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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
/x/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996.)
For the fiscal year ended April 30,1997 or
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/ / Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File No. 0-26608
CUTTER & BUCK INC.
(Exact Name of Registrant as Specified 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) (Zip Code)
(206) 622-4191
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Name of Each
Title of Each Class Exchange on Which Registered
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N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in
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definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. /X/
The aggregate market value as of July 24, 1997 of the voting stock held by
non-affiliates of the registrant was approximately $70,559,282. As of such
date, there were 5,206,555 shares outstanding of the Registrants Common Stock,
no par value per share.
Documents incorporated by reference:
(1) Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Parts II and IV hereof; and
(2) Portions of the registrant's definitive 1997 Proxy Statement to be filed
with the Securities and Exchange Commission are incorporated by reference
into Part III hereof.
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PART I
ITEM 1. BUSINESS
OVERVIEW
The Company designs, sources and markets its distinctive Cutter & Buck
brand sportswear and outerwear predominantly through golf pro shops and resorts,
better men's specialty stores and corporate sales accounts. The Company has
developed a colorful, innovative collection of sportswear apparel targeted to
the upscale 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 fit provides
versatility and a feeling of comfort. 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 $46.6 million and net income of $3.6 million in fiscal
1997.
The Company has 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. The
Company sells Cutter & Buck products to approximately 2,400 of the estimated
14,000 U.S. golf pro shops. The golf distribution channel accounted for
approximately 59% of the Company's net sales in fiscal 1997, and the Company
expects continuing growth of sales to this channel. The Company also
distributes its products primarily through the following distribution channels:
better men's specialty stores, direct corporate sales accounts, and
internationally through its two European subsidiaries, licensees and
distributors.
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.
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MARKET
According to industry estimates, sales of men's apparel at retail was $46.0
billion in 1995. Within this market, the Company targets men 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.
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. This segment of the market has grown faster than the overall men's
apparel market in the past three 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.
PRODUCTS
Cutter & Buck is a lifestyle brand of high-quality, sports-inspired men's
apparel. The Company's 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 frequently uses golf, fly-fishing and other sporting themes to evoke the
Cutter & Buck lifestyle.
Cutter & Buck's distinctive 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
styled and sized to provide versatility and a feeling of comfort.
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
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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, generally
from May to October for fall collections and generally 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 distribution channel
also involves embroidery of the product with corporate logos, either performed
or arranged by Cutter & Buck or 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 predominately
through three channels: golf pro shops and resorts, better 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. At the end of fiscal 1997, the Company's sales force for this
channel was composed of 32 representatives (12 of whom are independent and 18 of
whom are Company-employed) and two regional sales 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 regional trade shows and at the
customer's shop or resort. The Company's two regional sales managers
collectively cover the entire United States and report to the Company's Vice
President of Sales.
At April 30, 1997, the Company employed eight additional sales
representatives selling to better men's specialty stores. These
representatives present the Company's FASHION and CLASSIC collections each
season at national and regional trade shows and at the customers' stores. These
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specialty store representatives are managed by a retail sales manager, who
reports to the Company's Vice President of Sales.
The Company also sells its merchandise to major corporations using a
sales force of independent, multi-line sales representatives. As of the end
of fiscal 1997, in addition to these 19 independent sales representatives,
the eight specialty store sales representatives also sold 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 or arranged by the Company
or 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. They are
also responsible for implementing the Company's merchandise fixturing program
with all suitable golf pro shops, resorts and specialty stores. In fiscal 1997,
sales representatives employed by the Company received 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.
At the end of its fall and spring seasons, the Company typically has
unsold FASHION inventory as a consequence of making inventory available to
satisfy anticipated customer demand across a broad range of styles. The
Company has historically been able to sell this inventory approximately at
cost through sales to off-price retail accounts in subsequent seasons, but
consolidation among these retailers has limited the Company's ability to sell
through this channel. In response, the Company has used its expanded market
penetration in the golf and corporate distribution channels to sell its prior
season FASHION merchandise through these channels on more favorable sales
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 upscale 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 golf, fly-fishing and other activities
which reinforce this image. The Company
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believes that, by featuring these sports, its products will appeal not only to
participants, but also to those who identify with this lifestyle.
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 and logo signage 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 or shop owners 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
enhances the customer's image due to the quality and uniqueness of the Cutter &
Buck product and simultaneously reinforces the prestige of the Cutter & Buck
brand. 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, the cuff, 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 catalogs of its CLASSIC and
outerwear products to be shipped to its
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customers for in-stock reordering purposes. In addition, the Company has an
Internet home page on the World Wide Web at www.cutterbuck.com, where it
provides product information and pictures of its products and responds to
inquiries about the Company and its products.
INTERNATIONAL DISTRIBUTION AND LICENSING
The Company has subsidiaries in the United Kingdom and the Netherlands
for the purpose of marketing and selling its products in Europe. 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
the use of third-party distributors. The Company has recently strengthened
the management of its international operations. First, the Company has
recruited a new Vice President of International / Managing Director of Cutter
& Buck B.V., who will direct the operation of its European subsidiaries and
advise the Company on international marketing and product sourcing. Second,
the Company has promoted its Director of Sales in the United Kingdom to Vice
President of Sales and Marketing for its entire European business. Third,
the Company has recruited a Vice President of Finance and Administration for
its European operations.
The Company works closely with its licensees on concept and color so that
the licensed products complement the Company's apparel offerings as part of the
overall lifestyle collection. 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.
Historically, the Company has been able to enter into license agreements
that broaden its product line and introduce its fashions internationally,
without making a significant capital commitment. License and royalty income
from such agreements was approximately $409,000 in fiscal 1997 and $457,000 in
fiscal 1996. The reduction in royalty income reflects the Company's shift
toward direct international sales and exclusive distribution relationships and
away from licensing relationships. The Company currently has licensing
agreements for hosiery and neckwear. The Company recently reacquired its
license covering collections for the big and tall market.
In addition, Cutter & Buck has agreements with international distributors
in Australia, Lebanon, Singapore, and Malaysia. 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 identified
on pictorial line sheets. The Company's relationship with its distributors are
managed by an international merchandise manager, who reports to the Company's
Chief Executive Officer.
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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 reinvent, 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 is comprised of
various executive officers and the Company's design staff. 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. 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 is 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 of closeout and
liquidation sales, resulting in 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. 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 relationships 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, approximately four
months after placement of sample orders. 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 to enhance quality control of
its embroidered products, which has significantly reduced the Company's reliance
on independent embroiderers to customize its products. The Company currently
contracts with approximately ten independent domestic embroiderers during
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peak embroidery production and shipping periods. The Company's in-house
embroidery manufacturing operation handled approximately 50% of the embroidered
logo requirements of its golf pro shop and corporate customers in fiscal 1997.
The Company reduced its embroidery production costs in fiscal 1997 as a result
of establishing 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 maintaining quality production
standards, 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.
INFORMATION SYSTEM, INVENTORY MANAGEMENT AND WAREHOUSING
In addition to a computer-aided design system used by the 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 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 is also 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.
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ORDER BOOKING CYCLE AND BACKLOG
The Company receives its orders for a season over a ten-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 collections in January,
generally for delivery between May and October, and for its spring collections
in July, generally for delivery between November and April. The Company's
domestic backlog, which consists of open, unfilled customer orders from the golf
and specialty store distribution channels, was $12.5 million as of April 30,
1997. For various reasons endemic to the apparel industry, including occasional
sold out inventory positions, credit issues, and other customer-related issues,
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, Polo/Ralph
Lauren and Tommy Hilfiger. The golf distribution channel is highly
fragmented, with no single brand representing more than 10% of the market.
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 product differentiation, product quality
and production flexibility. The 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 over 30
countries. 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 on 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.
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EMPLOYEES
As of April 30, 1997, the Company had 149 full-time employees and five
part-time employees, of which 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 retail store. None of the Company's
employees is a member of a union. The Company considers its relations with its
employees to be excellent.
ITEM 2. PROPERTIES
The Company leases its principal executive offices, which are located in
Seattle, Washington, under a lease that covers 14,986 square feet and expires
in October 2001. The Company also leases for its warehousing and embroidery
operation approximately 58,920 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 expires in September 1999. 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.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is incorporated herein by reference
to the information contained in the "Shareholders' Information" section of the
Company's 1997 Annual Report to Shareholders.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated herein by reference
to the information contained in the "Selected Financial Data" section of the
Company's 1997 Annual Report to Shareholders.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated herein by reference
to the information contained in the "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section of the Company's 1997
Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference
to the information contained in the "Financial Statements" section of the
Company's 1997 Annual Report to Shareholders.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference
to the information contained in the "Executive Officers of the Company" and
"Election of Directors" sections of the Company's Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days after the close of
the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the information contained in the "Executive Compensation" section of the
Company's Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the information contained in the "Security Ownership of Certain Beneficial
Owners and Management" section of the Company's Proxy Statement to be filed with
the Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the information contained in the "Certain Relationships and Related
Transactions" section of the Company's Proxy
Page -13-
<PAGE>
Statement to be filed with the Securities and Exchange Commission within 120
days after the close of the Company's fiscal year.
PART IV
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,
1997 and the 1997 definitive proxy materials, which will be filed supplementally
to this report, are not being filed as part of this report.
A. Financial Statements, Financial Statement Schedules:
1. Financial Statements (the financial statements listed below are
incorporated herein by reference to the Company's 1997 Annual Report to
Shareholders):
Independent Auditors' Report
Balance Sheets as of April 30, 1997 and 1996
Statements of Income for the years ended April 30, 1997,
1996 and 1995
Statements of Stockholders' Equity for the years ended April 30, 1997,
1996 and 1995
Statements of Cash Flows for the years ended April 30, 1997, 1995 and 1995
Notes to Financial Statements
2. Financial Statement Schedules - see index on page 17 of this Report.
The independent auditor's report with respect to the financial statement
schedules appears in Exhibit 23.1 of this Report. All other financial
statements and schedules not listed are omitted because either they are
not applicable or not required, or the required information is included
in the consolidated financial statements.
