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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 January 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
incorporation or organization)
    
    (I.R.S. Employer
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 March 10, 2004$.001 par value Common Stock
    
    

    13,355,669




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Financial StatementsCONDENSED CONSOLIDATED BALANCE SHEETSCONDENSED CONSOLIDATED STATEMENTS OF INCOMECONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSItem 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 4. CONTROLS AND PROCEDURESPART II OTHER INFORMATIONItem 1. LEGAL PROCEEDINGSItem 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES  NONEItem 3. DEFAULTS UPON SENIOR SECURITIES  NONEItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  NONEItem 5. OTHER INFORMATION  NONEItem 6. EXHIBITS AND REPORTS ON FORM 8-KSIGNATURESEXHIBIT INDEXEXHIBIT 10(W)(1)EXHIBIT 10(W)(2)EXHIBIT 10(W)(3)EXHIBIT 10(W)(4)EXHIBIT 10(W)(5)EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2    Table of Contents  INDEX PAGEPart I.
    
    Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Income
    
    
    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
    
    
    8Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    17Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    18Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
    
    
    18Item 3.
    
    Defaults Upon Senior Securities
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    18Signatures
    
    
    23Exhibit Index
    
    
    24
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PART I FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS January 31,
    
    October 31,2004
    
    2003(UNAUDITED)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,831,000
    
    
    $
    5,024,000Accounts
receivable  trade, net
    
    
    27,442,000
    
    
    
    30,993,000Accounts
receivable  other
    
    
    1,114,000
    
    
    
    1,575,000Inventories, net
    
    
    53,070,000
    
    
    
    44,476,000Other current assets
    
    
    5,741,000
    
    
    
    3,676,000Deferred income tax asset
    
    
    1,906,000
    
    
    
    1,953,000Total current assets
    
    
    93,104,000
    
    
    
    87,697,000Property, plant and equipment, at cost
    
    
    41,098,000
    
    
    
    39,985,000Less accumulated depreciation and amortization
    
    
    (23,416,000
    )
    
    
    (22,523,000
    )Total property, plant and equipment, net
    
    
    17,682,000
    
    
    
    17,462,000Other assets, net
    
    
    1,634,000
    
    
    
    877,000Total assets
    
    $
    112,420,000
    
    
    $
    106,036,000LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Line of credit payable
    
    $
    3,800,000
    
    
    $
    3,400,000Current portion of long-term debt
    
    
    289,000
    
    
    
    289,000Accounts payable  trade
    
    
    10,103,000
    
    
    
    5,731,000Income taxes payable
    
    
    72,000
    
    
    
    118,000Accrued liabilities
    
    
    4,051,000
    
    
    
    3,917,000Total current liabilities
    
    
    18,315,000
    
    
    
    13,455,000Long-term debt, net of current portion
    
    
    2,560,000
    
    
    
    2,631,000Deferred income tax liability
    
    
    950,000
    
    
    
    950,000Other long-term liabilities
    
    
    329,000
    
    
    
    445,000Stockholders equity:Common stock
    
    
    13,000
    
    
    
    13,000Capital in excess of par value
    
    
    39,703,000
    
    
    
    39,230,000Retained earnings
    
    
    48,040,000
    
    
    
    47,906,000Accumulated other comprehensive income
    
    
    2,510,000
    
    
    
    1,406,000Total stockholders equity
    
    
    90,266,000
    
    
    
    88,555,000Total liabilities and stockholders equity
    
    $
    112,420,000
    
    
    $
    106,036,000
 See accompanying notes to condensed consolidated financial statements. 1




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ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED) Three months ended January 31,2004
    
    2003Net revenues
    
    $
    27,338,000
    
    
    $
    26,563,000Cost of goods sold
    
    
    16,647,000
    
    
    
    16,596,000Gross profit
    
    
    10,691,000
    
    
    
    9,967,000Selling, general and administrative expenses
    
    
    10,405,000
    
    
    
    9,682,000Income from operations
    
    
    286,000
    
    
    
    285,000Other income (expense):Interest income
    
    
    21,000
    
    
    
