##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2004 OR [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission file number: 0-18553 Ashworth, Inc. Delaware
    
    84-1052000(State or Other Jurisdiction of
    
    (I.R.S. EmployeeIncorporation or Organization)
    
    Identification No.)
 2765 LOKER AVENUE WEST
CARLSBAD, CA 92008
(Address of Principal Executive Offices) (760) 438-6610
(Telephone No. Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Title
    
    Outstanding at September 9, 2004$.001 par value Common Stock
    
    13,461,502




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INDEX PAGEPart I. Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item
2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item
3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    24Part II. Other InformationItem
1.
    
    Legal Proceedings
    
    
    24Item
2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item
3.
    
    Defaults Upon Senior Securities
    
    
    25Item
4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item
5.
    
    Other Information
    
    
    25Item
6.
    
    Exhibits and Reports on Form 8-K
    
    
    25Signatures
    
    
    32Exhibit Index
    
    
    33EXHIBIT 10.(z)(1)EXHIBIT 10.(z)(2)EXHIBIT 10.(z)(3)EXHIBIT 10.(z)(4)EXHIBIT 10.(z)(5)EXHIBIT 10.(z)(6)EXHIBIT 10.(z)(7)EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  -i-




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PART I FINANCIAL INFORMATION ASHWORTH, INC. AND SUBSIDIARIES 
  July 31,
    
    October 31,2004
    
    2003(UNAUDITED)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,140,000
    
    
    $
    5,024,000Accounts receivable  trade, net
    
    
    42,185,000
    
    
    
    30,993,000Accounts receivable  other
    
    
    1,218,000
    
    
    
    1,575,000Inventories, net
    
    
    46,406,000
    
    
    
    44,476,000Other current assets
    
    
    4,595,000
    
    
    
    3,676,000Deferred income tax asset
    
    
    1,890,000
    
    
    
    1,953,000Total current assets
    
    
    99,434,000
    
    
    
    87,697,000Property, plant and equipment, at cost
    
    
    51,746,000
    
    
    
    39,985,000Less accumulated depreciation and amortization
    
    
    (19,029,000
    )
    
    
    (22,523,000
    )Total property, plant and equipment, net
    
    
    32,717,000
    
    
    
    17,462,000Goodwill
    
    
    12,270,000
    
    
    
    Intangible assets, net
    
    
    10,974,000
    
    
    
    636,000Other assets
    
    
    675,000
    
    
    
    241,000Total assets
    
    $
    156,070,000
    
    
    $
    106,036,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit payable
    
    $
    1,750,000
    
    
    $
    3,400,000Current portion of long-term debt
    
    
    4,545,000
    
    
    
    289,000Accounts payable  trade
    
    
    12,133,000
    
    
    
    5,731,000Income taxes payable
    
    
    1,053,000
    
    
    
    118,000Accrued liabilities
    
    
    9,218,000
    
    
    
    3,917,000Total current liabilities
    
    
    28,699,000
    
    
    
    13,455,000Long-term debt, net of current portion
    
    
    28,237,000
    
    
    
    2,631,000Deferred income tax liability
    
    
    1,586,000
    
    
    
    950,000Other long-term liabilities
    
    
    346,000
    
    
    
    445,000Stockholders equity:Common stock
    
    
    13,000
    
    
    
    13,000Capital in excess of par value
    
    
    40,496,000
    
    
    
    39,230,000Retained earnings
    
    
    54,211,000
    

    
    
    47,906,000Accumulated other comprehensive income
    
    
    2,482,000
    
    
    
    1,406,000Total stockholders equity
    
    
    97,202,000
    
    
    
    88,555,000Total liabilities and stockholders equity
    
    $
    156,070,000
    
    
    $
    106,036,000
 See accompanying notes to condensed consolidated financial statements. 1




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##### Table of Contents



ASHWORTH, INC. AND SUBSIDIARIES 
   Three months ended July 31,
    
    Nine months ended July 31,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    42,825,000
    
    
    $
    37,960,000
    
    
    $
    124,835,000
    
    
    $
    117,118,000Cost of goods sold
    
    
    24,798,000
    
    
    
    22,284,000
    
    
    
    72,808,000
    
    
    
    69,515,000Gross profit
    
    
    18,027,000
    
    
    
    15,676,000
    
    
    
    52,027,000
    
    
    
    47,603,000Selling, general and
administrative expenses
    
    
    13,560,000
    
    
    
    12,051,000
    
    
    
    39,052,000
    
    
    
    36,445,000Income from operations
    
    
    4,467,000
    
    
    
    3,625,000
    
    
    
    12,975,000
    
    
    
    11,158,000Other income (expense):Interest income
    
    
    14,000
    
    
    
    9,000
    
    
    
    46,000
    
    
    
    24,000Interest expense
    
    
    (452,000
    )
    
    
    (232,000
    )
    
    
    (848,000
    )
    
    
    (683,000
    )Other income (expense), net
    
    
    (3,183,000
    )
    
    
    37,000
    
    
    
    (1,664,000
    )
    
    
    253,000Total other expense
    
    
    (3,621,000
    )
    
    
    (186,000
    )
    
    
    (2,466,000
    )
    
    
    (406,000
    )Income before provision
for income taxes
    
    
    846,000
    
    
    
    3,439,000
    
    
    
    10,509,000
    
    
    
    10,752,000Provision for income taxes
    
    
    338,000
    
    
    
    1,376,000
    
    
    
    4,204,000
    
    
    
    4,301,000Net income
    
    $
    508,000
    
    
    $
    2,063,000
    
    
    $
    6,305,000
    
    
    $
    6,451,000Net income per shareBasic:Weighted average shares
outstanding
    
    
    13,444,000
    
    
    
    13,006,000
    
    
    
    13,366,000
    
    
    
    12,972,000Net income per share
    
    $
    0.04
    
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.50Diluted:Weighted average shares
outstanding
    
    
    13,757,000
    
    
    
    13,211,000
    
    
    
    13,703,000
    
    
    
    13,124,000Net income per share
    
    $
    0.04
    
    
    $
    0.16
    
    
    $
    0.46
    
    
    $
    0.49
 See accompanying notes to condensed consolidated financial statements. 2




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##### Table of Contents



ASHWORTH, INC. AND SUBSIDIARIES 
   Nine months ended July 31,2004
    
    2003Cash flows from operating activities:Net cash provided by operating activities
    
    $
    8,588,000
    
    
    $
    8,432,000Cash flows from investing activities:Proceeds from sale of fixed assets
    
    
    5,277,000
    
    
    
    Purchases of property and equipment
    
    
    (19,263,000
    )
    
    
    (2,422,000
    )Acquisition of business
    
    
    (23,678,000
    )
    
    
    Net cash used in investing activities
    
    
    (37,664,000
    )
    
    
    (2,422,000
    )Increase in restricted cash
    
    
    (16,000
    )
    
    
    Principal payments on capital lease obligations
    
    
    (127,000
    )
    
    
    (129,000
    )Borrowings on line of credit
    
    
    27,539,000
    
    
    
    37,102,000Payments on line of credit
    
    
    (31,350,000
    )
    
    
    (42,227,000
    )Borrowing on notes payable and long-term debt
    
    
    31,666,000
    
    
    
    Principal payments on notes payable and long-term debt
    
    
    (2,677,000
    )
    
    
    (355,000
    )Proceeds from issuance of common stock
    
    
    1,081,000
    
    
    
    624,000Net cash provided by (used in) financing activities
    
    
    26,116,000
    
    
    
    (4,985,000
    )Effect of exchange rate changes on cash
    
    

    1,076,000
    
    
    
    668,000Net increase (decrease) in cash and cash equivalents
    
    
    (1,884,000
    )
    
    
    1,693,000Cash and cash equivalents, beginning of period
    
    
    5,024,000
    
    
    
    2,336,000Cash and cash equivalents, end of period
    
    $
    3,140,000
    
    
    $
    4,029,000Supplemental disclosures of noncash transactions:Note payable issued for acquisition of business
    
    $
    1,000,000
    
    
    
    
 See accompanying notes to condensed consolidated financial statements. 3




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ASHWORTH, INC. AND SUBSIDIARIES 
   NOTE 1  Basis of Presentation.  In the opinion of management, the accompanying condensed consolidated
balance sheets and related interim condensed consolidated statements of
operations and cash flows include all adjustments (consisting only of normal
recurring items) necessary for their fair presentation. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses and the disclosure of contingent assets
and liabilities. Actual results could differ from those estimates. Interim
results are not necessarily indicative of results to be expected for the
full year.Certain information in footnote disclosures normally included in financial
statements has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission (SEC). The
information included in this Form 10-Q should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations, and consolidated financial statements and notes thereto included
in the annual report on Form 10-K for the year ended October 31, 2003, filed
with the SEC on January 30, 2004.Shipping and Handling RevenueThe Company includes payments from its customers for shipping and handling
in its net revenues line item in accordance with Emerging Issues Task Force
(EITF) 00-10, Accounting of Shipping and Handling Fees and Costs.Cost of Goods SoldThe Company includes F.O.B. purchase price, inbound freight charges, duty,
buying commissions and overhead in its cost of goods sold line item.
Overhead costs include purchasing and receiving costs, inspection costs,
warehousing costs, internal transfers costs and other costs associated with
the Companys distribution. The Company does not exclude any of these costs
from cost of goods sold.Shipping and Handling ExpensesShipping expenses, which consist primarily of payments made to freight
companies, are reported in selling, general and administrative expenses.
Shipping expenses for the quarters ended July 31, 2004 and 2003 were
$572,000 and $525,000, respectively. For the nine-month periods ended July
31, 2004 and 2003, shipping expenses were $1,504,000 and $1,357,000,
respectively.ReclassificationsCertain reclassifications have been made to the prior periods condensed
consolidated financial statements to conform to classifications used in the
current period. These reclassifications had no impact on previously
reported results. NOTE 2  Inventories.  Inventories consisted of the following at July 31, 2004 and October 31, 2003: 4




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##### Table of Contents



July 31,
    
    October 31,2004
    
    2003Raw materials
    
    $
    107,000
    
    
    $
    127,000Finished goods
    
    
    46,299,000
    
    
    
    44,349,000Total inventories, net
    
    $
    46,406,000
    
    
    $
    44,476,000
 NOTE 3 Disposal and Acquisition of Fixed Assets.  The Company owned land and two buildings located in Carlsbad, California
that were purchased on December 9, 1993 for $3,500,000 and were reported in
the domestic segment. On February 24, 2004 the Company completed the sale
of the land, buildings and other assets for approximately $5,747,000 and
paid off the $2,610,000 balance due on the existing mortgage. The property
was sold as a unit on an as is basis for a price which exceeded its
carrying value. The gain on the sale of the property was recorded in the
second quarter of fiscal 2004. The Company has also entered into a lease
agreement to lease the facility from the new owner commencing on February
24, 2004 and terminating on December 31, 2004, with an option to renew the
term of the lease for a period of 60 days. Under the terms of the lease
agreement, the Company pays monthly rent of approximately $47,000 plus
taxes, insurance and utilities.On October 25, 2002, the Company entered into an agreement to purchase the
land and building, to be built to the Companys specifications, in the Ocean
Ranch Corporate Center in Oceanside, California. The building was
constructed with approximately 200,000 square feet of useable office and
warehouse space and will be used by the Company to warehouse, embroider,
finish, package and distribute clothing products and related accessories.
On April 2, 2004, the Company completed the purchase of the new distribution
center in Oceanside, California for approximately $14,023,000 and entered
into a secured loan agreement with a bank to finance $11,650,000 of the
purchase price. The loan carries a fixed interest rate of 5% and will be
amortized over 30 years, but is due and payable on May 1, 2014. NOTE 4 Acquisition of Membership Interests in Gekko Brands, LLC.  At close of business on July 6, 2004, Ashworth, Inc. completed the
acquisition of all of the membership interests in Gekko Brands, LLC (the
Acquisition), a leading designer, producer and distributor of headwear and
apparel under The Game® and Kudzu® brands, pursuant to the Membership
Interests Purchase Agreement entered into on July 6, 2004, between Ashworth
Acquisition Corp., a Delaware corporation and wholly owned subsidiary of
Ashworth, Inc. and the selling members identified therein.The purchase price for the Acquisition was $24 million consisting of $23
million in cash, a $1 million promissory note and $0.7 million in
acquisition costs. Up to an additional $6.5 million will be paid to the
remaining members of Gekko Brands, LLC management if the subsidiary achieves
specific EBIT and other operating targets over approximately the next four
years or through Ashworths fiscal year 2008. Ashworth intends that the
operations of the newly acquired subsidiary will continue to focus on
designing, producing and distributing headwear and apparel. Gekko Brands,
LLC will be included in the Companys existing reportable domestic segment.In connection with the Acquisition, Ashworth entered into a new secured
5-year bank facility comprised of a $20 million term loan and a $35 million
line of credit replacing its prior $55 million facility. To finance the
cash purchase price of the Acquisition, Ashworth utilized the term loan
together with part of the new line of credit. 5