3. Exhibits:
Exhibits required by Item 601 of Regulation S-K:
NO. EXHIBIT
- --- -------
3.1 Restated Articles of Incorporation (3.1) (1)
3.2 Bylaws, filed herewith
4.1 Specimen Common Stock Certificate (4.1)(1)
10.3 Lease dated May 22, 1994 between First and Cedar Associates and
Jones/Rodolfo
Page -14-
<PAGE>
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)
10.9 1991 Stock Option Plan (10.9) (1)
10.10 1995 Nonemployee Director Stock Incentive Plan (10.10) (1)
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 Loan Agreement dated February 20, 1997 between Cutter & Buck, Inc. and
Washington Mutual Bank d/b/a Enterprise Bank, and supporting documents
(incorporated by reference to Exhibit 10.15 of the registrant's Form
10-Q for the quarter ended January 31, 1997)
11.1 Statement of Computation of Net Income Per Share, filed herewith
13.1 Annual Report to Shareholders, 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. 33-94540-LA)
B. Report on Form 8-K:
On April 8, 1997, the Company filed a Current Report on Form 8-K
reporting the execution of the Transition Agreement dated March 25, 1997
(effective April 4, 1997) between the Company and Joey Rodolfo pursuant
to Item 5--Other Events--of Form 8-K.
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.
July 29, 1997 CUTTER & BUCK INC.
(Registrant)
By /s/ HARVEY N. JONES
-----------------------------
Harvey N. Jones, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Page -15-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title Date
/S/ HARVEY N. JONES Chairman and Chief Executive Officer July 29, 1996
- ---------------------- and Director
Harvey N. Jones (Principal Executive Officer)
/S/ MARTIN J. MARKS President, Chief Operating Officer, July 29, 1996
- ---------------------- Treasurer, Secretary and Director (Principal
Martin J. Marks Financial and Accounting Officer)
/S/ MICHAEL S. BROWNFIELD Director July 29, 1996
- ----------------------
Michael S. Brownfield
/S/ FRANCES M. CONLEY Director- July 29, 1996
- ----------------------
Frances M. Conley
/S/ LARRY C. MOUNGER- Director July 29, 1996
- ----------------------
Larry C. Mounger
/S/ JAMES B. SLAYDEN Director July 29, 1996
- ----------------------
James B. Slayden
/S/ JAMES C. TOWNE Director July 29, 1996
- ----------------------
James C. Towne
</TABLE>
Page -16-
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule Page
- -------- ----
<S> <C>
Schedule II Valuation and Qualifying Accounts 18
</TABLE>
- Page 17 -
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
CUTTER & BUCK INC.
COL. A COL. B COL. C COL. D COL. E
---------------------------------
ADDITIONS
---------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING REVENUE COSTS OTHER ACCOUNTS DEDUCTIONS AT END OF
Description OF PERIOD OR EXPENSES --DESCRIBE --DESCRIBE PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended April 30, 1997
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts
reserve for sales returns and
allowances............................. $472,402 $325,331 -- $ 43,033(A) $754,700
Reserve for inventory obsolescence....... $201,521 -- -- $103,736(B) $ 97,785
Year Ended April 30, 1996
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts
reserve for sales returns and
allowances............................. $292,005 $223,432 -- $43,035(A) $472,402
Reserve for inventory obsolescence....... $129,316 $ 72,205 -- $ -- $201,521
Year ended April 30, 1995
Reserves and allowances deducted from
asset accounts:
Allowance for doubtful accounts
reserve for sales returns and
allowances............................. $203,676 $100,261 -- $ 11,932(A) $292,005
Reserve for inventory obsolescence....... $107,448 $ 21,868 -- -- $129,316
</TABLE>
(A) Deductions consist of write-offs of uncollectable accounts, net of
recoveries.
(B) Deductions consist of inventory sold or disposed.
- Page 18 -
<PAGE>
BYLAWS
OF
CUTTER & BUCK INC.
(As amended and restated on June 27, 1997)
ARTICLE I
REGISTERED OFFICE AND REGISTERED AGENT
The registered office of the corporation shall be located in the state of
Washington at such place as may be fixed from time to time by the board of
directors upon filing of such notices as may be required by law, and the
registered agent shall have a business office identical with such registered
office. Any change in the registered agent or registered office shall be
effective upon filing such change with the office of the Secretary of State
of the state of Washington.
ARTICLE II
SHAREHOLDERS' MEETINGS
Section 1. ANNUAL MEETINGS. The annual meeting of the shareholders of
the corporation shall be held at the registered office of the corporation, or
such other place as may be designated by the notice of the meeting, during
the month of September each year, for the purpose of election of directors
and for such other business as may properly come before the meeting.
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders of
the corporation may be called at any time by the president, or by a majority
of the board of directors, or by the holders of at least twenty-five percent
(25%) of all the votes entitled to be cast on any issue proposed to be
considered at a proposed special meeting; provided that upon qualification of
the corporation as a "public company" under the Washington Business
Corporation Act, the percentage of votes required to call a special meeting
shall be thirty percent (30%). No business shall be transacted at any
special meeting of shareholders except as is specified in the notice calling
for said meeting. The board of directors may designate any place as the
place of any special meeting called by the president or the board of
directors, and special meetings called at the request of shareholders shall
be held at such place as may be determined by the board of directors and
placed in the notice of such meetings.
Section 3. NOTICE OF MEETINGS. Written notice of annual or special
meetings of shareholders stating the place, day, and hour of the meeting,
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be given by the Secretary or persons authorized to
call the meeting to each shareholder of record entitled to vote at the
meeting. In the case of an annual meeting, such notice shall be given not
less than ten (10) nor more than sixty (60) days prior to the date of the
meeting, except that notice of an annual meeting to act on (i) an amendment
to the Articles of Incorporation, (ii) a plan of merger or share exchange,
(iii) a proposed sale, lease, exchange or other disposition of substantially
all of
<PAGE>
the assets of the corporation other than in the usual or regular course of
business, or (iv) the dissolution of the corporation shall be given no fewer
than twenty (20) days nor more than sixty (60) days before the meeting date.
In the case of a special meeting, such notice shall be given not less than
fifty-five (55) nor more than sixty (60) days prior to the date of the
meeting. Notice may be transmitted by mail, private carrier or personal
delivery; telegraph or teletype; or telephone, wire or wireless equipment
which transmits a facsimile of the notice. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail addressed to
the shareholder at the shareholder's address as it appears on the stock
transfer books of the corporation.
Section 4. WAIVER OF NOTICE. Notice of the time, place, and purpose of
any meeting may be waived in writing (either before or after such meeting)
and will be waived by any shareholder by the shareholder's attendance at the
meeting in person or by proxy, unless the shareholder at the beginning of the
meeting objects to holding the meeting or transacting business at the
meeting. Any shareholder so waiving shall be bound by the proceedings of any
such meeting in all respects as if due notice thereof had been given.
Section 5. QUORUM AND ADJOURNED MEETINGS. A majority of the outstanding
shares of the corporation entitled to vote, represented in person or by
proxy, shall constitute a quorum at a meeting of shareholders. A majority of
the shares represented at a meeting, even if less than a quorum, may adjourn
the meeting from time to time without further notice. At such reconvened
meeting at which a quorum shall be present or represented, any business may
be transacted which might have been transacted at the meeting as originally
notified. The shareholders present at a duly organized meeting may continue
to transact business at such meeting and at any adjournment of such meeting
(unless a new record date is or must be set for the adjourned meeting),
notwithstanding the withdrawal of enough shareholders from either meeting to
leave less than a quorum.
Section 6. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by the shareholder's
duly authorized attorney in fact. Such proxy shall be filed with the
secretary of the corporation before or at the time of the meeting. No proxy
shall be valid after eleven (11) months from the date of its execution,
unless otherwise provided in the proxy.
Section 7. VOTING RECORD. After fixing a record date for a
shareholders' meeting, the corporation shall prepare an alphabetical list of
the names of all shareholders on the record date who are entitled to notice
of the shareholders' meeting. The list shall be arranged by voting group,
and within each voting group by class or series of shares, and show the
address of and number of shares held by each shareholder. A shareholder,
shareholder's agent, or a shareholder's attorney may inspect the
shareholder's list, beginning ten days prior to the shareholders' meeting and
continuing through the meeting, at the corporation's principal office or at a
place identified in the meeting notice in the city where the meeting will be
held during regular business hours and at the shareholder's expense. The
shareholders' list shall be kept open for inspection during such meeting or
any adjournment.
2
<PAGE>
Section 8. VOTING OF SHARES. Except as otherwise provided in the
Articles of Incorporation or in these Bylaws, every shareholder of record
shall have the right at every shareholders' meeting to one vote for every
share standing in the shareholder's name on the books of the corporation. If
a quorum exists, action on a matter, other than election of directors, is
approved by a voting group of shareholders if the votes cast within the
voting group favoring the action exceed the votes cast within the voting
group opposing the action, unless the Articles of Incorporation or the
Washington Business Corporation Act require a greater number of affirmative
votes.
Section 9. RECORD DATE. For the purpose of determining shareholders
entitled to notice of or to vote at any meeting of shareholders, or any
adjournment thereof, or entitled to receive payment of any dividend, the
board of directors may fix in advance a record date for any such
determination of shareholders, such date to be not more than seventy (70)
days prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If no record date is fixed for
the determination of shareholders entitled to notice of or to vote at a
meeting of shareholders, or shareholders entitled to receive payment of a
dividend, the day before the date on which notice of the meeting is mailed or
the date on which the resolution of the board of directors declaring such
dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled
to vote at any meeting of shareholders has been made as provided in this
section, such determination shall apply to any adjournment thereof, unless
the board of directors fixes a new record date, which it must do if the
meeting is adjourned more than one hundred twenty (120) days after the date
fixed for the original meeting.
Section 10. NOMINATION OF DIRECTORS. Only persons who are nominated in
accordance with the following procedures shall be eligible for election as
directors of the corporation. Nominations of persons for election to the
Board of Directors may be made at any annual meeting of shareholders (a) by
or at the direction of the Board of Directors (or any duly authorized
committee thereof) or (b) by any shareholder of the corporation (i) who is a
shareholder of record on the date of the giving of the notice provided for in
this Section 10 and on the record date for the determination of shareholders
entitled to vote at the annual meeting, and (ii) who timely complies with the
notice procedures and form of notice set forth in this Section 10.