    10,000Interest expense
    
    
    (169,000
    )
    
    
    (192,000
    )Other income
    
    
    85,000
    
    
    
    73,000Total other expense, net
    
    
    (63,000
    )
    
    
    (109,000
    )Income before provision for income taxes
    
    
    223,000
    
    
    
    176,000Provision for income taxes
    
    
    89,000
    
    
    
    70,000Net income
    
    $
    134,000
    
    
    $
    106,000Net income per shareBasic:Weighted average shares outstanding
    
    
    13,302,000
    
    
    
    12,952,000Net income per share
    
    $
    0.01
    
    
    $
    0.01Diluted:Weighted average shares outstanding
    
    
    13,644,000
    
    
    
    13,080,000Net income per share
    
    $
    0.01
    
    
    $
    0.01
 See accompanying notes to condensed consolidated financial statements. 2




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ASHWORTH, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) Three months ended January 31,2004
    
    2003Cash flows from operating activities:Net cash used in operating activities
    
    ($
    2,035,000
    )
    
    ($
    7,432,000
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (989,000
    )
    
    
    (764,000
    )Net cash used in investing activities
    
    
    (989,000
    )
    
    
    (764,000
    )Cash flows from financing activities:Principal payments on capital lease obligations
    
    
    (41,000
    )
    
    
    (43,000
    )Borrowings on line of credit
    
    
    7,800,000
    
    
    
    15,595,000Payments on line of credit
    
    
    (7,400,000
    )
    
    
    (9,400,000
    )Principal payments on notes payable and long-term debt
    
    
    (30,000
    )
    
    
    (163,000
    )Proceeds from issuance of common stock
    
    
    398,000
    
    
    
    46,000Net cash provided by financing activities
    
    
    727,000
    
    
    
    6,035,000Effect of exchange rate changes on cash
    
    
    1,104,000
    
    
    
    706,000Net decrease in cash and cash equivalents
    
    
    (1,193,000
    )
    
    
    (1,455,000
    )Cash and cash equivalents, beginning of period
    
    
    5,024,000
    
    
    
    2,336,000Cash and cash equivalents, end of period
    
    $
    3,831,000
    
    
    $
    881,000
 See accompanying notes to condensed consolidated financial statements. 3




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ASHWORTH, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 2004 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 29, 2004.Shipping and Handling ExpensesShipping expenses consist primarily of payments made to freight
companies and are reported in selling, general and administrative
(SG&A) expenses. Shipping expenses for the quarters ended January
31, 2004 and 2003 were $314,000 and $312,000, respectively.ReclassificationsCertain reclassifications have been made to prior year balances in
order to conform with current year presentation. NOTE 2 - Inventories.  Inventories consist of the following at January 31, 2004 and October
31, 2003: January 31,
    
    October 31,2004
    
    2003Raw materials
    
    $
    57,000
    
    
    $
    127,000Finished goods
    
    
    53,013,000
    
    
    
    44,349,000Total inventories, net
    
    $
    53,070,000
    
    
    $
    44,476,000
 4




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NOTE 3  Net Income Per Share Information.  Basic net income per share has been computed based upon the weighted
average number of common shares outstanding during the period.
Diluted net income per share has been computed based upon 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 upon the requirements of the Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share: Three months ended January 31,2004
    
    2003Numerator:Net incomenumerator for basic and diluted income per share income available to common stockholders
    
    $
    134,000
    
    
    $
    106,000Denominator:Denominator
for basic income per share  weighted average shares
    
    
    13,302,000
    
    
    
    12,952,000Effect of dilutive securities:Stock options
    
    
    342,000
    
    
    
    128,000Denominator
for diluted income per share  adjusted weighted average shares and assumed
conversions
    
    
    13,644,000
    
    
    
    13,080,000Basic net income per share
    
    $
    0.01
    
    
    $
    0.01Diluted net income per share
    
    $
    0.01
    
    
    $
    0.01
  For the quarters ended January 31, 2004 and 2003, the diluted weighted
average shares outstanding computation excludes 411,000 and 1,827,000
options, respectively, the impact of which would have had an
anti-dilutive effect. NOTE 4  Stock Option Compensation.  The Company follows 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.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- 5




