##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended July 31, 2008
 OR
 o
    
    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: 001-14547
 Ashworth, Inc.
  Delaware
    
    84-1052000(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 2765 LOKER AVENUE WEST
CARLSBAD, CA 92010
 (760) 438-6610
 þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ
  Title
    
    Outstanding at August 31, 2008$.001 par value Common Stock
    
    
    14,746,844




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##### 



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
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    29Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    29Item1A.
    
    Risk Factors
    
    
    30Item 4.
    
    Submission of Matters To a Vote of Security Holders
    
    
    31Item 6.
    
    Exhibits
    
    
    31Signatures
    
    
    33Exhibit Index
    
    
    34EXHIBIT 10.(F)EXHIBIT 10.(G)EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  -i-




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##### Table of Contents



PART I
 FINANCIAL INFORMATION
 
 
 July 31, 2008
    
    
    October 31, 2007(UNAUDITED)AssetsCurrent assets:Cash and cash equivalents
    
    $
    1,556,000
    
    
    $
    6,104,000Accounts receivable  trade, net
    
    
    32,500,000
    
    
    
    34,545,000Accounts receivable  other, net
    
    
    188,000
    
    
    
    147,000Inventories, net
    
    
    55,365,000
    
    
    
    50,529,000Income tax refund receivable
    
    
    202,000
    
    
    
    1,117,000Other current assets
    
    
    4,189,000
    
    
    
    4,981,000Deferred income tax asset, net
    
    
    112,000
    
    
    
    48,000Total current assets
    
    
    94,112,000
    
    
    
    97,471,000Property, plant and equipment, at cost
    
    
    64,040,000
    
    
    
    68,495,000Less accumulated depreciation and amortization
    
    
    (30,178,000
    )
    
    
    (30,980,000
    )Total property, plant and equipment, net
    
    
    33,862,000
    
    
    
    37,515,000Goodwill
    
    
    15,250,000
    
    
    
    15,250,000Intangible assets, net
    
    
    9,629,000
    
    
    
    9,806,000Other assets
    
    
    126,000
    
    
    
    372,000Total assets
    
    $
    152,979,000
    
    
    $
    160,414,000Liabilities and Stockholders EquityCurrent liabilities:Line of credit payable
    
    $
    34,928,000
    
    
    $
    19,615,000Current portion of long-term debt
    
    
    591,000
    
    
    
    2,360,000Accounts payable
    
    
    11,779,000
    
    
    
    12,728,000Accrued liabilities:Salaries and commissions
    
    
    3,290,000
    
    
    
    5,442,000Other
    
    
    6,723,000
    
    
    
    5,235,000Total current liabilities
    
    
    57,311,000
    
    
    
    45,380,000Long-term debt, net of current portion
    
    
    10,828,000
    
    
    
    13,844,000Deferred income tax liability
    
    
    2,415,000
    
    
    
    1,469,000Other long-term liabilities
    
    
    
    
    
    
    84,000Stockholders equity:Common stock
    
    
    15,000
    
    
    
    15,000Capital in excess of par value
    
    
    50,671,000
    
    
    
    50,325,000Retained earnings
    
    
    26,140,000
    
    
    
    42,217,000Accumulated other comprehensive income
    
    
    5,599,000
    
    
    
    7,080,000Total stockholders equity
    
    
    82,425,000
    
    
    
    99,637,000Total liabilities and stockholders equity
    
    $
    152,979,000
    
    
    $
    160,414,000
  1




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##### Table of Contents



Three months ended July 31,
    
    
    Nine months ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues
    
    $
    45,155,000
    
    
    $
    49,461,000
    
    
    $
    137,500,000
    
    
    $
    147,597,000Cost of goods sold
    
    
    29,399,000
    
    
    
    30,578,000
    
    
    
    84,858,000
    
    
    
    89,856,000Gross profit
    
    
    15,756,000
    
    
    