To be timely, a shareholder's notice must be given to the Secretary of
the corporation and must be delivered to or mailed and received at the
principal executive offices of the corporation not less than sixty (60) days
nor more than ninety (90) days prior to the anniversary date of the
immediately preceding annual meeting of shareholders; PROVIDED, HOWEVER, that
in the event that the annual meeting is called for a date that is not within
thirty (30) days before or after the anniversary date, or no annual meeting
was held in the immediately preceding year, notice by the shareholder in
order to be timely must be so received no later than the close of business on
the tenth (10th) day following the day on which the notice of the annual
meeting date was mailed to shareholders or other public disclosure of the
annual meeting date was made, whichever first occurs.
3
<PAGE>
To be in proper form, a shareholder's notice must be in written form and
must set forth (a) as to each person whom the shareholder proposes to
nominate for election as a director (i) the name, age, business address and
residence address of the person, (ii) the principal occupation or employment
of the person, (iii) the class or series and number of shares of capital
stock of the corporation which are owned beneficially or of record by the
person, and (iv) any other information relating to the person that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations promulgated thereunder,
and (b) as to the shareholder giving the notice (i) the name and record
address of the shareholder, (ii) the class or series and number of shares of
capital stock of the corporation which are owned beneficially or by record by
the shareholder, (iii) a description of all arrangements or understandings
between the shareholder and each proposed nominee and any other person or
persons (including their names) pursuant to which the nomination(s) are to be
made by the shareholder, (iv) a representation that the shareholder intends
to appear in person or by proxy at the meeting to nominate the person named
in its notice, and (v) any other information relating to the shareholder that
would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election
of directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. The notice must be accompanied by a
written consent of each proposed nominee to be named as a nominee and to
serve as a director if elected.
No person shall be eligible for election as a director of the corporation
unless nominated in accordance with the procedures set forth in this Section
10. If the Chairman of the meeting determines that a nomination was not made
in accordance with the foregoing procedures, the Chairman shall declare to
the meeting that the nomination was defective and the defective nomination
shall be disregarded.
Section 11. BUSINESS AT ANNUAL MEETINGS. No business may be transacted
at an annual meeting of shareholders, other than business that is either (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), (b) otherwise properly brought before the annual meeting by or at
the direction of the Board of Directors (or any duly authorized committee
thereof), or (c) otherwise properly brought before the annual meeting by any
shareholder of the corporation (i) who is a shareholder of record on the date
of the giving of the notice provided for in this Section 11 and on the record
date for the determination of shareholders of record on the date for the
determination of shareholders entitled to vote at the annual meeting, and
(ii) who timely complies with the notice procedures and form of notice set
forth in this Section 11.
To be timely, a shareholder's notice must be given to the Secretary of
the corporation and must be delivered to or mailed and received at the
principal executive offices of the corporation not less than sixty (60) days
nor more than ninety (90) days prior to the anniversary date of the
immediately preceding annual meeting of shareholders; PROVIDED, HOWEVER, that
in the event that the annual meeting is called for a date that is not within
thirty (30) days before or after the anniversary date, or no annual meeting
was held in the immediately preceding year,
4
<PAGE>
notice by the shareholder in order to be timely must be so received no later
than the close of business on the tenth (10th) day following the day on which
the notice of the annual meeting date was mailed to shareholders or other
public disclosure of the annual meeting date was made, whichever first occurs.
To be in proper form, a shareholder's notice must be in written form and
must set forth as to each matter the shareholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting the business at the
annual meeting, (ii) the name and record address of the shareholder, (iii)
the class or series and number of shares of capital stock of the corporation
which are owned beneficially or of record by each shareholder, (iv) a
description of all arrangements or understandings between the shareholder and
any other person or persons (including their names) in connection with the
proposal of the business, and (v) a representation that the shareholder
intends to appear in person or by proxy at the annual meeting to bring such
business before the meeting.
No business shall be conducted at the annual meeting of shareholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 11; PROVIDED, HOWEVER, that, once the
business has been properly brought before the annual meeting in accordance
with such procedures, nothing in this Section 11 shall be deemed to preclude
discussion by any shareholder of any such business. If the Chairman of the
annual meeting determines that business was not properly brought before the
annual meeting in accordance with the foregoing procedures, the Chairman
shall declare to the meeting that the business was not properly brought
before the meeting and the business shall not be transacted.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. All corporate powers shall be exercised by
or under the authority of, and the business and affairs of the corporation
shall be managed under the direction of, the board of directors except as
otherwise provided by the laws of the state of Washington or in the Articles
of Incorporation.
Section 2. NUMBER. The number of directors of the corporation shall be
seven (7). The number of directors can be increased or decreased from time to
time by the vote of the directors or shareholders to amend this Section 2,
provided that the number of directors shall be not less than one, and
provided further that no decrease shall shorten the term of any incumbent
director.
Section 3. TENURE AND QUALIFICATIONS. At the first annual meeting of
shareholders and at each annual meeting thereafter, the shareholders of the
corporation shall elect directors. Each director shall hold office until the
next succeeding annual meeting and until his or her successor shall have been
elected and qualified. Directors need not be residents of the state of
Washington or shareholders of the corporation.
5
<PAGE>
Section 4. ELECTION. The directors shall be elected by the shareholders
at their annual meeting each year; and if, for any cause, the directors shall
not have been elected at an annual meeting, they may be elected at a special
meeting of shareholders called for that purpose in the manner provided by
these Bylaws.
Section 5. VACANCIES. Vacancies in the board of directors, including
vacancies resulting from an increase in the number of directors, may be
filled by the shareholders, the board of directors, or a majority of the
remaining directors if they do not constitute a quorum.
Section 6. RESIGNATION. Any director may resign at any time by
delivering written notice to the board of directors, its chairperson, the
president or the secretary of the corporation. A resignation shall be
effective when the notice is delivered unless the notice specifies a later
effective date.
Section 7. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, the entire board of directors, or any member
thereof, may be removed, with or without cause, by a vote of the holders of a
majority of shares then entitled to vote at an election of such directors.
Section 8. MEETINGS.
(a) The annual meeting of the board of directors shall be held
immediately after the annual shareholders' meeting at the same place as the
annual shareholders' meeting or at such other place and at such time as may
be determined by the directors. No notice of the annual meeting of the board
of directors shall be necessary.
(b) Special meetings may be called at any time and place upon the
call of the president, secretary, or any director. Notice of the time and
place of each special meeting shall be given by the secretary or the persons
calling the meeting, by mail, private carrier, radio, telegraph, telegram,
facsimile transmission, personal communication by telephone or otherwise at
least two (2) days in advance of the time of the meeting. The purpose of the
meeting need not be given in the notice. Notice of any special meeting may
be waived in writing or by telegram (either before or after such meeting) and
will be waived by any director by attendance thereat.
(c) Regular meetings of the board of directors shall be held at
such place and on such day and hour as shall from time to time be fixed by
resolution of the board of directors. No notice of regular meetings of the
board of directors shall be necessary.
(d) At any meeting of the board of directors, any business may be
transacted, and the board may exercise all of its powers.
6
<PAGE>
Section 9. QUORUM AND VOTING.
(a) A majority of the directors shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time until a quorum is
obtained, and no further notice thereof need be given.
(b) If a quorum is present when a vote is taken, the affirmative
vote of a majority of the directors present at the meeting is the act of the
board of directors.
Section 10. COMPENSATION. By resolution of the board of directors, the
directors may be paid their expenses, if any, of attendance at each meeting
of the board of directors and may be paid a fixed sum for attendance at each
meeting of the board of directors or a stated salary as director. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 11. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the board of directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless:
(a) The director objects at the beginning of the meeting, or
promptly upon the director's arrival, to holding it or transacting business
at the meeting;
(b) The director's dissent or abstention from the action taken is
entered in the minutes of the meeting; or
(c) The director delivers written notice of the director's dissent
or abstention to the presiding officer of the meeting before its adjournment
or to the corporation within a reasonable time after adjournment of the
meeting.
The right of dissent or abstention is not available to a director who votes
in favor of the action taken.
Section 12. COMMITTEES. The board of directors, by resolution adopted
by a majority of the full board of directors, may designate one or more
committees from among its members, each of which must have two or more
members and, to the extent provided in such resolution, shall have and may
exercise all the authority of the board of directors, except that no such
committee shall have the authority to: authorize or approve a distribution
except according to a general formula or method prescribed by the board of
directors; approve or propose to shareholders action that the Washington
Business Corporation Act requires to be approved by shareholders; fill
vacancies on the board of directors or on any of its committees; amend any
Articles of Incorporation requiring shareholder approval; adopt, amend or
repeal Bylaws; approve a plan of merger requiring shareholder approval; or
authorize or approve the issuance or sale or contract for sale of shares, or
determine the designation and relative rights, preferences and limitations of
a class or series of shares, except that the board of directors may
7
<PAGE>
authorize a committee, or a senior executive officer of the corporation, to
do so within limits specifically prescribed by the board of directors.
ARTICLE IV
SPECIAL MEASURES FOR CORPORATE ACTION
Section 1. ACTIONS BY WRITTEN CONSENT. Any corporate action required or
permitted by the Articles of Incorporation, Bylaws, or the laws under which
the corporation is formed, to be voted upon or approved at a duly called
meeting of the directors, committee of directors, or shareholders may be
accomplished without a meeting if one or more unanimous written consents of
the respective directors or shareholders, setting forth the actions so taken,
shall be signed, either before or after the action taken, by all the
directors, committee members, or shareholders, as the case may be. Action
taken by unanimous written consent is effective when the last director or
committee member signs the consent, unless the consent specifies a later
effective date. Action taken by unanimous written consent of the
shareholders is effective when all consents are in possession of the
corporation, unless the consent specifies a later effective date.
Section 2. MEETINGS BY CONFERENCE TELEPHONE. Members of the board of
directors, members of a committee of directors, or shareholders may
participate in their respective meetings by means of a conference telephone
or similar communications equipment by means of which all persons
participating in the meeting can hear each other at the same time;
participation in a meeting by such means shall constitute presence in person
at such meeting.