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Scholes option-pricing model with the following
weighted-average assumptions used for grants during the first quarter
fiscal 2004 and first quarter fiscal 2003, respectively: risk-free
interest rates of 4.18% to 4.49% in 2004 and 3.98% to 4.01% in 2003;
expected volatility of 58.0% to 58.3% in 2004 and 58.3% in 2003; and
expected life of 10 years in 2004 and 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. The Companys pro forma information is as follows: Three months ended January 31,2004
    
    2003Net income, as reported
    
    $
    134,000
    
    
    $
    106,000Deduct: Stock-based employee
compensation expense determined under
fair value based method for all
awards, net of tax effect
    
    
    (60,000
    )
    
    
    (197,000
    )Pro forma net income (loss)
    
    $
    73,000
    
    
    $
    (91,000
    )Net income (loss) per share:Basic  as reported
    
    $
    0.01
    
    
    $
    0.01Basic  pro forma
    
    $
    0.01
    
    
    $
    (0.01
    )Diluted  as reported
    
    $
    0.01
    
    
    $
    0.01Diluted  pro forma
    
    $
    0.01
    
    
    $
    (0.01
    )
 NOTE 5 - Issuance of Common Stock  Common stock and capital in excess of par value increased by $473,000
in the three months ended January 31, 2004, of which $398,000 is due
to the issuance of 72,500 shares of common stock on exercise of
options and $75,000 is the tax benefit related to the exercise of
those options. NOTE
6 - 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 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 January 31,2004
    
    2003Net income
    
    $
    134,000
    
    
    $
    106,000Net unrealized gains on cash flow
hedges, net of tax
    
    
    80,000
    
    
    
    Foreign currency translation
    
    
    1,024,000
    
    
    
    706,000Total comprehensive income
    
    $
    1,238,000
    
    
    $
    812,000
 6




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NOTE 7  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 that two former
executives engaged in insider trading. The plaintiffs seek
unspecified damages. The parties are currently in the discovery
process. Based on the current status of the litigation the
Company has not booked any provision for settlement charges.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, liquidity or results of operations of the Company. NOTE 8  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.
Management 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 dates or periods
presented) below: Three months ended January 31,2004
    
    2003Net Revenues:Domestic
    
    $
    23,061,000
    
    
    $
    23,537,000International
    
    
    4,277,000
    
    
    
    3,026,000Total
    
    $
    27,338,000
    
    
    $
    26,563,000Income From Operations:Domestic
    
    $
    9,000
    
    
    $
    252,000International
    
    
    277,000
    
    
    
    33,000Total
    
    $
    286,000
    
    
    $
    285,000
 7




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January 31,
    
    October 31,2004
    
    2003Total Assets:Domestic
    
    $
    91,060,000
    
    
    $
    85,947,000International
    
    
    21,360,000
    
    
    
    20,089,000Total
    
    $
    112,420,000
    
    
    $
    106,036,000
 Note 9  Subsequent Events  The Company owned two buildings located in Carlsbad, California that
were purchased on December 9, 1993 for $3,500,000. On February 24,
2004 the Company completed the sale of the two buildings for
approximately $5,747,000 and paid off the $2,610,000 balance due on
the existing mortgage. The gain on the sale of the buildings will be
recorded in the second quarter of fiscal 2004 utilizing a 1031
tax-free exchange. 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 will pay monthly rent of
approximately $47,000 plus taxes, insurance and utilities. 
 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
amounts at January 31, 2004 may more meaningfully be compared to the balances
at January 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 8




