<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
-------------------- --------------------
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
Incorporation or Organization) Identification No.)
2701 First Avenue, Suite 500
Seattle, WA 98121
(Address of Principal Executive Offices, Including Zip Code)
(206) 622-4191
(Registrant's Telephone Number, Including Area Code)
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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The number of shares of Common Stock of the registrant outstanding as of
September 10, 1997 was 5,206,555.
Page 1 of 11
<PAGE>
CUTTER & BUCK INC.
Quarterly Report on Form 10-Q
For the Quarter Ended July 31, 1997
Index
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PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (unaudited):
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
<TABLE>
<CAPTION>
CUTTER & BUCK INC.
BALANCE SHEETS
ASSETS
April 30, July 31,
1997 1997
----------- -----------
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 7,441,717 $ 7,046,232
Accounts receivable, net of allowances for doubtful
accounts, and returns and allowances of $754,700
and $1,129,860 respectively 14,419,108 11,415,995
Inventories 12,489,410 13,705,033
Deferred income taxes 284,000 284,000
Prepaid expenses and other current assets 1,426,983 1,336,045
----------- -----------
Total current assets 36,061,218 33,787,305
Furniture and equipment 2,646,018 2,828,994
Other assets 252,923 268,750
----------- -----------
Total assets $38,960,159 $36,885,049
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,481,380 $ 2,237,632
Accrued liabilities 740,746 659,754
Income taxes payable 887,632 560,632
Current portion of capital lease obligations 140,545 148,637
----------- -----------
Total current liabilities 6,250,303 3,606,655
Capital lease obligations 522,547 526,141
Shareholders' equity:
Common stock, no par value: 25,000,000 shares
authorized; 5,156,397 issued and outstanding
at April 30, 1997 and 5,206,555 at July 31, 1997 29,750,791 29,887,435
Retained earnings 2,507,935 2,983,205
Currency translation adjustment (71,417) (118,387)
----------- -----------
Total shareholders' equity 32,187,309 32,752,253
----------- -----------
Total liabilities and shareholders' equity $38,960,159 $36,885,049
=========== ===========
</TABLE>
See accompanying notes.
Page 3
<PAGE>
CUTTER & BUCK INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
---------------------------------
July 31, July 31,
1996 1997
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<S> <C> <C>
Net sales $7,999,639 $12,378,031
Cost of sales 5,020,064 7,417,669
---------- -----------
Gross profit 2,979,575 4,960,362
Operating expenses:
Design and production 336,247 418,473
Selling and handling 1,711,920 2,684,957
General and administrative 713,321 1,139,171
---------- -----------
Total operating expenses 2,761,488 4,242,601
---------- -----------
Operating income 218,087 717,761
Other income (expense):
Factor commissions and
interest expense net
of interest income (111,545) (50,635)
License and royalty income 96,221 53,144
---------- -----------
Total other income (expense) (15,324) 2,509
---------- -----------
Income before income taxes 202,763 720,270
Income taxes (61,000) (245,000)
---------- -----------
Net income $ 141,763 $ 475,270
========== ===========
Net income per share $ 0.04 $ 0.09
========== ===========
Shares used in computation
of net income per share 3,941,213 5,461,373
========== ===========
</TABLE>
See accompanying notes.