    18,883,000
    
    
    
    52,642,000
    
    
    
    57,741,000Selling, general and
administrative expenses
    
    
    22,807,000
    
    
    
    21,841,000
    
    
    
    64,950,000
    
    
    
    62,799,000Loss from operations
    
    
    (7,051,000
    )
    
    
    (2,958,000
    )
    
    
    (12,308,000
    )
    
    
    (5,058,000
    )Other income (expense):Interest income
    
    
    13,000
    
    
    
    24,000
    
    
    
    63,000
    
    
    
    82,000Interest expense
    
    
    (840,000
    )
    
    
    (837,000
    )
    
    
    (2,562,000
    )
    
    
    (2,209,000
    )Net foreign currency
exchange gain (loss)
    
    
    130,000
    
    
    
    (49,000
    )
    
    
    1,253,000
    
    
    
    69,000Other expense, net
    
    
    (117,000
    )
    
    
    (5,000
    )
    
    
    (184,000
    )
    
    
    (183,000
    )Total other expense, net
    
    
    (814,000
    )
    
    
    (867,000
    )
    
    
    (1,430,000
    )
    
    
    (2,241,000
    )Loss before income tax
    
    
    (7,865,000
    )
    
    
    (3,825,000
    )
    
    
    (13,738,000
    )
    
    
    (7,299,000
    )Provision for income taxes
    
    
    1,716,000
    
    
    
    1,824,000
    
    
    
    2,339,000
    
    
    
    3,331,000Net loss
    
    $
    (9,581,000
    )
    
    $
    (5,649,000
    )
    
    $
    (16,077,000
    )
    
    $
    (10,630,000
    )Net loss per share:Basic
    
    $
    (0.65
    )
    
    $
    (0.39
    )
    
    $
    (1.09
    )
    
    $
    (0.73
    )Diluted
    
    $
    (0.65
    )
    
    $
    (0.39
    )
    
    $
    (1.09
    )
    
    $
    (0.73
    )Weighted-average shares
outstanding:Basic
    
    
    14,714,000
    
    
    
    14,602,000
    
    
    
    14,714,000
    
    
    
    14,548,000Diluted
    
    
    14,714,000
    
    
    
    14,602,000
    
    
    
    14,714,000
    
    
    
    14,548,000
  2




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Nine months ended July 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (16,077,000
    )
    
    $
    (10,630,000
    )Adjustments to reconcile net income to net cash:Depreciation of property and equipment
    
    
    4,155,000
    
    
    
    4,235,000Amortization of trademarks and distribution rights
    
    
    303,000
    
    
    
    346,000Loss on disposal of fixed assets
    
    
    6,000
    
    
    
    80,000Decrease in net deferred income taxes
    
    
    882,000
    
    
    
    2,676,000Stock compensation expense
    
    
    346,000
    
    
    
    572,000(Increase)/decrease in:Accounts receivable
    
    
    2,004,000
    
    
    
    2,982,000Inventories
    
    
    (4,836,000
    )
    
    
    (8,637,000
    )Prepaid expenses
    
    
    792,000
    
    
    
    888,000Other assets (net of amortization)
    
    
    982,000
    
    
    
    (272,000
    )(Increase)/decrease in:Accounts payable
    
    
    (949,000
    )
    
    
    (437,000
    )Accrued liabilities
    
    
    (664,000
    )
    
    
    (656,000
    )Income taxes payable
    
    
    915,000
    
    
    
    2,820,000Other long term liabilities
    
    
    (84,000
    )
    
    
    (98,000
    )Net cash used in operating activities
    
    
    (12,225,000
    )
    
    
    (6,131,000
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property, plant and equipment
    
    
    (1,574,000
    )
    
    
    (3,189,000
    )Proceeds from trade-in of equipment
    
    
    27,000
    
    
    
    Purchase of intangibles
    
    
    (126,000
    )
    