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period of the sale for estimated product
returns and sales allowances. Sales Returns and Other Allowances.Management must make estimates of
potential future product returns related to current period product revenues.
Management analyzes historical returns, current economic trends, changes in
customer demand and sell-through of our products when evaluating the 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. Material differences
may result in the amount and timing of our revenues for any period if
management makes different judgments or utilizes different estimates. The
reserves for sales returns and other allowances amounted to $881,000 at January
31, 2004 compared to $728,000 at October 31, 2003 and $466,000 at January 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
historical bad debts and evaluating individual customer receivables considering
the customers financial condition and current economic conditions. As of
January 31, 2003, the Company had reserved approximately $2.0 million of
receivables due from a national retail customer which later filed for
protection under U.S. bankruptcy laws, as well as $1.4 million for other
estimated uncollectible receivables based on managements analysis. If the
financial condition of significant customers of ours were to deteriorate,
resulting in the impairment of their ability to make payments, additional
allowances for doubtful accounts may be required. In October 2002, the Company
acquired credit insurance to cover many of its major accounts. Our trade
accounts receivable balance was $27.4 million, net of allowances for doubtful
accounts of $1.1 million, at January 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 January 31, 2003, the trade accounts receivable balance
was $28.3 million, net of allowances for doubtful accounts of $3.4 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. Our inventory balance was $53.1
million, net of inventory write-downs of $0.8 million, at January 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 January 31, 2003, the inventory
balance was $52.7 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 inventory 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 entered into a
second agreement with the third party and exchanged $0.9 million of additional
inventory (at cost) resulting in an additional $0.9 million in future APCs.
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.
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 January
31, 2004, the 9




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Company had $1.2 million of the APCs remaining and management
expects to fully utilize them over their remaining life. Off-Balance Sheet Arrangements At January 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 80% of it manufactured in Asian countries. The Company
embroiders a majority of these garments with custom golf course, tournament and
corporate logos for its customers. First quarter fiscal 2004 net revenue increased slightly to $27,338,000 as
compared to $26,563,000 for the same period of the prior year. The increase
was primarily driven by net revenue increases in its retail, international and
corporate channels, offset by a decline in our domestic core golf and
off-course specialty distribution channel. The net revenues growth, combined
with improved gross margins and controlled expenses, resulted in first quarter
net income of $134,000 or $0.01 per diluted share, compared to net income of
$106,000 or $0.01 per diluted share in the same quarter of last year. Results of Operations First quarter 2004 compared to first quarter 2003 Consolidated net revenues for the first quarter of fiscal 2004 increased
2.9% to $27,338,000 from $26,563,000 for the same period in fiscal 2003
primarily due to higher revenues from its retail and corporate distribution
channels as well as the international segment. Net revenues for the domestic segment decreased 2.0% to $23,061,000 for
the current quarter from $23,537,000 in the first quarter of 2003. Net
revenues from the Companys core golf and off-course specialty distribution
channel decreased $2,009,000 or 13.0% as compared to the first quarter of
fiscal 2003. This decrease was primarily due to continuing industry weakness
and a trend among buyers in the golf related distribution channel to lower
their inventory risk by delaying shipments until closer to the spring/summer
selling season. Net revenues from Company owned stores decreased by $456,000
or 26.8% primarily due to the closing of two Company owned stores. These
decreases were partially offset by increased net revenues in the Companys
retail and corporate distribution channels. Net revenues from
the retail distribution channel increased $1,726,000 or 88.6% as compared
to the first quarter of fiscal 2003. The increase in the retail distribution
channel is primarily due to an increased number of doors as well as slightly
higher comparable 10