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##### Table of Contents



The operating results of Gekko Brands, LLC are included in the Companys
consolidated results from the date of acquisition.The acquisition has been accounted for using the purchase method in
accordance with Statement of Financial Accounting Standards (SFAS) No.
141, Business Combinations. The Company is obtaining a third party
valuation of certain tangible and intangible assets acquired with the Gekko
brands acquisition and expects to receive the final report prior to October
31, 2004. The following table presents the tentative allocation of the
aggregate purchase price for Gekko Brands, LLC based on its estimated fair
value of the assets and liabilities acquired: In millionsNet working capital (net of cash received)
    
    $
    3.1Property, plant and equipment
    
    
    1.5Assumed debt
    
    
    (2.6
    )Goodwill
    
    
    12.3Other intangible assets
    
    
    10.4Total net assets
    
    $
    24.7
  The $12.3 million allocated to goodwill reflects the benefit the Company
expects to realize from expanding its distribution into new channels.  The $10.4 million in other assets includes tradenames, customer lists and
non-compete agreements.  Pro Forma Results of Operations  The results of Gekko Brand, LLCs operations have been included in the
consolidated financial statements since July 7, 2004. Had the acquisition
been completed as of the beginning of the fiscal year, the Company would have reported pro forma net revenues, net income
(loss) and basic and diluted net income (loss) per share amounts as follows
(in millions, except per share data): Three months ended July 31,
    
    Nine months ended July 31,2004
    
    2003
    
    2004
    
    2003Net revenues
    
    $
    52.5
    
    
    $
    46.0
    
    
    $
    145.8
    
    
    $
    138.4Net income (loss)
    
    
    (1.5
    )
    
    
    2.3
    
    
    
    4.8
    
    
    
    6.0Net income (loss)
per share:Basic
    
    $
    (0.11
    )
    
    $
    0.17
    
    
    $
    0.36
    
    
    $
    0.46Diluted
    
    $
    (0.11
    )
    
    $
    0.17
    
    
    $
    0.35
    
    
    $
    0.46
  The pro forma results include interest expense on the Companys term loan
and line of credit that were used to finance the acquisition. The pro forma
results also include adjustments for income taxes and deprecation and
amortization of assets to give effect for purchase accounting adjustments in
recording the acquisition. The pro forma amounts are not indicative of
anticipated future results. 6




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##### Table of Contents



NOTE 5  Intangible Assets.  The Company accounts for goodwill and intangible assets in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets.Under SFAS No. 142,
goodwill and certain intangible assets are not amortized but are subject to
an annual impairment test. Changes in goodwill and tradenames during the
nine months ended July 31, 2004 were due to the acquisition of Gekko Brands,
LLC. The following sets forth the intangible assets by major category: July 31, 2004
    
    October 31, 2003UsefulLife
    
    Gross Carrying
    
    Accumulated
    
    Net Book
    
    
    
    
    
    Accumulated
    
    Net Book(Years)
    
    Amount
    
    Amortization
    
    Value
    
    Gross
    
    Amortization
    
    ValueNon-amortizing:Goodwill
    
    
    
    
    
    $
    12,270,000
    
    
    $
    
    
    
    $
    12,270,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Tradenames
    
    
    
    
    
    
    8,700,000
    
    
    
    
    
    
    
    8,700,000
    
    
    
    
    
    
    
    
    
    
    
    Amortizing:Customer lists
    
    
    3-5
    
    
    
    1,530,000
    
    
    
    (13,000
    )
    
    
    1,517,000
    
    
    
    
    
    
    
    
    
    
    
    Non-Compete
    
    
    4-10
    
    
    
    1,372,000
    
    
    
    (639,000
    )
    
    
    733,000
    
    
    
    1,142,000
    
    
    
    (549,000
    )
    
    
    593,000Trademarks
    
    
    5
    
    
    
    1,289,000
    
    
    
    (1,265,000
    )
    
    
    24,000
    
    
    
    1,231,000
    
    
    
    (1,188,000
    )
    
    
    43,000Total intangible
assets
    
    
    
    
    
    $
    25,161,000
    
    
    $
    (1,917,000
    )
    
    $
    23,244,000
    
    
    $
    2,373,000
    
    
    $
    (1,737,000
    )
    
    $
    636,000
  Intangible assets with definite lives are amortized using the straight-line
method over periods ranging from 2 to 10 years. During the three months
ended July 31, 2004 and 2003, aggregate amortization expense was
approximately $40,000 and $50,000, respectively. During the nine months
ended July 31, 2004 and 2003, aggregate amortization expense was
approximately $91,000 and $149,000, respectively. Amortization expense
related to intangible assets at July 31, 2004 in each of the next five
fiscal years and beyond is expected to be as follows: Remainder 2004
    
    $
    83,0002005
    
    
    331,0002006
    
    
    331,0002007
    
    
    322,0002008
    
    
    304,0002009
    
    
    154,000Thereafter
    
    
    749,000Total
    
    $
    2,274,000
 NOTE 6  Line of Credit Agreement.  On July 6, 2004, the Company entered into a new business loan agreement with
Union Bank of California, N.A., as the administrative agent, and two other
lenders. The new loan agreement is comprised of a $20,000,000 term loan and
a $35,000,000 revolving credit facility, which expires on July 6, 2009 and
is collateralized by substantially all of the assets of the Company other
than the Companys real estate.  Under this loan agreement, interest on the $20,000,000 term loan is fixed at
5.4% for the term of the loan. Interest on the revolving credit facility is
charged at the banks reference rate. At July 31, 2004, the banks
reference rate was 4.50%. The loan agreement also provides for optional
interest rates based on London interbank offered rates (LIBOR) for periods
of at least 30 days in increments of $500,000. 7




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On September 3, 2004, the Company entered into the First Amendment to the
loan agreement to amend Section 6.12(a). The loan agreement, as amended,
contains certain financial covenants that include a requirement that the
Company maintain (1) a minimum tangible net worth of $74,000,000 plus the
net proceeds from any equity securities issued (including net proceeds from
stock option exercises) after the date of the loan agreement for the period
ending October 31, 2004, and a minimum tangible net worth of $74,000,000,
plus 90% of net income after taxes (without subtracting losses) earned in
each quarterly accounting period commencing after January 31, 2005, plus the
net proceeds from any equity securities issued (including net proceeds from
stock option exercises) after the date of the loan agreement, (2) a minimum
EBITDA determined on a rolling four quarter basis ranging from $16,500,000
at July 6, 2004 and increasing over time to $27,000,000 at October 31, 2008
and thereafter, (3) a minimum ratio of cash and accounts receivable to
current liabilities of 0.75:1.00 for fiscal quarters ending January 31 and
April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31,
and (4) a minimum fixed charge coverage ratio of 1.10:1.00 at April 30, 2004
and 1.25:1.00 thereafter. The loan agreement limits annual lease and rental
expense associated with the Companys new distribution center in Oceanside,
California as well as annual capital expenditures in any single fiscal year
on a consolidated basis in excess of certain amounts allowed for the
acquisition of real property and equipment in connection with the new
distribution center. The loan agreement has an additional requirement
where, for any period of 30 consecutive days, the total indebtedness under
the revolving credit facility may not be more than $15,000,000. The loan
agreement also limits the annual aggregate amount the Company may spend to
acquire shares of its common stock. The Company is in compliance with, or
has obtained waivers for, all of the loan agreements financial covenants as
of July 31, 2004.  The line of credit under the loan agreement may also be used to finance
commercial letters of credit and standby letters of credit. Commercial
letters of credit outstanding under this loan agreement totaled $2,532,000
at July 31, 2004 as compared to $5,998,000 outstanding at July 31, 2003
under the prior loan agreement. The Company had $1,750,000 outstanding
against the revolving credit facility under this loan agreement at July 31,
2004, compared to $6,000,000 outstanding at July 31, 2003 under the prior
agreement. The decrease in outstanding letters of credit and borrowings is
primarily due to converting several vendors from letters of credit to open
credit terms. The Company had $20,000,000 outstanding on the term loan
under this loan agreement at July 31, 2004. At July 31, 2004, $30,718,000
was available for borrowings against the revolving credit facility under
this loan agreement. NOTE 7  Net Income Per Share Information.  Basic net income per share has been computed based on the weighted average
number of common shares outstanding during the period. Diluted net income
per share has been computed based on the weighted average number of common shares outstanding plus the dilutive effects of common shares potentially
issuable from the exercise of common stock options. Common stock options
are excluded from the computation of net income per share if their effect is
anti-dilutive. The following table sets forth the computation of basic and
diluted net income per share based on the requirements SFAS No. 128,
Earnings Per Share: 8




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##### Table of Contents



Three months ended July 31,
    
    Nine months ended July 31,2004
    
    2003
    
    2004
    
    2003Numerator:Net incomeNumerator for basic and diluted
income per share  income
available to common stockholders
    
    $
    508,000
    
    
    $
    2,063,000
    
    
    $
    6,305,000
    
    
    $
    6,451,000Denominator:Denominator for basic income
per share  weighted average shares
    
    
    13,444,000
    
    
    
    13,006,000
    
    
    
    13,366,000
    
    
    
    12,972,000Effect of dilutive securities:stock options
    
    
    313,000
    
    
    
    205,000
    
    
    
    337,000
    
    
    
    152,000Denominator for diluted income
per share  adjusted weighted
average
shares and assumed conversions
    
    
    13,757,000
    
    
    
    13,211,000
    
    
    
    13,703,000
    
    
    
    13,124,000Basic net income per share
    
    $
    0.04
    
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.50Diluted net income per share
    
    $
    0.04
    
    
    $
    0.16
    
    
    $
    0.46
    
    
    $
    0.49
  For the quarters ended July 31, 2004 and 2003, the
diluted weighted average shares outstanding computation excludes 327,000 and 916,000 options whose
impact would have an anti-dilutive effect, respectively. For the nine-month
periods ended July 31, 2004 and 2003, the diluted weighted average shares
outstanding computation excludes 318,000 and 1,095,000 options whose impact
would have an anti-dilutive effect, respectively. NOTE 8  Issuance of Common Stock.  Common stock and capital in excess of par value increased by $1,266,000 in
the nine months ended July 31, 2004, of which $1,081,000 is due to the
issuance of 194,000 shares of common stock on exercise of options and
$185,000 is the tax benefit related to the exercise of those options. NOTE 9  Stock Option Compensation.  The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees,and related
interpretations in accounting for its employee stock options. Under APB No.
25, because the exercise price of the Companys employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The interim information regarding pro
forma net income and earnings per share is required by SFAS No. 123,
Accounting for Stock Based Compensation, and SFAS No. 148, Accounting for
Stock Based Compensation  Transition and Disclosure. For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to
expense over the vesting period of the options.  Compensation expense for options issued to non-employees is based on the
fair value of each option estimated at date of grant using the Black-Scholes
option-pricing model. The Company made no such grants to non-employees
during the first nine months of either fiscal year 2004 or fiscal year 2003.  For purposes of the following pro forma disclosures required by SFAS No.
123, the fair value of each option granted after fiscal 1995 has been
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants during the
third quarter of fiscal 2004 and the third quarter fiscal 2003,
respectively: risk-free interest rate of 9