    
    (64,000
    )Net cash used in investing activities
    
    
    (1,673,000
    )
    
    
    (3,253,000
    )CASH FLOWS FROM FINANCING ACTIVITIESDecrease in restricted cash
    
    
    261,000
    
    
    
    Principal payments on capital lease obligations
    
    
    (310,000
    )
    
    
    (229,000
    )Borrowings on line of credit
    
    
    105,896,000
    
    
    
    31,250,000Payments on line of credit
    
    
    (90,583,000
    )
    
    
    (22,950,000
    )Borrowings on notes payable and long-term debt
    
    
    
    
    
    
    683,000Principal payments on notes payable and long-term debt
    
    
    (4,475,000
    )
    
    
    (1,518,000
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    881,000Net cash provided by financing activities
    
    
    10,789,000
    
    
    
    8,117,000Effect of exchange rate changes
    
    
    (1,439,000
    )
    
    
    1,628,000Net decrease in cash and cash equivalents
    
    
    (4,548,000
    )
    
    
    361,000Cash, beginning of period
    
    
    6,104,000
    
    
    
    7,508,000Cash, end of period
    
    $
    1,556,000
    
    
    $
    7,869,000
  3




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##### Table of Contents



NOTE 1  Basis of Presentation.
   Shipping and Handling Revenue
 Accounting of Shipping
and Handling Fees and Costs
 Cost of Goods Sold
  Shipping and Handling Expenses
  Earnings (Loss) Per Share
  4




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Earnings Per
Share
 Three months ended July 31,
    
    
    Nine months ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net loss
    
    $
    (9,581,000
    )
    
    $
    (5,649,000
    )
    
    $
    (16,077,000
    )
    
    $
    (10,630,000
    )Denominator:Weighted-average shares outstanding
    
    
    14,714,000
    
    
    
    14,602,000
    
    
    
    14,714,000
    
    
    
    14,548,000Effect of dilutive options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Denominator for diluted loss per share
    
    
    14,714,000
    
    
    
    14,602,000
    
    
    
    14,714,000
    
    
    
    14,548,000Basic loss per share
    
    $
    (0.65
    )
    
    $
    (0.39
    )
    
    $
    (1.09
    )
    
    $
    (0.73
    )Diluted loss per share
    
    $
    (0.65
    )
    
    $
    (0.39
    )
    
    $
    (1.09
    )
    
    $
    (0.73
    )
  NOTE 2  Inventories.
  July 31,
    
    
    October 31,2008
    
    
    2007Raw materials
    
    $
    379,000
    
    
    $
    135,000Finished Goods
    
    
    54,986,000
    
    
    
    50,394,000Total inventories, net
    
    $
    55,365,000
    
    
    $
    50,529,000
 NOTE 3  Property, Plant and Equipment.
  5




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##### Table of Contents



NOTE 4  Goodwill and Other Intangible Assets.
 Goodwill and Other Intangible Assets
 July 31, 2008
    
    
    October 31, 2007Gross Carrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Gross Carrying
    
    
    Accumulated
    
    
    Net BookAmount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueIndefinite life:Tradenames
    
    $
    8,700,000
    
    
    $
    
    
    
    $
    8,700,000
    
    
    $
    8,700,000
    
    
    $
    
    
    
    $
    8,700,000Finite life:Customer lists
    
    
    1,530,000
    
    
    
    (923,000
    )
    
    
    607,000
    
    
    
    1,530,000
    
    
    
    (767,000
    )
    
    
    763,000Non-competes
    
    
    1,372,000
    
    
    
    (1,325,000
    )
    
    
    47,000
    
    
    
    1,372,000
    
    
    
    (1,238,000
    )
    
    
    134,000Customer sales backlog
    
    
    190,000
    
    
    
    (190,000
    )
    
    
    
    
    
    
    190,000
    
    
    
    (190,000
    )
    
    
    Trademarks
    
    
    1,708,000
    
    
    
