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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-Q

For the quarterly period ended October 31, 2002

or

For the transition period from                              to                             

Commission File No. 0-26608

CUTTER & BUCK INC.
(Exact Name of Registrant as Specified in Its Charter)

701 N. 34^th Street, Suite 400
Seattle, WA 98103
(Address of Principal Executive Offices, Including Zip Code)

(206) 622-4191
(Registrant's Telephone Number, Including Area Code)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        The number of shares of Common Stock of the registrant outstanding as of November 30, 2002 was 10,604,510.

CUTTER & BUCK INC.

Quarterly Report on Form 10-Q

For the Quarter Ended October 31, 2002

Index

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PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

CUTTER & BUCK INC.

Condensed Consolidated Balance Sheets

See accompanying notes.

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CUTTER & BUCK INC.

Condensed Consolidated Statements of Operations (Unaudited)

See accompanying notes.

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CUTTER & BUCK INC.

Condensed Consolidated Statement of Cash Flows (Unaudited)

See accompanying notes.

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Cutter & Buck Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1.    Basis of Presentation and Restatement of Financial Statements

        The accompanying unaudited condensed consolidated financial statements have been prepared by Cutter & Buck Inc. (the Company) in accordance with accounting principles generally accepted in the United States for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In our opinion all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Our revenues are seasonal, and therefore the results of operations for the three months and six months ended October 31, 2002 may not be indicative of the results for the full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2002, included in our filing on Form 10-K.

        In consultation with our independent auditors, we restated our audited financial statements for the years ended April 30, 2000 and 2001, and our unaudited financial statements for each of the quarters in those years and for the quarters ended July 31, 2001, October 31, 2001 and January 31, 2002. We initially announced our intention to restate certain financial statements on August 12, 2002. That announcement was made after our new Chairman and Chief Executive Officer, appointed April 2002, discovered certain accounting irregularities. In early August, shortly after her discovery, the Board of Directors appointed a Special Committee to investigate these irregularities. The preliminary conclusion of the Special Committee was that approximately $5.8 million of shipments to three distributors made on a consignment basis during fiscal year 2000 had been recorded as sales of inventory for that year. Subsequent to that announcement, the Special Committee continued its investigation in order to confirm whether any additional accounting irregularities had occurred. The Special Committee was assisted in its investigation by our regular outside legal counsel, special independent legal counsel, a forensic accounting firm and our independent auditors.

        Upon completion of the Special Committee's restatement investigation, our restatement was expanded to include adjustment of certain other transactions related to the timing of revenue recognition and accounting errors discovered at our European subsidiary encompassing the fiscal years 2000 and 2001 and each of the periods noted above. We also recorded a cumulative effect adjustment to retained earnings for amounts related to fiscal 1998 and 1999 of $250,541. Since the restatement adjustments related primarily to the timing of the recognition of revenue, the restatement had an insignificant impact on our shareholders' equity as of April 30, 2002. Refer to the Form 10-K for the year ended April 30, 2002 for details of the restatement impact on the years and quarters previously reported. All adjustments fell into the following categories:

        Restatement of distributor transactions:    In the fourth quarter of fiscal 2000 we made shipments of product to three distributors on a consignment basis and improperly recorded these shipments as sales. Some of this product was sold by the distributors during fiscal 2001 and cash was remitted to us. At the end of fiscal 2001 the unsold product was returned to us and recorded as sales returns. The fiscal 2000 financial statements were restated to reverse these sales and the fiscal 2001 financial statements were restated to record sales by the distributors on a cash basis and to reverse the sales returns.

        Restatement of premature shipments:    We generally ship our product to arrive on customer specified delivery dates. In certain instances, we shipped product to customers well in advance of the date originally specified by the customer. We restated our financial statements for fiscal years 2000 and 2001 and the first three quarters of fiscal 2002 to record sales in the period that the customer requested the goods be received, taking into account a normal time to assure receipt in accordance with customer specified terms.

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        In addition, on certain occasions we shipped product to third parties, who held the product until the customer specified dates, or shipped product in ways that assured slow delivery. We have restated for all such sales to record the sales upon substantive transfer of the products to the customer.