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4.71% in 2004 and 3.34% to 3.43% in 2003; expected volatility of 56.4% in
2004 and 58.0% in 2003; and expected life of 10 years in 2004 and 2003. The
following weighted-average assumptions were used for grants during the first
nine months of fiscal 2004 and first nine months of fiscal 2003,
respectively: risk-free interest rates of 3.73% to 4.71% in fiscal 2004 and
3.34% to 4.01% in fiscal 2003; expected volatility of 56.4% to 58.3% in
fiscal 2004 and 58.0% to 58.3% in fiscal 2003; and expected life of 10 years
in fiscal 2004 and fiscal 2003.  The Company has not paid any cash or other dividends and does not anticipate
paying dividends in the foreseeable future; therefore, the expected dividend
yield is zero for all periods.  The Companys pro forma information is as follows: Three months ended July 31,
    
    Nine months ended July 31,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    508,000
    
    
    $
    2,063,000
    
    
    $
    6,305,000
    
    
    $
    6,451,000Deduct: Stock-based
employee compensation
expense determined
under fair value based
method for all awards,
net of tax effect
    
    
    (179,000
    )
    
    
    (100,000
    )
    
    
    (548,000
    )
    
    
    (437,000
    )Pro forma net income
    
    $
    329,000
    
    
    $
    1,963,000
    
    
    $
    5,757,000
    
    
    $
    6,014,000Net income per share:Basic  as reported
    
    $
    0.04
    
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.50Basic  pro forma
    
    $
    0.02
    
    
    $
    0.15
    
    
    $
    0.43
    
    
    $
    0.46Diluted  as reported
    
    $
    0.04
    
    
    $
    0.16
    
    
    $
    0.46
    
    
    $
    0.49Diluted  pro forma
    
    $
    0.02
    
    
    $
    0.15
    
    
    $
    0.42
    
    
    $

    0.46
  The Company did not reflect any stock-based employee compensation expense in
the consolidated financial statements for the periods presented in the above
table. NOTE 10  Comprehensive Income.  The Company includes the cumulative foreign currency translation adjustment
as well as the net unrealized gains and loss on cash flow hedges as
components of the comprehensive income in addition to net income for the
period. The following table sets forth the computation of comprehensive
income for the periods presented: Three months ended July 31,
    
    Nine months ended July 31,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    508,000
    
    
    $
    2,063,000
    
    
    $
    6,305,000
    
    
    $
    6,451,000Net unrealized gains (losses) on cash
flow hedges, net of tax of $72,000 and
$33,000, respectively
    
    
    
    
    
    
    (49,000
    )
    
    
    108,000
    
    
    
    (49,000
    )Effects of foreign currency translation
    
    
    544,000
    
    
    
    151,000
    
    
    
    968,000
    
    
    
    717,000Total comprehensive income
    
    $
    1,052,000
    
    
    $
    2,165,000
    
    
    $
    7,381,000
    
    
    $
    7,119,000
 10




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NOTE 11  Legal Proceedings.  On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a class
action in the United States District Court for the Southern District of
California (U.S. District Court) on behalf of purchasers of the Companys
common stock during the period between September 4, 1997 and July 15, 1998.
The action was subsequently consolidated with two similar suits and
plaintiffs filed their Amended and Consolidated Complaint on December 17,
1999. Upon the Companys motion, the U.S. District Court dismissed the
Complaint with leave to amend on July 18, 2000. On September 18, 2000,
plaintiffs served their Second Consolidated Amended Complaint (Second
Amended Complaint). On November 6, 2000, the Company filed its motion to
dismiss the Second Amended Complaint, which the U.S. District Court granted,
in part, and denied, in part. The remaining portions of the Second Amended
Complaint alleged that, among other things, during the class period and in
violation of the Securities Exchange Act of 1934, the Companys financial
statements, as reported, did not conform to generally accepted accounting
principles with respect to revenues and inventory levels. It further
alleged that certain Company executives made false or misleading statements
or omissions concerning product demand and that two former executives
engaged in insider trading. The Company has reached a tentative settlement
to conclude this securities class action lawsuit. Under the settlement, all
claims will be dismissed and the litigation will be terminated in exchange
for a payment of $15.25 million, approximately 82% of which will be paid by
Ashworths insurance carriers. As part of the settlement, Ashworth also
agreed to adopt modifications to certain corporate governance policies.
Ashworth recorded a pre-tax charge in the third quarter of fiscal year 2004
of $3 million related to settlement of this suit.  The Company is party to other claims and litigation proceedings arising in
the normal course of business. Although the legal responsibility and
financial impact with respect to such other claims and litigation cannot
currently be ascertained, the Company does not believe that these other
matters will result in payment by the Company of monetary damages, net of
any applicable insurance proceeds, that, in the aggregate, would be material
in relation to the consolidated financial position or results of operations
of the Company. NOTE 12  Segment Information.  The Company defines its operating segments as components of an enterprise
for which separate financial information is available and regularly reviewed
by the Companys senior management. The Company has the following two
reportable segments: domestic and international. The chief operating
decision maker evaluates segment performance based primarily on revenues and
income from operations. Interest income and expense is evaluated on a
consolidated basis and is not allocated to the Companys business segments.
Segment information is summarized (for the periods or dates presented)
below: Three months ended July 31,
    
    Nine months ended July 31,2004
    
    2003
    
    2004
    

    2003Net revenues:Domestic
    
    $
    35,795,000
    
    
    $
    31,674,000
    
    
    $
    103,305,000
    
    
    $
    98,651,000International
    
    
    7,030,000
    
    
    
    6,286,000
    
    
    
    21,530,000
    
    
    
    18,467,000Total
    
    $
    42,825,000
    
    
    $
    37,960,000
    
    
    $
    124,835,000
    
    
    $
    117,118,000Income from operations:Domestic
    
    $
    3,429,000
    
    
    $
    2,877,000
    
    
    $
    9,259,000
    
    
    $
    8,344,000International
    
    
    1,038,000
    
    
    
    748,000
    
    
    
    3,716,000
    
    
    
    2,814,000Total
    
    $
    4,467,000
    
    
    $
    3,625,000
    
    
    $
    12,975,000
    
    
    $
    11,158,000
 11




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July 31,
    
    October 31,2004
    
    2003Total assets:Domestic
    
    $
    132,849,000
    
    
    $
    85,947,000International
    
    
    23,221,000
    
    
    
    20,089,000Total
    
    $
    156,070,000
    
    
    $
    106,036,000Long lived assets, costDomestic
    
    $
    76,077,000
    
    
    $
    41,327,000International
    
    
    1,505,000
    
    
    
    1,272,000Total
    
    $
    77,582,000
    
    
    $
    42,599,000
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company operates in an industry that is highly competitive and must
accurately anticipate fashion trends and consumer demand for its products.
There are many factors that could cause actual results to differ materially
from the projected results contained in certain forward-looking statements in
this report. For additional information, see Cautionary Statements and Risk
Factors, below. Because the Companys business is seasonal, the current balance sheet
balances at July 31, 2004 may more meaningfully be compared to the balances at
July 31, 2003, rather than to the balances at October 31, 2003. Critical Accounting Policies In response to the SECs Release Numbers 33-8040, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies and 33-8056,
Commission Statement About Managements Discussion and Analysis of Financial
Condition and Results of Operations, the Company has identified the following
critical accounting policies that affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements. Revenue Recognition.Based on its terms of F.O.B. shipping point, where
risk of loss and title transfer to the buyer at the time of shipment, the
Company recognizes revenue at the time products are shipped or, for Company
stores, at the point of sale. The Company records sales in accordance with SEC
Staff Accounting Bulletin No. 104, Revenue Recognition. Under these
guidelines, revenue is recognized when all of the following exist: persuasive
evidence of a sale arrangement exists, delivery of the product has occurred,
the price is fixed or determinable and payment is reasonably assured.
Provisions are made in the period of the sale for estimated product returns and
sales allowances. The Company also includes payments from its customers for
shipping and handling in its net revenues line item in accordance with Emerging
Issues Task Force (EITF) 00-10, Accounting of Shipping and Handling Fees and
Costs. Sales Returns and Other Allowances.Management must make estimates of
potential future product returns related to current period product revenues.
The Company also makes payments and/or grants credits to its customers as
markdown (buydown) allowances and must make estimates of such potential future
allowances. Management analyzes historical returns and allowances, current
economic trends, changes in customer demand, and sell-through of the Companys
products when evaluating the 12




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adequacy of the sales returns and other allowances. Significant
management judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any accounting period.
These markdown allowances are reported as a reduction of the Companys net
revenues. Material differences may result in the amount and timing of the
Companys revenues for any period if management makes different judgments or
utilizes different estimates. The reserves for sales returns and other
allowances amounted to $1,050,000 at July 31, 2004 compared to $728,000 at
October 31, 2003 and $526,000 at July 31, 2003. Allowance for Doubtful Accounts.Management must also make estimates of
the uncollectability of accounts receivable. The Company maintains an
allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments, which results in bad debt
expense. Management determines the adequacy of this allowance by analyzing
current economic conditions, historical bad debts and continually evaluating
individual customer receivables considering the customers financial condition.
If the financial condition of any significant customers were to deteriorate,
resulting in the impairment of their ability to make payments, material
additional allowances for doubtful accounts may be required. In October 2002,
the Company acquired credit insurance to cover many of its major accounts. The
Companys trade accounts receivable balance was $42.2 million, net of
allowances for doubtful accounts of $1.6 million, at July 31, 2004, as compared
to the balance of $31.0 million, net of allowances for doubtful accounts of
$1.3 million, at October 31, 2003. At July 31, 2003, the trade accounts
receivable balance was $33.7 million, net of allowances for doubtful accounts
of $1.1 million. Inventory.The Company writes down its inventory for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated net realizable value based on assumptions about
age of the inventory, future demand and market conditions. This process
provides for a new basis for the inventory until it is sold. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required. The Companys inventory balance was
$46.4 million, net of inventory write-downs of $0.8 million, at July 31, 2004,
as compared to an inventory balance of $44.5 million, net of inventory
write-downs of $1.0 million, at October 31, 2003. At July 31, 2003, the
inventory balance was $42.3 million, net of inventory write-downs of $1.0
million. Asset Purchase Credits.In November 2000, the Company entered into an
agreement with a third party whereby prior seasons slower selling inventory
which was not damaged was exchanged for future asset purchase credits (APCs),
which may be utilized by the Company to purchase future goods and services over
a four-year period. The original value of the inventory exchanged (at cost)
was $1.4 million resulting in $1.4 million in future APCs. In December 2003,
the Company amended its agreement with the third party to exchange $0.9 million
of additional prior seasons slower selling inventory (at cost) for an
additional $0.9 million in future APCs and an extension of the original
November 2000 agreement through December 1, 2007. The Company has entered into
contracts with several third party suppliers who have agreed to accept these
APCs, in part, as payment for goods and services. The Company purchases
products such as sales fixtures, office and packaging supplies, as well as
temporary help, freight and printing services from such third party suppliers.
From time to time the Company may enter into additional contracts with such
third party suppliers to use the APCs. Management reviews and estimates the
likelihood of fully utilizing the APCs on a periodic basis. If the Company is
unable to find suppliers who agree to accept the APCs in quantities as
projected by management, a write-down of the value of the APCs may be required.
At July 31, 2004, the Company had $0.9 million of the APCs remaining and
management expects to fully utilize them over the remaining life of the
contract through December 1, 2007. At July 31, 2004, the Company recorded $0.5
million of the APCs in its Other Current Assets line item and $0.4 million
in its Other Assets line item. 13