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store sales in the first quarter of fiscal 2004 as compared
to the same period of the prior fiscal year. Net revenues from the corporate
distribution channel increased $263,000 or 5.9% as compared to the same quarter
in the prior fiscal year. Since the end of 2001, corporate promotional budgets
had been cut due to the overall economic and business conditions resulting in
price compression pressures in the corporate distribution channel. When
corporations increase their promotional budgets, the Company expects net
revenues to increase. Net revenues for the international segment increased 41.4% to $4,277,000
for the current quarter from $3,026,000 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 $414,000 was due to the weakening
of the U.S. dollar against the British pound and Canadian dollar during the
first quarter of fiscal 2004. Net revenues from the Companys U.K. subsidiary
in the first quarter of fiscal 2004 increased by $1,014,000 or 56.2% compared
to the same quarter of the prior fiscal year, of which $289,000 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 $313,000 or 66.0% as
compared to net revenues in the same quarter of the prior fiscal year, of which
$125,000 was due to changes in currency exchange rates. Consolidated gross margin for the quarter increased 160 basis points to
39.1% as compared to 37.5% for the same quarter a year earlier. This
improvement was primarily due to improved product sourcing as well as a more
favorable product sales mix. Consolidated SG&A expenses increased 7.5% to $10,405,000 for the first
quarter of fiscal 2004 from $9,682,000 for the same period in fiscal 2003. As
a percent of net revenues, SG&A increased to 38.1% in the current quarter as
compared to 36.5% for the same quarter of the prior fiscal year. The increase
in SG&A is primarily due to increased insurance expense as well as the timing
of sales and marketing expenses. Total other expense decreased to $63,000 for the first quarter of fiscal
2004 from $109,000 in the first quarter of fiscal 2003, primarily due to higher
currency transaction gains in the current quarter as compared to the same
quarter of the prior fiscal year at the Companys U.K. subsidiary and Canadian
divisions and slightly lower interest expense resulting from lower average
borrowings under the Companys line of credit of $4,461,000 during the first
quarter of fiscal 2004 as compared to $16,045,000 during the same quarter of
fiscal 2003. The effective income tax rate for the first quarter of fiscal 2004
remained at 40.0% of pre-tax income. Liquidity and Capital Resources The Companys primary sources of liquidity are expected to be cash flows
from operations, a 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 from approximately December through the
end of July each year. The inventory build-up during this period is to provide
product for shipment for the spring/summer selling season. On April 24, 2003, the Company entered into a new business loan agreement
with Bank of America, N.A., as the administrative agent, and two other lenders.
The new credit facility expires on April 30, 2005 11




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and is collateralized by
substantially all of the assets of the Company, other than real estate. The
loan agreement provides a revolving line of credit of $45,000,000 with a
seasonal increase in the line of credit to $55,000,000 for each period
commencing December 1 through June 15 during the term of the agreement. Interest under this loan agreement is currently charged at the banks
reference (prime) rate. At January 31, 2004, the prime rate was 4.00%. 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. The loan agreement contains various restrictive covenants
requiring, among other matters, the maintenance of certain financial ratios.
Management believes the Company was in compliance with all such covenants as of
January 31, 2004. The line of credit 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 $5,081,000 at January 31, 2004 as
compared to $9,635,000 at January 31, 2003 under the prior loan agreement. The
Company had $3,800,000 outstanding at January 31, 2004, compared to $17,320,000
outstanding at January 31, 2003 under the prior loan 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 as well as better
working capital management. At January 31, 2004, $46,119,000 was available for
borrowing under this loan agreement. During the quarter ended January 31, 2004, cash used in operations was
$2,035,000 as compared to $7,432,000 used during the same quarter of the prior
fiscal year. The improvement in cash management was primarily due to the
Companys ability to negotiate more favorable payment terms with many of its
vendors as well as controlling inventory growth and improving collections of
accounts receivable. Net trade receivables were $27,442,000 at January 31, 2004, a decrease of
$3,551,000 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 $28,268,000 at January 31, 2003, rather than the
year-end balance. The comparison to the first quarter of fiscal 2003 shows a
decrease of 2.9% in net trade receivables despite a 2.9% increase in net
revenues. Net inventories increased 19.3% to $53,070,000 at January 31, 2004 from
$44,476,000 at October 31, 2003. Because the Companys business is seasonal,
the inventory balance may more meaningfully be compared to the balance of
$52,730,000 at January 31, 2003, rather than the year-end balance. Net
inventories at January 31, 2004 were essentially flat when compared to net
inventories at January 31, 2003. The Company believes that its current
inventory mix and amounts are appropriate to respond to market demand. During the first three months of fiscal 2004, the Company incurred capital
expenditures of $989,000 primarily for upgrades of computer systems and
equipment as well as warehouse automation. During the remainder of fiscal
2004, Ashworth management anticipates capital spending of approximately
$18,711,000, primarily for the purchase of the new distribution center in
Oceanside, California and on sales fixtures, embroidery equipment, outlet
stores openings and renovations and upgrades of computer systems and equipment.
Except for the purchase of the real property, for which the Company plans to
obtain mortgage financing, management currently intends to finance the purchase
of the Companys capital equipment from its own cash resources, but may use
leases or equipment financing
agreements if deemed appropriate. The Company capitalized interest of $27,000 and $0 during the three months
ended January 31, 2004 and 2003, respectively, related to construction in
progress. The Company owned two buildings located in Carlsbad, California that were
purchased on 12