    (1,433,000
    )
    
    
    275,000
    
    
    
    1,582,000
    
    
    
    (1,373,000
    )
    
    
    209,000Total intangible assets
    
    $
    13,500,000
    
    
    $
    (3,871,000
    )
    
    $
    9,629,000
    
    
    $
    13,374,000
    
    
    $
    (3,568,000
    )
    
    $
    9,806,000
   Remainder 2008
    
    $
    112,0002009
    
    
    312,0002010
    
    
    279,0002011
    
    
    192,0002012
    
    
    32,0002013
    
    
    2,000Thereafter
    
    
    Total
    
    $
    929,000
 NOTE 5  Business Loan Agreement.
  6




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7




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##### Table of Contents



NOTE 6  Common Stock and Capital in Excess of Par Value.
  NOTE 7  Stock-Based Compensation.
 Share-Based Payment
  Three months ended July 31,
    
    Nine months ended July 31,2008
    
    2007
    
    2008
    
    2007Expected life (years)
    
    
    
    
    
    
    4.64
    
    
    
    3.51
    
    
    
    4.91Risk-free interest rate
    
    
    
    
    
    
    4.89
    %
    
    
    2.74
    %
    
    
    4.65
    %Volatility
    
    
    
    
    
    
    37.4
    %
    
    
    50.6
    %
    
    
    37.4
    %Dividend yields
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted-average fair value of options
granted during the period
    
    $
    
    
    
    $
    3.24
    
    
    $
    1.00
    
    
    $
    3.06
 
 8




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##### Table of Contents



NOTE 8  Comprehensive Loss.
  Three months ended July 31,
    
    
    Nine months ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (9,581,000
    )
    
    $
    (5,649,000
    )
    
    $
    (16,077,000
    )
    
    $
    (10,630,000
    )Effects of foreign
currency translation
    
    
    (107,000
    )
    
    
    618,000
    
    
    
    (1,481,000
    )
    
    
    1,704,000Total comprehensive loss
    
    $
    (9,688,000
    )
    
    $
    (5,031,000
    )
    
    $
    (17,558,000
    )
    
    $
    (8,926,000
    )
 NOTE 9  Legal Proceedings.
   9




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##### Table of Contents



NOTE 10  Income Taxes.
 Accounting for Income
Taxes
   Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109 Accounting for Income Taxes
  10




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##### Table of Contents



(11) Related-Party Transactions
  ® ®
      11




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##### Table of Contents



Three months ended July 31,
    
    
    Nine months ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Sunice inventory purchased
    
    $
    40,000
    
    
    $
    
    
    
    $
    775,000
    
    
    $
    Management fees paid
    
    
    347,000
    
    
    
    337,000
    
    
    
    1,182,000
    
    
    
    1,199,000Expenses and supplies
reimbursed
    
    
    44,000
    
    
    
    
    
    
    
    275,000
    
    
    
    Sunice trademark purchase
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    Total transactions with FLG
    
    $
    431,000
    
    
    $
    337,000
    
    
    $
    2,232,000
    
    
    $
    1,199,000
    NOTE 12  Segment Information.
  12




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##### Table of Contents



Three months ended July 31,
    
    
    Nine months ended July 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Net revenues:Domestic
    
    $
    26,195,000
    
    
    $
    28,368,000
    
    
    $
    78,418,000
    
    
    $
    87,291,000Gekko Brands, LLC
    
    
    11,666,000
    
    
    
    12,574,000
    
    
    
    34,344,000
    
    
    
    32,809,000Ashworth, U.K., Ltd.
    