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Off-Balance Sheet Arrangements At July 31, 2004 and 2003, the Company did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. In addition, the Company
does not engage in trading activities involving non-exchange traded contracts
which rely on estimation techniques to calculate fair value. As such, the
Company is not exposed to any financing, liquidity, market or credit risk that
could arise if the Company had engaged in such relationships. Overview The Company earns revenues and income and generates cash through the
design, marketing and distribution of quality mens and womens sports apparel
under the Ashworth® and Callaway Golf apparel brands. The Companys products
are sold in the United States, Europe, Canada and various other international
markets to selected golf pro shops, resorts, off-course specialty shops,
upscale department stores, to top specialty-advertising firms for the corporate
market as well as in the Companys own stores. Nearly all of the Companys
production is through full package purchases of ready-made goods with
approximately 85% of its products manufactured in Asian countries. The Company
embroiders a majority of these garments with custom golf course, tournament and
corporate logos for its customers. The Company includes F.O.B. purchase price, inbound freight charges, duty,
buying commissions and overhead in its cost of goods sold line item. Overhead
costs include purchasing and receiving costs, inspection costs, warehousing
costs, internal transfers costs and other costs associated with the Companys
distribution. The Company does not exclude any of these costs from cost of
goods sold. During the second quarter of fiscal 2004 the Company completed two
transactions relating to its distribution facilities. In February 2004, the
Company completed the sale and lease-back of its old distribution center
located in Carlsbad, California. The Company sold the Carlsbad distribution
center for $5,747,000 and realized a gain on sale of fixed assets of
$1,589,000. In April 2004, the Company completed the purchase of the new
distribution facility in Oceanside, California for approximately $14,023,000.
The Company applied the tax deferred gain on sale of the old facility to reduce
the cost basis of the new facility, for tax purposes, utilizing a tax-deferred
exchange under Internal Revenue Code section 1031. During the third quarter of fiscal 2004 the Company completed the
acquisition of all of the membership interests in Gekko Brands, LLC (the
Acquisition), a leading designer, producer and distributor of headwear and
apparel under The Game® and Kudzu® brands, pursuant to that certain Membership
Interests Purchase Agreement entered into on July 6, 2004, by and among
Ashworth Acquisition Corp., a Delaware corporation and wholly owned subsidiary
of Ashworth, Inc. and the selling members identified therein. Ashworth intends
that the operations of the newly acquired subsidiary will continue to focus on
designing, producing and distributing headwear and apparel. The purchase price for the Acquisition was $24,000,000 consisting of
$23,000,000 in cash and a $1,000,000 promissory note. Up to an additional
$6,500,000 will be paid to the remaining members of Gekko Brands, LLC
management if the subsidiary achieves specific EBIT and other operating targets
over approximately the next four years or through Ashworths fiscal year 2008. In connection with the Acquisition, Ashworth entered into a new secured
5-year bank facility comprised of a $20,000,000 term loan and a $35,000,000
line of credit replacing its prior $55,000,000 14




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facility. To finance the cash purchase price of the Acquisition, Ashworth
utilized the term loan together with part of the new line of credit. Also during the third quarter of fiscal 2004 the Company recorded a
pre-tax charge of $3,000,000 related to a tentative settlement to conclude the
securities class action lawsuit brought in 1999 against the Company and certain
current and former directors and officers in the United States District Court
for the Southern District of California. The litigation was brought on behalf
of a class of investors who purchased the Companys stock in the open market
between September 4, 1997 and July 15, 1998. Under the settlement, all claims
will be dismissed and the litigation will be terminated in exchange for a
payment of $15,250,000, approximately 82% of which will be paid by Ashworths
insurance carriers. As part of the settlement, Ashworth also agreed to adopt
modifications to certain corporate governance policies. Third quarter fiscal 2004 net revenue increased 12.8% to $42,825,000 as
compared to $37,960,000 for the same period of the prior year. The increase
was primarily driven by the addition of Gekko Brands, LLC in the month of July
2004 as well as net revenue increases in its international, retail and core
golf and off-course specialty distribution channels, offset by decreases in net
revenues from the Company owned stores and corporate distribution channel. The
net revenues growth, combined with improved gross margins, offset by the $1.8
million after tax charge related to the settlement of the class action law
suit, resulted in third quarter net income of $508,000 or $0.04 per diluted
share, compared to net income of $2,063,000 or $0.16 per diluted share in the
same quarter of last fiscal year. Results of Operations Third quarter 2004 compared to third quarter 2003 Consolidated net revenues for the third quarter of fiscal 2004 increased
12.8% to $42,825,000 from $37,960,000 for the same period in 2003 primarily due
the addition of Gekkos net revenues as well as higher revenues from the
Companys retail and core golf and off-course specialty distribution channels
and the international segment. Net revenues for the domestic segment increased 13.0% to $35,795,000 for
the current quarter from $31,674,000 in the third quarter of 2003, primarily
due to the Gekko acquisition, which contributed $3,434,000 in net revenues.
Net revenues from the Companys retail distribution channel increased 6.3% or
$187,000 resulting from an increase in the number of doors selling the
Companys product lines. Net revenues from the green grass and off-course
specialty distribution channel increased 3.8% or $785,000 primarily driven by
an increase in sales of Callaway Golf apparel. These increases were partially
offset by the 12.5% or $191,000 decrease in revenues from Company-owned stores
primarily due to the closing of the studio store in September 2003, and a 1.5%
or $95,000 decrease in revenues in the corporate distribution channel primarily
due to generally weak industry-wide trends. Net revenues for the international segment increased 11.8% to $7,030,000
for the current quarter from $6,286,000 for the same period of the prior fiscal
year. The increase was primarily due to higher revenues in the Companys U.K.
subsidiary and Canadian divisions, of which $515,000 was due to the weakening
of the U.S. dollar against the British pound and Canadian dollar during the
third quarter of fiscal 2004, partially offset by slight decreases in other
international territories. Consolidated gross margin for the third quarter of fiscal 2004 increased
80 basis points to 42.1% as compared to 41.3% for the same quarter a year
earlier. This improvement was primarily due to improved sourcing and the
addition of Gekko Brands, LLC. Consolidated selling, general and administrative (SG&A) expenses
increased 12.5% to $13,560,000 for the third quarter of fiscal 2004 from
$12,051,000 for the same period in fiscal 2003. As a 15




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percent of net revenues, SG&A expenses were 31.7% for the third quarter of
fiscal 2004 as compared to 31.8% for the same period of the prior year. The
improved operating margin was partly due to the seasonally high sales of Gekko
products and the associated operating leverage. Total other expense increased to $3,621,000 for the third quarter of
fiscal 2004 from $186,000 in the third quarter of fiscal 2003. The increase
was primarily due to the $3,000,000 charge related to the settlement of the
class action law suit, higher interest expense resulting from increased
long-term debt and equipment financing as well as currency transaction losses
recorded in the third quarter of fiscal 2004 as compared to currency
transaction gains recorded by the Companys U.K. subsidiary and Canadian
divisions in the same period of the prior fiscal year. The effective income tax rate for the third quarter of fiscal 2004
remained unchanged from the same period of fiscal year 2003 at 40.0% of pre-tax
income. Nine months ended July 31, 2004 compared to nine months ended July 31, 2003 Consolidated net revenues for the first nine months of fiscal 2004
increased 6.6% to $124,835,000 from $117,118,000 for the same period in fiscal
2003. Net revenues for the domestic segment increased 4.7% to $103,305,000 from
$98,651,000 in the first nine months of fiscal 2003. Net revenues increased
$3,434,000 as a result of the Companys recent acquisition of Gekko Brands,
LLC. Net revenues from the Companys retail distribution channel increased
33.5% or $2,989,000. The increase in the retail distribution channel in the
first nine months of fiscal 2004 as compared to the same period of the prior
fiscal year is primarily due to the increased number of doors as well as
slightly higher comparable store sales resulting from retail-specific product
offerings and the implementation of the resort shop concept in retail
locations. Net revenues from the Companys corporate distribution channel
increased 2.7% or $441,000 in the first nine months of fiscal 2004 as compared
to the same period of the prior fiscal year. The increase in the corporate
distribution channel was primarily due to the addition of the Callaway Golf
apparel Sport line to the other product lines offered by the corporate
distribution channel. These increases were partially offset by a decrease in
the net revenues from the Companys golf-related distribution channel as well
as from the Company-owned stores. Net revenues from the Companys green grass
and off-course specialty distribution channel decreased 2.0% or $1,352,000 in
the first nine months of fiscal 2004 as compared to the same period of the
prior fiscal year. This decrease was primarily due to continuing industry
weakness resulting in a reduction in the average order size. Net revenues from
the Company-owned stores decreased 17.8% or $861,000 primarily due to the
closing of two of the nine Company-owned stores. Net revenues for the international segment increased 16.6% to $21,530,000
from $18,467,000 for the same period of the prior fiscal year. The increase
was primarily due to higher revenues in the Companys U.K. subsidiary and
Canadian divisions, of which $2,064,000 was due to the weakening of the U.S.
dollar against the British pound and Canadian dollar during the first nine
months of fiscal 2004. This increase was partially offset by an 11.9% or
$273,000 decrease in net revenues from other international territories. Net
revenues from the Companys U.K. subsidiary in the first nine months of fiscal
2004 increased by $2,475,000 or 22.2% compared to the same period of the prior
fiscal year, of which $1,587,000 was due to fluctuations in currency exchange
rates. The balance of the increase was due to an increased number of accounts
as well as an increased average order size. Net revenue from the Canadian
divisions increased by $590,000 or 11.8% as compared to net revenues in the
same period of the prior fiscal year, of which $477,000 was due to changes in
currency exchange rates. Consolidated gross margin for the first nine months of fiscal 2004
improved 100 basis points to 41.7% as compared to 40.7% in the first nine
months of fiscal 2003. The improvement was primarily due 16




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to improved sourcing. Consolidated SG&A expenses increased 7.1% to $39,052,000 for the first
nine months of fiscal 2004 from $36,445,000 for the same period in fiscal 2003.
As a percent of net revenues, SG&A expenses were 31.3% for the first nine
months of fiscal 2004 as compared to 31.1% for the same period of the prior
year. The increase in SG&A is primarily due to timing of sales and marketing
related expenses. Total other expense increased to $2,466,000 in the first nine months of
fiscal 2004 from $406,000 during the same period of fiscal 2003. The increase
was primarily due to the $3,000,000 charge related to the settlement of the
class action law suit, higher interest expense resulting from increased
long-term debt and equipment financing as well as lower currency transaction
gains recorded by the Companys U.K. subsidiary and Canadian divisions in the
first nine months of fiscal 2004 as compared to the same period of the prior
fiscal year. This increase in other expenses was partially offset by the
$1,517,000 net gain on disposal of fixed assets recorded in the first nine
months of fiscal 2004. The effective income tax rate in the first nine months of fiscal 2004
remained unchanged from the same period of fiscal year 2003 at 40.0% of pre-tax
income. Capital Resources and Liquidity The Companys primary sources of liquidity for the next 12 months are
expected to be its cash flows from operations, the working capital line of
credit with its bank and other financial alternatives such as leasing. The
Company requires cash for capital expenditures and other requirements
associated with the expansion of its domestic and international production,
distribution and sales, as well as for general working capital purposes.
Ashworths need for working capital is seasonal with the greatest requirements
existing from approximately December through the end of July each year. The
Company typically builds up its inventory during this period to provide product
for shipment for the spring/summer selling season. On July 6, 2004, the Company entered into a new business loan agreement
with Union Bank of California, N.A., as the administrative agent, and two other
lenders. The new loan agreement is comprised of a $20,000,000 term loan and a
$35,000,000 revolving credit facility, which expires on July 6, 2009 and is
collateralized by substantially all of the assets of the Company other than the
Companys real estate. Under this loan agreement, interest on the $20,000,000 term loan is fixed
at 5.4% for the term of the loan. Interest on the revolving credit facility is
charged at the banks reference rate. At July 31, 2004, the banks reference
rate was 4.50%. The loan agreement also provides for optional interest rates
based on London interbank offered rates (LIBOR) for periods of at least 30
days in increments of $500,000. On September 3, 2004, the Company entered into the First Amendment to the
loan agreement to amend Section 6.12(a), Tangible Net Worth. The loan
agreement, as amended, contains certain financial covenants that include a
requirement that the Company maintain (1) a minimum tangible net worth of
$74,000,000 plus the net proceeds from any equity securities issued (including
net proceeds from stock option exercises) after the date of the loan agreement
for the period ending October 31, 2004, and a minimum tangible net worth of
$74,000,000, plus 90% of net income after taxes (without subtracting losses)
earned in each quarterly accounting period commencing after January 31, 2005,
plus the net proceeds from any equity securities issued (including net proceeds
from stock option exercises) after the date of the loan agreement, (2) a
minimum EBITDA determined on a rolling four quarter basis ranging from
$16,500,000 at July 6, 2004 and increasing over time to $27,000,000 at October
31, 2008 and thereafter, (3) a minimum ratio of cash and accounts receivable to
current liabilities of 0.75:1.00 for fiscal quarters ending January 31 and
April 30 and 1.00:1.00 for fiscal quarters ending July 31 and October 31, and
(4) a minimum fixed charge coverage ratio of 1.10:1.00 at April 30, 2004 and
1.25:1.00 thereafter. 17