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December 9, 1993 for $3,500,000. The Company entered into an
agreement to sell the two buildings for approximately $5,747,000 and escrow
closed on February 24, 2004. The Company has entered into a lease agreement to
lease the facility from the new owner. The term of the lease commenced on the
close of escrow 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 will
pay monthly rent of approximately $47,000 plus taxes, insurance and utilities. The Company is party to an exclusive licensing agreement with Callaway
Golf Company with royalty payments being calculated as a percent of sales with
certain minimum guarantees. These royalty payments 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. Common stock and capital in excess of par value increased by $473,000 in
the three months ended January 31, 2004, of which $398,000 is due to the
issuance of 72,500 shares of common stock on exercise of options and $75,000 is
the tax benefit related to the exercise of those options. On October 25, 2002, the Company entered into an agreement to purchase
land and a building, to be built to the Companys specifications, in the Ocean
Ranch Corporate Center in Oceanside, California. The building, to be
constructed with approximately 203,000 square feet of useable space, will be
used by the Company to warehouse, embroider, finish, package and distribute
clothing products and related accessories. Subject to timely completion of
construction, the purchase agreement obligates the Company to purchase the land
and building in the first half of fiscal 2004 for approximately $15,000,000.
The Company has also entered into a contingent lease agreement that obligates
the Company to pay a monthly base rent plus standard common area maintenance
(CAM) charges for a term of 10 years. The lease would take effect only if
the land and building purchase is not completed due to certain defaults by the
Company, as specified in the purchase agreement. The base rent and CAM
payments under the conditional lease would start on the date 30 days after
substantial completion of the improvements. The base rent would be calculated
according to a specified formula based on the purchase price under the purchase
agreement, expected interest rates and other criteria. If the Company were to
default on the purchase agreement, monthly rental under the lease agreement is
currently estimated to commence at approximately $132,000 and the monthly CAM
charges are currently estimated to commence at approximately $27,000. The
Company is not obligated to make any deposits or progress payments under the
purchase agreement unless the Company makes change requests which require a
deposit that exceeds a certain dollar limit. As of the end of February 2004,
the building has essentially been completed and the Company is in negotiations
with various financial institutions to obtain a long-term loan separate from
the line of credit agreement to finance the purchase of the land and the
building. 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 will make progress
payments to the equipment manufacturers during the period while the equipment
is being purchased, assembled, installed and/or tested as required by the
purchase agreements. The total cost of the equipment is expected to be
approximately $12,000,000. The Company is obligated to pay 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 January 31, 2004, the financial institution has made
progress payments of $5,059,000 leaving an available balance of $6,941,000 and
the Company has paid $51,000 in interest charges during the first quarter of
fiscal 2004. Under the 13




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original agreement, if the Company failed to deliver a
certificate of acceptance and execute an equipment schedule by the outside
closing date, the Company would be obligated to purchase the equipment from the
financial institution at a price equal to the aggregate amount of all costs,
disbursements and expenses incurred or committed to be incurred by the
financial institution. The Company has entered into an agreement with the
financial institution to extend the outside closing date to August 31, 2004. 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. At
January 31, 2004, the notional amount of the remaining foreign exchange
contracts designated as cash flow hedges was $1,358,000 with an unrealized
after tax loss of $28,000. 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. To
date, the Company has not created any variable interest entities nor obtained
an interest in any variable interest entities for which the Company would be
required to apply the consolidation provisions of FIN No. 46. Cautionary Statements and Risk Factors This report contains certain forward-looking statements, including without
limitation those regarding the 14