ARTICLE V
OFFICERS
Section 1. OFFICERS DESIGNATED. The officers of the corporation shall
be a chairman, a president, one or more vice presidents, a secretary and a
treasurer, each of whom shall be elected by the board of directors. Such
other officers and assistant officers as may be deemed necessary may be
elected or appointed by the board of directors. Any two or more offices may
be held by the same person.
The board of directors may, in its discretion, elect a chairperson and
one or more vice-chairpersons of the board of directors; and, if a
chairperson has been elected, the chairperson shall, when present, preside at
all meetings of the board of directors and the shareholders and shall have
such other powers as the board may prescribe.
Section 2. ELECTION, QUALIFICATION AND TERM OF OFFICE. Each of the
officers shall be elected by the board of directors. None of said officers
need be a director. The officers shall be elected by the board of directors
at each annual meeting of the board of directors. Except as hereinafter
provided, each of said officers shall hold office from the date of his or her
election until the next annual meeting of the board of directors and until
his or her successor shall have been duly elected and qualified.
8
<PAGE>
Section 3. POWERS AND DUTIES.
(a) CHAIRMAN. The chairman shall be the chief executive officer of
the corporation and, subject to the direction and control of the board of
directors, shall have general supervision and control over its property,
business, and affairs. The chairman may sign any and all documents, deeds,
mortgages, bonds, contracts, or other instruments which the board of
directors has authorized to be executed, except in cases where the signing
and execution thereof shall be expressly delegated by the board of directors
or by these bylaws to some other officer or agent of the corporation or shall
be required by law to be otherwise signed or executed; and in general shall
perform all duties incident to such office and such other duties as may be
prescribed by the board of directors from time to time.
(b) PRESIDENT. In the absence of the chairman or in the event of
the chairman's death, inability or refusal to act, the president shall
perform the duties of the chairman and when so acting shall have all the
powers of and be subject to all the restrictions upon the chairman. The
president shall perform such other duties as from time to time may be
assigned by the chairman or by the board of directors.
(c) VICE PRESIDENT. In the absence of the chairman and the
president, or in the event of their death, inability or refusal to act, the
vice president, or the vice presidents in the order designated at the time of
their election or in the absence of any designation, then in the order of
their election, shall perform the duties of the chairman and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
chairman. Any vice president shall perform such other duties as from time to
time may be assigned by the chairman, the president, or by the board of
directors.
(d) SECRETARY. The secretary shall: (1) keep the minutes of the
shareholders' and of the board of directors' meetings in one or more books
provided for that purpose; (2) see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; (3) be
custodian of the corporate records and of the seal of the corporation and
affix the seal of the corporation to all documents as may be required; (4)
keep a register of the post office address of each shareholder which shall be
furnished to the secretary by such shareholder; (5) sign with the chairman,
the president, or a vice president, certificates for shares of the
corporation, the issuance of which shall have been authorized by resolution
of the board of directors; (6) have general charge of the stock transfer
books of the corporation; and (7) in general perform all duties incident to
the office of secretary and such other duties as from time to time may be
assigned to him or her by the chairman, the president or by the board of
directors.
(e) TREASURER. Subject to the direction and control of the board
of directors, the treasurer shall have the custody, control, and disposition
of the funds and securities of the corporation and shall account for the
same; and, at the expiration of his or her term of office, he or she shall
turn over to his or her successor all property of the corporation in his or
her possession.
9
<PAGE>
Section 4. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries, when authorized by the board of directors, may sign
with the chairman, the president, or a vice president, certificates for
shares of the corporation, the issuance of which shall have been authorized
by resolution of the board of directors. The assistant treasurers shall,
respectively, if required by the board of directors, give bonds for the
faithful discharge of their duties in such sums and with such sureties as the
board of directors shall determine. The assistant secretaries and assistant
treasurers, in general, shall perform such duties as shall be assigned to
them by the secretary or the treasurer, respectively, or by the chairman, the
president or the board of directors.
Section 5. REMOVAL. The board of directors shall have the right to
remove any officer whenever in its judgment the best interests of the
corporation will be served thereby.
Section 6. VACANCIES. The board of directors shall fill any office
which becomes vacant with a successor who shall hold office for the unexpired
term and until his or her successor shall have been duly elected and
qualified.
Section 7. SALARIES. The salaries of all officers of the corporation
shall be fixed by the board of directors.
ARTICLE VI
SHARE CERTIFICATES
Section 1. ISSUANCE, FORM AND EXECUTION OF CERTIFICATES. No shares of
the corporation shall be issued unless authorized by the board. Such
authorization shall include the maximum number of shares to be issued, the
consideration to be received for each share, the value of noncash
consideration, and a statement that the board has determined that such
consideration is adequate. Certificates for shares of the corporation shall
be in such form as is consistent with the provisions of the Washington
Business Corporation Act and shall state:
(a) The name of the corporation and that the corporation is
organized under the laws of this state;
(b) The name of the person to whom issued; and
(c) The number and class of shares and the designation of the
series, if any, which such certificate represents. They shall be signed by
two officers of the corporation, and the seal of the corporation may be
affixed thereto. Certificates may be issued for fractional shares. No
certificate shall be issued for any share until the consideration established
for its issuance has been paid.
Section 2. TRANSFERS. Shares may be transferred by delivery of the
certificate therefor, accompanied either by an assignment in writing on the
back of the certificate, written assignment separate from certificate, or
written power of attorney to assign and transfer the same, signed
10
<PAGE>
by the record holder of the certificate. The board of directors may, by
resolution, provide that beneficial owners of shares shall be deemed holders
of record for certain specified purposes. Except as otherwise specifically
provided in these Bylaws, no shares shall be transferred on the books of the
corporation until the outstanding certificate therefor has been surrendered
to the corporation.
Section 3. LOSS OR DESTRUCTION OF CERTIFICATES. In case of loss or
destruction of any certificate of shares, another may be issued in its place
upon proof of such loss or destruction and upon the giving of a satisfactory
indemnity bond to the corporation. A new certificate may be issued without
requiring any bond when in the judgment of the board of directors it is
proper to do so.
ARTICLE VII
BOOKS AND RECORDS
Section 1. BOOKS OF ACCOUNT, MINUTES AND SHARE REGISTER. The
corporation shall keep as permanent records minutes of all meetings of its
shareholders and board of directors, a record of all actions taken by the
shareholders or board of directors without a meeting, and a record of all
actions taken by a committee of the board of directors exercising the
authority of the board of directors on behalf of the corporation. The
corporation shall maintain appropriate accounting records. The corporation
or its agent shall maintain a record of its shareholders, in a form that
permits preparation of a list of the names and addresses of all shareholders,
in alphabetical order by class of shares showing the number and class of
shares held by each. The corporation shall keep a copy of the following
records at its principal office: the Articles or Restated Articles of
Incorporation and all amendments to them currently in effect; the Bylaws or
Restated Bylaws and all amendments to them currently in effect; the minutes
of all shareholders' meetings, and records of all actions taken by
shareholders without a meeting, for the past three years; its financial
statements for the past three years, including balance sheets showing in
reasonable detail the financial condition of the corporation as of the close
of each fiscal year, and an income statement showing the results of its
operations during each fiscal year prepared on the basis of generally
accepted accounting principles or, if not, prepared on a basis explained
therein; all written communications to shareholders generally within the past
three years; a list of the names and business addresses of its current
directors and officers; and its most recent annual report delivered to the
Secretary of State of the state of Washington.
Section 2. COPIES OF RESOLUTIONS. Any person dealing with the
corporation may rely upon a copy of any of the records of the proceedings,
resolutions, or votes of the board of directors or shareholders, when
certified by the president or secretary.
11
<PAGE>
ARTICLE VIII
AMENDMENT OF BYLAWS
The board of directors shall have the power to adopt, amend or repeal the
bylaws or adopt new bylaws. Nothing herein shall deny the concurrent power
of the shareholders to adopt, alter, amend or repeal the bylaws.
12
<PAGE>
Exhibit 11.1
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Year ended April 30
----------------------------------------
1995 1996 1997
---------- ---------- ------------
<S> <C> <C> <C>
Weighted average common shares
outstanding 327,820 2,686,777 4,393,903
Weighted average common shares
giving effect to the conversion of
Preferred Stock into Common
Stock 1,451,862 545,356 --
Net effect of stock options granted
and Preferred Stock issued
during the 12-month period prior
to the Company's filing of its initial
public offering, at less than the
offering price, calculated using the
treasury stock method at the
offering price of $7 per share, and
treated as outstanding for all
periods presented 220,904 44,780 --
Net effect of outstanding stock options
(excluding stock options granted
during the 12 months prior to the
Company's filing of its initial public
offering) and warrants calculated
using the treasury stock method
at the average price for each
quarter during the year 33,624 198,668 281,689
---------- ---------- ------------
Shares used in computation of net
income per share 2,034,210 3,475,581 4,675,592
---------- ---------- ------------
---------- ---------- ------------
Net income $ 239,232 $ 996,350 $ 3,597,617
---------- ---------- ------------
---------- ---------- ------------
Net income per share $ 0.12 $ 0.29 $ 0.77
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
PAGE -18-
<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 ANNUAL REPORT. IN ADDITION TO THE
HISTORICAL INFORMATION CONTAINED HEREIN, THIS DISCUSSION AND ANLYSIS 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 AND TO
EFFECTIVELY MANAGE ITS CREDIT AND COLLECTION OPERATIONS, 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 ENDING APRIL 30.
OVERVIEW
The Company markets its Cutter & Buck brand sportswear and outerwear
predominantly through golf pro shops and resorts, better men's specialty stores
and corporate sales accounts. The Company's sales to golf pro shops have
increased in the last three fiscal years to $27.7 million, representing
approximately 59% of the Company's net sales in fiscal 1997. Sales to corporate
accounts also increased to $9.2 million, or approximately
PAGE -1-
<PAGE>
20% of net sales in fiscal 1997. Sales to specialty stores, the dominant
channel of distribution for the Company's products during its first few years,
amounted to $5.7 million in fiscal 1997, representing approximately 12% of net
sales for the fiscal year.