    
    4,663,000
    
    
    
    6,065,000
    
    
    
    16,162,000
    
    
    
    19,395,000Other International
    
    
    2,631,000
    
    
    
    2,454,000
    
    
    
    8,576,000
    
    
    
    8,102,000Total
    
    $
    45,155,000
    
    
    $
    49,461,000
    
    
    $
    137,500,000
    
    
    $
    147,597,000Income (loss) from operations:Domestic
    
    $
    (8,764,000
    )
    
    $
    (5,433,000
    )
    
    $
    (16,891,000
    )
    
    $
    (10,753,000
    )Gekko Brands, LLC
    
    
    698,000
    
    
    
    813,000
    
    
    
    1,429,000
    
    
    
    2,112,000Ashworth, U.K., Ltd.
    
    
    499,000
    
    
    
    1,094,000
    
    
    
    1,086,000
    
    
    
    1,604,000Other International
    
    
    516,000
    
    
    
    568,000
    
    
    
    2,068,000
    
    
    
    1,979,000Total
    
    $
    (7,051,000
    )
    
    $
    (2,958,000
    )
    
    $
    (12,308,000
    )
    
    $
    (5,058,000
    )Capital expenditures:Domestic
    
    $
    235,000
    
    
    $
    755,000
    
    
    $
    1,151,000
    
    
    $
    2,710,000Gekko Brands, LLC
    
    
    147,000
    
    
    
    112,000
    
    
    
    396,000
    
    
    
    313,000Ashworth, U.K., Ltd.
    
    
    5,000
    
    
    
    2,000
    
    
    
    27,000
    
    
    
    166,000Total
    
    $
    387,000
    
    
    $
    869,000
    
    
    $
    1,574,000
    
    
    $
    3,189,000Depreciation expense:Domestic
    
    $
    944,000
    
    
    $
    1,196,000
    
    
    $
    3,578,000
    
    
    $
    3,735,000Gekko Brands, LLC
    
    
    136,000
    
    
    
    121,000
    
    
    
    408,000
    
    
    
    332,000Ashworth, U.K., Ltd.
    
    
    54,000
    
    
    
    63,000
    
    
    
    169,000
    
    
    
    168,000Total
    
    $
    1,134,000
    
    
    $
    1,380,000
    
    
    $
    4,155,000
    
    
    $
    4,235,000
 July 31,
    
    
    October 31,2008
    
    
    2007Total assets:Domestic
    
    $
    72,392,000
    
    
    $
    80,715,000Gekko Brands, LLC
    
    
    45,534,000
    
    
    
    45,217,000Ashworth, U.K., Ltd.
    
    
    25,274,000
    
    
    
    25,733,000Other International
    
    
    12,779,000
    
    
    
    8,749,000Total
    
    $
    155,979,000
    
    
    $
    160,414,000Long-lived assets, at cost:Domestic
    
    $
    55,429,000
    
    
    $
    65,532,000Gekko Brands, LLC
    
    
    31,645,000
    
    
    
    29,653,000Ashworth, U.K., Ltd.
    
    
    5,842,000
    
    
    
    2,306,000Total
    
    $
    92,916,000
    
    
    $
    97,491,000Goodwill:Gekko Brands, LLC
    
    $
    15,250,000
    
    
    $
    15,250,000
 13




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NOTE 13  Recent Accounting Pronouncements.
 Fair Value Measurements
 Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115 , Fair Value Measurements
 Business Combinations
  14




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
   Cautionary Statements and Risk Factors
  Critical Accounting Policies and Estimates
 Cautionary Advice Regarding Disclosure About
Critical Accounting Policies
 Revenue Recognition. Revenue Recognition Accounting of Shipping and
Handling Fees and Costs
 15




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Sales Returns and Other Allowances.
 Allowance for Doubtful Accounts.
 Inventory.
 Deferred Taxes and Uncertain Tax Positions. Accounting for Income Taxes
 16




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Accounting for Uncertainty in Income Taxes
 Stock-Based Compensation. Share-Based Payment
 Off-Balance Sheet Arrangements
  Overview
   17




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Results of Operations
 Third quarter 2008 compared to Third quarter 2007
  Three months ended
    
    
    
    
    
    
    
    
    