        Restatement of European operations:    Certain accounting errors were discovered during the process of closing our European operations. We restated our financial statements for fiscal years 2000 and 2001 and the first three quarters of fiscal 2002 related to an understatement of accrued expatriate compensation and overstatement of recoverable value added taxes.

        Income Taxes:    We recorded the income tax effects of the restatements in each period using the marginal federal and state income tax rates.

        The effect of the restatement on the consolidated financial statements for the quarter and six months ended October 31, 2001 is summarized as follows (in thousands, except per share data):

        Results identified in the above table as previously reported include reclassifications to conform to EITF 00-10 "Accounting for Shipping and Handling Fees and Costs" and SAB 101 "Revenue Recognition in Financial Statements" that increased net sales and cost of sales for the quarter ended October 31, 2001 by $1,164,000 ($2,831,000 for the six months then ended) and to reclassify licensing and royalty income of $91,000 to net sales ($176,000 for the six months then ended).

Note 2.    Recently Issued Pronouncements

        In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or exit or disposal activity. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of this pronouncement to have a material effect on our consolidated results of operations or financial position.

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Note 3.    Earnings (Loss) Per Share

        Basic earnings (loss) per share is based on the weighted average number of common shares outstanding. Diluted earnings (loss) 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 except when the effect of their inclusion would be antidilutive.

        The following table sets forth the computation of basic and diluted earnings (loss) per share:

Note 4.    Income Taxes

        We recorded approximately $145,000 of income tax expense in the second quarter of fiscal 2003 compared to $223,000 in the second quarter of fiscal 2002. The effective rates for income taxes in the second quarter of fiscal 2003 and 2002 were 34% and 39%, respectively. This decrease in the effective rate on the year-to-date loss related mainly to state tax liabilities in certain jurisdictions and uncertainty as to the utilization of losses in certain other jurisdictions.

Note 5.    Comprehensive Income (Loss)

        The components of our total comprehensive income (loss) were:

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Note 6.    Debt

        In July 2000, we entered into a loan agreement with Washington Mutual Bank (Washington Mutual) for a $55 million line of credit, replacing our previous line of credit. Washington Mutual has included Bank of America, N.A. (Bank of America) in the arrangement as co-lender. The line of credit was originally scheduled to expire on August 1, 2002. In March 2002, we renewed and modified our loan agreement to provide a $35 million line of credit. The new agreement was effective January 31, 2002. Availability of funds under the line is determined by a borrowing formula and those funds are to be used for general corporate purposes. Interest on borrowings is charged and payable monthly at either the Prime rate or the LIBOR rate plus 2.75%, each as defined in the loan agreement, at the borrower's election. The line of credit expires on August 1, 2003 and is collateralized by a security interest in our inventory, accounts receivable, furniture and equipment, contract rights and general intangibles. At October 31, 2002, letters of credit outstanding against this line of credit totaled approximately $11 million and there were no working capital advances outstanding.

        Under the renegotiated line of credit, the $5 million sub-limit in support of Cutter & Buck, B.V. (our European subsidiary) was eliminated in April 2002 upon pay-off of Bank of America's line of credit to Cutter & Buck B.V. The subsidiary's line of credit was used for the same purposes and was subject to the same terms and performance criteria described above.

        The loan agreement contains certain restrictive covenants covering minimum working capital, tangible net worth and interest service coverage, as well as a maximum debt-to-equity ratio and maximum capital expenditures. At October 31, 2002, we were in compliance with these covenants. However, on December 6, 2002, Genesis Insurance Company, our primary Directors' and Officers' liability insurance carrier, notified us that it intends to rescind our Directors' and Officers' liability insurance coverage as a result of alleged misrepresentations made in connection with the policy application. We are currently negotiating the terms of replacement Directors' and Officers' liability insurance coverage from another carrier, but this replacement coverage is not expected to protect us against liabilities resulting from existing claims. As a result, we are out of compliance with a covenant in our loan agreement requiring us to maintain adequate risk insurance. In addition, on December 3, 2002 we announced our intention to close our fourteen retail stores and record a pre-tax charge in the range of $12 to $15 million. We expect the majority of the charge will occur in the third quarter depending on the timing of the store closures, and expect to be out of compliance with certain of our financial covenants as a result of this charge.