The Company's $16.3 million increase in net sales to the golf
distribution channel in fiscal 1997 represented approximately 65% of the
Company's total increase in net sales for that year. This growth in net
sales to the golf distribution channel is primarily attributable to (i) an
increase in the number of golf pro shops purchasing the Company's products
(approximately 2,400 golf pro shops in fiscal 1997 compared to 1,800 golf pro
shops in fiscal 1996), and (ii) an increase in the average annual net sales
per golf pro shop. The Company believes that the golf distribution channel
is comprised of approximately 14,000 U.S. golf pro shops. The increase in
the number of the Company's golf pro shop customers is due to the growth in
the size of its golf pro shop sales force and to the increasing proportion of
these sales representatives exclusively selling Cutter & Buck products. The
increase in average annual net sales per customer for fiscal 1997 compared to
fiscal 1996 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 reflect the establishment
of cooperative working relationships between the Company's sales force and
golf pro shops, particularly in the area of merchandising the Company's
coordinated themes and collections, as well as consumer acceptance of, and
increasing demand for, the Company's products. The Company plans to increase
the size and effectiveness of its sales force and further augment its product
offerings.
The Company increased its inventory levels in fiscal 1997 to support
planned sales growth, reducing inventory turns. The Company believes that
higher inventory levels enabled it to improve overall merchandise availability,
to better accommodate in-season orders for its FASHION merchandise (i.e.,
products incorporating the latest innovations in color, fabric and styling
which tend to remain in the line for only one season) across a broad range of
styles, and to satisfy increased demand from all distribution channels for quick
delivery of its CLASSIC merchandise (i.e., predominantly solid-color garments
with multi-season appeal). The ability to provide quick delivery of CLASSIC
knit shirts is of particular importance to the corporate sales and golf
distribution channels.
In the fourth quarter of fiscal 1996, the Company reacquired the exclusive
distribution rights for its apparel in the United Kingdom and in the first
quarter of fiscal 1997 formed a new European subsidiary for the direct
marketing, sales and distribution of Cutter & Buck sportswear and outerwear in
the United Kingdom and Europe.
As the volume of Cutter & Buck products has increased, the Company has been
able to increase its gross profit margin by negotiating improved cost
arrangements with its suppliers. 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.
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:
PAGE -2-
<PAGE>
FISCAL YEAR ENDED APRIL 30,
-----------------------------
1995 1996 1997
-----------------------------
Statements of Operations Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales 65.2 63.1 60.2
---- ---- ----
Gross profit 34.8 36.9 39.8
Operating expenses:
Design and production 5.6 4.8 2.7
Selling and handling 18.2 17.8 18.8
General and administrative 10.1 9.5 7.6
---- --- ---
Total operating expenses 33.9 32.1 29.1
---- ---- ----
Operating income 0.9 4.8 10.7
Other income (expense):
Factor commissions and interest expense
net of interest income (2.8) (1.1) (0.4)
License and royalty income 3.7 2.1 0.9
--- --- ---
Total other income 0.9 1.0 0.5
--- --- ---
Income before income taxes 1.8 5.8 11.2
Income taxes 0.0 1.2 3.5
--- --- ---
Net income 1.8% 4.6% 7.7%
--- --- ---
--- --- ---
YEARS ENDED APRIL 30, 1997, 1996 AND 1995
NET SALES
During fiscal 1997 and fiscal 1996, net sales increased
from the prior year period by 115.3% and 61.1%, respectively. The expansion
of the Company's sales to the golf distribution channel had a significant
impact on its sales growth. Net sales to this channel increased $16.3
million, or approximately 143%, to $27.7 million in fiscal 1997, increased
$5.7 million, or approximately 100%, to $11.4 million in fiscal 1996, and
increased $2.9 million, or approximately 104%, to $5.7 million in fiscal
1995. Net sales in the golf distribution channel through the Company's
European subsidiaries included in these figures increased to $2.8 million in
fiscal 1997 from $399,000 in fiscal 1996. The Company's development of a
directed sales effort in its corporate sales channel beginning in the second
half of fiscal 1995 also had a significant impact on its sales growth. Net
sales to this channel increased $6.2 million, or approximately 210%, to $9.2
million in fiscal 1997, and increased approximately 261% to $3.0 million in
fiscal 1996 from $831,000 in fiscal 1995. Retail channel sales to better
men's specialty stores increased 19.1% in fiscal 1997 when compared to fiscal
1996 and increased 23.8% in fiscal 1996 compared to fiscal 1995. Despite the
overall sales growth in this channel, specialty store sales declined to
approximately 12% of total Company sales in fiscal 1997 from 21% in fiscal
1996 and 36% in fiscal 1995. The Company's sales of seasonal remainder
merchandise to off-price retailers was approximately 4% of net sales in
fiscal 1997, compared to approximately 3% of net sales in fiscal 1996 and 7%
of net sales in fiscal 1995. The decline in the portion of total sales to
off-price retailers in fiscal 1997 and 1996 when compared to fiscal 1995 was
primarily attributable to the Company's expanded market penetration and its
ability to more accurately forecast sales to the golf and corporate
distribution channels. The Company's sales to other distribution channels
were less than 10% of net sales in each of fiscal years 1997, 1996 and 1995.
GROSS PROFIT MARGIN
In fiscal 1997, the Company's gross profit margin was 39.8% of net
sales, compared to 36.9% in fiscal 1996 and 34.8% in fiscal 1995. The increase
during fiscal 1997 was primarily due to economies of scale. Higher production
volumes have given the Company increased negotiating leverage to purchase
product at lower unit costs and the ability to expand its international
sourcing. Gross profit margin improvement in fiscal 1997 also reflected cost of
sales reductions due to the development of an in-house embroidery operation,
which has decreased costs of production. The Company has also increased use of
letters of credit, thereby eliminating financing costs previously included in
product costs charged by the Company's international sources.
The gross profit margin increase in fiscal 1996 was also primarily due
to economies of scale, improved product sourcing and letter of credit financing,
and was also the result of higher production costs in fiscal 1995 due to the
late deliveries of approximately 10 styles in the Company's 1995 spring
collection that were caused by production delays at a new foreign manufacturing
source. These delays resulted in increased expediting costs and markdowns.
PAGE -3-
<PAGE>
During fiscal 1997, the Company established an in-house embroidery
manufacturing operation. This facility has enabled the Company to handle
directly more than half of the embroidered logo requirements of its golf, resort
and corporate customers. The Company expects to produce directly up to 70% of
its embroidered sales in fiscal 1998 versus 50% in fiscal 1997 thereby further
reducing embroidery costs with an accompanying beneficial effect on gross
margins.
DESIGN AND PRODUCTION EXPENSES
Design and production expenses increased by $212,000 or 20.2%, to
$1.3 million in fiscal 1997 from $1.0 million in fiscal 1996 but decreased as a
percentage of net sales to 2.7% in 1997 from 4.8% in 1996 and 5.6% in 1995. The
dollar increase in these expenses is primarily attributable to increased
management and staffing costs associated with expansion of the Company's product
line and increased embroidery design and production costs 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.
SELLING AND HANDLING EXPENSES
Selling and handling expenses increased by $4.9 million, or 127.4%, to
$8.8 million in fiscal 1997 from $3.9 million in fiscal 1996, representing 18.8%
of net sales in fiscal 1997 and 17.8% in fiscal 1996. The dollar amount
increase was primarily attributable to increased salaries and commissions,
management and marketing expenses, increased costs of samples associated with
the expanded sales force and product line, and additional direct overhead
costs resulting from the establishment of the Company's direct warehouse
operation. The Company expanded the size of its domestic golf sales force from
26 at the end of fiscal 1996 to 32 at the end of fiscal 1997. In April 1996,
the Company reorganized the management of its golf distribution sales channel by
reducing the direct sales responsibilities of the Company's regional sales
managers to allow them to focus their attention on management of the sales
force. The Company employed two regional sales managers at the end of fiscal
1997. 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 19 sales representatives at the end of fiscal 1997 from
nine at the end of fiscal 1996 and six at the end of fiscal 1995 and increased
the size of its sales force for the specialty store channel to nine at the end
of fiscal 1997 from seven at the end of fiscal 1996 and 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 $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 $1.4 million increase
primarily resulted from increased commissions and, to a lesser extent, from
management and marketing expenses. The Company expanded the size of its golf
sales force to 26 sales representatives at the end of fiscal 1996 from 22 at the
end of fiscal 1995. To provide the necessary management for this increase in
sales representatives, three of these sales representatives also assumed
regional management responsibilities at the end of fiscal 1996, which resulted
in an increase in sales management expense.
During fiscal 1997 and fiscal 1996, the Company purchased and
installed $997,000 and $284,000, respectively, of point of sale fixturing to
enhance collection merchandising in a total of 526 of its customers'
locations. The Company expects to purchase an additional $1.4 million of
fixtures in fiscal 1998 to be targeted to an additional 150 locations,
reaching a total of 676 golf pro shop and men's better specialty stores by
the end of fiscal 1998. 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.
PAGE -4-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased by $1.5 million, or
72.0%, to $3.5 million in fiscal 1997 from $2.0 million in fiscal 1996 and $1.4
million in fiscal 1995, but decreased as a percent of net sales to 7.5% in
fiscal 1997 from 9.5% in fiscal 1996 and 10.1% in fiscal 1995. The dollar
amount increase over the three year period 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. Commencing in fiscal 1997, general
and administrative expenses included the cost of an expanded credit and
collections function which replaced a significant portion of factor commission
expense incurred in prior years.
FACTOR COMMISSIONS AND NET INTEREST EXPENSE
Factor commissions and net interest expense decreased by $40,000, or
16.9%, to $197,000 in fiscal 1997 from $237,000 in fiscal 1996, representing
0.4% and 1.1% of net sales in fiscal 1997 and fiscal 1996, respectively. The
reduction in the dollar amount is primarily due to interest savings made
possible by the Company's ability to fund its working capital growth with the
net proceeds of the Company's public offering in November 1996, and limiting
factoring services in the United States to the specialty store channel. In
fiscal 1996, factor commissions and net interest expense decreased by
$139,000, or 36.9%, to $237,000 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 net proceeds of the Company's initial public offering in
August 1995.