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The loan agreement limits annual lease and rental expense associated with
the Companys new distribution center in Oceanside, California as well as
annual capital expenditures in any single fiscal year on a consolidated basis
in excess of certain amounts allowed for the acquisition of real property and
equipment in connection with the new distribution center. The loan agreement
has an additional requirement where, for any period of 30 consecutive days, the
total indebtedness under the revolving credit facility may not be more than
$15,000,000. The loan agreement also limits the annual aggregate amount the
Company may spend to acquire shares of its common stock. The Company is in
compliance with or has obtained waivers for, all of the loan agreements
financial covenants as of July 31, 2004. The line of credit under the loan agreement may also be used to finance
commercial letters of credit and standby letters of credit. Commercial letters
of credit outstanding under this loan agreement totaled $2,532,000 at July 31,
2004 as compared to $5,998,000 outstanding at July 31, 2003 under the prior
loan agreement. The Company had $1,750,000 outstanding against the revolving
credit facility under this loan agreement at July 31, 2004, compared to
$6,000,000 outstanding at July 31, 2003 under the prior agreement. The
decrease in outstanding letters of credit and borrowings is primarily due to
converting several vendors from letters of credit to open credit terms. The
Company had $20,000,000 outstanding on the term loan under this loan agreement
at July 31, 2004. At July 31, 2004, $30,718,000 was available for borrowings
against the revolving credit facility under this loan agreement. During the first nine months ended July 31, 2004, cash provided by
operations was $8,588,000 as compared to $8,432,000 provided during the same
period of the prior fiscal year. The improvement in cash flow from operations
was primarily due to the Company being able to convert several of its vendors
from letters of credit to open credit terms. Net trade receivables were $42,185,000 at July 31, 2004, an increase of
$11,192,000 from the balance at October 31, 2003. Because the Companys
business is seasonal, the net receivables balance may more meaningfully be
compared to the balance of $33,733,000 at July 31, 2003, rather than the
year-end balance. The comparison of the third quarter fiscal 2004 balance to
the third quarter fiscal 2003 balance shows an increase of 25.1% in net trade
receivables while net revenues increased 12.8% for the comparable quarter.
This increase is in part due to the addition of the Gekko Brands, LLC accounts
receivable. The Company also implemented certain sales programs that offered
extended payment terms to customers meeting credit worthiness requirements and
other specified qualification criteria. Net inventories increased 4.3% to $46,406,000 at July 31, 2004 from
$44,476,000 at October 31, 2003. Compared to net inventories of $42,321,000 at
July 31, 2003, net inventories at July 31, 2004 have increased by 9.7%,
primarily due to the addition of Gekko Brands, LLC. The Company believes that
its current inventory mix is appropriate to respond to market demand. Current liabilities increased 113.3% to $28,699,000 at July 31, 2004 from
$13,455,000 at October 31, 2004. Compared to current liabilities of
$17,360,000 at July 31, 2003, current liabilities increased 65.3%, primarily
due to the $4,370,000 in additional current liabilities from the acquisition of
Gekko Brands, LLC, the $4,000,000 in additional current portion of long-term
debt related to the term loan used to finance part of the acquisition as well
as the accrual of the $3,000,000 related to the settlement of the class action
lawsuit. On October 25, 2002, the Company entered into an agreement to purchase the
land and building, to be built to the Companys specifications, in the Ocean
Ranch Corporate Center in Oceanside, California. The building was constructed
with approximately 200,000 square feet of useable office and warehouse space
and will be used by the Company to warehouse, embroider, finish, package and
distribute clothing products and related accessories. On April 2, 2004, the
Company completed the purchase of the new distribution center for approximately
$13,686,000 and entered into a secured loan agreement with a 18




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bank to finance $11,650,000 of the purchase price. The loan is at a fixed
interest rate of 5% and will be amortized over 30 years, but is due and payable
on May 1, 2014. To fulfill certain requirements under the mortgage loan
agreement, the Company created Ashworth EDC LLC, a special purpose entity, to
be the purchaser and mortgagor. Ashworth EDC LLC is a wholly owned limited
liability company organized under the laws of the State of Delaware and its
results and assets are reported in the condensed consolidated statements
included in this report. During the first nine months of fiscal 2004, the Company incurred capital
expenditures of $19,263,000 primarily for the purchase of the new distribution
center, computer systems and equipment, leasehold improvements and distribution
center equipment. The Company anticipates capital spending of approximately
$800,000 during the remainder of fiscal 2004, primarily on distribution center
related improvements, outlet stores openings and renovations and upgrades of
computer systems and equipment. Except for the purchase of the real property,
for which the Company obtained mortgage financing, management currently intends
to finance the purchase of the additional capital equipment from its own cash
resources, but may use leases or equipment financing agreements if deemed
appropriate. The Company capitalized interest of $107,000 and $0 during the nine months
ended July 31, 2004 and 2003, respectively, related to self-constructed
construction in progress for the new distribution center. On February 24, 2004, the Company sold certain property located in
Carlsbad, California, used in its distribution operation for $5,747,000 and
recorded a gain on disposal of fixed assets of $1,589,000. The land, buildings
and other assets were reported in the Companys domestic segment and were sold
as a unit on an as is basis. As a result of the sale, the Company paid the
$2,610,000 balance due on the mortgage relating to the subject property. The
Company has entered into a lease agreement to lease the facility from the new
owner. The term of the lease commenced on February 24, 2004 and terminates on
December 31, 2004, with an option to renew the term of the lease for a period
of 60 days with written notice of intent to exercise the option due at least 90
days prior to the expiration of the initial term of the lease. Under the terms
of the lease agreement, the Company pays monthly rent of approximately $47,000
plus taxes, insurance and utilities. The Company has entered into agreements with equipment manufacturers to
purchase the equipment required for the operation of the Companys new
distribution center in Oceanside, California. On June 23, 2003, the Company
entered into a Master Equipment Lease Agreement with a financial institution
which has accepted an assignment of these purchase agreements and assumed all
rights and payment obligations under these agreements. From time to time,
commencing approximately June 26, 2003, the financial institution made progress
payments to the equipment manufacturers during the period while the equipment
was being purchased, assembled, installed and/or tested as required by the
purchase agreements. The total cost of the equipment is approximately
$10,439,000. The Company has paid the financial institution for interest costs
related to the progress payments calculated using the prime rate plus one half
of one percentage point per annum based on a 360-day year. As of July 31,
2004, the financial institution has made progress payments of $7,915,000
leaving an available balance of $2,524,000 and the Company has paid $145,000 in
interest charges during the first nine months of fiscal 2004. On August 30,
2004, the Company entered into Equipment Schedule No. 01. Under the terms of
the Schedule, the Company will be leasing the equipment for an initial term of
91 months beginning on September 1, 2004 for $128,800 per month. The Company is party to an exclusive licensing agreement with Callaway
Golf Company which requires certain minimum royalty payments which began in
January 2003. The revenues from the Callaway Golf apparel product line have
been, and the Company believes will continue to be, sufficient to cover such
minimum guarantees. 19




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Common stock and capital in excess of par value increased by $1,266,000 in
the nine months ended July 31, 2004, of which $1,081,000 is due to the issuance
of 194,000 shares of common stock on exercise of options and $185,000 is the
tax benefit related to the exercise of those options. Based on current levels of operations, the Company expects that sufficient
cash flow will be generated from operations so that, combined with other
financing alternatives available, including cash on hand, borrowings under its
bank credit facility and leasing alternatives, the Company will be able to meet
all of its debt service, capital expenditure and working capital requirements
for at least the next 12 months. Derivatives From time to time the Company enters into short-term foreign exchange
contracts with its bank to hedge against the impact of currency fluctuations
between the U.S. dollar and the British pound and the U.S. dollar and the
Canadian dollar. The contracts provide that, on specified dates, the Company
would sell the bank a specified number of British pounds or Canadian dollars in
exchange for a specified number of U.S. dollars. Additionally, from time to
time the Companys U.K. subsidiary enters into similar contracts with its bank
to hedge against currency fluctuations between the British pound and the U.S.
dollar and the British pound and other European currencies. Realized gains and
losses on these contracts are recognized in the same period as the hedged
transactions. These contracts have maturity dates that do not normally exceed
12 months. On July 15, 2003, the Companys U.K. subsidiary entered into four
forward exchange contracts to sell British pounds and buy U.S. dollars, as well
as five forward exchange contracts to sell Euros and buy British pounds. All
of these contracts were settled as intended and, at July 31, 2004, neither the
Company nor any of its subsidiaries had any outstanding foreign exchange
contracts. New Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities(FIN No.
46). FIN No. 46 addresses consolidation of entities that are not controllable
through voting interests or in which the equity investors do not bear the
residual economic risks and rewards. These entities have been commonly
referred to as special purpose entities. FIN No. 46 provides guidance related
to identifying variable interest entities and determining whether such entities
should be consolidated. It also provides guidance related to the initial and
subsequent measurement of assets, liabilities and non-controlling interests in
newly consolidated variable interest entities and requires disclosures for both
the primary beneficiary of a variable interest entity and other beneficiaries
of the entity. For variable interest entities created, or interests in
variable interest entities obtained, subsequent to January 31, 2003, the
Company is required to apply the consolidation provisions of FIN No. 46
immediately. For variable interest entities created, or interests in variable
interest entities obtained, on or before January 31, 2003, the consolidation
provisions of FIN No. 46 were first required to be applied in the Companys
financial statements as of July 31, 2003. In January 2004, the FASB issued a
revision to FIN No. 46, to clarify some requirements and add new scope
exceptions. The revised guidance is effective for the first reporting period
beginning after December 15, 2003. The provisions of FIN No. 46 have not had a
material impact on the Companys financial position and results of operations. In March 2004, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments.EITF Issue No. 03-01 requires the use of
fair values calculated in connection with SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, to be used as the basis for determining whether
a cost method investment is impaired. Any impairment would be applied
prospectively to all current and future investments, within the scope of EITF
Issue No. 03-01, effective in reporting periods 20




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beginning after June 15, 2004. EITF Issue No. 03-01 further specifies
disclosures an investor should provide about unrealized losses that have not
been recognized as other-than-temporary impairments for cost method
investments. The Companys adoption of EITF Issue No. 03-01 (effective August
1, 2004) is not expected to have a material impact on the Companys financial
position and results of operations. In March 2004, the EITF reached a consensus regarding Issue No. 03-16,
Accounting for Investments in Limited Liability Companies. EITF Issue No.
03-16 requires investments in limited liability companies (LLCs) that have
separate ownership accounts for each investor to be viewed as similar to a
limited partnership for purposes of determining whether a non-controlling
investment in an LLC should be accounted for using the cost method or the
equity method of accounting. Therefore, the provisions of Statement of
Position (SOP) No. 78-9, Accounting for Investments in Real Estate Ventures,
and the guidance provided by the SEC staff in Topic D-46, would apply to such
LLCs. EITF Issue No. 03-16 is effective for the first reporting period
beginning after June 15, 2004. The effect of that consensus would be applied
to the accounting for existing investments in LLCs as of the beginning of the
first fiscal period beginning after FASB ratification of the consensus, by
recognizing the cumulative effect of retroactive application. The adoption of
EITF Issue No. 03-16 (effective August 1, 2004) is not expected to have a
material impact on the Companys financial position and results of operations. Cautionary Statements and Risk Factors This report contains certain forward-looking statements, including without
limitation those regarding the Companys plans and expectations for revenue
growth, product lines, strategic alliances, designs and seasonal collections,
capital spending, marketing programs, foreign sourcing, cost controls,
inventory levels and availability of working capital. These forward-looking
statements may contain the words believe, anticipate, expect,
estimate, project, will be, will continue, will likely result or
other similar words and phrases. Readers are cautioned not to place undue
reliance on these forward-looking statements. The Company undertakes no
obligation to update any such statements or publicly announce any updates or
revisions to any of the forward-looking statements contained herein.
Forward-looking statements and the Companys plans and expectations are subject
to a number of risks and uncertainties that could cause actual results to
differ materially from those anticipated, and the Companys business in general
is subject to certain risks that could affect the value of the Companys common
stock. These risks include, but are not limited to, the following:  
    
    Demand for the Companys products may decrease significantly if the
economy weakens, if the popularity of golf decreases or if unusual
weather conditions cause a reduction in rounds played.
    
