<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1999
REGISTRATION NO. 333-81145
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
--------------------------
CUTTER & BUCK INC.
(Exact name of registrant as specified in its charter)
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WASHINGTON 91-1474587
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
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2701 FIRST AVENUE, SUITE 500
SEATTLE, WASHINGTON 98121
(206) 622-4191
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MARTIN J. MARKS
PRESIDENT AND CHIEF OPERATING OFFICER
2701 FIRST AVENUE, SUITE 500
SEATTLE, WASHINGTON 98121
(206) 622-4191
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
MICHAEL E. MORGAN, ESQ. GERALD S. TANENBAUM, ESQ.
GREGORY L. ANDERSON, ESQ. Cahill Gordon & Reindel
Lane Powell Spears Lubersky LLP 80 Pine Street
1420 Fifth Avenue, Suite 4100 New York, New York 10005
Seattle, Washington 98101 (212) 701-3000
(206) 223-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box: / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- ----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ----------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
PROSPECTUS
SUBJECT TO COMPLETION
DATED JUNE 29, 1999
1,700,000 SHARES
[LOGO]
COMMON STOCK
Cutter & Buck Inc. is selling all of the shares of common stock in this
offering.
Our common stock is traded on the Nasdaq National Market under the symbol
"CBUK." On June 28, 1999, the reported last sale price of our common stock was
$16.00 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROCEEDS TO
PRICE TO UNDERWRITING CUTTER &
PUBLIC DISCOUNT BUCK
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Per Share $ $ $
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Total $ $ $
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We have granted the underwriters the right to purchase up to an additional
255,000 shares of common stock to cover over-allotments. If the over-allotment
option is exercised in full, we will receive proceeds of $ .
J.P. MORGAN & CO.
HAMBRECHT & QUIST
NEEDHAM & COMPANY, INC.
, 1999
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Edgar artwork description:
Front cover: [Picture of golf course with mountain in the background]
Front cover flap: [Picture of golfer kneeling on putting green]
Front cover gatefold: [Picture of interior of Cutter & Buck retail store located
in Seattle, Washington. Text to read: On October 29, 1998 Cutter & Buck opened
its flagship retail store at Pacific Place in downtown Seattle.]
<PAGE>
You should rely only on the information contained or incorporated by reference
in this prospectus. We have not authorized anyone to provide you with
information different from that contained or incorporated by reference in this
prospectus. In this prospectus, "Cutter & Buck," "the company," "we," "us" and
"our" refer to Cutter & Buck Inc., and its subsidiaries, Cutter & Buck (U.K.)
Ltd., Cutter & Buck (Europe) B.V. and Cutter & Buck GmbH. This prospectus is an
offer to sell, or a solicitation of offers to buy, shares of common stock only
in jurisdictions where offers and sales are permitted.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary...................................................... 1
Risk Factors............................................................ 5
Forward-Looking Statements.............................................. 9
Price Range of Common Stock and Dividend Policy......................... 9
Use of Proceeds......................................................... 10
Capitalization.......................................................... 10
Selected Financial Data................................................. 11
Management's Discussion and Analysis of Financial Condition and Results
of Operations....................................................... 12
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Business................................................................ 23
Management.............................................................. 31
Description of Capital Stock............................................ 33
Underwriting............................................................ 35
Legal Matters........................................................... 36
Experts................................................................. 36
Where You Can Find More Information..................................... 36
Index to Consolidated Financial Statements.............................. F-1
</TABLE>
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ON MAY 28, 1999, OUR BOARD OF DIRECTORS APPROVED A 3-FOR-2 STOCK SPLIT OF THE
SHARES OF OUR COMMON STOCK, TO BE EFFECTED IN THE FORM OF A SHARE DIVIDEND ON
SHARES OF COMMON STOCK OUTSTANDING ON JUNE 4, 1999. THE DISTRIBUTION OF SHARES
WAS MADE ON JUNE 15, 1999. ALL SHARE AND PER SHARE INFORMATION IN THIS
PROSPECTUS HAS BEEN ADJUSTED TO REFLECT THE 3-FOR-2 STOCK SPLIT. EXCEPT AS
OTHERWISE NOTED, INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
UNDERWRITERS' OVER-ALLOTMENT OPTION.
Cover photography by John R. Johnson
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN OF THE INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. TO UNDERSTAND THIS OFFERING FULLY, YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE RISK FACTORS, OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE INFORMATION INCORPORATED BY REFERENCE IN THIS PROSPECTUS.
CUTTER & BUCK INC.
We design and market upscale sportswear and outerwear under the Cutter & Buck
brand. Cutter & Buck is a premium lifestyle brand with broad demographic appeal,
targeted to men and women who seek updated classic American styles inspired by
golf and our Pacific Northwest heritage. We sell our products primarily through
golf pro shops and resorts, corporate sales accounts and better specialty
stores.
We have experienced rapid growth in sales and profits. Our net sales have
increased from $13.4 million in fiscal 1995 to $107.3 million in fiscal 1999 and
our net income has grown from $239,000 to $8.0 million over the same period. We
benefit from the trends in our market including the growing national interest in
the game of golf and a trend toward casual dress in the work place. According to
industry estimates, between 1996 and 1998 sales of men's and women's apparel
grew 10.0% and 8.9%, respectively, while we estimate that our segments of those
markets grew 14.7% and 17.2% over the same period.
COMPANY STRENGTHS
We believe that the following strengths have contributed to our success and
provide us with a competitive advantage:
- DISTINCTIVE, QUALITY PRODUCTS Our garments feature comfort, high-quality
materials and manufacturing and original Cutter & Buck designs. We use
fine-gauge combed cotton, virgin wools and performance microfibers, with
unique trims, distinctive colors and special fabric finishes. Each season,
we source new fabrications from our worldwide sourcing partners and
introduce new collections unique to our industry.
- UPSCALE BRAND IDENTITY Cutter & Buck is a nationally recognized premium
lifestyle brand, built on quality products and strong imagery. Our
marketing themes revolve around golf, tennis, fly fishing and other
sporting pursuits appealing to many of our target customers. We reinforce
our upscale brand image at the store level with specialized fixturing that
presents our lines as distinctive collections.
- SELECTIVE DISTRIBUTION STRATEGY To protect the integrity of the Cutter &
Buck brand and ensure a high level of customer service, we predominantly
distribute our products through golf pro shops and resorts, corporate
sales accounts and better specialty stores, including our company-owned
retail store in Seattle, Washington. We believe that these channels
complement one another, since they target a similar consumer base and use
similar merchandising and pricing practices that generally feature Cutter
& Buck as a leading premium apparel brand.
- DEDICATED SALES FORCE As our account base and sales has grown, so have the
size and exclusivity of our sales force. As of June 15, 1999, we employ
112 domestic and international salespeople who present seasonal
collections to buyers, design in-store fixturing and merchandising with
store owners and service accounts year round. We believe that our business
is relationship-driven and having our own sales force enables us to grow
in partnership with our accounts.
- STRONG OPERATIONAL SKILLS One of our competitive strengths is our ability
to manage a highly complex business. We create new collections twice a
year, source hundreds of individual products annually from a total of 35
factories in 13 different countries and sell to approximately 7,500
accounts worldwide. Our management team comprises apparel industry
veterans in design, merchandising, manufacturing, marketing, sales and
distribution. Our infrastructure has been carefully developed to meet the
needs of customers in every market we serve.
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GROWTH STRATEGY
Our goal is to become one of the most recognized and respected brands of
sportswear and outerwear in the world. We have achieved strong sales growth in
all of our channels of distribution over the last five years by simultaneously
increasing the number of accounts and the average sales per account, an
accomplishment we believe was made possible by our strong expansion in fixturing
installations, merchandising breadth and the growth in our brand recognition. In
addition to capitalizing on our current strengths, we intend to continue our
strong and profitable sales growth and enhance our reputation by:
- INCREASING THE NUMBER OF ACCOUNTS AND THE AVERAGE ORDER SIZE PER ACCOUNT
IN OUR SELECT TOP GOLF PRO SHOP CHANNEL. We currently sell products to
approximately 3,800 of the estimated 15,000 golf pro shops in the United
States. Our goal is to sell to approximately 5,200 golf courses that sell
high quality apparel and have greens fees of $30 or higher.
- BROADENING OUR CORPORATE ACCOUNT BASE DIRECTLY AND THROUGH THIRD PARTY
RELATIONSHIPS WITH PROMOTIONAL PRODUCTS COMPANIES. Many corporations
choose Cutter & Buck sportswear for company outings, special awards and
other non-traditional marketing programs due to our strong brand
recognition. We intend to continue to devote significant resources to
increase our corporate sales, the fastest growing area of our business.
- FURTHER PENETRATING THE BETTER SPECIALTY STORE CHANNEL. We currently sell
our products to approximately 750 of the 3,500 specialty store accounts
that we believe are suitable Cutter & Buck customers. Due to our careful
distribution strategy, our products are desired by specialty stores
seeking to differentiate themselves from broadline department stores. We
believe that we will become an increasingly important resource to these
stores as our brand awareness grows and our women's line gains
recognition.
- LEVERAGING OUR DOMESTIC STRATEGY INTO INTERNATIONAL MARKETS. International
markets are receptive to American lifestyle apparel brands. We believe we
can emulate the success of our domestic distribution strategy in Europe
and other foreign markets.
- OPENING ADDITIONAL CUTTER & BUCK RETAIL STORES. We opened our flagship
store in October 1998 in Seattle, Washington, offering a broad assortment
of our products to the upscale casual wear consumer in a relaxed, friendly
environment. While providing another channel of distribution, our stores
will also showcase the Cutter & Buck brand to a wider audience. We believe
that there are significant opportunities for Cutter & Buck stores in a
number of metropolitan markets in the United States.
- CAPITALIZING ON THE CUTTER & BUCK BRAND TO GROW OUR WOMEN'S WEAR LINE AND
INTRODUCE NEW PRODUCTS. We believe that our women's wear line, which was
introduced in summer 1998, will be an important part of our growth in all
of our distribution channels. Our first men's and women's golf shoes were
shipped to golf pro shops and resorts in June 1999. We believe that this
category and others, such as casual footwear, weekend luggage, small
leather goods and headwear, represent product extensions that could
augment our Cutter & Buck lifestyle brand and lead to additional sales
within our existing distribution channels.
Cutter & Buck-Registered Trademark- and the Cutter & Buck pennant logo are
registered trademarks of Cutter & Buck. All other trademarks appearing in this
prospectus are the property of their holders.
Cutter & Buck is incorporated in Washington. Our executive offices are located
at 2701 First Avenue, Suite 500, Seattle, Washington 98121, and our telephone
number is (206) 622-4191.
2
<PAGE>
THE OFFERING
The following information is based on 8,312,236 shares of common stock
outstanding on April 30, 1999. This number excludes 692,407 shares of common
stock issuable upon the exercise of stock options outstanding on April 30, 1999
at a weighted average exercise price of $10.91 per share. It also excludes an
additional 560,846 shares of common stock available for future issuance under
our stock option and other employee benefit plans and assumes no exercise of the
underwriters' over-allotment option.
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COMMON STOCK OFFERED............................... 1,700,000 shares
COMMON STOCK OUTSTANDING AFTER THE OFFERING........ 10,012,236 shares
OVER-ALLOTMENT OPTION.............................. 255,000 shares
USE OF PROCEEDS.................................... We intend to use the net proceeds from this offering for
capital expenditures on our facilities, fixturing and
systems, to repay outstanding borrowings under our revolving
credit facility and for other general corporate purposes.
DIVIDEND POLICY.................................... We do not currently intend to pay cash dividends on our
common stock. We intend to retain any future earnings to
fund future growth.
NASDAQ NATIONAL MARKET SYMBOL...................... CBUK
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3
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SUMMARY FINANCIAL DATA
The following table contains our summary financial data which you should read
together with our consolidated financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information found elsewhere or incorporated by reference
in this prospectus. The as adjusted consolidated balance sheets data presented
below gives effect to the issuance of 1,700,000 shares of common stock upon the
consummation of this offering and the use of a portion of the net proceeds to
repay outstanding borrowings under our revolving line of credit.
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FISCAL YEAR ENDED APRIL 30,
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1995 1996 1997 1998 1999
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IN THOUSANDS, EXCEPT PER SHARE DATA
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net sales...................................... $ 13,435 $ 21,645 $ 46,593 $ 70,104 $ 107,286
Gross profit................................... 4,675 7,981 18,539 29,462 46,228
Operating income............................... 118 1,036 4,996 8,503 12,509
License and royalty income, net of other
expense...................................... 497 457 409 212 400
Net income..................................... 239 996 3,598 5,660 8,008
Basic earnings per share....................... 0.09 0.21 0.55 0.72 0.98
Diluted earnings per share..................... 0.08 0.19 0.51 0.68 0.94
Shares used in computation of:
Basic earnings per share................... 2,670 4,848 6,581 7,852 8,212
Diluted earnings per share................. 3,051 5,215 7,004 8,294 8,562
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APRIL 30, 1999
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ACTUAL AS ADJUSTED
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IN THOUSANDS
CONSOLIDATED BALANCE SHEETS DATA:
Working capital......................................................... $ 44,911
Total assets............................................................ 80,589
Short-term debt......................................................... 12,305
Long-term debt.......................................................... 5,907
Total shareholders' equity.............................................. 48,908
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4
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND
THE OTHER INFORMATION IN THIS PROSPECTUS AND INCORPORATED BY REFERENCE BEFORE
DECIDING TO INVEST IN SHARES OF COMMON STOCK. THESE ARE NOT THE ONLY RISKS AND
UNCERTAINTIES THAT WE FACE. IF ANY OF THESE RISKS OR UNCERTAINTIES ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
COMPANY RISKS
WE MAY BE UNABLE TO SUSTAIN OUR RATE OF GROWTH
Successful implementation of our business strategy requires us to manage our
growth. To manage growth effectively, we will need to continue to implement
changes in certain aspects of our business, enhance our information systems and
operations to respond to increased demand, attract and retain qualified
personnel, and develop, train and manage an increasing number of
management-level and other employees. Growth could place an increasing strain on
our management, financial, product design, marketing, distribution and other
resources, and we could experience operating difficulties. If we fail to manage
our growth effectively, our business, financial condition or operating results
could be materially harmed.
WE RELY ON FOREIGN SUPPLIERS FOR OUR PRODUCTS
We obtain substantially all of our garments from independent foreign and other
offshore suppliers and manufacturers, and do not have formal long-term contracts
with any of our suppliers or agents. Currently, our production is sourced
through:
- An agent in Thailand handling suppliers in that country;
- Three agents in Hong Kong coordinating Chinese and Far Eastern suppliers;
- Three agents in the United States and Canada managing other Asian sources
of supply;
- An agent in the United States coordinating suppliers in Peru; and
- An agent in Turkey managing factories in that country.
We also have direct factory relationships in Asia and North America. Our
products are manufactured in 35 factories located in 13 countries around the
world. A number of our products are manufactured in factories located in
Thailand. We could experience difficulty satisfying our production requirements
if any of our significant suppliers or manufacturers were to have an
interruption of business or were unable or unwilling to meet our production
needs. We could also experience delays in shifting production to other
manufacturers or agents because of the complex fabrication, unique trims and
extensive detailing of our products.
We have experienced production delays in the past, and production delays may
occur in the future. Delays in shipments, inconsistent garment quality and other
factors beyond our control could materially harm our relationships with our
customers, our reputation in the industry and our business, financial condition
or operating results.
OUR SUPPLIERS ARE SUBJECT TO INCREASED LEGAL AND SOCIAL SCRUTINY
Our operations are affected by economic, political, governmental and labor
conditions in the countries where our products are manufactured. Changes in
economic policies or political conditions in those countries could result in
disruption of trade, new or additional currency or exchange controls or the
imposition of other restrictions and could increase the prices we pay for our
products. Foreign and domestic suppliers of our garments are subject to
increased scrutiny and public sensitivity to ensure their compliance with
applicable laws, including laws affecting working conditions and pay. Recent
lawsuits have targeted both suppliers and companies that purchase goods from
foreign and domestic suppliers for manufacturers' failure to comply with those
laws. We are a defendant in two related cases
5
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involving production of our products in Saipan. An adverse judgment in either of
these cases or similar cases that may be brought in the future, or changes in
economic or political conditions adverse to our interests, could harm our
business, financial condition or operating results.
WE FACE DISTRIBUTION CENTER AND INFORMATION MANAGEMENT CHALLENGES
In December 1999, we plan to consolidate our current embroidery and distribution
operations into a new facility in Renton, Washington, approximately 15 miles
from our current distribution centers in Seattle, Washington, and to install a
new warehouse management system. In addition to the possibility of experiencing
construction delays, technological difficulties and business disruption, we
could lose employees as a result of the relocation of our distribution
facilities and experience delays in product shipments. Any significant delay
could require us to postpone the move and the installment and implementation
until after the end of our current fiscal year so as not to interfere with
planned product shipments in the fourth quarter of fiscal 2000. Our inability to
timely consolidate the embroidery and distribution operations at our facilities
and to implement the warehouse management system could increase our expenses and
harm our business, financial condition or operating results.
OUR ENTRY INTO RETAILING WILL PRESENT CHALLENGES
We opened our first retail store, located in Seattle, Washington, in October
1998, and intend to open additional stores in the next 12 months. There are many
risks associated with our entry into retailing, including our ability to find
suitable locations for our stores on reasonable rental terms, our ability to
manage our relationships with specialty retailers who currently sell our
products, competition from other retailers, potential premises liability and the
risks associated with our entry into long-term leases. We have limited
experience in managing retail operations and will need to augment our management
team as appropriate. We will also need to substantially increase our number of
employees, which will result in an increased burden on our human resources
function and increased exposure to employment-related legal liabilities. Our
inability to successfully implement our retail strategy could harm our business,
financial condition or operating results.
OUR BUSINESS IS SEASONAL
Our business has been, and will continue to be, highly seasonal, and our
quarterly operating results have fluctuated primarily due to the seasonality of
our sales of sportswear. Our sales tend to be highest during our second and
fourth fiscal quarters, ending October 31 and April 30, respectively, and lowest
during our first and third fiscal quarters, ending July 31 and January 31,
respectively. Other factors contributing to the variability of our operating
results include seasonal fluctuation in consumer demand, the timing and amount
of orders from key customers, the timing and magnitude of sales of seasonal
remainder merchandise and availability of products. As a result, our operating
results may fall below market analysts' expectations in some future quarters,
which could materially harm the market price of our common stock.
WE DEPEND UPON OUR KEY PERSONNEL
Our success largely depends on the personal efforts and abilities of key
executives and consultants, including Harvey N. Jones, our Chairman and Chief
Executive Officer, and Martin J. Marks, our President and Chief Operating
Officer. The loss of the services of either Mr. Jones or Mr. Marks could
materially harm our business, financial condition or operating results. We do
not have an employment agreement with either Mr. Jones or Mr. Marks. We have
entered into agreements with Mr. Jones and Mr. Marks under which they will
receive payments equal to one year's compensation if Cutter & Buck becomes
subject to a change of control.
THE YEAR 2000 MAY RESULT IN UNFORESEEN PROBLEMS FOR OUR BUSINESS
Beginning in the year 2000, the date fields coded in some software products and
computer systems will need to accept four digit entries in order to distinguish
21st century dates from 20th century dates. We may face exposure and risk if the
systems on which we depend to conduct our operations are not year 2000
compliant. We expect to
6
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complete both our internal and external year 2000 compliance assessment by
October 1999. We do not believe that the cost of preparing for year 2000
compliance will exceed $100,000 although we could face additional expenses to
fix any year 2000 problems if our estimates are incorrect. In addition, utility
companies, third party service providers and others outside our control may not
be year 2000 compliant. This could result in a systematic failure beyond our
control. Finally, our suppliers may face difficulties due to the non-compliance
of their systems or those of their third party providers. This could result in
our inability to obtain our products in a timely manner. If we encounter
difficulties obtaining our products, our business, financial condition or
operating results could be materially harmed.
WE FACE RISKS RELATED TO COLLECTION OF RECEIVABLES
We extend credit to our customers based on an assessment of their financial
circumstances, generally without requiring collateral. Our business is seasonal
and we offer customers discounts for placing pre-season orders and extended
payment terms for taking delivery before the peak shipping season. These
extended payment terms increase our exposure to the risk of uncollectible
receivables. Some of our customers have experienced financial difficulties in
the past, and future financial difficulties of customers could materially harm
our business.
In addition, we are currently party to factoring agreements which we use to sell
a portion of our qualified accounts receivable primarily in our specialty store
channel in order to alleviate part of our credit risk. We currently plan to
discontinue factoring our receivables in the United States in fiscal 2000 which
will increase our exposure to credit risk.
WE BEAR SOME RISK ASSOCIATED WITH FOREIGN EXCHANGE RATES
To the extent we have assets and liabilities denominated in foreign currencies
that are not hedged, we are subject to foreign currency transaction gains and
losses.
INDUSTRY RISKS
WE COULD FAIL TO ANTICIPATE CHANGES IN FASHION TRENDS
Fashion trends can change rapidly, and our business is particularly sensitive to
such changes because we typically design and arrange for the manufacture of our
apparel substantially in advance of sales of our products to consumers. With the
introduction of our women's line in January 1998, we have added a consumer base
that is typically more sensitive to changes in fashion. We cannot assure you
that we will accurately anticipate shifts in fashion trends, or in the
popularity of golf, and adjust our merchandise mix to appeal to changing
consumer tastes in apparel in a timely manner. If we misjudge the market for our
products or are unsuccessful in responding to changes in fashion trends or in
market demand, we could experience insufficient or excess inventory levels,
missed market opportunities or higher markdowns, any of which could
substantially harm our business or our brand image. As our women's line becomes
a greater part of our business as a whole, fashion obsolescence becomes an even
greater risk for us.
WE FACE SUBSTANTIAL COMPETITION IN OUR BUSINESS
The sportswear and outerwear segments of the apparel industry are highly
competitive. Our future growth and financial success depend on our ability to
further penetrate and expand our distribution channels, including golf,
corporate, international and retail sales. We encounter substantial competition
in the golf distribution channel from Ashworth, Izod Club and Polo/Ralph Lauren.
In our other channels we encounter substantial competition from other similar
apparel companies and distributors of promotional products and apparel and,
specifically in the corporate distribution channel, from Gear for Sport. Many of
our competitors are significantly larger and more diversified than we are and
have substantially greater resources available for developing and marketing
their products. In addition, our competitors may be able to enter the emerging
e-commerce marketplace more quickly or more efficiently than us. We cannot
assure you that we will be able to maintain our growth rate or to increase our
market share in our distribution channels at the expense of existing competitors
and other apparel manufacturers choosing to enter those markets.
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THE APPAREL INDUSTRY IS SENSITIVE TO ECONOMIC CONDITIONS
The apparel industry historically has been subject to substantial cyclical
variations. Any downturn, whether real or perceived, in economic conditions or
prospects could change consumer spending habits and materially harm our
business, financial condition or operating results. During the past several
years, various specialty retailers, including some of our customers, have
experienced financial problems which impact the size of our prospective customer
base and increase the risk of extending credit to those retailers.
OUR OPERATIONS ARE SUBJECT TO IMPORT RESTRICTIONS
Our import operations are subject to constraints imposed by bilateral textile
agreements between the United States and some of the countries in which we
source our products, such as Thailand and China. These agreements, which have
been negotiated under the framework established by the Arrangement Regarding
International Trade in Textiles, known as the Multifiber Agreement, impose
quotas on the amount and type of goods that can be imported into the United
States from these countries. These agreements also allow the United States to
impose at any time restraints on importing categories of merchandise that, under
the terms of the agreements, are not subject to specified limits.
Our imported products are also subject both to customs inspections, which could
result in delays in delivery of our products, and to U.S. customs duties. The
United States and the countries in which our products are manufactured may, from
time to time, impose or increase quotas, duties, tariffs or other restrictions,
or adversely adjust presently prevailing quota, duty or tariff levels. Changes
to the bilateral textile agreements or an increase in customs duties or a
decrease in quotas could harm our business, financial condition or operating
results.
OFFERING RISKS
MANAGEMENT HAS BROAD DISCRETION IN THE USE OF PROCEEDS FOR THIS OFFERING
We intend to use the net proceeds of this offering for debt repayment, capital
expenditures, working capital and other general corporate purposes. However, our
management is able to spend the proceeds in ways with which our shareholders may
not agree. We expect to increase domestic and international sales and marketing
expenditures and invest in a new distribution center, information technology and
systems and new Cutter & Buck retail stores. Pending such uses, the net proceeds
of this offering will be invested in short term, investment grade, interest
bearing securities.