        We are currently working with our primary lenders to reduce our line of credit to $20 million. We believe that a credit facility of $20 million is sufficient to meet our current operating needs. We are also in discussion with other lenders about our financing needs. Based on these discussions we may or may not continue with our existing lenders and will consider other lenders interested in providing a similar line of credit. We also believe that sufficient financing in the form of asset based or vendor financing will be available to provide sufficient credit to meet our needs in lieu of our line of credit.

Note 7.    Shareholders' Equity

        During the six months ended October 31, 2002, we sold 16,984 shares under our employee stock purchase plan and pursuant to the exercise of stock options.

Note 8.    Litigation

        We are party to various legal proceedings, including the shareholder lawsuits that arose from the restatement of our financial statements. In addition, we are a party to a shareholder derivative suit,

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purportedly brought on our own behalf, against certain of our current and former directors and executive officers.

        These proceedings are described in Part II, Item 1—Legal Proceedings. We are not in a position at this time to quantify the amount or range of any possible losses related to those claims.

        We are also party to other routine litigation incidental to our business. Management believes the ultimate resolution of these other routine matters will not have a material adverse effect on our financial position and results of operations.

Note 9.    Restructuring and Asset Impairment

        Restructuring and asset impairment expenses were $0.1 million for the three months ended October 31, 2002 and $3.9 million for the six months ended October 31, 2002. Of the $3.8 million recorded in the first quarter, $3.3 million related to losses on subleases of our excess warehouse capacity at our distribution center, $0.3 million related to additional reserves against receivable balances with both our former Chief Executive Officer and our former President and $0.2 million related to additional expenses arising under our restructuring plan. The liability resulting from recognizing the losses on subleases has been recorded in other current liabilities and other long term liabilities on our Condensed Consolidated Balance Sheets. The $0.1 million recorded in the second quarter related to additional expenses resulting from our restructuring plan.

        Effective May 1, 2002, we entered into a license agreement with Eurostyle Ltd. (Eurostyle) to distribute our men's and women's Golf and Classic apparel collections and golf accessories throughout Europe. The license agreement requires Eurostyle to make certain minimum royalty payments and expires on June 30, 2005. Effective May 1, 2002 we also entered into an asset purchase agreement with Eurostyle to sell inventory, certain accounts receivable balances and fixtures.

        For the six months ended October 31, 2002, the total restructuring and asset impairment charges were as follows:

        Activity in the accrued liability for restructuring consisted of the following for the first six months of fiscal 2003:

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        Total severance and termination benefits as a result of the fiscal 2002 restructuring plan related to approximately 35 employees, all of whom have been terminated. Total cash paid for severance and termination benefits was approximately $0.7 million.

        The amounts recorded represent management's best estimate of the costs to be incurred. The actual amounts incurred could vary from these estimates if future developments differ from the underlying assumptions used in developing the accrual.

Note 10.    Restatement Expenses

        As described in Note 1, we restated certain of our financial statements for irregularities and errors. The restatements required a thorough investigation of what occurred and how it should be corrected. In addition to the extensive efforts of our employees in this investigation, we utilized our regular outside legal counsel, special independent legal counsel, a forensic accounting firm, our independent auditors and other specialists for additional procedures. The resulting professional fees plus accrued retention bonuses to certain key employees amounted to approximately $1.3 million for the quarter ended October 31, 2002. We will continue to incur substantial legal and other professional service costs in connection with the shareholder lawsuits and responding to the inquiries of the SEC. In addition, there will be an ongoing charge each quarter until April 2004 for the retention bonus, which will aggregate to as much as $2.5 million payable in March 2004.

Note 11.    Segment and Geographic Information

        We have two operating segments: wholesale and retail. The wholesale segment is primarily comprised of sales to golf and fashion apparel resellers and to corporate customers. The retail segment is comprised of our retail stores and our e-commerce site. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The information

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presented below for these segments is information used by our chief operating decision maker in evaluating operating performance.