Page 4
<PAGE>
CUTTER & BUCK INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------------------
July 31, July 31,
1996 1997
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 141,763 $ 475,270
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization
Changes in assets and liabilities: 179,669 388,879
Receivables, net (438,727) 3,105,649
Inventories (2,755,185) (1,215,623)
Prepaid expenses and other current assets (163,759) (21,676)
Accounts payable and accrued liabilities (19,464) (2,324,740)
Income taxes payable 62,600 (327,000)
---------- ----------
Net cash provided by (used for) operating activities (2,993,103) 80,759
INVESTING ACTIVITIES
Purchases of furniture and equipment (651,735) (365,481)
Increase in trademarks and patents (3,945) (60,611)
---------- ----------
Net cash used in investing activities (655,680) (426,092)
FINANCING ACTIVITIES
Proceeds from loan from bank 1,956,422 0
Payments under capital lease obligations (22,405) (37,290)
Net decrease in advances from factor 0 (102,536)
Issuance of common stock, net of offering costs 10,730 136,644
---------- ----------
Net cash provided by (used for) financing activities 1,944,747 (3,182)
Effects of foreign exchange rate changes on cash 0 (46,970)
---------- ----------
Net decrease in cash (1,704,036) (395,485)
Cash, beginning of period 2,010,047 7,441,717
---------- ----------
Cash, end of period $ 306,011 $7,046,232
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest $ 53,165 $ 27,749
========== ==========
Cash paid during the period for income taxes $ 178,400 $ 572,000
========== ==========
Noncash financing and investing activities:
Equipment acquired with capital leases $ 436,912 $ 48,976
========== ==========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Cutter & Buck Inc. ("Company"), in accordance with generally accepted accounting
principles for interim financial statements and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and disclosures required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation have been included. The Company's revenues are
seasonal, and therefore the results of operations for the three months ended
July 31, 1997 may not be indicative of the results for the full fiscal year.
For further information, refer to the financial statements and footnotes thereto
for the year ended April 30, 1997, included in the Company's filing on Form
10-K.
2. NET INCOME PER SHARE
Net income per share has been computed by dividing net income by the
weighted average number of common shares and equivalents outstanding. Common
share equivalents included in the computation represent shares issuable upon
assumed exercise of stock options and warrants except when the effect of their
inclusion would be antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements, the Company does not expect to report a
material change in primary earnings per share disclosure.
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. Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
April 30, 1997 July 31, 1997
----------------- -----------------
<S> <C> <C>
Unmatured receivables:
Nonrecourse $ 2,704,702 $ 1,821,807
With recourse 13,765 499,081
Matured receivables 213,019 152,506
Advances (562,551) (460,015)
----------- -----------
Due from factor 2,368,935 2,013,379
Non-factored receivables 12,804,873 10,532,476
Allowance for doubtful accounts and reserve
for sales returns and allowances (754,700) (1,129,860)
----------- -----------
$14,419,108 $11,415,995
=========== ===========
</TABLE>
4. LINE OF CREDIT
The Company has 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 Business Credit 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. At July 31, 1997, letters of credit outstanding
against this line of credit totaled $6,844,198 and there were no working capital
advances.
Page 6
<PAGE>
5. SHAREHOLDERS' EQUITY
The Company has three stock option plans that provide for the granting of
options to employees, officers and directors of the Company to purchase up to
525,313 shares of Common Stock. Options granted under the 1991 plan provide for
50% vesting on the first anniversary from the date of grant and 25% vesting on
each of the second and third anniversaries. Options granted under the 1995
employee plan generally provide for vesting over a five-year period with vesting
at 20% each year. Options granted under the 1995 director plan become
exercisable six months after the date of grant. Options under the plans expire
after 10 years and have been granted at fair market value on the date of grant.
At July 31, 1997, 443,864 options to purchase shares of common stock were
outstanding under these plans, 263,935 of which were exercisable. At July 31,
1997, 27,757 shares under these plans remained available for future grant.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Statements made in this filing that are not historical facts are forward looking
- --------------------------------------------------------------------------------
information. Actual results may differ materially from those projected in any
- ------------------------------------------------------------------------------
forward looking information. Specifically, there are a number of important
- ---------------------------------------------------------------------------
factors that could cause actual results to differ materially from those
- -----------------------------------------------------------------------
anticipated by any forward looking information. Those factors include, but are
- -------------------------------------------------------------------------------
not limited to, style changes and product acceptance, relations with suppliers
- ------------------------------------------------------------------------------
and independent sales representatives, the ability of the Company to control
- ----------------------------------------------------------------------------
costs and expenses, the ability to penetrate its chosen distribution channels,
- -----------------------------------------------------------------------------
competition, foreign currency risks and the effect of interest rates, political
- -------------------------------------------------------------------------------
and trade relations and general economic conditions.
- ----------------------------------------------------
OVERVIEW
The Company designs, sources and markets updated, traditional men's
sportswear and outerwear. It distributes its products predominantly through
golf pro shops and resorts, better men's specialty stores and direct corporate
sales accounts. The Company continues to emphasize the golf distribution
channel because it believes this is an effective way to build brand identity and
to reach its target market of men who are sports-minded and want casual clothing
that reflects an active lifestyle. The Company has found golf pro shops to be
receptive to its distinctive product, merchandising approach and sales support.