OUR COMMON STOCK IS SUBJECT TO SIGNIFICANT PRICE VOLATILITY
Our common stock, which is quoted on the Nasdaq National Market, has
experienced, and is likely to experience in the future, significant price and
volume fluctuations which could adversely affect the market price of our common
stock without regard to our operating performance. In addition, we believe that
factors such as quarterly fluctuations in our financial results, announcements
by other designers and marketers of men's and women's sportswear, and changes in
the overall economy or the condition of the financial markets could cause the
price of our common stock to fluctuate substantially.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS
Some provisions of our restated articles of incorporation, our bylaws and our
shareholder rights plan make it more difficult for a third party to acquire us,
even if its doing so would be beneficial to our shareholders.
WE DO NOT PAY DIVIDENDS
We have never declared or paid any dividends on our common stock. We currently
intend to retain any future earnings for funding growth and, therefore, do not
expect to pay any cash dividends in the foreseeable future.
8
<PAGE>
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus contains forward-looking statements
within the meaning of the federal securities laws.
Forward-looking statements typically are identified by the use of such terms as
"may," "will," "expect," "believe," "anticipate," "estimate," "plan" and similar
words, although some forward-looking statements are expressed differently. You
should be aware that our actual growth and results could differ materially from
those contained in the forward-looking statements due to a number of factors,
which include, among others, the following:
- volatility of the apparel industry;
- unexpected changes in fashion trends;
- prior season inventories;
- competition;
- dependence on key personnel;
- reliance on contractors and foreign sourcing;
- import restrictions; and
- other factors referenced in this prospectus.
You should also consider carefully the statements under "Risk Factors" and other
sections of this prospectus, which address factors that could cause our actual
results to differ from those set forth in the forward-looking statements.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is traded on the Nasdaq National Market under the symbol
"CBUK." The following table sets forth, for the periods indicated, the high and
low closing sale prices of the common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1998
First Quarter - May 1, 1997 through July 31............................. $ 12.25 $ 7.67
Second Quarter - Aug. 1 through Oct. 31................................. 14.33 11.25
Third Quarter - Nov. 1 through Jan. 31.................................. 13.88 11.50
Fourth Quarter - Feb. 1 through Apr. 30, 1998........................... 18.67 12.79
FISCAL 1999
First Quarter - May 1, 1998 through July 31............................. $ 20.83 $ 13.79
Second Quarter - Aug. 1 through Oct. 31................................. 19.00 12.50
Third Quarter - Nov. 1 through Jan. 31.................................. 24.83 16.75
Fourth Quarter - Feb. 1 through Apr. 30, 1999........................... 22.79 16.33
FISCAL 2000
First Quarter (through June 28, 1999)................................... $ 21.33 $ 16.00
</TABLE>
The last reported sale price of the common stock on the Nasdaq National Market
on June 28, 1999 was $16.00 per share. As of that date, there were approximately
184 shareholders of record of the common stock.
We have never declared or paid any cash dividend on our common stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any cash dividends in the foreseeable future.
9
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of common stock offered are estimated to be
approximately $ million (approximately $ million if the underwriters'
over-allotment option is exercised in full) after deducting underwriting
discounts and commissions and estimated offering expenses. We currently intend
to use:
- Between $ and $ million of the net proceeds of this offering for
capital expenditures for: Cutter & Buck stores; the new distribution
center and related equipment, systems, and leasehold improvements;
fixturing, concept shops and a trade show booth; and computer hardware,
software and office furniture, equipment and other leasehold improvements.
- $ of the net proceeds of this offering for the repayment of our
outstanding borrowings under our revolving line of credit with Western
Bank, which at June 29, 1999 was $9.5 million.
We intend to use the balance of the net proceeds of this offering, together with
cash generated from operations and other sources for general corporate purposes,
including increased inventory and accounts receivable required to support
anticipated sales growth and capital expenditures beyond fiscal 2000. Pending
use of the net proceeds for the above purposes, we intend to invest such funds
in short-term, interest bearing, investment-grade obligations.
The foregoing discussion represents our best estimate of the allocation of the
net proceeds of this offering based upon our current plans. Actual expenditures
may vary substantially from these estimates and we may find it necessary or
advisable to reallocate the net proceeds within the above-described categories
or to use portions of the proceeds for other purposes.
CAPITALIZATION
The following table shows, as of April 30, 1999, our actual capitalization and
our capitalization as adjusted to give effect to the sale of 1,700,000 shares of
common stock in this offering and the application of a portion of the estimated
net proceeds from that sale, after deducting underwriting discounts and
estimated offering expenses, to repay outstanding borrowings under our revolving
line of credit.
<TABLE>
<CAPTION>
----------------------
APRIL 30, 1999
----------------------
DOLLARS IN THOUSANDS ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
Short-term debt.......................................................... $ 12,305 $
--------- -----------
--------- -----------
Long-term debt........................................................... $ 5,907 $
Shareholders' equity:
Preferred Stock, no par value: 6,000,000 shares authorized; none
outstanding.......................................................... -- --
Common Stock, no par value: 25,000,000 shares authorized; 8,312,236
shares issued and outstanding actual; 10,012,236 shares issued and
outstanding as adjusted.............................................. 32,998
Deferred compensation.................................................. (107)
Retained earnings...................................................... 16,176
Accumulated other comprehensive loss................................... (159)
--------- -----------
Total shareholders' equity........................................... 48,908
--------- -----------
Total capitalization............................................... $ 54,815 $
--------- -----------
--------- -----------
</TABLE>
The above table excludes 692,407 shares of common stock issuable upon the
exercise of stock options outstanding on April 30, 1999 at a weighted average
exercise price of $10.91 per share and assumes no exercise of the underwriters'
over-allotment option.
10
<PAGE>
SELECTED FINANCIAL DATA
The tables that follow present portions of our consolidated financial statements
and are not complete. You should read the following selected financial
information in conjunction with our consolidated financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this prospectus. The
consolidated statements of income data for each of the three years in the period
ended April 30, 1999 and the consolidated balance sheets data as of April 30,
1998 and 1999 are derived from our audited consolidated financial statements
which are included elsewhere in this prospectus. The consolidated statements of
income data for each of the two years in the period ended April 30, 1996 and the
consolidated balance sheets data as of April 30, 1995, 1996 and 1997 are derived
from audited consolidated financial statements that are not included in this
prospectus. Historical results are not necessarily an indication of future
results.
<TABLE>
<CAPTION>
-----------------------------------------------------
FISCAL YEAR ENDED APRIL 30,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net sales...................................... $ 13,435 $ 21,645 $ 46,593 $ 70,104 $ 107,286
Cost of sales.................................. 8,760 13,664 28,054 40,642 61,058
--------- --------- --------- --------- ---------
Gross profit................................... 4,675 7,981 18,539 29,462 46,228
Operating expenses:
Design and production........................ 747 1,045 1,256 2,120 2,915
Selling and shipping......................... 2,446 3,858 8,774 13,129 22,333
General and administrative................... 1,364 2,042 3,513 5,710 8,471
--------- --------- --------- --------- ---------
Total operating expenses................... 4,557 6,945 13,543 20,959 33,719
--------- --------- --------- --------- ---------
Operating income............................... 118 1,036 4,996 8,503 12,509
Other income (expense):
Factor commission and interest expense, net
of interest income......................... (376) (237) (197) (135) (393)
License and royalty income, net of other
expense.................................... 497 457 409 212 400
--------- --------- --------- --------- ---------
Total other income......................... 121 220 212 77 7
--------- --------- --------- --------- ---------
Income before income taxes..................... 239 1,256 5,208 8,580 12,516
Income taxes................................... -- 260 1,610 2,920 4,508
--------- --------- --------- --------- ---------
Net income..................................... $ 239 $ 996 $ 3,598 $ 5,660 $ 8,008
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share....................... 0.09 0.21 0.55 0.72 0.98
Diluted earnings per share..................... 0.08 0.19 0.51 0.68 0.94
Shares used in computation of:
Basic earnings per share..................... 2,670 4,848 6,581 7,852 8,212
Diluted earnings per share................... 3,051 5,215 7,004 8,294 8,562
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
APRIL 30,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
IN THOUSANDS
CONSOLIDATED BALANCE SHEETS DATA:
Cash............................................. $ 499 $ 2,010 $ 7,442 $ 7,590 $ 4,760
Working capital.................................. 3,209 12,488 29,811 34,391 44,911
Total assets..................................... 5,693 17,170 38,960 48,144 80,589
Short-term debt(1)............................... 24 114 141 681 12,305
Long-term debt................................... 98 -- 523 627 5,907
Total shareholders' equity....................... 3,566 14,023 32,187 38,621 48,908
</TABLE>
(1) As of April 30, 1999, includes borrowings of $9,500 under our revolving line
of credit, all of which will be repaid with a portion of the net proceeds of
this offering.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS SECTION TOGETHER WITH "SELECTED FINANCIAL DATA" AND OUR
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE
AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS. IN ADDITION TO THE HISTORICAL
INFORMATION CONTAINED HERE, THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE
THOSE DISCUSSED IN "RISK FACTORS." ALL REFERENCES TO FISCAL YEARS ARE REFERENCES
TO OUR FISCAL YEAR ENDED APRIL 30.
OVERVIEW
Cutter & Buck is a lifestyle brand with broad demographic appeal, targeted to
men and women who seek updated classic American styles inspired by golf and our
Pacific Northwest heritage. We sell our distinctive sportswear and outerwear
products primarily through golf pro shops and resorts, corporate sales accounts
and better specialty stores. In fiscal 1999, net sales to golf pro shops and
resorts represented 53.6% of our net sales, corporate accounts represented 30.5%
of our net sales, specialty retail represented 10.0% of our net sales and other
distribution channels, including company-owned retail, represented 5.9% of our
net sales.
We have grown sales in our three primary channels of distribution over the last
five years through an increase in the number of accounts and an increase in the
average annual net sales per account. The increase in the number of accounts is
primarily due to the growth in the size of our direct sales force. We have
increased average annual net sales per account by offering more product styles
and increasing the average annual net sales per style. We believe the increased
purchasing levels by our customers also reflect strong cooperative working
relationships in the area of fixturing and merchandising our coordinated product
line, and growing consumer recognition of our brand. We recognize our revenue at
the time the product is shipped to the account, and there is no right to return
other than for defective products.
As our sales volume has increased, we have continued to invest in management and
systems, to strengthen our sales and marketing effort and to negotiate improved
cost arrangements with our suppliers through economies of scale. We have also
expanded our customer support, embroidery services and distribution center
operations. While these actions have resulted in an increase in operating
expenses as a percentage of net sales for the most recent fiscal year, we have
also continued to experience improvements in gross margin.
The Company introduced a women's line of apparel in summer 1998. We sell our
women's line through our existing channels of distribution and expect to make
women's wear an increasingly important part of our business in each of our
distribution channels. We opened our flagship store in October 1998 in Seattle,
Washington and will seek to open a limited number of additional stores in
selected metropolitan markets during fiscal 2000 and beyond.
12
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, certain
consolidated statements of income data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
-------------------------------
FISCAL YEAR ENDED APRIL 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF INCOME DATA:
Net sales....................................................... 100.0% 100.0% 100.0%
Cost of sales................................................... 60.2 58.0 56.9
--------- --------- ---------
Gross profit.................................................... 39.8 42.0 43.1
Operating expenses:
Design and production......................................... 2.7 3.0 2.7
Selling and shipping.......................................... 18.8 18.7 20.8
General and administrative.................................... 7.6 8.2 7.9
--------- --------- ---------
Total operating expenses.................................... 29.1 29.9 31.4
--------- --------- ---------
Operating income................................................ 10.7 12.1 11.7
Other income (expense):
Factor commission and interest expense, net of interest
income...................................................... (0.4) (0.2) (0.4)
License and royalty income, net of other expense.............. 0.9 0.3 0.4
--------- --------- ---------
Total other income.......................................... 0.5 0.1 0.0
--------- --------- ---------
Income before income taxes...................................... 11.2 12.2 11.7
Income taxes.................................................... (3.5) (4.1) (4.2)
--------- --------- ---------
Net income...................................................... 7.7% 8.1% 7.5%
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED APRIL 30, 1999 COMPARED TO THE YEAR ENDED APRIL 30, 1998
NET SALES During fiscal 1999, total net sales increased $37.2 million, or
53.1%, to $107.3 million. The detail of net sales by distribution channel is as
follows:
<TABLE>
<CAPTION>
----------------------------------------------
FISCAL YEAR ENDED
APRIL 30,
-------------------- INCREASE PERCENT
1998 1999 (DECREASE) CHANGE
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
IN MILLIONS, EXCEPT PERCENT CHANGE
Golf......................................................... $ 36.4 $ 57.5 $ 21.1 58.0%
Corporate.................................................... 17.2 32.7 15.5 90.1
Specialty stores............................................. 9.3 10.8 1.5 16.1
Other........................................................ 7.2 6.3 (0.9) (12.5)
--------- --------- -----
$ 70.1 $ 107.3 $ 37.2 53.1%
--------- --------- -----
--------- --------- -----
</TABLE>
The $21.1 million increase in net sales to the golf distribution channel in
fiscal 1999 represented approximately 56.7% of the total increase in net sales
for the year. This growth in net sales to the golf distribution channel is
primarily attributable to an increase in the number of golf pro shops purchasing
Cutter & Buck products, an increase in the average annual net sales per golf pro
shop and increasing brand awareness. Approximately 3,800 golf pro shops
purchased our products in fiscal 1999 compared to approximately 3,000 golf pro
shops in fiscal 1998. We believe that the golf distribution channel comprises
approximately 15,000 U.S. golf pro shops of which we are presently targeting
approximately the top 5,200. The increase in the number of our golf pro shop
customers is primarily due to the growth in the size of our golf pro shop sales
force that exclusively sell Cutter & Buck products. The increase in average
annual net sales per golf pro shop for fiscal 1999 compared to fiscal 1998 is
the result of offering more product styles, including women's styles, in-store
fixturing programs and increased brand recognition among consumers. Net sales
through our European subsidiaries, which are included in the golf distribution
channel figures, increased $1.9 million, or approximately 41.3%, to $6.5 million
in fiscal 1999.
13
<PAGE>
Net sales through the corporate distribution channel increased $15.5 million, or
approximately 90.1%, to $32.7 million in fiscal 1999 from $17.2 million in
fiscal 1998. The increase in fiscal 1999 represented approximately 41.7% of the
total increase in net sales for the year. This increase is primarily
attributable to the increased size and effectiveness of our exclusive sales
force, the increase in our styles and inventory levels of our CLASSICS products,
improved relationships with a greater number of promotional products companies
that resell Cutter & Buck apparel to large corporate accounts and our growing
brand strength.
Specialty store sales increased $1.5 million or approximately 16.1% to $10.8
million in fiscal 1999 representing approximately 10.1% of our net sales in
fiscal 1999, a decrease from 13.3% in fiscal 1998. Sales to other distribution
channels, including liquidation, company-owned retail and international
distributors, declined from $7.2 million or 10.3% of net sales in fiscal 1998 to
$6.3 million or 5.9% of net sales in fiscal 1999. We anticipate continued sales
growth in each of our three primary distribution channels in fiscal 2000, with
the corporate sales channel expected to achieve the largest increase in net
sales.
Net sales per channel comprise gross sales per channel less product returns per
channel less a charge for price adjustments, allowances and non-physical credits
allocated per channel proportional to sales volume each month.
COST OF SALES In fiscal 1999, our cost of sales was 56.9% of net sales,
compared to 58.0% in fiscal 1998. The decrease during fiscal 1999 was primarily
due to economies of scale. Higher production volumes have given us increased
negotiating leverage to purchase product at lower unit costs and the ability to
expand our international sourcing. The reduction in the cost of sales percentage
resulting from economies of scale was partially offset by costs resulting from
expansion of our in-house embroidery capacity during the first half of fiscal
1999.
DESIGN AND PRODUCTION EXPENSES Design and production expenses increased by $0.8
million, or 37.5%, to $2.9 million in fiscal 1999 from $2.1 million in fiscal
1998 and decreased as a percentage of net sales to 2.7% in 1999 from 3.0% in
1998. The dollar increase in these expenses was primarily attributable to
increased management and staffing costs associated with the addition of a
women's line and the golf shoe product extension, increased embroidery design
costs for the golf and corporate distribution channels and increased expenses
associated with our efforts to further diversify and monitor production
sourcing. These increases were more than offset by the benefits of economies of
scale which resulted in an overall reduction in design and production costs as a
percentage of sales in fiscal 1999 compared to fiscal 1998.
SELLING AND SHIPPING EXPENSES Selling and shipping expenses increased by $9.2
million, or 70.1%, to $22.3 million in fiscal 1999 from $13.1 million in fiscal
1998, and increased as a percentage of net sales to 20.8% in fiscal 1999 from
18.7% in fiscal 1998. The increase was primarily attributable to increased
salaries and commissions, management and marketing expenses and additional
direct overhead costs of the warehouse operation associated with increased sales
volumes and higher levels of inventory. The store level operating expenses
associated with the new company-owned retail store in Seattle, Washington also
contributed to increased selling and handling expenses during fiscal 1999.
We increased the size of our sales force for the corporate distribution channel
to 28 sales representatives at the end of fiscal 1999 from 27 at the end of
fiscal 1998. We also strengthened our domestic golf sales force by increasing
the percentage of employee representatives selling Cutter & Buck products
exclusively as opposed to independent, multi-line sales representatives. In
fiscal 1999, we increased the percentage of exclusive representatives within the
golf sales force to 86% from 73% in fiscal 1998. The number of sales
representatives in the golf distribution channel increased to 36 at the end of
fiscal 1999 from 33 at the end of fiscal 1998. In fiscal 1999 we also added a
total of four sales managers to our corporate and golf distribution channels.
During fiscal 1999, we had three regional sales representatives working in the
specialty store channel and one sales representative exclusively dedicated to
the big and tall market. Due to the addition of a women's line and the increase
in our sales force for our golf and corporate channels, we have increased the
number of samples produced for use by our sales force and in our corporate
showrooms. At April 30, 1999 we had capitalized $1.7 million of cost of samples
that relate primarily to the Fall 1999 and Spring 2000 lines. The cost of these
samples will be amortized as selling expenses during the six months of each
selling season. Selling seasons begin on May 1 and November 1 of each year.
14
<PAGE>
During fiscal 1999, we purchased and installed $1.7 million of in-store and
concept shop fixturing to enhance collection merchandising in approximately 380
of our customers' locations, reaching a total of approximately 1,060 golf pro
shops and specialty stores by the end of fiscal 1999. In fiscal 1998, we
purchased and installed $1.2 million of in-store fixturing. We expect to
purchase and install an additional $1.3 million of in-store fixturing and
concept shops in fiscal 2000. Customer eligibility for the fixturing program is
based on minimum order commitments for Cutter & Buck products. The investment in
these fixtures is amortized as a marketing expense over a three year period.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased by $2.8 million, or 48.4%, to $8.5 million in fiscal 1999 from $5.7
million in fiscal 1998, and decreased as a percentage of net sales to 7.9% in
fiscal 1999 from 8.2% in fiscal 1998. The dollar increase during fiscal 1999 was
primarily due to increased management, staffing and facilities in support of our
growth. The increased general and administrative expenses in fiscal 1999 also
reflected increased investments in systems, technical support and professional
fees required by expanded operations and planned future growth. Since these
expenses grew at a slower rate than the growth in sales, general and
administrative expenses decreased as a percentage of net sales.
OPERATING INCOME As a result of the above items, operating income increased by
$4.0 million, or 47.1%, to $12.5 million in fiscal 1999 from $8.5 million in
fiscal year 1998, and decreased as a percentage of net sales to 11.7% in fiscal
1999 from 12.1% in fiscal 1998.
FACTOR COMMISSION AND INTEREST EXPENSE, NET OF INTEREST INCOME Factor
commission and interest expense, net of interest income, increased by
approximately $0.3 million to $0.4 million in fiscal 1999 from $0.1 million in
fiscal 1998, and increased as a percentage of net sales to 0.4% in fiscal 1999
from 0.2% in fiscal 1998. The increase is primarily due to interest expense
resulting from increased borrowing under bank lines of credit. Factoring during
fiscal 1999 was limited to the big and tall business and to our European
operation. We expect to discontinue factoring our big and tall business during
fiscal 2000.
LICENSE AND ROYALTY INCOME, NET OF OTHER EXPENSE License and royalty income,
net of other expense, increased by $0.2 million, or 88.7%, to $0.4 million,
representing 0.4% of net sales in fiscal 1999, from $0.2 million and 0.3% of net
sales in fiscal 1998. This category also includes gains and losses from foreign
currency transactions which resulted in a net transaction gain of $19,000 in
fiscal 1999 compared to a net transaction loss of $75,000 in fiscal 1998. The
increase in license and royalty income in fiscal 1999 was primarily attributable
to contractual increases in minimum royalties with licensees.
INCOME TAXES We recorded $4.5 million of income tax expense in fiscal 1999.
Income taxes for fiscal 1999 are at an effective rate of 36% compared to 34% for
fiscal 1998.
YEAR ENDED APRIL 30, 1998 COMPARED TO THE YEAR ENDED APRIL 30, 1997
NET SALES During fiscal 1998, net sales increased by $23.5 million, or 50.4%,
to $70.1 million. The detail of net sales by distribution channel is as follows:
<TABLE>
<CAPTION>
----------------------------------------------
FISCAL YEAR ENDED
APRIL 30,
-------------------- INCREASE PERCENT
1997 1998 (DECREASE) CHANGE
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
IN MILLIONS, EXCEPT PERCENT CHANGE
Golf.......................................................... $ 27.7 $ 36.4 $ 8.7 31.4%
Corporate..................................................... 9.2 17.2 8.0 87.0
Specialty stores.............................................. 5.7 9.3 3.6 63.2
Other......................................................... 4.0 7.2 3.2 80.0
--------- --------- -----
$ 46.6 $ 70.1 $ 23.5 50.4%
--------- --------- -----
--------- --------- -----
</TABLE>
15
<PAGE>
The expansion of sales to the golf distribution channel had a significant impact
on our overall net sales growth and made up approximately 37.0% of the total
increase in net sales for the year. Net sales through our European subsidiaries
that are included in the golf distribution channel increased $1.8 million, or
approximately 64.3%, to $4.6 million in fiscal 1998. Sales through the corporate
distribution channel also contributed significantly to our overall net sales
growth, making up approximately 34.0% of the total increase in net sales for
fiscal 1998. The growth in the corporate distribution channel in fiscal 1998 was
primarily due to the increased size of the sales force dedicated to this
distribution channel. Specialty store sales represented approximately 13.3% of
total net sales in fiscal 1998 compared to 12.2% in fiscal 1997. Our sales to
other distribution channels were 10.3% of net sales in 1998, up from 8.6% of net
sales in 1997.
COST OF SALES In fiscal 1998, cost of sales was 58.0% of net sales, compared to
60.2% in fiscal 1997. The decrease during fiscal 1998 was primarily due to
economies of scale. Higher production volumes have given us increased
negotiating leverage to purchase products at lower unit costs and the ability to
expand our international sourcing. Gross profit margin improvement in fiscal
1998 also reflected cost of sales reductions due to the utilization of an
in-house embroidery operation, which decreased unit costs of embroidery
production, and due to reduced expediting costs associated with a more effective
production scheduling. In 1998, the off-price liquidation market for apparel
experienced an oversupply while at the same time the number of large companies
dealing in liquidation apparel decreased. The combination of these factors
reduced the expected wholesale selling price of our out-of-season fashion
merchandise. The increase in inventory during fiscal year 1998 was concentrated
in the higher-risk single-season FASHION category rather than the more
predictable multi-season CLASSICS category. As a result we increased our
inventory reserve by approximately $0.4 million in fiscal 1998.
DESIGN AND PRODUCTION EXPENSES Design and production expenses increased by $0.9
million, or 68.8%, to $2.1 million in fiscal 1998 from $1.3 million in fiscal
1997 and increased as a percentage of net sales to 3.0% in fiscal 1998 from 2.7%
in fiscal 1997. The dollar increase in these expenses is primarily attributable
to increased management and staffing costs associated with expansion of the
Cutter & Buck product line and increased embroidery design costs for the golf
distribution and corporate distribution channels. The increase in design and
production costs as a percentage of net sales in fiscal 1998 compared to fiscal
1997 is primarily attributable to an increased investment in management,
staffing and systems to support the addition of a women's line as well as
increased expenses associated with efforts to further diversify our production
sourcing.