LICENSE AND ROYALTY INCOME
License and royalty income decreased by $49,000, or 10.7%, to
$409,000, representing 0.9% of net sales in fiscal 1997, from $457,000 and 2.1%
of net sales in fiscal 1996. The reduction in license and royalty income
reflects the Company's shift towards direct international sales and exclusive
distributor relationships and away from licensing relationships. This decline
in license and royalty income in fiscal 1997 was primarily attributable to the
Company's decision to repurchase its outerwear license effective May 1996. In
fiscal 1996, license and royalty income decreased by $40,000, or 7.9%, to
$457,000 from $497,000 and 3.7% of net sales in fiscal 1995. This decline in
license and royalty income was primarily due to the Company's decision to
discontinue its relationship with its licensee for Central and South America.
INCOME TAXES
The Company recorded $1.6 million of income tax expense in fiscal
1997, $260,000 in fiscal 1996 and none in fiscal 1995. Tax expenses are lower
than statutory rates primarily due to the utilization of net operating loss
carryforwards. As of April 30, 1997, there are no remaining net operating loss
carryforwards available to offset future taxable income.
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 level 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 better 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.
PAGE -5-
<PAGE>
The following tables set forth certain operating data of the Company,
including percentages of net sales, for the eight quarters ending April 30,
1997.
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED FISCAL 1997 QUARTER ENDED
-------------------------------------------- --------------------------------------------
July 31, October 31, January 31, April 30, July 31, October 31, January 31, April 30,
1995 1995 1996 1996 1996 1996 1997 1997
-------------------------------------------- --------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net Sales $3,305 $5,131 $5,210 $7,999 $8,000 $12,290 $8,452 $17,851
Cost of sales 2,077 3,197 3,377 5,013 5,020 7,494 4,963 10,577
----- ----- ----- ----- ----- ----- ----- ------
Gross profit 1,228 1,934 1,833 2,986 2,980 4,796 3,489 7,274
Operating expenses:
Design and production 215 230 275 325 336 365 362 193
Selling and handling 668 980 874 1,336 1,712 2,221 1,903 2,938
General and administrative 411 487 510 634 714 913 876 1,010
--- --- --- --- --- --- --- -----
Total operating expenses 1,294 1,697 1,659 2,295 2,762 3,499 3,141 4,141
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) (66) 237 174 691 218 1,297 348 3,133
Other income (expense):
Factor commissions and
interest income, net of
interest expense (113) (28) (12) (84) (111) (119) 40 (7)
License and royalty income 116 83 102 156 96 61 92 160
--- -- --- --- -- -- -- ---
Total other income (expense) 3 55 90 72 (15) (58) 132 153
- -- -- -- --- --- --- ---
Income (loss) before income taxes (63) 292 264 763 203 1,239 480 3,286
Income taxes 0 (50) (60) (150) (61) (374) (156) (1,019)
- --- --- --- --- ---- ---- ------
Net income (loss) $ (63) $ 242 $ 204 $ 613 $ 142 $ 865 $ 324 $ 2,267
------ ------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ ------ -------
FISCAL 1996 QUARTER ENDED FISCAL 1997 QUARTER ENDED
-------------------------------------------- --------------------------------------------
July 31, October 31, January 31, April 30, July 31, October 31, January 31, April 30,
1995 1995 1996 1996 1996 1996 1997 1997
-------------------------------------------- --------------------------------------------
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 62.8 62.3 64.8 62.7 62.8 61.0 58.7 59.3
---- ---- ---- ---- ---- ---- ---- ----
Gross profit 37.2 37.7 35.2 37.3 37.2 39.0 41.3 40.7
Operating expenses:
Design and production 6.5 4.5 5.3 4.1 4.2 3.0 4.3 1.1
Selling and handling 20.3 19.1 16.8 16.7 21.4 18.1 22.5 16.4
General and administrative 12.4 9.5 9.8 7.9 8.9 7.4 10.4 5.7
---- --- --- --- --- --- ---- ---
Total operating expenses 39.2 33.1 31.9 28.7 34.5 28.5 37.2 23.2
---- ---- ---- ---- ---- ---- ---- ----
Operating income (loss) (2.0) 4.6 3.3 8.6 2.7 10.5 4.1 17.5
Other income (expense):
Factor commissions and
interest income, net of
interest expense (3.4) (0.5) (0.2) (1.1) (1.4) (1.0) 0.5 (0.0)
License and royalty income 3.5 1.6 2.0 2.0 1.2 0.5 1.1 0.9
--- --- --- --- --- --- --- ---
Total other income (expense) 0.1 1.1 1.8 0.9 (0.2) (0.5) 1.6 0.9
--- --- --- --- ---- ---- --- ---
Income (loss) before income taxes (1.9) 5.7 5.1 9.5 2.5 10.0 5.7 18.4
Income taxes 0.0 (1.0) (1.2) (1.9) (0.8) (3.0) (1.9) (5.7)
--- ---- ---- ---- ---- ---- ---- ----
Net income (loss) (1.9)% 4.7% 3.9% 7.6% 1.7% 7.0% 3.8% 12.7%
----- --- --- --- --- --- --- ----
----- --- --- --- --- --- --- ----
</TABLE>
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, 1997 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 profitable operations and by a combination
of increased accounts payable, accounts receivable financing through a factor,
bank borrowing, the private sale of Preferred Stock and the public sale of
Common Stock.
Net cash used in operating activities in fiscal 1997 was $7.8 million. This
resulted primarily from an increase in inventory of $7.8 million and an increase
in accounts receivable of $7.3 million which were partially offset by profitable
operations and an increase in accounts payable and accrued liabilities and
income taxes payable of $3.1 million. 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
PAGE -6-
<PAGE>
merchandise delivery and from the golf distribution and corporate sales channels
for CLASSIC knit shirts in particular.
In fiscal 1997, net cash provided by financing activities was $15.0
million, resulting primarily from the receipt of net proceeds of $14.6 million
from the Company's public offering of Common Stock in November 1996 and by a
$563,000 increase in advances from the European factor.
Net cash used in investing activities was $1.6 million in fiscal 1997 and
was substantially the result of an increased investment in furniture and
fixtures of $1.7 million.
The Company incurred capital expenditures and lease purchases of $2.5
million, $655,000 and $208,000 in fiscal years 1997, 1996 and 1995,
respectively. In fiscal 1997, expenditures for capital assets included $997,000
for in-store fixtures, $917,000 for warehouse and embroidery equipment and a
total of $586,000 for other furniture and equipment. 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, capital expenditures
were primarily for the acquisition of office furniture and equipment for the
Company's corporate headquarters. Capital expenditures of $3.3 million are
planned for fiscal 1998, including additional investments in in-store fixturing
of $1.4 million, the purchase of warehouse and embroidery equipment of $600,000,
upgrades to computer hardware and software totaling $1.1 million and other
purchases totaling $200,000.
On February 20, 1997, the Company entered into a loan agreement with
Washington Mutual Bank d/b/a Western Bank ("Western Bank") for a $20.0 million
line of credit, replacing the Company's previous line of credit. The Western
Bank line of credit is to be used for international letters of credit, working
capital advances and other corporate purposes. Interest on borrowings is
charged and payable monthly at Western 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 and
tangible net worth, as well as a maximum debt to equity ratio. Western 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 Western Bank and Republic prohibits the Company
from taking advances under the Factoring Agreement. Subject to its credit
review procedures, Republic 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 day's 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 directly
managed the accounts receivable credit and collection functions associated with
its sales to the golf, corporate and international distribution channels. The
Company plans to continue to use Republic's accounts receivable management
exclusively for its sales to the specialty store channel. In conjunction with
this change to its accounts receivable management and financing, the Company
plans to primarily use the Western Bank line of credit to fund its anticipated
working capital needs. The Company believes that this change in its credit
management practices will enable it to better control 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 continue to benefit the Company's financial condition and results of
operations.
As of May 31, 1997, the Company had working capital of approximately
$29.5 million. The Company's principal source of liquidity in fiscal 1998, in
addition to cash on hand, is expected to be the Western Bank line of credit in
the amount of $20 million, of which the Company had open letters of credit in
the amount of $6.1 million as of June 30, 1997 and no outstanding loans.
The Company believes that cash generated from operations and the ability to
borrow under its line of credit will be sufficient to meet its operating needs
in fiscal 1998. However, the Company's capital needs will depend on many
factors, including the Company's growth rate, the
PAGE -7-
<PAGE>
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.
PAGE -8-
<PAGE>
Selected Financial Data
The following selected financial data as of April 30, 1995, 1996 and
1997, and for each of the three years in the period ended April 30, 1997 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 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."
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $8,036 $9,882 $13,435 $21,645 $46,593
Cost of sales 5,991 6,444 8,760 13,664 28,054
----- ----- ----- ------ ------
Gross profit 2,045 3,438 4,675 7,981 18,539
Operating expenses:
Design and production 495 510 747 1,045 1,256
Selling and handling 1,136 1,781 2,446 3,858 8,774
General and administrative 784 1,053 1,364 2,042 3,513
--- ----- ----- ----- -----
Total operating expenses 2,415 3,344 4,557 6,945 13,543
----- ----- ----- ----- ------
Operating income (loss) (370) 94 118 1,036 4,996
Other income (expense):
Factor commissions and interest expense,
net of interest income (207) (278) (376) (237) (197)
License and royalty income 39 285 497 457 409
-- --- --- --- ---
Total other income (expense) (168) 7 121 220 212
---- - --- --- ---
Income (loss) before income taxes (538) 101 239 1,256 5,208
Income taxes -- -- -- (260) (1,612)
------ ------ ------ ----- -----
Net income (loss) $ (538) $ 101 $ 239 $ 996 $ 3,598
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Net income per share (1) $ 0.05 $ 0.12 $ 0.29 $ 0.77
Shares used in computation of net income
per share 1,993 2,034 3,476 4,676
BALANCE SHEET DATA
APRIL 30,
-------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------------------------------------------------------------------
(IN THOUSANDS)
Balance Sheet Data:
Cash $135 $327 $499 $2,010 $7,442
Receivables (2) 635 981 2,335 7,653 14,419
Inventories 598 561 1,890 4,693 12,489
Working capital 998 1,058 3,209 12,488 29,811
Total assets 1,818 2,488 5,693 17,170 38,960
Long-term debt 48 38 98 -- 523
Total shareholders' equity 1,285 1,387 3,566 14,023 32,187
</TABLE>
(1) Such Amounts for 1993 are not considered meaningful.