    Like other apparel manufacturers, the Company must correctly
anticipate and help direct fashion trends within its industry. The
Companys results of operations would suffer if the Company fails to
develop fashions or styles that are well received in any season.
    
    The Company is party to a multi-year licensing agreement to design,
source and sell Callaway Golf apparel primarily in the United States,
Europe and Canada. The Company must correctly anticipate the fashion
trends and demand for these product lines. The Companys results of
operations would suffer if it fails to develop fashions or styles for
the Callaway Golf apparel product line that are well received in any
season.
    
    The market for golf apparel and sportswear is extremely competitive.
The Company has several strong competitors that are better
capitalized. Outside the green grass market, the Companys market
share is not as significant. Price competition or industry
consolidation could weaken the Companys competitive position. 21




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
    
    In July 2004, Ashworth, Inc. acquired Gekko Brands, LLC (Gekko), a
leading designer, producer and distributor of headwear and apparel
under The Game® and Kudzu® brands. The Company must successfully
integrate the acquisition to realize the expected growth in new,
quality channels of distribution for the Ashworth® and Callaway Golf
apparel brands as well as further growth from The Game and Kudzu
brands sales into the Companys current distribution channels. The
Companys results of operations would be adversely affected if it
fails to successfully integrate the new operations as anticipated or
the expected synergies are not realized.
    
    The Company has purchased land and a building in Oceanside, California
to replace and expand existing owned and leased office and
distribution facilities. The Companys results of operations would be
adversely affected if the Oceanside distribution center does not
become operational as anticipated or functionality problems are
encountered. Any such delay or operational problems may cause the
Company to incur additional expense, experience delays in customer
shipments, require the Company to lease additional distribution space
or extend the term of existing leases. In addition, whether or not
the facilities are operational at the time anticipated, the Companys
results of operations could be negatively impacted if future sales
volume growth does not reach expected levels and the facilitys
additional distribution capacity is not fully utilized, or if the
Company does not achieve projected cost savings from the new
distribution facilities as soon as, or in the amounts, anticipated.
    
    The Company relies on domestic and foreign contractors to manufacture
various products. If these contractors deliver goods late or fail to
meet the Companys quality standards, the Company could lose sales and
its reputation could suffer. The Companys foreign suppliers ability
to deliver products may be adversely affected by future changes in
tariffs, quotas and other trade barriers imposed by the foreign
countries, as well as by the United States. In particular the
suppliers for the Companys newly acquired subsidiary are concentrated
in China.
    
    The outbreak of Severe Acute Respiratory Syndrome affected travel to
countries where the Companys products are manufactured. Visiting
manufacturers in the affected countries is an important part of the
product development process for the Company. If travel to these
countries is again restricted by a similar outbreak, the Companys
product development process and reputation as a designer and
manufacturer of innovative products may be adversely affected, our
international production and shipments may be limited, and the Company
could lose sales.
    
    The Companys domestic and foreign suppliers rely on readily available
supplies of raw materials at reasonable prices. If these raw
materials are in short supply or are only available at inflated
prices, the contractors may be unable to deliver the Companys
products in sufficient quantities or at expected prices and the
Company could lose sales or have lower gross profit margins.
    
    An increase in terrorist activities, as well as continued conflicts
around the world, would likely adversely affect the level of demand
for the Companys products as customers and consumers attention and
interest are diverted from golf and fashion and become focused on
these events and the economic, political, and public safety issues and
concerns associated with them. Also, such events could adversely
affect the Companys ability to manage its supply and delivery of
product from domestic and foreign contractors. If such events caused
a significant disruption in domestic or international shipments, the
Companys ability to fulfill customer orders also would be materially
adversely affected.
    
    If economic conditions deteriorate, the ability of the Companys
customers to pay current obligations may be adversely impacted and the
Company may experience an increase in delinquent and uncollectible
accounts. 22




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
    
    The Company is from time to time party to claims and litigation
proceedings. Such matters include the specific litigation described
in this report and other litigation arising in the ordinary course of
business. See Legal Proceedings, below. Such matters are subject
to many uncertainties and the Company cannot predict with assurances
the outcomes and ultimate financial impacts of them. There can be no
guarantees that actions that have been or may be brought against the
Company in the future will be resolved in the Companys favor or that
insurance carried by the Company will be available or paid to cover
any litigation exposure. Any losses resulting from settlements or
adverse judgments arising out of these claims could materially and
adversely affect the Companys consolidated financial position and
results of operations.
    
    Fluctuations in foreign currency exchange rates could affect the
Companys ability to sell its products in foreign markets and the
value in U.S. dollars of revenues received in foreign currencies. The
Companys revenues from its international segment may also be
adversely affected by taxation and laws or policies of the foreign
countries in which the Company has operations, as well as laws and
policies of the United States affecting foreign trade, investment and
taxation.
    
    The Company maintains high levels of inventory to support its
AuthenticsTM program as well as the Callaway Golf apparel Classics
program. Additional products, greater sales volume, and customer
trends toward increased at-once ordering may require increased
inventory. Disposal of excess prior season inventory is an ongoing
part of the Companys business, and write-downs of inventories may
materially impair the Companys financial performance in any period.
Particular inventories may be subject to multiple write-downs if the
Companys initial reserve estimates for inventory obsolescence or lack
of throughput prove to be too low. These risks increase as inventory
increases. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Companys debt consists of notes payable which had a total balance of
$32,639,000 at July 31, 2004. The debt bears interest at variable and fixed
rates ranging from 3.5% to 8.3%, which approximates fair value based on current
rates offered for debt with similar risks and maturities. The Company also had
$1,750,000 outstanding at July 31, 2004 on its revolving line of credit with
interest charged at the banks reference rate. The loan agreement also
provides for optional interest rates based on LIBOR for periods of at least 30
days in increments of $500,000. A hypothetical 10% increase in interest rates
during the nine months ended July 31, 2004 would have resulted in a $25,000
decrease in net income. For details regarding the Companys variable and fixed rate debt, see Item
2. Management Discussion and Analysis of Financial Condition and Results of
Operations  Capital Resources and Liquidity. Foreign Currency Exchange Rate Risk The Companys ability to sell its products in foreign markets and the U.S.
dollar value of the sales made in foreign currencies can be significantly
influenced by foreign currency fluctuations. A decrease in the value of
foreign currencies relative to the U.S. dollar could result in downward price
pressure for the Companys products or losses from currency exchange rates.
From time to time the Company enters into short-term foreign exchange contracts
with its bank to hedge against the impact of currency fluctuations between the
U.S. dollar and the British pound and the U.S. dollar and the Canadian dollar.
The contracts provide that, on specified dates, the Company would sell the bank
a specified number of British pounds or Canadian dollars in exchange for a
specified number of U.S. dollars. Additionally, from time to time the 23




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Companys U.K. subsidiary enters into similar contracts with its bank to
hedge against currency fluctuations between the British pound and the U.S.
dollar and the British pound and other European currencies. Realized gains and
losses on these contracts are recognized in the same period as the hedged
transaction. These contracts have maturity dates that do not normally exceed
12 months. The Company will continue to assess the benefits and risks of
strategies to manage the risks presented by currency exchange rate
fluctuations. There is no assurance that any strategy will be successful in
avoiding losses due to exchange rate fluctuations, or that the failure to
manage currency risks effectively would not have a material adverse effect on
the Companys results of operations. On July 15, 2003, the Companys U.K.
subsidiary entered into four forward exchange contracts to sell British pounds
and buy U. S. dollars, as well as five forward exchange contracts to sell Euros
and buy British pounds. All of these contracts were settled as intended and,
at July 31, 2004, neither the Company nor any of its subsidiaries had any
outstanding foreign exchange contracts. 
 Item 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of July 31, 2004, the Company carried out an evaluation, under the
supervision and with the participation of the Companys management, including
the Companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls
and procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are effective and provide
reasonable assurance that information required to be disclosed by the Company
in the reports it files under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within required time periods. Changes in Internal Control over Financial Reporting There was no significant change in the Companys internal controls over
financial reporting during the Companys third quarter of fiscal 2004 that has
materially affected or is reasonably likely to materially affect the Companys
internal control over financial reporting. 
 PART II OTHER INFORMATION 
 Item 1. LEGAL PROCEEDINGS On January 22, 1999, Milberg Weiss Bershad Hynes & Lerach LLP filed a
class action in the United States District Court for the Southern District of
California (U.S. District Court) on behalf of purchasers of the Companys
common stock during the period between September 4, 1997 and July 15, 1998.
The action was subsequently consolidated with two similar suits and plaintiffs
filed their Amended and Consolidated Complaint on December 17, 1999. Upon the
Companys motion, the U.S. District Court dismissed the Complaint with leave to
amend on July 18, 2000. On September 18, 2000, plaintiffs served their Second
Consolidated Amended Complaint (Second Amended Complaint). On November 6,
2000, the Company filed its motion to dismiss the Second Amended Complaint,
which the U.S. District Court granted, in part, and denied, in part. The
remaining portions of the Second Amended Complaint allege that, among other
things, during the class period and in violation of the Securities Exchange Act
of 1934, the Companys financial statements, as reported, did not conform to
generally accepted accounting principles with respect to revenues and inventory
levels. It further alleges that certain Company executives made false or
misleading statements or omissions concerning product demand and 24




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that two former executives engaged in insider trading. Ashworth has
reached a tentative settlement to conclude this securities class action
lawsuit. Under the settlement, all claims will be dismissed and the litigation
will be terminated in exchange for a payment of $15,250,000, approximately 82%
of which will be paid by Ashworths insurance carriers. As part of the
settlement, Ashworth also agreed to adopt modifications to certain corporate
governance policies. Ashworth recorded a pre-tax charge in the third quarter
of fiscal year 2004 of $3,000,000 related to settlement of this suit. The Company is party to other claims and litigation proceedings arising in
the normal course of business. Although the legal responsibility and financial
impact with respect to such other claims and litigation cannot currently be
ascertained, the Company does not believe that these other matters will result
in payment by the Company of monetary damages, net of any applicable insurance
proceeds, that, in the aggregate, would be material in relation to the
consolidated financial position or results of operations of the Company. 
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None 
 Item 3. DEFAULTS UPON SENIOR SECURITIES  Not applicable. 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 
Not applicable. 
 Item 5. OTHER INFORMATION  Not applicable. 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3(a)
    
    Certificate of Incorporation as filed March 19, 1987 with the Secretary
of State of Delaware, Amendment to Certificate of Incorporation as filed
August 3, 1987 and Amendment to Certificate of Incorporation as filed
April 26, 1991 (filed as Exhibit 3(a) to the Companys Registration
Statement dated February 21, 1992 (File No. 33-45078) and incorporated
herein by reference) and Amendment to Certificate of Incorporation as
filed April 6, 1995 (filed as Exhibit 3(a) to the Companys Form 10-K for
the fiscal year ended October 31, 1994 (File No. 0-18553) and incorporated
herein by reference).3(b)
    
    Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the
Companys Current Report on Form 8-K on February 23, 2000 (File No.
0-18553) and incorporated herein by reference).4(a)
    
    Specimen certificate for Common Stock, par value $.001 per share, of the
Company (filed as Exhibit 4(a) to the Companys Registration Statement
dated November 4, 1987 (File No. 33-16714-D) and incorporated herein by
reference).4(b)(1)
    
    Specimen certificate for Options granted under the Amended and Restated
Nonqualified Stock Option Plan dated March 12, 1992 (filed as Exhibit 4(b)
to the Companys Form 10-K for the fiscal year ended October 31, 1993
(File No. 0-18553) and incorporated herein by reference).4(b)(2)
    
    Specimen certificate for Options granted under the Founders Stock
Option Plan dated November 6, 1992 (filed as Exhibit 4(b)(2) to the
Companys Form 10-K for the fiscal year ended October 31, 1993 (File No.
0-18553) and incorporated herein by reference).
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##### Table of Contents



4(c)
    
    Specimen certificate for Options granted under the Incentive Stock Option
Plan dated June 15, 1993 (filed as Exhibit 4(c) to the Companys Form 10-K
for the fiscal year ended October 31, 1993 (File No. 0-18553) and
incorporated herein by reference).4(d)
    
    Rights Agreement dated as of October 6, 1998 and amended on February 22,
2000 by and between Ashworth, Inc. and American Securities Transfer &
Trust, Inc. (filed as Exhibit 4.1 to the Companys Form 8-K filed on March
14, 2000 (File No. 0-18553) and incorporated herein by reference).10(a)*
    
    Personal Services Agreement and Acknowledgement of Termination of
Executive Employment effective December 31, 1998 by and between Ashworth,
Inc. and Gerald W. Montiel (filed as Exhibit 10(b) to the Companys Form
10-K for the fiscal year ended October 31, 1998 (File No. 0-18553) and
incorporated herein by reference).10(b)*
    
    Amendment to Personal Services Agreement effective January 1, 1999 by
and between Ashworth, Inc. and Gerald W. Montiel (filed as Exhibit 10(c)
to the Companys Form 10-K for the fiscal year ended October 31, 1998
(File No. 0-18553) and incorporated herein by reference).10(c)*
    
    First Amended and Restated Executive Employment Agreement effective
February 22, 1999 by and between Ashworth, Inc. and Randall L. Herrel, Sr.
(filed as Exhibit 10(a) to the Companys Form 10-Q for the quarter ended
April 30, 1999 (File No. 0-18553) and incorporated herein by reference).10(d)*
    
    Employment Agreement effective December 15, 2000 by and between
Ashworth, Inc. and Terence W. Tsang (filed as Exhibit 10(f) to the
Companys Form 10-Q for the quarter ended January 31, 2001 (File No.
0-18553) and incorporated herein by reference).10(e)*
    
    Amended and Restated Nonqualified Stock Option Plan dated November 1,
1996 (filed as Exhibit 10(i) to the Companys Form 10-K for the fiscal
year ended October 31, 2000 (File No. 0-18553) and incorporated herein by
reference).10(f)*
    
    Amended and Restated Incentive Stock Option Plan dated November 1, 1996
(filed as Exhibit 10(j) to the Companys Form 10-K for the fiscal year
ended October 31, 2000 (File No. 0-18553) and incorporated herein by
reference).10(g)*
    
    Amended and Restated 2000 Equity Incentive Plan dated December 14, 1999
adopted by the stockholders on March 24, 2000 (filed as Exhibit 4.1 to the
Companys Form S-8 filed on December 12, 2000 (File No. 333-51730) and
incorporated herein by reference).10(h)(1)
    
    Credit Agreement dated April 24, 2003, between Ashworth, Inc. as
Borrower, Bank of America, N.A., as Administrative Agent and Lender, Union
Bank of California, N.A. and Bank of the West as Lenders, expiring April
30, 2005 (filed as Exhibit 10(i)(1) to the Companys Form 10-Q for the
quarter ended April 30, 2003 (File No. 0-18553) and incorporated herein by
reference).10(h)(2)
    
    Guaranty Agreement dated April 24, 2003 between Ashworth Store I,
Inc., Ashworth Store II, Inc. and Ashworth Store III, Inc. as Guarantors
and Bank of America, N.A., as Administrative Agent on behalf of Ashworth,
Inc. as the Borrower (filed as Exhibit 10(i)(2) to the Companys Form 10-Q
for the quarter ended April 30, 2003 (File No. 0-18553) and incorporated
herein by reference).10(h)(3)
    
    Security Agreement effective as of April 24, 2003 to the Credit
Agreement dated April 24, 2000, between Ashworth, Inc. as Pledgor, Bank of
America, N.A., as Administrative Agent and Lender, Union Bank of
California, N.A. and Bank of the West as Lenders, expiring
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##### Table of Contents



April 30, 2005 (filed as Exhibit 10(i)(3) to the Companys Form 10-Q
for the quarter ended April 30, 2003 (File No. 0-18553) and
incorporated herein by reference).10(h)(4)
    
    Security Agreement effective as of April 24, 2003 to the Credit
Agreement dated April 24, 2000, between Ashworth Store I, Inc., Ashworth
Store II, Inc. and Ashworth Store III, Inc. as Pledgor, Bank of America,
N.A., as Administrative Agent and Lender, Union Bank of California, N.A.
and Bank of the West as Lenders, expiring April 30, 2005 (filed as Exhibit
10(i)(4) to the Companys Form 10-Q for the quarter ended April 30, 2003
(File No. 0-18553) and incorporated herein by reference).10(h)(5)
    
    Deed of Hypothec of Universality of Moveable Property effective as of
April 24, 2003 to the Credit Agreement dated April 24, 2000, between
Ashworth, Inc. as Grantor, Bank of America, N.A., as Administrative Agent
and Lender, Union Bank of California, N.A. and Bank of the West as
Lenders, expiring April 30, 2005 (filed as Exhibit 10(i)(5) to the
Companys Form 10-Q for the quarter ended April 30, 2003 (File No.
0-18553) and incorporated herein by reference).10(h)(6)
    
    Equitable Mortgage Over Securities effective as of April 24, 2003 to
the Credit Agreement dated April 24, 2000, between Ashworth, Inc. as
Mortgagor, Bank of America, N.A., as Security Trustee and Beneficiary,
Union Bank of California, N.A. and Bank of the West as Beneficiaries,
expiring April 30, 2005 (filed as Exhibit 10(i)(6) to the Companys Form
10-Q for the quarter ended April 30, 2003 (File No. 0-18553) and
incorporated herein by reference).10(i)*
    
    Change in Control Agreement dated November 1, 2000 by and between
Ashworth, Inc. and Randall L. Herrel, Sr. (filed as Exhibit 10(m) to the
Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
0-18553) and incorporated herein by reference).10(j)*
    
    Change in Control Agreement dated November 1, 2000 by and between
Ashworth, Inc. and Terence W. Tsang (filed as Exhibit 10(n) to the
Companys Form 10-K for the fiscal year ended October 31, 2000 (File No.
0-18553) and incorporated herein by reference).10(k)
    
    Promotion Agreement effective November 1, 1999 by and between Ashworth,
Inc. and Fred Couples (filed as Exhibit 10(o) to the Companys Form 10-K
for the fiscal year ended October 31, 2000 (File No. 0-18553) and
incorporated herein by reference).10(l)*
    
    Offer and Acceptance of Executive Employment effective May 29, 2001 by
and between Ashworth, Inc. and Eddie Fadel (filed as Exhibit 10(o) to the
Companys Form 10-K for the fiscal year ended October 31, 2002 (File No.
0-18553) and incorporated herein by reference).10(m)*
    
    Contract Termination Agreement effective October 31, 2002 by and among
Ashworth, Inc., James Nantz, III and Nantz Communications, Inc. (filed as
Exhibit 10(p) to the Companys Form 10-K for the fiscal year ended October
31, 2002 (File No. 0-18553) and incorporated herein by reference).10(n)
    
    Real Estate Purchase and Sale Agreement and Joint Escrow Instructions
effective October 25, 2002 by and between Innovative Development
Enterprises, Inc. and Ashworth, Inc. (filed as Exhibit 10(q) to the
Companys Form 10-K for the fiscal year ended October 31, 2002 (File No.
0-18553) and incorporated herein by reference).10(o)*
    
    Promotion Agreement effective October 31, 2002 by and among Ashworth,
Inc., James W. Nantz, III and Nantz Enterprises, Ltd. (filed as Exhibit
10(q) to the Companys Form 10-Q for the quarter ended January 31, 2003
(File No. 0-18553) and incorporated herein by reference).10(p)
    
    Purchase and Installation Agreement dated April 10, 2003 between
Ashworth, Inc. and Gartner Storage & Sorter Systems of Pennsylvania (filed
as Exhibit 10® to the Companys Form 10-Q
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for the quarter ended April 30, 2003 (File No. 0-18553) and
incorporated herein by reference).10(q)
    
    Agreement for Lease dated May 1, 2003 by and among Ashworth, Inc.,
Ashworth U.K. Limited and Juniper Developments Limited (filed as Exhibit
10(s) to the Companys Form 10-Q for the quarter ended April 30, 2003
(File No. 0-18553) and incorporated herein by reference).10(r)
    
    Lease dated September 1, 2003 by and among Ashworth, Inc., Ashworth U.K.
Limited and Juniper Developments Limited (filed as Exhibit 10(t) to the
Companys Form 10-Q for the quarter ended July 31, 2003 (File No. 0-18553)
and incorporated herein by reference).10(s)(1)
    
    Master Equipment Lease Agreement dated as of June 23, 2003 by and
between Key Equipment Finance and Ashworth, Inc. including Amendment 01,
the Assignment of Purchase Agreement and the Certificate of Authority
(filed as Exhibit 10(u) to the Companys Form 10-Q for the quarter ended
July 31, 2003 (File No. 0-18553) and incorporated herein by reference).10(s)(2)
    
    Equipment Schedule No. 01 dated as of August 30, 2004 by and between
Ashworth, Inc. and Key Equipment Finance, a Division of Key Corporate
Capital, Inc.(filed as Exhibit 99.1 to the Companys Form 8-K on September
3, 2004 (File No. 0-18553) and incorporated herein by reference).10(t)*
    
    Offer and Acceptance of Executive Employment effective August 30, 2001
by and between Ashworth, Inc. and Gary I. Schneiderman (filed as Exhibit
10(u) to the Companys Form 10-K for the fiscal year ended October 31,
2003 (File No. 0-18553) and incorporated herein by reference).10(u)
    
    License Agreement, effective May 14, 2001, by and between Ashworth, Inc.
and Callaway Golf Company (filed as Exhibit 10(v) to the Companys Form
10-K for the fiscal year ended October 31, 2003 (File No. 0-18553) and
incorporated herein by reference).10(v)
    
    Amendment to License Agreement, effective December 16, 2003, by and
between Ashworth, Inc. and Callaway Golf Company (filed as Exhibit 10(w)
to the Companys Form 10-K for the fiscal year ended October 31, 2003
(File No. 0-18553) and incorporated herein by reference).10(w)(1)
    
    Purchase and Sale Agreement, dated as of December 2, 2003, by and
between Ashworth, Inc. and LBA Inc. (filed as Exhibit 10(w)(1) to the
Companys Form 10-Q for the quarter ended January 31, 2004 (File No.
0-18553) and incorporated herein by reference).10(w)(2)
    
    First Amendment to Purchase and Sale Agreement, dated as of January
29, 2004, by and between Ashworth, Inc. and LBA Inc. (filed as Exhibit
10(w)(2) to the Companys Form 10-Q for the quarter ended January 31, 2004
(File No. 0-18553) and incorporated herein by reference).10(w)(3)
    
    Assignment and Assumption of Purchase and Sale Agreement, effective
February 24, 2004, by and between LBA Inc. and LBA Industrial Fund-Canyon,
Inc. (filed as Exhibit 10(w)(3) to the Companys Form 10-Q for the quarter
ended January 31, 2004 (File No. 0-18553) and incorporated herein by
reference).10(w)(4)
    