SELLING AND SHIPPING EXPENSES Selling and shipping expenses increased by $4.4
million, or 49.6%, to $13.1 million in fiscal 1998 from $8.8 million in fiscal
1997, representing 18.7% of net sales in fiscal 1998 compared to 18.8% in fiscal
1997. The dollar amount increase was primarily attributable to increased
salaries and commissions, management and marketing expenses and additional
direct overhead costs of the warehouse operation associated with increased sales
volumes and higher levels of inventory.
We increased the size of our sales force for the corporate channel to 27 sales
representatives at the end of fiscal 1998 from 19 at the end of fiscal 1997. We
also strengthened our domestic golf sales force by increasing the percentage of
employee representatives selling Cutter & Buck products exclusively as opposed
to independent, multi-line sales representatives. In fiscal 1998, we increased
the percentage of exclusive representatives within the golf sales force to 73%
from 63% in fiscal 1997. The number of sales representatives in the golf
distribution channel increased to 33 at the end of fiscal 1998 from 32 at the
end of fiscal 1997. At the beginning of fiscal 1998, we reorganized our sales
force for the specialty store channel. As of the end of fiscal 1998, we had
three regional sales representatives working in this channel and one sales
representative exclusively dedicated to the big and tall market, all under the
direction of a national sales manager for the specialty store channel.
During fiscal 1998, we purchased and installed $1.2 million of in-store
fixturing to enhance collection merchandising in 218 of our customers'
locations, reaching a total of 680 golf pro shops and specialty stores by the
end of fiscal 1998.
GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses
increased by $2.2 million, or 62.5%, to $5.7 million in fiscal 1998 from $3.5
million in fiscal 1997 and increased as a percentage of net sales to 8.2% in
16
<PAGE>
fiscal 1998 from 7.6% in fiscal 1997. The dollar amount increase during fiscal
1998 was primarily due to increased management, staffing and facilities in
support of our growth. The increased general and administrative expenses in
fiscal 1998 also reflected increased investment in systems and in professional
fees required by expanded operations and expected future growth. Finally, due to
the increase in accounts receivable balances as of April 30, 1998 as well as
amounts greater than 120 days, we reported an increased provision for bad debt
expense of $465,000 during fiscal 1998 as compared to the fiscal 1997 amount.
These additional investments and costs resulted in a moderate increase in
general and administrative expenses as a percentage of net sales for fiscal
1998.
OPERATING INCOME As a result of the above items, operating income increased by
$3.5 million, or 70.2%, to $8.5 million in fiscal 1998 from $5.0 million in
fiscal 1997 and increased as a percentage of net sales to 12.1% in fiscal 1998
from 10.7% in fiscal 1997.
FACTOR COMMISSION AND INTEREST EXPENSE, NET OF INTEREST INCOME Factor
commissions and interest expense, net of interest income decreased by $0.1
million, or 31.5%, to $0.1 million in fiscal 1998 from $0.2 million in fiscal
1997, and decreased as a percentage of net sales to 0.2% in fiscal 1998 from
0.4% of net sales in fiscal 1997. The reduction in the dollar amount is
primarily due to interest earned on invested cash and limiting factoring
services in the United States to the specialty store channel.
LICENSE AND ROYALTY INCOME, NET OF OTHER EXPENSE License and royalty income,
net of other expense decreased by $0.2 million, or 48.2%, to $0.2 million,
representing 0.3% of net sales in fiscal 1998, from $0.4 million and 0.9% of net
sales in fiscal 1997. The decline in license and royalty income in fiscal 1998
reflects our decision to directly market big and tall merchandise and terminate
our license for this category in June 1997 and our shift towards direct
international sales and exclusive distributor relationships and away from
licensing relationships. This category also includes gains and losses from
foreign currency transactions which resulted in net exchange losses of $75,000
in fiscal 1998 and $4,000 in fiscal 1997.
INCOME TAXES We recorded $2.9 million of income tax expense in fiscal 1998 and
$1.6 million in fiscal 1997. Income taxes for fiscal 1998 are at an effective
rate of 34%. In fiscal 1997, income taxes were lower than the statutory rates
primarily due to the utilization of net operating loss carryforwards, the
benefit of which had been previously reserved.
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QUARTERLY RESULTS AND SEASONALITY
Historically, we have generally experienced our lowest level of net sales in the
first and third quarters of our fiscal year, ending July 31 and January 31,
respectively. Correspondingly, our highest level of net sales are achieved in
the 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 specialty stores in the second and fourth quarters. We
recognize our revenue at the time the product is shipped to our customers. Other
factors contributing to the variability of our quarterly results include
seasonal fluctuations in consumer demand, the timing and amount of orders from
key customers, the timing and magnitude of sales of seasonal remainder
merchandise and availability of product. This pattern of sales creates seasonal
profitability and working capital financing and liquidity issues, as we
generally must finance higher levels of inventory during the first and third
quarters when net sales are lowest.
The following tables set forth certain unaudited financial data, including
percentages of net sales, for the eight quarters ended April 30, 1999.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
FISCAL 1998 QUARTER ENDED FISCAL 1999 QUARTER ENDED
---------------------------------------------- ----------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
IN THOUSANDS 1997 1997 1998 1998 1998 1998 1999 1999
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED
STATEMENTS OF INCOME
DATA:
Net sales............. $ 12,378 $ 17,349 $ 14,151 $ 26,226 $ 17,763 $ 25,993 $ 23,148 $ 40,382
Cost of sales......... 7,418 10,204 8,199 14,821 10,151 15,054 13,256 22,597
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Gross profit.......... 4,960 7,145 5,952 11,405 7,612 10,939 9,892 17,785
Operating expense:
Design and
production........ 418 605 583 514 602 859 706 748
Selling and
shipping.......... 2,685 3,196 2,945 4,303 4,024 5,296 5,398 7,615
General and
administrative.... 1,139 1,558 1,435 1,578 1,826 2,238 2,276 2,131
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Total operating
expenses...... 4,242 5,359 4,963 6,395 6,452 8,393 8,380 10,494
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Operating income...... 718 1,786 989 5,010 1,160 2,546 1,512 7,291
Other income
(expense):
Factor commission
and interest
expense, net of
interest income... (11) (41) (42) (41) 0 (46) (84) (263)
License and royalty
income, net of
other expense..... 13 15 76 108 81 94 91 134
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Total other
income
(expense)..... 2 (26) 34 67 81 48 7 (129)
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Income before income
taxes............... 720 1,760 1,023 5,077 1,241 2,594 1,519 7,162
Income taxes.......... (245) (600) (350) (1,725) (447) (930) (550) (2,581)
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Net income............ $ 475 $ 1,160 $ 673 $ 3,352 $ 794 $ 1,664 $ 969 $ 4,581
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
FISCAL 1998 QUARTER ENDED FISCAL 1999 QUARTER ENDED
---------------------------------------------- ----------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1997 1997 1998 1998 1998 1998 1999 1999
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET
SALES
CONSOLIDATED
STATEMENTS OF INCOME
DATA:
Net sales............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......... 59.9 58.8 57.9 56.5 57.1 57.9 57.3 56.0
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Gross profit.......... 40.1 41.2 42.1 43.5 42.9 42.1 42.7 44.0
Operating expenses:
Design and
production........ 3.4 3.5 4.1 2.0 3.4 3.3 3.0 1.8
Selling and
shipping.......... 21.7 18.4 20.8 16.4 22.7 20.4 23.3 18.8
General and
administrative.... 9.2 9.0 10.2 6.0 10.3 8.6 9.8 5.3
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Total operating
expenses...... 34.3 30.9 35.1 24.4 36.4 32.3 36.1 25.9
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Operating income...... 5.8 10.3 7.0 19.1 6.5 9.8 6.6 18.1
Other income
(expense):
Factor commission
and interest
expense, net of
interest income... (0.1) (0.2) (0.3) (0.1) 0.0 (0.2) (0.4) (0.7)
License and royalty
income, net of
other expense..... 0.1 0.1 0.5 0.4 0.5 0.4 0.4 0.3
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Total other
income
(expense)..... 0.0 (0.1) 0.2 0.3 0.5 0.2 0.0 (0.4)
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Income before income
taxes............... 5.8 10.2 7.2 19.4 7.0 10.0 6.6 17.7
Income taxes.......... (2.0) (3.5) (2.4) (6.6) (2.5) (3.6) (2.4) (6.4)
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
Net income............ 3.8% 6.7% 4.8% 12.8% 4.5% 6.4% 4.2% 11.3%
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
--------- ----------- ----------- --------- --------- ----------- ----------- ---------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Our primary need for funds is to finance working capital and to fund increased
investment in our in-store fixturing program and other capital expenditures.
Increased working capital requirements during the three years ended April 30,
1999 related to increasing accounts receivable and 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 1999 was $14.7 million. This
resulted primarily from increases in inventory and accounts receivable of $15.5
million and $12.6 million, respectively, which were partially offset by
profitable operations, depreciation and amortization, increases in accounts
payable and accrued liabilities and income taxes payable totaling $16.2 million.
During fiscal 1999, we purposely increased our inventory levels of CLASSICS
merchandise to support the growing on-demand requirements of the corporate
distribution channel and reorder requirements of the golf distribution channel.
Growth of CLASSICS inventory during fiscal 1999 accounted for approximately
$10.8 million, or 70.0%, of the total inventory increase of $15.5 million. We
expect to continue to build inventory levels through December 1999 as part of
our year 2000 contingency plans before beginning to work levels down during the
last four months of fiscal 2000. We had net cash provided by operations in
fiscal 1998 of $2.1 million which was achieved primarily by profitable
operations, depreciation and amortization, increases in
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<PAGE>
accounts payable and accrued liabilities and income taxes payable which were
partially offset by an increase in accounts receivable. Inventory growth during
fiscal 1998 was just 6.1% while sales increased by 50.5%.
Net cash used in investing activities was $6.7 million in fiscal 1999 and was
substantially the result of an increased investment in furniture and equipment
of $6.6 million. In fiscal 1999, net cash provided by financing activities was
$18.6 million, resulting primarily from borrowings from banks totaling $17.0
million and the issuance of common stock in connection with the exercise of
outstanding options and purchases pursuant to the employee stock purchase plan
resulting in proceeds to us of $1.8 million.
We made capital expenditures and lease purchases of $7.2 million, $3.1 million
and $2.5 million in fiscal 1999, 1998 and 1997, respectively. In fiscal 1999,
expenditures for capital assets included $1.7 million for in-store fixtures,
$1.2 million for warehouse and embroidery equipment, $1.9 million for computer
hardware and software, $0.6 million for equipment and leasehold improvements
associated with a company-owned retail specialty store, $0.8 million for
leasehold improvements and a total of $1.0 million for other furniture and
equipment. In fiscal 1998, expenditures for capital assets included $1.2 million
for in-store fixtures, $0.5 million for warehouse and embroidery equipment, $0.7
million for upgrades to computer hardware and software, $0.4 million for
leasehold improvements and a total of $0.3 million for other furniture and
equipment. In fiscal 1997, expenditures for capital assets included $1.0 million
for in-store fixtures, $0.9 million for warehouse and embroidery equipment and a
total of $0.6 million for other furniture and equipment.
Capital expenditures of $10.0 million are planned for fiscal 2000, including
amounts for in-store fixtures and concept shops; other marketing programs
including fixturing for a merchandise tent to support the golf tournament
business, a trade show booth and showroom improvements; a warehouse management
system, related equipment and leasehold improvements for a new distribution
center; equipment and leasehold improvements associated with company-owned
retail specialty stores; computer hardware, software, and furniture and office
equipment; and embroidery equipment.
We are a party to a loan agreement with Washington Mutual Bank d/b/a Western
Bank for a $40 million line of credit. Western Bank has included Bank of America
National Trust and Savings Association d/b/a Seafirst Bank in the arrangement as
a co-lender. The revolving line of credit is to be used for general corporate
purposes, without limitation, repayment of any other advances, reimbursement of
draws under letters of credit, equipment and leasehold improvements and other
corporate purposes and provides for a $25 million sublimit for direct advances.
Interest on borrowings is charged and payable monthly at either a floating rate
or the LIBOR rate plus 2%, each as defined in the loan agreement, at our
election. The line of credit is collateralized by a security interest in our
inventory, accounts receivable, furniture and equipment, contract rights, money
and other property, rents and profit including insurance proceeds, books,
records, trade secrets and other formulae 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 and a
limitation on capital expenditures.
Under our factoring agreement with Republic Business Credit Corporation,
Republic acts as the sole factor in the United States for our accounts
receivable. The factoring agreement provides that we can sell qualified accounts
receivable to Republic and Republic will pay us an amount equal to the gross
amount of our accounts receivable from customers reduced by certain offsets,
including, among other things, discounts and returns and a .95% commission
payable to Republic. Western Bank and Republic have entered into an
intercreditor agreement allocating between them priority as to our assets in
which both financial institutions have a security interest. The intercreditor
agreement between Western Bank and Republic prohibits us 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 us at any
time, provided that in each case the terminating party gives 60 days prior
written notice.
Our Dutch subsidiary, Cutter & Buck (Europe) B.V., is a party to a loan
agreement with Cooperatieve Rabobank "Huizen" B.A., or Rabobank, for a $3.4
million line of credit. The line of credit with Rabobank is to be used for
international letters of credit and working capital advances. Interest on
borrowings is charged and payable quarterly
20
<PAGE>
at a variable rate (4.45% at April 30, 1999). The line of credit is secured by
our subsidiaries' inventory in Europe, an irrevocable standby letter of credit
issued by Western Bank of $3.8 million and subordination of $2.7 million of
intercompany debt.
Commencing in fiscal 1997, we have directly managed the accounts receivable
credit and collection functions associated with our sales to the golf, corporate
and international distribution channels and have used Republic's accounts
receivable management exclusively for a portion of our sales to the specialty
store channel. We expect to terminate our factoring relationship with Republic
during fiscal 2000 and plan to continue to primarily use the Western Bank line
of credit to fund our anticipated working capital needs.
As of April 30, 1999, we had working capital lines of credit of approximately
$43.4 million and had outstanding loans in the amount of $12.1 million against
the Western Bank and Rabobank lines of credit. In addition, we had open letters
of credit in the aggregate amount of $19.3 million at April 30, 1999.
We intend to use the net proceeds of this offering to repay approximately $
million of outstanding direct advances under the Western Bank revolving credit
facility, which at June 29, 1999 was $9.5 million. By repaying this debt, we
expect to have more flexibility to aggressively pursue our growth strategy,
including opening a limited number of additional company-owned specialty retail
stores.
We believe that cash on hand and cash generated from this offering and
operations, as well as the ability to borrow under bank lines of credit will be
sufficient to meet our cash requirements in fiscal 2000. However, our capital
needs will depend on many factors, including our growth rate, the need to
finance increased production and inventory levels, the success of our various
sales and marketing programs and various other factors. Depending upon our
growth and working capital needs, we may require additional financing in the
future through debt or equity offerings, which may or may not be available or
may be dilutive. Our ability to obtain additional financing will depend on our
operations, financial condition and business prospects, as well as conditions
then prevailing in the relevant capital markets.
EURO TRANSITION
We currently have sales in all of the participating countries of the European
Economic and Monetary Union, or EMU, which have adopted the Euro as a currency.
We expect some of the non-participating European Union countries where we have
sales, such as the United Kingdom, to eventually join the EMU. Currently the
Euro is used solely for non-cash transactions. We were Euro compliant within our
accounting and business systems by December 1998 and expect to be compliant
within our other business operations prior to the introduction of the Euro bills
and coins in 2002. Currently, most of our customers have not requested dual
billing; however, we have put procedures and systems into place to perform dual
billing. We do not currently expect to experience any significant operational
disruptions or to incur any significant costs related to the phased introduction
of the Euro, including any currency risk, which could materially harm our
liquidity or capital resources.
FOREIGN CURRENCY EXCHANGE RISK
From time to time, we use derivative financial instruments to reduce our
exposure to changes in foreign exchange rates in connection with the operations
of our European subsidiaries. While these instruments are subject to risk of
loss from changes in exchange rates, those losses would generally be offset by
gains on the related exposure. We do not use derivative financial instruments
for speculative or trading purposes. We reduce the risks associated with changes
in foreign currency rates by entering into forward contracts and purchase
options to hedge accounts receivable denominated in non-Euro currencies and to
hedge expected payments for product purchases not denominated in Euro. Gains and
losses on contracts which hedge specific foreign currency denominated
commitments are recognized in the period in which the transaction is completed.
In fiscal 1999 we incurred a net foreign exchange transaction gain of $19,000
compared to a net transaction loss of $75,000 during fiscal 1998.
The fair value of foreign exchange forward contracts is based on quoted market
prices. At April 30, 1999 we held forward contracts to deliver approximately
$714,000 in foreign currencies with maturities of up to 120 days. At
21
<PAGE>
April 30, 1999 the fair value of the forward contracts exceeded the cost by
approximately $41,000. To the extent we have assets and liabilities denominated
in foreign currencies that are not hedged, we are subject to foreign currency
transaction gains and losses.
YEAR 2000
We recognize the need to ensure that our systems, applications and hardware will
recognize and process transactions for the year 2000 and beyond. We have
developed and are implementing a company-wide plan which includes identifying
all significant issues related to the impact of year 2000 on our internal
systems, testing these systems and addressing deficiencies before October 31,
1999. We expect to successfully implement the systems and programming changes
necessary to address year 2000 issues with respect to our internal systems and
believe that the total cost of such actions will not exceed $100,000. We
estimate we are approximately 90% complete with this effort and all costs
incurred to date have been expensed. Due to the nature of our business, our
operations generally do not include significant systems relying on embedded
technology such as microcontrollers which are difficult to evaluate and repair.
We have a fully integrated, real-time management information system specifically
designed for the apparel industry. The system runs on IBM's RISC 6000 hardware
with an AIX operating system. We have received assurances from the vendors for
these systems that they are year 2000 compliant. We are completing testing
programs for both systems to verify compliance and will complete this testing by
the end of June 1999. In the event these systems fail the testing program, our
existing information technology staff will arrange for the assistance of outside
professionals to remedy the deficiencies. Although we are not presently aware of
any material operational issues or costs associated with preparing our internal
systems for the year 2000, there can be no assurance that there will not be a
delay in, or increased costs associated with, the implementation of the
necessary systems and changes to address all year 2000 issues.
We are in the process of identifying and working with our significant suppliers,
customers and financial institutions to ensure that those parties have
appropriate plans to remedy year 2000 issues when their systems may affect our
systems or otherwise impact operations. We have received assurances from the
majority of our significant suppliers, but cannot definitively determine that
all major suppliers will reach a year 2000-ready status that will ensure no
disruption of business. Although we have no reason to conclude that any specific
supplier represents a risk, the most reasonably likely worst-case scenario would
entail production disruption due to the inability of a number of our suppliers
to obtain raw materials or components, or encounter transportation or
communications problems affecting delivery of products to us. We are unable to
quantify such a scenario, but it could potentially materially harm our results
of our operations, liquidity or financial position. Our contingency plans for
suppliers and systems, which are still being developed, include increasing
inventory levels before January 1, 2000.
22
<PAGE>
BUSINESS
OVERVIEW
We design and market distinctive upscale sportswear and outerwear under the
Cutter & Buck brand. We sell our products primarily through golf pro shops and
resorts, corporate sales accounts and better specialty stores. Our goal is to
become one of the most recognized and respected brands of sportswear and
outerwear in the world. Our products feature distinctive, comfortable designs
and rich detailing and predominantly utilize natural fiber textiles. We
merchandise our products as lifestyle collections targeted to men and women who
seek classic American styles inspired by golf and our Pacific Northwest
heritage. In addition to the growing national interest in the game of golf, we
benefit from the trend toward casual dress in the workplace. We have grown net
sales from $13.4 million in fiscal 1995 to $107.3 million in fiscal 1999 and net
income from $239,000 in fiscal 1995 to $8.0 million in fiscal 1999.
COMPANY STRENGTHS
We believe that the following strengths have contributed to our success and
provide us with a competitive advantage:
- DISTINCTIVE, QUALITY PRODUCTS Our garments feature comfort, high-quality
materials and manufacturing and original Cutter & Buck designs. We use
fine-gauge combed cotton, virgin wools and performance microfibers, with
unique trims, distinctive colors and special fabric finishes. Each season,
we source new fabrications from our worldwide sourcing partners and
introduce new collections unique to our industry.
- UPSCALE BRAND IDENTITY Cutter & Buck is a nationally recognized premium
lifestyle brand, built on quality products and strong imagery. Our
marketing themes revolve around golf, tennis, fly fishing and other
sporting pursuits appealing to many of our target customers. We reinforce
our upscale brand image at the store level with specialized fixturing that
presents our lines as distinctive collections.
- SELECTIVE DISTRIBUTION STRATEGY To protect the integrity of the Cutter &
Buck brand and ensure a high level of customer service, we predominantly
distribute our products through golf pro shops and resorts, corporate
sales accounts and better specialty stores, including our company-owned
retail store in Seattle, Washington. We believe that these channels
complement one another, since they target a similar consumer base and use
similar merchandising and pricing practices that generally feature Cutter
& Buck as a leading premium apparel brand.
- DEDICATED SALES FORCE As our account base and sales have grown, so has the
size and exclusivity of our sales force. As of June 15, 1999, we employ
112 domestic and international salespeople who present seasonal
collections to buyers, design in-store fixturing and merchandising with
store owners and service accounts year round. We believe that our business
is relationship-driven and having our own sales force enables us to grow
in partnership with our accounts.
- STRONG OPERATIONAL SKILLS One of our competitive strengths is our ability
to manage a highly complex business. We create new collections twice a
year, source hundreds of individual products annually from a total of 35
factories in 13 different countries and sell to approximately 7,500
accounts worldwide. Our management team comprises apparel industry
veterans in design, merchandising, manufacturing, marketing, sales and
distribution. Our infrastructure has been carefully developed to meet the
needs of customers in every market we serve.
GROWTH STRATEGY
We intend to enhance our reputation as a leading, premium sportswear and
outerwear brand in the men's and women's casual apparel market and to continue
our strong and profitable sales growth in all of our selected distribution
channels. Key elements of our growth strategy include:
- GOLF PRO SHOPS AND RESORTS We sell products to approximately 3,800 of the
estimated 15,000 golf pro shops in the United States. We intend to
continue our strategy of selectively growing the number of accounts we
serve by focusing on the approximately 5,200 golf courses that sell high
quality apparel and that have greens
23
<PAGE>
fees which are $30 per round or higher. We also intend to grow our average
order size per account as our fixturing program extends to more shops, our
women's line and other product extensions become a larger part of our
sales and our brand recognition increases. With over 400 new golf courses
being built every year in the United States, we believe our core channel
of distribution is growing.
- CORPORATE ACCOUNTS Many corporations around the world choose Cutter & Buck
for their sportswear needs due to our strong brand recognition in golf pro
shops and resorts and in better specialty stores. These needs include
apparel for company outings, special awards and other non-traditional
marketing programs. Corporate sales represent the fastest growing area of
our business, and we intend to grow this segment by broadening our target
base of companies directly and through third party relationships with
promotional products companies. We service our corporate accounts with a
dedicated sales force, in-house embroidery expertise and a substantial
investment in our CLASSICS inventory to facilitate responsiveness to
customer requests.
- BETTER SPECIALTY STORES We currently sell our products to approximately
750 of the 3,500 better speciality store accounts that we believe are
suitable Cutter & Buck customers. We believe our penetration of this
channel is well below the brand's long-term potential. Due to our careful
distribution strategy, our products are desired by specialty stores
seeking to differentiate themselves from broadline department stores. To
service these customers, we have hired additional sales representatives
and have recently opened showrooms in apparel centers in Dallas, San
Antonio and Atlanta and expanded our New York showroom. We believe that we
will become an increasingly important resource to these stores as our
brand awareness grows and our women's line gains acceptance.
- INTERNATIONAL MARKETS International markets are receptive to American
lifestyle apparel brands. We believe we can emulate the success of our
domestic distribution strategy in Europe and in other foreign markets. We
service most of our international markets through distributors and
licensees. However, we have set up wholly-owned subsidiaries in Europe in
recognition of the potential of the European market and to better control
the growth of our distinctive U.S. lifestyle brand in this region.
- RETAIL We opened our flagship store in October 1998 in Seattle,
Washington. The 3,300 square foot store offers a compelling assortment of
our products to the upscale casual wear consumer in a relaxed, friendly
environment. The store showcases our men's, women's and footwear
collections as well as tournament-licensed Cutter & Buck merchandise from
the U. S. Open, PGA Championship and Ryder Cup. We believe that there are
opportunities for Cutter & Buck stores in a number of metropolitan markets
in the United States. Accordingly, we will seek to open a limited number
of additional stores in fiscal 2000 and beyond. While providing another
channel of distribution, our stores will also showcase the Cutter & Buck
brand to a wider audience.
