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Risk Factors
CUTTER & BUCK INC Item 1A Risk Factors Brand Integrity Because we position the Cutter & Buck brand to consistently represent high-quality premium-branded apparel that is available at select locations, maintaining the integrity of the Cutter & Buck brand is essential to our business
We regard our name and logo as valuable assets, and critical to marketing our products based on our brand image
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 do not believe we have been materially harmed by infringement of our trademarks or trade dress to date, we have experienced some instances of such infringement and have taken actions to protect our rights
If we are unable to successfully defend the integrity of our brand, our business may be materially harmed
Design The success of Cutter & Buck is dependant on our ability to offer styles that please consumer tastes for color, styles, and fabrics
If we misjudge these tastes, we could experience insufficient or excess inventory levels, missed market opportunities, or higher markdowns
Inventory Management Due to long lead times in the apparel industry that result from the seasonal characteristics of our business, customer delivery schedules, and the shipping time from factories to our distribution center, which is generally four to six weeks, sales forecasting and inventory planning are of paramount importance
Our ability to continue to satisfy our Corporate customers is partially dependant upon our ability to meet their needs on demand
In order to meet the unique needs of all our distribution channels, we generally maintain inventory balances of approximately four to five months of sales
If we are unable to accurately forecast our sales or plan for appropriate levels of inventories, it may have a material adverse impact on our financial condition and results of operations
6 ______________________________________________________________________ Third-Party Production Our products are produced by third parties
We do not own or operate any production facilities
Although we believe we have good relationships with our factory partners, we do not have long-term contracts with them
Therefore, our competitors may gain production capacity that we need for our business or the factories may fail to perform as expected, which may result in our customers canceling or reducing their orders
Reliance on third-party manufacturers also creates quality control risks
A failure in our quality control program could result in diminished product quality
Overseas Production We have not experienced any material difficulties as a result of foreign political, economic, or social instability, however we remain subject to the risks associated with foreign suppliers, including, without limitation, economic, environmental, political, and health risks, especially if they impacted Thailand and India, where the majority of our production occurs
We may experience delays in shipping from time to time, whether due to third-party strikes or otherwise
Delays in shipments and other factors beyond our control could materially harm our relationships with our customers, our reputation in the industry, and our financial condition and operating results
Distractions of a Governance or Proxy Challenge In the past, shareholders have submitted nominees for our board of directors and it is possible that we might receive shareholder nominations for our board at our 2006 annual meeting
If we do receive nominations our Corporate Governance Committee determines that inclusion of those nominees as part of our recommended slate is not in the best interest of the Company or our shareholders, the Committee’s fiduciary duties would dictate that it oppose the election of those nominees
In that circumstance, we could face a proxy contest and management would be required to expend substantial time and energy, which may divert management’s attention from our operations
We could also incur significant additional costs, including legal and financial advisory fees, that would negatively impact our operating results
We could also experience management and employee distraction and may have difficulty attracting and retaining employees as a result of the uncertainty that often accompanies this type of event
Key Employees Because we position the Cutter & Buck brand to represent high-quality, premium-branded apparel, coupled with superior customer service, we rely on key employees in various areas of our operations
We also operate on a strict seasonal merchandise calendar that includes personnel from our design, product development, production, and sales groups
If we were to experience the loss of key employees in the future without orderly succession, our business might be harmed
Competition Some of our competitors are significantly larger and more diversified than we are and have substantially greater resources available for developing, marketing, sourcing, and selling their products
We cannot provide assurance that we will be able to maintain or increase our market share in our distribution channels
We may also face increased competition from new competitors
As a result of this competition, we may experience lower sales or greater operating costs, which would have an adverse effect on our margins and our results of operations