    
    % of TotalJuly 31,
    
    
    Change
    
    
    Revenue2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007Net revenues:Retail distribution
    
    $
    1,142
    
    
    $
    1,652
    
    
    $
    (510
    )
    
    
    (30.9
    )%
    
    
    2.5
    %
    
    
    3.3
    %Domestic green grass
    
    
    18,183
    
    
    
    17,240
    
    
    
    943
    
    
    
    5.5
    %
    
    
    40.3
    %
    
    
    34.8
    %Domestic corporate
    
    
    4,290
    
    
    
    6,259
    
    
    
    (1,969
    )
    
    
    (31.5
    )%
    
    
    9.5
    %
    
    
    12.7
    %Domestic outlet store
    
    
    2,580
    
    
    
    3,217
    
    
    
    (637
    )
    
    
    (19.8
    )%
    
    
    5.7
    %
    
    
    6.5
    %Total domestic
    
    
    26,195
    
    
    
    28,368
    
    
    
    (2,173
    )
    
    
    (7.7
    )%
    
    
    58.0
    %
    
    
    57.3
    %Gekko
    
    
    11,666
    
    
    
    12,574
    
    
    
    (908
    )
    
    
    (7.2
    )%
    
    
    25.9
    %
    
    
    25.4
    %Ashworth U.K.
    
    
    4,663
    
    
    
    6,065
    
    
    
    (1,402
    )
    
    
    (23.1
    )%
    
    
    10.3
    %
    
    
    12.3
    %Other international
    
    
    2,631
    
    
    
    2,454
    
    
    
    177
    
    
    
    7.2
    %
    
    
    5.8
    %
    
    
    5.0
    %Total net revenues
    
    
    45,155
    
    
    
    49,461
    
    
    
    (4,306
    )
    
    
    (8.7
    )%
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    29,399
    
    
    
    30,578
    
    
    
    (1,179
    )
    
    
    (3.9
    )%
    
    
    65.1
    %
    
    
    61.9
    %Selling, general and administrative expenses
    
    
    22,807
    
    
    
    21,841
    
    
    
    966
    
    
    
    4.4
    %
    
    
    50.5
    %
    
    
    44.2
    %Total operating expenses
    
    
    52,206
    
    
    
    52,419
    
    
    
    (213
    )
    
    
    (0.4
    )%
    
    
    115.6
    %
    
    
    106.1
    %Loss from operations
    
    
    (7,051
    )
    
    
    (2,958
    )
    
    
    (4,093
    )
    
    
    138.4
    %
    
    
    (15.6
    )%
    
    
    (6.1
    )%Interest expense, net
    
    
    (827
    )
    
    
    (813
    )
    
    
    (14
    )
    
    
    1.7
    %
    
    
    (1.9
    )%
    
    
    (1.4
    )%Other income (expense), net
    
    
    13
    
    
    
    (54
    )
    
    
    67
    
    
    
    (124.1
    )%
    
    
    0.0
    %
    
    
    (0.1
    )%Loss before provision for income taxes
    
    
    (7,865
    )
    
    
    (3,825
    )
    
    
    (4,040
    )
    
    
    105.6
    %
    
    
    (17.5
    )%
    
    
    (7.6
    )%Provision for income taxes
    
    
    1,716
    
    
    
    1,824
    
    
    
    (108
    )
    
    
    (5.9
    )%
    
    
    3.7
    %
    
    
    3.8
    %Net loss
    
    $
    (9,581
    )
    
    $
    (5,649
    )
    
    $
    (3,932
    )
    
    
    69.6
    %
    
    
    (21.2
    )%
    
    
    (11.4
    )%
     19




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Nine months ended July 31, 2008 compared to Nine months ended July 31, 2007
  Nine months ended
    
    
    
    
    
    
    
    
    