The Company continues to leverage a growing brand awareness and its expanded
product line by selling into the corporate channel, which is targeted at Fortune
1000 companies.
Historically, the Company has experienced its lowest level of net sales and
profitability in its first and third quarters, ending July 31 and January 31,
respectively. Correspondingly, the Company's highest level of sales and
profitability have been achieved in its second and fourth quarters, ending
October 31 and April 30, respectively. This seasonality has resulted primarily
from the timing of shipments to golf pro shops and men's specialty stores due to
seasonal fluctuations in consumer demand, the timing and amount of orders from
key customers, the timing of sales of seasonal remainder merchandise and
availability of product. This pattern of sales affects working capital
requirements and liquidity, as the Company generally must finance higher levels
of inventory during the first and third quarters, when sales are lowest.
Page 7
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 31, 1997 COMPARED WITH THREE MONTHS ENDED JULY 31,
-------------------------------------------------------------------------
1996
- ----
Net sales increased 54.7% in the three months ended July 31, 1997 to
---------
$12,378,031 from $7,999,639 in the three months ended July 31, 1996. For the
first quarter of fiscal 1998 compared to the first quarter of fiscal 1997, net
sales in the United States to the golf distribution channel increased $1,726,211
to $5,845,284, and net sales to the corporate channel increased $2,143,409 to
$3,694,906. Other sales, including sales to the specialty store and
international channels, increased $508,772 to $2,837,841 for the three months
ended July 31, 1997 compared to the same three month period of the previous
year.
Gross profit increased in the three months ended July 31, 1997 to
------------
$4,960,362 from $2,979,575 in the three months ended July 31, 1996. Gross
profit as a percentage of net sales was 40.1% for the first quarter of fiscal
1998 compared to 37.2% for the first quarter of fiscal 1997. The increase in
gross profit margin in the first quarter of fiscal 1998 was primarily due to the
Company's ability to negotiate lower production costs based on higher volumes,
reduced embroidery costs related to the Company's in-house embroidery operation,
reduced expediting costs due to the orderly receipt of fall season merchandise,
and realigned international sourcing that relies less on production in countries
subject to shipping disruptions caused by possible trade sanctions. In the
first quarter of fiscal 1997, the Company experienced additional expenses to
assure timely deliveries during the Company's transition to its new distribution
facility and start-up expenses associated with an in-house embroidery operation
and the Company's new European operations.
Operating expenses increased to $4,242,601 in the three months ended July
------------------
31, 1997 from $2,761,488 in the three months ended July 31, 1996, but decreased
as a percentage of net sales to 34.3% in the first quarter of fiscal 1998 from
34.5% in the first quarter of fiscal 1997. The increase in operating expenses
was due primarily to increases in management, staffing and facilities costs to
support the Company's expanded operations. The relative consistency in
operating expenses when expressed as a percentage of net sales reflects the fact
that the Company's cost structure now includes a higher level of fixed costs
(such as increased warehousing costs) to support higher sales volumes. Selling
and handling expenses increased by $973,037, making up 65.7% of the overall
increase in operating expenses. The majority of the increase in selling and
handling expenses was due to increased sales commissions, staffing costs and
travel related to a higher sales volume and a larger sales force. The Company
has also increased its advertising expenditures and incurred additional handling
expenses associated with operating its own warehouse facility in Seattle and
supporting higher sales volume.
Other income. License and royalty income earned under licensing contracts
------------
totaled $53,144 for the three months ended July 31, 1997 and $96,221 for the
three months ended July 31, 1996. The decline in license and royalty income was
primarily due to the Company's termination of its license for Big and Tall
merchandise effective June 1997 which now allows the Company to design and
market Cutter & Buck Big and Tall clothing directly. Net interest and factor
commission expense, was $50,635 in the quarter ended July 31, 1997 compared to
$111,545 in the quarter ended July 31, 1996. Factor commission expense
decreased by $15,443 due to a lower rate of factored sales made possible by the
Company's expanded in-house credit function and net interest expense decreased
by $45,467 as the Company earned interest income for the three months ended July
31, 1997 on invested cash balances made possible by the receipt of proceeds from
the Company's Common Stock offering in October 1996.