- WOMEN'S WEAR AND NEW PRODUCT EXTENSIONS We introduced our women's wear
line in summer 1998. We believe that we can make women's wear an important
part of our growth strategy in all of our distribution channels. For fall
1999, we offered 290 women's FASHION style/colorways. In our fall 2000
line to be released in July 1999, we will offer 621 women's FASHION
style/colorways. To support this effort, we employ a separate women's
merchandise and design team and have established an exclusive sales force
to sell our women's apparel products to specialty retail stores. In June
1999, we shipped our first men's and women's golf shoes to golf pro shops
and resorts. We believe that this category and others, such as casual
footwear, weekend luggage, small leather goods and headwear represent
product extensions that could augment our Cutter & Buck lifestyle brand
and lead to additional revenues within our existing distribution channels.
MARKET
According to industry estimates, net sales of apparel at retail were $177
billion in 1998, with $54.3 billion and $92.6 billion spent on men's and women's
apparel, respectively. 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. For example, according to industry estimates, between
1996 and 1998 sales of men's and women's apparel grew
24
<PAGE>
10.0% and 8.9%, respectively, while we estimate that our segments of those
markets grew by 14.7% and 17.2% over the same period.
Our target consumers are sports-minded professional men and women who like
casual, high-quality and distinctively styled apparel that reflects an active
lifestyle. Since we believe that many of these busy professionals prefer to
spend their limited free time pursuing sports and recreational activities, we
have developed our distribution strategy to ensure that our products are
available in these locations, as well as selected traditional retail outlets.
PRODUCTS
We design industry-leading products in-house which feature high-quality
materials, such as fine-gauge combed cotton, virgin wools and performance
microfibers and are finished with unique trims, special fabric finishes and
washes and extra needlework. They are manufactured in factories selected for
their ability to ensure quality in the production process.
Our designs incorporate distinctive, clear colors and are merchandised as color-
and design-coordinated collections rather than isolated categories. We offer two
collections a year, spring and fall, composed of a FASHION line and a
complementary CLASSICS line. CLASSICS are predominantly solid-color garments
with multi-season appeal. We rely on the styling, detailing, color and quality
of our fabrics to distinguish our CLASSICS products from competitive products.
We generally price our CLASSICS at levels lower than our FASHION line, which
permits our customers to offer Cutter & Buck products at a range of price
points. Higher per-item volumes for CLASSICS products allow us to achieve
production efficiencies and lower costs. CLASSICS products are sold throughout
the year through all of our distribution channels. CLASSICS products represent a
majority of sales through the corporate channel.
Our FASHION products incorporate the latest innovations in color, fabric and
styling and tend to remain in the line for only one season. We develop
proprietary fabrications, artwork for our complex prints and distinctive trim
components in cooperation with experienced sources worldwide. FASHION products
currently represent a majority of sales in both the golf and specialty channels.
We present each season's collections to our customers in several groups of
distinct, coordinated merchandise. These groups are available for delivery to
customers during sequential time periods, typically from May to October for fall
collections and from November to April for spring collections.
Customer-initiated product reorders can often extend the delivery period for a
season by up to three months. The product mix changes seasonally, including, for
example, more sweater styles in fall collections and more short-sleeve shirts in
spring collections. Our ability to offer merchandise collections is a strategic
advantage since our 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 our products that are shipped to the golf
distribution channel are embroidered with golf club names or logos. Sales to the
corporate channel also involve embroidery of corporate logos. In all cases, the
Cutter & Buck logo is also featured on the garment. We have established an
in-house embroidery operation to reduce costs, shorten delivery time and enhance
quality control of our embroidered products.
PRODUCT DEVELOPMENT AND SOURCING
Updated traditional sportswear and outerwear for men and women is an established
and growing category within the apparel field. Changes of color, fabric and body
shapes in this category tend to be gradual, thereby allowing our product
development team to evolve, rather than re-invent, the product lines each
season. This provides stability in the design environment and consistency in our
product offerings.
Our experienced product development team, comprising various executive officers
and our design staff, determines product strategy, color and fabric selection
and assortment of styles for each season's collections, which is accomplished
through a series of meetings occurring over a three- to four-month period. Due
to the length of our production and sales cycles, we generally strive to
complete the design process and place orders for product samples at least 10 to
14 months prior to the first delivery of products to our customers.
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The design staff is responsible for creating innovative products for our two
seasonal collections. During the design process, our manufacturing sources
develop new seasonal textiles in association with the design team. This enables
us to source a wide variety of textile and printed artwork designs, many of
which we acquire for our exclusive use. Our partnerships with our key suppliers
have enhanced our ability to develop distinctive and innovative apparel.
Currently, we source our production through factories in Asia, North and South
America and in Turkey and do not have formal long-term contracts with any of our
suppliers or agents.
Our in-house embroidery operation substantially reduces our reliance on
independent embroiderers. This operation reduces costs, shortens delivery time
and enhances quality control of our embroidered products. We currently contract
with eight independent domestic embroiderers during peak embroidery production
and shipping periods. Our in-house embroidery manufacturing operation handled
approximately 87% of the embroidered logo requirements of our golf pro shop and
corporate customers in fiscal 1999.
DISTRIBUTION AND SALES
Our products are distributed in the United States primarily through three
channels: golf pro shops and resorts, corporate sales accounts and better
specialty stores. Each of these channels sells CLASSICS and FASHION products
from our seasonal collections. We believe that these channels are complementary,
since they have compatible merchandising and pricing practices and broaden the
awareness and reach of the Cutter & Buck brand among our target consumers, many
of whom tend to shop in more than one channel. For example, many of our
corporate sales leads come through corporate executives who have purchased our
products at golf pro shops and resorts.
DOMESTIC We sell to golf pro shops and resorts primarily through an exclusive
sales force. At the end of fiscal 1999, our exclusive golf sales force was
composed of 36 Cutter & Buck field sales representatives. We also employed 28
sales representatives who sell to major corporations, either directly or through
promotional products companies, and four additional sales representatives who
sell to better specialty stores, college bookstores and the big and tall market.
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. Sales
representatives present our collections each season at national and regional
trade shows and at customers' stores through pictorial workbooks, looseleaf
promotional materials and full sample lines. In addition to their other
responsibilities, these sales representatives implement our merchandise
fixturing program with suitable golf pro shops, resorts and specialty stores.
INTERNATIONAL We have subsidiaries in the Netherlands, Germany and the United
Kingdom for the purpose of marketing and selling our products in Europe. In
addition, we have two to five year renewable contracts with international
distributors to sell our products in Australia, New Zealand, the Philippines,
Greece, Cyprus, the United Arab Emirates, Saudi Arabia, Bahrain, Qatar, Kuwait
and Oman. These distributors purchase our products at reduced cost for resale to
their respective retail customers. The products offered for distribution in
these territories are identical to the products offered in the United States and
these distributors often use our marketing technique of offering the products in
collections.
We also have licensees that have contracted for the right to manufacture and
market Cutter & Buck designs in specified international markets, including Hong
Kong, China and Canada. Cutter & Buck license agreements generally provide for
three-year terms and provide for royalties as a percentage of net sales. Most
agreements contain annual royalty minimums, and all agreements give us final
control over product design and quality. These licensing arrangements enable us
to broaden the geographic distribution and type of products bearing the Cutter &
Buck name in a cost-effective manner.
DISTRIBUTION CENTER
We established our in-house distribution center in May 1996, prior to which we
relied upon third party contract warehouse services. This change in operating
strategy was designed to improve efficiency, shorten order cycle time and
provide greater flexibility. Our distribution services are currently conducted
out of three separate facilities located in Seattle, Washington. Our existing
operations rely upon primarily manual systems and procedures. In order to
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manage our planned growth and enhance the effectiveness of our distribution
service, we are planning to consolidate all of our current operations into a new
facility in the greater Seattle area. This relocation is planned for a
seasonally slow period in December 1999 to minimize disruption. The construction
contracts include penalties should the contractors fail to meet their completion
schedules. In conjunction with the move, we are installing a warehouse
management system and bar-code tracking software. With the implementation of
this system, our goal is to realize improved effectiveness in such areas as
inventory management, order fulfillment and cost control. We also believe that
the benefits of our investment in the new distribution center facility and
warehouse management system will enable us to provide better customer service
and support planned growth.
RETAIL OPERATIONS
We opened our flagship store in October 1998 in Seattle, Washington and plan to
open a limited number of additional stores in selected urban areas across the
country. The Seattle store showcases the men's, women's and footwear collections
as well as tournament-licensed Cutter & Buck merchandise from the U.S. Open, PGA
Championship and Ryder Cup. We believe the store's environment evokes the casual
sporting atmosphere of an upscale golf clubhouse, complete with historic photos
and antique sporting equipment. Collections of business casual dress for men,
upscale weekend wear for women and golf wear for both are displayed on tables
and in wall units in the 3,300 square foot store. We believe that the store
offers a compelling assortment of our products to the upscale casual wear
consumer in a relaxed, friendly environment.
Our stores will provide opportunities for introducing the Cutter & Buck brand to
a wider audience not previously familiar with our full range of products due to
the relatively small size of most golf pro shops and specialty stores. We
believe that there are opportunities for Cutter & Buck stores in a number of
large urban areas across the United States. Accordingly, we will seek to open a
limited number of additional stores in fiscal 2000 and beyond. We are currently
examining locations for additional stores throughout the United States. We will
seek store locations within premier malls and shopping centers and also in close
proximity to other upscale retailers who serve our target customers. We
anticipate our typical retail location will be approximately 4,000 square feet
and will contain the same merchandise mix as our Seattle store.
MARKETING AND MERCHANDISING
We portray our brand image of an American sporting lifestyle by creating
seasonal merchandise collections that are theme- and color-related. Themes we
commonly use in marketing are golf, tennis, fly fishing and other sporting
activities which reinforce our image. We believe that, by featuring these sports
and leisure activities, our products will appeal not only to participants, but
also to those who identify with this type of lifestyle. Our name or logo is
generally featured prominently on our products and displays to reinforce the
Cutter & Buck brand in the mind of the consumer.
We currently advertise in national and regional trade magazines and produce
photographic renditions of our new product lines for national distribution to
existing wholesale customers. We also produce a catalog of our CLASSICS products
to be viewed by wholesale customers for in-stock reordering purposes. In
addition, we have an Internet home page on the World Wide Web at
http://www.cutterbuck.com, where we provide information and pictures of our
products and respond to inquiries from customers and consumers. We have recently
hired an experienced e-commerce professional to coordinate our efforts in that
regard. This individual will fill the newly-created position of Director of
E-Business Development. We believe that we can accelerate brand recognition
through increased expenditures of targeted magazine advertising and
point-of-sale promotions, and we are planning increased investment in direct
consumer marketing campaigns, including print advertisements in regional and
national general interest publications.
Our merchandise is sold and shipped to customers in collection groups in order
to reinforce the overall conceptual strength of our product offerings. Our
distinctive in-store fixturing program showcases these collections and enhances
our brand image at the point of sale. The fixtures are designed to display
assorted elements of our collections and allow the consumer to easily assemble
and purchase coordinated outfits of shirts, pants, shorts, sweaters, sweatshirts
and outerwear. We also offer customers display mannequins, logo signage and
antique sporting props in order to
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complement the fixturing and create an environment that enhances the Cutter &
Buck brand image. In fiscal 1998, we initiated our first concept shop
partnership, an extension of our fixturing program, which we offer to our
higher-end, potentially best-performing golf pro shops and resort customers on a
very selective basis. As of April 30, 1999, we had 26 concept shops. We expect
to open an additional 32 concept shops by the end of fiscal 2000. In a concept
shop partnership, we team with customers that meet a higher minimum order
requirement who provide the square footage and certain construction costs while
we provide shop design, custom made display cabinets and high quality fixtures
to create a shop within a shop environment dedicated exclusively to Cutter &
Buck merchandise.
To address the special needs of pro shops, tournament organizers and corporate
customers we have developed an in-house embroidery service and also work with
independent embroiderers to embroider the customer's name or logo on our
garments. The customary placement of the Cutter & Buck logo on the sleeve, cuff,
or on the back of the garment allows us to accommodate more easily the desire of
pro shops, tournaments and corporations to have their name or logo embroidered
on the garment's left chest.
INFORMATION SYSTEMS
In addition to the computer-aided design system used by the product development
team, we have a fully integrated, real-time management information system that
is specifically designed for the wholesale 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 our production personnel,
sales are tracked by the Vice President of Merchandise and Design in order to
compare purchases against availability, thereby allowing us to react quickly to
changes and trends. We also have a remote-order entry system for our sales
force, on which they can daily monitor and reserve inventory of every style.
Customer service personnel receive this information daily and have access to
real-time inventory availability.
This comprehensive information system serves users in each of our operating
areas, 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. Our
information system also provides detailed product gross margin information that
assists us in managing product profitability. The system runs on IBM's RISC 6000
hardware with an AIX operating system, which allows for the fast processing of
critical information, and has the capability of serving a much greater number of
users as we grow. During fiscal 1999, we installed a multi-currency version of
the same real-time management systems at our wholly-owned subsidiary located in
the Netherlands. During fiscal 2000, we plan to implement a relational database
component to our management information system to allow us to create specialized
management reports.
In fiscal 2000, we plan to install a warehouse management system specifically
designed for the apparel industry. This system provides a wide variety of
modular applications that can be added as the needs of our distribution center
operations evolve. We plan to install the following system components:
- A radio frequency hardware server to support bar coding to track the
real-time movement of inventory from receiving, order picking embroidery
production, order packing and order shipment,
- A cycle counting inventory management module,
- An automated customer return authorization and receiving control system,
and
- Automated tools to support our distribution center employee productivity
and accuracy. This system was designed for and runs on an IBM AS/400
platform.
In addition, in fiscal 2000, we plan to install an integrated retail management
and point of sale system. The purpose of this investment is to provide daily
information to control our planned investment in the testing of additional
Cutter & Buck owned retail stores. In order to meet Cutter & Buck's retail
management needs, we will be investing in a system that addresses sales tracking
and management, profitability, inventory management, merchandising and financial
controls and reporting.
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ORDER BOOKING CYCLE AND BACKLOG
We receive our orders for a season over a 10-month period beginning when samples
are first shown to customers and continuing into the season. We begin to take
orders for our fall collections in January, generally for delivery between May
and October and for our spring collection in July, generally for delivery
between November and April. Our domestic backlog, which consists of open,
unfilled customer orders from the golf and specialty store distribution
channels, was approximately $22.1 million as of April 30, 1999. We expect to
fill between 90% and 95% of those orders. For various reasons endemic to the
apparel industry, including occasional sold out inventory positions, credit
issues and other customer-related issues, we typically do not expect to ship all
of our backlog. Backlog is generally shipped within nine months.
COMPETITION
The sportswear segment of the apparel industry is highly competitive. Although
our primary distribution channel, golf pro shops, is highly fragmented, with no
single brand representing more than 10% of the market, we encounter substantial
competition from Ashworth, Izod Club and Polo/Ralph Lauren. In addition, we face
substantial competition in our other channels, other similar apparel companies
and distributors of promotional products and apparel and, specifically in the
corporate distribution channel, from Gear for Sport. We believe that our ability
to compete effectively is based primarily on product differentiation, product
quality, production flexibility and distribution capabilities, all of which
enhance our brand.
TRADEMARKS
Cutter & Buck and the Cutter & Buck pennant logo are our trademarks and are
registered for use on apparel and other products in over 30 countries, including
the United States. We also have applied for registration in a number of other
countries. Our name and logo are regarded as valuable assets and critical to
marketing our products. Leading brands in the apparel industry have historically
been subject to competition from imitators that infringe the trademarks and
trade dress of the brand. Although we have not been materially harmed from
infringement of our trademarks or trade dress, we have experienced some
instances of such infringement and have taken actions to protect our rights.
EMPLOYEES
As of April 30, 1999 we had 429 full time and 64 part time employees, of whom 37
were primarily engaged in administration and finance, 87 in sales, 12 in
production, 17 in design, 25 in customer service, 4 in marketing, 18 in
embroidery development, 15 in retail, 161 in embroidery operations and 117 in
distribution. None of our employees is a member of a union. We consider our
relations with our employees to be excellent.
At our wholly-owned subsidiaries we employed 23 employees as of April 30, 1999,
six of whom were in finance and administration, seven in sales, five in customer
service and five in operations.
LITIGATION
We have been named as a defendant in two lawsuits related to our sourcing of
garments manufactured in Saipan. The first, Does v. The Gap, Inc., et al., was
filed in Federal District Court in Los Angeles on behalf of an alleged class of
garment factory workers located in Saipan, and generally alleges that the
defendants have conspired to control unlawful "sweatshop" conditions
constituting peonage and involuntary servitude. The plaintiffs in this action
generally seek an order enjoining defendants from continuing to manufacture
garments under the alleged "sweatshop" conditions, establishment of a monitoring
program and imposition of an asset freeze or constructive trust, and punitive as
well as treble, special and compensatory damages in unspecified amounts. The
second, UNITE v. The Gap, Inc., et al., was filed in Superior Court in San
Francisco, California, by a union and three public interest groups, and
generally alleges that the defendants engaged in various unlawful business acts
and practices. The plaintiffs in this action generally seek an order restraining
the defendants from engaging in the allegedly unfair business acts and
practices, requiring a corrective advertising campaign or monitoring program,
imposition of an asset
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freeze or constructive trust, payment of restitution and disgorgement of profits
from engaging in the allegedly unlawful business acts and practices in
unspecified amounts. In the federal action, all of the defendants including
Cutter & Buck have filed motions to transfer the venue of that case to Saipan.
That motion is noted for consideration on July 12, 1999. The retailer or buyer
defendants including Cutter & Buck have responded to written interrogatories
concerning witnesses and documents that relate to the Saipan garment business.
The retailer or buyer defendants including Cutter & Buck also have submitted a
motion to dismiss all of the causes of action in the federal action, other than
the claim for false imprisonment, on the grounds that the allegations of the
complaint fail to state a claim upon which relief can be granted. In addition,
the defendants in the state action including Cutter & Buck have filed a demurrer
(motion to dismiss the claims asserted in that lawsuit). The hearing on that
motion is scheduled for August 6, 1999. Although we intend to vigorously defend
ourself, these lawsuits are subject to many uncertainties and we are not able to
make a determination of the ultimate exposure with respect to these matters. As
a result, there can be no assurance that these lawsuits will not materially harm
our business, financial condition or operating results.
We are also a party to routine litigation incidental to our business. Management
believes the ultimate resolution of these routine matters will not materially
harm our business, financial condition or operating results.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Cutter & Buck are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
NAME AGE POSITION
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Harvey N. Jones(1) 48 Chairman and Chief Executive Officer
Martin J. Marks 50 President, Chief Operating Officer, Treasurer, Secretary
and Director
Jim C. McGehee 49 Vice President of Sales
Patricia A. Nugent 44 Vice President of Merchandise and Design
Jon P. Runkel 42 Vice President of Production
Philip C. Davis 41 Vice President of Operations
Philip B. Jones 46 Vice President of International/Managing Director of
Cutter & Buck (Europe) B.V.
Stephen S. Lowber 48 Vice President and Chief Financial Officer
Jeffrey S. Buchman 51 Vice President of Marketing and Communications
Michael S. Brownfield(1)(3) 59 Director
Frances M. Conley(1)(2)(3) 56 Director
Larry C. Mounger(2)(3) 61 Director
James C. Towne(2) 56 Director
</TABLE>
- ------------------------
(1) Member of the Nominating Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
HARVEY N. JONES has been Chief Executive Officer and a director of Cutter & Buck
since its inception in January 1990 and has been Chairman of the Board of
Directors since 1997.
MARTIN J. MARKS, President, Chief Operating Officer, Treasurer, Secretary and a
director of Cutter & Buck, joined Cutter & Buck as Chief Financial Officer in
January 1991. Prior to being named President in 1997, he held the position of
Senior Vice President. Mr. Marks has a bachelor's degree in business
administration from Portland State University.
JIM C. MCGEHEE, Vice President of Sales, joined Cutter & Buck in February 1990.
Mr. McGehee has a bachelor's degree in business (marketing) from Auburn
University.
PATRICIA A. NUGENT, Vice President of Merchandise and Design, joined Cutter &
Buck in December 1993 and served as Vice President of Production from April 1994
to April 1996. Beginning her career at Roffe/Demetre, she has experience
merchandising, designing, sourcing and in the technical aspects of apparel with
leading brands in men's and women's sportswear, activewear (golf, tennis,
running and skiing), outerwear and accessories. Ms. Nugent has a bachelor's
degree in Clothing and Textile Design from the University of Washington and a
design certificate from the Modeschule der StadtWien in Vienna, Austria.
JON P. RUNKEL, Vice President of Production, joined Cutter & Buck in April 1995
and served as Operations Manager from April 1995 to April 1996. From October
1994 to April 1995, he was a production manager of Organik Technologies, Inc.,
an apparel manufacturer, producing contract work for such names as Patagonia,
Eddie Bauer, Timberland and Jantzen, and from March 1993 to September 1994, he
was a consultant on operations and production for Susan Barry Designs, a women's
line.
PHILIP C. DAVIS, Vice President of Operations, joined Cutter & Buck in January
1997. From 1987 to 1996, he held various positions at Stusser Electric, an
electrical parts distribution company, including president from 1994 to 1996.
Mr. Davis has a bachelor's degree in economics from Stanford University.
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PHILIP B. JONES, Vice President of International / Managing Director of Cutter &
Buck (Europe) B.V., joined Cutter & Buck in July 1997. From 1989 to June 1997,
Mr. Jones was an independent international trade consultant serving certain
major U.S. companies. Mr. Jones holds a bachelor's degree in East Asian studies
from Harvard University.
STEPHEN S. LOWBER, Vice President and Chief Financial Officer, joined Cutter &
Buck in September 1997. From April 1992 to June 1997, Mr. Lowber was Chief
Financial Officer of LUXAR Corporation, a medical devices manufacturing company.
Mr. Lowber has a bachelor's degree in accounting from Western Washington
University and a master's degree in business administration from Seattle
University, and he is a certified public accountant.
JEFFREY S. BUCHMAN, Vice President of Marketing & Communications, joined Cutter
& Buck in July 1998. From 1974 to June 1998, Mr. Buchman was a faculty member at
The Fashion Institute of Technology, most recently serving as the Chairman of
the Advertising and Marketing Communications Department. From 1986 to 1998, he
also served as the president of The Telefashion Group, a provider of marketing
and communications consulting services. Mr. Buchman has a bachelor's degree in
English from the State University of New York at Buffalo and a master's degree
in communications management from Brooklyn College.
MICHAEL S. BROWNFIELD has been a director of Cutter & Buck since May 1995. He is
a private investor and has a bachelor's degree in chemistry from the University
of Oregon. Mr. Brownfield is the Chairman of Accurate Molded Plastics, a private
manufacturer of tooling and injection-molded plastics, and also serves on the
boards of directors of Heartsmart, Inc., a private biomedical company, Northwest
Cascade, Inc., a private construction company, Kitsap Entertainment Corporation,
a private restaurant franchisee, and Global Tel Resources, Inc., a private
telecommunications company.
FRANCES M. CONLEY has been a director of Cutter & Buck since July 1990. Since
1982, she has been a shareholder, director and principal of Roanoke Capital,
Ltd., the general partner of Roanoke Investors' Limited Partnership, a venture
capital limited partnership. She has a bachelor's degree in music from Emmanuel
College and a master's degree in business administration from the Harvard
Graduate School of Business Administration. Ms. Conley is a director of
Recreation Equipment Inc., a private national retailer of outdoor gear and
clothing.
LARRY C. MOUNGER has been a director of Cutter & Buck since July 1990. Since
1997, he has been Chairman and Chief Executive Officer of Sunrise Clothing,
Inc., a screen printing company. From January 1993 to October 1995, he served as
President, Chief Executive Officer and a director of Sun Sportswear, Inc., a
publicly held garment screenprinter. He has a bachelor's degree in business
administration and a juris doctor degree from the University of Washington.
JAMES C. TOWNE has been a director of Cutter & Buck since 1997. Mr. Towne has
been Chairman of Greenfield Development Corporation, a remediation and
development company since 1995. From 1982 to 1995, he was President, CEO or
Chairman of various companies, including Osteo Sciences Corporation, Photon
Kinetics, Inc., MCV Corporation, Metheus Corporation and Microsoft Corporation.
Mr. Towne also serves on the board of directors of Tully's Coffee Co., a private
specialty coffee retailer. He has a bachelor's degree in economics and a
master's degree in business administration from Stanford University.