    
    % of TotalJuly 31,
    
    
    Change
    
    
    Revenue2008
    
    
    2007
    
    
    $
    
    
    %
    
    
    2008
    
    
    2007Net revenues:Retail distribution
    
    $
    7,332
    
    
    $
    12,160
    
    
    $
    (4,828
    )
    
    
    (39.7
    )%
    
    
    5.3
    %
    
    
    8.2
    %Domestic green grass
    
    
    50,036
    
    
    
    48,059
    
    
    
    1,977
    
    
    
    4.1
    %
    
    
    36.4
    %
    
    
    32.6
    %Domestic corporate
    
    
    13,718
    
    
    
    18,515
    
    
    
    (4,797
    )
    
    
    (25.9
    )%
    
    
    10.0
    %
    
    
    12.5
    %Domestic outlet store
    
    
    7,332
    
    
    
    8,557
    
    
    
    (1,225
    )
    
    
    (14.3
    )%
    
    
    5.3
    %
    
    
    5.8
    %Total domestic
    
    
    78,418
    
    
    
    87,291
    
    
    
    (8,873
    )
    
    
    (10.2
    )%
    
    
    57.0
    %
    
    
    59.1
    %Gekko
    
    
    34,344
    
    
    
    32,809
    
    
    
    1,535
    
    
    
    4.7
    %
    
    
    25.0
    %
    
    
    22.3
    %Ashworth U.K.
    
    
    16,162
    
    
    
    19,395
    
    
    
    (3,233
    )
    
    
    (16.7
    )%
    
    
    11.8
    %
    
    
    13.1
    %Other international
    
    
    8,576
    
    
    
    8,102
    
    
    
    474
    
    
    
    5.9
    %
    
    
    6.2
    %
    
    
    5.5
    %Total net revenues
    
    
    137,500
    
    
    
    147,597
    
    
    
    (10,097
    )
    
    
    (6.8
    )%
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold
    
    
    84,858
    
    
    
    89,856
    
    
    
    (4,998
    )
    
    
    (5.6
    )%
    
    
    61.7
    %
    
    
    61.0
    %Selling, general and administrative expenses
    
    
    64,950
    
    
    
    62,799
    
    
    
    2,151
    
    
    
    3.4
    %
    
    
    47.2
    %
    
    
    42.5
    %Total operating expenses
    
    
    149,808
    
    
    
    152,655
    
    
    
    (2,847
    )
    
    
    (1.9
    )%
    
    
    108.9
    %
    
    
    103.5
    %Loss from operations
    
    
    (12,308
    )
    
    
    (5,058
    )
    
    
    (7,250
    )
    
    
    143.3
    %
    
    
    (8.9
    )%
    
    
    (3.5
    )%Interest expense, net
    
    
    (2,499
    )
    
    
    (2,127
    )
    
    
    (372
    )
    
    
    17.5
    %
    
    
    (1.8
    )%
    
    
    (1.3
    )%Other income (expense), net
    
    
    1,069
    
    
    
    (114
    )
    
    
    1,183
    
    
    
    (1037.7
    )%
    
    
    0.8
    %
    
    
    (0.1
    )%Loss before provision for income taxes
    
    
    (13,738
    )
    
    
    (7,299
    )
    
    
    (6,439
    )
    
    
    88.2
    %
    
    
    (9.9
    )%
    
    
    (4.9
    )%Provision for income taxes
    
    
    2,339
    
    
    
    3,331
    
    
    
    (992
    )
    
    
    (29.8
    )%
    
    
    1.7
    %
    
    
    2.3
    %Net loss
    
    $
    (16,077
    )
    
    $
    (10,630
    )
    
    $
    (5,447
    )
    
    
    51.2
    %
    
    
    (11.6
    )%
    
    
    (7.2
    )%
     22




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th
     23




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Capital Resources and Liquidity
     24




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25




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26




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Contractual Obligations
  Recent Accounting Pronouncements
 Fair Value Measurements
 Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115 , Fair Value Measurements
 27




