
Conversion of loan and note payable to
shareholders, including accrued interest,
to Series B preferred stock $ - $ 564,385 $ -
--------------------------------------------
--------------------------------------------
</TABLE>
See accompanying notes.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
- ------------------------ 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 year 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 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 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.
13
<PAGE>
1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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
is not considered meaningful due to the significant changes in the Company's
capital structure that occurred upon the closing of the Company's initial public
offering; accordingly, such per share information is not presented.
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.
2. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
April 30,
-----------------------------
1995 1996
-----------------------------
Prepaid expenses $102,301 $ 461,524
Sample costs 380,849 588,869
Other 31,093 48,579
-----------------------------
$514,243 $1,098,972
-----------------------------
-----------------------------
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
year ended April 30, 1996 ($257,829 in 1995 and $218,762 in 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 Company is permitted to receive advances from the
factors against uncollected amounts factored. The amount due from factors
consisted of the following:
April 30,
-----------------------------
1995 1996
-----------------------------
Unmatured receivables:
Nonrecourse $ 3,603,139 $ 5,779,659
With recourse 40,280 55,385
Matured receivables - 160,331
Reserve for sales returns and allowances (222,050) (260,088)
Advances (2,320,891) -
-----------------------------
$ 1,100,478 $ 5,735,287
-----------------------------
-----------------------------
14
<PAGE>
4. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
April 30,
-----------------------------
1995 1996
-----------------------------
Leasehold improvements $ 23,762 $ 33,382
Equipment 358,106 534,925
Store fixtures - 284,257
Furniture and other fixtures 272,079 459,621
-----------------------------
653,947 1,312,185
Less accumulated depreciation and amortization (322,934) (513,263)
-----------------------------
$ 331,013 $ 798,922
-----------------------------
-----------------------------
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, 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
The Company has a $4,000,000 line of credit with a bank for the sole
purpose of issuing letters of credit and bankers' acceptances for the purchase
of inventories. The line expires August 31, 1996 and bears interest at the
bank's prime rate, plus 1% (9-1/4% at April 30, 1996). Interest on the line of
credit was $0 in 1996, $3,007 in 1995 and $0 in 1994. Letters of credit and
bankers' acceptances outstanding at April 30, 1996 total $2,146,378 and $0,
respectively.
At April 30, 1996, the Company was required to maintain a deposit of
$1,646,378 for the excess of the amount of letters of credit and bankers'
acceptances over $500,000.
On July 8, 1996, the Company entered into a loan agreement with Bank of
America NW, N.A. d/b/a Seafirst Bank (Seafirst Bank) for a $7 million line of
credit, replacing the Company's previous line of credit. The line of credit
with Seafirst Bank is to be used for international letters of credit, bankers'
acceptances and working capital advances. Interest on borrowings is charged and
payable monthly at Seafirst Bank's prime rate. The line of credit is
collateralized by a security interest in the Company's inventory, accounts
receivable, contract rights and general intangibles. The agreement contains
certain restrictive covenants covering minimum working capital, tangible net
worth and accounts receivable turnover, as well as a maximum debt-to-equity
ratio. Seafirst Bank and Republic Factors Corp. have entered into an
intercreditor agreement allocating between them priority as to the Company's
assets in which both financial institutions have a security interest.
8. INCOME TAXES
The provision for income taxes consists of the following:
Year Ended April 30,
-----------------------------------------------
1994 1995 1996
-----------------------------------------------
Current tax provision:
Federal $ - $ - $ 340,000
State - - 100,000
-----------------------------------------------
- - 440,000
Deferred federal tax benefit - - (180,000)
-----------------------------------------------
$ - $ - $ 260,000
-----------------------------------------------
-----------------------------------------------
15
<PAGE>
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>
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 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:
April 30,
-----------------------------
1995 1996
-----------------------------
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
-----------------------------
-----------------------------
9. COMMITMENTS
The Company leases its office facilities and an outlet store under
operating leases. Total rent expense amounted to $112,924 in 1994, $154,096 in
1995, and $217,292 in 1996. During 1996, the Company entered into leases for a
warehouse and embroidery production facility commencing May 1, 1996.
Future minimum rental payments under noncancelable operating leases are as
follows:
Year Ending April 30,
---------------------
1997 $ 346,105
1998 387,296
1999 286,240
2000 197,108
2001 186,000
----------
$1,402,749
----------
----------
16
<PAGE>
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. The
warrants are exercisable for four years beginning in August 1996.
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, 1995 are as follows:
Range of Option
Options Prices
----------------- -------------------
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
-----------------
-----------------
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 Company
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 1996,
no shares of common stock were purchased by employees under this plan.
17
<PAGE>
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 on 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.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial results by quarter for the fiscal years ended April 30, 1995 and
1996 are as follows:
<TABLE>
<CAPTION>
Fiscal 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 2,985
Net income (loss) (63) 242 204 614
Net income (loss) per share (0.02) 0.07 0.05 0.16
</TABLE>
18
<PAGE>
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.
/s/ Ernst & Young LLP
Seattle, Washington
June 17, 1996,
except for the third paragraph of Note 7,
as to which the date is July 8, 1996
<PAGE>
SHAREHOLDERS INFORMATION
COMMON STOCK
Since August 5, 1995, the Common Stock has been listed on the NASDAQ National
Market under the symbol "CBUK". The following table sets forth, for the periods
indicated, the high and low sale prices of the Common Stock as reported on the
NASDAQ National Market.
Fiscal 1996: (as of) High Low
- ------------ ---- ---
Second Qtr (from August 15, 1995) $8.50 $6.00
Third Qtr $10.00 $6.25
Fourth Qtr $12.63 $9.63
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
Company Jurisdiction of Incorporation
------- -----------------------------
Cutter & Buck (UK) Ltd. United Kingdom