In addition, we have recently hired John W. Leech who will be our new Vice
President and Chief Information Officer. Mr. Leech will commence employment with
us on July 26, 1999.
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DESCRIPTION OF CAPITAL STOCK
Our restated articles of incorporation authorize us to issue up to 25,000,000
shares of common stock, no par value per share and 6,000,000 shares of preferred
stock, no par value per share. The following summary of certain provisions of
the common stock and preferred stock is not complete and may not contain all the
information you should consider before investing in the common stock. You should
read carefully our restated articles of incorporation, which are included as an
exhibit to the registration statement, of which this prospectus is a part.
COMMON STOCK
As of April 30, 1999 there were 8,312,236 shares of common stock outstanding
held of record by 185 shareholders. Following this offering, there will be
10,012,236 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options. The
holders of common stock are entitled to one vote per share on all matters to be
voted on by the shareholders. Subject to preferences of any outstanding shares
of preferred stock, the holders of common stock are entitled to receive ratably
any dividends the board of directors declares out of funds legally available for
the payment of dividends. We have not paid any cash dividends since our
inception. If Cutter & Buck is liquidated, dissolved or wound up, the holders of
common stock are entitled to share pro rata all assets remaining after payment
of liabilities and liquidation preferences of any outstanding shares of
preferred stock. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable and the shares of common stock
to be issued following this offering will be fully paid and nonassessable.
PREFERRED STOCK
The board of directors, without shareholder approval, can issue preferred stock
with voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of common stock. Preferred stock could
thus be issued quickly with terms that could delay or prevent a change in
control of Cutter & Buck or make removal of management more difficult.
Additionally, the issuance of preferred stock may decrease the market price of
the common stock and may adversely affect the voting and other rights of the
holders of common stock. We currently have no plans to issue any preferred
stock.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR RESTATED ARTICLES, BYLAWS AND
SHAREHOLDER RIGHTS PLAN
As noted above, our board of directors, without shareholder approval, has the
authority under our restated articles of incorporation to issue preferred stock
with rights superior to the rights of the holders of common stock. As a result,
preferred stock could be issued quickly and easily, could adversely affect the
rights of holders of common stock and could be issued with terms calculated to
delay or prevent a change in control of Cutter & Buck or make removal of
management more difficult.
ELECTION AND REMOVAL OF DIRECTORS Our restated articles of incorporation
provide for the division of our board of directors into three classes, as nearly
as equal in number as possible, with the directors in each class serving for a
three-year term and one class being elected each year by our shareholders.
Because this system of electing and removing directors generally makes it more
difficult for shareholders to replace a majority of the board of directors, it
may tend to discourage a third party from making a tender offer or otherwise
attempting to gain control of Cutter & Buck and may maintain the incumbency of
the board of directors.
SHAREHOLDER MEETINGS Under our bylaws, our shareholders may call a special
meeting only upon the request of holders of at least 30% of the outstanding
shares. Additionally, the board of directors and the president may call special
meetings of shareholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF SHAREHOLDER NOMINATIONS AND
PROPOSALS Our bylaws establish advance notice procedures with respect to
shareholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee thereof.
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SHAREHOLDER RIGHTS PLAN We are a party to a Shareholder Rights Plan, referred
to as the Rights Plan, between us and ChaseMellon Shareholder Services, as
rights agent. Under the Rights Plan, the board of directors declared and
distributed to our shareholders a dividend of one right, each referred to as a
Right, for each outstanding share of common stock. Shares of common stock issued
in the offering, assuming no triggering event, automatically receive the Rights.
The Rights are not exercisable or transferable separately from shares of common
stock until the earlier of: (1) 10 days following a public announcement that a
person or group has acquired, or obtained the right to acquire, beneficial
ownership of the outstanding shares of the common stock and (2) 10 business days
following the commencement or announcement of an intention to make a tender or
exchange offer that would result in an acquiring person or group beneficially
owning a designated percentage of outstanding shares of common stock, unless the
board of directors sets a later date, referred to as the Distribution Date. The
board of directors has the option to redeem the Rights at a nominal cost or
prevent the Rights from being triggered by designating offers for all
outstanding common stock as a permitted offer. We may redeem the Rights during
the initial 180 days after a triggering event generally only by a majority of
directors who are directors before any person or group obtains or acquires the
right to acquire a designated percentage of outstanding shares of common stock.
Prior to the Distribution Date, we are able to amend or supplement the Rights
Plan without the consent of any of the holders of the Rights. Following the
Distribution Date, the Rights Plan could be amended to cure any ambiguity, to
correct or supplement any inconsistent provision or any other provision so long
as such amendment or supplement would not adversely affect the holders of the
Rights, other than an acquiring person or group. The Rights expire on November
20, 2008 unless earlier redeemed by us.
Each Right, other than those Rights held by an acquiring person or group, when
exercisable, would entitle its holders to purchase one one-hundredth of a share
of class A junior preferred stock, subject to adjustment or, in certain
instances, other securities of Cutter & Buck. In certain circumstances, if
Cutter & Buck, in a merger or consolidation, is not the surviving entity or
disposes of more than 50% of the company's assets or earnings power, the Rights
would entitle their holders, other than an acquiring person or group, to
purchase the highest priority voting shares in the surviving entity or its
affiliates having a market value of two times the exercise price of the Rights.
The Rights Plan, which is intended to encourage a potential acquiring person or
group to negotiate directly with the board of directors, may have certain
anti-takeover effects. The Rights Plan could significantly dilute the interest
in Cutter & Buck of an acquiring person or group. The Rights Plan could
therefore have the effect of delaying, deterring or preventing a change in
control of Cutter & Buck.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our restated articles of incorporation include a provision permitted by
Washington law that limits the liability of our directors. Under the provision,
no director shall be personally liable to us or our shareholders for monetary
damages for conduct as a director, excluding, however, liability for acts or
omissions involving intentional misconduct or knowing violations of law, illegal
distributions or transactions from which the director receives benefits to which
the director is not legally entitled. In addition, Washington law provides for
broad indemnification by Cutter & Buck of our officers and directors. Our
restated articles of incorporation implement this indemnification to the extent
permitted by law. Insofar as the indemnity for liabilities arising under the
Securities Act may be permitted to directors or officers of Cutter & Buck
pursuant to these provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is unenforceable.
TRANSFER AGENT
Our transfer agent is ChaseMellon Shareholder Services, Ridgefield Park, New
Jersey.
34
<PAGE>
UNDERWRITING
The underwriters named below, for whom J.P. Morgan Securities Inc., Hambrecht &
Quist LLC and Needham & Company, Inc. are acting as representatives, have
severally agreed, subject to the terms and conditions set forth in the
underwriting agreement between us and the underwriters, to purchase from us, and
we have agreed to sell to the underwriters, the respective numbers of shares of
common stock set forth opposite their names below:
<TABLE>
<CAPTION>
---------
NUMBER OF
SHARES
---------
<S> <C>
UNDERWRITERS
J.P. Morgan Securities Inc........................................................
Hambrecht & Quist LLC.............................................................
Needham & Company, Inc............................................................
---------
Total......................................................................... 1,700,000
---------
---------
</TABLE>
The nature of the underwriters' obligations under the underwriting agreement is
such that all of the common stock being offered, excluding shares covered by the
over-allotment option granted to the underwriters, must be purchased if any are
purchased.
The representatives of the underwriters have advised us that the several
underwriters propose to offer the common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and may
offer the common stock to selected dealers at such price less a concession not
to exceed $ per share. The underwriters may allow, and such dealers may
reallow, a concession to other dealers not to exceed $ per share. After the
initial public offering of the common stock, the public offering price and other
selling terms may be changed by the representatives.
We have granted the underwriters an option, exercisable for 30 days from the
date of this prospectus, to purchase up to 255,000 additional shares of common
stock at the same price per share to be paid by the underwriters for the other
shares offered hereby. If the underwriters purchase any such additional shares
pursuant to the option, each of the underwriters will be committed to purchase
such additional shares in approximately the same proportion as set forth in the
above table. The underwriters may exercise the option only to cover
over-allotments, if any, made in connection with the distribution of the common
stock offered hereby.
The following table shows the per share and total underwriting discounts to be
paid to the underwriters by us, assuming both no exercise and full exercise of
the underwriters' over-allotment option.
<TABLE>
<CAPTION>
------------------------
FULL
NO EXERCISE EXERCISE
----------- -----------
<S> <C> <C>
Per share............................................................. $ $
Total................................................................. $ $
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect thereof.
We estimate that the total expenses of this offering to us, excluding
underwriting discounts, will be $ .
35
<PAGE>
In connection with this offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of common stock.
Specifically, the underwriters may overallot this offering, creating a syndicate
short position. In addition, the underwriters may bid for, and purchase, shares
of common stock in the open market to cover syndicate shorts or to stabilize the
price of the common stock. Finally, the underwriting syndicate may reclaim
selling concessions allowed for distributing shares of common stock in this
offering, if the syndicate repurchases previously distributed common stock in
syndicate covering transactions, in stabilization transactions or otherwise. Any
of these activities may stabilize or maintain the market price of the shares of
common stock above independent market levels. The underwriters are not required
to engage in these activities, and may end any of these activities at any time.
Cutter & Buck and our executive officers and directors have agreed, with limited
exceptions, that, during the period beginning from the date of this prospectus
and continuing and including the date 90 days after the date of this prospectus,
they will not, directly or indirectly, offer, sell, offer to sell, contract to
sell or otherwise dispose of any shares of common stock or any of our securities
which are substantially similar to the common stock, including but not limited
to any securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock or any such substantially similar
securities or enter into any swap, option, future, forward or other agreement
that transfers, in whole or in part, the economic consequence of ownership of
common stock or any securities substantially similar to the common stock, other
than pursuant to employee stock option plans existing on the date of this
prospectus, without the prior written consent of J.P. Morgan Securities Inc.
The common stock is traded on the Nasdaq National Market under the symbol
"CBUK".
It is expected that delivery of the shares will be made to investors on or about
, 1999.
From time to time in the ordinary course of their respective businesses, certain
of the underwriters have engaged in and may in the future engage in investment
or commercial banking transactions with us.
LEGAL MATTERS
Certain legal matters with respect to the validity of common stock offered
hereby are being passed upon for us by Lane Powell Spears Lubersky LLP, Seattle,
Washington. Members of that firm beneficially owned 3,750 shares of our common
stock as of June 28, 1999. Cahill Gordon & Reindel, a partnership including a
professional corporation, New York, New York, is acting as counsel to the
underwriters in connection with certain legal matters relating to the common
stock offered hereby.
EXPERTS
The consolidated financial statements, including the financial statement
schedule incorporated by reference, of Cutter & Buck Inc. at April 30, 1998 and
1999, and for each of the three years in the period ended April 30, 1999,
appearing in and incorporated by reference in this prospectus and the
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing and incorporated by
reference elsewhere herein and are included in reliance upon such reports given
upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-3 under the
Securities Act, as amended, with respect to the common stock. This prospectus,
which forms a part of the registration statement, does not contain all of the
information included in the registration statement and its exhibits and
schedules. We also file periodic reports and proxy material with the SEC. The
registration statement, including its exhibits and schedules can be reviewed and
copied at the public reference facilities maintained by the SEC at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the regional offices of
the SEC: Seven World Trade Center, Suite 1300, New York, New York 10048, and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Our common stock is quoted on the Nasdaq National Market. Reports and other
information concerning us may be inspected and copied
36
<PAGE>
at the National Association of Securities Dealers, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850. The SEC maintains a Web site that contains reports,
proxy and information statements and other information that we file
electronically with the SEC, at http://www.sec.gov. Statements contained in this
prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete and in each instance reference is made
to the copy of such contract, agreement or other document filed as an exhibit to
the registration statement, each such statement being qualified in all respects
by such reference.
The SEC allows us to "incorporate by reference" the information we file with it,
which means that we can disclose important information to you by referring you
to another document that we filed with the SEC. The information incorporated by
reference is an important part of this prospectus, and information that we file
later with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934, as amended, until we sell all of the securities:
- Our annual report on Form 10-K for the fiscal year ended April 30, 1999.
You may request a copy of this filing (other than exhibits) at no cost, by
writing or telephoning us at 2701 First Avenue, Suite 500, Seattle, Washington
98121, telephone (206) 622-4191, attention Corporate Secretary.
37
<PAGE>
CUTTER & BUCK INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................................................... F-2
Consolidated Balance Sheets................................................................................. F-3
Consolidated Statements of Income........................................................................... F-4
Consolidated Statements of Shareholders' Equity............................................................. F-5
Consolidated Statements of Cash Flows....................................................................... F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF 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, 1998 and 1999, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended April 30, 1999. 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, 1998 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended April 30, 1999,
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
June 15, 1999
F-2
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------
APRIL 30,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................................................... $ 7,589,731 $ 4,760,259
Accounts receivable, net of allowances for doubtful accounts and returns of
$1,187,813 in 1998 and $1,726,191 in 1999................................... 20,216,721 32,518,666
Inventories................................................................... 13,247,892 28,620,774
Deferred income taxes......................................................... 730,850 1,496,945
Prepaid expenses and other current assets..................................... 1,502,634 3,288,538
----------- -----------
Total current assets........................................................ 43,287,828 70,685,182
Furniture and equipment, net.................................................... 4,568,515 9,478,174
Deferred income taxes........................................................... 51,695 127,715
Other assets.................................................................... 236,329 297,708
----------- -----------
Total assets................................................................ $48,144,367 $80,588,779
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings......................................................... $ 486,913 $12,084,704
Accounts payable.............................................................. 5,110,405 6,807,324
Accrued liabilities........................................................... 1,606,994 3,635,341
Income taxes payable.......................................................... 1,498,720 3,025,968
Current portion of capital lease obligations.................................. 194,040 220,546
----------- -----------
Total current liabilities................................................... 8,897,072 25,773,883
Capital lease obligations....................................................... 626,682 907,260
Long-term debt.................................................................. -- 5,000,000
Commitments
Shareholders' equity:
Preferred stock, no par value, 6,000,000 shares authorized; none issued and
outstanding................................................................. -- --
Common stock, no par value: 25,000,000 shares authorized; 7,876,194 issued and
outstanding in 1998 and 8,312,236 in 1999................................... 30,577,648 32,998,010
Deferred compensation......................................................... -- (107,340)
Retained earnings............................................................. 8,168,003 16,175,865
Accumulated other comprehensive loss.......................................... (125,038) (158,899)
----------- -----------
Total shareholders' equity.................................................. 38,620,613 48,907,636
----------- -----------
Total liabilities and shareholders' equity.................................. $48,144,367 $80,588,779
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
--------------------------------------
YEAR ENDED APRIL 30,
--------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net sales....................................................................... $46,592,758 $70,104,015 $107,285,920
Cost of sales................................................................... 28,053,845 40,642,031 61,057,635
----------- ----------- ------------
Gross profit.................................................................... 18,538,913 29,461,984 46,228,285
Operating expenses:
Design and production......................................................... 1,256,247 2,119,831 2,914,613
Selling and shipping.......................................................... 8,773,380 13,128,725 22,333,870
General and administrative.................................................... 3,512,824 5,710,430 8,471,133
----------- ----------- ------------
Total operating expenses.................................................... 13,542,451 20,958,986 33,719,616
----------- ----------- ------------
Operating income................................................................ 4,996,462 8,502,998 12,508,669
Other income (expense):
Factor commission and interest expense, net of interest income of $212,968 in
1997, $359,565 in 1998 and $245,314 in 1999................................. (196,973) (134,579) (393,291)
License and royalty income, net of other expense.............................. 408,728 211,649 400,284
----------- ----------- ------------
Total other income.......................................................... 211,755 77,070 6,993
----------- ----------- ------------
Income before income taxes...................................................... 5,208,217 8,580,068 12,515,662
----------- ----------- ------------
Income taxes.................................................................... 1,610,600 2,920,000 4,507,800
----------- ----------- ------------
Net income...................................................................... $ 3,597,617 $ 5,660,068 $ 8,007,862
----------- ----------- ------------
----------- ----------- ------------
Basic earnings per share........................................................ $ 0.55 $ 0.72 $ 0.98
----------- ----------- ------------
Diluted earnings per share...................................................... $ 0.51 $ 0.68 $ 0.94
----------- ----------- ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------
NOTE
COMMON STOCK RECEIVABLE
----------------------- FROM DEFERRED RETAINED
SHARES AMOUNT SHAREHOLDER COMPENSATION EARNINGS
---------- ----------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, April 30, 1996................................. 5,500,074 $15,156,702 $ (44,520) -- $(1,089,682)
Sale of common stock, net of offering expenses of
$1,434,356............................................ 2,181,460 14,563,021 -- -- --
Stock issued under employee stock purchase plan......... 4,194 12,549 -- -- --
Exercise of stock options............................... 8,718 18,519 -- -- --
Exercise of stock warrants.............................. 40,150 -- -- -- --
Repayment of note receivable............................ -- -- 44,520 -- --
Net income.............................................. -- -- -- -- 3,597,617
Foreign currency translation............................ -- -- -- -- --
Comprehensive income....................................
---------- ----------- ------------ -------------- -----------
Balance, April 30, 1997................................. 7,734,596 29,750,791 -- -- 2,507,935
Stock issued under employee stock purchase plan......... 8,806 68,464 -- -- --
Exercise of stock options............................... 132,792 359,908 -- -- --
Tax benefit on exercise of stock options................ -- 398,485 -- -- --
Net income.............................................. -- -- -- -- 5,660,068
Foreign currency translation............................ -- -- -- -- --
Comprehensive income....................................
---------- ----------- ------------ -------------- -----------
Balance, April 30, 1998................................. 7,876,194 30,577,648 -- -- 8,168,003
Stock issued under employee stock purchase plan......... 11,221 149,233 -- -- --
Exercise of stock options............................... 296,245 950,116 -- -- --
Exercise of stock warrants.............................. 118,378 662,920 -- -- --
Deferred compensation relating to restricted stock
grants................................................ 10,198 171,744 -- (171,744) --
Amortization of deferred compensation................... -- -- -- 64,404 --
Tax benefit on exercise of stock options................ -- 486,349 -- -- --
Net income.............................................. -- -- -- -- 8,007,862
Foreign currency translation............................ -- -- -- -- --
Comprehensive income....................................
---------- ----------- ------------ -------------- -----------
Balance, April 30, 1999................................. 8,312,236 $32,998,010 $ -- $ (107,340) $16,175,865
---------- ----------- ------------ -------------- -----------
---------- ----------- ------------ -------------- -----------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
LOSS TOTAL
--------------- -----------
<S> <C> <C>
Balance, April 30, 1996................................. $ -- $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
Net income.............................................. -- 3,597,617
Foreign currency translation............................ (71,417) (71,417)
-----------
Comprehensive income.................................... 3,526,200
--------------- -----------
Balance, April 30, 1997................................. (71,417) 32,187,309
Stock issued under employee stock purchase plan......... -- 68,464
Exercise of stock options............................... -- 359,908
Tax benefit on exercise of stock options................ -- 398,485
Net income.............................................. -- 5,660,068
Foreign currency translation............................ (53,621) (53,621)
-----------
Comprehensive income.................................... 5,606,447
--------------- -----------
Balance, April 30, 1998................................. (125,038) 38,620,613
Stock issued under employee stock purchase plan......... -- 149,233
Exercise of stock options............................... -- 950,116
Exercise of stock warrants.............................. -- 662,920
Deferred compensation relating to restricted stock
grants................................................ -- --
Amortization of deferred compensation................... -- 64,404
Tax benefit on exercise of stock options................ -- 486,349
Net income.............................................. -- 8,007,862
Foreign currency translation............................ (33,861) (33,861)
-----------
Comprehensive income.................................... 7,974,001
--------------- -----------
Balance, April 30, 1999................................. $ (158,899) $48,907,636
--------------- -----------
--------------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
CUTTER & BUCK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------
YEAR ENDED APRIL 30,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Operating activities:
Net income............................................. $3,597,617 $5,660,068 $ 8,007,862
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization........................ 1,057,348 1,385,616 2,306,276
Deferred income taxes................................ (104,000) (498,545) (842,115)
Amortization of deferred compensation................ -- -- 64,404
Changes in assets and liabilities:
Receivables, net................................... (7,329,046) (5,986,276) (12,639,245)
Inventories........................................ (7,795,977) (758,482) (15,547,970)
Prepaid expenses and other current assets.......... (328,011) (188,265) (1,870,703)
Accounts payable and accrued liabilities........... 2,588,827 1,495,273 3,823,477
Income taxes payable............................... 487,632 1,009,573 2,013,597
---------- ---------- -----------
Net cash provided by (used in) operating activities.... (7,825,610) 2,118,962 (14,684,417)
Investing activities:
Purchase of furniture and equipment.................... (1,716,583) (2,746,776) (6,624,987)
Decrease (increase) in trademarks, patents and
marketing rights..................................... 83,671 (97,107) (62,518)
---------- ---------- -----------
Net cash used in investing activities.................. (1,632,912) (2,843,883) (6,687,505)
Financing activities:
Net proceeds (repayments) from short term borrowings... (114,119) 486,913 11,953,708
Proceeds from long term debt........................... 5,000,000
Principal payments under capital lease obligations..... (125,432) (177,392) (261,766)
Net increase in advances from factor................... 562,551 188,663 185,619
Proceeds from note receivable from shareholder......... 44,520 -- --
Issuance of common stock............................... 14,594,089 428,372 1,762,269
---------- ---------- -----------
Net cash provided by financing activities.............. 14,961,609 926,556 18,639,830
Effects of foreign exchange rate changes on cash....... (71,417) (53,621) (97,380)
---------- ---------- -----------
Net increase (decrease) in cash........................ 5,431,670 148,014 (2,829,472)
Cash, beginning of year................................ 2,010,047 7,441,717 7,589,731
---------- ---------- -----------
Cash, end of year...................................... $7,441,717 $7,589,731 $ 4,760,259
---------- ---------- -----------
---------- ---------- -----------
Supplemental information:
Cash paid during the year for interest................. $ 176,191 $ 199,187 $ 308,277
---------- ---------- -----------
---------- ---------- -----------
Cash paid during the year for income taxes............. $ 991,500 $2,409,500 $ 3,245,000
---------- ---------- -----------
---------- ---------- -----------
Noncash financing and investing activities:
Equipment acquired with capital leases............... $ 788,524 $ 335,022 $ 568,850
---------- ---------- -----------
---------- ---------- -----------
Deferred compensation for issuance of restricted
stock.............................................. $ -- $ -- $ 171,744
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 and women's sportswear and outerwear apparel. The Company's
trade customers are principally golf pro shops and resorts, corporate sales
accounts and better specialty stores.
In 1996, the Company formed two wholly owned subsidiaries, Cutter & Buck (UK)
Ltd. and Cutter & Buck (Europe) B.V., for the purpose of direct marketing, sales
and distribution of Cutter & Buck sportswear and outerwear in Europe. In 1999,
the Company formed another wholly owned subsidiary, Cutter & Buck GmbH to
perform the same function.
PRINCIPLES OF CONSOLIDATION 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. A detailed analysis of inventory is performed on a quarterly basis to
identify unsold out-of-season fashion merchandise. The net realizable value of
the out-of-season merchandise is estimated based upon disposition plans and
historical experience. A valuation allowance is established to reduce the
carrying amount of out-of-season merchandise to its net realizable value.
SAMPLES The Company capitalizes the costs of merchandise samples that relate to
goods to be sold in future selling seasons. These samples are amortized on a
straight-line basis over the respective selling seasons of six months. The
amortization of samples is charged to selling expenses over the
revenue-generating period.
FURNITURE AND EQUIPMENT Furniture and equipment is carried 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
$800,000, $1,256,000 and $2,507,000 for the years ended April 30, 1997, 1998 and
1999 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's capital
lease obligations and long-term debt is estimated based on the current rates
offered to the Company for debt of the same remaining maturities. The carrying
amount of these financial instruments at April 30, 1998 and 1999 approximated
fair value.
CONCENTRATIONS OF CREDIT RISK 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. The Company is subject to credit risk on
the majority of its receivables. These receivables are geographically disbursed
throughout the United States, Europe and selected foreign countries where formal
distributor agreements exist.
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.
F-7
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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 a component of comprehensive income.
STOCK-BASED COMPENSATION The Company has elected to apply the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". Accordingly, the Company has elected
to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Compensation expense
for stock options is measured as the excess, if any, of the market price of the
Company's common stock at the date of grant over the stock option exercise
price. Under the Company's plans, stock options are generally granted at fair
market value.
EARNINGS PER SHARE Basic earnings per share is based on the weighted average
number of common shares outstanding. Diluted earnings per share is based on the
weighted average number of common shares and equivalents outstanding. Common
share equivalents included in the computation represent shares issuable upon
assumed exercise of outstanding stock options and warrants except when the
effect of their inclusion would be antidilutive.