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Companys plans and expectations for revenue
growth, product lines, strategic alliances, domestic and foreign distribution
centers, 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:  o
    
    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.o
    
    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.o
    
    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.o
    
    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.o
    
    The Company has entered into agreements to purchase 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 is not operational as anticipated or functionality
problems are encountered. Any such delay or operation 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.o
    
    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. 15




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o
    
    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 the United
States.o
    
    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.o
    
    An increase in terrorist activities, as well as the
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.o
    
    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.o
    
    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.o
    
    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.o
    
    The Company maintains high levels of inventory to
support its Authentics 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. 16




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The Companys long-term debt currently consists of notes payable which had
a total balance of $2,849,000 at January 31, 2004. The debt bears interest at
fixed rates ranging from 5.9% to 8.3%, which approximates fair value based on
current rates offered for debt with similar risks and maturities. The Company
also had $3,800,000 outstanding at January 31, 2004 on its revolving line of
credit with interest charged at the banks reference (prime) 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 three months ended January 31, 2004 would have
resulted in a $5,000 decrease in net income. 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 and its U.K. subsidiary enter 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. The
contracts provide that, on specified dates, the Company would sell the bank a
specified number of British pounds in exchange for a specified number of U.S.
dollars. Additionally, the Companys subsidiary in England from time to time
enters into similar contracts with its bank to hedge against currency
fluctuations between 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. At January 31, 2004, the notional amount of the
remaining foreign exchange contracts designated as cash flow hedges was
$1,358,000 with an unrealized after tax loss of $28,000. 
 Item 4. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures As of January 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. 17




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Changes in Internal Control over Financial Reporting There were no significant changes in the Companys internal controls over
financial reporting that occurred during the Companys first quarter of fiscal
2004 that has materially affected or are 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 that two
former executives engaged in insider trading. The plaintiffs seek unspecified
damages. The parties are currently in the discovery process. Based on the
current status of the litigation the Company has not booked any provision for
settlement charges. 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, liquidity or results of operations of the
Company. 
 Item 2. CHANGES IN
SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES  NONE 
 Item 3. DEFAULTS UPON
SENIOR SECURITIES  NONE 
 Item 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS  NONE 
 Item 5. OTHER
INFORMATION  NONE 
 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3(a)
    
    Certificate of Incorporation as filed March 19, 1987 with the
Secretary of State of Delaware,
 18




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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).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).
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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
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).
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##### Table of Contents



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 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)
    
    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(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).
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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.10(w)(2)
    
    First Amendment to Purchase and Sale Agreement, dated as of January
29, 2004, by and between Ashworth, Inc. and LBA Inc.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.10(w)(4)
    
    Lease dated February 24, 2004 by and between Ashworth, Inc. and LBA
Industrial Fund-Canyon, Inc.10(w)(5)
    
    Exchange Agreement and Supplemental Closing Instructions, dated as
of December 3, 2003, by and between Ashworth, Inc. and Asset
Preservation, Inc.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 December 18, 2003, the Company filed a report on Form 8-K dated
December 18, 2003 furnishing the press release reporting the results of
operations for the fourth quarter and fiscal year ended October 31,
2003. 22




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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: March 15, 2004
    
    By: /s/ Terence W. TsangTerence W. TsangExecutive Vice President, Chief Operating Officer,Chief Financial Officer and Treasurer
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EXHIBIT INDEX ExhibitNumber
    
    Description of Exhibit10(w)(1)
    
    Purchase and Sale Agreement, dated as of December 2, 2003,
by and between Ashworth, Inc. and LBA Inc.10(w)(2)
    
    First Amendment to Purchase and Sale Agreement, dated as of
January 29, 2004, by and between Ashworth, Inc. and LBA
Inc.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.10(w)(4)
    
    Lease dated February 24, 2004 by and between Ashworth, Inc.
and LBA Industrial Fund-Canyon, Inc.10(w)(5)
    
    Exchange Agreement and Supplemental Closing Instructions,
dated as of December 3, 2003, by and between Ashworth, Inc.
and Asset Preservation, Inc.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.
 24