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Business Combinations
  
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Foreign Currency Exchange Rate Risk
  28




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Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 PART II
 OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  29




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##### Table of Contents



Item 1A. Risk Factors
  Callaway Golf Company has claimed a material breach of the Companys exclusive licensing
agreement.
 The Company will need to improve cash flow from operations or through a financing or sale of
assets to avoid a future liquidity shortfall.
 30




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##### Table of Contents



Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 
  
 Item 6. 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, 1994 (filed as
Exhibit 3(a) to the Companys Form 10-K for the fiscal year ended October 31, 1994 (File
No. 001-14547) 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. 001-14547) 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)
    
    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. 001-14547) 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. 001-14547) 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. 001-14547) and incorporated herein by
reference).4(e)
    
    Amendment No. 1 effective as of July 3, 2007 to the Rights Agreement dated as of February
22, 2000 by and between Ashworth, Inc. and Computershare Trust Company, N. A., as successor
Rights Agent (filed as Exhibit 4.1 to the Companys Form 8-K filed on July 3. 2007 (File No.
001-14547) and incorporated herein by reference).10(a)
    
    Amendment to License Agreement, effective March 29, 2007, by and between Ashworth, Inc. and
Callaway Golf Company (filed as Exhibit 99.1 to the Companys Form 8-K on December 7, 2007
(File No. 001-14547) and incorporated herein by reference.
 31




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##### Table of Contents



10(a)(2)
    
    Amendment to License Agreement, effective December 3, 2007, by and between Ashworth, Inc.
and Callaway Golf Company (filed as Exhibit 99.2 to the Companys Form 8-K on December 7, 2007
(File No. 001-14547) and incorporated herein by reference.10(b)
    
    Amendment to the Companys Code of Business Conduct and Ethics effective December 12, 2007
(filed as Exhibit 14.1 to the Companys Form 8-K on December 14, 2007 (File No. 001-14547) and
incorporated herein by reference).10(c)
    
    Consulting agreement between Fletcher Leisure Group Ltd. and the Company, effective January
11, 2008 (filed as Exhibit 10(ap) to the Companys Form 10-K on January 14, 2008 (File No.
001-14547) and incorporated herein by reference).10(d)
    
    Loan agreement, effective January 11, 2008 by and between the Company and Bank of America,
N. A. (filed as Exhibit 10(aq) to the Companys Form 10-K on January 14, 2008 (File No.
001-14547) and incorporated herein by reference.10(e)
    
    Loan agreement, effective February 29, 2008 by and between Ashworth U.K. and Bank of
America, N.A. (filed as Exhibit 10(e) to the Companys Form 10-Q on March 11, 2008 (File No.
001-14547) and incorporated herein by reference).10(f)
    
    Compensation agreement dated August 6, 2008 between Ashworth, Inc., a Delaware corporation,
and Michael S. Koeneke.10(g)
    
    Compensation agreement dated August 6, 2008 between Ashworth, Inc., a Delaware corporation,
and David M. Meyer.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 Allan H. Fletcher.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 Greg W. Slack.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 Allan H. Fletcher.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 Greg W. Slack.
 32




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SIGNATURES
  ASHWORTH, INCDate: September 9, 2008
    By:
    /s/ Allan H. FletcherAllan H. FletcherChief Executive OfficerDate: September 9, 2008
    By:
    /s/ Greg W. SlackGreg W. SlackChief Financial Officer and

Principal Accounting Officer 33




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EXHIBIT INDEX
 ExhibitNumber
    
    Description of Exhibit10(f)
    
    Compensation agreement dated August 6, 2008 between
Ashworth, Inc., a Delaware corporation, and Michael S.
Koeneke.10(g)
    
    Compensation agreement dated August 6, 2008 between
Ashworth, Inc., a Delaware corporation, and David M. Meyer.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 Allan H. Fletcher.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 Greg W. Slack.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 Allan H. Fletcher.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 Greg W. Slack.
 34