COMPREHENSIVE INCOME On May 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 established new rules for the
reporting and display of comprehensive income or loss and its components.
Statement 130 also requires presentation of accumulated other comprehensive
income or loss separately in shareholders' equity. The adoption of this
Statement had no impact on the Company's net income or shareholders' equity.
Statement 130 requires unrealized gains or losses on the Company's foreign
currency translation adjustments to be included in comprehensive income.
SEGMENT AND GEOGRAPHIC INFORMATION On May 1, 1998, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
131 established interim and annual reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. The Company has one reportable segment,
the design, sourcing and marketing of sportswear and outerwear apparel. The
information for this segment is the information used by the Company's chief
operating decision-maker to evaluate operating performance. International sales
represented approximately 6.0%, 6.5% and 6.1% of net sales for the years ended
April 30, 1997, 1998 and 1999 respectively. No foreign country or geographic
area accounted for more than 10% of net sales in any of the periods presented.
Long-term assets of international operations represent approximately 7.4%, 13.0%
and 14.6% of the Company's long-term assets for fiscal 1997, 1998 and 1999,
respectively.
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.
DERIVATIVES AND HEDGING
The Company from time to time, uses derivative financial instruments to reduce
its exposure to changes in foreign exchange rates in connection with the
operations of its European subsidiary. While these instruments are subject to
risk of loss from changes in exchange rates, those losses would generally be
offset by gains on the related exposure.
F-8
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
The Company does not use derivative financial instruments for speculative or
trading purposes. The Company reduces the risks associated with changes in
foreign currency rates by entering into forward contracts and purchase options
to hedge accounts receivable denominated in non-euro currencies and to hedge
expected payments for product purchases not denominated in euro. Gains and
losses on contracts which hedge specific foreign currency denominated
commitments are recognized in the period in which the transaction is completed.
The fair value of foreign exchange forward contracts is based on quoted market
prices. At April 30, 1998 and 1999 the Company held forward contracts to deliver
$217,841 and $714,416, respectively in foreign currencies with maturities of up
to 120 days. The fair value of forward exchange contracts approximated cost at
April 30, 1998. At April 30, 1999 the fair value of the forward contracts
exceeded the cost by $41,315. To the extent the Company has assets and
liabilities denominated in foreign currencies that are not hedged, the Company
is subject to foreign currency transaction gains and losses.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires an entity to recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company plans to adopt
SFAS 133 on May 1, 2001, as required. The Company limits its use of derivative
financial instruments to the management of foreign currency risks. The Company
is currently evaluating the impact of SFAS 133 on its financial statements.
NOTE 2. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
----------------------
APRIL 30,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Prepaid expenses................................................................ $1,082,914 $1,580,557
Samples......................................................................... 419,720 1,707,981
---------- ----------
$1,502,634 $3,288,538
---------- ----------
---------- ----------
</TABLE>
NOTE 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 or
recourse basis. The factors' charges totaled $160,643, $194,945, $162,401 for
the years ended April 30, 1997, 1998 and 1999 and include a commission on net
sales and interest on advances
F-9
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. ACCOUNTS RECEIVABLE (CONTINUED)
at prime, plus 1 1/2% (9.25% at April 30, 1999). The Company is permitted to
receive advances from the European factor against uncollected amounts factored.
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
------------------------
APRIL 30,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Unmatured receivables
Nonrecourse................................................................... $ 2,622,705 $ 1,341,146
With recourse................................................................. 1,945,238 2,431,260
Matured receivables............................................................. 290,112 203,545
Advances........................................................................ (751,214) (936,833)
----------- -----------
Due from factor............................................................... 4,106,841 3,039,118
Nonfactored receivables......................................................... 17,297,693 31,205,739
Allowance for doubtful accounts and reserve for sales returns and allowance..... (1,187,813) (1,726,191)
----------- -----------
$20,216,721 $32,518,666
----------- -----------
----------- -----------
</TABLE>
NOTE 4. FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
----------------------
APRIL 30,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Leasehold improvements.............................................. $ 585,906 $1,856,577
Equipment........................................................... 3,074,654 6,196,722
Store fixtures...................................................... 2,466,500 4,200,903
Furniture and other fixtures........................................ 759,073 1,822,147
---------- ----------
6,886,133 14,076,349
Less accumulated depreciation and amortization...................... (2,317,618) (4,598,175)
---------- ----------
$4,568,515 $9,478,174
---------- ----------
---------- ----------
</TABLE>
The total cost of leased equipment capitalized at April 30, 1998 and 1999 was
$1,123,546 and $1,692,396, respectively, with related accumulated amortization
of $325,387 and $620,923, respectively.
NOTE 5. DEBT
In April 1999, the Company entered into a loan agreement with Washington Mutual
Bank d/b/a Western Bank ("Western Bank") for a $40 million line of credit,
replacing the Company's previous line of credit. Western Bank has included Bank
of America National Trust and Savings Association d/b/a Seafirst Bank in the
arrangement as co-lender. The revolving line of credit is to be used for general
corporate purposes, without limitation, repayment of any other advances,
reimbursement of draws under letters of credit, equipment and leasehold
improvements and other corporate purposes and provides for a $25 million
sublimit for direct advances. Interest on borrowings is charged and payable
monthly at either a floating rate or the LIBOR rate plus 2%, each as defined in
the loan agreement, at the borrower's election (7.75% at April 30, 1999). The
line of credit is collateralized by a security interest in the Company's
inventory, accounts receivable, furniture and equipment, contract rights and
general intangibles and expires on August 1, 2000. The loan agreement contains
certain restrictive covenants covering
F-10
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. DEBT (CONTINUED)
minimum working capital and tangible net worth, as well as a maximum
debt-to-equity ratio. The Company was in compliance with these covenants at
April 30, 1999. Western Bank and Republic Business Credit Corporation 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, 1999, letters of credit outstanding against this line of
credit totaled $18,773,683 and working capital advances were $9.5 million.
During fiscal 1999, the Company's Dutch subsidiary entered into a loan agreement
with Cooperatieve Rabobank "Huizen" B.A. ("Rabobank") for a $3.4 million line of
credit. The line of credit with Rabobank is to be used for international letters
of credit and working capital advances. Interest on borrowings is charged and
payable quarterly at a variable rate (4.45% at April 30, 1999). The line of
credit is secured by the Company's European inventory, an irrevocable standby
letter of credit issued by Western Bank of $3.8 million and subordination of
$2.7 million of intercompany debt. At April 30, 1999, letters of credit
outstanding against this line of credit totaled $533,358 and working capital
advances totaled $2,584,704.
The Company also has a $5 million term credit facility with Western Bank. As of
April 30, 1999 $5 million had been advanced against the term credit facility.
The term loan bears interest at a fixed rate of 6.6% with interest payable
monthly and annual principal payments of $714,286 due in August of years 2000
through 2004. The final principal payment of $1,428,570 is due in August 2005.
The term loan is also collateralized by a security interest in the Company's
inventory, accounts receivable, furniture and equipment, and contract rights.
F-11
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INCOME TAXES
The foreign and domestic components of income before income taxes were as
follows:
<TABLE>
<CAPTION>
-----------------------------------
YEAR ENDED APRIL 30,
-----------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
Domestic........................................................................ $5,086,697 $8,794,780 $12,726,877
Foreign......................................................................... 121,520 (214,712) (211,215)
---------- ---------- -----------
$5,208,217 $8,580,068 $12,515,662
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED APRIL 30,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current tax provision:
Federal....................................................................... $1,514,600 $3,318,545 $5,201,306
State......................................................................... 200,000 100,000 148,609
---------- ---------- ----------
1,714,600 3,418,545 5,349,915
Deferred federal tax benefit.................................................... (104,000) (498,545) (842,115)
---------- ---------- ----------
$1,610,600 $2,920,000 $4,507,800
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
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,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Tax provision at federal statutory tax rate..................................... $1,770,749 $2,917,223 $4,380,482
Foreign loss not benefited...................................................... -- 73,002 73,925
Nondeductable expenses.......................................................... 18,862 17,834 53,726
Decrease in valuation allowance................................................. (440,278) -- --
State income taxes, net of federal benefit...................................... 132,000 66,000 96,596
Other........................................................................... 129,267 (154,059) (96,929)
---------- ---------- ----------
$1,610,600 $2,920,000 $4,507,800
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company recorded compensation expense in 1998 and 1999 for income tax
purposes of approximately $1.1 million and $1.4 million respectively, resulting
from the exercise of nonqualified stock options and disqualifying dispositions
of Common Stock received through the exercise of incentive stock options. The
resulting tax benefit of $398,485 and $486,349 respectively, is included in
shareholders' equity.
F-12
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. INCOME TAXES (CONTINUED)
The 1997 tax provision is recorded net of the benefit of utilizing a net
operating loss carryforward of approximately $1,139,000. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
--------------------
APRIL 30,
--------------------
1998 1999
-------- ----------
<S> <C> <C>
Deferred income tax assets:
Reserve for doubtful accounts................................................. $337,339 $ 529,402
Reserve for inventory obsolescence............................................ 140,290 326,071
Unicap........................................................................ 195,897 563,664
Depreciation and amortization................................................. 51,695 127,715
Other......................................................................... 61,249 109,196
-------- ----------
Total deferred income tax assets................................................ 786,470 1,656,048
Deferred income tax liabilities:
Prepaid expenses................................................................ -- (31,388)
Other........................................................................... (3,925) --
-------- ----------
Total deferred income tax liabilities........................................... (3,925) (31,388)
-------- ----------
Net deferred taxes.............................................................. $782,545 $1,624,660
-------- ----------
-------- ----------
</TABLE>
NOTE 7. COMMITMENTS
The Company leases its office facilities, two retail stores and a warehouse and
embroidery production facility under operating leases. Total rent expense
amounted to $472,823 in 1997, $684,270 in 1998 and $1,325,647 in 1999.
Future minimum payments, by year and in the aggregate, under capital leases and
noncancelable operating leases with initial or remaining terms of one year or
more consisted of the following at April 30, 1999:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CAPITAL OPERATING
YEAR ENDING APRIL 30, LEASES LEASES
- -------------------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
2000............................................................................ $ 433,490 $ 796,137
2001............................................................................ 422,144 460,861
2002............................................................................ 265,300 285,977
2003............................................................................ 198,224 226,332
2004............................................................................ 40,248 11,088
---------- ----------
Total minimum lease payments.................................................... 1,359,406 $1,780,395
----------
----------
Less amount representing interest............................................... (231,600)
----------
Present value of net minimum lease payments..................................... 1,127,806
Less: current portion........................................................... (220,546)
----------
$ 907,260
----------
----------
</TABLE>
NOTE 8. SHAREHOLDERS' EQUITY
PREFERRED STOCK The Company has authorized 6,000,000 shares of preferred stock,
no par value. There was no preferred stock outstanding at April 30, 1998 and
1999.
F-13
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK On November 1, 1996 the Company sold 1,993,960 shares of its
Common Stock in a secondary offering at $7.33 per share. Pursuant to the
exercise of the underwriters' over-allotment option, the Company sold an
additional 187,500 shares of Common Stock at $7.33 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
197,296 shares of Common Stock at an exercise price of $5.60. In April 1997,
78,918 of these warrants were exercised in a cashless transaction, and 40,150
shares of Common Stock were issued. The remaining warrants to purchase 118,378
shares were exercised in May 1998 with proceeds to the Company totaling
$662,920.
STOCK OPTION PLANS The Company has four stock option plans that provide for the
granting of options to employees, officers and directors of the Company to
purchase up to 1,312,969 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 four-year period
with vesting at 25% each year. Options granted under the 1995 director plan
become exercisable six months after the date of grant. Options granted under the
1997 plan generally provide for vesting over a five-year period with vesting at
20% each year. Options under the plans expire after 10 years and have been
granted at fair value on the date of grant.
The weighted average fair value of stock options granted in 1997, 1998 and 1999
was $5.13, $10.59 and $9.05 repectively. 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
weighted average assumptions for 1997, 1998 and 1999, respectively: risk-free
interest rate of 6.2%, 6.1% and 5.3%; volatility of 68%, 68% and 70%; expected
life of 4.5 years, 4 years and 5 years; and no future dividends.
The weighted average fair value of shares granted under the Employee Stock
Purchase Plan in 1998 and 1999 was $2.02 and $3.21 respectively. The fair value
of shares granted under the Employee Stock Purchase Plan used to calculate pro
forma net income and net income per share disclosures was determined using the
Black-Sholes option-pricing model with the following weighted average
assumptions for 1997, 1998 and 1999 respectively: risk free interest rate of
6.8%, 6.2% and 5.0%; volatility of 68%, 68% and 70%; expected life of 6 months
and no future dividends. Had compensation cost for the stock option and Employee
Stock Purchase plans been recognized based on the fair value at the date of
grant for options and stock, awarded under the plans, pro forma amounts of the
Company's net income and net income per share would have been as follows:
<TABLE>
<CAPTION>
----------------------------------
APRIL 30,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net income...................................................................... $3,597,617 $5,660,068 $8,007,862
Pro forma compensation expense under SFAS No. 123............................... (186,822) (572,927) (865,636)
---------- ---------- ----------
Pro forma net income under SFAS No. 123......................................... $3,410,795 $5,087,141 $7,142,226
---------- ---------- ----------
---------- ---------- ----------
Pro forma diluted earnings per share............................................ $ 0.49 $ 0.61 $ 0.83
</TABLE>
Under SFAS No. 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.
F-14
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SHAREHOLDERS' EQUITY (CONTINUED)
A summary of the Company stock option activity and related information is as
follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------
APRIL 30,
----------------------------------------------------------------------
1997 1998 1999
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year.................... 610,983 $ 3.39 658,137 $ 3.86 774,342 $ 6.94
Granted....................................... 55,872 8.70 261,372 12.57 218,622 14.59
Exercised..................................... (8,718) 2.13 (132,792) 2.71 (296,245) 2.14
Canceled...................................... -- -- (12,375) 7.17 (4,312) 13.64
--------- --------- ---------
Balance, end of year.......................... 658,137 $ 3.86 774,342 $ 6.94 692,407 $ 10.91
--------- --------- ---------
--------- --------- ---------
Exercisable at end of year.................... 369,475 $ 2.49 405,400 $ 3.40 254,522 $ 7.49
--------- ----- --------- ----------- --------- -----------
</TABLE>
The following information is provided for options outstanding and exercisable at
April 30, 1999:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
OUTSTANDING
------------------------------------------- EXERCISABLE
WEIGHTED AVERAGE --------------------------
-------------------------------- WEIGHTED
REMAINING EXERCISE AVERAGE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE OPTIONS EXERCISE PRICE
- ----------------------------------- --------- ----------------- ------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.44-$3.16....................... 67,031 4.8 $ 1.62 67,030 $ 1.62
4.75- 7.17........................ 124,101 6.9 7.03 95,248 6.99
8.09- 9.09........................ 43,311 7.8 8.60 22,311 8.63
10.00-13.71....................... 240,842 8.3 12.55 56,061 12.77
13.79-16.83....................... 217,122 9.2 14.63 13,872 16.17
--------- ---------
692,407 254,522
--------- ---------
--------- ---------
</TABLE>
At April 30, 1999, 183,788 shares were available for future grant and 876,195
shares were reserved for future issuance.
RESTRICTED STOCK PLAN In August 1998, the Company adopted a Stock Bonus Plan
which permits eligible employees receiving cash bonuses to elect to receive
shares of Restricted Stock of the Company in lieu of all or a portion of their
cash bonus. Up to 37,500 shares of Restricted Stock can be issued under the
Stock Bonus Plan and no more than 11,250 shares of Restricted Stock can be
issued to any one participant in any one year. Eligible employees are awarded
the Restricted Stock at a 15% discount from market price. As of April 30, 1999,
11,221 shares had been issued under the Stock Bonus Plan and 26,279 shares were
reserved for future issuance. The Company has recorded deferred compensation of
$171,744 in 1999. This amount is being amortized over the vesting period, 25%
every six months. Compensation expense relating to restricted stock awards was
$64,404 in 1999.
SHAREHOLDER RIGHTS PLAN In November 1998, the Board of Directors adopted a
Shareholder Rights Plan "Rights Plan" designed to protect shareholders from
certain takeover tactics. Under the Rights Plan, the Board of Directors declared
and distributed to our shareholders a dividend of one right, each referred to as
a Right, for each outstanding share of common stock. The Rights are not
exercisable or transferable separately from shares of common stock until
F-15
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. SHAREHOLDERS' EQUITY (CONTINUED)
the earlier of : (1) 10 days following a public announcement that a person or
group has acquired, or obtained the right to acquire, beneficial ownership of a
designated percentage of the outstanding shares of the common stock and (2) 10
business days following the commencement or announcement of an intention to make
a tender or exchange offer that would result in an acquiring person or group
beneficially owning a designated percentage of outstanding shares of common
stock, unless the Board of Directors sets a later date, referred to as the
Distribution Date. The Board of Directors has the option to redeem the Rights at
a nominal cost or prevent the Rights from being triggered by designating offers
for all outstanding common stock as a permitted offer. The Company may redeem
the Rights during the initial 180 days after a triggering event generally only
by a majority of directors who are directors before any person or group obtains
or acquires the right to acquire a designated percentage of outstanding shares
of common stock. Prior to the Distribution Date, the Company is able to amend or
supplement the Rights Plan without the consent of any of the holders of the
Rights. Following the Distribution Date, the Rights Plan could be amended to
cure any ambiguity, to correct or supplement any inconsistent provision or any
other provision so long as such amendment or supplement would not adversely
affect the holders of the Rights, other than an acquiring person or group. The
Rights expire on November 20, 2008 unless earlier redeemed by the Company.
Each Right, other than those Rights held by an acquiring person or group, when
exercisable, would entitle its holders to purchase one one-hundredth of a share
of class A junior preferred stock, subject to adjustment or, in certain
instances, other securities of the Company. In certain circumstances, if the
Company, in a merger or consolidation, is not the surviving entity or disposes
of more than 50% of the company's assets or earnings power, the Rights would
entitle their holders, other than an acquiring person or group, to purchase the
highest priority voting shares in the surviving entity or its affiliates having
a market value of two times the exercise price of the Rights.
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. As of April 30,
1999, 24,221 shares had been issued under the plan and 350,779 shares have been
reserved for future issuance.
STOCK SPLIT On May 28, 1999, the Company's Board of Directors approved a
3-for-2 stock split of the shares of common stock, to be effected in the form of
a share dividend on shares of common stock outstanding on June 4, 1999. The
distribution of shares was made on June 15, 1999. Accordingly, the accompanying
consolidated financial statements have been restated to reflect the stock split.
NOTE 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.
F-16
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
----------------------------------
YEAR ENDED APRIL 30,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share--net income................ $3,597,617 $5,660,068 $8,007,862
---------- ---------- ----------
---------- ---------- ----------
Denominator:
Denominator for basic earnings per share--weighted average common shares...... 6,581,454 7,851,564 8,212,468
Effect of dilutive securities stock options..................................... 422,255 441,986 349,764
---------- ---------- ----------
Denominator for diluted earnings per share.................................... 7,003,709 8,293,550 8,562,232
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share........................................................ $ 0.55 $ 0.72 $ 0.98
Diluted earnings per share...................................................... $ 0.51 $ 0.68 $ 0.94
</TABLE>
NOTE 11. LITIGATION
The Company has been named as a defendant in two lawsuits related to its
sourcing of garments manufactured in Saipan. The first, Does v. The Gap, Inc.,
et al. was filed in the Federal District Court in Los Angeles on behalf of an
alleged class of garment factory workers located in Saipan, and generally
alleges that the defendants have conspired to control unlawful "sweatshop"
conditions constituting peonage and involuntary servitude. The plaintiffs in
this action generally seek an order enjoining defendants from continuing to
manufacture garments under the alleged "sweatshop" conditions, establishment of
a monitoring program and imposition of an asset freeze or constructive trust,
and punitive as well as treble, special and compensatory damages in unspecified
amounts. The second, UNITE v. The Gap, Inc. et al., was filed in the Superior
Court in San Francisco, California, by a union and three public interest groups,
and generally alleges that the defendants engaged in various unlawful business
acts and practices. The plaintiffs in this action generally seek an order
restraining the defendants from engaging in the allegedly unfair business acts
and practices, requiring a corrective advertising compaign or monitoring
program, imposition of an asset freeze or constructive trust, payment of
restitution and disgorgement of profits from engaging in the allegedly unlawful
business acts and practices in unspecified amounts. In the federal action, all
of the defendants including the Company have filed motions to transfer the venue
of that case to Saipan. The motion is noted for consideration on July 12, 1999.
The retailer or buyer defendants including the Company have responded to written
interrogatories concerning witnesses and documents that relate to the Saipan
garment business. The retailer or buyer defendants including the Company also
have submitted a motion to dismiss all of the causes of action in the federal
action, other than the claim for false imprisonment, on the grounds that the
allegations of the complaint fail to state a claim upon which relief can be
granted. In addition, the defendants, including the Company, in the state action
have filed a demurrer (motion to dismiss the claims asserted in that lawsuit).
The hearing on that motion is scheduled for August 6, 1999. Although the Company
intends to vigorously defend itself, these lawsuits are subject to many
uncertainties and management of the Company is not able to make a determination
of the ultimate exposure with respect to these matters. As a result, there can
be no assurance that these lawsuits will not have a material adverse effect on
the Company's financial position or results of operations.
F-17
<PAGE>
CUTTER & BUCK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. LITIGATION (CONTINUED)
The Company is also a party to routine litigation incidental to its business.
Management believes the ultimate resolution of these routine matters will not
have a material adverse effect on its financial position and results of
operations.
NOTE 12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Financial results by quarter for the fiscal years ended April 30, 1998 and 1999
are as follows:
<TABLE>
<CAPTION>
-------------------------------------------
FISCAL QUARTER ENDED
-------------------------------------------
JULY 31 OCTOBER 31 JANUARY 31 APRIL 30
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT SHARE AMOUNTS
1998
Net sales........................................................... $12,378 $17,349 $14,151 $ 26,226
Gross profit........................................................ 4,960 7,145 5,952 11,405
Net income.......................................................... 475 1,160 673 3,352
Diluted earnings per share.......................................... $ 0.06 $ 0.14 $ 0.08 $ .40
1999
Net sales........................................................... $17,763 $25,993 $23,148 $ 40,382
Gross profit........................................................ 7,612 10,939 9,892 17,785
Net income.......................................................... 794 1,664 969 4,581
Diluted earnings per share.......................................... $ 0.09 $ 0.20 $ 0.11 $ 0.53
</TABLE>
F-18
<PAGE>
Edgar artwork description:
Inside back cover: [Four pictures of Cutter & Buck shirts.]
Back cover: [Cutter & Buck logo. Picture of crew boats on dock with a lake in
the background.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of estimated expenses in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
ITEM AMOUNT
- ---------------------------------------------------------------------------------------------
<S> <C>
Securities and Exchange Commission Registration Fee............................... $ 10,819
NASD filing fee................................................................... 4,392
Nasdaq additional listing fee..................................................... 17,500
Blue Sky fees and expenses........................................................ 5,000
Printing expenses................................................................. 100,000
Legal fees and expenses........................................................... 150,000
Accounting fees and expenses...................................................... 100,000
Transfer agent's fees and expenses................................................ 5,000
Miscellaneous expenses............................................................ 82,289
---------
Total......................................................................... $ 475,000
---------
---------
</TABLE>
All amounts, except the Securities and Exchange Commission registration fee, the
NASD filing fee and the Nasdaq additional listing fee, are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 23B.08.500 through 23B.08.600 of the Washington Business Corporation
Act authorize a court to award, or a corporation's board of directors to grant,
indemnification to directors and officers on terms sufficiently broad to permit
indemnification under certain circumstances for liabilities arising under the
Securities Act. Article XI of the registrant's Restated Articles of
Incorporation provides for indemnification of the registrant's directors,
officers, employees and agents to the fullest extent permitted by Washington
law.
Section 23B.08.320 of the Washington Business Corporation Act authorizes a
corporation to limit a director's liability to the corporation or its
shareholders for monetary damages for conduct as a director, except in certain
circumstances involving intentional misconduct or a knowing violation of law for
any transaction from which the director personally receives a benefit in money,
property or services to which the director is not legally entitled. Article X of
the registrant's Restated Articles of Incorporation contains provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the registrant and its shareholders.