(2) Includes factored receivables, net of factor advances. See Note 3 to Notes
to Consolidated Financial Statements.
PAGE -9-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
APRIL 30,
----------------------------------
1996 1997
----------------------------------
<S> <C> <C> <C>
Current Assets:
Cash $ 2,010,047 $ 7,441,717
Accounts receivable, net of allowances for doubtful
accounts, and returns and allowances of $472,402 in 1996
and $754,700 in 1997 (Note 3) 7,652,613 14,419,108
Inventories 4,693,433 12,489,410
Deferred income taxes 180,000 284,000
Prepaid expenses and other current assets (Note 2) 1,098,972 1,426,983
------------ ------------
Total current assets 15,635,065 36,061,218
Furniture and equipment (Note 4) 798,922 2,646,018
Other assets 735,931 252,923
---------------------------------
Total assets $17,169,918 $38,960,159
---------------------------------
---------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,313,937 $ 4,481,380
Accrued liabilities 319,362 740,746
Income taxes payable 400,000 887,632
Loan payable to bank 114,119 --
Current portion of capital lease obligations -- 140,545
---------------------------------
Total current liabilities 3,147,418 6,250,303
Capital lease obligations -- 522,547
Commitments (Note 7)
Shareholders' equity (Note 8):
Preferred stock, no par value,
6,000,000 shares authorized, none issued and outstanding -- --
Common stock, no par value:
25,000,000 shares authorized; 3,666,715 issued and outstanding
in 1996 and 5,156,397 in 1997 15,156,702 29,750,791
Note receivable from shareholder (44,520) --
Retained earnings (accumulated deficit) (1,089,682) 2,507,935
Currency translation adjustment -- (71,417)
---------------------------------
Total shareholders' equity 14,022,500 32,187,309
---------------------------------
Total liablilities and shareholders' equity $17,169,918 $38,960,159
---------------------------------
---------------------------------
</TABLE>
See accompanying notes.
PAGE -10-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED APRIL 30,
-------------------------------------------
1995 1996 1997
-------------------------------------------
<S> <C> <C> <C>
Net sales $13,434,788 $21,645,202 $46,592,758
Cost of sales 8,759,623 13,664,607 28,053,845
-------------------------------------------
Gross profit 4,675,165 7,980,595 18,538,913
Operating expenses:
Design and production 747,381 1,044,692 1,256,247
Selling and shipping 2,445,951 3,858,184 8,773,380
General and administrative 1,364,053 2,042,194 3,512,824
-------------------------------------------
Total operating expenses 4,557,385 6,945,070 13,542,451
-------------------------------------------
Operating income 117,780 1,035,525 4,996,462
Other income (expense):
Factor commission and interest expense,
net of interest income of $8,538 in 1995,
$134,915 in 1996, and $212,968 in 1997 (375,643) (236,962) (196,973)
License and royalty income 497,095 457,787 408,728
-------------------------------------------
Total other income 121,452 220,825 211,755
-------------------------------------------
Income before income taxes 239,232 1,256,350 5,208,217
Income taxes (Note 6) -- 260,000 1,610,600
-------------------------------------------
Net income $ 239,232 $ 996,350 $ 3,597,617
-------------------------------------------
-------------------------------------------
Net income per share $ 0.12 $ 0.29 $ 0.77
-------------------------------------------
-------------------------------------------
Shares used in computation of net
income per share (Note 1) 2,034,210 3,475,581 4,675,592
-------------------------------------------
-------------------------------------------
</TABLE>
See accompanying notes.
PAGE -11-
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK
SERIES A SERIES B COMMON STOCK
------------------------- --------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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
Sale of common stock,
net of offering expenses
of $1,434,356 - - - - 1,454,307 14,563,021
Stock issued under
employee stock purchase plan - - - - 2,796 12,549
Exercise of stock options - - - - 5,812 18,519
Exercise of stock warrants - - - - 26,767 -
Repayment of note receivable - - - - - -
Foreign currency translation - - - - - -
Net income - - - - - -
------------------------- --------------------------- ------------ ------------
BALANCE, APRIL 30, 1997 - $ - - $ - 5,156,397 $29,750,791
------------------------- --------------------------- ------------ ------------
------------------------- --------------------------- ------------ ------------
<CAPTION>
NOTE RECEIVABLE CURRENCY
FROM RETAINED TRANSLATION
SHAREHOLDER EARNINGS ADJUSTMENT TOTAL
--------------- ------------ ------------ ------------
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
Sale of common stock,
net of offering expenses
of $1,434,356 - - - 14,563,021
Stock issued under
employee stock purchase plan - - - 12,549
Exercise of stock options - - - 18,519
Exercise of stock warrants - - - -
Repayment of note receivable 44,520 - - 44,520
Foreign currency translation - - (71,417) (71,417)
Net income - 3,597,617 - 3,597,617
----------- ----------- ------------ ------------
BALANCE, APRIL 30, 1997 $ - $ 2,507,935 $ (71,417) $32,187,309
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
</TABLE>
See accompanying notes.
PAGE -12-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
--------------------------------------------------------
1995 1996 1997
--------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 239,232 $ 996,350 $ 3,597,617
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 133,220 231,487 1,057,348
Deferred income taxes -- (180,000) (104,000)
Changes in assets and liabilities:
Receivables, net (2,255,894) (2,996,564) (7,329,046)
Inventories (1,328,793) (2,803,818) (7,795,977)
Prepaid expenses and other current assets (312,178) (584,729) (328,011)
Accounts payable and accrued liabilities 1,542,453 627,258 2,588,827
Income taxes payable -- 400,000 487,632
--------------------------------------------------------
Net cash used in operating activities (1,981,960) (4,310,016) (7,825,610)
INVESTING ACTIVITIES
Purchase of furniture and equipment (119,004) (654,723) (1,716,583)
Decrease (increase) in trademarks, patents and marketing rights (4,122) (656,751) 83,671
--------------------------------------------------------
Net cash used in investing activities (123,126) (1,311,474) (1,632,912)
FINANCING ACTIVITIES
Proceeds from (repayments of) note payable to bank -- 114,119 (114,119)
Principal payments under capital lease obligation (40,787) (121,563) (125,432)
Net increase (decrease) in advances from factor 943,642 (2,320,891) 562,551
Proceeds from note receivable from shareholder -- -- 44,520
Issuance of preferred stock 1,375,084 1,039,625 --
Issuance of common stock -- 8,420,830 14,594,089
--------------------------------------------------------
Net cash provided by financing activities 2,277,939 7,132,120 14,961,609
Effects of foreign exchange rate changes on cash -- -- (71,417)
--------------------------------------------------------
Net increase in cash 172,853 1,510,630 5,431,670
Cash, beginning of year 326,564 499,417 2,010,047
--------------------------------------------------------
Cash, end of year $ 499,417 $ 2,010,047 $ 7,441,717
--------------------------------------------------------
--------------------------------------------------------
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest $ 259,133 $ 173,502 $ 176,191
--------------------------------------------------------
--------------------------------------------------------
Cash paid during the year for income taxes $ -- $ 40,000 $ 991,500
--------------------------------------------------------
--------------------------------------------------------
Noncash financing and investing activities:
Equipment acquired with capital leases $ 89,184 $ -- $ 788,524
--------------------------------------------------------
--------------------------------------------------------
Conversion of loan and note payable to
shareholders, including accrued interest,
to Series B preferred stock $ 564,385 $ -- $ --
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
See accompanying notes.
PAGE -13-
<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 better 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 and outerwear in the United Kingdom. In May 1996, the Company
formed another wholly owned subsidiary, Cutter & Buck (Europe) B.V. to perform
the same function throughout Europe. The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiaries
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.
Advertising
Advertising costs are expensed as incurred. Advertising expense was
$250,000, $326,000 and $800,000 for the years ended April 30, 1995, 1996 and
1997 respectively.
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.
Concentrations of Credit Risk
The Company is subject to credit risk on receivables that are not factored.
These non-factored receivables are geographically disbursed throughout the
United States, Europe and selected foreign countries where formal distributor
agreements exist. 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.
Foreign Currency Translation
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at the average rates of exchange prevailing during
the year. Translation adjustments resulting from this process are shown
separately in shareholders' equity.
Stock-Based Compensation
The Company accounts for stock option grants in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes
no compensation expense for stock options when the exercise price is equal to
the fair market value at the date of grant. Compensation expense is recognized
when options are issued at less than the fair market value.
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)
PAGE -14-
<PAGE>
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,
----------------------------------
1996 1997
----------------------------------
Prepaid expenses $ 461,524 $ 1,028,474
Sample costs 588,869 265,643
Other 48,579 132,866
----------------------------------
$ 1,098,972 $ 1,426,983
----------------------------------
----------------------------------
3. Accounts Receivable
Pursuant to the terms of factoring agreements, the Company assigns a
portion of its qualifying accounts receivable to factors on a preapproved,
nonrecourse basis. The factors' charges, totaling $160,643 for the year ended
April 30, 1997 ($255,393 in 1996 and $257,829 in 1995), include a commission on
net sales and interest on advances at prime, plus 1-1/2% (10% at April 30,
1997). The Company is permitted to receive advances from the European factor
against uncollected amounts factored. Accounts receivable consisted of the
following:
April 30,
-------------------------------
1996 1997
-------------------------------
Unmatured receivables
Nonrecourse $ 5,779,659 $ 2,704,702
With recourse 55,385 13,765
Matured receivables 160,331 213,019
Advances -- (562,551)
-------------------------------
Due from factor 5,995,375 2,368,935
Nonfactored receivables 2,129,640 12,804,873
Allowance for doubtful accounts and reserve for
sales returns and allowances
(472,402) (754,700)
-------------------------------
$ 7,652,613 $14,419,108
-------------------------------
-------------------------------
4. Furniture and Equipment
Furniture and equipment consisted of the following:
April 30,
-------------------------------
1996 1997
-------------------------------
Leasehold improvements $ 33,382 $ 166,293
Equipment 534,925 1,618,871
Store fixtures 284,257 1,281,447
Furniture and other fixtures 459,621 750,681
-------------------------------
1,312,185 3,817,292
Less accumulated depreciation and amortization (513,263) (1,171,274)
-------------------------------
$ 798,922 $ 2,646,018
-------------------------------
-------------------------------
PAGE -15-
<PAGE>
5. Line of Credit
On February 20, 1997, the Company entered into a loan agreement with
Washington Mutual Bank d/b/a Western Bank (Western Bank) for a $20 million line
of credit, replacing the Company's previous line of credit. The line of credit
with Western Bank is to be used for international letters of credit, working
capital advances and other corporate purposes. Interest on borrowings is
charged and payable monthly at Western 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 and
tangible net worth, as well as a maximum debt-to-equity ratio. Western Bank and
Republic Factors Corp. have entered into an intercreditor agreement allocating
between them priority as to the Company's assets in which both financial
institutions have a security interest. At April 30, 1997, letters of credit
outstanding against this line of credit totaled $5,184,908, and there were no
working capital advances.