Page 8
<PAGE>
Income taxes. The Company recorded $245,000 of income tax expense in the
------------
three months ended July 31, 1997 and $61,000 in the three months ended July 31,
1996. As of April 30, 1997, all net operating loss carryforwards from prior
years had been used to offset taxable income.
As a result of the foregoing factors, the Company had net income of
$475,270 for the three months ended July 31, 1997 compared to $141,763 for the
three months ended July 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for funds is to finance working capital
associated with growth in sales volume, specifically accounts receivable and
finished goods inventory which includes the Company's Classic products with
-------
multi-season appeal. Working capital for the three months ended July 31, 1997
was funded primarily by profitable operating activities.
Net cash provided by operating activities was $80,759 for the three months
ended July 31, 1997 compared to net cash used for operating activities of
$2,993,103 for the three months ended July 31, 1996. For the three months ended
July 31, 1997, cash was primarily provided by a net decrease in accounts
receivable of $3,105,649 which was offset by an increase in inventory of
$1,215,623 and a reduction in accounts payable and accrued liabilities of
$2,324,740. The increase in inventory primarily relates to planned sales volume
in the second quarter and purchases of Classic products. The reduction in
-------
accounts payable and accrued liabilities is due in part to increased reliance on
offshore factories for inventory purchases which are paid using letters of
credit payable at sight and therefore require faster settlement than typical
open accounts payable terms. For the three months ended July 31, 1996, cash was
used to support increases in inventory, accounts receivable and prepaid
expenses.
Net cash used in investing activities of $426,092 for the three months
ended July 31, 1997 was primarily attributable to investments in warehouse
equipment and leasehold improvements totaling $169,300, in-store fixtures of
$169,175 and other furniture and equipment totaling $27,006. For the three
months ended July 31, 1996, net cash used in investing activities was $655,680
and was primarily attributable to purchases of in-store fixtures totaling
$350,828, investments in warehouse equipment and leasehold improvements totaling
$203,652 and purchases of other furniture and equipment totaling $97,255.
Net cash used for financing activities for the three months ended July 31,
1997 was $3,182 compared to net cash provided by financing activities of
$1,944,747 during the three months ended July 31, 1996. During the three months
ended July 31, 1997, the Company sold 47,534 shares under its employee stock
purchase plan and pursuant to the exercise of stock options, generating $136,644
and decreased its borrowing from the factor by $102,536. For the three months
ended July 31, 1996, cash provided by financing activities was primarily due to
bank borrowing on the Company's line of credit totaling $1,956,422.
The Company has a loan agreement with Washington Mutual Bank d/b/a Western
Bank for a $20 million line of credit, which is more fully described in footnote
four to the Company's financial statements on page six hereof.
Page 9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first quarter
ended July 31, 1997
Page 10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CUTTER & BUCK INC.
------------------
(Registrant)
Dated: September 15, 1997 By /s/ Martin J. Marks
------ --------------------------------
Martin J. Marks
President,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Page 11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<CASH> 7,046,232
<SECURITIES> 0
<RECEIVABLES> 11,415,995
<ALLOWANCES> (1,129,860)
<INVENTORY> 13,705,033
<CURRENT-ASSETS> 33,787,305
<PP&E> 2,828,994
<DEPRECIATION> (1,402,755)
<TOTAL-ASSETS> 36,885,049
<CURRENT-LIABILITIES> 3,606,655
<BONDS> 0
0
0
<COMMON> 29,887,435
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 36,885,049
<SALES> 12,378,031
<TOTAL-REVENUES> 12,378,031
<CGS> 7,417,669
<TOTAL-COSTS> 7,417,669
<OTHER-EXPENSES> 4,242,601
<LOSS-PROVISION> 75,360
<INTEREST-EXPENSE> (50,635)
<INCOME-PRETAX> 720,270
<INCOME-TAX> (245,000)
<INCOME-CONTINUING> 475,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 475,270
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