Officers and directors of the Registrant are covered by insurance (with certain
exceptions and certain limitations) that indemnifies them against losses and
liabilities arising from certain alleged "wrongful acts," including alleged
errors or misstatements, or certain other alleged wrongful acts or omissions
constituting neglect or breach of duty.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- ---------------------------------------------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement
5.1* Opinion of Lane Powell Spears Lubersky LLP regarding legality of shares
23.1* Consent of Lane Powell Spears Lubersky LLP (contained in opinion filed as Exhibit 5.1)
23.2+ Consent of Ernst & Young LLP, Independent Auditors
24.1+ Power of Attorney (contained on signature page)
</TABLE>
- ------------------------
* Filed herewith.
+ Previously filed.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to section 13(a) or section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be delivered
with the prospectus, to each person to whom the prospectus is sent or given, the
latest annual report, to security holders that is incorporated by reference in
the prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For puposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 403A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Seattle, State of Washington, on July
20, 1999.
<TABLE>
<S> <C> <C>
CUTTER & BUCK INC.
By: /s/ HARVEY N. JONES
-----------------------------------------
Harvey N. Jones
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
Chairman, Chief Executive
/s/ HARVEY N. JONES Officer and Director
- ------------------------------ (Principal Executive July 20, 1999
Harvey N. Jones Officer)
* President, Chief Operating
- ------------------------------ Officer, Treasurer, July 20, 1999
Martin J. Marks Secretary and Director
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial and July 20, 1999
Stephen S. Lowber Accounting Officer
*
- ------------------------------ Director July 20, 1999
Michael S. Brownfield
*
- ------------------------------ Director July 20, 1999
Frances M. Conley
*
- ------------------------------ Director July 20, 1999
Larry C. Mounger
*
- ------------------------------ Director July 20, 1999
James C. Towne
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ HARVEY N. JONES
-------------------------
Harvey N. Jones
(ATTORNEY-IN-FACT)
</TABLE>
II-3
<PAGE>
EXHIBIT 1.1
CUTTER & BUCK INC.
1,700,000 Shares of Common Stock
Underwriting Agreement
, 1999
J.P. Morgan Securities Inc.
Hambrecht & Quist LLC
Needham & Company, Inc.
As Representatives of the several underwriters
listed in Schedule I hereto
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260
Ladies and Gentlemen:
Cutter & Buck Inc., a Washington corporation (the "COMPANY"), proposes to
issue and sell to the several Underwriters listed in Schedule I hereto (the
"UNDERWRITERS"), for whom you are acting as representatives (the
"REPRESENTATIVES"), an aggregate of 1,700,000 shares (the "UNDERWRITTEN
SHARES") of common stock, no par value, of the Company (the "COMMON STOCK").
In addition, at the option of the Underwriters and for the sole purpose of
covering over-allotments in connection with the sale of the Underwritten
Shares, the Company proposes to issue and sell to the Underwriters up to an
additional 255,000 shares (the "OPTION SHARES") of Common Stock. The
Underwritten Shares and the Company Option Shares are herein referred to as
the "SHARES." Pursuant to a Rights Agreement (the "RIGHTS AGREEMENT") dated
as of November 20, 1998 between the Company and ChaseMellon Shareholders
Services L.L.C., as rights agent, each share of Common Stock, including, when
issued, the Shares, has or will have attached thereto a right (a "RIGHT" and,
collectively, the "RIGHTS") to purchase from the Company .6667/100th of a
share of Class A Junior Preferred Stock (the "CLASS A JUNIOR PREFERRED STOCK").
The Company has prepared and filed with the Securities and Exchange
Commission (the "COMMISSION") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "SECURITIES ACT"), a registration
statement, including a prospectus, relating to the Shares. The registration
statement as amended at the time when it shall become effective including
infor-
<PAGE>
-2-
mation (if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Securities Act, is referred to
in this Agreement as the "REGISTRATION STATEMENT", and the prospectus in the
form first used to confirm sales of Shares is referred to in this Agreement as
the "PROSPECTUS." If the Company has filed an abbreviated registration
statement pursuant to Rule 462(b) under the Securities Act (the "RULE 462
REGISTRATION STATEMENT"), then any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462 Registration Statement.
Any reference in this Agreement to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to refer to and include the
documents incorporated by reference therein pursuant to Item 12 of Form S-3
under the Securities Act, as of the effective date of the Registration
Statement or the date of such preliminary prospectus or the Prospectus, as the
case may be, and any reference to "amend", "amendment" or "supplement" with
respect to the Registration Statement, any preliminary prospectus or the
Prospectus shall be deemed to refer to and include any documents filed after
such date under the Securities Exchange Act of 1934, as amended, and the rules
and regulations of the Commission thereunder (collectively, the "EXCHANGE
ACT") that are deemed to be incorporated by reference therein.
1. The Company agrees to sell the Underwritten Shares to the several
Underwriters as hereinafter provided, and each Underwriter, upon the basis of
the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees to purchase, severally and not jointly,
from the Company the respective number of Underwritten Shares set forth opposite
such Underwriter's name on Schedule I hereto at a purchase price per share of
$ (the "PURCHASE PRICE").
If any Option Shares are to be purchased, the number of Option Shares
to be purchased by each Underwriter shall be the number of Option Shares which
bears the same ratio to the aggregate number of Option Shares being purchased as
the number of Underwritten Shares set forth opposite the name of such
Underwriter in Schedule I hereto (or such number increased as set forth in
Section 9 hereof) bears to the aggregate number of Underwritten Shares being
purchased from the Company by the several Underwriters, subject, however, to
such adjustments to eliminate any fractional Shares as the Representatives in
their sole discretion shall make.
The Underwriters may exercise the option to purchase the Option Shares
at any time (but not more than once) on or before the thirtieth day following
the date of this Agreement, by written notice from the Representatives to the
Company. Such notice shall set forth the aggregate number of Option Shares as to
which the option is being exercised and the date and time when the Option Shares
are to be delivered and paid for which may be the same date and time as the
Closing Date (as hereinafter defined) but shall not be earlier than the Closing
Date nor later than the tenth full Business Day (as hereinafter defined) after
the date of such notice (unless such time and date are postponed in accordance
with the provisions of Section 9
<PAGE>
-3-
hereof). Any such notice shall be given at least two Business Days prior to
the date and time of delivery specified therein.
2. The Company understands that the Underwriters intend (i) to make a
public offering of the Shares as soon after (A) the Registration Statement has
become effective and (B) the parties hereto have executed and delivered this
Agreement, as in the judgment of the Representatives is advisable and (ii)
initially to offer the Shares upon the terms set forth in the Prospectus.
3. Payment for the Shares shall be made by wire transfer in immediately
available funds to the account specified by the Company to the Representatives
in the case of the Underwritten Shares, on , 1999, or at such other
time on the same or such other date, not later than the fifth Business Day
thereafter, as the Company and the Representatives may agree upon in writing or,
in the case of the Option Shares, on the date and time specified by the
Representatives in the written notice of the Underwriters' election to purchase
such Option Shares. The time and date of such payment for the Underwritten
Shares is referred to herein as the "CLOSING DATE" and the time and date for
such payment for the Company Option Shares, if other than the Closing Date, are
herein referred to as the "ADDITIONAL CLOSING DATE." As used herein, the term
"BUSINESS DAY" means any day other than a day on which banks are permitted or
required to be closed in New York City.
Payment for the Shares to be purchased on the Closing Date or the
Additional Closing Date, as the case may be, shall be made against delivery to
the Representatives for the respective accounts of the several Underwriters of
the Shares to be purchased on such date registered in such names and in such
denominations as the Representatives shall request in writing not later than two
full Business Days prior to the Closing Date or the Additional Closing Date, as
the case may be, with any transfer taxes payable in connection with the transfer
to the Underwriters of the Shares duly paid by the Company. The certificates for
the Shares will be made available for inspection and packaging by the
Representatives at the office of J.P. Morgan Securities Inc. set forth above not
later than 1:00 P.M., New York City time, on the Business Day prior to the
Closing Date or the Additional Closing Date, as the case may be.
4. (A) The Company represents and warrants to each Underwriter that:
(a) no order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission, and each preliminary
prospectus filed as part of the Registration Statement as originally filed
or as part of any amendment thereto, or filed pursuant to Rule 424 under
the Securities Act, complied when so filed in all material respects with
the Securities Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were
<PAGE>
-4-
made, not misleading; provided that this representation and warranty shall
not apply to any statements or omissions made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by such Underwriter through the Representatives
expressly for use therein;
(b) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has been
instituted or, to the knowledge of the Company, threatened by the
Commission; and the Registration Statement and Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) comply, or will comply, as the case may be, in all
material respects with the Securities Act and do not and will not, as of
the applicable effective date as to the Registration Statement and any
amendment thereto and as of the date of the Prospectus and any amendment or
supplement thereto, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and the Prospectus, as amended
or supplemented, if applicable, at the Closing Date or Additional Closing
Date, as the case may be, will not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading; except that the foregoing representations and
warranties shall not apply to statements or omissions in the Registration
Statement or the Prospectus made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through the Representatives expressly for use therein;
(c) the documents incorporated by reference in the Prospectus, when
they become effective or were filed with the Commission, as the case may
be, conformed in all material respects to the requirements of the
Securities Act or the Exchange Act, as applicable and none of such
documents contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading; and any
further documents so filed and incorporated by reference in the
Prospectus, when such documents are filed with the Commission, will
conform in all material respects to the requirements of the Exchange Act,
and will not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(d) the financial statements, and the related notes thereto,
included or incorporated by reference in the Registration Statement and
the Prospectus present fairly the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates indicated and
the results of their operations and changes in their consolidated cash
flows for the periods specified; said financial statements have been pre-
<PAGE>
-5-
pared in conformity with generally accepted accounting principles applied
on a consistent basis, and the supporting schedules included or
incorporated by reference in the Registration Statement present fairly the
information required to be stated therein;
(e) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
change in the capital stock or long-term debt of the Company or any of
its subsidiaries taken as a whole, or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, business, prospects, management, financial
position, shareholders' equity or results of operations of the Company
and its subsidiaries, taken as a whole (a "MATERIAL ADVERSE CHANGE"),
otherwise than as set forth or contemplated in the Prospectus; and except
as set forth or contemplated in the Prospectus neither the Company nor
any of its subsidiaries has entered into any transaction or agreement
(whether or not in the ordinary course of business) material to the
Company and its subsidiaries taken as a whole;
(f) the Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus, and
has been duly qualified as a foreign corporation for the transaction of
business and is in good standing under the laws of each other
jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a material
adverse effect on the general affairs, business, prospects, management,
financial position, shareholders' equity or results of operations of the
Company and its subsidiaries, taken as a whole (a "MATERIAL ADVERSE
EFFECT");
(g) each of the Company's subsidiaries has been duly incorporated
and is validly existing as a corporation under the laws of its
jurisdiction of incorporation, with power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus, and has been duly qualified as a foreign corporation for the
transaction of business and is in good standing under the laws of each
other jurisdiction in which it owns or leases properties, or conducts any
business, so as to require such qualification, other than where the
failure to be so qualified or in good standing would not have a Material
Adverse Effect; and all the outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued,
are fully-paid and non-assessable, and (except, in the case of foreign
subsidiaries, for directors' qualifying shares and except as described in
the Prospectus) are owned by the Company, directly or indirectly, free
and clear of all liens, encumbrances, security interests and claims;
<PAGE>
-6-
Cutter & Buck (U.K.) Ltd., a corporation organized under the laws of
the United Kingdom, Cutter & Buck (Europe) B.V., a corporation organized
under the laws of the Netherlands and Cutter & Buck GmbH, a corporation
organized under the laws of Germany, are the Company's only subsidiaries;
Cutter & Buck GmbH was formed by the Company on January 29, 1999; the
Company intends to dissolve Cutter & Buck (U.K.) Ltd. within sixty days
following the date of this Agreement; none of the Company's subsidiaries
accounted for greater than 7% of the Company's net sales, gross profit
or operating income during the fiscal year ended April 30, 1999.
(h) this Agreement has been duly authorized, executed and delivered
by the Company;
(i) the Company has an authorized capitalization as set forth in the
Prospectus and such authorized capital stock conforms as to legal matters
to the description thereof set forth in the Prospectus, and all of the
outstanding shares of capital stock of the Company (including the Shares)
have been duly authorized and validly issued, are fully-paid and
non-assessable and are not subject to any pre-emptive or similar rights;
and, except as described in or expressly contemplated by the Prospectus,
there are no outstanding rights (including, without limitation, pre-emptive
rights), warrants or options to acquire, or instruments convertible into or
exchangeable for, any shares of capital stock or other equity interest in
the Company or any of its subsidiaries, or any contract, commitment,
agreement, understanding or arrangement of any kind relating to the
issuance of any capital stock of the Company or any such subsidiary, any
such convertible or exchangeable securities or any such rights, warrants or
options;
(j) the Shares to be issued and sold by the Company hereunder have
been duly authorized, and, when issued and delivered to and paid for by
the Underwriters in accordance with the terms of this Agreement, will be
duly issued and will be fully paid and non-assessable and will conform to
the descriptions thereof in the Prospectus; and the issuance of the
Shares is not subject to any preemptive or similar rights;
(k) the Rights Agreement has been duly authorized, executed and
delivered by the Company; the Rights have been duly authorized and
validly issued by the Company, and the Class A Junior Preferred Stock has
been duly authorized by the Company and validly reserved for issuance
upon the exercise in accordance with the terms of the Rights Agreement,
and will be validly issued, fully paid and non-assessable;
(l) neither the Company nor any of its subsidiaries is, or with the
giving of notice or lapse of time or both would be, in violation of or in
default under, its articles of incorporation (the "ARTICLES OF
INCORPORATION") or by-laws (the "BY-LAWS") or any
<PAGE>
-7-
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which it or any of them or any of their respective properties is
bound, except for violations and defaults which individually and in the
aggregate are not material to the Company and its subsidiaries taken as a
whole; the issue and sale of the Shares to be sold by the Company
hereunder and the performance by the Company of its obligations under
this Agreement and the consummation of the transactions contemplated
herein will not conflict with or result in a breach of any of the terms
or provisions of, or constitute a default under, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which
the Company or any of its subsidiaries is a party or by which the Company
or any of its subsidiaries is bound or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor will any
such action result in any violation of the provisions of the Articles of
Incorporation or the By-Laws of the Company or any applicable law or
statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Company, its subsidiaries or
any of their respective properties; and no consent, approval,
authorization, order, license, registration or qualification of or with
any such court or governmental agency or body is required for the issue
and sale of the Shares to be sold by the Company hereunder or the
consummation by the Company of the transactions contemplated by this
Agreement, except such consents, approvals, authorizations, orders,
licenses, registrations or qualifications as have been obtained under the
Securities Act and as may be required under state securities or Blue Sky
Laws in connection with the purchase and distribution of the Shares by
the Underwriters;
(m) other than as set forth or contemplated in the Prospectus, there
are no legal or governmental investigations, actions, suits or proceedings
pending or, to the knowledge of the Company, threatened against or
affecting the Company or any of its subsidiaries or any of their
respective properties or to which the Company or any of its subsidiaries
is or may be a party or to which any property of the Company or any of
its subsidiaries is or may be the subject which, if determined adversely
to the Company or any of its subsidiaries, could individually or in the
aggregate have, or reasonably be expected to have, a Material Adverse
Effect, and, to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened
by others; and there are no statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required;
(n) the Company and its subsidiaries have good and marketable title
in fee simple to all items of real property and good and marketable title
to all personal property owned by them, in each case free and clear of
all liens, encumbrances and defects
<PAGE>
-8-
except such as are described or referred to in the Prospectus or such as
do not materially affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Company
and its subsidiaries; and any real property and buildings held under
lease by the Company and its subsidiaries are held by them under valid,
existing and enforceable leases with such exceptions as are not material
and do not interfere with the use made or proposed to be made of such
property and buildings by the Company or its subsidiaries;
(o) no relationship, direct or indirect, exists between or among the
Company or any or its subsidiaries on the one hand, and the directors,
officers, shareholders, customers or suppliers of the Company or any of its
subsidiaries on the other hand, which is required by the Securities Act to
be described in the Registration Statement and the Prospectus which is not
so described;
(p) no person has the right to require the Company to register any
securities for offering and sale under the Securities Act by reason of the
filing of the Registration Statement with the Commission or the issue and
sale of the Shares hereunder;
(q) the Company is not an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(r) the Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida) relating to doing
business with the Government of Cuba or with any person or affiliate
located in Cuba;
(s) Ernst & Young LLP ("ERNST & YOUNG") who have certified certain
financial statements of the Company and its subsidiaries are independent
public accountants as required by the Securities Act;
(t) the Company and its subsidiaries have filed all federal, state,
local and foreign tax returns which have been required to be filed and
have paid all taxes shown thereon and all assessments received by them or
any of them to the extent that such taxes have become due and are not
being contested in good faith; and, except as disclosed in the
Registration Statement and the Prospectus, there is no tax deficiency
which has been determined or threatened against the Company or any
subsidiary;
(u) the Company has not taken nor will it take, directly or
indirectly, any action designed to, or that might be reasonably expected
to, cause or result in stabilization or manipulation of the price of the
Common Stock;
<PAGE>
-9-
(v) each of the Company and its subsidiaries owns, possesses or has
obtained all licenses, permits, certificates, consents, orders, approvals
and other authorizations from, and has made all declarations and filings
with, all federal, state, local and other governmental authorities
(including foreign regulatory agencies), all self-regulatory organizations
and all courts and other tribunals, domestic or foreign, necessary to own
or lease, as the case may be, and to operate its properties and to carry on
its business as conducted as of the date hereof, other than where the
failure to possess such licenses, permits, certifications, consents,
orders, approvals or other authorizations would not have a Material Adverse
Effect, and neither the Company nor any such subsidiary has received any
actual notice of any proceeding relating to revocation or modification of
any such license, permit, certificate, consent, order, approval or other
authorization, except as described in the Registration Statement and the
Prospectus; and each of the Company and its subsidiaries is in compliance
with all laws and regulations relating to the conduct of its business as
conducted as of the date hereof;
(w) there are no existing or, to the best knowledge of the Company,
threatened labor disputes with the employees of the Company or any of its
subsidiaries which are likely to have a Material Adverse Effect;
(x) the Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly
or in the aggregate, have a Material Adverse Effect;
(y) each employee benefit plan, within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended,
("ERISA") that is maintained, administered or contributed to by the
Company or any of its affiliates for employees or former employees of the
Company and its affiliates has been maintained in compliance with its
terms and the requirements of any applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended ("Code"). No prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code has occurred
with respect to any such plan excluding transactions effected pursuant to
a statutory or administrative exemption. For each such plan which is
subject to the funding rules of Section 412 of
<PAGE>
-10-
the Code or Section 302 of ERISA no "accumulated funding deficiency" as
defined in Section 412 of the Code has been incurred, whether or not
waived, and the fair market value of the assets of each such plan
(excluding for these purposes accrued but unpaid contributions) exceeded
the present value of all benefits accrued under such plan determined
using reasonable actuarial assumptions;
(z) each of the Company and its subsidiaries owns, is licensed to
use or otherwise possesses adequate rights to use the patents, patent
rights, licenses, inventions, trademarks, service marks, trade names,
copyrights and know-how, including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures (collectively, the "INTELLECTUAL PROPERTY") necessary to carry
on the business conducted by it, except to the extent that the failure to
own, be licensed to use or otherwise possess adequate rights to use such
Intellectual Property would not have a Material Adverse Effect; except as
set forth in the Prospectus, the Company has not received any notice of
infringement of or conflict with (and the Company has no knowledge of any
infringement of or conflict with ) asserted rights of others with respect
to its Intellectual Property; the discoveries, inventions, products or
processes of the Company and its subsidiaries, taken as a whole, referred
to in the Registration Statement and the Prospectus do not, to the
knowledge of the Company, infringe or conflict with any right or patent
of any third party, or any discovery, patent product or process which is
the subject of a patent application filed by any third party, known to
the Company which could have a Material Adverse Effect;
(aa) the statistical and market-related data included in the
Registration Statement and the Prospectus are based on or derived from
sources which are believed by the Company to be reliable;
(bb) the Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business
and the value of its properties and as is customary for companies engaged
in similar businesses in similar industries;
(cc) except for compensation to be received by the Underwriters
under this Agreement, the Company does not know of any outstanding claims
for services, either in the nature of a finder's fee or origination fee,
with respect to any of the transactions contemplated hereby;
(dd) The Company has reviewed its operations, the operations of its
subsidiaries and the operations of any third parties with which the Company
has a material relationship to evaluate the extent to which the business or
operations of the Company will be affected by the Year 2000 Problem. As a
result of such review, the Company has no reason to believe that the Year
2000 Problem will have a Material Adverse Ef-
<PAGE>
-11-
fect or result in any material loss or interference with the Company's or
any subsidiary's business or operations. The "YEAR 2000 PROBLEM" as used
herein means any significant risk that computer hardware or software used
in the receipt, transmission, processing, manipulation, storage,
retrieval, retransmission or other utilization of data or in the
operation of mechanical or electrical systems of any kind will not, in
the case of dates or time periods occurring after December 31, 1999,
function at least as effectively as in the case of dates or time periods
occurring prior to January 1, 2000; and
(ee) the Company has delivered to the Representatives written
agreements, in form and substance satisfactory to you (each, a "LOCK-UP
AGREEMENT"), of each of its directors and executive officers and certain
stockholders previously identified by the Representatives.
5. (A) The Company covenants and agrees with each of the several
Underwriters as follows:
(a) to use its best efforts to cause the Registration Statement to
become effective at the earliest possible time and, if required, to file
the final Prospectus with the Commission within the time periods
specified by Rule 424(b) and Rule 430A under the Securities Act and to
file promptly all reports and any definitive proxy or information
statements required to be filed by the Company with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of the Prospectus and for so long as the delivery
of a prospectus is required in connection with the offering or sale of
the Shares; and to furnish copies of the Prospectus to the Underwriters
in New York City prior to 10:00 a.m., New York City time, on the Business
Day next succeeding the date of this Agreement in such quantities as the
Representatives may reasonably request; (b) to deliver, at the expense of
the Company, to the Representatives four signed copies of the
Registration Statement (as originally filed) and each amendment thereto,
in each case including exhibits and documents incorporate by reference
therein, and to each other Underwriter a conformed copy of the
Registration Statement (as originally filed) and each amendment thereto,
in each case without exhibits but including the documents incorporated by
reference therein and, during the period mentioned in paragraph (e)
below, to each of the Underwriters as many copies of the Prospectus
(including all amendments and supplements thereto) and documents
incorporated by reference therein as the Representatives may reasonably
request;
(c) before filing any amendment or supplement to the Registration
Statement or the Prospectus, whether before or after the time the
Registration Statement becomes effective, to furnish to the
Representatives a copy of the proposed amendment
<PAGE>
-12-
or supplement for review and not to file any such proposed amendment or
supplement to which the Representatives reasonably object;
(d) to advise the Representatives promptly, and to confirm such
advice in writing (i) when the Registration Statement has become
effective, (ii) when any amendment to the Registration Statement has been
filed or becomes effective, (iii) when any supplement to the Prospectus
or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof, (iv) of any request by the
Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for any additional
information, (v) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any
order preventing or suspending the use of any preliminary prospectus or
the Prospectus or the initiation or threatening of any proceeding for
that purpose, (vi) of the occurrence of any event, within the period
referenced in paragraph (e) below, as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, and (vii) of the
receipt by the Company of any notification with respect to any suspension
of the qualification of the Shares for offer and sale in any jurisdiction
or the initiation or threatening of any proceeding for such purpose; and
to use its best efforts to prevent the issuance of any such stop order,
or of any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of any order suspending any such
qualification of the shares, or notification of any such order thereof
and, if issued, to obtain as soon as possible the withdrawal thereof;
(e) if, during such period of time after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters a
prospectus relating to the Shares is required by law to be delivered in
connection with sales by the Underwriters or any dealer, any event shall
occur as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if it is necessary to amend or supplement the Prospectus to
comply with law, forthwith to prepare and furnish, at the expense of the
Company, to the Underwriters and to the dealers (whose names and addresses
the Representatives will furnish to the Company) to which Shares may have
been sold by the Representatives on behalf of the Underwriters and to any
other dealers upon request, such amendments or supplements to the
Prospectus as may be necessary so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus will comply with law;
<PAGE>
-13-
(f) to endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Representatives
shall reasonably request and to continue such qualification in effect so
long as reasonably required for distribution of the Shares; PROVIDED that
the Company shall not be required to file a general consent to service of
process in any jurisdiction;
(g) to make generally available to its security holders and to the
Representatives as soon as practicable an earnings statement covering a
period of at least twelve months beginning with the first fiscal quarter
of the Company occurring after the effective date of the Registration
Statement, which shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 of the Commission promulgated thereunder;
(h) so long as the Shares are outstanding, to furnish to the
Representatives copies of all reports or other communications (financial or
other) furnished to holders of the Shares, and copies of any reports and
financial statements furnished to or filed with the Commission or any
national securities exchange;
(i) for a period of 90 days after the date of the initial public
offering of the Shares not to (i) offer, pledge, announce the intention
to sell, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock or (ii) enter into any
swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise
without the prior written consent of the Representatives, other than any
shares of Common Stock of the Company issued upon the exercise of options
granted under any existing employee or director stock option plans;
(j) to use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market (the "NASDAQ NATIONAL MARKET");
(k) to use the net proceeds received by the Company from the sale
of the Shares by the Company pursuant to this Agreement in the manner
specified in the Prospectus under caption "Use of Proceeds"; and
(l) whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all costs and expenses incident to the performance of its obligations
hereunder, including without limiting the generality of the foregoing, all
costs and expenses (i) incident to the
<PAGE>
-13-
preparation, reregistration, transfer, execution and delivery of the
Shares, (ii) incident to the preparation, printing and filing under the
Securities Act of the Registration Statement, the Prospectus and any
preliminary prospectus (including in each case all exhibits, amendments
and supplements thereto), (iii) incurred in connection with the
registration or qualification of the Shares under the laws of such
jurisdictions as the Representatives may designate (including fees of
counsel for the Underwriters and its disbursements), (iv) in connection
with the listing of the Shares on the Nasdaq National Market, (v) related
to the filing with, and clearance of the offering by, the National
Association of Securities Dealers, Inc., (vi) in connection with the
printing and delivery of this Agreement, the Preliminary and Supplemental
Blue Sky Memoranda and the furnishing to the Underwriters and dealers of
copies of the Registration Statement and the Prospectus, including
mailing and shipping, as herein provided, (vii) any expenses incurred by
the Company in connection with a "road show" presentation to potential
investors, (viii) the cost of preparing stock certificates and (ix) the
cost and charges of any transfer agent and any registrar.