6. Income Taxes
The provision for income taxes consists of the following:
Year Ended April 30,
----------------------------------------
1995 1996 1997
----------------------------------------
Current tax provision:
Federal $ - $ 340,000 $1,514,600
State - 100,000 200,000
----------------------------------------
- 440,000 1,714,600
Deferred federal tax benefit - (180,000) (104,000)
----------------------------------------
$ - $ 260,000 $1,610,600
----------------------------------------
----------------------------------------
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,
-----------------------------------------
1995 1996 1997
-----------------------------------------
<S> <C> <C> <C>
Tax provision at federal statutory tax rate $ 81,338 $ 427,159 $1,770,794
Foreign loss not benefited - - 33,065
Nondeductible expenses - - 18,862
Decrease in valuation allowance (91,838) (259,569) (440,278)
State income taxes, net of federal benefit - 66,000 132,000
Other 10,500 26,410 96,157
-----------------------------------------
$ - $ 260,000 $1,610,600
-----------------------------------------
-----------------------------------------
</TABLE>
The 1996 and 1997 tax provisions are recorded net of the benefit of
utilizing net operating loss carryforwards (approximately $500,000 in 1996
and $1,139,000 in 1997). Significant components of the Company's deferred
tax assets and liabilities are as follows:
April 30,
------------------------------
1996 1997
------------------------------
Deferred income tax assets:
Reserve for doubtful accounts $ 152,616 $ 145,710
Reserve for inventory obsolescence 68,517 33,247
Net operating loss carryforwards 387,114 -
Unicap - 65,749
Other 25,588 50,842
------------------------------
Total deferred income tax assets 633,835 295,548
Valuation reserve for deferred tax assets (440,278) -
------------------------------
Net deferred tax assets 193,557 295,548
Deferred income tax liabilities:
Accelerated depreciation (13,557) (11,548)
------------------------------
Total deferred income tax liabilities (13,557) (11,548)
------------------------------
Net deferred taxes $ 180,000 $ 284,000
------------------------------
------------------------------
The decrease in the valuation allowance of $440,278 in fiscal year 1997 is
primarily attributable to the utilization of net operating loss carryforwards
and related changes in the estimate of the amount of deferred tax assets to be
realizable.
PAGE -16-
<PAGE>
7. Commitments
The Company leases its office facilities, a retail store, and a
warehouse and embroidery production facility under operating leases. Total rent
expense amounted to $154,096 in 1995, $217,292 in 1996, and $472,823 in 1997.
Future minimum rental payments under noncancelable operating leases are as
follows:
Year Ending April 30,
-----------------------
1998 $ 424,454
1999 410,930
2000 302,287
2001 186,000
2002 -
-------------
$1,323,671
-------------
-------------
8. 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.
On November 1, 1996 the Company sold 1,329,307 shares of its Common Stock
to the public at $11 per share. Pursuant to the exercise of the Underwriters'
over-allotment option, the Company sold an additional 125,000 shares of Common
Stock at $11 per share on December 3, 1996. Proceeds to the Company, net of
underwriting discounts and commissions and offering expenses totaling
$1,434,356, amounted to $14,563,021.
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. In April
1997, 52,612 of these warrants were exercised in a cashless transaction, and
26,767 shares of Common Stock were issued. The remaining warrants are
exercisable through August 2000.
Stock Option Plans: The Company has three stock option plans that provide
for the granting of options to employees, officers and directors of the Company
to purchase up to 525,313 shares of Common Stock. Options granted under the
1991 plan provide for 50% vesting on the first anniversary from the date of
grant and 25% vesting on each of the second and third anniversaries. Options
granted under the 1995 employee plan generally provide for vesting over a
five-year period with vesting at 20% each year. Options granted under the 1995
director plan become exercisable six months after the date of grant. Options
under the plans expire after 10 years and have been granted at fair value on the
date of grant.
The fair value of stock options used to calculate pro forma net income and
net income per share disclosures was determined using the Black-Scholes
option-pricing model with the following assumptions in effect on the option
grant date: risk-free interest rate of 5.5% to 6.8%; expected volatility of 49%
to 68%; expecting holding period of 3 to 5 years from the vest date; and a
dividend yield of 0.0%. The Company's pro forma net income and net income per
share under Statement 123 are as follows:
Year Ended April 30,
---------------------------
1996 1997
---------------------------
Net income $ 996,350 $ 3,597,617
Pro forma compensation expense under Statement 123 (41,476) (177,457)
---------------------------
Pro forma net income under Statement 123 $ 954,874 $ 3,420,160
---------------------------
---------------------------
Pro forma net income per share $ 0.27 $ 0.73
PAGE -17-
<PAGE>
Under Statement 123, compensation expense representing the fair value of
the option grant is recognized over the vesting period. The initial impact on
pro forma net income may not be representative of compensation expense in future
years, when the effect of the amortization of multiple awards would be reflected
in earnings.
A summary of the Company stock option activity, and related information
is as follows:
<TABLE>
<CAPTION>
April 30,
------------------------------------------------------------------------------------
1995 1996 1997
---------------------------- --------------------------- -------------------------
Options Weighted Avg. Options Weighted Avg. Options Weighted Avg.
Exercise Price Exercise Price Exercise Price
--------- --------------- ---------- -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 34,686 $2.16 252,074 $2.16 407,322 $ 5.08
Granted 238,202 2.16 155,248 9.82 37,248 13.05
Exercised - - - - (5,812) 3.19
Canceled (20,814) 2.16 - - -
--------- --------- -------- -
Balance, end of year 252,074 $2.16 407,322 $5.08 438,758 $ 5.78
--------- --------- --------
--------- --------- --------
Exercisable at end of year 39,310 $2.16 142,224 $2.16 246,317 $ 3.74
</TABLE>
The following information is provided for options outstanding and
exercisable at April 30, 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------------------------------- -------------------------------
Weighted Average
Number Remaining Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Contractual Life Exercise Price Exercise Exercise Price
- ----------------------- ----------- ---------------- ---------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
$2.16 - $ 4.74 264,762 7.0 $ 2.32 202,321 $ 2.25
7.13 - 10.75 136,748 8.9 10.51 34,748 9.79
13.50 - 13.63 37,248 9.4 13.05 9,248 13.63
-------- -------
438,758 246,317
-------- -------
-------- -------
</TABLE>
At April 30, 1997, 80,397 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. As of
April 30, 1997, 2,796 shares had been issued under the plan.
9. 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.
10. Quarterly Financial Data (unaudited)
Financial results by quarter for the fiscal years ended April 30, 1996
and 1997 are as follows:
<TABLE>
<CAPTION>
Fiscal Quarter Ended
-------------------------------------------------------------
July 31 October 31 January 31 April 30
-------------------------------------------------------------
(in thousands, except share amounts)
<S> <C> <C> <C> <C>
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 $12,290 $ 8,452 $ 17,851
Gross profit 2,980 4,796 3,489 7,274
Net income 142 865 324 2,267
Net income per share 0.04 0.22 0.06 0.42
</TABLE>
PAGE -18-
<PAGE>
REPORT OF ERNST & YOUNG LLP, 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, 1996 and 1997, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended April 30, 1997. 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, 1996 and 1997, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
April 30, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Seattle, Washington
June 16, 1997
PAGE -19-
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Cutter & Buck Inc. of our report dated June 16, 1997, included in the
1997 Annual Report to Shareholders of Cutter & Buck Inc.
Our audits also included the financial statement schedule of Cutter &
Buck Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as
a whole, present fairly in all material respects the information set forth
therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8) pertaining to the 1995 Employee Stock Option Plan, 1995
Nonemployee Director Stock Incentive Plan and 1995 Employee Stock Purchase Plan
of our report dated June 16, 1997, with respect to the consolidated financial
statements of Cutter & Buck Inc. incorporated herein by reference in the Annual
Report (Form 10-K) for the year ended April 30, 1997.
/s/ ERNST & YOUNG LLP
Seattle, Washington
July 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-END> APR-30-1997
<CASH> 7,441,717
<SECURITIES> 0
<RECEIVABLES> 14,419,108
<ALLOWANCES> (754,700)
<INVENTORY> 12,489,410
<CURRENT-ASSETS> 36,061,218
<PP&E> 2,646,018
<DEPRECIATION> (1,171,274)
<TOTAL-ASSETS> 38,960,159
<CURRENT-LIABILITIES> 6,250,303
<BONDS> 0
0
0
<COMMON> 29,750,791
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 38,960,159
<SALES> 46,592,758
<TOTAL-REVENUES> 46,592,758
<CGS> 28,053,845
<TOTAL-COSTS> 28,053,845
<OTHER-EXPENSES> 13,542,451
<LOSS-PROVISION> 52,877
<INTEREST-EXPENSE> (196,973)
<INCOME-PRETAX> (5,208,217)
<INCOME-TAX> (1,610,600)
<INCOME-CONTINUING> 3,597,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,597,617
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