    Lease dated February 24, 2004 by and between Ashworth, Inc. and LBA
Industrial Fund-Canyon, Inc. (filed as Exhibit 10(w)(4) to the Companys
Form 10-Q for the quarter ended January 31, 2004 (File No. 0-18553) and
incorporated herein by reference).10(w)(5)
    
    Exchange Agreement and Supplemental Closing Instructions, dated as of
December 3, 2003, by and between Ashworth, Inc. and Asset Preservation,
Inc. (filed as Exhibit 10(w)(5) to the Companys Form 10-Q for the quarter
ended January 31, 2004 (File No. 0-18553) and incorporated herein by
reference).10(x)(1)
    
    Assignment and Assumption Agreement, effective April 1, 2004, by and
between Innovative Development Enterprises, Inc., Ashworth EDC, LLC and
Ashworth, Inc. (filed as Exhibit 10(x)(1)
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##### Table of Contents



to the Companys Form 10-Q for the quarter ended April 30, 2004 (File
No. 0-18553) and incorporated herein by reference).10(x)(2)
    
    Grant Deed, effective March 30, 2004, by and between Innovative
Development Enterprises, Inc., Ashworth EDC, LLC. (filed as Exhibit
10(x)(2) to the Companys Form 10-Q for the quarter ended April 30, 2004
(File No. 0-18553) and incorporated herein by reference).10(x)(3)
    
    Loan Agreement, effective April 2, 2004, by and between Ashworth EDC,
LLC and Bank of America, N.A. (filed as Exhibit 10(x)(3) to the Companys
Form 10-Q for the quarter ended April 30, 2004 (File No. 0-18553) and
incorporated herein by reference).10(x)(4)
    
    Promissory Note, effective April 2, 2004, by and between Ashworth EDC,
LLC and Bank of America, N.A. (filed as Exhibit 10(x)(4) to the Companys
Form 10-Q for the quarter ended April 30, 2004 (File No. 0-18553) and
incorporated herein by reference).10(x)(5)
    
    Deed of Trust, Assignment of Leases and Rents, Security Agreement and
Fixture Filing, effective April 2, 2004, by and between Ashworth EDC, LLC,
PRLAP, Inc. and Bank of America, N.A. (filed as Exhibit 10(x)(5) to the
Companys Form 10-Q for the quarter ended April 30, 2004 (File No.
0-18553) and incorporated herein by reference).10(x)(6)
    
    Environmental Indemnity Agreement, effective April 2, 2004, by and
between Ashworth EDC, LLC, Ashworth, Inc. and Bank of America, N.A. (filed
as Exhibit 10(x)(6) to the Companys Form 10-Q for the quarter ended April
30, 2004 (File No. 0-18553) and incorporated herein by reference).10(y)(1)
    
    Membership Interests Purchase Agreement, dated July 6, 2004, by and
among Ashworth Acquisition Corp. and the selling members, identified
therein (filed as Exhibit 99.1 to the Companys Form 8-K on July 21, 2004
(File No. 0-18553) and incorporated herein by reference).10(y)(2)
    
    Ashworth Acquisition Corp. Promissory Note in favor of W. C. Bradley
Co. (filed as Exhibit 99.2 to the Companys Form 8-K on July 21, 2004
(File No. 0-18553) and incorporated herein by reference).10(y)(3)
    
    Ashworth, Inc. Guaranty of Ashworth Acquisition Corp. Promissory Note
in favor of W. C. Bradley Co. (filed as Exhibit 99.3 to the Companys Form
8-K on July 21, 2004 (File No. 0-18553) and incorporated herein by
reference).10(y)(4)
    
    Amended and Restated Lease Agreement, dated July 6, 2004, by and
between 16 Downing, LLC as Lessor and Gekko Brands, LLC as Lessee (filed
as Exhibit 99.4 to the Companys Form 8-K July 21, 2004 (File No. 0-18553)
and incorporated herein by reference).10(y)(5)
    
    Ashworth, Inc. Guaranty of Payments under the Amended and Restated
Lease Agreement, dated July 6, 2004, by and between 16 Downing, LLC as
Lessor and Gekko Brands, LLC as Lessee (filed as Exhibit 99.5 to the
Companys Form 8-K on July 21, 2004 (File No. 0-18553) and incorporated
herein by reference).10(y)(6)
    
    Form of Executive Employment Agreement by and between Gekko Brands,
LLC and certain selling members (filed as Exhibit 99.6 to the Companys
Form 8-K on July 21, 2004 (File No. 0-18553) and incorporated herein by
reference).10(z)(1)
    
    Credit Agreement dated July 6, 2004, between Ashworth, Inc. as
Borrower, Union Bank of California, N.A., as Administrative Agent and
Lender, Bank of the West and Columbus Bank and Trust as Lenders, expiring
July 6, 2009.10(z)(2)
    
    Guaranty Agreement dated July 6, 2004 between Ashworth Store I, Inc.,
Ashworth Store II, Inc., Ashworth Acquisition Corp, Gekko Brands, LLC,
Kudzu, LLC and The Game, LLC as Guarantors and Union Bank of California,
N.A., as Administrative Agent on behalf of Ashworth, Inc. as the Borrower.
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10(z)(3)
    
    Security Agreement effective as of July 6, 2004 to the Credit
Agreement dated July 6, 2004, between Ashworth, Inc. as Pledgor, Union
Bank of California, N.A., as Administrative Agent and Lender, Bank of the
West and Columbus Bank and Trust as Lenders, expiring July 6, 2009.10(z)(4)
    
    Security Agreement effective as of July 6, 2004 to the Credit
Agreement dated July 6, 2004, between Ashworth Store I, Inc., Ashworth
Store II, Inc., Ashworth Acquisition Corp, Gekko Brands, LLC, Kudzu, LLC
and The Game, LLC as Pledgor, Union Bank of California, N.A., as
Administrative Agent and Lender, Bank of the West and Columbus Bank and
Trust as Lenders, expiring July 6, 2009.10(z)(5)
    
    Deed of Hypothec of Universality of Moveable Property effective as of
July 6, 2004 to the Credit Agreement dated July 6, 2004, between Ashworth,
Inc. as Grantor, Union Bank of California, N.A., as Administrative Agent
and Lender, Bank of the West and Columbus Bank and Trust as Lenders,
expiring July 6, 2009.10(z)(6)
    
    Equitable Mortgage Over Securities effective as of July 6, 2004 to the
Credit Agreement dated July 6, 2004, between Ashworth, Inc. as Mortgagor,
Union Bank of California, N.A., as Security Trustee and Beneficiary, Bank
of the West and Columbus Bank and Trust as Beneficiaries, expiring July 6,
2009.10(z)(7)
    
    First Amendment effective as of September 3, 2004 to the Credit
Agreement dated July 6, 2004, between Ashworth, Inc. as Borrower, Union
Bank of California, N.A., as Administrative Agent and Lender, Bank of the
West and Columbus Bank and Trust as Lenders, expiring July 6, 2009.14
    
    Ashworth, Inc. Code of Business Conduct and Ethics adopted October 17,
2003 (filed as Exhibit 14 to the Companys Form 10-K for the fiscal year
ended October 31, 2003 (File No. 0-18553) and incorporated herein by
reference).31.1
    
    Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 by Randall L. Herrel, Sr.31.2
    
    Certification Pursuant to Rules 13a-14 and 15d-14, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 by Terence W. Tsang.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Randall L. Herrel, Sr.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 by Terence W. Tsang.
 * Management contract or compensatory plan or arrangement required to be filed
as an Exhibit pursuant to Item 15(c) of Form 10-K and applicable rules of the
Securities and Exchange Commission.  Certain portions of this exhibit have been omitted pursuant to a request for
confidential treatment filed separately with the Securities and Exchange
Commission. (b) Reports on Form 8-K: On June 5, 2004, the Company filed a report on Form 8-K
dated June 5, 2004 furnishing the press release reporting the
results of operations for the second quarter fiscal 2004 and first
six months ended April 30, 2004. On July 7, 2004, the Company filed a report on Form 8-K
dated July 7, 2004 furnishing the press release announcing a
settlement in principle to conclude a securities class action
lawsuit brought against the Company and certain current and former
directors and officers in the United States District Court for the
Southern District of California. 30




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On July 7, 2004, the Company filed a report on Form 8-K
dated July 7, 2004 furnishing the press release announcing its
acquisition of Gekko Brands, LLC, a leading designer, producer and
distributor of headwear and apparel under The Game® and Kudzu®
brands. On July 21, 2004, the Company filed a report on Form 8-K
dated July 7, 2004 discussing its acquisition of all of the
membership interests in Gekko Brands, LLC, pursuant to that
certain Membership Interests Purchase Agreement entered into on
July 6, 2004, by and among Ashworth Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of Ashworth, Inc. and the
selling members, identified therein. 31




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. ASHWORTH, INCDate: September 14, 2004
    
    By: /s/ Terence W. Tsang
Terence W. Tsang
Executive Vice President,
Chief Operating Officer,
Chief Financial Officer and
Treasurer
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EXHIBIT INDEX ExhibitNumber
    
    Description of Exhibit10(z)(1)
    
    Credit Agreement dated July 6, 2004, between Ashworth, Inc.
as Borrower, Union Bank of California, N.A., as
Administrative Agent and Lender, Bank of the West and
Columbus Bank and Trust as Lenders, expiring July 6, 2009.10(z)(2)
    
    Guaranty Agreement dated July 6, 2004 between Ashworth
Store I, Inc., Ashworth Store II, Inc., Ashworth
Acquisition Corp, Gekko Brands, LLC, Kudzu, LLC and The
Game, LLC as Guarantors and Union Bank of California, N.A.,
as Administrative Agent on behalf of Ashworth, Inc. as the
Borrower.10(z)(3)
    
    Security Agreement effective as of July 6, 2004 to the
Credit Agreement dated July 6, 2004, between Ashworth, Inc.
as Pledgor, Union Bank of California, N.A., as
Administrative Agent and Lender, Bank of the West and
Columbus Bank and Trust as Lenders, expiring July 6, 2009.10(z)(4)
    
    Security Agreement effective as of July 6, 2004 to the
Credit Agreement dated July 6, 2004, between Ashworth Store
I, Inc., Ashworth Store II, Inc., Ashworth Acquisition
Corp, Gekko Brands, LLC, Kudzu, LLC and The Game, LLC as
Pledgor, Union Bank of California, N.A., as Administrative
Agent and Lender, Bank of the West and Columbus Bank and
Trust as Lenders, expiring July 6, 2009.10(z)(5)
    
    Deed of Hypothec of Universality of Moveable Property
effective as of July 6, 2004 to the Credit Agreement dated
July 6, 2004, between Ashworth, Inc. as Grantor, Union Bank
of California, N.A., as Administrative Agent and Lender,
Bank of the West and Columbus Bank and Trust as Lenders,
expiring July 6, 2009.10(z)(6)
    
    Equitable Mortgage Over Securities effective as of July 6,
2004 to the Credit Agreement dated July 6, 2004, between
Ashworth, Inc. as Mortgagor, Union Bank of California,
N.A., as Security Trustee and Beneficiary, Bank of the West
and Columbus Bank and Trust as Beneficiaries, expiring July
6, 2009.10(z)(7)
    
    First Amendment effective as of September 3, 2004 to the
Credit Agreement dated July 6, 2004, between Ashworth, Inc.
as Borrower, Union Bank of California, N.A., as
Administrative Agent and Lender, Bank of the West and
Columbus Bank and Trust as Lenders, expiring July 6, 2009.31.1
    
    Certification Pursuant to Rules 13a-14 and 15d-14, as
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002 by Randall L. Herrel, Sr.31.2
    
    Certification Pursuant to Rules 13a-14 and 15d-14, as
Adopted Pursuant to Section 302 of The Sarbanes-Oxley Act
of 2002 by Terence W. Tsang.32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002 by Randall L. Herrel, Sr.32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002 by Terence W. Tsang.
 33