6. The several obligations of the Underwriters hereunder to purchase
the Shares on the Closing Date or the Additional Closing Date, as the case may
be, are subject to the performance by the Company of their respective
obligations hereunder and to the following additional conditions:
(a) the Registration Statement shall have become effective (or if a
post-effective amendment is required to be filed under the Securities Act,
such post-effective amendment shall have become effective) not later than
5:00 P.M., New York City time, on the date hereof; and no stop order
suspending the effectiveness of the Registration Statement or any
post-effective amendment shall be in effect, and no proceedings for such
purpose shall be pending before or threatened by the Commission; the
Prospectus shall have been filed with the Commission pursuant to
Rule 424(b) within the applicable time period prescribed for such filing by
the rules and regulations under the Securities Act and in accordance with
Section 5(a) hereof; and all requests for additional information shall have
been complied with to the satisfaction of the Representatives;
(b) the respective representations and warranties of the Company
contained herein are true and correct on and as of the Closing Date or the
Additional Closing Date, as the case may be, as if made on and as of the
Closing Date or the Additional Closing Date, as the case may be, and the
Company shall have complied with all agreements and all conditions on its
part to be performed or satisfied hereunder at or prior to the Closing Date
or the Additional Closing Date, as the case may be;
(c) subsequent to the execution and delivery of this Agreement and
prior to the Closing Date or the Additional Closing Date, as the case may
be, there shall not
<PAGE>
-15-
have occurred any downgrading, nor shall any notice have been given of
(i) any downgrading, (ii) any intended or potential downgrading or (iii)
any review or possible change that does not indicate an improvement, in
the rating accorded any securities of or guaranteed by the Company by any
"nationally recognized statistical rating organization," as such term is
defined for purposes of Rule 436(g)(2) under the Securities Act;
(d) since the respective dates as of which information is given in
the Prospectus there shall not have been any change in the capital stock
or long-term debt of the Company or any of its subsidiaries or any
Material Adverse Change, or any development involving a prospective
Material Adverse Change, otherwise than as set forth or contemplated in
the Prospectus, the effect of which in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares on the Closing Date or the
Additional Closing Date, as the case may be, on the terms and in the
manner contemplated in the Prospectus; and neither the Company nor any of
its subsidiaries has sustained since the date of the latest audited
financial statements included or incorporated by reference in the
Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or
decree, otherwise than as set forth or contemplated in the Prospectus;
(e) the Representatives shall have received on and as of the
Closing Date or the Additional Closing Date, as the case may be, a
certificate of an executive officer of the Company, with specific
knowledge about the Company's financial matters, satisfactory to the
Representatives to the effect set forth in subsections (a) through (d)
of this Section and to the further effect that there has not occurred
any Material Adverse Change, or any development involving a prospective
Material Adverse Change, from that set forth or contemplated in the
Registration Statement;
(f) Lane Powell Spears Lubersky LLP, counsel for the Company, shall
have furnished to the Representatives their written opinion, dated the
Closing Date or the Additional Closing Date, as the case may be, in form
and substance satisfactory to the Representatives, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as
described in the Prospectus;
(ii) the Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each
<PAGE>
-16-
other jurisdiction in which it owns or leases properties, or conducts
any business, so as to require such qualification, other than where
the failure to be so qualified or in good standing would not have a
Material Adverse Effect;
(iii) each of the Company's subsidiaries has been duly
incorporated and is validly existing as a corporation under the laws
of its jurisdiction of incorporation with power and authority
(corporate and other) to own its properties and conduct its business
as described in the Prospectus; and all of the outstanding shares of
capital stock of each subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable, and
(except, in the case of foreign subsidiaries, for directors'
qualifying shares and except as otherwise set forth in the
Prospectus) are owned directly or indirectly by the Company, free
and clear of all liens, encumbrances, equities or claims;
(iv) other than as set forth or contemplated in the
Prospectus, to the best of such counsel's knowledge, there are no
legal or governmental investigations, actions, suits or proceedings
pending or threatened against or affecting the Company or any of its
subsidiaries or any of their respective properties or to which the
Company or any of its subsidiaries is or may be a party or to which
any property of the Company or its subsidiaries is or may be the
subject which, if determined adversely to the Company or any of its
subsidiaries, could individually or in the aggregate have, or
reasonably be expected to have, a Material Adverse Effect; to the
best of such counsel's knowledge, no such proceedings are threatened
or contemplated by governmental authorities or threatened by others;
and such counsel does not know of any statutes, regulations,
contracts or other documents that are required to be described in
the Registration Statement or Prospectus or to be filed as exhibits
to the Registration Statement that are not described or filed as
required;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the outstanding shares of capital stock of the Company
have been duly authorized and are validly issued, fully paid and
non-assessable;
(viii) the Shares to be issued and sold by the Company hereunder
have been duly authorized, and when delivered to and paid for by the
Underwriters in accordance with the terms of this Agreement, will be
validly issued,
<PAGE>
-17-
fully paid and non-assessable and, to the best of such counsel's
knowledge, the issuance of such Shares is not subject to any
preemptive or similar rights;
(ix) the statements in the Prospectus under "Shares Eligible For
Future Sale" and "Description of Capital Stock", in the Prospectus
incorporated by reference from Item 3 of Part 1 of the Company's
Annual Report on Form 10-K for the year ended April 30, 1999 and in
the Registration Statement in Items 14 and 15, insofar as such
statements constitute a summary of the terms of the Common Stock,
legal matters, documents or proceedings referred to therein, fairly
present the information called for with respect to such terms, legal
matters, documents or proceedings;
(x) such counsel is of the opinion that the Registration
Statement and the Prospectus and any amendments and supplements
thereto (other than the financial statements, schedules and related
financial information included therein, as to which such counsel
need express no opinion) comply as to form in all material respects
with the requirements of the Securities Act and believes that (other
than the financial statements, schedules and related financial
information included therein, as to which such counsel need express
no belief) the Registration Statement and the prospectus included
therein at the time the Registration Statement became effective did
not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make
the statements therein not misleading, and that the Prospectus, as
amended or supplemented, if applicable, does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
(xi) neither the Company nor, to the best of such counsel's
knowledge, any of its subsidiaries is, or with the giving of notice
or lapse of time or both would be, in violation of or in default
under, its Articles of Incorporation or By-Laws or any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which it or any of them or any of
their respective properties is bound, except for violations and
defaults which individually and in the aggregate are not material to
the Company and its subsidiaries taken as a whole; and the
performance by the Company of its obligations under this Agreement
and the consummation of the transactions contemplated herein will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which
<PAGE>
-18-
the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is
subject, nor will any such action result in any violation of the
provisions of the Articles of Incorporation or the By-Laws of the
Company or any applicable law or statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or, to the
best of such counsel's knowledge, any subsidiary or its respective
properties;
(xii) no consent, approval, authorization, order, license,
registration or qualification of or with any court or governmental
agency or regulatory body is required for the consummation by the
Company of the transactions contemplated by this Agreement, except
such consents, approvals, authorizations, orders, licenses,
registrations or qualifications as have been obtained under the
Securities Act and as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters;
(xiii) the Company is not and, after giving effect to the
offering and sale of the shares, will not be an "investment company"
or entity "controlled" by an "investment company", as such terms are
defined in the Investment Company Act;
(xiv) the documents incorporated by reference in the
Prospectus or any further amendment or supplement thereto made by
the Company prior to the Closing Date or the Additional Closing
Date, as the case may be, (other than the financial statements,
schedules and related financial information included therein, as to
which such counsel need express no opinion), when they became
effective or were filed with the Commission, as the case may be,
complied as to form in all material respects with the requirements
of the Securities Act or the Exchange Act, as applicable, and the
rules and regulations of the Commission thereunder; and they have no
reason to believe that any of such documents, when such documents
became effective or were so filed, as the case may be, contained, in
the case of a registration statement which became effective under
the Securities Act, an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or in the
case of other documents which were filed under the Exchange with the
Commission, an untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were
made when such documents were so filed, not misleading;
<PAGE>
-19-
(xv) the Rights Agreement has been duly authorized, executed
and delivered by the Company; the Rights have been duly authorized
by the Company and, when issued upon issuance of the Shares, will be
validly issued, and the Class A Junior Preferred Stock has been duly
authorized by the Company and validly reserved for issuance upon the
exercise of the Rights and, when issued upon such exercise in
accordance with the terms of the Rights Agreement, will be validly
issued, fully paid and non-assessable;
(xvi) to the best of such counsel's knowledge, each of the
Company and its subsidiaries owns, possesses or has obtained all
licenses, permits, certificates, consents, orders, approvals and
other authorizations from, and has made all declarations and filings
with, all federal, state, local and other governmental authorities
(including foreign regulatory agencies), all self-regulatory
organizations and all courts and other tribunals, domestic or
foreign, necessary to own or lease, as the case may be, and to
operate its properties and to carry on its business as conducted as
of the date hereof, and neither the Company nor any such subsidiary
has received any actual notice of any proceeding relating to
revocation or modification of any such license, permit, certificate,
consent, order, approval or other authorization, except as described
in the Registration Statement and the Prospectus; and each of the
Company and its subsidiaries is in compliance with all laws and
regulations relating to the conduct of its business as conducted as
of the date of the Prospectus;
(xvii) to the best of such counsel's knowledge, the Company
owns, possesses or has the right to use the Intellectual Property
necessary to carry on the business conducted by it as of the date
hereof; and
(xviii) the Registration Statement has been declared effective
under the Securities Act and, to such counsel's knowledge, no stop
order proceedings with respect thereto are pending before or
threatened by the Commission under the Securities Act.
In rendering such opinions, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States
and the State of Washington, to the extent such counsel deems proper and to
the extent specified in such opinion, if at all, upon an opinion or
opinions (in form and substance reasonably satisfactory to Underwriters'
counsel) of other counsel reasonably acceptable to the Underwriters'
counsel, familiar with the applicable laws; (B) as to matters of fact, to
the extent such counsel deems proper, on certificates of responsible
officers of the Company and certificates or other written statements of
officials of jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company. The opinion of such
counsel for the Company shall state that the opinion
<PAGE>
-20-
of any such other counsel upon which they relied is in form satisfactory
to such counsel. With respect to the matters to be covered in
subparagraphs (vi), (ix) and (x) above counsel may state their opinion
and belief is based upon their participation in the preparation of the
Registration Statement and the Prospectus and any amendment or supplement
thereto (other than the documents incorporated by reference herein) and
review and discussion of the contents thereof (including the documents
incorporated by reference therein) but is without independent check or
verification except as specified.
The opinion of Lane Powell Spears Lubersky LLP described above shall
be rendered to the Underwriters at the request of the Company and shall so
state therein;
(g) on the effective date of the Registration Statement and the
effective date of the most recently filed post-effective amendment to the
Registration Statement and also on the Closing Date or Additional Closing
Date, as the case may be, Ernst & Young shall have furnished to you
letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, containing statements and information of
the type customarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus;
(h) the Representatives shall have received on and as of the Closing
Date or Additional Closing Date, as the case may be, an opinion of Cahill
Gordon & Reindel, counsel to the Underwriters, with respect to the due
authorization and valid issuance of the Shares, the Registration
Statement, the Prospectus and other related matters as the
Representatives may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(i) the Shares to be delivered on the Closing Date or Additional
Closing Date, as the case may be, shall have been approved for listing on
the Nasdaq National Market, subject to official notice of issuance;
(j) on or prior to the Closing Date or Additional Closing Date, as
the case may be, the Company shall have furnished to the Representatives
such further certificates and documents as the Representatives shall
reasonably request; and
(k) the Lock-Up Agreements shall be in full force and effect on the
Closing Date or Additional Closing Date, as the case may be.
7. The Company agrees to indemnify and hold harmless each Underwriter,
each affiliate of any Underwriter which assists such Underwriter in the
distribution of
<PAGE>
-21-
the Shares and each person, if any, who controls any Underwriter within the
meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act, from and against any and all losses, claims, damages and
liabilities (including, without limitation, the legal fees and other expenses
incurred in connection with any suit, action or proceeding or any claim
asserted) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus (as
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) or any preliminary prospectus, or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with information relating to any Underwriter
furnished to the Company in writing by such Underwriter through the
Representatives expressly for use therein.
Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement and each person who controls the Company within the meaning of Section
15 of the Securities Act and Section 20 of the Exchange Act to the same extent
as the foregoing indemnity from the Company to each Underwriter, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through the Representatives expressly for use in
the Registration Statement, the Prospectus, any amendment or supplement thereto,
or any preliminary prospectus.
If any suit, action, proceeding (including any governmental or regulatory
investigation), claim or demand shall be brought or asserted against any
person in respect of which indemnity may be sought pursuant to the preceding
paragraphs of this Section 7, such person (the "INDEMNIFIED PERSON") shall
promptly notify the person or persons against whom such indemnity may be
sought (each an "INDEMNIFYING PERSON") in writing, and such Indemnifying
Persons, upon request of the Indemnified Person, shall retain counsel
reasonably satisfactory to the Indemnified Person to represent the Indemnified
Person and any others the Indemnifying Persons may designate in such
proceeding and shall pay the fees and expenses of such counsel related to such
proceeding. In any such proceeding, any Indemnified Person shall have the
right to retain its own counsel, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Person and not the Indemnifying
Persons unless (i) the Indemnifying Persons and the Indemnified Person shall
have mutually agreed to the contrary, (ii) the Indemnifying Persons has failed
within a reasonable time to retain counsel reasonably satisfactory to the
Indemnified Person or (iii) the named parties in any such proceeding
(including any impleaded parties) include both an Indemnifying Person and the
Indemnified Person and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them in the conduct of the defense in such proceeding. It is understood that
no Indemnifying Person shall, in connection with any proceed-
<PAGE>
-22-
ing or related proceeding in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel) for
all Indemnified Persons, and that all such fees and expenses shall be
reimbursed as they are incurred. Any such separate firm for the Underwriters,
each affiliate of any Underwriter which assists such Underwriter in the
distribution of the Shares, and such control persons of Underwriters shall be
designated in writing by J.P. Morgan Securities Inc. and any such separate
firm for the Company, its directors, its officers who sign the Registration
Statement and such control persons of the Company shall be designated in
writing by the Company. No Indemnifying Person shall be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff,
each Indemnifying Person agrees to indemnify any Indemnified Person from and
against any loss or liability by reason of such settlement or judgment in
accordance with the terms hereof. Notwithstanding the foregoing sentence, if
at any time an Indemnified Person shall have requested an Indemnifying Person
to reimburse the Indemnified Person for fees and expenses of counsel as
provided in the second and third sentences of this paragraph, such
Indemnifying Person agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by such Indemnifying Person of
the aforesaid request and (ii) such Indemnifying Person shall not have
reimbursed the Indemnified Person in accordance with such request prior to the
date of such settlement. No Indemnifying Person shall, without the prior
written consent of the Indemnified Person, effect any settlement of any
pending or threatened proceeding in respect of which any Indemnified Person is
or could have been a party and indemnity could have been sought hereunder by
such Indemnified Person, unless such settlement includes an unconditional
release of such Indemnified Person from all liability on claims that are the
subject matter of such proceeding.
If the indemnification provided for in the first three paragraphs of
this Section 7 is unavailable to an Indemnified Person or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each Indemnifying Person under such paragraph, in lieu of indemnifying such
Indemnified Person thereunder, shall contribute to the amount paid or payable by
such Indemnified Person as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Underwriters on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand shall be deemed
to be in the same respective proportions as the net proceeds from the offering
(before deducting expenses) received by the Company and the total underwriting
discounts and the commissions received by the Underwriters, in each case as set
forth in the
<PAGE>
-23-
table on the cover of the Prospectus, bear to the aggregate public offering
price of the Shares. The relative fault of the Company on the one hand and the
Underwriters on the other hand shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by PRO RATA
allocation (even if the Underwriters were treated as one entity for such
purposes) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses incurred by such Indemnified Person in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, in no event shall an
Underwriter be required to contribute any amount in excess of the amount by
which the total price at which the Shares underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages that
such Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section ll(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares set forth opposite their names in Schedule I hereto,
and not joint.
The remedies provided for in this Section 7 are not exclusive and shall
not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
The indemnity and contribution agreements contained in this Section 7
and the representations and warranties of the Company set forth in this
Agreement shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Underwriter or any person controlling any Underwriter or by or on behalf
of the Company, its officers or directors or any other person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
8. Notwithstanding anything herein contained, this Agreement (or the
obligations of the several Underwriters with respect to the Option Shares) may
be terminated in the absolute discretion of the Representatives, by notice given
to the Company if after the execution and delivery of this Agreement and prior
to the Closing Date (or, in the case of the
<PAGE>
-24-
Option Shares, prior to the Additional Closing Date) (i) trading generally
shall have been suspended or materially limited on or by, as the case may be,
any of the New York Stock Exchange or the American Stock Exchange, the
National Association of Securities Dealers, Inc., the Chicago Board Options
Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii)
trading of any securities of or guaranteed by the Company shall have been
suspended on any exchange or in any over-the-counter market, (iii) a general
moratorium on commercial banking activities in New York shall have been
declared by either Federal or New York State authorities, or (iv) there shall
have occurred any outbreak or escalation of hostilities or any change in
financial markets or any calamity or crisis that, in the judgment of the
Representatives, is material and adverse and which, in the judgment of the
Representatives, makes it impracticable to market the Shares being delivered
at the Closing Date or the Additional Closing Date, as the case may be, on the
terms and in the manner contemplated in the Prospectus.
9. This Agreement shall become effective upon the later of (x)
execution and delivery hereof by the parties hereto and (y) release of
notification of the effectiveness of the Registration Statement (or, if
applicable, any post-effective amendment) by the Commission.
If on the Closing Date or the Additional Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
which it or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of Shares to be purchased on such date, the other Underwriters
shall be obligated severally in the proportions that the number of Shares set
forth opposite their respective names in Schedule I bears to the aggregate
number of Underwritten Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as the Representatives
may specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; PROVIDED
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to Section 1 be increased pursuant to this Section 9 by an
amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If on the Closing Date or the Additional Closing
Date, as the case may be, any Underwriter or Underwriters shall fail or refuse
to purchase Shares which it or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date, and arrangements satisfactory to the Representatives, the Company
for the purchase of such Shares are not made within 36 hours after such default,
this Agreement (or the obligations of the several Underwriters to purchase the
Company Option Shares, as the case may be) shall terminate without liability on
the part of any non-defaulting Underwriter or the Company. In any such case
either you or the Company shall have the right to postpone the Closing Date (or,
in the
<PAGE>
-25-
case of the Option Shares, the Additional Closing Date), but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
10. If this Agreement shall be terminated by the Underwriters, or any
of them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason any of the Company shall be unable to perform its obligations under
this Agreement or any condition of the Underwriters' obligations cannot be
fulfilled, the Company agrees to reimburse the Underwriters or such Underwriters
as have so terminated this Agreement with respect to themselves, severally, for
all out-of-pocket expenses (including the fees and expenses of its counsel)
reasonably incurred by the Underwriter in connection with this Agreement or the
offering contemplated hereunder.
11. This Agreement shall inure to the benefit of and be binding upon
the Company and the Underwriters, each affiliate of any Underwriter which
assists such underwriter in the distribution of the Shares, any controlling
persons referred to herein and their respective successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person, firm or corporation any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. No purchaser of Shares from any Underwriter shall be deemed to be a
successor by reason merely of such purchase.
12. Any action by the Underwriters hereunder may be taken by the
Representatives jointly or by J.P. Morgan Securities Inc. alone on behalf of the
Underwriters, and any such action taken by the Representatives jointly or by
J.P. Morgan Securities Inc. alone shall be binding upon the Underwriters. All
notices and other communications hereunder shall be in writing and shall be
deemed to have been duly given if mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be given to the
Representatives, c/o J.P. Morgan Securities Inc., 60 Wall Street, New York, New
York 10260 (telefax: (212) 648-5705); Attention: Syndicate Department. Notices
to the Company shall be given to it at 2701 First Avenue, Suite 500, Seattle, WA
98121, (telefax: (206) 448-0589); Attention: President.
13. This Agreement may be signed in counterparts, each of which shall
be an original and all of which together shall constitute one and the same
instrument.
14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS
OF LAWS PROVISIONS THEREOF.
<PAGE>
-26-
If the foregoing is in accordance with your understanding, please sign
and return four counterparts hereof.
Very truly yours,
CUTTER & BUCK INC.
By:
-------------------------------
Name:
Title:
<PAGE>
-27-
Accepted as of the date first
written above:
J.P. MORGAN SECURITIES INC.
HAMBRECHT & QUIST LLC
NEEDHAM & COMPANY, INC.
Acting severally on behalf
of themselves and the
several Underwriters listed
in Schedule I hereto.
By: J.P. MORGAN SECURITIES INC.
By:
---------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
SCHEDULE I
<TABLE>
<CAPTION>
Number of Under-
written Shares
Underwriter To Be Purchased
- ----------- ----------------
<S> <C>
J.P. Morgan Securities Inc..................................
Hambrecht & Quist LLC.......................................
Needham & Co................................................
---------
Total 1,700,000
---------
---------
</TABLE>
<PAGE>
EXHIBIT 5.1
July 20, 1999
Cutter & Buck Inc.
2701 First Avenue
Suite 500
Seattle, WA 98121
Dear Sir/Madam:
We have acted as counsel to Cutter & Buck Inc. (the "Company") in connection
with the preparation and filing of a registration statement on Form S-3 (the
"Registration Statement") under the Securities Act of 1933, as amended, which
the Company has filed with the Securities and Exchange Commission with respect
to 1,700,000 shares (the "Company Stock") of the Company's common stock, no par
value (the "Common Stock"), to be offered by the Company, together with an
additional 255,000 shares if and to the extent the Underwriters exercise an
over-allotment option granted by the Company (the "Over-allotment Shares").
The Company Shares and the Over-allotment Shares are together referred to as
the "Shares."
We have examined the Registration Statement and such documents and records of
the Company and other documents as we have deemed necessary for the purpose of
this opinion. Based on the foregoing, we are of the opinion that upon the
happening of the following events:
(a) filing of any amendments to the Registration Statement and the
effectiveness of the Registration Statement, and
(b) due execution by the Company and registration by its registrar of the
Shares, and the sale of the Shares as contemplated by the Registration
Statement and in accordance with the aforesaid governmental authorizations,
and the resolutions adopted by the Board of Directors of the Company,
the Shares will be duly authorized, validly issued, fully paid and
nonassessable.
<PAGE>
July 20, 1999
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the reference to our firm in the Prospectus of
the Registration Statement under the heading "Legal Matters."
LANE POWELL SPEARS LUBERSKY LLP
/s/ Lane Powell Spears Lubersky LLP
